[JPRT 106-8-99]
[From the U.S. Government Publishing Office]


                                                               JCS-8-99

                                     

                        [JOINT COMMITTEE PRINT]


 
                        EXPLANATION OF PROPOSED
                         INCOME TAX TREATY AND
                       PROPOSED PROTOCOL BETWEEN
                         THE UNITED STATES AND
                        THE KINGDOM OF DENMARK

                        Scheduled for a Hearing

                               before the

                     COMMITTEE ON FOREIGN RELATIONS

                          UNITED STATES SENATE

                          ON OCTOBER 13, 1999

                               __________

                         Prepared by the Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED]


                            OCTOBER 8, 1999
                      JOINT COMMITTEE ON TAXATION

                      106th Congress, 1st Session
                                 ------                                
               HOUSE                               SENATE
BILL ARCHER, Texas,                  WILLIAM V. ROTH, Jr., Delaware,
  Chairman                             Vice Chairman
PHILIP M. CRANE, Illinois            JOHN H. CHAFEE, Rhode Island
WILLIAM M. THOMAS, California        CHARLES GRASSLEY, Iowa
CHARLES B. RANGEL, New York          DANIEL PATRICK MOYNIHAN, New York
FORTNEY PETE STARK, California       MAX BAUCUS, Montana
                     Lindy L. Paull, Chief of Staff
               Bernard A. Schmitt, Deputy Chief of Staff
                 Mary M. Schmitt, Deputy Chief of Staff
              Richard A. Grafmeyer, Deputy Chief of Staff
                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1

 I. Summary...........................................................2

II. Overview of U.S. Taxation of International Trade and Investment and 
    U.S. Tax Treaties.................................................4

        A. U.S. Tax Rules........................................     4

        B. U.S. Tax Treaties.....................................     5

III.Explanation of Proposed Treaty and Proposed Protocol..............8


        Article 1.  General Scope................................     8
        Article 2.  Taxes Covered................................    10
        Article 3.  General Definitions..........................    11
        Article 4.  Residence....................................    12
        Article 5.  Permanent Establishment......................    14
        Article 6.  Income From Real Property....................    16
        Article 7.  Business Profits.............................    17
        Article 8.  Shipping and Air Transport...................    19
        Article 9.  Associated Enterprises.......................    21
        Article 10. Dividends....................................    22
        Article 11. Interest.....................................    25
        Article 12. Royalties....................................    27
        Article 13. Capital Gains................................    28
        Article 14. Independent Personal Services................    31
        Article 15. Dependent Personal Services..................    31
        Article 16. Directors' Fees..............................    32
        Article 17. Artistes and Sportsmen.......................    32
        Article 18. Pensions, Social Security, Annuities, 
            Alimony and Child Support Payments...................    33
        Article 19. Government Service...........................    34
        Article 20. Students and Trainees........................    35
        Article 21. Other Income.................................    35
        Article 22. Limitation of Benefits.......................    36
        Article 23. Relief from Double Taxation..................    42
        Article 24. Non-Discrimination...........................    45
        Article 25. Mutual Agreement Procedure...................    47
        Article 26. Exchange of Information......................    48
        Article 27. Administrative Assistance....................    49
        Article 28. Diplomatic Agents and Consular Officers.....    50
        Article 29. Entry into Force.............................    50
        Article 30. Termination..................................    51

IV. Issues...........................................................52

        A. Creditability of Danish Hydrocarbon Tax...............    52

        B. Treaty Shopping.......................................    55
                              INTRODUCTION

    This pamphlet,\1\ prepared by the staff of the Joint 
Committee on Taxation, describes the proposed income tax 
treaty, as supplemented by the proposed protocol, between the 
United States of America and the Kingdom of Denmark 
(``Denmark''). The proposed treaty and proposed protocol were 
both signed on August 19, 1999.\2\ The Senate Committee on 
Foreign Relations has scheduled a public hearing on the 
proposed treaty and proposed protocol on October 13, 1999.
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    \1\ This pamphlet may be cited as follows: Joint Committee on 
Taxation, Explanation of Proposed Income Tax Treaty and Proposed 
Protocol Between the United States and the Kingdom of Denmark (JCS-8-
99), October 8, 1999.
    \2\ For a copy of the proposed treaty and proposed protocol, see 
Senate Treaty Doc. 106-12, September 21, 1999.
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    Part I of the pamphlet provides a summary with respect to 
the proposed treaty and proposed protocol. Part II provides a 
brief overview of U.S. tax laws relating to international trade 
and investment and of U.S. income tax treaties in general. Part 
III contains an article-by-article explanation of the proposed 
treaty and proposed protocol. Part IV contains a discussion of 
issues with respect to the proposed treaty and proposed 
protocol.

                               I. SUMMARY

    The principal purposes of the proposed income tax treaty 
between the United States and Denmark are to reduce or 
eliminate double taxation of income earned by residents of 
either country from sources within the other country and to 
prevent avoidance or evasion of the taxes of the two countries. 
The proposed treaty also is intended to promote close economic 
cooperation between the two countries and to eliminate possible 
barriers to trade and investment caused by overlapping taxing 
jurisdictions of the two countries.
    As in other U.S. tax treaties, these objectives principally 
are achieved through each country's agreement to limit, in 
certain specified situations, its right to tax income derived 
from its territory by residents of the other country. For 
example, the proposed treaty contains provisions under which 
each country generally agrees not to tax business income 
derived from sources within that country by residents of the 
other country unless the business activities in the taxing 
country are substantial enough to constitute a permanent 
establishment or fixed base (Articles 7 and 14). Similarly, the 
proposed treaty contains ``commercial visitor'' exemptions 
under which residents of one country performing personal 
services in the other country will not be required to pay tax 
in the other country unless their contact with the other 
country exceeds specified minimums (Articles 14, 15, and 17). 
The proposed treaty provides that dividends, interest, 
royalties, and certain capital gains derived by a resident of 
either country from sources within the other country generally 
may be taxed by both countries (Articles 10, 11, 12, and 13); 
however, the rate of tax that the source country may impose on 
a resident of the other country on dividends, interest, and 
royalties generally will be limited by the proposed treaty 
(Articles 10, 11, and 12).
    In situations where the country of source retains the right 
under the proposed treaty to tax income derived by residents of 
the other country, the proposed treaty generally provides for 
relief from the potential double taxation through the allowance 
by the country of residence of a tax credit for certain foreign 
taxes paid to the other country (Article 23).
    The proposed treaty contains the standard provision (the 
``saving clause'') included in U.S. tax treaties pursuant to 
which each country retains the right to tax its residents and 
citizens as if the treaty had not come into effect (Article 1). 
In addition, the proposed treaty contains the standard 
provision providing that the treaty may not be applied to deny 
any taxpayer any benefits the taxpayer would be entitled to 
under the domestic law of a country or under any other 
agreement between the two countries (Article 1). The proposed 
treaty also contains a detailed limitation on benefits 
provision to prevent the inappropriate use of the treaty by 
third-country residents (Article 22).
    The United States and Denmark have an income tax treaty 
currently in force (signed in 1948).\3\ The proposed treaty is 
similar to other recent U.S. income tax treaties, the 1996 U.S. 
model income tax treaty (``U.S. model''), and the model income 
tax treaty of the Organization for Economic Cooperation and 
Development (``OECD model''). However, the proposed treaty 
contains certain substantive deviations from those treaties and 
models.
---------------------------------------------------------------------------
    \3\ A prior proposed U.S. income tax treaty with Denmark was signed 
in 1980 with a related proposed protocol that was signed in 1983. The 
Committee reported favorably on this proposed treaty (and protocol) in 
1984. However, the Senate did not consider the treaty further in 1984. 
The Committee also reported favorably on the treaty (and protocol) in 
1985. During Senate consideration of the treaty in 1985, objections 
were raised regarding the creditability under the treaty of the Danish 
hydrocarbon tax. The Senate has not given its advice and consent to 
ratification of this treaty.

II. OVERVIEW OF U.S. TAXATION OF INTERNATIONAL TRADE AND INVESTMENT AND 
                           U.S. TAX TREATIES

    This overview briefly describes certain U.S. tax rules 
relating to foreign income and foreign persons that apply in 
the absence of a U.S. tax treaty. This overview also discusses 
the general objectives of U.S. tax treaties and describes some 
of the modifications to U.S. tax rules made by treaties.

                           A. U.S. Tax Rules

    The United States taxes U.S. citizens, residents, and 
corporations on their worldwide income, whether derived in the 
United States or abroad. The United States generally taxes 
nonresident alien individuals and foreign corporations on all 
their income that is effectively connected with the conduct of 
a trade or business in the United States (sometimes referred to 
as ``effectively connected income''). The United States also 
taxes nonresident alien individuals and foreign corporations on 
certain U.S.-source income that is not effectively connected 
with a U.S. trade or business.
    Income of a nonresident alien individual or foreign 
corporation that is effectively connected with the conduct of a 
trade or business in the United States generally is subject to 
U.S. tax in the same manner and at the same rates as income of 
a U.S. person. Deductions are allowed to the extent that they 
are related to effectively connected income. A foreign 
corporation also is subject to a flat 30-percent branch profits 
tax on its ``dividend equivalent amount,'' which is a measure 
of the effectively connected earnings and profits of the 
corporation that are removed in any year from the conduct of 
its U.S. trade or business. In addition, a foreign corporation 
is subject to a flat 30-percent branch-level excess interest 
tax on the excess of the amount of interest that is deducted by 
the foreign corporation in computing its effectively connected 
income over the amount of interest that is paid by its U.S. 
trade or business.
    U.S.-source fixed or determinable annual or periodical 
income of a nonresident alien individual or foreign corporation 
(including, for example, interest, dividends, rents, royalties, 
salaries, and annuities) that is not effectively connected with 
the conduct of a U.S. trade or business is subject to U.S. tax 
at a rate of 30 percent of the gross amount paid. Certain 
insurance premiums earned by a nonresident alien individual or 
foreign corporation are subject to U.S. tax at a rate of 1 or 4 
percent of the premiums. These taxes generally are collected by 
means of withholding.
    Specific statutory exemptions from the 30-percent 
withholding tax are provided. For example, certain original 
issue discount and certain interest on deposits with banks or 
savings institutions are exempt from the 30-percent withholding 
tax. An exemption also is provided for certain interest paid on 
portfolio debt obligations. In addition, income of a foreign 
government or international organization from investments in 
U.S. securities is exempt from U.S. tax.
    U.S.-source capital gains of a nonresident alien individual 
or a foreign corporation that are not effectively connected 
with a U.S. trade or business generally are exempt from U.S. 
tax, with two exceptions: (1) gains realized by a nonresident 
alien individual who is present in the United States for at 
least 183 days during the taxable year, and (2) certain gains 
from the disposition of interests in U.S. real property.
    Rules are provided for the determination of the source of 
income. For example, interest and dividends paid by a U.S. 
citizen or resident or by a U.S. corporation generally are 
considered U.S.-source income. Conversely, dividends and 
interest paid by a foreign corporation generally are treated as 
foreign-source income. Special rules apply to treat as foreign-
source income (in whole or in part) interest and dividends paid 
by certain U.S. corporations with foreign businesses and to 
treat as U.S.-source income (in whole or in part) dividends 
paid by certain foreign corporations with U.S. businesses. 
Rents and royalties paid for the use of property in the United 
States are considered U.S.-source income.
    Because the United States taxes U.S. citizens, residents, 
and corporations on their worldwide income, double taxation of 
income can arise when income earned abroad by a U.S. person is 
taxed by the country in which the income is earned and also by 
the United States. The United States seeks to mitigate this 
double taxation generally by allowing U.S. persons to credit 
foreign income taxes paid against the U.S. tax imposed on their 
foreign-source income. A fundamental premise of the foreign tax 
credit is that it may not offset the U.S. tax liability on 
U.S.-source income. Therefore, the foreign tax credit 
provisions contain a limitation that ensures that the foreign 
tax credit offsets only the U.S. tax on foreign-source income. 
The foreign tax credit limitation generally is computed on a 
worldwide basis (as opposed to a ``per-country'' basis). The 
limitation is applied separately for certain classifications of 
income. In addition, a special limitation applies to the credit 
for foreign taxes imposed on foreign oil and gas extraction 
income.
    For foreign tax credit purposes, a U.S. corporation that 
owns 10 percent or more of the voting stock of a foreign 
corporation and receives a dividend from the foreign 
corporation (or is otherwise required to include in its income 
earnings of the foreign corporation) is deemed to have paid a 
portion of the foreign income taxes paid by the foreign 
corporation on its accumulated earnings. The taxes deemed paid 
by the U.S. corporation are included in its total foreign taxes 
paid and its foreign tax credit limitation calculations for the 
year the dividend is received (or an amount is included in 
income).

                          B. U.S. Tax Treaties

    The traditional objectives of U.S. tax treaties have been 
the avoidance of international double taxation and the 
prevention of tax avoidance and evasion. Another related 
objective of U.S. tax treaties is the removal of the barriers 
to trade, capital flows, and commercial travel that may be 
caused by overlapping tax jurisdictions and by the burdens of 
complying with the tax laws of a jurisdiction when a person's 
contacts with, and income derived from, that jurisdiction are 
minimal. To a large extent, the treaty provisions designed to 
carry out these objectives supplement U.S. tax law provisions 
having the same objectives; treaty provisions modify the 
generally applicable statutory rules with provisions that take 
into account the particular tax system of the treaty partner.
    The objective of limiting double taxation generally is 
accomplished in treaties through the agreement of each country 
to limit, in specified situations, its right to tax income 
earned from its territory by residents of the other country. 
For the most part, the various rate reductions and exemptions 
agreed to by the source country in treaties are premised on the 
assumption that the country of residence will tax the income at 
levels comparable to those imposed by the source country on its 
residents. Treaties also provide for the elimination of double 
taxation by requiring the residence country to allow a credit 
for taxes that the source country retains the right to impose 
under the treaty. In addition, in the case of certain types of 
income, treaties may provide for exemption by the residence 
country of income taxed by the source country.
    Treaties define the term ``resident'' so that an individual 
or corporation generally will not be subject to tax as a 
resident by both the countries. Treaties generally provide that 
neither country will tax business income derived by residents 
of the other country unless the business activities in the 
taxing jurisdiction are substantial enough to constitute a 
permanent establishment or fixed base in that jurisdiction. 
Treaties also contain commercial visitation exemptions under 
which individual residents of one country performing personal 
services in the other will not be required to pay tax in that 
other country unless their contacts exceed certain specified 
minimums (e.g., presence for a set number of days or earnings 
in excess of a specified amount). Treaties address passive 
income such as dividends, interest, and royalties from sources 
within one country derived by residents of the other country 
either by providing that such income is taxed only in the 
recipient's country of residence or by reducing the rate of the 
source country's withholding tax imposed on such income. In 
this regard, the United States agrees in its tax treaties to 
reduce its 30-percent withholding tax (or, in the case of some 
income, to eliminate it entirely) in return for reciprocal 
treatment by its treaty partner.
    In its treaties, the United States, as a matter of policy, 
generally retains the right to tax its citizens and residents 
on their worldwide income as if the treaty had not come into 
effect. The United States also provides in its treaties that it 
will allow a credit against U.S. tax for income taxes paid to 
the treaty partners, subject to the various limitations of U.S. 
law.
    The objective of preventing tax avoidance and evasion 
generally is accomplished in treaties by the agreement of each 
country to exchange tax-related information. Treaties generally 
provide for the exchange of information between the tax 
authorities of the two countries when such information is 
relevant for carrying out provisions of the treaty or of their 
domestic tax laws. The obligation to exchange information under 
the treaties typically does not require either country to carry 
out measures contrary to its laws or administrative practices 
or to supply information that is not obtainable under its laws 
or in the normal course of its administration or that would 
reveal trade secrets or other information the disclosure of 
which would be contrary to public policy. The Internal Revenue 
Service (the ``IRS''), and the treaty partner's tax 
authorities, also can request specific tax information from a 
treaty partner. This can include information to be used in a 
criminal investigation or prosecution.
    Administrative cooperation between countries is enhanced 
further under treaties by the inclusion of a ``competent 
authority'' mechanism to resolve double taxation problems 
arising in individual cases and, more generally, to facilitate 
consultation between tax officials of the two governments.
    Treaties generally provide that neither country may subject 
nationals of the other country (or permanent establishments of 
enterprises of the other country) to taxation more burdensome 
than that it imposes on its own nationals (or on its own 
enterprises). Similarly, in general, neither treaty country may 
discriminate against enterprises owned by residents of the 
other country.
    At times, residents of countries that do not have income 
tax treaties with the United States attempt to use a treaty 
between the United States and another country to avoid U.S. 
tax. To prevent third-country residents from obtaining treaty 
benefits intended for treaty country residents only, U.S. 
treaties generally contain an ``anti-treaty shopping'' 
provision that is designed to limit treaty benefits to bona 
fide residents of the two countries.

