[JPRT 106-11-99]
[From the U.S. Government Publishing Office]


                                                              JCS-11-99

                                     

                        [JOINT COMMITTEE PRINT]


 
                        EXPLANATION OF PROPOSED
                       INCOME TAX TREATY BETWEEN
                         THE UNITED STATES AND
                       THE REPUBLIC OF SLOVENIA

                        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....................................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 (Immovable 
            Property)............................................    16
        Article 7.  Business Profits.............................    17
        Article 8.  Shipping and Air Transport...................    20
        Article 9.  Associated Enterprises.......................    21
        Article 10. Dividends....................................    22
        Article 11. Interest.....................................    25
        Article 12. Royalties....................................    28
        Article 13. Gains........................................    30
        Article 14. Independent Personal Services................    32
        Article 15. Dependent Personal Services..................    33
        Article 16. Directors' Fees..............................    33
        Article 17. Artistes and Sportsmen.......................    33
        Article 18. Pensions, Social Security, Annuities, 
            Alimony and Child Support............................    34
        Article 19. Government Service...........................    35
        Article 20. Students, Trainees, Professors and 
            Researchers..........................................    36
        Article 21. Other Income.................................    37
        Article 22. Limitation on Benefits.......................    37
        Article 23. Relief from Double Taxation..................    41
        Article 24. Non-Discrimination...........................    42
        Article 25. Mutual Agreement Procedure...................    44
        Article 26. Exchange of Information and Administration 
            Assistance...........................................    45
        Article 27. Diplomatic Agents and Consular Officers.....    46
        Article 28. Capital......................................    46
        Article 29. Entry Into Force.............................    47
        Article 30. Termination..................................    47

IV. Issues...........................................................48

        A. Main Purpose Tests....................................    48

        B. Exchange of Information...............................    51

        C. Treaty Shopping.......................................    52
                              INTRODUCTION

    This pamphlet,1 prepared by the staff of the 
Joint Committee on Taxation, describes the proposed income tax 
treaty between the United States of America and the Republic of 
Slovenia (``Slovenia''). The proposed treaty was signed on June 
21, 1999.2 The Senate Committee on Foreign Relations 
has scheduled a public hearing on the proposed treaty on 
October 13, 1999.
---------------------------------------------------------------------------
    \1\ This pamphlet may be cited as follows: Joint Committee on 
Taxation, Explanation of Proposed Income Tax Treaty Between the United 
States and the Republic of Slovenia (JCS-11-99), October 8, 1999.
    \2\ For a copy of the proposed treaty, see Senate Treaty Doc. No. 
106-9, September 13, 1999.
---------------------------------------------------------------------------
    Part I of the pamphlet provides a summary with respect to 
the proposed treaty. 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. Part IV 
contains a discussion of issues with respect to the proposed 
treaty.

                               I. SUMMARY

    The principal purposes of the proposed income tax treaty 
between the United States and Slovenia 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 in the case of the United States) 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 to 
which the taxpayer would be entitled under the domestic law of 
a country or under any other agreement between the two 
countries (Article 1).
    The proposed treaty contains certain ``main purpose'' tests 
which operate to deny the benefits of the dividends article 
(Article 10), the interest article (Article 11), the royalties 
article (Article 12) and the other income article (Article 21) 
if the main purpose or one of the main purposes of a person is 
to take advantage of the benefits of the respective article 
through a creation or assignment of shares, debt claims, or 
rights that would give rise to income to which the respective 
article would apply. 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).
    No income tax treaty between the United States and Slovenia 
is in force at present. 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.

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 one or 
four 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 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.

                          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 
necessary 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, 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

