[Senate Executive Report 114-3]
[From the U.S. Government Publishing Office]


114th Congress    )                                  {    Exec. Rept.
                                 SENATE
 2d Session       }                                  {      114-3

======================================================================



 
                       TAX CONVENTION WITH POLAND

                                _______
                                

                February 8, 2016.--Ordered to be printed

                                _______
                                

          Mr. Corker, from the Committee on Foreign Relations,
                        submitted the following

                                 REPORT

                    [To accompany Treaty Doc. 113-5]

    The Committee on Foreign Relations, to which was referred 
the Convention between the United States of America and the 
Republic of Poland For the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income 
(the ``Convention'') (Treaty Doc. 113-5), having considered the 
same, reports favorably thereon with one declaration, as 
indicated in the resolution of advice and consent, and 
recommends that the Senate give its advice and consent to 
ratification thereof, as set forth in this report and the 
accompanying resolution of advice and consent.

                                CONTENTS

                                                                   Page

  I. Purpose..........................................................1
 II. Background.......................................................2
III. Major Provisions.................................................2
 IV. Entry Into Force.................................................3
  V. Implementing Legislation.........................................3
 VI. Committee Action.................................................3
VII. Committee Comments...............................................3
VIII.Text of Resolution of Advice and Consent to Ratification.........5

 IX. Annex 1.--Technical Explanation..................................6

                               I. Purpose

    The purpose of the Convention is to promote and facilitate 
trade and investment between the United States and Poland. The 
proposed Convention replaces the existing convention, signed in 
1974, and would bring United States-Poland tax treaty relations 
into closer conformity with current U.S. tax treaty policies. 
The Convention contains rigorous protections designed to 
protect against ``treaty shopping,'' which is the inappropriate 
use of a tax treaty by third-country residents, that are not 
contained in the existing treaty. While the proposed Convention 
generally follows the 2006 U.S. Model Income Tax Treaty (the 
``U.S. Model''), it deviates from the U.S. Model in certain 
respects discussed below.

                             II. Background

    The United States has a tax treaty with Poland that is 
currently in force, which was concluded in 1974 (Convention 
between the Government of the United States of America and the 
Government of the Polish People's Republic for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Income, and a related exchange of notes, signed at 
Washington on October 8, 1974.). The new Convention was 
negotiated to bring United States-Poland tax treaty relations 
into closer conformity with current United States tax treaty 
policies. For example, the proposed Convention contains 
comprehensive provisions designed to address ``treaty-
shopping.'' The existing Convention with Poland signed in 1974 
does not contain treaty shopping protections and, as a result, 
is susceptible to abuse by third-country investors.

                         III. Major Provisions

    A detailed article-by-article analysis of the Convention 
may be found in the Technical Explanation Published by the 
Department of the Treasury on June 19, 2014, which is included 
at Annex 1 to this report. In addition, the staff of the Joint 
Committee on Taxation prepared an analysis of the Convention, 
JCX-68-14 (June 17, 2014), which was of great assistance to the 
committee in reviewing the Convention. A summary of the key 
provisions of the Convention is set forth below.

                         LIMITATION ON BENEFITS

    Consistent with current U.S. tax treaty policy, the 
proposed Convention includes a ``Limitation on Benefits'' 
provision, which is designed to avoid treaty-shopping by 
limiting the indirect use of a treaty's benefits by persons who 
were not intended to take advantage of those benefits. The 
limitation of benefits provision states that a corporation or 
similar entity resident in a contracting state (i.e., the 
United States or Poland) is not entitled to the benefits of the 
treaty unless that entity meets certain tests, such as carrying 
on an active trade or business, or being a publicly-traded 
company on certain specified stock exchanges. The provision is 
designed to identify entities that have established residency 
for tax-abuse purposes.

                               DIVIDENDS

    Although the treatment of dividends in the proposed 
Convention is generally consistent with the U.S. and OECD Model 
treaties, the proposed Convention does not provide for the 
complete exemption from withholding tax for certain direct 
dividends as is found in several recent U.S. tax treaties. 
Article 10 of the Convention includes a five percent 
withholding rate on direct dividends (where a 10 percent 
ownership threshold is met) and 15 percent on all other 
dividends. The proposed Convention allows for a zero percent 
withholding rate on certain dividends received by pension 
funds.