       III. EXPLANATION OF PROPOSED TREATY AND PROPOSED PROTOCOL

    A detailed, article-by-article explanation of the proposed 
income tax treaty between the United States and Denmark is set 
forth below. The provisions of the proposed protocol are 
covered together with the relevant articles of the proposed 
treaty.
Article 1. General Scope
            Overview
    The general scope article describes the persons who may 
claim the benefits of the proposed treaty. It also includes a 
``saving clause'' provision similar to provisions found in most 
U.S. income tax treaties.
    The proposed treaty generally applies to residents of the 
United States and to residents of Denmark, with specific 
modifications to such scope provided in other articles (e.g., 
Article 19 (Government Service), Article 24 (Non-
Discrimination), and Article 26 (Exchange of Information)). 
This scope is consistent with the scope of other U.S. income 
tax treaties, the U.S. model, and the OECD model. For purposes 
of the proposed treaty, residence is determined under Article 4 
(Residence).
    The proposed treaty provides that it does not restrict in 
any manner any benefit (e.g., an exclusion, exemption, 
deduction, credit, or other allowance) accorded by internal law 
or by any other agreement between the United States and 
Denmark. Thus, the proposed treaty will not apply to increase 
the tax burden of a resident of either the United States or 
Denmark. According to the Treasury Department's Technical 
Explanation (hereinafter referred to as the ``Technical 
Explanation''), the fact that the proposed treaty only applies 
to a taxpayer's benefit does not mean that a taxpayer may 
select inconsistently among treaty and internal law provisions 
in order to minimize its overall tax burden. In this regard, 
the Technical Explanation sets forth the following example. 
Assume a resident of Denmark has three separate businesses in 
the United States. One business is profitable and constitutes a 
U.S. permanent establishment. The other two businesses generate 
effectively connected income as determined under the Internal 
Revenue Code (the ``Code''), but do not constitute permanent 
establishments as determined under the proposed treaty; one 
business is profitable and the other business generates a net 
loss. Under the Code, all three businesses would be subject to 
U.S. income tax, in which case the losses from the unprofitable 
business could offset the taxable income from the other 
businesses. On the other hand, only the income of the business 
which gives rise to a permanent establishment is taxable by the 
United States under the proposed treaty. The Technical 
Explanation makes clear that the taxpayer may not invoke the 
proposed treaty to exclude the profits of the profitable 
business that does not constitute a permanent establishment and 
invoke U.S. internal law to claim the loss of the unprofitable 
business that does not constitute a permanent establishment to 
offset the taxable income of the permanent establishment.\4\
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    \4\ See Rev. Rul. 84-17, 1984-1 C.B. 308.
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    The proposed treaty provides that the dispute resolution 
procedures under its mutual agreement article take precedence 
over the corresponding provisions of any other agreement to 
which the United States and Denmark are parties in determining 
whether a measure is within the scope of the proposed treaty. 
Unless the competent authorities agree that a taxation measure 
is outside the scope of the proposed treaty, only the proposed 
treaty's non-discrimination rules, and not the non-
discrimination rules of any other agreement in effect between 
the United States and Denmark, generally apply to that measure. 
The only exception to this general rule is such national 
treatment or most favored nation obligations as may apply to 
trade in goods under the General Agreement on Tariffs and 
Trade. For purposes of this provision, the term ``measure'' 
means a law, regulation, rule, procedure, decision, 
administrative action, or any similar provision or action.
            Saving clause
    Like all U.S. income tax treaties, the proposed treaty 
includes a ``saving clause.'' Under this clause, with specific 
exceptions described below, the proposed treaty does not affect 
the taxation by a country of its residents or its citizens. By 
reason of this saving clause, unless otherwise specifically 
provided in the proposed treaty, the United States may continue 
to tax its citizens who are residents of Denmark as if the 
treaty were not in force. For purposes of the proposed treaty 
(and, thus, for purposes of the saving clause), the term 
``residents,'' which is defined in Article 4 (Residence), 
includes corporations and other entities as well as 
individuals.
    The proposed treaty contains a provision under which the 
saving clause (and therefore the U.S. jurisdiction to tax) 
applies to a former U.S. citizen or long-term resident whose 
loss of citizenship or resident status had as one of its 
principal purposes the avoidance of tax (as defined under the 
laws of the country of which the person was a citizen or long-
term resident); such application is limited to the ten-year 
period following the loss of citizenship. Section 877 of the 
Code provides special rules for the imposition of U.S. income 
tax on former U.S. citizens and long-term residents for a 
period of ten years following the loss of citizenship or 
resident status; these special tax rules apply to a former 
citizen or long-term resident only if his or her loss of U.S. 
citizenship or resident status had as one of its principal 
purposes the avoidance of U.S. income, estate or gift taxes. 
For purposes of applying the special tax rules to former 
citizens and long-term residents, individuals who meet a 
specified income tax liability threshold or a specified net 
worth threshold generally are considered to have lost 
citizenship or resident status for a principal purpose of U.S. 
tax avoidance.
    Exceptions to the saving clause are provided for the 
following benefits conferred by a treaty country: the allowance 
of correlative adjustments when the profits of an associated 
enterprise are adjusted by the other country (Article 9, 
paragraph 2); the allowance of a special basis adjustment 
election with respect to gains recognized in the other country, 
and the ability to coordinate the timing of gain recognition 
between countries (Article 13, paragraphs 7 and 8); the source 
rule for pension distributions, the exemption from residence 
country tax for social security benefits, and certain child 
support payments (Article 18, paragraphs 1(c), 2, and 5); 
relief from double taxation through the provision of a foreign 
tax credit (Article 23); protection from discriminatory tax 
treatment with respect to transactions with residents of the 
other country (Article 24); and benefits under the mutual 
agreement procedures (Article 25). These exceptions to the 
saving clause permit residents or citizens of the United States 
or Denmark to obtain such benefits of the proposed treaty with 
respect to their country of residence or citizenship.
    In addition, the saving clause does not apply to the 
following benefits conferred by one of the countries upon 
individuals who neither are citizens of that country nor have 
been admitted for permanent residence in that country. Under 
this set of exceptions to the saving clause, the specified 
treaty benefits are available to, for example, a Danish citizen 
who spends enough time in the United States to be taxed as a 
U.S. resident but who has not acquired U.S. permanent residence 
status (i.e., does not hold a ``green card''). The benefits 
that are covered under this set of exceptions are the 
exemptions from host country tax for certain compensation from 
government service (Article 19), certain income received by 
students or trainees (Article 20), and certain income of 
diplomats and consular officers (Article 28).
Article 2. Taxes Covered
    The proposed treaty generally applies to the income taxes 
of the United States and Denmark. However, Article 24 (Non-
Discrimination) is applicable to all taxes imposed at all 
levels of government, including State and local taxes. 
Moreover, Article 26 (Exchange of Information) generally is 
applicable to all national-level taxes, including, for example, 
estate and gift taxes.
    In the case of the United States, the proposed treaty 
applies to the Federal income taxes imposed by the Code and the 
excise taxes imposed with respect to private foundations, but 
excludes social security taxes.
    In the case of Denmark, the proposed treaty applies to (1) 
Denmark's income tax (indkomstskatten til staten), (2) the 
municipal income tax (den kommunale indkomstskat), (3) the 
income tax to the county municipalities (den amtskommunale 
indkomstskat), and (4) taxes imposed under the Hydrocarbon Tax 
Act (skatter i henhold til kulbrinteskatteloven).
    The proposed treaty also contains a rule generally found in 
U.S. income tax treaties which provides that the proposed 
treaty applies to any identical or substantially similar taxes 
that are imposed subsequently in addition to, or in place of, 
the taxes covered. The proposed treaty obligates the competent 
authority of each country to notify the competent authority of 
the other country of any significant changes in its internal 
tax laws (or other laws) that affect its obligations under the 
treaty or of any official published materials concerning the 
application of the treaty (including explanations, regulations, 
rulings, or judicial decisions). The Technical Explanation 
states that this requirement relates to changes that are 
significant to the operation of the proposed treaty.
Article 3. General Definitions
    The proposed treaty provides definitions of a number of 
terms for purposes of the proposed treaty. Certain of the 
standard definitions found in most U.S. income tax treaties are 
included in the proposed treaty.
    The term ``person'' includes an individual, an estate, a 
trust, a partnership, a company, and any other body of persons.
    A ``company'' under the proposed treaty is any body 
corporate or any entity which is treated as a body corporate 
for tax purposes according to the laws of the state in which it 
is organized.
    The terms ``enterprise of a Contracting State'' and 
``enterprise of the other Contracting State'' mean, 
respectively, an enterprise carried on by a resident of a 
treaty country and an enterprise carried on by a resident of 
the other treaty country. The terms also include an enterprise 
carried on by a resident of a treaty country through an entity 
that is treated as fiscally transparent in such country. The 
proposed treaty does not define the term ``enterprise.'' 
However, despite the absence of a clear, generally accepted 
meaning, the Technical Explanation states that the term is 
understood to refer to any activity or set of activities that 
constitute a trade or business.
    The proposed treaty defines ``international traffic'' as 
any transport by a ship or aircraft, except when the transport 
is solely between places in a treaty country. Accordingly, with 
respect to a Danish enterprise, purely domestic transport 
within the United States does not constitute ``international 
traffic.''
    The U.S. ``competent authority'' is the Secretary of the 
Treasury or his delegate. The U.S. competent authority function 
has been delegated to the Commissioner of Internal Revenue, who 
has redelegated the authority to the Assistant Commissioner 
(International). On interpretative issues, the latter acts with 
the concurrence of the Associate Chief Counsel (International) 
of the IRS. The Danish ``competent authority'' is the Minister 
for Taxation or his authorized representative.
    The term ``United States'' means the United States of 
America (encompassing the States and the District of Columbia), 
but does not include Puerto Rico, the Virgin Islands, Guam, or 
any other U.S. possession or territory. The term ``United 
States'' also includes the territorial sea of the United 
States, and the sea bed and subsoil of the submarine areas 
adjacent to the territorial sea of the United States over which 
the United States exercises sovereignty in accordance with 
international law. The Technical Explanation states that this 
extension of the definition applies, however, only for the 
purpose of natural resource exploration and exploitation of 
such areas and only if the person, property, or activity to 
which the proposed treaty is being applied is connected with 
such natural resource exploration or exploitation. Thus, the 
term ``United States'' 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 term ``Denmark'' means the Kingdom of Denmark, 
including any area outside the territorial sea of Denmark which 
in accordance with international law has been or may be 
designated under Danish laws as an area within which Denmark 
may exercise sovereign rights with respect to the exploration 
and exploitation of the natural resources of the sea-bed or its 
subsoil and the superjacent waters and with respect to other 
activities for the exploration and economic exploitation of the 
area. The proposed treaty provides that the term ``Denmark'' 
does not comprise the Faroe Islands or Greenland. However, the 
proposed protocol provides that the treaty may, through a 
supplementary treaty, be extended in its entirety or with any 
necessary modifications to the Faroe Islands or Greenland if 
they impose taxes substantially similar in character to those 
covered by the proposed treaty. The Technical Explanation 
states that such an extension would be subject to ratification 
in the case of the United States, and approval in accordance 
with Denmark's constitutional procedures.
    The term ``national of a Contracting State'' means (1) any 
individual possessing the nationality or citizenship of a 
treaty country; and (2) any legal person, partnership, or 
association deriving its status as such from the laws in force 
in a treaty country.
    The term ``qualified governmental entity'' means: (1) the 
governing body, political subdivision, or local authority of a 
treaty country; (2) a person wholly owned (directly or 
indirectly) by the treaty country or its political subdivisions 
or local authorities, provided that it is organized under the 
laws of such country, its earnings are credited to its own 
account with no portion of its income inuring to the benefit of 
a private person, and its assets vest in the country, political 
subdivision or local authority upon dissolution; and (3) a 
pension trust or fund of a person described in (1) or (2) above 
that is constituted and operated exclusively to administer or 
provide pension benefits described in Article 19 (Government 
Service). A qualified governmental entity described in (2) and 
(3) above cannot engage in any commercial activity. This 
definition is the same as that contained in the U.S. model.
    The proposed treaty also contains the standard provision 
that, unless the context otherwise requires or the competent 
authorities agree to a common meaning, all terms not defined in 
the treaty have the meaning pursuant to the respective laws of 
the country that is applying the treaty. Where a term is 
defined both under a country's tax law and under a non-tax law, 
the definition in the tax law is to be used in applying the 
proposed treaty.
Article 4. Residence
    The assignment of a country of residence is important 
because the benefits of the proposed treaty generally are 
available only to a resident of one of the treaty countries as 
that term is defined in the proposed treaty. Furthermore, 
issues arising because of dual residency, including situations 
of double taxation, may be avoided by the assignment of one 
treaty country as the country of residence when under the 
internal laws of the treaty countries a person is a resident of 
both countries.
            Internal taxation rules
United States
    Under U.S. law, the residence of an individual is important 
because a resident alien, like a U.S. citizen, is taxed on his 
or her worldwide income, while a nonresident alien is taxed 
only on certain U.S.-source income and on income that is 
effectively connected with a U.S. trade or business. An 
individual who spends sufficient time in the United States in 
any year or over a three-year period generally is treated as a 
U.S. resident. A permanent resident for immigration purposes 
(i.e., a ``green card'' holder) also is treated as a U.S. 
resident.
    Under U.S. law, a company is taxed on its worldwide income 
if it is a ``domestic corporation.'' A domestic corporation is 
one that is created or organized in the United States or under 
the laws of the United States, a State, or the District of 
Columbia.
Denmark
    Under Danish law, resident individuals are subject to tax 
on their worldwide income, while nonresident individuals are 
subject to tax only on income earned in Denmark. Individuals 
are considered to be residents of Denmark if they are present 
in Denmark for more than six months or if their permanent place 
of residence is in Denmark. Companies that are incorporated in 
Denmark, or whose seat of management is in Denmark, are 
considered as residents of Denmark and subject to tax on their 
worldwide income.
            Proposed treaty rules
    The proposed treaty specifies rules to determine whether a 
person is a resident of the United States or Denmark for 
purposes of the proposed treaty. The rules generally are 
consistent with the rules of the U.S. model.
    The proposed treaty generally defines ``resident of a 
Contracting State'' to mean any person who, under the laws of 
that country, is liable to tax by reason of the person's 
domicile, residence, citizenship, place of management, place of 
incorporation, or any other criterion of a similar nature. The 
term ``resident of a Contracting State'' does not include any 
person that is liable to tax in that country only on income 
from sources in that country or on profits attributable to a 
permanent establishment in that country. A United States 
citizen or an alien lawfully admitted for permanent residence 
in the United States (i.e., a ``green card'' holder) is a U.S. 
resident only if he or she has a substantial presence, 
permanent home, or habitual abode in the United States. The 
determination of whether a citizen or national is considered a 
resident of the United States or Denmark is made based on the 
principles of the treaty tie-breaker rules described below.
    The proposed treaty also provides that a resident includes 
a legal person organized under the laws of a treaty country and 
that is generally exempt from tax in the treaty country because 
it is established and maintained in that country either (1) 
exclusively for a religious, charitable, educational, 
scientific, or other similar purpose; or (2) to provide 
pensions or other similar benefits to employees, including 
self-employed individuals, pursuant to a plan. The Technical 
Explanation states that the term ``similar benefits'' is 
intended to encompass employee benefits such as health and 
disability benefits.
    A qualified governmental entity is also treated as a 
resident of the country in which it is established.
    The proposed treaty provides a special rule for fiscally 
transparent entities. Under this rule, an item of income, 
profit, or gain derived through an entity that is fiscally 
transparent under the laws of either country will be considered 
to be derived by a resident of a country to the extent that the 
item is treated, for purposes of the tax laws of such country, 
as the income, profit, or gain of a resident of such country. 
The Technical Explanation states that in the case of the United 
States, such fiscally transparent entities include 
partnerships, common investment trusts under section 584 of the 
Code, grantor trusts, and U.S. limited liability companies 
treated as partnerships for U.S. tax purposes. For example, if 
a corporation resident in Denmark distributes a dividend to an 
entity treated as fiscally transparent for U.S. tax purposes, 
the dividend will be considered to be derived by a resident of 
the United States only to the extent that U.S. tax laws treat 
one or more U.S. residents (whose status as U.S. residents is 
determined under U.S. tax laws) as deriving the dividend income 
for U.S. tax purposes.
    A set of ``tie-breaker'' rules is provided to determine 
residence in the case of an individual who, under the basic 
residence definition, would be considered to be a resident of 
both countries. Under these rules, an individual is deemed to 
be a resident of the country in which he or she has a permanent 
home available. If the individual has a permanent home in both 
countries, the individual's residence is deemed to be the 
country with which his or her personal and economic relations 
are closer (i.e., his or her ``center of vital interests''). If 
the country in which the individual has his or her center of 
vital interests cannot be determined, or if he or she does not 
have a permanent home available in either country, he or she is 
deemed to be a resident of the country in which he or she has 
an habitual abode. If the individual has an habitual abode in 
both countries or in neither country, he or she is deemed to be 
a resident of the country of which he or she is a national. If 
the individual is a national of both countries or neither 
country, the competent authorities of the countries will settle 
the question of residence by mutual agreement.
    If a company would be a resident of both countries under 
the basic definition in the proposed treaty, the competent 
authorities of the countries will attempt to settle the 
question of residence by mutual agreement and to determine the 
mode of application of the treaty to such person.
Article 5. Permanent Establishment
    The proposed treaty contains a definition of the term 
``permanent establishment'' that generally follows the pattern 
of other recent U.S. income tax treaties, the U.S. model, and 
the OECD model.
    The permanent establishment concept is one of the basic 
devices used in income tax treaties to limit the taxing 
jurisdiction of the host country and thus to mitigate double 
taxation. Generally, an enterprise that is a resident of one 