    A detailed, article-by-article explanation of the proposed 
income tax treaty between the United States and Slovenia is set 
forth below.
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 Slovenia, with specific 
modifications to such scope provided in other articles (e.g., 
Article 24 (Non-Discrimination) and Article 26 (Exchange of 
Information and Administrative Assistance)). 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 exclusion, exemption, deduction, credit, or 
other allowance or benefit accorded by internal law or by any 
other agreement between the United States and Slovenia. Thus, 
the proposed treaty will not apply to increase the tax burden 
of a resident of either the United States or Slovenia. 
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 Slovenia has three separate businesses in the United States. 
One business is profitable and constitutes a U.S. permanent 
establishment. The other two businesses generate taxable income 
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.3
---------------------------------------------------------------------------
    \3\ 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 Slovenia are parties in determining 
whether a measure is within the scope of the proposed treaty. 
Unless the competent authorities determine 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 Slovenia, generally apply to that law or 
other 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 other form of measure.
            Saving clause
    Like all U.S. income tax treaties, and the U.S. model, the 
proposed treaty includes a ``saving clause.'' Under this 
clause, with specific exceptions described below, the proposed 
treaty does not affect the taxation by either treaty country of 
its residents or 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 Slovenia as if the treaty were not in force. For 
purposes of the proposed treaty (and, thus, for purposes of the 
saving clause), the term ``resident of a Contracting State,'' 
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 a country's jurisdiction to tax) 
applies to a former citizen or long-term resident whose loss of 
citizenship 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 exemption from residence country tax for 
social security benefits and certain child support payments 
(Article 18, paragraphs 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 and 
citizens of the United States or Slovenia 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 
immigrant status in that country. Under this set of exceptions 
to the saving clause, the specified treaty benefits are 
available to, for example, a Slovenian citizen who spends 
enough time in the United States to be taxed as a U.S. resident 
but who has not acquired U.S. immigrant 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, trainees, professors and 
researchers (Article 20), and certain income of diplomats and 
consular officers (Article 27).
Article 2. Taxes Covered
    The proposed treaty generally applies to the income taxes 
of the United States and Slovenia. 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 and 
Administrative Assistance) 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, but 
excludes social security taxes. The proposed treaty also 
applies to the Federal excise taxes imposed with respect to 
private foundations.
    In the case of Slovenia, the proposed treaty applies to the 
tax on profits of legal persons; the tax on income of 
individuals, including wages and salaries, income from 
agricultural activities, income from business, capital gains 
and income from immovable and movable property; and the assets 
tax on banks and savings institutions.
    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 may be 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 affecting their obligations under the 
proposed treaty and of any official published material 
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 country 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 proposed treaty does not define 
the term ``enterprise.'' The Technical Explanation states that 
the term ``enterprise'' generally 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 Slovenian enterprise, purely domestic transport 
within the United States does not constitute ``international 
traffic.'' The Technical Explanation states that transportation 
that constitutes international traffic includes any portion of 
the transport that is between two points within a country, even 
if the internal portion of the transport involves a transfer to 
a land vehicle or is handled by an independent carrier 
(provided that the original bills of lading include such 
portion of such transport).
    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 Slovenian ``competent authority'' is the 
Ministry of Finance or its authorized representative.
    The term ``United States'' means the United States of 
America, and includes the States, the District of Columbia, and 
the territorial sea of the United States; it also includes the 
seas, seabed and subsoil of the submarine areas adjacent to the 
territorial sea over which the United States has sovereign 
rights in accordance with international law. The term does not 
include, however, Puerto Rico, the Virgin Islands, Guam, or any 
other U.S. possession or territory. The Technical Explanation 
states that the sea bed and subsoil of undersea areas adjacent 
to the territorial sea of the United States are included only 
to the extent that the person, property, or activity to which 
the proposed treaty is being applied is connected with the 
exploration or exploitation of natural resources.
    The term ``Slovenia'' means the Republic of Slovenia, as 
well as the territorial sea, sea bed, and subsoil adjacent to 
the territorial sea over which Slovenia, in accordance with 
international law and its domestic legislation, exercises its 
sovereign rights or jurisdiction.
    Under the proposed treaty, a person is a ``national'' of 
one of the treaty countries if the person is an individual 
possessing nationality or citizenship of that country or is a 
legal person, partnership or association deriving its status as 
such from the laws in force in that country.
    The term ``qualified governmental entity'' under the 
proposed treaty means any person or body of persons that 
constitutes a governing body of one of the treaty countries, or 
a political subdivision or local authority of the country. It 
also includes a person that is wholly owned, directly or 
indirectly, by one of the treaty countries or a political 
subdivision or local authority of the country. Such a wholly-
owned person, however, is only a qualified governmental entity 
if it is organized under the laws of the treaty country; its 
earnings are credited to its own account with no portion of its 
income inuring to the benefit of any private person; and its 
assets vest in the treaty country (or its political subdivision 
or local authority) upon dissolution--provided that such 
wholly-owned entity does not carry on commercial activities. A 
qualified governmental entity also includes a pension or trust 
fund of a person described above and that is constituted and 
operated exclusively to administer or provide pension benefits 
described in the government service article (Article 19), 
provided that the pension or trust fund does not carry on 
commercial activities.
    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 that they have under 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.
Slovenia
    Under Slovenian law, resident individuals are subject to 
tax on their worldwide income, while nonresident individuals 
are subject to tax only on certain income derived in Slovenia. 
An individual who is present in Slovenia for at least 183 
consecutive days in a calendar year is considered a resident 
for tax purposes. Individuals who are present in Slovenia for a 
period of less than 183 consecutive days in a calendar year are 
nonresidents for tax purposes and are taxable in Slovenia only 
on Slovenian-source taxable income.
    Under Slovenian law, resident legal entities and companies 
generally are subject to tax on their worldwide income. 
Nonresident legal entities generally are subject to Slovenian 
tax only on income attributable to a permanent establishment 
(within the meaning of Slovenian law) in Slovenia and on income 
attributable to any agents of the foreign company entitled to 
conclude contracts on its behalf (other than contracts for the 
mere purchase of products or services). A company or legal 
entity is a nonresident if it does not have its head office in 
Slovenia
            Proposed treaty rules
    The proposed treaty specifies rules to determine whether a 
person is a resident of the United States or Slovenia 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 in that country by reason of the 
person's domicile, residence, citizenship, place of management, 
place of incorporation, or any other criterion of a similar 
nature. The proposed treaty provides that a U.S. citizen or 
alien lawfully admitted to the United States for permanent 
residence (a ``green card'' holder) will be treated as a U.S. 
resident only if such person has a substantial presence, 
permanent home or habitual abode in the United States. 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 capital situated in that country or 
profits attributable to a permanent establishment in that 
country.
    The proposed treaty provides a special rule for fiscally 
transparent entities. Under this rule, the income of a 
partnership, estate, or trust is considered to be a resident of 
one of the treaty countries only to the extent that the income 
it derives is subject to tax in that country as the income of a 
resident, either in its hands or in the hands of its partners, 
beneficiaries, members, or grantors. The Technical Explanation 
states that this includes a U.S. limited liability company that 
is classified as a partnership for U.S. tax purposes. Under 
this provision, for example, if the U.S. partners' share of the 
income of a U.S. partnership is only one-half, the proposed 
treaty's limitations on withholding tax rates would apply to 
only one-half of the Slovenian source income paid to the 
partnership. Under Slovenian law, all entities are subject to 
tax at the entity level and, accordingly, this aspect of the 
proposed treaty has no effect as applied to Slovenian entities.
    The proposed treaty also provides a special rule to treat 
as residents of a treaty country certain organizations that 
generally are exempt from tax in that country. Under this rule, 
certain organizations that are established and maintained in a 
country exclusively for religious, charitable, educational, 
scientific or similar purposes or to provide pension or similar 
benefits to employees pursuant to a plan are treated as 
residents of that country, notwithstanding that all or part of 
its income may be exempt from tax under the domestic law of 
that country.
    Qualified governmental entities (as defined in Article 
3(1)(i)) are treated as residents of the countries in which 
they are established for purposes of the proposed treaty.
    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.
    A company that would be a resident of both countries under 
the basic definition in the proposed treaty is deemed to be a 
resident of the country in which it is created or organized. If 
the company is dual-incorporated, then the company will be 
treated as a resident of one of the countries only if and to 
the extent that the competent authorities can agree to a single 
country of residence for the company. In the case of any other 
persons other than individuals or companies (such as trusts or 
estates) that would be a resident of both countries under the 
basic definition in the proposed treaty, the proposed treaty 
requires the competent authorities to settle the issue of 
residence by mutual agreement and to determine the mode of 
application of the proposed 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 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, if the 
site, project, or activities continue for more than twelve 
months. 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. The U.S. and OECD models contain 
similar rules (except for the absence in the OECD model of a 
rule for drilling rigs).
    Under the proposed treaty, the following activities are 
deemed not to constitute a permanent establishment: the use of 
facilities solely for storing, displaying, or delivering goods 