                        EXCHANGE OF INFORMATION

    The proposed Convention provides the authority for the two 
countries to exchange tax information that is foreseeably 
relevant to carrying out the provisions of the proposed 
Convention or the domestic tax laws of either country. The 
proposed Convention allows the United States to obtain 
information (including from financial institutions) from Poland 
regardless of whether Poland needs the information for its own 
tax purposes.

                          IV. Entry Into Force

    Article 28 states that the proposed Convention shall enter 
into force when both the United States and Poland have notified 
each other that they have completed all required internal 
procedures for entry into force. For withholding taxes, the 
proposed Convention will have effect for amounts paid or 
credited on or after the first day of the second month 
following the date on which the proposed treaty enters into 
force. For other taxes, the proposed Convention has effect for 
taxable years beginning on or after January 1 of the calendar 
year immediately following the date on which the Convention 
enters into force.

                      V. Implementing Legislation

    As is the case generally with income tax treaties, the 
Convention is self-executing and does not require implementing 
legislation for the United States.

                          VI. Committee Action

    The committee held a public hearing on the Convention on 
October 29, 2015. Testimony was received from Robert Stack, 
Deputy Assistant Secretary (International Tax Affairs) at the 
U.S. Department of the Treasury and Thomas Barthold, Chief of 
Staff of the Joint Committee on Taxation. A transcript of the 
hearing is included in Annex 2 of Executive Report 114-1.
    On November 10, 2015, the committee considered the Protocol 
and ordered it favorably reported by voice vote, with a quorum 
present and without objection.
    In the 113th Congress, on April 1, 2014, the committee 
considered the Protocol and ordered it favorably reported by 
voice vote, with a quorum present and without objection.

                        VII. Committee Comments

    The Committee on Foreign Relations believes that the 
Convention will stimulate increased trade and investment, 
reduce treaty shopping incentives, and promote closer co-
operation between the United States and Poland. The committee 
therefore urges the Senate to act promptly to give advice and 
consent to ratification of the Convention, as set forth in this 
report and the accompanying resolution of advice and consent.

                       A. LIMITATION ON BENEFITS

    The committee applauds the Treasury Department's 
significant efforts to address treaty shopping both in this 
Convention and in other bilateral tax treaties. After careful 
examination of this Convention, as well as testimony and 
responses to questions for the record from the Treasury 
Department, the committee is of the view that the Convention's 
protections against treaty-shopping are robust and will 
substantially deny treaty shoppers the benefit of the 
Convention. The committee believes that it is critical for the 
Treasury Department to closely monitor and keep the committee 
informed on the effectiveness of the above-mentioned provisions 
in discouraging and eliminating treaty-shopping under the 
Convention.

                        B. INFORMATION EXCHANGE

    The Convention would replace the existing Convention's tax 
information exchange provisions with updated rules that are 
consistent with current U.S. tax treaty practice. The 
Convention would allow the tax authorities of each country to 
exchange information relevant to carrying out the provisions of 
the Convention or the domestic tax laws of either country. It 
would also enable the United States to obtain information 
(including from financial institutions) from Poland whether or 
not Poland needs the information for its own tax purposes.
    After careful examination of this Convention, as well as 
witness testimony and responses to questions for the record, 
the committee believes that the exchange of information 
provisions in the Convention will substantially aid in the full 
and fair enforcement of United States tax laws. According to 
witness testimony, the ``foreseeably relevant'' standard used 
in the Convention does not represent a lower threshold than the 
standard found in earlier U.S. tax treaties. Witnesses also 
testified that the ``foreseeably relevant'' standard has been 
extensively defined in internationally agreed guidance to which 
no country has expressed a dissenting opinion to date. The 
committee is also of the view that the Convention provides 
adequate provisions to ensure that any information exchanged 
pursuant to the Convention is treated confidentially. In sum, 
the committee believes these provisions on information exchange 
are important to the administration of U.S. tax laws and the 
Convention provides adequate protection against the misuse of 
information exchanged pursuant to the Convention.

     C. DECLARATION ON THE SELF-EXECUTING NATURE OF THE CONVENTION

    The committee has included one declaration in the 
recommended resolution of advice and consent. The declaration 
states that the Convention is self-executing, as is the case 
generally with income tax treaties. Prior to the 110th 
Congress, the committee generally included such statements in 
the committee's report, but in light of the Supreme Court 
decision in Medellin v. Texas, 128 S. Ct. 1346 (2008), the 
committee determined that a clear statement in the Resolution 
is warranted. A further discussion of the committee's views on 
this matter can be found in Section VIII of Executive Report 
110-12.