country is not taxable by the other country on its business 
profits unless those profits are attributable to a permanent 
establishment of the resident in the other country. In 
addition, the permanent establishment concept is used to 
determine whether the reduced rates of, or exemptions from, tax 
provided for dividends, interest, and royalties apply, or 
whether those items of income will be taxed as business 
profits.
    In general, under the proposed treaty, a permanent 
establishment is a fixed place of business through which the 
business of an enterprise is wholly or partly carried on. A 
permanent establishment includes a place of management, a 
branch, an office, a factory, a workshop, a mine, an oil or gas 
well, a quarry, or any other place of extraction of natural 
resources. It also includes a building site or a construction 
or installation project, or an installation or drilling rig or 
ship used for the exploration of natural resources, but only if 
the site, project, or activity continues for more than twelve 
months. For these purposes, activities carried on by an 
enterprise related to another enterprise, within the meaning of 
Article 9 (Associated Enterprises), are treated as carried on 
by the enterprise to which it is related if the activities in 
question are substantially the same as those carried on by the 
last-mentioned enterprise and are concerned with the same 
project or operation (except to the extent that those 
activities are carried on at the same time). The Technical 
Explanation states that the twelve-month test applies 
separately to each individual site or project, with a series of 
contracts or projects that are interdependent both commercially 
and geographically treated as a single project. The Technical 
Explanation further states that if the twelve-month threshold 
is exceeded, the site or project constitutes a permanent 
establishment as of the first day that work in the country 
began.
    Under the proposed treaty, the following activities are 
deemed not to constitute a permanent establishment: (1) the use 
of facilities solely for storing, displaying, or delivering 
goods or merchandise belonging to the enterprise; (2) the 
maintenance of a stock of goods or merchandise belonging to the 
enterprise solely for storage, display, or delivery or solely 
for processing by another enterprise; (3) the maintenance of a 
fixed place of business solely for the purchase of goods or 
merchandise or for the collection of information for the 
enterprise; and (4) the maintenance of a fixed place of 
business solely for the purpose of carrying on for the 
enterprise any other activity of a preparatory or auxiliary 
character.
    Under the U.S. model, the maintenance of a fixed place of 
business solely for any combination of the above-listed 
activities does not constitute a permanent establishment. Under 
the proposed treaty (as under the OECD Model), a fixed place of 
business used solely for any combination of these activities 
does not constitute a permanent establishment, provided that 
the overall activity of the fixed place of business is of a 
preparatory or auxiliary character. In this regard, the 
Technical Explanation states that it is assumed that a 
combination of preparatory or auxiliary activities generally 
will also be of a character that is preparatory or auxiliary.
    Under the proposed treaty, if a person, other than an 
independent agent, is acting in a treaty country on behalf of 
an enterprise of the other country and has, and habitually 
exercises, the authority to conclude contracts in the name of 
such enterprise, the enterprise is deemed to have a permanent 
establishment in the first country in respect of any activities 
undertaken by such person for that enterprise. This rule does 
not apply where the activities of such person are limited to 
the activities listed above, such as storage, display, or 
delivery of merchandise, which are excluded from the definition 
of a permanent establishment.
    Under the proposed treaty, no permanent establishment is 
deemed to arise if the agent is a broker, general commission 
agent, or any other agent of independent status, provided that 
the agent is acting in the ordinary course of its business. The 
Technical Explanation states that whether an enterprise and an 
agent are independent is a factual determination, a relevant 
factor of which includes the extent to which the agent bears 
business risk.
    The proposed treaty provides that the fact that a company 
that is a resident of one country controls or is controlled by 
a company that is a resident of the other country or that 
carries on business in the other country does not of itself 
cause either company to be a permanent establishment of the 
other.
Article 6. Income from Real Property
    This article covers income from real property. The rules 
covering gains from the sale of real property are in Article 13 
(Capital Gains).
    Under the proposed treaty, income derived by a resident of 
one country from real property situated in the other country 
may be taxed in the country where the property is located. This 
rule is consistent with the rules in the U.S. and OECD models. 
For this purpose, income from real property includes income 
from agriculture or forestry.
    The term ``real property'' has the meaning which it has 
under the law of the country in which the property in question 
is situated.\5\ The proposed treaty specifies that the term in 
any case includes property accessory to real property; 
livestock and equipment used in agriculture and forestry; 
rights to which the provisions of general law respecting landed 
property apply; usufruct of real property; and rights to 
variable or fixed payments as consideration for the working of, 
or the right to work, mineral deposits, sources, and other 
natural resources. Ships, boats, and aircraft are not 
considered to be real property.
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    \5\ In the case of the United States, the term is defined in Treas. 
Reg. sec. 1.897-1(b).
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    The proposed treaty specifies that the country in which the 
property is situated also may tax income derived from the 
direct use, letting, or use in any other form of real property. 
The rules of Article 6, permitting source country taxation, 
also apply to the income from real property of an enterprise 
and to income from real property used for the performance of 
independent personal services.
    The proposed treaty provides that residents of a treaty 
country that are liable for tax in the other treaty country on 
income from real property situated in such other treaty country 
may elect to compute the tax on such income on a net basis. 
Such an election will be binding for the taxable year of the 
election and all subsequent taxable years unless the competent 
authority of the country in which the property is situated 
agrees to terminate the election. U.S. internal law provides 
such a net-basis election in the case of income of a foreign 
person from U.S. real property (Code secs. 871(d) and 882(d)).
Article 7. Business Profits
            Internal taxation rules
United States
    U.S. law distinguishes between the U.S. business income and 
the other U.S. income of a nonresident alien or foreign 
corporation. A nonresident alien or foreign corporation is 
subject to a flat 30-percent rate (or lower treaty rate) of tax 
on certain U.S.-source income if that income is not effectively 
connected with the conduct of a trade or business within the 
United States. The regular individual or corporate rates apply 
to income (from any source) which is effectively connected with 
the conduct of a trade or business within the United States.
    The treatment of income as effectively connected with a 
U.S. trade or business depends upon whether the source of the 
income is U.S. or foreign. In general, U.S.-source periodic 
income (such as interest, dividends, rents, and wages) and 
U.S.-source capital gains are effectively connected with the 
conduct of a trade or business within the United States if the 
asset generating the income is used in (or held for use in) the 
conduct of the trade or business or if the activities of the 
trade or business were a material factor in the realization of 
the income. All other U.S.-source income of a person engaged in 
a trade or business in the United States is treated as 
effectively connected with the conduct of a trade or business 
in the United States (under what is referred to as a ``force of 
attraction'' rule).
    Foreign-source income generally is effectively connected 
income only if the foreign person has an office or other fixed 
place of business in the United States and the income is 
attributable to that place of business. Only three types of 
foreign-source income are considered to be effectively 
connected income: rents and royalties for the use of certain 
intangible property derived from the active conduct of a U.S. 
business; certain dividends and interest either derived in the 
active conduct of a banking, financing or similar business in 
the United States or received by a corporation the principal 
business of which is trading in stocks or securities for its 
own account; and certain sales income attributable to a U.S. 
sales office. Special rules apply for purposes of determining 
the foreign-source income that is effectively connected with a 
U.S. business of an insurance company.
    Any income or gain of a foreign person for any taxable year 
that is attributable to a transaction in another year is 
treated as effectively connected with the conduct of a U.S. 
trade or business if it would have been so treated had it been 
taken into account in that other year (Code sec. 864(c)(6)). In 
addition, if any property ceases to be used or held for use in 
connection with the conduct of a trade or business within the 
United States, the determination of whether any income or gain 
attributable to a sale or exchange of that property occurring 
within ten years after the cessation of business is effectively 
connected with the conduct of a trade or business within the 
United States is made as if the sale or exchange occurred 
immediately before the cessation of business (Code sec. 
864(c)(7)).
Denmark
    Foreign corporations and nonresident individuals generally 
are subject to Danish tax only on income derived in Denmark. 
Business income derived in Denmark by a foreign corporation or 
nonresident individual generally is taxed in the same manner as 
the income of a Danish corporation or resident individual.
            Proposed treaty limitations on internal law
    Under the proposed treaty (and similar to the present 
treaty), business profits of an enterprise of one of the 
countries are taxable in the other country only to the extent 
that they are attributable to a permanent establishment in the 
other country through which the enterprise carries on business. 
This is one of the basic limitations on a country's right to 
tax income of a resident of the other country. The rule is 
similar to those contained in the U.S. and OECD models.
    The taxation of business profits under the proposed treaty 
differs from U.S. internal law rules for taxing business 
profits primarily by requiring more than merely being engaged 
in a trade or business before a country can tax business 
profits and by substituting an ``attributable to'' standard for 
the Code's ``effectively connected'' standard. Under the 
proposed treaty, some type of fixed place of business would 
have to be present and the business profits generally would 
have to be attributable to that fixed place of business.
    The proposed treaty (similar to the present treaty) 
provides that there will be attributed to a permanent 
establishment the business profits which it might be expected 
to make if it were a distinct and independent enterprise 
engaged in the same or similar activities under the same or 
similar conditions. For this purpose, the business profits to 
be attributed to the permanent establishment include only the 
profits derived from the assets or activities of the permanent 
establishment. The Technical Explanation states that this 
provision permits the use of methods other than separate 
accounting to determine the arm's-length profits of a permanent 
establishment where it is necessary to do so for practical 
reasons, such as when the affairs of the permanent 
establishment are so closely bound up with those of the head 
office that it would be impossible to disentangle them on any 
strict basis of accounts.
    The proposed protocol provides that nothing in Article 7 
(Business Profits) or 24 (Non-Discrimination) prevents either 
treaty country from applying their special rules dealing with 
the taxation of insurance companies. Thus, for example, the 
proposed treaty will not prevent the United States from 
continuing to tax permanent establishments of Danish insurance 
companies in accordance with section 842(b) of the Code.
    In computing taxable business profits, the proposed treaty 
provides that deductions are allowed for expenses, wherever 
incurred, which are incurred for the purposes of the permanent 
establishment. These deductions include a reasonable allocation 
of executive and general administrative expenses, research and 
development expenses, interest, and other expenses incurred for 
the purposes of the enterprise as a whole (or the part of the 
enterprise which includes the permanent establishment). The 
Technical Explanation states that this rule permits (but does 
not require) each treaty country to apply the type of expense 
allocation rules provided by U.S. law (such as in Treas. Reg. 
secs. 1.861-8 and 1.882-5). The Technical Explanation clarifies 
that deductions will not be allowed 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.
    Business profits are not attributed to a permanent 
establishment merely by reason of the purchase of goods or 
merchandise by the permanent establishment for the enterprise. 
Thus, where a permanent establishment purchases goods for its 
head office, the business profits attributed to the permanent 
establishment with respect to its other activities are not 
increased by a profit element in its purchasing activities.
    The proposed treaty requires the determination of business 
profits of a permanent establishment to be made in accordance 
with the same method year by year unless a good and sufficient 
reason to the contrary exists. Where business profits include 
items of income that are dealt with separately in other 
articles of the proposed treaty, those other articles, and not 
the business profits article, govern the treatment of those 
items of income (except where such other articles specifically 
provide to the contrary). Thus, for example, dividends are 
taxed under the provisions of Article 10 (Dividends), and not 
as business profits, except as specifically provided in Article 
10.
    For purposes of the proposed treaty, the term ``business 
profits'' means income derived from any trade or business, 
including income derived by an enterprise from the performance 
of personal services and from the rental of tangible personal 
property.
    The proposed treaty incorporates the rule of Code section 
864(c)(6) and provides that any income or gain attributable to 
a permanent establishment or a fixed base during its existence 
is taxable in the country where the permanent establishment or 
fixed base is located even though payments are deferred until 
after the permanent establishment or fixed base has ceased to 
exist. This rule applies with respect to business profits 
(Article 7, paragraphs 1 and 2), dividends (Article 10, 
paragraph 6), interest (Article 11, paragraph 3), royalties 
(Article 12, paragraph 3), capital gains (Article 13, paragraph 
3), independent personal services income (Article 14), and 
other income (Article 21, paragraph 2).
Article 8. Shipping and Air Transport
    Article 8 of the proposed treaty covers income from the 
operation or rental of ships, aircraft, and containers in 
international traffic. The rules governing income from the 
disposition of ships, aircraft, and containers are in Article 
13 (Capital Gains).
    The United States generally taxes the U.S.-source income of 
a foreign person from the operation of ships or aircraft to or 
from the United States. An exemption from U.S. tax is provided 
if the income is earned by a corporation that is organized in, 
or an alien individual who is resident in, a foreign country 
that grants an equivalent exemption to U.S. corporations and 
residents. The United States has entered into agreements with a 
number of countries providing such reciprocal exemptions.
    Under the proposed treaty, profits which are derived by an 
enterprise of one country from the operation in international 
traffic of ships or aircraft are taxable only in that country, 
regardless of the existence of a permanent establishment in the 
other country. ``International traffic'' is defined in Article 
3(1)(d) (General Definitions) as any transport by a ship or 
aircraft, except when the transport is solely between places in 
a treaty country.
    For purposes of the proposed treaty, profits from the 
operation of ships or aircraft include profits derived from the 
rental of ships or aircraft on a full (time or voyage) basis 
(i.e., with crew). It also includes profits from the rental of 
ships or aircraft on a bareboat basis (i.e., without crew) if 
such ships or aircraft are operated in international traffic by 
the lessee or if such rental income is incidental to profits 
from the operation of ships or aircraft in international 
traffic. Profits derived by an enterprise from the inland 
transport of property or passengers within either treaty 
country are treated as profits from the operation of ships or 
aircraft in international traffic if such transport is 
undertaken as part of international traffic by the enterprise. 
These rules are the same as the corresponding rules in the U.S. 
model.
    The proposed treaty provides that profits of an enterprise 
of a country from the use, maintenance, or rental of containers 
(including trailers, barges, and related equipment for the 
transport of containers) used in international traffic are 
taxable only in that country.
    The shipping and air transport provisions of the proposed 
treaty apply to profits 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. According to the proposed 
protocol, the Scandinavian Airlines System (SAS) is a 
consortium within the meaning of this article; its 
participating members being SAS Danmark A/S, SAS Norge ASA, and 
SAS Sverige AB. In order to avoid the problems inherent in 
operating in the United States through a consortium, the 
members of the consortium in 1946 established a New York 
corporation, Scandinavian Airlines System, Inc. (SAS, Inc.) to 
act on their behalf in the United States pursuant to an agency 
agreement dated September 18, 1946. A similar agreement was 
entered into by SAS directly and SAS, Inc., on March 14, 1951. 
Pursuant to the agency agreement, SAS, Inc., is authorized to 
perform only such functions as SAS assigns to it, all in 
connection with international air traffic. Under that 
agreement, all revenues collected by SAS, Inc., are 
automatically credited to SAS. Operation expenses incurred by 
SAS, Inc., are debited to SAS in accordance with the terms of 
the agency agreement. SAS is obligated under the terms of the 
agency agreement to reimburse SAS, Inc. for all of its expenses 
irrespective of the revenues of SAS, Inc. SAS, Inc., does not 
perform any functions except those connected with or incidental 
to the business of SAS as an operator of aircraft in 
international traffic. According to the Technical Explanation, 
the income share of SAS Danmark A/S from its participation in 
the SAS consortium is taxable in accordance with this article 
of the proposed treaty. In addition, the proposed protocol 
provides that in view of the special nature of the SAS 
consortium and the agency agreement as described above, for 
purposes of this article, the United States will treat all of 
the income earned by SAS, Inc. that is derived from the 
operation in international traffic of aircraft as income of the 
SAS consortium.
    The profits of an enterprise of a treaty country from the 
transport by ships or aircraft of supplies or personnel to a 
location where offshore activities in connection with the 
exploration or exploitation of natural resources are being 
carried on in the other country, or from the operation of 
tugboats and similar vessels in connection with such 
activities, are taxable only in the first-mentioned country 
(i.e., the residency country). This rule applies 
notwithstanding provisions under the permanent establishment 
article that would otherwise subject such activities to source 
country taxation. This rule is not contained in the U.S. model.
Article 9. Associated Enterprises
    The proposed treaty, like most other U.S. tax treaties, 
contains an arm's-length pricing provision. The proposed treaty 
recognizes the right of each country to make an allocation of 
profits to an enterprise of that country in the case of 
transactions between related enterprises, if conditions are 
made or imposed between the two enterprises in their commercial 
or financial relations which differ from those which would be 
made between independent enterprises. In such a case, a country 
may allocate to such an enterprise the profits which it would 
have accrued but for the conditions so imposed. This treatment 
is consistent with the U.S. model.
    For purposes of the proposed treaty, an enterprise of one 
country is related to an enterprise of the other country if one 
of the enterprises participates directly or indirectly in the 
management, control, or capital of the other enterprise. 
Enterprises are also related if the same persons participate 
directly or indirectly in their management, control, or 
capital.
    Under the proposed treaty, when a redetermination of tax 
liability has been made by one country under the provisions of 
this article, the other country will (after agreeing that the 
adjustment was appropriate) make an appropriate adjustment to 
the amount of tax paid in that country on the redetermined 
income if it considers an adjustment justified. In making such 
adjustment, due regard is to be given to other provisions of 