or merchandise belonging to the enterprise; 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; 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 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. The 
Technical Explanation gives advertising or the supply of 
information as examples of such preparatory and auxiliary 
activities.
    Under the proposed treaty, as 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. The proposed treaty does not contain 
the OECD model's qualification that 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 the United States position that a combination 
of activities that are each preparatory or auxiliary activities 
always will result in an overall activity that is also 
preparatory or auxiliary.
    Under the proposed treaty, if a person, other than an 
independent agent, is acting on behalf of an enterprise and 
has, and habitually exercises in a country, the authority to 
conclude contracts that are binding on such enterprise, the 
enterprise is deemed to have a permanent establishment in that 
country in respect of any activities undertaken for that 
enterprise. This rule does not apply where the contracting 
authority is 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; relevant 
factors include the extent to which the agent operates based on 
instructions from the enterprise, which party bears the 
business risk associated with the agent's activities on behalf 
of the enterprise, and whether the agent has an exclusive or 
nearly exclusive relationship with the principal.
    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 (whether through a 
permanent establishment or otherwise) does not of itself cause 
either company to be a permanent establishment of the other.
Article 6. Income from Real Property (Immovable Property)
    This article covers income from real property. The rules 
covering gains from the sale of real property are in Article 13 
(Gains).
    Under the proposed treaty, income derived by a resident of 
one country from real property (immovable property), including 
income from agriculture or forestry, 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.
    The term ``real property'' (``immovable property'') has the 
meaning which it has under the law of the country in which the 
property in question is situated.4 The proposed 
treaty specifies that the term in any case includes property 
accessory to immovable property, livestock and equipment used 
in agriculture and forestry, rights to which the provisions of 
general law respecting landed property apply, usufruct of 
immovable 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 immovable property.
---------------------------------------------------------------------------
    \4\ In the United States, the term ``real property'' 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 proposed treaty further provides that the rules of this 
article permitting source country taxation apply to the income 
from real property of an enterprise and to income from real 
property used for the performance of independent personal 
services.
    Like the U.S. model and certain other U.S. income tax 
treaties, the proposed treaty provides residents of a country 
with an election to be taxed on a net basis by the other 
country on income from real property in that other country. 
Such election is binding for the taxable year and all 
subsequent taxable years unless the competent authority of the 
country where the real property is located agrees to terminate 
the election. U.S. internal law provides such a net-basis 
election in the case of income from 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)).
Slovenia
    Nonresident legal entities (i.e., companies or entities 
that do not have their head office in Slovenia) generally are 
subject to Slovenian tax only on income attributable to a 
permanent establishment (within the meaning of Slovenian law) 
in Slovenia, on income attributable to any agents of the 
foreign company entitled to conclude contracts on its behalf 
(other than contracts for the mere purchase of products or 
services), and on Slovenian-source dividends. Nonresident 
individuals generally are subject to Slovenian tax only on 
Slovenian-source income.
            Proposed treaty limitations on internal law
Business profits subject to host country tax
    Under the proposed 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 level 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 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 
entity engaged in the same or similar activities under the same 
or similar conditions. The Technical Explanation explains that 
this incorporates the arm's-length standard for purposes of 
determining the profits attributable to a permanent 
establishment. The Technical Explanation further states that it 
is understood 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.
Treatment of expenses
    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 
purposes of the enterprise as a whole (or, if not the 
enterprise as whole, at least the part of the enterprise that 
includes the permanent establishment). According to the 
Technical Explanation, under this language, each treaty country 
is permitted to (but not required to) apply the type of expense 
allocation rules provided by U.S. law (such as Treas. Reg. 
secs. 1.861-8 and 1.882-5). Thus, for example, a Slovenian 
company that has a branch office in the United States but which 
has its head office in Slovenia may, in computing the U.S. tax 
liability, be entitled to deduct a portion of the executive and 
general administrative expenses incurred in Slovenia by the 
head office for purposes of operating the U.S. branch, 
allocated and apportioned in accordance with Treas. Reg. sec. 
1.861-8 (or 1.882-5). In addition, the Technical Explanation 
states that this rule does not permit a deduction for expenses 
charged to a permanent establishment by another unit of the 
enterprise. Thus, a permanent establishment may not deduct a 
royalty deemed paid to the head office.
Other rules
    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 amount of profits attributable to a permanent 
establishment must be determined by the same method each year 
unless there is good and sufficient reason to change the 
method. The Technical Explanation states that this rule does 
not restrict a treaty country from imposing additional 
requirements, such as the rules under Code section 481, to 
prevent amounts from being duplicated or omitted following a 
change in accounting method.
    The proposed treaty provides that the business profits 
attributed to a permanent establishment shall include only the 
profits derived from the assets or activities of the permanent 
establishment. The proposed treaty does not incorporate the 
limited force of attraction rule of Code section 864(c)(3). The 
proposed treaty is consistent with the U.S. model treaty and 
other existing U.S. treaties in this regard.
    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.
    The proposed treaty follows the U.S. model and defines the 
term ``business profits'' broadly to mean income derived from 
any trade or business, including income derived from the 
performance of personal services and from the rental of 
tangible property.
    The proposed treaty also provides that, for purposes of the 
taxation of business profits, income or gain may be 
attributable to a permanent establishment or fixed base (and 
therefore may be taxable in the country where the permanent 
establishment or fixed base was situated) even if the payment 
of such income is deferred until after the permanent 
establishment or fixed base has ceased to exist. This rule 
incorporates into the proposed treaty the rule of Code section 
864(c)(6). The rule applies with respect to business profits 
(Article 7, paragraphs 1 and 2), dividends (Article 10, 
paragraph 6), interest (Article 11, paragraph 5), royalties 
(Article 12, paragraph 4), gains (Article 13, paragraph 3), 
independent personal services (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 (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'' means any transport by 
a ship or aircraft, except where the transport is solely 
between places in the other country (Article 3(1)(d) (General 
Definitions)).
    The proposed treaty provides that profits from the rental 
of ships or aircraft on a full (time or voyage) basis 
constitute profits from the operation of ships or aircraft. 
Thus, such profits from the rental of ships or aircraft for use 
in international traffic are exempt from tax in the other 
country. In addition, the proposed treaty provides that profits 
from the operation of ships or aircraft include profits derived 
from the rental of ships or aircraft on a bareboat basis if the 
ships or aircraft are operated in international traffic by the 
lessee, or if such rental profits are incidental to other 
profits of the lessor from the operation of ships or aircraft 
in international traffic. Thus, the exemption from source-
country tax for shipping profits applies to a bareboat lessor 
(such as a financial institution or a leasing company) that 
does not operate ships or aircraft in international traffic, 
but that leases the ships or aircraft for use in international 
traffic. In addition, profits derived by an enterprise from the 
inland transport of property or passengers within a 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 rules in the U.S. model.
    Like 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 is exempt from tax in the other 
country.
    Also like the U.S. model, 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.
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, and the other country agrees that the adjustment 
was appropriate to reflect arm's-length conditions, the other 
country will make an appropriate adjustment to the amount of 
tax paid in that country on the redetermined income. 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.
    According to the Technical Explanation, it is understood 
that this article does not replace the internal law provisions 
that permit this type of adjustment. 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. The Technical 
Explanation states that this article also permits the tax 
authorities of the countries to address thin capitalization 
issues.
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.
Slovenia
    Slovenia generally imposes a withholding tax on dividend 
payments to nonresident legal entities and individuals at a 
rate of 15 percent.
            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 to 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 company which owns at least 25 percent of the 
voting shares of the payor company (or, in the case of 
Slovenia, if there is no voting stock, at least 25 percent of 
the statutory capital of the payor company). The source country 
dividend withholding tax generally is limited to 15 percent of 
the gross amount of the dividends beneficially owned by 
residents of the other country in all other cases.
    The rates of source country dividend withholding tax 
permitted under the proposed treaty are the same as those 
provided for in the U.S. model and the OECD model, but the 
ownership requirement generally follows the OECD model. The 
proposed treaty provides that these rules do not affect the 
taxation of the payor company on the profits out of which the 
dividends are paid.
    The proposed treaty allows the United States to impose a 
15-percent tax on a U.S.-source dividend paid by a RIC to a 
Slovenian person. The proposed treaty allows the United States 
to impose a 15-percent tax on a U.S.-source dividend paid by a 
REIT to a Slovenian person if: (1) the beneficial owner of the 
dividend is an individual holding an interest of not more than 
10 percent of the REIT; (2) the dividend is paid with respect 
to a class of stock that is publicly traded and the beneficial 
owner of the dividend is a person holding an interest of not 
more than 5 percent of any class of the REIT's stock; or (3) 
the beneficial owner of the dividend is a person holding an 
interest of not more than 10 percent of the REIT and the REIT 
is diversified. There is no limitation in the proposed treaty 
on the tax that may be imposed by the United States with 
respect to a REIT dividend that does not satisfy at least one 
of these requirements. Thus, such a dividend is taxable at the 
30-percent U.S. statutory withholding 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.
    Like the U.S. model, the proposed treaty exempts dividends 
paid to qualified governmental entities (that do not control 