     VIII. Text of Resolution of Advice and Consent to Ratification

    Resolved (two-thirds of the Senators present concurring 
therein),

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION

    The Senate advises and consents to the ratification of the 
Convention between the United States of America and the 
Republic of Poland for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income, 
signed on February 13, 2013, at Warsaw (the ``Convention'') 
(Treaty Doc. 113-5), subject to the declaration of section 2.

SECTION 2. DECLARATION

    The advice and consent of the Senate under section 1 is 
subject to the following declaration:
          The Convention is self-executing.
                   IX. Annex 1.--Technical Explantion


  DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION 
BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF POLAND FOR THE 
AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH 
                       RESPECT TO TAXES ON INCOME

     This is a Technical Explanation of the Convention between 
the United States and the Republic of Poland for the Avoidance 
of Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income, signed at Warsaw on February 13, 
2013 (the ``Convention'').
     Negotiations took into account the U.S. Treasury 
Department's current tax treaty policy, and the Treasury 
Department's Model Income Tax Convention, published on November 
15, 2006 (the ``U.S. Model.'' Negotiations also took into 
account the Model Tax Convention on Income and on Capital, 
published by the Organisation for Economic Cooperation and 
Development (the ``OECD Model''), and recent tax treaties 
concluded by the United States and Poland.
    The Technical Explanation is an official guide to the 
Convention. It reflects the policies behind particular 
Convention provisions, as well as understandings reached during 
the negotiations with respect to the application and 
interpretation of the Convention. References in the Technical 
Explanation to ``he'' or ``his'' should be read to mean ``he or 
she'' or ``his or her,'' respectively. References to the 
``Code'' are to the Internal Revenue Code of 1986, as amended. 
References to a ``Treas. Reg.'' are to regulations issued under 
the Code by the Internal Revenue Service and the Treasury 
Department.

                       ARTICLE 1 (GENERAL SCOPE)

Paragraph 1

    Paragraph 1 of Article 1 provides that the Convention 
applies only to residents of one or both Contracting States 
except where the terms of the Convention provide otherwise. 
Under Article 4 (Resident) a person is generally treated as a 
resident of a Contracting State if that person is, under the 
laws of that State, liable to tax therein by reason of 
domicile, citizenship, residence, or any other criterion of a 
similar nature. However, if a person is considered a resident 
of both Contracting States, Article 4 provides rules for 
determining a single Contracting State of residence (or no 
Contracting State of residence). This determination governs for 
all purposes of the Convention.
    Certain provisions are applicable to persons who may not be 
residents of either Contracting State. For example, paragraph 1 
of Article 24 (Non-Discrimination) applies to nationals of the 
Contracting States. In addition, under Article 26 (Exchange of 
Information), information may be exchanged with respect to 
residents of third states.