the proposed treaty, and the competent authorities of the two 
countries are to consult with each other if necessary. The 
proposed treaty's saving clause retaining full taxing 
jurisdiction in the country of residence or citizenship does 
not apply in the case of such adjustments. Accordingly, 
internal statute of limitations provisions do not prevent the 
allowance of appropriate correlative adjustments.
    The Technical Explanation states that the treaty countries 
reserve their rights to apply internal law provisions that 
permit adjustments between related parties. The Technical 
Explanation also states that adjustments are permitted under 
internal law provisions even if such adjustments are different 
from, or go beyond, the adjustments authorized by this article, 
provided that such adjustments are consistent with the general 
principles of this article permitting adjustments to reflect 
arm's-length terms.
Article 10. Dividends
            Internal taxation rules
United States
    The United States generally imposes a 30-percent tax on the 
gross amount of U.S.-source dividends paid to nonresident alien 
individuals and foreign corporations. The 30-percent tax does 
not apply if the foreign recipient is engaged in a trade or 
business in the United States and the dividends are effectively 
connected with that trade or business. In such a case, the 
foreign recipient is subject to U.S. tax on such dividends on a 
net basis at graduated rates in the same manner that a U.S. 
person would be taxed.
    Under U.S. law, the term ``dividend'' generally means any 
distribution of property made by a corporation to its 
shareholders, either from accumulated earnings and profits or 
current earnings and profits. However, liquidating 
distributions generally are treated as payments in exchange for 
stock and thus are not subject to the 30-percent withholding 
tax described above (see discussion of capital gains in 
connection with Article 13 below).
    Dividends paid by a U.S. corporation generally are U.S.-
source income. Also treated as U.S.-source dividends for this 
purpose are portions of certain dividends paid by a foreign 
corporation that conducts a U.S. trade or business. The U.S. 
30-percent withholding tax imposed on the U.S.-source portion 
of the dividends paid by a foreign corporation is referred to 
as the ``second-level'' withholding tax. This second-level 
withholding tax is imposed only if a treaty prevents 
application of the statutory branch profits tax.
    In general, corporations are not entitled under U.S. law to 
a deduction for dividends paid. Thus, the withholding tax on 
dividends theoretically represents imposition of a second level 
of tax on corporate taxable income. Treaty reductions of this 
tax reflect the view that where the United States already 
imposes corporate-level tax on the earnings of a U.S. 
corporation, a 30-percent withholding rate may represent an 
excessive level of source country taxation. Moreover, the 
reduced rate of tax often applied by treaty to dividends paid 
to direct investors reflects the view that the source country 
tax on payments of profits to a substantial foreign corporate 
shareholder may properly be reduced further to avoid double 
corporate-level taxation and to facilitate international 
investment.
    A real estate investment trust (``REIT'') is a corporation, 
trust, or association that is subject to the regular corporate 
income tax, but that receives a deduction for dividends paid to 
its shareholders if certain conditions are met. In order to 
qualify for the deduction for dividends paid, a REIT must 
distribute most of its income. Thus, a REIT is treated, in 
essence, as a conduit for federal income tax purposes. Because 
a REIT is taxable as a U.S. corporation, a distribution of its 
earnings is treated as a dividend rather than income of the 
same type as the underlying earnings. Such distributions are 
subject to the U.S. 30-percent withholding tax when paid to 
foreign owners.
    A REIT is organized to allow persons to diversify ownership 
in primarily passive real estate investments. As such, the 
principal income of a REIT often is rentals from real estate 
holdings. Like dividends, U.S.-source rental income of foreign 
persons generally is subject to the 30-percent withholding tax 
(unless the recipient makes an election to have such rental 
income taxed in the United States on a net basis at the regular 
graduated rates). Unlike the withholding tax on dividends, 
however, the withholding tax on rental income generally is not 
reduced in U.S. income tax treaties.
    U.S. internal law also generally treats a regulated 
investment company (``RIC'') as both a corporation and a 
conduit for income tax purposes. The purpose of a RIC is to 
allow investors to hold a diversified portfolio of securities. 
Thus, the holder of stock in a RIC may be characterized as a 
portfolio investor in the stock held by the RIC, regardless of 
the proportion of the RIC's stock owned by the dividend 
recipient.
    A foreign corporation engaged in the conduct of a trade or 
business in the United States is subject to a flat 30-percent 
branch profits tax on its ``dividend equivalent amount.'' The 
dividend equivalent amount is the corporation's earnings and 
profits which are attributable to its income that is 
effectively connected with its U.S. trade or business, 
decreased by the amount of such earnings that are reinvested in 
business assets located in the United States (or used to reduce 
liabilities of the U.S. business), and increased by any such 
previously reinvested earnings that are withdrawn from 
investment in the U.S. business. The dividend equivalent amount 
is limited by (among other things) aggregate earnings and 
profits accumulated in taxable years beginning after December 
31, 1986.
Denmark
    Denmark generally imposes a 25 percent withholding tax on 
dividend payments to nonresidents that own less than 25 percent 
of the paying corporation. However, there is no dividend 
withholding tax in the case of shareholders that own 25 percent 
or more of the paying corporation. Denmark does not impose a 
branch tax on the repatriation of the after-tax profit of a 
permanent establishment.
            Proposed treaty limitations on internal law
    Under the proposed treaty, dividends paid by a resident of 
a treaty country to a resident of the other country may be 
taxed in such other country. Dividends paid by a resident of a 
treaty country and beneficially owned by a resident of the 
other country may also be taxed by the country in which the 
payor is resident, but the rate of such tax is limited. Under 
the proposed treaty, source country taxation (i.e., taxation by 
the country in which the payor is resident) generally is 
limited to 5 percent of the gross amount of the dividend if the 
beneficial owner of the dividend is a resident of the other 
country and is a company that owns at least 10 percent of the 
share capital of the payor company. The source country dividend 
withholding tax generally is limited to 15 percent of the gross 
amount of the dividends paid to residents of the other country 
in all other cases. These provisions do not affect the taxation 
of the company in respect of the profits out of which the 
dividends are paid.
    The present treaty provides for a similar dividend 
withholding rate structure. However, in order to obtain the 5-
percent withholding rate under the present treaty, the 
beneficial owner must control (directly or indirectly) at least 
95 percent of the voting power of the paying corporation. 
Furthermore, the paying corporation cannot derive more than 25 
percent of its gross income from interest and dividends, other 
than interest and dividends received from its own subsidiary 
corporations. The 5-percent withholding rate does not apply 
under the present treaty if the relationship of the two 
corporations has been arranged or is maintained primarily with 
the intention of securing such reduced rate.
    Under the proposed treaty, dividends paid by a U.S. RIC are 
eligible only for the limitation that applies the 15-percent 
rate, regardless of the beneficial owner's percentage ownership 
in such entity. Dividends paid by a U.S. REIT are not eligible 
for the 5-percent rate. Moreover, such REIT dividends are 
eligible for the 15-percent rate only if (1) the dividends are 
beneficially owned by an individual who holds 10 percent or 
less of the REIT; (2) the dividends are paid with respect to a 
class of stock that is publicly traded and the beneficial owner 
of the dividends is a person owning not more than 5 percent of 
any class of the REIT's stock; or (3) the beneficial owner of 
the dividends is a person owning not more than 10 percent of 
the REIT and the REIT is diversified. Otherwise, dividends paid 
by a U.S. REIT are subject to U.S. taxation at the full 
statutory rate. For purposes of this provision, the Technical 
Explanation states that a REIT will be considered to be 
diversified if the value of no single interest in the REIT's 
real property exceeds 10 percent of the REIT's total interests 
in real property.
    Notwithstanding the discussion above, dividends cannot be 
taxed by the source country if the beneficial owner of the 
dividends is a qualified governmental entity that does not 
control the payor of the dividends. This rule is the same as 
that contained in the U.S. model.
    The proposed treaty defines a ``dividend'' to include 
income from shares or other rights, not being debt-claims, 
participating in profits, as well as income that is subject to 
the same tax treatment as income from shares by the internal 
laws of the treaty country of which the company making the 
distribution is a resident.
    The proposed treaty's reduced rates of tax on dividends do 
not apply if the dividend recipient carries on business through 
a permanent establishment in the source country and the 
dividends are attributable to the permanent establishment. 
Dividends attributable to a permanent establishment are taxed 
as business profits (Article 7). The proposed treaty's reduced 
rates of tax on dividends also do not apply if the dividend 
recipient is a nonresident who performs independent personal 
services from a fixed base located in a treaty country and such 
dividends are attributable to the fixed base. In such a case, 
the dividends attributable to the fixed base are taxed as 
income from the performance of independent personal services 
(Article 14). Under the proposed treaty, these rules also apply 
if the permanent establishment or fixed base no longer exists 
when the dividends are paid but such dividends are attributable 
to the former permanent establishment or fixed base.
    The proposed treaty provides that a country may not impose 
any tax on dividends paid by a company that is a resident of 
the other country, except to the extent that the dividends are 
paid to a resident of the first country or the dividends are 
attributable to a permanent establishment or fixed base 
situated in that first country. Thus, this provision overrides 
the ability of the United States to impose its second-level 
withholding tax on the U.S.-source portion of dividends paid by 
a Danish corporation. The proposed treaty also provides that a 
country may not impose a tax on a corporation's undistributed 
profits, except as provided below. These rules apply even if 
the dividends paid or the undistributed profits consist wholly 
or partially of profits arising in that country.
    The proposed treaty permits the imposition of a branch 
profits tax, but limits the rate of such tax to 5 percent 
(i.e., the rate prescribed in paragraph 2(a) of this article). 
The branch profits tax may be imposed on a company that is a 
resident of a treaty country and that has a permanent 
establishment in the other treaty country or is subject to tax 
in the other treaty country on a net basis on its income from 
real property (Article 6) or capital gains (Article 13). Such 
tax may be imposed only on the portion of the business profits 
attributable to such permanent establishment, or the portion of 
such real property income or capital gains, that represents the 
``dividend equivalent amount,'' and in the case of Denmark, an 
amount that is analogous to the dividend equivalent amount. The 
Technical Explanation states that the term ``dividend 
equivalent amount'' has the same meaning that it has under Code 
section 884, as amended from time to time, provided the 
amendments are consistent with the purpose of the branch 
profits tax.
Article 11. Interest
            Internal taxation rules
United States
    Subject to several exceptions (such as those for portfolio 
interest, bank deposit interest, and short-term original issue 
discount), the United States imposes a 30-percent withholding 
tax on U.S.-source interest paid to foreign persons under the 
same rules that apply to dividends. U.S.-source interest, for 
purposes of the 30-percent tax, generally is interest on the 
debt obligations of a U.S. person, other than a U.S. person 
that meets specified foreign business requirements. Also 
subject to the 30-percent tax is interest paid by the U.S. 
trade or business of a foreign corporation. A foreign 
corporation is subject to a branch-level excess interest tax 
with respect to certain ``excess interest'' of a U.S. trade or 
business of such corporation; under this rule, an amount equal 
to the excess of the interest deduction allowed with respect to 
the U.S. business over the interest paid by such business is 
treated as if paid by a U.S. corporation to a foreign parent 
and therefore is subject to the 30-percent withholding tax.
    Portfolio interest generally is defined as any U.S.-source 
interest that is not effectively connected with the conduct of 
a trade or business if such interest (1) is paid on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto and (2) is not received by a 10-
percent owner of the issuer of the obligation, taking into 
account shares owned by attribution. However, the portfolio 
interest exemption does not apply to certain contingent 
interest income.
    If an investor holds an interest in a fixed pool of real 
estate mortgages that is a real estate mortgage interest 
conduit (``REMIC''), the REMIC generally is treated for U.S. 
tax purposes as a pass-through entity and the investor is 
subject to U.S. tax on a portion of the REMIC's income (which, 
generally is interest income). If the investor holds a so-
called ``residual interest'' in the REMIC, the Code provides 
that a portion of the net income of the REMIC that is taxed in 
the hands of the investor--referred to as the investor's 
``excess inclusion''--may not be offset by any net operating 
losses of the investor, must be treated as unrelated business 
income if the investor is an organization subject to the 
unrelated business income tax, and is not eligible for any 
reduction in the 30-percent rate of withholding tax (by treaty 
or otherwise) that would apply if the investor were otherwise 
eligible for such a rate reduction.
Denmark
    Denmark generally does not impose a withholding tax on 
interest paid to nonresidents.
            Proposed treaty limitations on internal law
    Like the U.S. model and the present treaty, the proposed 
treaty exempts interest derived and beneficially owned by a 
resident of one country from tax in the source country.
    The proposed treaty defines the term ``interest'' as income 
from debt claims of every kind, whether or not secured by a 
mortgage and whether or not carrying a right to participate in 
the debtor's profits. In particular, it includes income from 
government securities and from bonds or debentures, including 
premiums or prizes attaching to such securities, bonds, or 
debentures. The proposed treaty includes in the definition of 
interest any other income that is treated as interest by the 
domestic law of the country in which the income arises. Penalty 
charges for late payment are not regarded as interest for 
purposes of this article. The proposed treaty provides that the 
term ``interest'' does not include amounts treated as dividends 
under Article 10 (Dividends).
    The proposed treaty's reductions in source country tax on 
interest do not apply if the beneficial owner carries on 
business in the source country through a permanent 
establishment located in that country and the interest is 
attributable to that permanent establishment. In such an event, 
the interest is taxed as business profits (Article 7). The 
proposed treaty's reduced rates of tax on interest also do not 
apply if the interest recipient is a treaty country resident 
who performs independent personal services from a fixed base 
located in the other treaty country and such interest is 
attributable to the fixed base. In such a case, the interest 
attributable to the fixed base is taxed as income from the 
performance of independent personal services (Article 14). 
These rules also apply if the permanent establishment or fixed 
base no longer exists when the interest is paid but such 
interest is attributable to the former permanent establishment 
or fixed base.
    The proposed treaty addresses the issue of non-arm's-length 
interest charges between related parties (or parties otherwise 
having a special relationship) by providing that the amount of 
interest for purposes of applying this article is the amount of 
interest that would have been agreed upon by the payor and the 
beneficial owner in the absence of the special relationship. 
Any amount of interest paid in excess of such amount is taxable 
according to the laws of each country, taking into account the 
other provisions of the proposed treaty. For example, excess 
interest paid by a subsidiary corporation to its parent 
corporation may be treated as a dividend under local law and 
thus be subject to the provisions of Article 10 (Dividends).
    The proposed treaty provides two anti-abuse exceptions to 
the general source-country reduction in tax discussed above. 
The first exception relates to ``contingent interest'' 
payments. If interest is paid by a source-country resident to a 
resident of the other country and is determined with reference 
(1) to receipts, sales, income, profits, or other cash flow of 
the debtor or a related person, (2) to any change in the value 
of any property of the debtor or a related person, or (3) to 
any dividend, partnership distribution, or similar payment made 
by the debtor to a related person, such interest may be taxed 
in the source country in accordance with its internal laws. 
However, if the beneficial owner is a resident of the other 
country, such interest may not be taxed at a rate exceeding 15 
percent (i.e., the rate prescribed in paragraph 2(b) of Article 
10 (Dividends)). The second anti-abuse exception provides that 
the reductions in and exemption from source country tax do not 
apply to excess inclusions with respect to a residual interest 
in a REMIC. Such income may be taxed in accordance with each 
country's internal law.
Article 12. Royalties
            Internal taxation rules
United States
    Under the same system that applies to dividends and 
interest, the United States imposes a 30-percent withholding 
tax on U.S.-source royalties paid to foreign persons. U.S.-
source royalties include royalties for the use of or the right 
to use intangible property in the United States.
Denmark
    Denmark generally imposes a withholding tax on royalties 
paid to nonresidents at a rate of 30 percent.
            Proposed treaty limitations on internal law
    The proposed treaty provides that royalties derived and 
beneficially owned by a resident of a treaty country are 
taxable only in that country. Thus, the proposed treaty 
generally exempts U.S.-source royalties beneficially owned by 
Danish residents from the 30-percent U.S. tax. This exemption 
from source country taxation is similar to that provided in the 
U.S. model and the present treaty.
    The term ``royalties'' means any consideration for the use 
of, the right to use, or the sale (which is contingent on the 
productivity, use, or further disposition) of any copyright of 
literary, artistic, scientific, or other work (including 
computer software, cinematographic films, audio or video tapes 
or disks, and other means of image or sound reproduction), 
patent, trademark, design or model, plan, secret formula or 
process, or other like right or property. The term also 
includes consideration for the use of, or the right to use 
information concerning industrial, commercial, or scientific 
experience. The Technical Explanation states that it is 
understood that payments with respect to transfers of ``shrink 
wrap'' computer software will not be considered as royalty 
income.
    The reduced rates of source country taxation do not apply 
where the beneficial owner carries on business through a 
permanent establishment in the source country, and the 
royalties are attributable to the permanent establishment. In 
that event, the royalties are taxed as business profits 
(Article 7). The proposed treaty's reduced rates of source 
country tax on royalties also do not apply if the beneficial 
owner is a treaty country resident who performs independent 
personal services from a fixed base located in the other treaty 
country and such royalties are attributable to the fixed base. 
In such a case, the royalties attributable to the fixed base 
are taxed as income from the performance of independent 
personal services (Article 14). These rules also apply if the 
permanent establishment or fixed base no longer exists when the 
royalties are paid but such royalties are attributable to the 
former permanent establishment or fixed base.
    The proposed treaty addresses the issue of non-arm's-length 
royalties between related parties (or parties otherwise having 
a special relationship) by providing that the amount of 
royalties for purposes of applying this article is the amount 
that takes into account the use, right, or information for 
which they are paid, in the absence of the special 
relationship. Any amount of royalties paid in excess of such 
amount is taxable according to the laws of each country, taking 
into account the other provisions of the proposed treaty. For 
example, excess royalties paid by a subsidiary corporation to 
its parent corporation may be treated as a dividend under local 
law and thus be subject to the provisions of Article 10 
(Dividends).