the payor) from tax in the treaty country of source. This 
provision is analogous to the exemption provided to foreign 
governments under section 892 of the Code and makes that 
exemption reciprocal.
    The proposed treaty provides a definition of ``dividends'' 
that is broad and flexible and generally follows the U.S. 
model. The proposed treaty generally defines ``dividends'' as 
income from shares or other rights which participate in profits 
and which are not debt claims. The term also includes income 
from other corporate rights if such income is subjected to the 
same tax treatment by the country in which the distributing 
corporation is resident as income from shares.
    The proposed treaty's reduced rates of tax on dividends do 
not apply if the beneficial owner of the dividend carries on 
business through a permanent establishment (or a fixed base, in 
the case of an individual who performs independent personal 
services) in the source country and the dividends are 
attributable to the permanent establishment (or fixed base). 
Such dividends are taxed as business profits (Article 7) or as 
income from the performance of independent personal services 
(Article 14), as the case may be. In addition, dividends 
attributable to a permanent establishment or fixed base, but 
received after the permanent establishment or fixed base is no 
longer in existence are taxable in the country where the 
permanent establishment or fixed base existed (Article 7, 
paragraph 8).
    The proposed treaty contains a general limitation on the 
taxation by a treaty country of dividends paid to a resident of 
the other country by a corporation that is not a resident of 
the first country (a so-called ``second-level withholding 
tax''). Under this provision, a treaty country may not impose 
any tax on dividends paid by a corporation that is resident in 
the other country except where the dividends are paid to a 
resident of the first country, or insofar as the holding in 
respect of which the dividends are paid is effectively 
connected with a permanent establishment or fixed base of the 
recipient in the first country.
    The proposed treaty permits the imposition of a branch 
profits tax, but limits the rate of such tax to five percent. 
In the case of the United States, the branch profits tax may be 
imposed on a corporation resident in Slovenia to the extent of 
the corporation's (1) business profits that are attributable to 
a permanent establishment in the United States, (2) income that 
is subject to taxation on a net basis because the corporation 
has elected under section 882(d) of the Code to treat income 
from real property not otherwise taxed on a net basis as 
effectively connected income and (3) gain from the disposition 
of certain U.S. real property interests. 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 gains, that represents the 
``dividend equivalent amount.'' The Technical Explanation 
states that the term ``dividend equivalent amount'' has the 
same meaning as it has under section 884 of the Code (as it may 
be amended).
    The proposed treaty provides a ``main purpose'' test that 
is not specifically included in the dividends articles of the 
U.S. model or OECD model. Under this rule, the proposed 
treaty's reduced rates of tax on dividends do not apply if the 
main purpose, or one of the main purposes, for the creation or 
assignment of shares or other rights in respect of which 
dividends are paid is to take advantage of the dividends 
article of the proposed treaty. The Technical Explanation 
states that it is intended that the provisions of this article 
will be self-executing, but the tax authorities of one of the 
treaty countries, on review, may deny the benefits of the 
reduced rate of tax on dividends. In addition, the Technical 
Explanation states that the competent authorities of both of 
the treaty countries may together agree that this standard has 
been met in a particular case or with respect to a type of 
transaction entered into by a number of taxpayers.
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.
Slovenia
    Slovenia does not generally impose a withholding tax on 
Slovenian-source interest paid to nonresidents legal entities. 
Slovenia does, however, impose a withholding tax at a rate of 
25 percent when the payment is from a Slovenian legal entity to 
a nonresident individual.
            Proposed treaty limitations on internal law
    The proposed treaty provides that interest arising in one 
of the countries and paid to a resident of the other country 
generally may be taxed by both countries. This is contrary to 
the position of the U.S. model which provides for an exemption 
from source-country tax for interest earned by a resident of 
the other country, but not unlike other U.S. treaties with 
developing countries.
    The proposed treaty limits the rate of source-country tax 
that may be imposed on interest income. Under the proposed 
treaty, if the beneficial owner of interest is a resident of 
the other country, the source-country tax on such interest 
generally may not exceed five percent of the gross amount of 
such interest.
    The proposed treaty provides for a complete exemption from 
source-country withholding tax in the case of certain 
categories of interest earned by residents of the other 
country. Interest arising in one of the treaty countries and 
paid to a qualified government entity is exempt from source-
county tax, provided that the qualified governmental entity 
does not control the person paying the interest. Moreover, 
interest arising in either country in connection with a debt 
obligation that is guaranteed or insured by a qualified 
governmental entity of the other country is exempt from source-
country tax. In addition, the proposed treaty exempts from 
source-country tax interest paid or accrued with respect to a 
deferred payment for personal property (movable property) or 
services.
    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 income from money 
lent by the domestic law of the country in which the income 
arises. The proposed treaty provides that the term ``interest'' 
does not include amounts treated as dividends under Article 10 
(Dividends) or penalty charges for late payment.
    In the case of the United States, the proposed treaty 
permits limited source-country taxation of the excess, if any, 
of (1) the amount of interest borne by a permanent 
establishment, fixed base, or trade or business subject to tax 
on a net basis with respect to real property income or gains, 
over (2) the interest paid by that permanent establishment, 
fixed base or trade or business in the United States. This rule 
allows the United States to impose its branch-level excess 
interest tax; however, such tax may be imposed only at the 
treaty rate applicable to interest payments (i.e., five 
percent).
    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 resident of a treaty 
country who performs independent personal services in the other 
treaty country from a fixed base located in the other 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). The Technical Explanation states that 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 provision of the proposed treaty does not address cases in 
which the amount of interest is less than an arm's-length 
amount. The Technical Explanation states that in those cases, a 
transaction may be characterized to reflect its substance and 
interest may be imputed.
    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 subparagraph (b) of 
paragraph 2 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.
    The proposed treaty provides that interest is treated as 
arising in a country if the payor is a resident of that 
country.5 If, however, the interest expense is borne 
by a permanent establishment or a fixed base in a treaty 
country, the interest would have as its source the country in 
which the permanent establishment or fixed base is located, 
regardless of the residence of the payor. Thus, for example, if 
a French resident has a permanent establishment in Slovenia and 
that French resident incurs indebtedness to a U.S. person, the 
interest on which is borne by the Slovenian permanent 
establishment, the interest would be treated as having its 
source in Slovenia.
---------------------------------------------------------------------------
    \5\ This is consistent with the source rules of U.S. law, which 
provide as a general rule that interest income has as its source the 
country in which the payor is resident.
---------------------------------------------------------------------------
    The proposed treaty also provides a main purpose test 
similar to that for dividends (Article 10) under which the 
provision with respect to interest will not apply if the main 
purpose, or one of the main purposes, for the creation or 
assignment of the debt claim in respect of which interest is 
paid is to take advantage of the interest article of the 
proposed treaty.
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.
Slovenia
    Slovenia does not generally impose a withholding tax on 
Slovenian-source royalties paid to nonresidents legal entities. 
Slovenia does, however, impose a withholding tax at a rate of 
15 percent when the payment is from a Slovenian legal entity to 
a nonresident individual.
            Proposed treaty limitations on internal law
    The proposed treaty provides that royalties arising in a 
treaty country and paid to a resident of the other country may 
be taxed by that other country. In addition, the proposed 
treaty allows the country where the royalties arise to tax such 
royalties. However, if the beneficial owner of the royalties is 
a resident of the other country, the source-country tax 
generally may not exceed five percent of the gross royalties. 
The U.S. and OECD models generally exempt royalties from 
source-country taxation.
    For purposes of this five-percent limitation, the term 
``royalties'' means payment of any kind received as 
consideration for the use of, or the right to use, 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), any patent, trademark, design or model, plan, 
secret formula or process or other like right or property, or 
for information concerning industrial, commercial or scientific 
experience. The term also includes gains derived from the 
alienation of such rights or property or rights provided that 
such gains are contingent on the productivity, use, or 
disposition of such property. According to the Technical 
Explanation, it is understood that whether payments with 
respect to computer software are treated as royalties (or as 
business profits) will depend on the facts and circumstances of 
the particular transaction. The Technical Explanation also 
states that it is understood that payments with respect to 
transfers of ``shrink wrap'' computer software will be treated 
as business profits.
    The proposed treaty rates with respect to royalties do not 
apply if the beneficial owner is an enterprise that 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 rates of 
tax on royalties also do not apply if the beneficial owner is a 
Slovenian resident who performs independent personal services 
in the United States from a fixed base located in the United 
States 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). The Technical Explanation 
states that 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 would have been agreed upon by the payor and the 
beneficial owner 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).
    The proposed treaty provides special source rules for 
royalties which are not included in the U.S. model. Royalties 
are deemed to arise within a country if the payor is that 
country, including its political or administrative subdivisions 
and local authorities, or a resident of that country. If, 
however, the royalty expense is borne by a permanent 
establishment (or fixed base) that the payor has in Slovenia or 
the United States, the royalty has as its source the country in 
which the permanent establishment (or fixed base) is located, 
regardless of the residence of the payor. Thus, for example, if 
a French resident has a permanent establishment in Slovenia and 
that French resident pays a royalty to a U.S. person which is 
attributable to the Slovenian permanent establishment, then the 
royalty would be treated as having its source in Slovenia. The 
proposed treaty provides that notwithstanding the foregoing 
rules, royalties with respect to the use of, or right to use, 
rights or property within a treaty county may be deemed to 
arise within that country. Thus, consistent with U.S. internal 