Paragraph 2

    Paragraph 2 states the generally accepted relationship both 
between the Convention and domestic law and between the 
Convention and other agreements between the Contracting States. 
That is, no provision in the Convention may restrict any 
exclusion, exemption, deduction, credit or other benefit 
accorded by the laws of either Contracting State, or by any 
other agreement to which both Contracting States are parties. 
The relationship between the non-discrimination provisions of 
the Convention and the General Agreement on Trade in Services 
(the ``GATS'') is addressed in paragraph 3.
    Under paragraph 2, for example, if a deduction would be 
allowed under the Code in computing the U.S. taxable income of 
a resident of Poland, the deduction also is allowed to that 
person in computing taxable income under the Convention. 
Paragraph 2 also means that the Convention may not increase the 
tax burden on a resident of a Contracting State beyond the 
burden determined under domestic law. Thus, a right to tax 
given by the Convention cannot be exercised unless that right 
also exists under domestic law.
    It follows that, under the principle of paragraph 2, a 
taxpayer's U.S. tax liability need not be determined under the 
Convention if the Code would produce a more favorable result. A 
taxpayer may not, however, choose among the provisions of the 
Code and the Convention in an inconsistent manner in order to 
minimize tax. Thus, a taxpayer may use the Convention to reduce 
its taxable income, but may not combine both treaty and Code 
rules where doing so would be inconsistent with the intent of 
either set of rules. For example, assume that a resident of 
Poland has three separate businesses in the United States. One 
activity is a profitable permanent establishment and the other 
two are trades or businesses that would earn taxable income 
under the Code but do not meet the permanent establishment 
threshold tests of the Convention. One is profitable and the 
other incurs a loss. Under the Convention, the income of the 
permanent establishment is taxable in the United States, and 
both the profit and loss of the other two businesses are 
ignored. Under the Code, all three would be subject to tax, but 
the loss would offset the profits of the two profitable 
ventures. The taxpayer may not invoke the Convention to exclude 
the profits of the profitable trade or business and invoke the 
Code to claim the loss of the loss trade or business against 
the profit of the permanent establishment. (See Rev. Rul. 84-
17, 1984-1 C.B. 308.) If, however, the taxpayer invokes the 
Code for the taxation of all three ventures, he would not be 
precluded from invoking the Convention with respect, for 
example, to any dividend income he may receive from the United 
States that is not effectively connected with any of his 
business activities in the United States.
    Similarly, except as provided in paragraph 3, nothing in 
the Convention can be used to deny any benefit granted by any 
other agreement to which both Contracting State are parties. 
For example, if certain benefits are provided for military 
personnel or military contractors under a Status of Forces 
Agreement between the United States and Poland, those benefits 
or protections will be available to residents of the 
Contracting States regardless of any provisions to the contrary 
(or silence) in the Convention.

Paragraph 3

    Paragraph 3 relates to non-discrimination obligations of 
the Contracting States under the GATS. The provisions of 
paragraph 3 are an exception to the rule provided in paragraph 
2 of this Article under which the Convention shall not restrict 
in any manner any benefit now or hereafter accorded by any 
other agreement between the Contracting States.
    Subparagraph 3(a) provides that, unless the competent 
authorities determine that a taxation measure is not within the 
scope of the Convention, the national treatment obligations of 
the GATS shall not apply with respect to that measure. Further, 
any question arising as to the interpretation or application of 
the Convention, including in particular whether a measure is 
within the scope of the Convention, shall be considered only by 
the competent authorities of the Contracting States, and the 
procedures under the Convention exclusively shall apply to the 
dispute. Thus, paragraph 3 of Article XXII (Consultation) of 
the GATS may not be used to bring a dispute before the World 
Trade Organization unless the competent authorities of both 
Contracting States have determined that the relevant taxation 
measure is not within the scope of Article 24 (Non-
Discrimination) of the Convention.
    The term ``measure'' for these purposes is defined broadly 
in subparagraph 3(b). It would include a law, regulation, rule, 
procedure, decision, administrative action or any other similar 
provision or action.