Article 13. Capital Gains

            U.S. internal law
    Generally, gain realized by a nonresident alien or a 
foreign corporation from the sale of a capital asset is not 
subject to U.S. tax unless the gain is effectively connected 
with the conduct of a U.S. trade or business or, in the case of 
a nonresident alien, he or she is physically present in the 
United States for at least 183 days in the taxable year. A 
nonresident alien or foreign corporation is subject to U.S. tax 
on gain from the sale of a U.S. real property interest as if 
the gain were effectively connected with a trade or business 
conducted in the United States. ``U.S. real property 
interests'' include interests in certain corporations if at 
least 50 percent of the assets of the corporation consist of 
U.S. real property.
            Proposed treaty limitations on internal law
    The proposed treaty specifies rules governing when a 
country may tax gains from the alienation of property by a 
resident of the other country. The rules are generally 
consistent with those contained in the U.S. model.
    Under the proposed treaty, gains derived by a resident of 
one treaty country from the alienation of real property 
situated in the other country may be taxed in the country where 
the property is situated. For the purposes of this article, 
real property in the other country includes (1) real property 
as defined in Article 6 (Income From Real Property), (2) a U.S. 
real property interest, and (3) an equivalent interest in real 
property situated in Denmark.
    Gains from the alienation of personal property that are 
attributable to a permanent establishment which an enterprise 
of one country has in the other country, gains from the 
alienation of personal property attributable to a fixed base 
which is available to a resident of one country in the other 
country for the purpose of performing independent personal 
services, and gains from the alienation of such a permanent 
establishment (alone or with the whole enterprise) or such a 
fixed base, may be taxed in that other country. This rule also 
applies if the permanent establishment or fixed base no longer 
exists when the gains are recognized but such gains relate to 
the former permanent establishment or fixed base.
    Gains derived by an enterprise of a treaty country from the 
alienation of ships, boats, aircraft, or containers operated or 
used in international traffic (or personal property pertaining 
to the operation or use of such ships, boats, aircraft, or 
containers), are taxable only in such country.
    Gains derived by an enterprise of a treaty country from the 
deemed alienation of an installation, drilling rig, or ship 
used in the other country for the exploration or exploitation 
of oil and gas resources may be taxed by such other country in 
accordance with its internal law, but only to the extent of any 
depreciation taken in such other country. Thus, at the time of 
deemed alienation of the property under the law of the host 
country, an enterprise of the other treaty country may be 
required to recapture the depreciation claimed in the host 
country of an oil or gas exploration or exploitation 
installation, drilling rig, or ship. Because the amount that 
may be taxable is limited to the amount of any gain, 
depreciation will be recaptured only to the extent it has 
reduced the basis of the property below its fair market value. 
This provision is not contained in the U.S. model. The 
Technical Explanation states that the provision was included to 
permit Denmark to impose its income tax at the same time an oil 
or gas exploration or exploitation installation, drilling rig 
or ship is deemed alienated under Denmark's income tax laws. 
The Technical Explanation also states that other rules 
(described below) were included in the proposed treaty in order 
to prevent double taxation that might otherwise result from 
this provision.
    Gains from the alienation of any property other than that 
discussed above is taxable under the proposed treaty only in 
the country where the person disposing of the property is 
resident.
    The proposed treaty coordinates U.S. and Danish taxation of 
gains in circumstances where a treaty country resident is 
subject to tax in both treaty countries and one country deems a 
taxable disposition of property to have occurred, but the other 
country does not currently tax such gains. In such a case, the 
resident can elect in the annual return of income for the year 
of disposition to be liable to tax in the residence country as 
if he had sold and repurchased the property for an amount equal 
to its fair market value at a time immediately prior to the 
deemed disposition. This election applies to all property 
disposed of during the taxable year for which the election is 
made or at any time thereafter. The Technical Explanation 
states that this provision might be useful in a case where a 
U.S. corporation transfers a drilling rig, on which 
depreciation was taken in Denmark, to its home office in the 
United States. According to the Technical Explanation, Denmark 
generally would tax any built-in gain upon the transfer, 
limited to the amount of depreciation taken in Denmark, but the 
United States would defer taxation until the rig actually was 
sold. If the period for foreign tax credit carryovers had 
expired at the time of actual disposition, the U.S. corporation 
might not receive a foreign tax credit, resulting in double 
taxation. The Technical Explanation states that if the U.S. 
corporation elected the benefits of this provision, it would be 
subject to U.S. tax currently on the built-in gain, and take a 
new tax basis in the property.
    The proposed treaty also provides coordination rules with 
respect to gains from the alienation of property in a corporate 
or other reorganization. Under the proposed treaty, if a 
transaction is tax-deferred in the country of residence, then 
the competent authority of the source country may agree, if 
requested to do so by the person acquiring property in the 
transaction, to enter into an agreement to defer tax to the 
extent necessary to avoid double taxation. For this purpose, a 
tax-deferred transaction includes a corporate or other 
organization, reorganization, amalgamation, division, or 
similar transaction in which profit, gain, or income is not 
recognized for tax purposes. The Technical Explanation states 
that one situation in which this provision might be useful is 
the merger of two companies that are resident in one treaty 
country, both of which have permanent establishments in the 
other country. According to the Technical Explanation, if two 
U.S. resident corporations, each with a permanent establishment 
in Denmark, merged in a transaction that qualified as a tax-
free reorganization under Code section 368 but was taxable in 
Denmark, Denmark could tax built-in gain on assets of the 
permanent establishments. When those assets eventually were 
sold, the United States might also tax the gain, but without a 
foreign tax credit if the period for tax credit carryovers had 
already expired. The Technical Explanation states that the 
company surviving the merger could request that the Danish 
competent authority defer recognition of the gain until actual 
disposition of the assets, in order to assure a U.S. foreign 
tax credit for the Danish tax. The Technical Explanation also 
states that whether deferral should be granted is a matter to 
be decided by the competent authority.

Article 14. Independent Personal Services

            U.S. internal law
    The United States taxes the income of a nonresident alien 
individual at the regular graduated rates if the income is 
effectively connected with the conduct of a trade or business 
in the United States by the individual. The performance of 
personal services within the United States may constitute a 
trade or business within the United States.
    Under the Code, the income of a nonresident alien 
individual from the performance of personal services in the 
United States is excluded from U.S.-source income, and 
therefore is not taxed by the United States in the absence of a 
U.S. trade or business, if the following criteria are met: (1) 
the individual is not in the United States for over 90 days 
during the taxable year, (2) the compensation does not exceed 
$3,000, and (3) the services are performed as an employee of, 
or under a contract with, a foreign person not engaged in a 
trade or business in the United States, or are performed for a 
foreign office or place of business of a U.S. person.
            Proposed treaty limitations on internal law
    The proposed treaty limits the right of a country to tax 
income from the performance of personal services by a resident 
of the other country. Under the proposed treaty, income from 
the performance of independent personal services (i.e., 
services performed as an independent contractor, not as an 
employee) is treated separately from income from the 
performance of dependent personal services.
    Under the proposed treaty, income in respect of personal 
services of an independent character performed in one country 
by a resident of the other country is exempt from tax in the 
country where the services are performed (the source country) 
unless the individual performing the services has a fixed base 
regularly available to him or her in that country for the 
purpose of performing the services.\6\ In that case, the source 
country is permitted to tax only that portion of the 
individual's income which is attributable to the fixed base.
---------------------------------------------------------------------------
    \6\ According to the Technical Explanation, it is understood that 
the concept of a fixed base is similar, but not identical, to the 
concept of a permanent establishment.
---------------------------------------------------------------------------
    Under the proposed treaty, income that is taxable in the 
source country pursuant to this article will be determined 
under the principles of Article 7 (Business Profits). Thus, all 
relevant expenses, including expenses not incurred in the 
source country, must be allowed as deductions in computing the 
net income from services subject to tax in the source country.

Article 15. Dependent Personal Services

    Under the proposed treaty, salaries, wages, and other 
remuneration derived from services performed as an employee in 
one country (the source country) by a resident of the other 
country are taxable only by the country of residence if three 
requirements are met: (1) the individual must be present in the 
source country for not more than 183 days in any twelve-month 
period; (2) the individual is paid by, or on behalf of, an 
employer who is not a resident of the source country; and (3) 
the compensation must not be borne by a permanent establishment 
or fixed base of the employer in the source country. These 
limitations on source country taxation are the same as the 
rules of the U.S. model and the OECD model. If these three 
requirements are not met and the employee's services are 
performed in the other country, such other country may tax the 
related compensation.
    The proposed treaty provides that remuneration derived by a 
resident of one country in respect of employment as a member of 
the regular complement (including the crew) of a ship or 
aircraft operated in international traffic is taxable only in 
that country.
    This article is subject to the provisions of the separate 
articles covering directors' fees (Article 16), pensions, 
social security, annuities, alimony, and child support payments 
(Article 18), and government service income (Article 19).

Article 16. Directors' Fees

    Under the proposed treaty, directors' fees and other 
similar payments derived by a resident of one country as a 
member of the board of directors of a company which is a 
resident of that other country is taxable in that other 
country. Under this rule, which is the same as the OECD model, 
the country in which the company is resident may tax all of the 
remuneration paid to nonresident board members, regardless of 
where the services are performed. The U.S. model contains a 
different rule, which provides that the country in which the 
company is resident may tax nonresident directors, but only 
with respect to compensation for services performed in that 
country.

Article 17. Artistes and Sportsmen

    Like the U.S. and OECD models, the proposed treaty contains 
a separate set of rules that apply to the taxation of income 
earned by entertainers (such as theater, motion picture, radio, 
or television artistes, or musicians) and sportsmen. These 
rules apply notwithstanding the other provisions dealing with 
the taxation of income from personal services (Articles 14 and 
15) and are intended, in part, to prevent entertainers and 
sportsmen from using the treaty to avoid paying any tax on 
their income earned in one of the countries.
    Under the proposed treaty, income derived by an entertainer 
or sportsman who is a resident of one country from his or her 
personal activities as such exercised in the other country may 
be taxed in the other country if the amount of the gross 
receipts derived by him or her from such activities exceeds 
$20,000 or its equivalent in Danish kroner. The $20,000 
threshold includes reimbursed expenses. Under this rule, if a 
Danish entertainer or sportsman maintains no fixed base in the 
United States and performs (as an independent contractor) for 
one day of a taxable year in the United States for total 
compensation of $10,000, the United States could not tax that 
income. If, however, that entertainer's or sportsman's total 
compensation were $30,000, the full amount would be subject to 
U.S. tax.
    The proposed treaty provides that where income in respect 
of activities exercised by an entertainer or sportsman in his 
or her capacity as such accrues not to the entertainer or 
sportsman but to another person, that income is taxable by the 
country in which the activities are exercised unless it is 
established that neither the entertainer or sportsman nor 
persons related to him or her participated directly or 
indirectly in the profits of that other person in any manner, 
including the receipt of deferred remuneration, bonuses, fees, 
dividends, partnership distributions, or other distributions. 
This provision applies notwithstanding the business profits 
(Article 7) and independent personal service (Article 14) 
articles. This provision prevents highly-paid entertainers and 
sportsmen from avoiding tax in the country in which they 
perform by, for example, routing the compensation for their 
services through a third entity such as a personal holding 
company or a trust located in a country that would not tax the 
income.

Article 18. Pensions, Social Security, Annuities, Alimony and Child 
        Support Payments

    Under the proposed treaty, pension distributions arising in 
a treaty country and beneficially owned by a resident of the 
other country, whether paid periodically or in a single sum, 
are taxable only in the country in which they arose. Under the 
present treaty, on the other hand, pension distributions are 
taxable only in the country of residence. The proposed treaty 
provides that pension distributions will only be considered to 
arise in a treaty country if paid by a pension scheme 
established in such country. The proposed protocol provides 
that a payment is treated as a pension distribution for these 
purposes if paid under a pension scheme recognized for tax 
purposes in the country in which the pension scheme is 
established. For these purposes, pension schemes recognized for 
tax purposes include, under U.S. law, 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, individual retirement annuities, section 
408(p) accounts, and Roth IRAs under section 408A), section 
403(a) qualified annuity plans, and section 403(b) plans. Under 
Danish law, pension schemes recognized for tax purposes include 
pension schemes under Section 1 of the Act on Taxation of 
Pension Schemes (pensionsbeskatningslovens afsnit I). The 
proposed treaty includes a grandfather rule preserving taxation 
only by the residence country if, prior to the entry into force 
of the proposed treaty, a person was a resident of a treaty 
country and was receiving pension distributions arising in the 
other country.
    Like the U.S. model, the proposed treaty provides that 
payments made by one of the countries under the provisions of 
the social security or similar legislation of a country to a 
resident of the other country or to a U.S. citizen are taxable 
only by the source country, and not by the country of 
residence. The Technical Explanation states that the term 
``similar legislation'' is intended to include U.S. tier 1 
Railroad Retirement benefits. Consistent with the U.S. model, 
this rule with respect to social security payments is an 
exception to the proposed treaty's saving clause.
    The proposed treaty provides that annuities are taxed only 
in the country of residence of the individual who beneficially 
owns and derives them. The term ``annuities'' is defined for 
purposes of this provision as a stated sum paid periodically at 
stated times during a specified number of years or for life 
under an obligation to make the payments in return for adequate 
and full consideration (other than services rendered).
    Under the proposed treaty, alimony paid by a resident of 
one country, and deductible therein, to a resident of the other 
country is taxable only in the other country. For this purpose, 
the term ``alimony'' means periodic payments made pursuant to a 
written separation agreement or a decree of divorce, separate 
maintenance, or compulsory support, which payments are taxable 
to the recipient under the laws of the country of residence. 
However, periodic payments (other than alimony) for the support 
of a child made pursuant to a written separation agreement or a 
decree of divorce, separate maintenance, or compulsory support, 
paid by a resident of one country to a resident of the other 
country, are taxable only in the payor's country of residence.

Article 19. Government Service

    Under the proposed treaty, salaries, wages, and other 
remuneration (other than a pension) paid from the public funds 
of a treaty country or a political subdivision or local 
authority thereof to an individual in respect of services 
rendered to that country (or subdivision or authority) in the 
discharge of functions of a governmental nature generally are 
taxable only by that country. Such remuneration is taxable only 
in the other country, however, if the services are rendered in 
that other country by an individual who is a resident of that 
country and who (1) is also a national of that country or (2) 
did not become a resident of that country solely for the 
purpose of rendering the services. This treatment is similar to 
the rules under the U.S. and OECD models.
    The proposed treaty further provides that any pension paid 
from the public funds of one of the countries (or a political 
subdivision or local authority thereof) to an individual in 
respect of services rendered to that country (or subdivision or 
authority) in the discharge of functions of a governmental 
nature (other than social security payments described in 
Article 18) is taxable only by that country. Such a pension is 
taxable only by the other country, however, if the individual 
is a resident and national of that other country. Social 
security benefits in respect of government service are subject 
to Article 18 (Pensions, Social Security, Annuities, Alimony 
and Child Support Payments) and not this article.
    The Technical Explanation states that the phrase 
``functions of a governmental nature'' is generally understood 
to encompass functions traditionally carried on by a 
government. It generally 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 provisions of this article do not apply to remuneration 
and pensions paid in respect of services rendered in connection 
with a business carried on by a treaty country (or a political 
subdivision or a local authority thereof). Rather, such 
payments are subject to Articles 15 (Dependent Personal 
Services), 16 (Directors' Fees), 17 (Artistes and Sportsmen), 
and 18 (Pensions, Social Security, Annuities, Alimony and Child 
Support Payments) as the case may be.

Article 20. Students and Trainees

    Under the proposed treaty, payments received by a student, 
apprentice, or business trainee who is, or was immediately 
before visiting a country (the host country), a resident of the 
other country, and who is present in the host country for the 
purpose of his or her full-time education at an accredited 
educational institution, or for his or her full-time training, 
is not subject to tax in the host country. The exemption from 
host country tax only applies to payments that arise outside of 
the other country and are for the purpose of his or her 
maintenance, education, or training. In the case of an 
apprentice or business trainee, the exemption from host country 
tax only applies for a period of no more than three years from 
the date of first arrival for the purpose of his or her 
training. The proposed treaty provides that this article does 
not apply to income from research undertaken not in the public 
interest, but primarily for the private benefit of a specific 
person or persons.
    This article of the proposed treaty is an exception from 
the saving clause in the case of persons who are neither 
citizens nor permanent residents of the host country. Thus, for 
example, the United States would not tax such amounts paid to a 
Danish citizen who is not a U.S. green-card holder but who 
resides in the United States as a full-time student.

Article 21. Other Income

    This article is a catch-all provision intended to cover 
items of income not specifically covered in other articles, and 
to assign the right to tax income from third countries to 
either the United States or Denmark. As a general rule, items 
of income not otherwise dealt with in the proposed treaty, 
wherever arising, which are beneficially owned by residents of 
one of the countries are taxable only in the country of 
residence. This rule is similar to the rules in the U.S. and 
OECD models.
    This rule, for example, gives the United States the sole 
right under the proposed treaty to tax income derived from 
sources in a third country and paid to a U.S. resident. This 
article is subject to the saving clause, so U.S. citizens who 
are residents of Denmark will continue to be taxable by the 
United States on their third-country income.
    The general rule just stated does not apply to income 
(other than income from real property as defined in Article 6) 
if the beneficial owner of the income is a resident of one 
country and carries on business in the other country through a 
permanent establishment, or performs independent personal 
services in the other country from a fixed base, and the income 
is attributable to such permanent establishment or fixed base. 
In such a case, the provisions of Article 7 (Business Profits) 
or Article 14 (Independent Personal Services), as the case may 
be, will apply. Such exception also applies where the income is 
received after the permanent establishment or fixed base is no 
longer in existence, but the income is attributable to the 
former permanent establishment or fixed base.