law, the United States may treat royalties with respect to the 
use of property in the United States as U.S. source income.
    As in the case of dividends (Article 10) and interest 
(Article 11), the proposed treaty includes a main purpose test 
under which the royalty provision will not apply if the main 
purpose, or one of the main purposes, for the creation or 
assignment of rights in respect of which royalties are paid is 
to take advantage of the proposed treaty's royalty article.
Article 13. Gains
            Internal taxation rules
United States
    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.
Slovenia
    Under Slovenian law, with respect to legal entities, gain 
from the sale of a capital asset generally is treated as 
ordinary business income and subject to tax at the regular 
corporate rates. Nonresident legal entities would be subject to 
tax by Slovenia on Slovenian-source capital gains and on 
capital gains attributable to a permanent establishment in 
Slovenia. Nonresident individuals are subject to tax on 
Slovenian-source capital gains to the extent that such gains 
would be taxable if the individual were a resident of Slovenia. 
Capital gains for this purpose include gains from the sale of 
real estate if the real estate is sold within three years from 
the date of acquisition, and securities and other shares in 
capital.
            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. In addition, gains derived by a 
resident of one country from the alienation of an interest in a 
partnership, trust, or estate, to the extent attributable to 
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 (Immovable Property)) situated in the other country, 
(2) an interest in a partnership, trust, or estate, to the 
extent that its assets consist of real property situated in 
that other country, and (3) shares or other comparable rights, 
other than shares that are regularly traded on an established 
securities market, in a company that is a resident of a treaty 
country and that derives at least 50 percent of its value 
directly or indirectly from immovable property situated in the 
other treaty country. The Technical Explanation states that 
this provision is intended to cover U.S. real property 
interests as well as any similar interests in Slovenian real 
property. The Technical Explanation also states that the United 
States will look through distributions made by a REIT and treat 
those distributions as gains subject to this article when they 
are attributable to gains derived from the alienation of real 
property.
    Gains from the alienation of personal property (movable 
property) that form a part of the business property of a 
permanent establishment which an enterprise of one country has 
in the other country, gains from the alienation of movable 
property pertaining 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. The Treasury Explanation makes clear that 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 from the alienation of ships, aircraft, or containers 
operated in international traffic, (or movable property 
pertaining to the operation of ships, aircraft, or containers) 
are taxable only in the country in which the person disposing 
of such property is resident.
    Gains from the alienation of any property other than that 
discussed above is taxable under the proposed treaty only in 
the country in which the person disposing of the property is 
resident.
Article 14. Independent Personal Services
            Internal taxation rules
United States
    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.
Slovenia
    Nonresident individuals generally are subject to tax on 
salaries or wages income earned under a contract for temporary 
work, and other income if the income is derived from services 
or work in the territory of Slovenia. Such income is taxed 
according to the same general rules and rates that apply to 
Slovenian residents.
            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 
professional services or other activities 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), except that an individual 
may be taxed in the source country if he or she 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 analogous to the concept of a permanent 
establishment.
---------------------------------------------------------------------------
    For purposes of this article of the proposed treaty, 
``professional services'' includes especially independent 
scientific, literary, artistic, educational or teaching 
activities as well as independent activities of physicians, 
lawyers, engineers, architects, dentists, and accountants. This 
list is derived from the OECD model and, according to the 
Technical Explanation, is not exhaustive.
    The principles of paragraph 3 of Article 7 (Business 
Profits) are applicable under the proposed treaty for 
determining taxable independent personal services income. Thus, 
according to the Technical Explanation, all relevant expenses, 
including expenses not incurred in the country in which the 
fixed base is located, must be allowed as deductions in 
computing independent personal services net income.
Article 15. Dependent Personal Services
    Under the proposed treaty, wages, salaries, and other 
similar 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) his or her employer must not be 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 identical to the rules of the U.S. model 
and the OECD model.
    The proposed treaty provides that remuneration derived by a 
resident of one country in respect of employment as a member of 
the regular complement of a ship or aircraft operated in 
international traffic shall be taxable only by that country. 
This rule follows the U.S. model.
    This article is subject to the provisions of the separate 
articles covering directors' fees (Article 16), pensions, 
social security benefits, annuities, alimony and child support 
(Article 18), and government service income (Article 19).
Article 16. Directors' Fees
    Under the proposed treaty, directors' fees and other 
compensation derived by a resident of one country for services 
rendered in the other 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. This rule is the same 
as the corresponding rule in the U.S. model.
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 athletes. 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 
athletes 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 athlete who is a resident of one country from his or her 
personal activities as such 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 (including 
reimbursed expenses) exceeds $15,000 or its Slovenian currency 
equivalent. Under this rule, if a Slovenian entertainer or 
athlete 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 
$14,000, the United States could not tax that income. If, 
however, that entertainer's or athlete's total compensation 
were $16,000, 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 athlete in his or 
her capacity as such accrues not to the entertainer or athlete 
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 athlete 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 and personal service 
articles (Articles 7, 14, and 15).) This provision prevents 
highly-paid entertainers and athletes 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.
    The proposed treaty provides that these rules do not apply 
to income derived from activities performed in a country by 
entertainers or athletes if such activities are wholly or 
mainly supported by public funds of the other country or a 
political subdivision or a local authority thereof. In such a 
case, the income is taxable only in the entertainer's or 
athlete's country of residence. This rule is not contained in 
the U.S. or OECD models, but is contained in some other U.S. 
treaties.
Article 18. Pensions, Social Security, Annuities, Alimony, and Child 
        Support
    Under the proposed treaty, pensions and other similar 
remuneration beneficially owned by a resident of either country 
in consideration of past employment, whether paid periodically 
or in a lump sum, is taxable only in the recipient's country of 
residence; however, that country may not tax such income to the 
extent that it has already been included in taxable income in 
the other country prior to its distribution.
    The proposed treaty provides that payments made by one of 
the countries under the provisions of the social security or 
similar legislation of the 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 also 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).
    The proposed treaty also provides that alimony paid by a 
resident of one treaty country, and deductible in that country, 
to a resident of the other country are taxable only in the 
country of residence of the recipient. The term ``alimony'' for 
this purpose is defined as periodic payments made pursuant to a 
written separation agreement or decree of divorce, separate 
maintenance, or compulsory support and which are taxable to the 
recipient in its country of residence. In addition, the 
proposed treaty provides that periodic payments for child 
support made pursuant to a written separation agreement or 
decree of divorce, separate maintenance, or compulsory support, 
which are not otherwise alimony, are exempt from tax in both 
the United States and Slovenia. These rules are similar to the 
corresponding rules in the U.S. model.
Article 19. Government Service
    Under the proposed treaty, wages and other remuneration, 
other than a pension, paid from the pubic 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 generally is 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 consistent with 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 is taxable only by that country. Such a pension is 
taxable only by the other country, however, if the individual 
is a national and resident of that other country. This 
treatment is consistent with the rules under the U.S. and OECD 
models. When benefits paid by a country in respect of services 
rendered to that country are in the form of social security 
benefits, those payments are covered by paragraph 2 of the 
article dealing with pensions, social security and the like 
(Article 18).
    The provisions described in the foregoing paragraphs are 
exceptions to the proposed treaty's saving clause for 
individuals who are neither citizens nor permanent residents of 
the country where the services are performed. Thus, for 
example, payments by the government of Slovenia to its 
employees in the United States are exempt from U.S. tax if the 
employees are not U.S. citizens or green card holders and were 
not residents of the United States at the time they became 
employed by the Slovenian government.
    The Technical Explanation clarifies that if a country or 
one of its political subdivisions or local authorities is 
carrying on business (as opposed to functions of a governmental 
nature), the provisions of Articles 14 (Independent Personal 
Services), 15 (Dependent Personal Services), 16 (Directors' 
Fees), and 17 (Artistes and Sportsmen) apply to remuneration 
for services rendered in connection with the business.
Article 20. Students, Trainees, Professors and Researchers
    Under the proposed treaty, a resident of a country that 
visits the other country (the host country) for the primary 
purpose of studying at a university or other recognized 
educational institution, securing training in a professional 
specialty, or studying or doing research as a recipient of a 
grant, allowance, or award from a governmental, religious, 
charitable, scientific, literary, or educational organization, 
is not taxable in the host country on certain items of income. 
Those exempt items include payments from abroad, other than 
compensation for personal services, for the purpose of 
maintenance, education, study, research or training; a grant, 
allowance or award; and income from personal services in the 
host country in an aggregate amount not in excess of $5,000 (or 
the equivalent in Slovenian tolars) for the taxable year 
involved. The exemptions are available for a period not 
exceeding five years from the beginning of the visit, and for 
such additional time as is necessary to complete, as a full 
time student, requirements to be a candidate for a postgraduate 
or professional degree from a recognized educational 
institution. The U.S. and OECD models also provide for some 
host-country exemptions for students and trainees. The U.S. 
model provides a time limit of one year for such exemption; 