Paragraph 4

    Paragraph 4 contains the traditional saving clause found in 
all U.S. income tax treaties. The Contracting States reserve 
their rights, except as provided in paragraph 5, to tax their 
residents and citizens as provided under their domestic laws, 
notwithstanding any provisions of the Convention to the 
contrary. For example, if a resident of Poland performs 
professional services in the United States and the income from 
the services is not attributable to a permanent establishment 
in the United States, Article 7 (Business Profits) would by its 
terms prevent the United States from taxing the income. If, 
however, the resident of Poland is also a citizen of the United 
States, the saving clause permits the United States to include 
the remuneration in the worldwide income of the citizen and 
subject it to tax under the normal Code rules (i.e., without 
regard to Code section 894(a)). Subparagraph 5(a) of Article 1 
also preserves the benefits of special foreign tax credit rules 
applicable to the U.S. taxation of certain U.S. income of its 
citizens resident in the other Contracting State. See paragraph 
4 of Article 23 (Relief from Double Taxation).
    For purposes of the saving clause, ``residence'' is 
determined under Article 4 (Resident). Thus, an individual who 
is a resident of the United States under the Code (but not a 
U.S. citizen) but who is determined to be a resident of the 
Poland under the tie-breaker rules of Article 4 would be 
subject to U.S. tax only to the extent permitted by the 
Convention. The United States would not be permitted to apply 
its domestic law to that person to the extent that its law is 
inconsistent with the Convention.
     However, the person would still be treated as a U.S. 
resident for U.S. tax purposes other than determining the 
individual's U.S. tax liability. For example, in determining 
under Code section 957 whether a foreign corporation is a 
controlled foreign corporation, shares in that corporation held 
by the individual would be considered to be held by a U.S. 
resident. As a result, other U.S. citizens or residents might 
be deemed to be United States shareholders of a controlled 
foreign corporation subject to current inclusion of subpart F 
income recognized by the corporation. See Treas. Reg. section 
301.7701(b)-7(a)(3).
    Under paragraph 4, each Contracting State also reserves its 
right to tax former citizens and former long-term residents in 
accordance with domestic law for a period of ten years 
following the loss of such status. Thus, paragraph 4 allows the 
United States to tax former U.S. citizens and former U.S. long-
term residents in accordance with Code section 877. Section 877 
generally applies to a former citizen or long-term resident of 
the United States who relinquishes citizenship or terminates 
long-term residency before June 17, 2008 if he fails to certify 
that he has complied with U.S. tax laws during the 5 preceding 
years, or if either of the following criteria exceed 
established thresholds: (a) the average annual net income tax 
of such individual for the period of 5 taxable years ending 
before the date of the loss of status; or (b) the net worth of 
such individual as of the date of the loss of status.
    The United States defines ``long-term resident'' as an 
individual (other than a U.S. citizen) who is a lawful 
permanent resident of the United States in at least 8 of the 
prior 15 taxable years. An individual is not treated as a 
lawful permanent resident of the United States for any taxable 
year in which the individual is treated as a resident of Poland 
under this Convention, or as a resident of any country other 
than the United States under the provisions of any other U.S. 
tax treaty, and the individual does not waive the benefits of 
the relevant tax treaty.

Paragraph 5

    Paragraph 5 sets forth certain exceptions to the saving 
clause. The referenced provisions are intended to provide 
benefits to citizens and residents even if such benefits do not 
exist under domestic law.
    Subparagraph 5(a) lists certain provisions of the 
Convention that are applicable to all citizens and residents of 
a Contracting State, despite the general saving clause rule of 
paragraph 4:

          (1) Paragraph 2 of Article 9 (Associated Enterprises) 
        grants the right to a correlative adjustment with 
        respect to income tax due on profits reallocated under 
        Article 9.
          (2) Paragraphs 2, 3 and 5 of Article 18 (Pensions, 
        Social Security, Annuities, Alimony and Child Support) 
        provide exemptions from source or residence State 
        taxation for certain pension distributions, social 
        security payments, alimony and child support.
          (3) Article 23 (Relief from Double Taxation) confirms 
        to citizens and residents of one Contracting State the 
        benefit of a credit for income taxes paid to the other 
        or an exemption for income earned in the other State. 
        In addition, paragraph 5 of Article 23 coordinates the 
        tax systems of the Contracting States to avoid double 
        taxation that could result from the imposition of an 
        exit tax or similar regime on an individual who ceases 
        to be treated as a resident (as determined under 
        paragraph 1 of Article 4 (Resident)) of one Contracting 
        State and becomes a resident of the other Contracting 
        State.
          (4) Article 24 (Non-Discrimination) protects 
        residents and nationals of one Contracting State 
        against the adoption of certain discriminatory taxation 
        practices in the other Contracting State.
          (5) Article 25 (Mutual Agreement Procedure) confers 
        certain benefits on citizens and residents of the 
        Contracting States in order to reach and implement 
        solutions to disputes between the two Contracting 
        States.

    Subparagraph 5(b) provides a different set of exceptions to 
the saving clause. The benefits referred to are all intended to 
be granted to temporary residents of a Contracting State (for 
example, in the case of the United States, holders of non-
immigrant visas), but not to citizens or to persons who have 
acquired permanent residence in that State. If beneficiaries of 
these provisions travel from one Contracting State to the 
other, and remain in the other long enough to become residents 
under its internal law, but do not acquire permanent residence 
status (i.e., in the U.S. context, they do not become ``green 
card'' holders) and are not citizens of that State, the host 
State will continue to grant these benefits even if they 
conflict with the statutory rules. The benefits preserved by 
this paragraph are: the host country exemptions for government 
service salaries and pensions under Article 19 (Government 
Service), certain income of visiting students and trainees 
under Article 20 (Students and Trainees) and the income of 
diplomatic agents and consular officers and under Article 27 
(Members of Diplomatic Missions and Consular Posts).