Article 22. Limitation of Benefits

            In general
    The proposed treaty contains a provision generally intended 
to limit the indirect use of the proposed treaty by persons who 
are not entitled to its benefits by reason of residence in the 
United States or Denmark.
    The proposed treaty is intended to limit double taxation 
caused by the interaction of the tax systems of the United 
States and Denmark as they apply to residents of the two 
countries. At times, however, residents of third countries 
attempt to use a treaty. This use is known as ``treaty 
shopping,'' which refers to the situation where a person who is 
not a resident of either treaty country seeks certain benefits 
under the income tax treaty between the two countries. Under 
certain circumstances, and without appropriate safeguards, the 
third-country resident may be able to secure these benefits 
indirectly by establishing a corporation or other entity in one 
of the treaty countries, which entity, as a resident of that 
country, is entitled to the benefits of the treaty. 
Additionally, it may be possible for the third-country resident 
to reduce the income base of the treaty country resident by 
having the latter pay out interest, royalties, or other amounts 
under favorable conditions either through relaxed tax 
provisions in the distributing country or by passing the funds 
through other treaty countries until the funds can be 
repatriated under favorable terms.
    The proposed anti-treaty-shopping article provides that a 
resident of either Denmark or the United States will be 
entitled to the benefits of the proposed treaty only if the 
resident is:
          (1) an individual;
          (2) a treaty country, a political subdivision or a 
        local authority thereof, or an agency or 
        instrumentality of such country, subdivision, or 
        authority;
          (3) a company that satisfies one of three public 
        company tests;
          (4) a charitable organization or other legal person 
        established and maintained exclusively for a religious, 
        charitable, educational, scientific, or other similar 
        purpose;
          (5) a pension fund that satisfies an ownership test;
          (6) an entity that satisfies both an ownership and 
        base erosion test; or
          (7) in the case of Denmark, a taxable nonstock 
        corporation that satisfies a modified base erosion 
        test.
    A resident that does not fit into any of the above 
categories may claim treaty benefits with respect to certain 
items of income under an active business test, or for shipping 
and air transport income if certain conditions are satisfied. A 
resident that does not fit into any of the above categories 
also may claim treaty benefits if it satisfies a derivative 
benefits test. Finally, in any case a resident of either 
country may be entitled to the benefits of the proposed treaty 
if the competent authority of the country in which the income 
in question arises so determines.
            Individuals
    An individual resident of a treaty country is entitled to 
the benefits of the proposed treaty.
            Governments
    Under the proposed treaty, the two countries, their 
political subdivisions or local authorities, or agencies or 
instrumentalities of the countries or their political 
subdivisions or local authorities, are entitled to all treaty 
benefits.
            Public company tests
    A company that is a resident of Denmark or the United 
States is entitled to treaty benefits if more than 50 percent 
of the vote and value of all classes of the shares in such 
company are listed on a recognized stock exchange and are 
substantially and regularly traded on one or more recognized 
stock exchanges.
    In addition, the company is entitled to treaty benefits if 
more than 50 percent of the voting power of the company is 
owned by one or more Danish taxable nonstock corporations 
entitled to treaty benefits (described below), and all other 
shares of the company are listed on a recognized stock exchange 
and are substantially and regularly traded on one or more 
recognized stock exchanges. The Technical Explanation states 
that this rule is included to ensure that a corporation whose 
voting shares are substantially owned by a Danish taxable 
nonstock corporation is not precluded from qualifying as a 
publicly traded company, so long as there is sufficient trading 
in the remainder of its shares.
    Alternatively, the company is entitled to treaty benefits 
if at least 50 percent of each class of shares of the company 
is owned (directly or indirectly) by five or fewer companies 
that satisfy one of the two public company tests previously 
described, provided that each intermediate owner used to 
satisfy the control requirement is a resident of Denmark or the 
United States.
    For purposes of the above rules, the proposed treaty 
provides that shares are considered to be substantially and 
regularly traded on one or more recognized stock exchanges in a 
taxable year if two conditions are satisfied. First, trades 
must be effected other than in de minimis quantities during 
every quarter. Second, the aggregate number of shares or units 
traded during the previous taxable year must be at least 6 
percent of the average number of shares or units outstanding 
during that taxable year (including shares held by taxable 
nonstock corporations).
    A further test applies for a company in order to meet the 
public company test described above through ownership by Danish 
taxable nonstock corporations. Under this test, the 
substantially and regularly traded requirement (described 
above) is to be determined as if all the shares issued by the 
company are one class of shares. Thus, shares held by Danish 
taxable nonstock corporations in such company would be 
considered outstanding for purposes of determining whether six 
percent of the outstanding shares of the company are traded 
during a taxable year. Without this rule, it might be possible 
for a small class of shares to qualify a company as being 
substantially and regularly traded.
    Under the proposed treaty, the term ``recognized stock 
exchange'' means (1) the NASDAQ System owned by the National 
Association of Securities Dealers, Inc. and any stock exchange 
registered with the U.S. Securities and Exchange Commission as 
a national securities exchange under the U.S. Securities 
Exchange Act of 1934; (2) the Copenhagen Stock Exchange and the 
stock exchanges of Amsterdam, Brussels, Frankfurt, Hamburg, 
London, Paris, Stockholm, Sydney, Tokyo, and Toronto; and (3) 
any other stock exchange agreed upon by the competent 
authorities of the countries.
            Tax exempt organizations
    An entity is entitled to the benefits under the proposed 
treaty if it is a legal person organized under the laws of a 
treaty country, generally exempt from tax in such country, and 
established and maintained in such country exclusively for a 
religious, charitable, educational, scientific, or other 
similar purpose.
            Pension funds
    A legal person, whether or not exempt from tax, is entitled 
to treaty benefits if (1) it is organized under the laws of a 
treaty country to provide pension or other similar benefits to 
employees, including self-employed individuals, pursuant to a 
plan, and (2) more than 50 percent of the person's 
beneficiaries, members, or participants are individuals 
resident in either treaty country. This rule is similar but not 
identical to the rule in the U.S. model. The Technical 
Explanation states that since Denmark taxes pension funds, the 
U.S. model rule was modified to allow such taxable entities to 
qualify for treaty benefits.
            Ownership and base erosion tests
    Under the proposed treaty, an entity that is a resident of 
one of the countries is entitled to treaty benefits if it 
satisfies an ownership test and a base erosion test. Under the 
ownership test, on at least half of the days during the taxable 
year at least 50 percent of the beneficial interests in an 
entity must be owned (directly or indirectly) by certain 
qualified residents of the treaty country (i.e., an individual; 
a treaty country, a political subdivision or a local authority 
thereof, or its agencies or instrumentalities; a company that 
satisfies one of the public company tests (described in the 
discussion of public company tests above); a charitable 
organization or other legal person established and maintained 
exclusively for a religious, charitable, educational, 
scientific, or other similar purpose; or a legal person that 
satisfies the test for pension funds (described in the 
discussion of pension funds above)). In the case of a company, 
ownership is determined by reference to both the vote and value 
of the company's shares. The Technical Explanation states that 
trusts may be entitled to treaty benefits if they are treated 
as residents of a treaty country and otherwise satisfy the 
requirements under these provisions.
    The base erosion test is satisfied only if less than 50 
percent of the person's gross income for the taxable year is 
paid or accrued (directly or indirectly), in the form of 
deductible payments, to persons who are not residents of either 
treaty country (unless the payment is attributable to a 
permanent establishment situated in either treaty country). For 
this purpose, deductible payments include payments for interest 
or royalties, but do not include arm's length payments for the 
purchase or use of or the right to use tangible property in the 
ordinary course of business or arm's length remuneration for 
services performed in the treaty country in which the person 
making such payments is a resident. The competent authorities 
may agree to add to, or eliminate from, the exceptions 
mentioned in the preceding definition of ``deductible 
payments.'' For purposes of measuring gross income, the term 
means gross income for the first taxable period preceding the 
current taxable period, provided that the amount of gross 
income for such first taxable period is deemed to be no less 
than the average of the annual amounts of gross income for the 
four taxable periods preceding the current taxable period.
            Danish taxable nonstock corporations
    Under the proposed treaty, a Danish taxable nonstock 
corporation is entitled to treaty benefits if it satisfies a 
two-part modified base erosion test. The proposed treaty 
provides that the term ``taxable nonstock corporation'' means a 
foundation that is taxable in accordance with the Danish Act on 
Taxable Nonstock Corporations (fonde der beskattes efter 
fondsbeskatningsloven). The Technical Explanation states that a 
Danish taxable nonstock corporation is a legal person that is 
controlled by a professional board of directors, who must be 
unrelated to the persons that formerly owned the operating 
company controlled by the taxable nonstock corporation. The 
Technical Explanation also states that a Danish taxable 
nonstock corporation's capital is irrevocably separated from 
the control of any founder that contributes assets at the time 
such entity is established.
    The modified base erosion test is satisfied if two 
requirements are met. First, the amount paid or accrued by the 
Danish taxable nonstock corporation in the form of deductible 
payments in the taxable year and in each of the preceding three 
taxable years (directly or indirectly) to persons who are not 
generally qualified residents (excluding, for this purpose, 
from the definition of qualified residents any companies that 
satisfy the public company test through ownership by Danish 
taxable nonstock corporations) of the proposed treaty under the 
tests described above may not exceed 50 percent of its gross 
income (excluding tax-exempt income).
    Second, the amount paid or accrued, in the form of both 
deductible payments and non-deductible distributions, in the 
taxable year and in each of the preceding three taxable years 
(directly or indirectly) to persons who are not generally 
qualified residents of the proposed treaty under the tests 
described above may not exceed 50 percent of its total income 
(including tax-exempt income). For purposes of these rules, 
deductible payments include deductible distributions made by a 
Danish taxable nonstock corporation. This two-part test is a 
modification of the ownership-base erosion test. The Technical 
Explanation states that the ownership-base erosion test needed 
to be modified because Danish taxable nonstock corporations do 
not have owners and, thus, cannot be subject to any ownership 
test. The Technical Explanation also states that the test 
described above was included for Danish taxable nonstock 
corporations in order to treat them as similarly as possible to 
other Danish corporations.
            Active business test
    A resident satisfies the active business test if it is 
engaged in the active conduct of a trade or business in its 
country of residence; the income is connected with or 
incidental to that trade or business; and the trade or business 
is substantial in relation to the activity in the other country 
generating the income. However, the business of making or 
managing investments does not constitute an active trade or 
business (and benefits therefore may be denied) unless such 
activity is a banking, insurance, or securities activity 
conducted by a bank, insurance company, or registered 
securities dealer. Under the proposed treaty, the term 
``engaged in the active conduct of a trade or business'' 
applies to a person that is directly engaged or to a partner in 
a partnership that is so engaged, or is so engaged through one 
or more associated enterprises, wherever resident.
    The determination of whether a trade or business is 
substantial is made based on all facts and circumstances. 
However, the proposed treaty provides a safe harbor rule under 
which a trade or business of the resident is considered to be 
substantial if certain attributes of the residence-country 
business exceed a threshold fraction of the corresponding 
attributes of the trade or business located in the source 
country that produces the source-country income. Under this 
safe harbor, the attributes are assets, gross income, and 
payroll expense. To satisfy the safe harbor, the level of each 
such attribute in the active conduct of the trade or business 
by the resident (and any related parties) in the residence 
country, and the level of each such attribute in the trade or 
business producing the income in the source country, is 
measured for the prior year or for the prior three years. For 
each separate attribute, the ratio of the residence country 
level to the source country level is computed.
    In general, the safe harbor is satisfied if, for the prior 
year or for the average of the three prior years, the average 
of the three ratios exceeds 10 percent, and each ratio 
separately is at least 7.5 percent. These rules are similar to 
those contained in the U.S. model. In determining these ratios, 
only amounts to the extent of the resident's direct or indirect 
ownership interest in the activity in the other treaty country 
are taken into account. Under the proposed treaty, if neither 
the resident nor any of its associated enterprises has an 
ownership interest in the activity in the other country, the 
resident's trade or business in its country of residence is 
considered substantial in relation to such activity.
    The proposed treaty provides that income is derived in 
connection with a trade or business if the activity in the 
other country generating the income is a line of business that 
forms a part of or is complementary to the trade or business. 
The Technical Explanation states that a business activity 
generally is considered to ``form a part of'' a business 
activity conducted in the other country if the two activities 
involve the design, manufacture, or sale of the same products 
or type of products, or the provision of similar services. The 
Technical Explanation further provides that 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. Under the proposed treaty, income is incidental to a 
trade or business if it facilitates the conduct of the trade or 
business in the other country.
    The term ``trade or business'' is not specifically defined 
in the proposed treaty. However, as provided in Article 3 
(General Definitions), undefined terms are to have the meaning 
which they have under the laws of the country applying the 
proposed treaty. In this regard, the Technical Explanation 
states that the U.S. competent authority will refer to the 
regulations issued under Code section 367(a) to define an 
active trade or business.
            Derivative benefits test
    The proposed treaty contains a reciprocal derivative 
benefits rule. This rule effectively allows a Danish company, 
for example, to receive ``derivative benefits'' in the sense 
that it derives its entitlement to U.S. tax reductions in part 
from the U.S. treaty benefits to which its owners would be 
entitled if they earned the income directly. If the 
requirements of this rule are satisfied, a company that is 
resident in one of the countries will be entitled to the 
benefits of the treaty.
    First, the company must satisfy an ownership test. Under 
this test, at least 95 percent of the aggregate vote and value 
of all of the company's shares must be owned (directly or 
indirectly) by seven or fewer residents of the member states of 
the European Union (``EU''), European Economic Area (``EEA''), 
or parties to the North American Free Trade Agreement 
(``NAFTA'').
    Second, the company must satisfy a base erosion test. Under 
this test, less than 50 percent of the gross income of the 
company for the year may be paid or accrued by the company as 
deductible amounts (directly or indirectly) to persons other 
than residents of the member states of the EU, EEA, or parties 
to the NAFTA.
    A company will not be considered to have satisfied the 
ownership or base erosion requirements above if it, or a 
company that controls it, has an outstanding class of shares 
(1) with terms (or other arrangements) that entitle its holders 
to a portion of the company's income derived in the other 
treaty country that is larger than the portion applicable in 
the absence of such terms (or arrangements) and (2) which is 
50-percent or more owned (based on vote or value) by persons 
who are not residents of member states of the EU, the EEA, or 
parties to the NAFTA .
    For purposes of the rules described above, the proposed 
treaty provides that a person is considered a resident of an 
EU, EEA, or NAFTA country, only if such person would be 
entitled to the benefits of a comprehensive income tax treaty 
in force between any member state of the EU, EEA, or party to 
the NAFTA and the country from which the benefits of such 
treaty are being claimed; provided that, if the applicable 
treaty between the owner's country of residence and the source 
country does not contain a comprehensive limitation on benefits 
article (including provisions similar to the public company 
tests, the ownership and base erosion tests, and the active 
business test, as described above), the owner itself would be a 
qualified resident under the proposed treaty (under the rules 
described above) if such person were a resident of the United 
States or Denmark, as the case may be under Article 4 
(Residence).
    The proposed treaty imposes an additional condition for a 
company that is claiming benefits under the treaty with respect 
to certain types of income. Specifically, dividends, interest, 
or royalties in respect of which benefits are claimed under the 
proposed treaty must be subject to a rate of tax under such 
other treaty that is at least as low as the rates applicable to 
such company under the corresponding provisions of the proposed 
treaty.
            Shipping and air transport test
    A resident of one country that derives shipping or aircraft 
income from the other country is entitled to treaty benefits 
with respect to such interest if at least 50 percent of the 
beneficial interests in the resident (or in the case of a 
company, at least 50 percent of the vote and value of such 
company) is owned, directly or indirectly, by qualified persons 
(as described above), U.S. citizens or residents, or 
individuals who are residents of a third country, or a company 
or companies the stock of which is primarily and regularly 
traded on an established securities market in the third 
country. However, this rule applies only if the third country 
grants an exemption for shipping and aircraft income under 
similar terms to citizens and corporations of the source 
country either under its laws, in common agreement with the 
other country, or under a treaty between the third country and 
the other country.
            Grant of treaty benefits by the competent authority
    The proposed treaty provides a ``safety-valve'' for a 
person that has not established that it meets one of the other 
more objective tests, but for which the allowance of treaty 
benefits would not give rise to abuse or otherwise be contrary 
to the purposes of the treaty. Under this provision, such a 
person may be granted treaty benefits if the competent 
authority of the source country so determines. The 
corresponding article in the U.S. model contains a similar 
rule. The Technical Explanation states that for this purpose, 
factors the competent authorities will take into account are 
whether the establishment, acquisition, and maintenance of the 
person, and the conduct of its operations, did not have as one 
of its principal purposes the obtaining of treaty benefits.

Article 23. Relief from Double Taxation

            Internal taxation rules

United States

    The United States taxes the worldwide income of its 
citizens and residents. It attempts unilaterally to mitigate 
double taxation generally by allowing taxpayers to credit the 
foreign income taxes that they pay against U.S. tax imposed on 
their foreign-source income. An indirect or ``deemed-paid'' 
credit is also provided. Under this rule, a U.S. corporation 
that owns 10 percent or more of the voting stock of a foreign 
corporation and that receives a dividend from the foreign 
corporation (or an inclusion of the foreign corporation's 
income) is deemed to have paid a portion of the foreign income 
taxes paid (or deemed paid) by the foreign corporation on its 
earnings. The taxes deemed paid by the U.S. corporation are 
included in its total foreign taxes paid for the year the 
dividend is received.