there is no such time limit in the OECD model.
    The proposed treaty also provides that a resident of a 
country who is employed or under contract with a resident of 
the same country and who temporarily visits the other country 
(the host country) for the primary purpose of acquiring 
technical, professional, or business experience from a person 
other than that other resident, or for studying at a university 
or other recognized educational institution in that other 
country is exempt from tax by the host country for a period not 
to exceed 12 months with respect to income from personal 
services in an aggregate amount not to exceed $8,000 (or the 
equivalent in Slovenian tolars).
    Under the proposed treaty, an individual who is, or was 
immediately before visiting the host country, a resident of the 
other country and who is present in the host country for the 
purpose of teaching or engaging in research at a recognized 
educational or research institution is not taxable in the host 
country on his or her remuneration from personal services for 
teaching or research for a period not exceeding two years from 
the date of the individual's arrival in the host country. The 
proposed treaty provides that in no event will any individual 
have the benefits of this rule apply for more than five taxable 
years.
    The proposed treaty provides that the special exemptions do 
not apply to income from research if such research is 
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 lawful 
permanent residents of the host country.
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 Slovenia. As a general rule, items 
of income not otherwise dealt with in the proposed treaty which 
are derived 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 Slovenia 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 paragraph 2 
of 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 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.
    The proposed treaty contains a main purpose test similar to 
that provided with respect to the dividends, interest, and 
royalties articles (Articles 10, 11 and 12). The Technical 
Explanation states that, like those articles, the other income 
article is intended to be self-executing. However, the tax 
authorities, on review, may deny the benefits of the article in 
cases in which the main purpose, or one of the main purposes, 
for the creation or assignment of the rights in respect of 
which income is paid is to take advantage of the article.
Article 22. Limitation on 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 Slovenia.
    The proposed treaty is intended to limit double taxation 
caused by the interaction of the tax systems of the United 
States and Slovenia 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 in which 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.
            Summary of proposed treaty provisions
    The proposed anti-treaty shopping article provides that a 
resident of either Slovenia or the United States is entitled to 
the benefits of the treaty only to the extent provided in the 
article. To be entitled to the benefits of the treaty under the 
article, a resident of Slovenia or the United States must also 
be one of the following:
          (1) an individual;
          (2) a qualified governmental entity;
          (3) a company that meets a public company test;
          (4) a company that is owned by certain public 
        companies;
          (5) a tax-exempt entity organized exclusively for a 
        religious, charitable, educational, scientific or other 
        similar purpose;
          (6) a tax-exempt entity that provides pension or 
        other similar benefits to employees pursuant to a plan, 
        provided that more than half of the beneficiaries, 
        members, or participants are individual residents of 
        the United States or Slovenia; or
          (7) a person other than an individual that meets an 
        ownership and base erosion test.
    Alternatively, a resident that does not satisfy any of the 
above requirements may claim treaty benefits for particular 
items of income if it satisfies an active business test. In 
addition, a person that does not satisfy any of the above 
requirements may be granted the benefits of the proposed treaty 
if the competent authority of the country in which the income 
in question arises so determines.
            Individuals
    Under the proposed treaty, individual residents of one of 
the countries are entitled to all treaty benefits.
            Qualified Governmental Entities
    Under the proposed treaty, a qualified governmental entity 
is entitled to all treaty benefits. Qualified governmental 
entities include the governments of the two countries and 
political subdivisions and local authorities thereof. Qualified 
governmental entities also include certain wholly-owned 
entities, the earnings of which are credited to its own account 
with no portion of its income inuring to the benefit of any 
private person and the assets of which vest in the government 
upon dissolution, and certain pension trusts or funds providing 
government service pension benefits.
            Public company tests
    Under the proposed treaty, a company that is a resident of 
Slovenia or the United States and in which all the shares in 
the class or classes of shares that represent more than 50 
percent of the voting power and value of such company are 
regularly traded on a ``recognized stock exchange'' is entitled 
to the benefits of the treaty regardless of where its actual 
owners reside or the amount or destination of payments it 
makes. Similarly, treaty benefits are available to a company if 
50 percent or more of each class of shares in the company is 
owned (directly or indirectly) by five or fewer companies that 
satisfy the public company test just described, provided that 
each company in the chain of ownership used to satisfy the 
control requirements is entitled to the treaty benefits. These 
rules follow the corresponding rules in the U.S. model.
    The term ``recognized stock exchange'' means the NASDAQ 
System owned by the National Association of Securities Dealers, 
Inc.; any stock exchange registered with the Securities and 
Exchange Commission as a national securities exchange for the 
purposes of the Securities Exchange Act of 1934; the Ljubljana 
Stock Exchange; the stock exchanges of Frankfurt, London, 
Paris, and Vienna; and any other stock exchange agreed upon by 
the competent authorities of the two countries.
            Tax-exempt organizations
    Under the proposed treaty, entities that are resident in 
one of the treaty countries and that are exempt from tax in 
their country of residence and that are operated exclusively to 
fulfill religious, charitable, educational, scientific or other 
similar purposes are entitled to treaty benefits.
            Pension funds
    Under the proposed treaty, tax-exempt entities that are 
resident in one of the treaty countries and that provide 
pension or other similar benefits to employees pursuant to a 
plan are entitled to treaty benefits, provided that more than 
half of the beneficiaries, members or participants of the 
organization are individual residents of either country.
            Ownership and base erosion tests
    A legal entity that is a resident of Slovenia or the United 
States can be entitled to treaty benefits through satisfying an 
ownership and base erosion test. Both tests must be satisfied 
in order to qualify for treaty benefits under this criterion.
    Under the ownership test, at least 50 percent of each class 
of shares or other beneficial interests in an entity must be 
owned, directly or indirectly (through a chain of ownership of 
persons entitled to treaty benefits), on at least half the days 
of the person's taxable year by one or more residents entitled 
to treaty benefits through satisfying the qualifications 
described above. That is, at least 50 percent of each class of 
shares or other beneficial interests is owned by residents of 
Slovenia or the United States that are individuals, qualified 
governmental entities, certain publicly traded companies or 
their subsidiaries (as described in the discussion of the 
public company tests above), certain tax-exempt organizations 
(as described in the discussion of tax-exempt entities above) 
or certain pension funds (as described in the discussion of 
pension funds above). This rule could, for example, deny the 
benefits of the reduced U.S. withholding tax rates on dividends 
and royalties paid to a Slovenian company that is controlled by 
individual residents of a third country. The ownership 
threshold in the proposed treaty follows the ownership 
threshold in the U.S. model.
    The base erosion test is met only if the income of the 
entity is not used in substantial part, directly or indirectly, 
to meet liabilities to persons or entities that are not 
residents of either treaty county. This rule is intended to 
prevent a corporation, for example, from distributing most of 
its income, in the form of deductible items such as interest, 
royalties, service fees, or other amounts to persons not 
entitled to benefits under the proposed treaty. Like the U.S. 
model, the proposed treaty provides that less than 50 percent 
of the person's gross income for the year can be paid or 
accrued (directly or indirectly) to persons who are not 
residents of the treaty countries in the form of payments that 
are deductible for income tax purposes in the person's country 
of residence. An exception is made for payments attributable to 
a permanent establishment in either country.
            Active business test
    Under the active business test, treaty benefits are 
available under the proposed treaty to an entity that is a 
resident of one of the treaty countries with respect to income 
from the other country if the entity is engaged in the active 
conduct of a trade or business in its residence country and the 
income is derived in connection with, or is incidental to, that 
trade or business. However, this does not apply (and benefits 
therefore may be denied) to the business of making or managing 
investments, unless these activities are banking, insurance or 
securities activities carried on by a bank, insurance company 
or registered securities dealer. In addition, the trade or 
business in the residence country must be substantial in 
relation to the activity in the other country from which it 
derives the income for which it is claiming treaty benefits.
    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 complimentary to 
the trade or business. Income is incidental to a trade or 
business if it facilitates the conduct of the trade or business 
in the other country.
    The term ``active conduct of a 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.
            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. According to the Technical Explanation, the competent 
authorities will base such a determination on whether the 
establishment, acquisition, or maintenance of the person, or 
the conduct of its operations, has or had 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.
Slovenia
    Slovenia uses a tax credit system to avoid double taxation 
under which payments of foreign tax with respect to foreign-
source income may be credited against the Slovenian tax due.
            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 Slovenia 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 proposed treaty generally provides that the United 
States will allow a U.S. citizen or resident a foreign tax 
credit for the income taxes imposed by Slovenia. The proposed 
treaty also requires the United States to allow a deemed-paid 
credit, with respect to Slovenian income tax, to any U.S. 
company that receives dividends from a Slovenian company if the 
U.S. company owns 10 percent or more of the voting stock of 
such Slovenian 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 consistent with those 
found in the U.S. model and many U.S. treaties.
    The proposed treaty provides that the Slovenian taxes 
referred to in paragraph 1(b)(i) and (ii) and paragraph 2 of 
Article 2 (Taxes Covered) are considered income taxes for 
purposes of the foregoing rules regarding the U.S. foreign tax 
credit. The proposed treaty excludes the Slovenian assets tax 
on banks and savings institutions, as described in paragraph 
1(b)(iii) of Article 2, from treatment as income taxes.
    The proposed treaty generally provides that Slovenia will 
allow residents of Slovenia, who derive income that, in 
accordance with the treaty, may be subject to tax in the United 