Paragraph 6

    Paragraph 6 addresses special issues presented by the 
payment of items of income, profit or gain to entities that are 
fiscally transparent, such as partnerships, estates and trusts. 
Because countries may take different views as to when an entity 
is fiscally transparent, the risk of both double taxation and 
double non-taxation is relatively high. The provision, and the 
corresponding requirements of the substantive rules of the 
other Articles of the Convention, should be read with two goals 
in mind. First, the intention of paragraph 6 is to eliminate a 
number of technical problems that could prevent investors using 
such entities from claiming treaty benefits, even though such 
investors would be subject to tax on the income derived through 
such entities. Second, the provision prevents a resident of a 
Contracting State from claiming treaty benefits in 
circumstances where the resident investing in the entity does 
not take into account the item of income paid to the entity 
because the entity is not fiscally transparent in its State of 
residence.
    In general, the principles incorporated in this paragraph 
reflect the regulations under Treas. Reg. section 1.894-1(d). 
Treas. Reg. 1.894-1(d)(3)(iii) provides that an entity will be 
fiscally transparent under the laws of an interest holder's 
jurisdiction with respect to an item of income to the extent 
that the laws of that jurisdiction require the interest holder 
resident in that jurisdiction to separately take into account 
on a current basis the interest holder's respective share of 
the item of income paid to the entity, whether or not 
distributed to the interest holder, and the character and 
source of the item in the hands of the interest holder are 
determined as if such item were realized directly by the 
interest holder. Entities falling under this description in the 
United States include partnerships, corporations that have made 
a valid election to be taxed under Subchapter S of Chapter 1 of 
the Code (``S corporations''), common investment trusts under 
section 584, simple trusts and grantor trusts. This paragraph 
also applies to payments made to other entities, such as U.S. 
limited liability companies (``LLCs''), that may be treated as 
either partnerships or as disregarded as a separate entity for 
U.S. tax purposes.
    Except as otherwise provided under subparagraph 6(b), under 
subparagraph 6(a), an item of income, profit or gain derived by 
or through such a fiscally transparent entity will be 
considered to be derived by a resident of a Contracting State 
if a resident is treated under the taxation laws of that State 
as deriving the item of income. For example, if a company that 
is a resident of Poland pays interest to an entity that is 
treated as fiscally transparent for U.S. tax purposes, the 
interest will be considered derived by a resident of the United 
States, but only to the extent that the taxation laws of the 
United States treats one or more U.S. residents (whose status 
as U.S. residents is determined, for this purpose, under U.S. 
tax law) as deriving the interest for U.S. tax purposes. Where 
the entity is a partnership, the persons who are, under U.S. 
tax laws, treated as partners of the entity would normally be 
the persons whom the U.S. tax laws would treat as deriving the 
interest income through the partnership. Also, it follows that 
persons whom the United States treats as partners but who are 
not U.S. residents for U.S. tax purposes may not claim a 
benefit under the Convention for the interest paid to the 
partnership, because such third-country partners are not 
residents of the United States for purposes of claiming this 
benefit. If, however, the country in which the third-country 
partners are treated as resident for tax purposes, as 
determined under the laws of that country, has an income tax 
convention with Poland, they may be entitled to claim a benefit 
under that convention (these results would also follow in the 
case of an entity that is disregarded as a separate entity 
under the laws of one jurisdiction but not the other, such as a 
single-owner entity that is viewed as a branch for U.S. tax 
purposes and as a corporation for tax purposes under the laws 
of Poland). In contrast, where the entity is organized under 
U.S. laws and is classified as a corporation for U.S. tax 
purposes, interest paid by a company that is a resident of 
Poland to the U.S. corporation will be considered derived by a 
resident of the United States since the U.S. corporation is 
treated under U.S. taxation laws as a resident of the United 
States and as deriving the income.
    Under subparagraph 6(a), the same result would be reached 
even if the tax laws of Poland would treat the entity 
differently (e.g., if the entity were not treated as fiscally 
transparent in Poland in the first example above where the 
entity is treated as a partnership for U.S. tax purposes). 
Similarly, the characterization of the entity in a third 
country is also irrelevant, even if the entity is organized in 
that third country, although subparagraph 6(b) imposes an 
additional requirement in the case of entities organized in a 
third country.
    Subparagraph 6(b) imposes an additional requirement in 
cases of payments through an entity that is organized in a 
third country. In such cases, if the entity is not treated as 
fiscally transparent under the laws of the State in which the 
income, profit or gains arises, and if the entity is eligible 
in its own right for benefits under a convention for the 
avoidance of double taxation between the third state and the 
State in which the income, profit or gain arises with respect 
to the particular item of income, profit or gain that are more 
favorable than the benefits provided under the Convention with 
respect to that item, subparagraph 6(a) shall not have 
application. For example, assume that USCo, a corporation 
resident in the United States, is the sole shareholder of FCo, 
an entity established in Country F. Under the laws of the 
United States, FCo is treated as fiscally transparent, but 
under the laws of Poland, FCo is treated as a corporation. FCo 
receives Poland-source interest which, under the provisions of 
Article 11 (Interest) of the Convention, would be subject to 
tax in Poland at a rate of 5 percent. Pursuant to subparagraph 
6(a), USCo would be considered as deriving the Poland-source 
interest. However, subparagraph 6(b) provides that if the tax 
treaty between Poland and Country F provides a limitation on 
the rate of interest withholding that is lower than 5 percent, 
and if FCo would be eligible for such lower rate in its own 
right on the payment of interest, USCo shall not be deemed as 
deriving the interest payment. Nevertheless, FCo may claim the 
more favorable treaty benefits from Poland in its own right 
under the tax treaty between Poland and Country F.
    The principles of paragraph 6 apply to trusts to the extent 
that they are fiscally transparent in either Contracting State. 
For example, suppose that X, a resident of Poland, creates a 
revocable trust in the United States and names persons resident 
in a third country as the beneficiaries of the trust. If, under 
the laws of Poland, X is treated as taking the trust's income 
into account for tax purposes, the trust's income would be 
regarded as being derived by a resident of Poland. In contrast, 
since the determination of deriving an item of income, profit 
or gain is made on an item by item basis, it is possible that, 
in the case of a U.S. non-grantor trust, the trust itself may 
be able to claim benefits with respect to certain items of 
income, such as capital gains, so long as it is a resident 
liable to tax on such gains, but not with respect to other 
items of income that are treated as income of the trust's 
interest holders.
    As noted above, paragraph 6 is not an exception to the 
saving clause of paragraph 4. Accordingly, paragraph 6 does not 
prevent a Contracting State from taxing an entity that is 
treated as a resident of that State under its tax law. For 
example, if a U.S. LLC with members who are residents of Poland 
elects to be taxed as a corporation for U.S. tax purposes, the 
United States will tax that LLC on its worldwide income on a 
net basis, without regard to whether Poland views the LLC as 
fiscally transparent.