Denmark

    Danish double tax relief is allowed either through a 
foreign tax credit or through an exemption with progression 
(where tax-exempt income is considered for purposes of 
determining the tax rate on taxable income, but is otherwise 
not taxable income). Danish tax credits are, like in the United 
States, limited to the lesser of the foreign tax paid or the 
Danish tax that would have been imposed on the amount of the 
income. Unlike the United States, the foreign tax credit 
limitation is determined on a per-country basis.
            Proposed treaty limitations on internal law
    One of the principal purposes for entering into an income 
tax treaty is to limit double taxation of income earned by a 
resident of one of the countries that may be taxed by the other 
country. Unilateral efforts to limit double taxation are 
imperfect. Because of differences in rules as to when a person 
may be taxed on business income, a business may be taxed by two 
countries as if it were engaged in business in both countries. 
Also, a corporation or individual may be treated as a resident 
of more than one country and be taxed on a worldwide basis by 
both.
    Part of the double tax problem is dealt with in other 
articles of the proposed treaty that limit the right of a 
source country to tax income. This article provides further 
relief where both Denmark and the United States otherwise still 
tax the same item of income. This article is not subject to the 
saving clause, so that the country of citizenship or residence 
will waive its overriding taxing jurisdiction to the extent 
that this article applies.
    The present treaty provides separate rules for relief from 
double taxation for the United States and Denmark. The present 
treaty generally provides for relief from double taxation of 
U.S. citizens, residents and corporations by requiring the 
United States to permit a credit against its tax for taxes paid 
to Denmark. The determination of this credit is made in 
accordance with U.S. law. In the case of Denmark, the present 
treaty generally provides for relief from double taxation for 
taxes paid to the United States on the following types of 
income: industrial or commercial profits, natural resource 
royalties, certain government services income, student and 
trainee income, teacher and professor income, and income earned 
within the United States. However, the amount of relief granted 
by Denmark cannot exceed the proportion of Danish taxes which 
such income bears to the entire income subject to tax by 
Denmark. Denmark also allows as a deduction from its taxes an 
amount equal to 15 percent (5 percent in certain cases) of the 
gross amount of U.S.-source dividends.
    The proposed treaty generally provides that the United 
States will allow a U.S. resident or citizen a foreign tax 
credit for the income taxes imposed by Denmark. The proposed 
treaty also requires the United States to allow a deemed-paid 
credit, with respect to Danish income tax, to any U.S. company 
that receives dividends from a Danish company if the U.S. 
company owns 10 percent or more of the voting stock of such 
Danish company. The credit generally is to be computed in 
accordance with the provisions and subject to the limitations 
of U.S. law (as such law may be amended from time to time 
without changing the general principles of the proposed treaty 
provisions). This provision is similar to those found in the 
U.S. model and many U.S. treaties.
    The proposed treaty provides that the taxes referred to in 
paragraphs 1(b) and 2 of Article 2 (Taxes Covered) will be 
considered creditable income taxes for purposes of the proposed 
treaty, subject to all the provisions and limitations of 
Article 23 (Relief from Double Taxation) of the proposed 
treaty. This includes the Danish national income tax, the 
Danish municipal income tax, the Danish income tax to the 
county municipalities, and taxes imposed under the Danish 
Hydrocarbon Tax Act.
    The proposed treaty provides special rules and limits to 
determine the appropriate amount of creditable taxes paid or 
accrued to Denmark by or on behalf of a U.S. national or 
resident on income separately assessed under the Hydrocarbon 
Tax Act. In connection with the special rules with respect to 
the creditability of taxes imposed under the Hydrocarbon Tax 
Act, the Technical Explanation states that the provisions in 
some respects allow for greater foreign tax credits than under 
U.S. statutory law. Specifically, the proposed treaty provides 
that, in the case of a U.S. resident or national subject to 
taxes imposed under the Hydrocarbon Tax Act, the United States 
will allow as a credit against United States tax on income the 
amount of tax paid or accrued to Denmark by the U.S. resident 
or national pursuant to the Hydrocarbon Tax Act on oil and gas 
extraction income from oil or gas wells in Denmark. The 
proposed treaty limits the creditable amount, however, to the 
product of (1) the maximum statutory U.S. rate applicable to 
the U.S. resident or national for the taxable year and (2) the 
amount of income separately assessed under the Hydrocarbon Tax 
Act. The proposed treaty further provides that its special 
rules on creditability apply separately, and in the same way, 
to the amount of tax paid or accrued to Denmark pursuant to the 
Hydrocarbon Tax Act on Danish-source oil related income and 
other Danish-source income.
    The proposed treaty also provides that for persons claiming 
benefits under the treaty, the amount of any U.S. tax credit 
with respect to taxes paid in connection with the Hydrocarbon 
Tax Act is also subject to any other limitations imposed under 
U.S. law, as it may be amended from time to time, that apply to 
creditable taxes under section 901 or 903 of the Code.
    Any taxes paid on income assessed separately under the 
Hydrocarbon Tax Act in excess of the creditable amount after 
application of the proposed treaty and Code limitations may be 
used only as a credit in another taxable year (carried over to 
those years specified under U.S. law--i.e., carried back two 
years and carried forward five years), and only against United 
States tax on income assessed separately under the Hydrocarbon 
Tax Act.
    Thus, the proposed treaty operates to create a separate 
``per-country'' limitation with respect to each U.S. category 
of extraction income or oil-related income on which tax is 
separately assessed under the Hydrocarbon Tax Act. Accordingly, 
the taxes paid pursuant to the Hydrocarbon Tax Act with respect 
to oil and gas extraction income in Denmark cannot be used as a 
credit to offset U.S. tax on (1) oil and gas extraction income 
arising in another country, (2) Danish-source oil-related 
income or other income on which tax is imposed under the 
Hydrocarbon Tax Act, or (3) other Danish-source non-oil-related 
income. The Technical Explanation states that if a person 
earning income that is separately assessed under the 
Hydrocarbon Tax Act chooses in a year not to rely on the 
provisions of the proposed treaty to claim a foreign tax credit 
for any amounts paid to Denmark, then the special ``per-
country'' limitation would not apply for that year. Instead, 
the current overall foreign tax credit limitations of the Code 
would apply, and the Danish taxes creditable under the Code 
could be used, subject to the Code's limitations, to offset 
U.S. tax on income from Danish and other foreign sources.
    The proposed treaty, like the U.S. model and other U.S. 
treaties, contains a special rule designed to provide relief 
from double taxation for U.S. citizens who are Danish 
residents. Under this rule, Denmark will allow a foreign tax 
credit to a U.S. citizen who is resident in Denmark by taking 
into account only the amount of U.S. taxes paid pursuant to the 
proposed treaty (other than taxes that may be imposed solely by 
reason of citizenship under the saving clause of paragraph 4 of 
Article 1 (General Scope)) with respect to items of income that 
are either exempt from U.S. tax or are subject to a reduced 
rate of tax when derived by a Danish resident who is not a U.S. 
citizen. The United States will then credit the income tax 
actually paid to Denmark, determined after application of the 
preceding sentence. The proposed treaty recharacterizes the 
income that is subject to Danish taxation as foreign source 
income for purposes of this computation, but only to the extent 
necessary to avoid double taxation of such income.
    The proposed treaty generally provides that Denmark will 
allow its residents, who derive income that may be subject to 
tax in the United States and Denmark, a deduction against 
Danish income tax for the U.S. income taxes paid. The reduction 
cannot exceed the pre-credit amount of Danish income tax 
attributable to the income that may be taxed in the United 
States. Under the proposed treaty, a Danish resident who 
derives income which, in accordance with the proposed treaty, 
is taxable only in the United States may be required to include 
such income in its tax base for Danish tax purposes, but will 
also be allowed a deduction from income tax for that part of 
the income tax which is attributable to the income derived from 
the United States.

Article 24. Non-Discrimination

    The proposed treaty contains a comprehensive non-
discrimination article relating to all taxes of every kind 
imposed at the national, state, or local level. It is similar 
to the non-discrimination article in the U.S. model and to 
provisions that have been included in other recent U.S. income 
tax treaties.
    In general, under the proposed treaty, one country cannot 
discriminate by imposing more burdensome taxes (or requirements 
connected with taxes) on nationals of the other country than it 
would impose on its citizens in the same circumstances, 
particularly with respect to taxation of worldwide income. This 
provision applies whether or not the persons in question are 
residents of the United States or Denmark.
    Under the proposed treaty, neither country may tax a 
permanent establishment of an enterprise (or a fixed base of a 
resident) of the other country less favorably than it taxes its 
own enterprises carrying on the same activities. Consistent 
with the U.S. model and the OECD model, however, a country is 
not obligated to grant residents of the other country any 
personal allowances, reliefs, or reductions for tax purposes on 
account of civil status or family responsibilities that are 
granted to its own residents.
    Each country is required (subject to the arm's-length 
pricing rules of paragraph 1 of Article 9 (Associated 
Enterprises), paragraph 4 of Article 11 (Interest), and 
paragraph 4 of Article 12 (Royalties)) to allow its residents 
to deduct interest, royalties, and other disbursements paid by 
them to residents of the other country under the same 
conditions that it allows deductions for such amounts paid to 
residents of the same country as the payor. The Technical 
Explanation states that 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. The Technical Explanation further 
states that the rules of section 163(j) of the Code are not 
discriminatory within the meaning of this provision. The 
proposed treaty further provides that any debts of an 
enterprise of one country to a resident of the other country 
are deductible for purposes of computing the capital tax of the 
debtor's country of residence under the same conditions as if 
the debt had been owed to a resident of the country imposing 
such tax.
    The non-discrimination rules also apply to enterprises of 
one country that are owned in whole or in part by residents of 
the other country. Enterprises resident in one country, the 
capital of which is wholly or partly owned or controlled, 
directly or indirectly, by one or more residents of the other 
country, will not be subjected in the first country to any 
taxation (or any connected requirement) which is more 
burdensome than the taxation (or connected requirements) that 
the first country imposes or may impose on its similar 
enterprises. The Technical Explanation includes examples of 
Code provisions that are understood by the two countries not to 
violate this provision of the proposed treaty. Those examples 
include the rules that impose a withholding tax on non-U.S. 
partners of a partnership and the rules that prevent foreign 
persons from owning stock in Subchapter S corporations.
    The proposed treaty provides that nothing in the non-
discrimination article is to be construed as preventing either 
of the countries from imposing a branch profits tax. 
Notwithstanding the definition of taxes covered in Article 2, 
this article applies to taxes of every kind and description 
imposed by either country, or a political subdivision or local 
authority thereof.
    The saving clause (which allows the country of residence or 
citizenship to impose tax notwithstanding certain treaty 
provisions) does not apply to the non-discrimination article. 
Therefore, a U.S. citizen resident in Denmark may claim 
benefits with respect to the United States under this article.

Article 25. Mutual Agreement Procedure

    The proposed treaty contains the standard mutual agreement 
provision, with some variation, that authorizes the competent 
authorities of the two countries to consult together to attempt 
to alleviate individual cases of double taxation not in 
accordance with the proposed treaty. The saving clause of the 
proposed treaty does not apply to this article, so that the 
application of this article might result in a waiver (otherwise 
mandated by the proposed treaty) of taxing jurisdiction by the 
country of citizenship or residence.
    Under this article, a resident of one country who considers 
that the action of one or both of the countries will cause him 
or her to be subject to tax which is not in accordance with the 
proposed treaty may present his or her case to the competent 
authority of the country of which he or she is a resident or 
national. A case may be presented to the competent authority 
irrespective of the remedies provided by domestic law and the 
time limits prescribed in such laws for presentation of claims 
for refund.
    If the objection appears to the competent authority to be 
justified and if it is not itself able to arrive at a 
satisfactory solution, that competent authority will endeavor 
to resolve the case by mutual agreement with the competent 
authority of the other country, with a view to the avoidance of 
taxation which is not in accordance with the proposed treaty. 
The provision authorizes a waiver of the statute of limitations 
of either country. Any assessment and collection procedures are 
suspended during the pendency of any mutual agreement 
proceeding.
    The competent authorities of the countries will endeavor to 
resolve by mutual agreement any difficulties or doubts arising 
as to the interpretation or application of the proposed treaty. 
In particular, the competent authorities may agree to the 
following: (1) the same attribution of income, deductions, 
credits, or allowances of an enterprise of one treaty country 
to the enterprise's permanent establishment situated in the 
other country; (2) the same allocation of income, deductions, 
credits, or allowances between persons; (3) the same 
characterization of particular items of income; (4) the same 
characterization of persons; (5) the same application of source 
rules with respect to particular items of income; (6) a common 
meaning of a term; (7) increases in any specific dollar amounts 
referred to in the proposed treaty to reflect economic or 
monetary developments; (8) advance pricing arrangements; and 
(9) the application of the provisions of each country's 
internal law regarding penalties, fines, and interest in a 
manner consistent with the purposes of the proposed treaty. The 
competent authorities may also consult together for the 
elimination of double taxation regarding cases not provided for 
in the proposed treaty. This treatment is similar to the 
treatment under the U.S. model.
    The proposed treaty authorizes the competent authorities to 
communicate with each other directly for purposes of reaching 
an agreement in the sense of this mutual agreement article. The 
Technical Explanation states that this provision makes clear 
that it is not necessary to go through diplomatic channels in 
order to discuss problems arising in the application of the 
proposed treaty.

Article 26. Exchange of Information

    This article provides for the exchange of information 
between the two countries. Notwithstanding the provisions of 
Article 2 (Taxes Covered), the proposed treaty's information 
exchange provisions apply to all taxes imposed in either 
country at the national level.
    The proposed treaty provides that the two competent 
authorities will exchange such information as is relevant to 
carry out the provisions of the proposed treaty or the 
provisions of the domestic laws of the two countries concerning 
taxes to which the proposed treaty applies (provided that the 
taxation under those domestic laws is not contrary to the 
proposed treaty). Such information may relate to the assessment 
or collection of, the enforcement or prosecution in respect of, 
or the determination of appeals in relation to, the taxes 
covered by the proposed treaty. This exchange of information is 
not restricted by Article 1 (General Scope). Therefore, 
information with respect to third-country residents is covered 
by these procedures.
    Any information exchanged under the proposed treaty will be 
treated as secret in the same manner as information obtained 
under the domestic laws of the country receiving the 
information. The exchanged information may be disclosed only to 
persons or authorities (including courts and administrative 
bodies) involved in the assessment, collection or 
administration of, the enforcement or prosecution in respect 
of, or the determination of appeals in relation to, the taxes 
to which the proposed treaty would apply. Such persons or 
authorities must use the information for such purposes only.\7\ 
The Technical Explanation states that persons involved in the 
administration of taxes include legislative bodies with 
oversight roles with respect to the administration of the tax 
laws, such as, for example, 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. 
Exchanged information may be disclosed in public court 
proceedings or in judicial decisions.
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    \7\ Code section 6103 provides that otherwise confidential tax 
information may be utilized for a number of specifically enumerated 
non-tax purposes. Information obtained by the United States pursuant to 
the proposed treaty could not be used for these non-tax purposes.
---------------------------------------------------------------------------
    As is true under the U.S. model and the OECD model, under 
the proposed treaty, a country is not required to carry out 
administrative measures at variance with the laws and 
administrative practice of the other country, to supply 
information that is not obtainable under the laws or in the 
normal course of the administration of the other country, or to 
supply information that would disclose any trade, business, 
industrial, commercial, or professional secret or trade process 
or information the disclosure of which would be contrary to 
public policy.
    Notwithstanding the preceding paragraph, a country has the 
authority to obtain and provide information held by financial 
institutions, nominees, or persons acting in an agency or 
fiduciary capacity. It also has the authority to obtain 
information respecting interests in a person. If information is 
requested by a treaty country pursuant to this article, the 
other country is obligated to obtain the requested information 
in the same manner and to the same extent as if the tax in 
question were the tax of the requested country, even if the 
requested country has no direct tax interest in the case to 
which the request relates. If specifically requested, the 
competent authority of a country must provide information in 
the form of depositions of witnesses and authenticated copies 
of unedited original documents (including books, papers, 
statements, records, accounts, and writings), to the same 
extent such depositions and documents can be obtained under the 
laws and administrative practices of the requested country with 
respect to its own taxes.

Article 27. Administrative Assistance

    The proposed treaty provides that the countries are to 
undertake to lend assistance to each other in collecting all 
categories of taxes (as described in Article 2) collected by or 
on behalf of the government of each country, together with 
interest, costs, additions to such taxes, and civil penalties 
(referred to as a ``revenue claim''). The assistance provision 
is substantially broader than the most nearly comparable 
provision in the U.S. model, but similar in scope to the 
existing U.S.-Denmark treaty. It is also similar to the 
corresponding provisions in several U.S. treaties, including 
the treaties with Canada and the Netherlands.
    When one country applies to the other for assistance in 
enforcing a revenue claim, its application must include a 
certification that the taxes have been finally determined under 
its own laws. For purposes of this article, a revenue claim is 
finally determined when the applicant country has the right 
under its internal law to collect the revenue claim and all 
administrative and judicial rights of the taxpayer to restrain 
collection in the applicant country have lapsed or been 
exhausted.
    The proposed treaty specifies that each country may accept 
for collection a revenue claim of the other country which has 
been finally determined. Consistent with this language, the 
Technical Explanation states that each country has the 
discretion whether to accept any particular application for 
collection assistance. If the application for assistance is 
accepted, generally the accepting country is to collect the 
revenue claim as though it were its own revenue claim, finally 
determined in accordance with the laws applicable to the 
collection of its own taxes. However, a revenue claim of an 
applicant country accepted for collection will not have, in the 
requested country, any priority accorded to the revenue claims 
of the requested country.
    When a treaty country accepts a request for assistance in 
collection, the claim will be treated by such country as an 
assessment under its laws against the taxpayer as of the time 
the application is received.
    Nothing in this administrative assistance article is to be 
construed as creating or providing any rights of administrative 
or judicial review of the applicant country's finally 
determined revenue claim by the requested country, based on any 
such rights that may be available under the laws of either 
country. On the other hand, if, at any time pending execution 
of a request for assistance under this provision, the applicant 
country loses the right under its internal law to collect the 
revenue claim, its competent authority must promptly withdraw 
the request for assistance in collection.
    In general, amounts collected under this article by the 
requested country must be forwarded to the competent authority 
of the applicant country. Unless the competent authorities 
otherwise agree, the ordinary costs incurred in providing 
assistance are to be borne by the requested country, and any 
extraordinary costs by the applicant country.
    No assistance is required to be provided under this article 
for a revenue claim with respect to an individual taxpayer to 
the extent that the taxpayer can demonstrate that the claim 
relates to a taxable period in which the taxpayer was a citizen 
of the country from which assistance is requested. Similarly, 
where the taxpayer is a company, estate, or trust, no 
assistance is required to be provided under this article for a 
revenue claim to the extent that the claim relates to a taxable 
period in which the taxpayer derived its status as such an 
entity from the laws in force in the requested country. The 
only collection assistance required in such cases would be 
assistance authorized under the proposed treaty's mutual 
agreement procedure article.
    Each treaty country will endeavor to collect on behalf of 
the other country such amounts as may be necessary to ensure 
that relief granted by the proposed treaty from taxation 
imposed by the other country does not inure to the benefit of 
persons not entitled thereto.
    Nothing in this article is to be construed as requiring 
either country to carry out administrative measures of a 
different nature from those used in the collection of its own 
taxes, or that would be contrary to its public policy. The 
competent authorities shall agree upon the mode of application 
of the article, including agreement to ensure comparable levels 
of assistance to each country.
    A requested country is not obligated to accede to the 
request of the applicant country if the applicant country has 
not pursued all appropriate collection action in its own 
jurisdiction or in those cases where the administrative burden 
for the requested country is disproportionate to the benefit to 
be derived by the applicant country.

Article 28. Diplomatic Agents and Consular Officers

    The proposed treaty contains the rule found in the U.S. 
model and other U.S. tax treaties that its provisions do not 
affect the fiscal privileges of diplomatic agents or consular 
officers under the general rules of international law or under 
the provisions of special agreements. Accordingly, the proposed 
treaty will not defeat the exemption from tax which a host 
country may grant to the salary of diplomatic officials of the 
other country. The saving clause does not apply in the 
application of this article to host country residents who are 
neither citizens nor lawful permanent residents of that 
country. Thus, for example, U.S. diplomats who are considered 
Danish residents may be protected from Danish tax.

Article 29. Entry into Force

    The proposed treaty will enter into force on the date on 
which the second of the two notifications of the completion of 
ratification requirements has been received. Each country must 
notify the other when its requirements for ratification have 
been satisfied.
    With respect to taxes withheld at source, the proposed 
treaty will be effective for amounts paid or credited on or 
after the first day of the second month next following the date 
on which the proposed treaty enters into force. With respect to 
other taxes, the proposed treaty will be effective for taxable 
years beginning on or after the first day of January next 
following the date on which the proposed treaty enters into 
force.
    Taxpayers may elect temporarily to continue to claim 
benefits under the present treaty with respect to a period 
after the proposed treaty takes effect. For such a taxpayer, 
the present treaty would continue to have effect in its 
entirety for one year after the date on which the provisions of 
the proposed treaty would otherwise take effect. The present 
treaty ceases to have effect once the provisions of the 
proposed treaty take effect, and will terminate on the last 
date on which it has effect in accordance with the provisions 
of this article.

Article 30. Termination

    The proposed treaty will continue in force until terminated 
by either country. Either country may terminate the proposed 
treaty at any time by giving written notice of termination 
through diplomatic channels. A termination is effective, with 
respect to taxes withheld at source for amounts paid or 
credited six months after the date on which notice of 
termination was given. In the case of other taxes, a 
termination is effective for taxable periods beginning on or 
after six months from the date on which notice of termination 
was given.

                               IV. ISSUES

    The proposed treaty with Denmark, as supplemented by the 
proposed protocol, presents the following specific issues.