States, a deduction against Slovenian income tax for the U.S. 
incomes taxes paid. The deduction cannot exceed the portion of 
the income tax which has been computed before making the 
deduction which is attributable to the income which may be 
taxed in the United States. The proposed treaty provides that 
the taxes referred to in paragraphs 1(a) and 2 of Article 2 are 
to be treated as income taxes for this purpose.
    Like the U.S. model and other U.S. treaties, the proposed 
treaty provides a special rule designed to provide relief from 
double taxation for U.S. citizens who are Slovenian residents. 
Under this rule, Slovenia will apply the foreign tax credit 
relief provisions to a U.S. citizen who is resident in Slovenia 
as if the person were not a U.S. citizen (i.e., by taking into 
account only the amount of U.S. taxes that would be paid if he 
or she were not a U.S. citizen with respect to items of income 
that, under the proposed treaty, are either exempt from U.S. 
tax or are subject to a reduced rate of tax when derived from a 
Slovenian resident who is not a U.S. citizen). The United 
States then will credit the income tax actually paid to 
Slovenia (after application of the Slovenian credit). The 
proposed treaty recharacterizes the income that is subject to 
Slovenian taxation as Slovenian-source income for purposes of 
this computation, to the extent necessary to avoid double 
taxation under the computation. The result of this computation 
is that the ultimate U.S. tax liability of a U.S. citizen who 
is a Slovenian resident, with respect to an item of income, 
should not be less than the tax that would be paid if the 
individual were a Slovenian resident and not a U.S. citizen.
    The proposed treaty also provides that where income is 
derived by a resident of one of the treaty countries that is 
exempt from tax by that country under any provision of the 
treaty, in determining the tax on the remaining income of the 
resident, that country may apply the rate of tax as if the 
exempted income had not been exempt. This provision is not 
included in the U.S. model, but is included in the OECD model.
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 may not 
discriminate by imposing more burdensome taxes (or requirements 
connected with taxes) on nationals of the other country than it 
would impose on its nationals in the same circumstances. This 
provision applies whether or not the nationals in question are 
residents of the United States or Slovenia. The Technical 
Explanation states that whether or not two persons are both 
taxable on worldwide income is a significant circumstance for 
this purpose. Because the relevant circumstances include 
taxation on worldwide income, the proposed treaty does not 
obligate the United States to apply the same taxing regime to a 
national of Slovenia who is not resident in the United States 
and a U.S. national who is not resident in the United States. 
The proposed treaty states explicitly that U.S. citizens who 
are not residents of the United States but who are, 
nevertheless, subject to U.S. tax on their worldwide income are 
not in the same circumstances with respect to U.S. taxation as 
nationals of Slovenia who are not U.S. residents.
    Under the proposed treaty, neither country may tax a 
permanent establishment or fixed base of a resident or an 
enterprise of the other country less favorably than it taxes 
its own enterprises or residents 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 which it grants to its own residents.
    Each country is required (subject to the arm's-length 
pricing rules of Articles 9 (Associated Enterprises), 11 
(Interest), and 12 (Royalties)) to allow its residents or 
enterprises 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 so-called ``earnings-
stripping'' rules of section 163(j) of the Code are not 
discriminatory within the meaning of this provision. In 
addition, the proposed treaty provides that any debts of a 
resident or enterprise of a country to a resident of the other 
country are deductible in the debtor's country for computing 
capital tax of the resident or enterprise under the same 
conditions as if the debt was contracted to a resident of that 
country.
    The non-discrimination rules also apply to enterprises of 
one country that are owned in whole 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 and 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 
cover 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 or a 
branch-level interest tax.
    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.
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 and to resolve disputes and 
clarify issues that may arise under the 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 person 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 (irrespective of the 
remedies under the domestic laws of the countries and the time 
limits prescribed in such laws for presenting refund claims) to 
the competent authority of the country of which he or she is a 
resident or national. The competent authority then makes a 
determination as to whether the objection appears justified. If 
the objection appears to it to be justified and if it is not 
itself able to arrive at a satisfactory solution, that 
competent authority endeavors 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, 
provided that the case is presented to the competent authority 
within five years from the first notification of action 
resulting in taxation not in accordance with the treaty. The 
U.S. model does not specify any such time period; the OECD 
model specifies a three-year period. Assessment and collection 
procedures are suspended during the pendency of any mutual 
agreement proceeding.
    The competent authorities of the countries must 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 (1) the 
attribution of income, deductions, credits, or allowances of an 
enterprise of one treaty country to the enterprise's permanent 
establishment in the other country; (2) the allocation of 
income, deductions, credits, or allowances between persons; (3) 
the characterization of particular items of income; (4) the 
characterization of persons; (5) the application of source 
rules with respect to particular items of income; (6) a common 
meaning of a term and (7) increases in specific dollar 
thresholds in the proposed treaty to reflect economic or 
monetary developments. 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.
    In addition, the proposed treaty provides that the 
competent authorities can agree that the conditions of the main 
purpose tests in Article 10 (Dividends), Article 11 (Interest), 
Article 12 (Royalties), or Article 21 (Other Income) have been 
met. The Technical Explanation states that, as is the case with 
all other matters, the agreement of the competent authorities 
does not have to relate to a particular case. As a result, the 
competent authorities could agree that all transactions of a 
particular type are entered into with a main purpose of taking 
advantage of the treaty and, therefore, deny treaty benefits to 
all taxpayers who had entered into such transactions. The main 
purpose tests do not appear in the U.S. model or in the OECD 
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. 
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 and Administrative Assistance
    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). This exchange of information is not 
restricted by Article 1 (Personal 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, enforcement, or prosecution in respect of, or 
the determination of appeals in relation to, the taxes to which 
the proposed treaty would apply or the oversight thereof. Such 
persons or authorities may 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 either country, to supply 
information that is not obtainable under the laws or in the 
normal course of the administration of either 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.
    The proposed treaty provides that upon an appropriate 
request for information, the requested country will obtain the 
information to which the request relates in the same manner and 
to the same extent as if the tax were its own tax (even if the 
requested country may not, at that time, need such information 
for purposes of its own tax). If specifically requested by the 
competent authority of a country, the competent authority of 
the other country will provide requested information in a form 
consistent with the purposes of the request to the same extent 
possible under its laws and administrative practices and 
procedures. Although this generally follows the U.S. model, the 
proposed treaty omits the provision in the U.S. model that 
requires information to be provided to the requesting country 
notwithstanding that such disclosure may be precluded by a bank 
secrecy law or similar legislation. According to the Technical 
Explanation, the United States has received assurances from the 
Slovenian Ministry of Finance concerning Slovenia's ability to 
exchange third-party information obtained from banks and other 
financial institutions.
Article 27. 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 members of diplomatic agents or 
consular officers under the general rules of international law 
or 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 to override 
any benefits of this article available to an individual who is 
neither a citizen of a treaty country nor has been admitted for 
permanent residence in that country. Thus, for example, U.S. 
diplomats who are considered Slovenian residents may be 
protected from Slovenian tax.
Article 28. Capital
    Slovenia imposes an assets tax on banks and savings 
institutions (the ``Assets Tax''), which is a covered tax under 
Article 2 (Taxes Covered). The proposed treaty specifies the 
circumstances under which a treaty country may impose a tax on 
capital owned by a resident of the other treaty country. Since 
the United States does not impose taxes on capital, the only 
capital taxes covered by the purposes treaty is the Assets Tax 
imposed by Slovenia. Thus, although the article is drafted in a 
reciprocal manner, its provisions are relevant only for the 
imposition of the Slovenian tax.
    Under the proposed treaty, as a general rule, capital owned 
by a resident of a treaty country may be taxed only in that 
country. Slovenia, therefore, generally cannot tax a resident 
of the United States on capital owned by that resident. Two 
exceptions, however, are provided.
    First, under the proposed treaty, capital represented by 
real property (as defined in Article 6) which is owned by a 
U.S. resident and situated in Slovenia may be taxed by 
Slovenia. Second, capital represented by personal property 
(movable property) forming part of the business property of a 
permanent establishment which a U.S. enterprise has in Slovenia 
or pertaining to a fixed base available to a U.S. resident for 
purposes of performing independent personal services may be 
taxed by Slovenia.
    The proposed treaty provides that capital represented by 
ships, aircraft, or containers operated in international 
traffic, and by personal property (movable property) pertaining 
to the operation of such ships, aircraft, and containers is 
taxable only in the residence country of the enterprise that 
owns such capital.
Article 29. Entry Into Force
    The proposed treaty provides that it is subject to 
ratification in accordance with the applicable procedures of 
each country, and that the instruments of ratification are to 
be exchanged as soon as possible. The proposed treaty will 
enter into force on the date the instruments of ratification 
are exchanged.
    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 third month following the date on 
which the proposed treaty enters into force.
    With respect to other taxes, the proposed treaty will be 
effective for taxable periods beginning on or after the first 
day of January next following the date on which the proposed 
treaty enters into force.
Article 30. Termination
    The proposed treaty will continue in force until terminated 
by either country. Either country may terminate the proposed 
treaty by giving notice of termination to the other country 
through diplomatic channels. A termination is effective, with 
respect to taxes withheld at source for amounts paid or 
credited after the expiration of the six month period beginning 
on 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 the expiration of the six month 
period beginning on the date on which notice of termination was 
given.