                       ARTICLE 2 (TAXES COVERED)

    This Article specifies the U.S. taxes and the taxes of 
Poland to which the Convention applies. With two exceptions, 
the taxes specified in Article 2 are the covered taxes for all 
purposes of the Convention. A broader coverage applies for 
purposes of Articles 24 (Non-Discrimination) and 26 (Exchange 
of Information). Article 24 applies with respect to all taxes, 
including those imposed by state and local governments. Article 
26 applies with respect to all taxes imposed at the national 
level.

Paragraph 1

    Paragraph 1 identifies the category of taxes to which the 
Convention applies. Paragraph 1 is based on the OECD Model and 
defines the scope of application of the Convention. The 
Convention applies to taxes on income, including gains, imposed 
on behalf of a Contracting State, irrespective of the manner in 
which they are levied. Except with respect to Article 24 (Non-
Discrimination), state and local taxes are not covered by the 
Convention.

Paragraph 2

    Paragraph 2 also is based on the OECD Model and provides a 
definition of taxes on income and on capital gains. The 
Convention covers taxes on total income or any part of income 
and includes tax on gains derived from the alienation of 
property. The Convention does not apply, however, to social 
security or unemployment taxes, or any other charges where 
there is a direct connection between the levy and individual 
benefits. The Convention also does not apply to property taxes, 
except with respect to Article 24 (Non-Discrimination) or to 
Article 26 (Exchange of Information) to the extent that such 
property taxes are imposed at the national level.