               A. Creditability of Danish Hydrocarbon Tax

            Treatment under the proposed treaty
    The proposed treaty extends coverage to taxes imposed under 
the Danish Hydrocarbon Tax Act (paragraph 1(b)(iv) of Article 2 
(Taxes Covered)). Article 23 of the proposed treaty (Relief 
from Double Taxation) further provides, among other things, 
that the taxes imposed under the Hydrocarbon Tax Act are to be 
considered income taxes that are creditable against U.S. tax on 
income, subject to the provisions and limitations of that 
provision of the proposed treaty.
    Specifically, the proposed treaty provides that, in the 
case of a U.S. resident or national subject to taxes imposed 
under the Hydrocarbon Tax Act, the United States will allow as 
a credit against United States tax on income the amount of tax 
paid or accrued to Denmark by the U.S. resident or national 
pursuant to the Hydrocarbon Tax Act on oil and gas extraction 
income from oil or gas wells in Denmark. The proposed treaty 
limits the creditable amount, however, to the product of (1) 
the maximum statutory U.S. rate applicable to the U.S. resident 
or national for the taxable year and (2) the amount of income 
separately assessed under the Hydrocarbon Tax Act. The proposed 
treaty further provides that its special rules on creditability 
apply separately, and in the same way, to the amount of tax 
paid or accrued to Denmark pursuant to the Hydrocarbon Tax Act 
on Danish-source oil related income and other Danish-source 
income.
    The proposed treaty also provides that for persons claiming 
benefits under the treaty, the amount of any U.S. tax credit 
with respect to taxes paid in connection with the Hydrocarbon 
Tax Act is also subject to any other limitations imposed under 
U.S. law, as it may be amended from time to time, that apply to 
creditable taxes under section 901 or 903 of the Code.
    Any taxes paid on income assessed separately under the 
Hydrocarbon Tax Act in excess of the creditable amount after 
application of the treaty and Code limitations may be used only 
as a credit in another taxable year (carried over to those 
years specified under U.S. law--i.e., carried back two years 
and carried forward five years), and only against United States 
tax on income assessed separately under the Hydrocarbon Tax 
Act.
    Thus, the proposed treaty operates to create a separate 
``per-country'' limitation with respect to each U.S. category 
of extraction income or oil-related income on which tax is 
separately assessed under the Hydrocarbon Tax Act. Accordingly, 
the taxes paid pursuant to the Hydrocarbon Tax Act with respect 
to oil and gas extraction income in Denmark cannot be used as a 
credit to offset U.S. tax on (1) oil and gas extraction income 
arising in another country, (2) Danish-source oil-related 
income or other income on which tax is imposed under the 
Hydrocarbon Tax Act, or (3) other Danish-source non-oil-related 
income.
    To the extent that a taxpayer would obtain a more favorable 
result with respect to the creditability of the Danish taxes 
under the Code than under the proposed treaty, the taxpayer 
could choose not to rely on the proposed treaty.\8\ The 
Technical Explanation to Article 23 states that if a person 
earning income that is separately assessed under the 
Hydrocarbon Tax Act chooses in a year not to rely on the 
provisions of the proposed treaty to claim a foreign tax credit 
for any amounts paid to Denmark, then the special ``per-
country'' limitation of Article 23 would not apply for that 
year. Instead, the current overall foreign tax credit 
limitations of the Code would apply, and the Danish taxes 
creditable under the Code could be used, subject to the Code's 
limitations, to offset U.S. tax on income from Danish and other 
foreign sources.
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    \8\ See paragraph 2 of Article 1 of the proposed treaty (General 
Scope), and accompanying description in the Technical Explanation.
---------------------------------------------------------------------------
            Danish internal law
    The Danish Hydrocarbon Tax Act was introduced in 1982 to 
tax income earned from certain activities in connection with 
the surveying, exploration and extraction of hydrocarbons. The 
Act extends the jurisdiction to tax under Danish internal law 
in certain circumstances to areas beyond the Danish land 
territory and the territorial sea.
    Under the Hydrocarbon Tax Act, taxpayers with oil and gas 
concessions are required to pay a company tax at the same rate 
(currently 32 percent) as other companies, which is assessed 
under ordinary rules, but with additional limitations. In 
addition, a separate hydrocarbon tax is assessed at a rate of 
70 percent of the aggregate taxable income of fields showing 
profits. The Hydrocarbon Tax Act generally imposes a tax on 
income in connection with preliminary surveys, exploration, and 
extraction of hydrocarbons in Denmark, and any related 
activity, including the installation of pipelines, supply 
services and transport by ship and pipelines of hydrocarbons 
extracted. Regular Danish corporate and income taxes are 
deductible in computing taxable income subject to the separate 
hydrocarbon tax. Losses arising from other activities may not 
be set off against hydrocarbon income, but hydrocarbon losses 
may be deducted from other profits. Other special deduction and 
allowance rules also apply.
            Issues
    The proposed treaty treats the Danish hydrocarbon tax, and 
any substantially similar tax, as a creditable tax for U.S. 
foreign tax credit purposes. No specific determination has been 
made administratively or judicially concerning the 
creditability of the Danish hydrocarbon tax under the Code.\9\ 
It is unclear the extent to which the taxes imposed under the 
Hydrocarbon Tax Act would be creditable under U.S. law. In 
fact, the Technical Explanation to Article 23 states that in 
connection with the Hydrocarbon Tax Act, the proposed treaty in 
some respects allows for greater foreign tax credits than under 
U.S. statutory law.
---------------------------------------------------------------------------
    \9\ Although there have been no specific determinations with 
respect to the Danish hydrocarbon tax, the United States Tax Court has 
recently addressed the issue of the creditability under the Code and 
the prior temporary Treasury regulations under Code section 901 of 
special charges imposed under Norway's Petroleum Tax Act in Phillips 
Petroleum Co. v. Commissioner, 104 T.C. 256 (1995). The Norwegian 
petroleum tax was found to be creditable; however, the court was not 
applying the current final Treasury regulations under section 901. In 
addition, such determinations are inherently factual; therefore, the 
determination of the creditability of taxes imposed under the Danish 
Hydrocarbon Tax Act under U.S. law is still an open issue.
---------------------------------------------------------------------------
    The primary issue is the extent to which treaties should be 
used to provide a credit for taxes that may not otherwise be 
fully creditable and, in cases where a treaty does provide 
creditability, to what extent the treaty should impose 
limitations not contained in the Code. A related issue is 
whether a controversial matter in U.S. tax policy such as the 
tax credits to be allowed U.S. oil companies on their foreign 
extraction operations should be resolved through the treaty 
process rather than the regular legislative process. In 
considering these issues, it is important for the Committee to 
be aware that the tax credits allowed under the proposed treaty 
for Danish taxes could be somewhat larger than the credits 
otherwise allowed under Treasury regulations and, therefore, 
potentially could reduce somewhat the U.S. taxes collected from 
U.S. oil companies operating in the Danish sector of the North 
Sea. Because of the treaty's per-country limitation on the 
treaty credit and the creditability of the regular Danish 
income tax in the absence of the treaty, that reduction will be 
limited. However, taxpayers are likely to rely upon the 
proposed treaty only to the extent that it provides them with a 
more favorable foreign tax credit result than would otherwise 
result from the application of the Code.
    Although it is no longer U.S. treaty policy generally to 
provide a credit for foreign taxes on oil and gas extraction 
income like the Danish hydrocarbon tax, similar provisions 
making the United Kingdom's Petroleum Revenue Tax, Norway's 
Submarine Petroleum Resource Tax, and the Netherlands' Profit 
Share creditable are contained in the third protocol to the 
U.S.-United Kingdom income tax treaty, the protocol to the 
U.S.-Norway income tax treaty, and the U.S.-Netherlands income 
tax treaty, respectively.\10\ Also at issue, therefore, is 
whether Denmark should be denied a special treaty credit for 
taxes on oil and gas extraction income when Norway, the 
Netherlands, and the United Kingdom, its North Sea competitors, 
now receive a similar treaty credit under the U.S. income tax 
treaties with those countries currently in force. On the one 
hand, it would appear fair to treat Denmark like Norway, the 
Netherlands, and the United Kingdom. On the other hand, the 
United States should not view any particular treaty concession 
to one country as requiring identical or similar concessions to 
other countries.
---------------------------------------------------------------------------
    \10\ In the case of the U.S.-United Kingdom treaty, there was a 
threatened reservation on the provision. In response, the per-country 
limitation was inserted in that protocol.
---------------------------------------------------------------------------
    A prior proposed U.S. income tax treaty with Denmark 
contained a similar provision providing for the creditability 
of taxes imposed under the Hydrocarbon Tax Act. The Committee 
reported favorably on the treaty (and its protocol) in 1984 and 
1985. During Senate consideration of the treaty in 1985, 
objections were raised regarding the creditability under the 
treaty of the Danish hydrocarbon tax. The Senate has not given 
its advice and consent to ratification of that treaty. The 
Committee may wish to consider whether the proposed treaty is 
an appropriate vehicle for granting creditability of the Danish 
hydrocarbon tax.

                           B. Treaty Shopping

    The proposed treaty, like a number of U.S. income tax 
treaties, generally limits treaty benefits for treaty country 
residents so that only those residents with a sufficient nexus 
to a treaty country will receive treaty benefits. Although the 
proposed treaty generally is intended to benefit residents of 
Denmark and the United States only, residents of third 
countries sometimes attempt to use a treaty to obtain treaty 
benefits. This is known as treaty shopping. Investors from 
countries that do not have tax treaties with the United States, 
or from countries that have not agreed in their tax treaties 
with the United States to limit source country taxation to the 
same extent that it is limited in another treaty may, for 
example, attempt to reduce the tax on interest on a loan to a 
U.S. person by lending money to the U.S. person indirectly 
through a country whose treaty with the United States provides 
for a lower rate of withholding tax on interest. The third-
country investor may attempt to do this by establishing in that 
treaty country a subsidiary, trust, or other entity which then 
makes the loan to the U.S. person and claims the treaty 
reduction for the interest it receives.
    The anti-treaty-shopping provision of the proposed treaty 
is similar to anti-treaty-shopping provisions in the Code (as 
interpreted by Treasury regulations) and in the U.S. model. The 
provision also is similar to the anti-treaty-shopping provision 
in several recent treaties. The degree of detail included in 
these provisions is notable in itself. The proliferation of 
detail may reflect, in part, a diminution in the scope afforded 
the IRS and the courts to resolve interpretive issues adversely 
to a person attempting to claim the benefits of a treaty; this 
diminution represents a bilateral commitment, not alterable by 
developing internal U.S. tax policies, rules, and procedures, 
unless enacted as legislation that would override the treaty. 
(In contrast, the IRS generally is not limited under the 
proposed treaty in its discretion to allow treaty benefits 
under the anti-treaty-shopping rules.) The detail in the 
proposed treaty does represent added guidance and certainty for 
taxpayers that may be absent under treaties that may have 
somewhat simpler and more flexible provisions.
    The anti-treaty-shopping provisions in the proposed treaty 
differ from those in the Code and other treaties in a number of 
respects. The proposed treaty contains a particularly broad 
range of categories under which persons may qualify for 
benefits under the treaty.
    For example, the proposed treaty includes a special rule 
under which income derived from the operation of ships or 
aircraft in international traffic will be eligible for the 
exemption from source country tax provided under the treaty. 
Under this rule, a Danish resident that derives shipping or 
aircraft income from the United States is entitled to exemption 
from U.S. tax on such income if at least 50 percent of the 
interests (in the case of a company, at least 50 percent of the 
aggregate vote and value of the stock of such company) in the 
resident is owned, directly or indirectly, by certain qualified 
persons, U.S. citizens or residents, or individuals who are 
residents of a third country or a company or companies the 
stock of which is primarily and regularly traded on an 
established securities market in a third country. This rule 
applies as long as the third country grants an exemption to 
shipping and aircraft income under similar terms to citizens 
and corporations of the source country. Similar rules are 
included in the treaties with the Netherlands and Ireland.
    The proposed treaty also includes special rules relating to 
Danish taxable nonstock corporations. The Technical Explanation 
states that under Danish law, such corporations are foundations 
that are taxable in a similar manner to other Danish 
corporations. However, such corporations do not have owners per 
se. As a foundation, the taxable nonstock corporation is 
required to have a charter governing the corporation's 
distributions and identifying the corporation's beneficiaries 
and their entitlement to distributions. According to the 
Technical Explanation, like any other foundation, taxable 
nonstock corporations can deduct distributions to members of 
the founder's family provided that these family members are 
resident in Denmark and are fully taxable on such distributions 
in Denmark. Under the proposed treaty, a Danish taxable 
nonstock corporation is entitled to treaty benefits under a 
modified base erosion test which provides that: (1) no more 
than 50 percent of its gross income (excluding tax-exempt 
income) may be paid by the taxable nonstock corporation in the 
form of deductible payments (for the taxable year and the three 
preceding years) to persons who are not qualified residents of 
the treaty countries, and (2) no more than 50 percent of its 
total income (including tax-exempt income) may be paid by the 
taxable nonstock corporation, in the form of deductible 
payments and non-deductible distributions (for the taxable year 
and the three preceding years), to persons who are not 
qualified residents of the treaty countries. In addition, under 
the public company tests of the anti-treaty-shopping article, a 
company is entitled to treaty benefits if more than 50 percent 
of the voting power of the company is owned by one or more 
taxable nonstock corporations entitled to treaty benefits (as 
described above), and all of the other shares of the company 
are listed on a recognized stock exchange and substantially and 
regularly traded on one or more recognized stock exchanges. The 
Technical Explanation states that this test is necessary 
because it is common for Danish taxable nonstock corporations 
to own all of a certain class of shares of another company that 
provide disproportionate voting power but little or no rights 
to dividends. The shares held by the taxable nonstock 
corporation are listed but not traded on a stock exchange.
    The proposed treaty is similar to other U.S. treaties and 
the branch tax rules in affording treaty benefits to certain 
publicly traded companies. In comparison with the U.S. branch 
tax rules, the proposed treaty is more lenient. The proposed 
treaty allows benefits to be afforded to a company that is at 
least 50-percent owned, directly or indirectly, by five or 
fewer qualifying publicly traded companies (including companies 
owned by qualifying taxable nonstock corporations). The branch 
tax rules allow benefits to be afforded only to a wholly-owned 
subsidiary of a publicly traded company.
    The proposed treaty also provides mechanical rules under 
which so-called ``derivative benefits'' are afforded.\11\ Under 
these rules, an entity is afforded treaty benefits based in 
part on its ultimate ownership of at least 95 percent by seven 
or fewer residents of EU, EEA or NAFTA countries. The U.S. 
model does not contain a derivative benefits provision.
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    \11\ The U.S. income tax treaties with Ireland, Jamaica, Mexico, 
the Netherlands, and Switzerland provide similar benefits.
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    Taken as a whole, some may argue that the derivative 
benefits provisions of the proposed treaty are more generous to 
taxpayers claiming U.S. treaty benefits than the derivative 
benefits provisions of some other U.S. tax treaties currently 
in effect. For example, while other treaties to which the 
United States is a party generally allow derivative benefits 
only with respect to certain income (e.g., dividends, interest, 
or royalties), the proposed treaty allows a taxpayer to claim 
derivative benefits with respect to the entire treaty.\12\ In 
addition, unlike other treaties, the proposed treaty does not 
require any same-country ownership of a Danish company claiming 
treaty benefits.\13\ In other words, a Danish entity that is 
100-percent owned by certain third-country residents and that 
does not have a nexus with Denmark (e.g., by being engaged in 
an active trade or business there), may be entitled to claim 
benefits under the proposed treaty. Moreover, in order for 
residents of third countries to be taken into account under 
this rule, the proposed treaty generally requires that the 
third country have a comprehensive income tax treaty with the 
United States, and does not require that such treaty provide 
benefits as favorable as those under the proposed treaty. The 
latter requirement is imposed under the proposed treaty only in 
order to qualify for benefits with respect to dividends, 
interest, and royalties.
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    \12\ The U.S. income tax treaties with Ireland, Jamaica, and 
Switzerland allow a taxpayer to claim derivative benefits with respect 
to the entire treaty.
    \13\ Article 26(4) of the U.S.-Netherlands treaty, for example, 
requires more than 30-percent Dutch ownership of the entity claiming 
derivative benefits, and more than 70-percent EU ownership of such 
entity.
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    One provision of the anti-treaty shopping article differs 
from the comparable rule of some earlier U.S. treaties, but the 
effect of the change is not clear. The general test applied by 
those treaties to allow benefits to an entity that does not 
meet the bright-line ownership and base erosion tests is a 
broadly subjective one, looking to whether the acquisition, 
maintenance, operation of an entity did not have ``as a 
principal purpose obtaining benefits under'' the treaty. By 
contrast, the proposed treaty contains a more precise test that 
allows denial of benefits only with respect to income not 
derived in connection with (or incidental to) the active 
conduct of a substantial trade or business. (However, this 
active trade or business test does not apply with respect to a 
business of making or managing investments carried on by a 
person other than a bank, insurance company, or registered 
securities dealer, so benefits may be denied with respect to 
such a business regardless of how actively it is conducted). In 
addition, the proposed treaty (like all recent treaties) gives 
the competent authority of the country in which the income 
arises the authority to determine that the benefits of the 
treaty will be granted to a person even if the specified tests 
are not satisfied.
    The practical difference between the proposed treaty tests 
and the corresponding tests in other treaties will depend upon 
how they are interpreted and applied. Given the relatively 
bright line rules provided in the proposed treaty, the range of 
interpretation under it may be fairly narrow.
    The Committee has in the past expressed its belief that the 
United States should maintain its policy of limiting treaty-
shopping opportunities whenever possible. The Committee has 
further expressed its belief that, in exercising any latitude 
Treasury has with respect to the operation of a treaty, the 
treaty rules should be applied to deter treaty-shopping abuses. 
On the other hand, implementation of the tests for treaty 
shopping set forth in the proposed treaty raise factual, 
administrative, and other issues. The Committee may wish to 
satisfy itself that the anti-treaty-shopping rules in the 
proposed treaty are adequate under the circumstances.

                                  
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