                               IV. ISSUES

    The proposed treaty with Slovenia presents the following 
specific issues.

                         A. Main Purpose Tests

            In general
    The proposed treaty includes a series of specific ``main 
purpose'' tests that can operate to deny the benefits of the 
dividends article (Article 10), the interest article (Article 
11), the royalties article (Article 12) and the other income 
article (Article 21). This series of main purpose tests is not 
found in any other U.S. treaty, and is not included in the U.S. 
model or the OECD model.8 The main purpose tests 
apparently are modeled after similar main purpose provisions 
found in treaties of other countries, such as many of the 
modern treaties of the United Kingdom.9
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    \8\ Although not included in the OECD model, paragraph 17 of the 
commentary to the dividends article of the OECD model suggests that the 
treaty partners may find it appropriate to adopt a rule to deny treaty 
benefits if the acquisition of stock was ``primarily for the purpose of 
taking advantage of this provision.''
    \9\ For example, the Convention Between the Government of the 
United Kingdom of Great Britain and Northern Ireland and the Government 
of the Republic of Korea for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income and 
Capital Gains (Dec. 30, 1996) (``U.K.-Korea Treaty''), par. 6 of Art. 
10 (Dividends), provides that ``[t]he provisions of this Article 
[Article 10 (Dividends)] shall not apply if it was the main purpose or 
one of the main purposes of any person concerned with the creation or 
assignment of the shares or other rights in respect of which the 
dividend is paid to take advantage of this Article by means of that 
creation or assignment.'' See also par. 10 of Art. 11 (Interest), par. 
7 of Art. 12 (Royalties), and par. 4 of Art. 22 (Other Income) of the 
U.K.-Korea Treaty; Convention Between the Government of the United 
Kingdom of Great Britain and Northern Ireland and the Government of the 
Republic of Venezuela for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income and 
Capital Gains, par. 7 of Art. 10 (Dividends), par. 9 of Art. 11 
(Interest), par. 7 of Art. 12 (Royalties), par. 5 of Art. 21 (Other 
Income) (Dec. 31, 1996); Convention Between the Government of the 
United Kingdom of Great Britain and Northern Ireland and the Government 
of the Republic of Argentina for the Avoidance of Double Taxation and 
the Prevention of Fiscal Evasion with Respect to Taxes on Income and 
Capital Gains, par. 9 of Art. 11 (Interest), par. 7 of Art. 12 
(Royalties), par. 4 of Art. 21 (Other Income) (Aug. 1, 1997).
---------------------------------------------------------------------------
            Description of provisions
    Under the proposed treaty, the provisions of the dividends 
article (Article 10) will not apply if it was the main purpose 
or one of the main purposes of any person concerned with the 
creation or assignment of the shares or rights in respect of 
which the dividend is paid to take advantage of the dividends 
article by means of that creation or assignment. Similarly, the 
interest article (Article 11) provides that its provisions will 
not apply if it was the main purpose or one of the main 
purposes of any person concerned with the creation or 
assignment of the debt claim in respect of which the interest 
is paid to take advantage of the interest article by means of 
that creation or assignment. Substantially similar main purpose 
tests apply in the case of the royalties article (Article 12) 
and the other income article (Article 21).
    The Technical Explanation indicates that the main purpose 
tests are to be ``self-executing.'' The Technical Explanation 
further states that the tax authorities of one of the treaty 
countries may, on review, deny the benefits of the respective 
article if the conditions of the main purpose test are 
satisfied. In addition, the mutual agreement procedures article 
(Article 25) of the proposed treaty provides that the competent 
authorities of the treaty countries may agree that the 
conditions for application of the main purpose tests are met. 
The Technical Explanation states that the competent authority 
agreement does not have to relate to a particular case. Rather, 
if the competent authorities agree that a type of transaction 
entered into by several taxpayers is entered into with a main 
purpose of taking advantage of the treaty, treaty benefits can 
be denied to all taxpayers who had entered into such a 
transaction. The Technical Explanation states that it is 
anticipated that the public would be notified of such generic 
agreements through the issuance of press releases.
            Issues
    The new main purpose tests in the proposed treaty present 
several issues. The tests are subjective, vague, and add 
uncertainty to the treaty. It is unclear how the provisions are 
to be applied. In addition, the provisions lack conformity with 
other U.S. tax treaties. This uncertainty can create planning 
difficulties for legitimate business transactions, and can 
hinder a taxpayer's ability to rely on the treaty. The 
Committee may wish to consider whether the benefits of such 
tests outweigh the uncertainty the main purpose tests would 
create.
    The main purpose standard in the relevant provisions of the 
proposed treaty is that the ``main purpose or one of the main 
purposes'' is to ``take advantage of'' the particular article 
in which the main purpose test appears. This is a subjective 
standard, dependent upon the intent of the taxpayer, that is 
difficult to evaluate.
    U.S. treaty policy generally has shifted away from 
subjective tests. In fact, the limitation on benefits provision 
(Article 22), which addresses an abuse of the treaty whereby 
residents of third countries try to take advantage of the 
treaty provisions through what is known as ``treaty shopping'' 
(discussed below), is designed to avoid questions of taxpayer 
intent by providing a series of objective tests as to whether a 
person should be treated as a resident entitled to treaty 
benefits. The Technical Explanation to the limitation on 
benefits provision of the proposed treaty acknowledges in 
connection with a principal purpose test that a ``fundamental 
problem presented by this approach is that it is based on the 
taxpayer's motives in establishing an entity in a particular 
country, which a tax administrator is normally ill-equipped to 
identify.'' Although this criticism is specific to a principal 
purpose test with respect to a treaty shopping provision, the 
same criticism applies to subjective tests in general.
    It is also unclear how the rule would be administered. The 
Technical Explanation indicates that the provision is intended 
to be self-executing. In the absence of a taxpayer applying the 
rule to itself, the tax authorities of one of the countries 
may, on review, deny the treaty benefits. Thus, the Slovenian 
tax authorities apparently could apply Slovenian law to 
determine whether a U.S. company's main purpose, or one of its 
main purposes, was to take advantage of the specific article. 
If the U.S. company disagreed with the Slovenian tax authority, 
it could turn to the U.S. competent authority. In any event, it 
may be difficult for a U.S. company to evaluate whether its 
transaction may be subject to Slovenian main purpose standards. 
Again, this lack of clarity as to the application of the main 
purpose rule can impede reliance on the treaty.
    A fairness question also may be raised insofar as the 
proposed treaty provides the competent authorities with the 
ability to declare an entire class of transactions as abusive 
and, accordingly, deny treaty benefits to that class without 
the necessity of evaluating the facts of a specific 
transaction. It is unclear what degree of deference would be 
accorded to such a competent authority agreement.
    Many of the types of abusive transactions in which persons 
would be attempting to take advantage of the favorable treaty 
treatment with respect to dividends, interest, or royalties, 
involve persons who are not otherwise entitled to treaty 
benefits. The limitation on benefits provision (Article 22) is 
designed to address such concerns. On the other hand, 
potentially abusive situations could arise in which the 
limitation on benefits provision would not apply. For example, 
a bank that is a resident of Slovenia and that can satisfy the 
tests under the limitation on benefits provision may decide to 
``sell'' its treaty qualification to a customer that does not 
so qualify because it is a resident of a third country. The 
bank would agree to purchase immediately before a dividend 
record date shares in a U.S. company held by its customer. At 
the same time, the bank would enter into a ``repurchase'' 
agreement under which it agrees to ``resell'' the shares to the 
customer on a certain date at a certain price. The repurchase 
agreement would be designed to eliminate the bank's exposure to 
any market risk in connection with holding the shares. The bank 
would collect the dividend and, on its face, would qualify for 
the reduced withholding rate under the treaty. The bank then 
would resell the shares to the customer pursuant to the 
repurchase agreement.\10\
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    \10\ See the Technical Explanation to Article 10 (Dividends).
---------------------------------------------------------------------------
    The favorable withholding rates provided under the proposed 
treaty if certain ownership requirements are satisfied also 
could invite potentially abusive activities. For example, the 
source-country dividends rate in the proposed treaty is 5 
percent if the beneficial owner holds at least 25 percent of 
the voting stock of the company paying the dividend. A resident 
of Slovenia with an ownership interest of less than 25 percent 
in a U.S. company, shortly before the dividends become payable, 
could enter into a transaction to increase temporarily its 
holding or assign its stock to another resident satisfying the 
25-percent ownership threshold primarily for purposes of 
securing the reduced dividend withholding rate under the 
treaty.\11\ Because the party or parties to this transaction 
are residents of a treaty country, the proposed treaty's 
limitation on benefits provision (Article 22) would not apply.
---------------------------------------------------------------------------
    \11\ A similar example is provided in paragraph 17 of the 
Commentary to the dividends article of the OECD model.
---------------------------------------------------------------------------
    Although the limitation on benefits provision of the 
proposed treaty may not address all of the potential 
transactions in which a person can improperly take advantage of 
the treaty benefits, it would appear that residual abusive 
situations could be adequately addressed under U.S. internal 
law addressing issues such as beneficial ownership, conduit 
financing, economic substance, business purpose, and similar 
abuses, which should apply notwithstanding the treaty. 
Moreover, because this main purpose test does not appear in 
other U.S. treaties or with respect to all articles of this 
proposed treaty, some may assert that an issue arises as to 
whether its inclusion in specific provisions of this proposed 
treaty creates a negative inference as to the United States' 
ability to raise its internal anti-abuse rules in connection 
with other treaties (or provisions) in which such main purpose 
tests do not appear. The Technical Explanation states that no 
such inference with respect to other treaties is intended.

                       B. Exchange of Information

    One of the principal purposes of the proposed treaty 
between the United States and Slovenia is to prevent avoidance 
or evasion of taxes of the two countries. The exchange of 
information article of the proposed treaty (Article 26) is one 
of the primary vehicles used to achieve that purpose.
    The exchange of information article contained in the 
proposed treaty generally conforms to the corresponding article 
of the OECD model and the U.S. model. As is true under these 
model treaties, under the proposed treaty a country is not 
required to carry out administrative measures at variance with 
the laws and administrative practice of either country, to 
supply information that is not obtainable under the laws or in 
the normal course of the administration of either country, or 
to supply information that discloses any trade, business, 
industrial, commercial, or professional secret or trade 
process, or information the disclosure of which is contrary to 
public policy.
    The exchange of information article contained in the 
proposed treaty varies significantly from the U.S. model in one 
respect: the authority to obtain information from third parties 
(commonly referred to as the ``bank secrecy'' provision). This 
provision of the U.S. model provides that, notwithstanding the 
limitations described in the preceding paragraph, a country has 
the authority to obtain and provide information held by 
financial institutions, nominees, or persons acting in a 
fiduciary capacity. This information must be provided to the 
requesting country notwithstanding any laws or practices of the 
requested country that would otherwise preclude acquiring or 
disclosing such information.
    One issue is the significance of the omission of this 
provision with respect to this proposed treaty. The Technical 
Explanation to Article 26 notes the omission of this provision. 
The Technical Explanation states that:

        Notwithstanding this omission, the United States has 
        received assurances from the Slovenian Ministry of 
        Finance concerning Slovenia's ability to exchange 
        third-party information obtained from banks and other 
        financial institutions (hereinafter referred as 
        ``banks''). Specifically, Article 30 of Slovenia's Law 
        on Tax procedures allows Slovenia to obtain from banks 
        any and all information relevant to assessment and 
        collection of taxes, whether the information pertains 
        to the party under investigation or another party 
        involved in the tax matter. Article 26 of this law also 
        imposes on banks and savings banks an obligation to 
        send without specific request to the tax authorities 
        information about accounts which are held by 
        individuals and legal persons and information about 
        transactions through these accounts.

    Accordingly, the omission of this provision from the 
proposed treaty may not be significant in that, according to 
the Treasury Department, Slovenian law permits exchanges of the 
types of information provided for under the U.S. model 
provision. On the other hand, if Slovenian law is not in 
conflict with the provision of the U.S. model, some may 
question why it was omitted. The Committee may wish to satisfy 
itself as to the sufficiency of this provision.
    Another issue is the implications of the omission of this 
provision from this treaty with respect to future treaty 
negotiations. While some treaty partners do not object to this 
bank secrecy provision, other treaty partners have resisted its 
inclusion in tax treaties. The broader issue of transparency of 
transactions involving third parties is a significant issue 
internationally, and in many respects the United States has 
attempted to advance greater transparency. It is possible that 
the omission of the bank secrecy provision from this treaty may 
be interpreted by other treaty partners as a weakening of the 
U.S. commitment to greater transparency and may make other 
treaty negotiations with respect to this issue more difficult. 
The Committee may wish to consider whether a statement that the 
omission of this provision from this treaty does not lessen the 
commitment of the United States to pursue broader exchanges of 
information in future treaty negotiations would be beneficial.

                           C. 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 only residents 
of Slovenia and the United States, 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.
    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. 
The proposed treaty's ownership test may be effective in 
preventing third-country investors from obtaining treaty 
benefits by establishing investing entities in Slovenia because 
third-country investors may be unwilling to allow 50 percent or 
more of such investing entities to be owned by U.S. or 
Slovenian residents or other qualified owners in order to meet 
the ownership test of the anti-treaty shopping provision. The 
base erosion test contained in the proposed treaty will provide 
protection from certain potential abuses of a Slovenian 
conduit. 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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