Paragraph 3

    Paragraph 3 lists the taxes in force at the time of 
signature of the Convention to which the Convention applies.
    The existing covered taxes of Poland are identified in 
subparagraph 3(a) as the personal income tax and the corporate 
income tax, hereinafter referred to as ``Polish tax''.
    Subparagraph 3(b) provides that the existing U.S. taxes 
subject to the rules of the Convention are the Federal income 
taxes imposed by the Code, together with the Federal taxes 
imposed on the investment income of foreign private foundations 
(Code sections 4940 through 4948) hereinafter referred to as 
``United States tax.'' Social security and unemployment taxes 
(Code sections 1401, 3101, 3111 and 3301) are specifically 
excluded from coverage.

Paragraph 4

    Under paragraph 4, the Convention will apply to any taxes 
that are identical, or substantially similar, to those 
enumerated in paragraph 3, and which are imposed in addition 
to, or in place of, the existing taxes after February 13, 2013, 
the date of signature of the Convention. The paragraph also 
provides that the competent authorities of the Contracting 
States will notify each other of any significant changes to 
their taxation laws.

                    ARTICLE 3 (GENERAL DEFINITIONS)

    Article 3 provides general definitions and rules of 
interpretation applicable throughout the Convention. Certain 
other terms are defined in other articles of the Convention. 
For example, the term ``resident of a Contracting State'' is 
defined in Article 4 (Resident). The term ``permanent 
establishment'' is defined in Article 5 (Permanent 
Establishment). These definitions apply for all purposes of the 
Convention. Other terms, such as ``dividends,'' ``interest'' 
and ``royalties'' are defined in specific Articles for purposes 
of those Articles.

Paragraph 1

    Paragraph 1 defines a number of basic terms used in the 
Convention. The introduction to paragraph 1 makes clear that 
these definitions apply for all purposes of the Convention, 
unless the context requires otherwise. This latter condition 
allows flexibility in the interpretation of the Convention in 
order to avoid results not intended by the Convention's 
negotiators.
    Subparagraph 1(a) defines the term ``person'' to include an 
individual, an estate, a trust, a partnership, a company and 
any other body of persons. The definition is significant for a 
variety of reasons. For example, under Article 4, only a 
``person'' can be a ``resident'' and therefore eligible for 
most benefits under the treaty. Also, all ``persons'' are 
eligible to claim relief under Article 25 (Mutual Agreement 
Procedure).
    The term ``company'' is defined in subparagraph 1(b) as a 
body corporate or an entity treated as a body corporate for tax 
purposes in the state where it is organized. The definition 
refers to the law of the state in which an entity is organized 
in order to ensure that an entity that is treated as fiscally 
transparent in its country of residence will not get 
inappropriate benefits, such as the reduced withholding rate 
provided by subparagraph 2(b) of Article 10 (Dividends). It 
also ensures that the Limitation on Benefits provisions of 
Article 22 will be applied at the appropriate level.
    The terms ``enterprise of a Contracting State'' and 
``enterprise of the other Contracting State'' are defined in 
subparagraph 1(c) as an enterprise carried on by a resident of 
a Contracting State and an enterprise carried on by a resident 
of the other Contracting State. An enterprise of a Contracting 
State need not be carried on in that State. It may be carried 
on in the other Contracting State or a third state (e.g., a 
U.S. corporation doing all of its business in Poland would 
still be a U.S. enterprise).
    Subparagraph 1(c) further provides that these terms also 
encompass an enterprise conducted through an entity (such as a 
partnership) that is treated as fiscally transparent in the 
Contracting State where the entity's owner is resident. The 
definition makes this point explicitly to ensure that the 
purpose of the Convention is not thwarted by an overly 
technical application of the term ``enterprise of a Contracting 
State'' to activities carried on through partnerships and 
similar entities. In accordance with Article 4 (Resident), an 
entity that is fiscally transparent in the Contracting State in 
which it is organized is not considered to be a resident of 
that Contracting State (although income derived through such an 
entity may be taxed as the income of a resident of a 
Contracting State to the extent that it is taxed in the hands 
of resident partners or other resident owners). The definition 
makes clear that as provided in Article 1 (General Scope) 
paragraph 6, an enterprise conducted by such an entity will be 
treated as carried on by a resident of a Contracting State to 
the extent its partners or other owners are residents. This 
approach is consistent with Code section 875, which attributes 
a trade or business conducted by a partnership to its partners 
and a trade or business conducted by an estate or trust to its 
beneficiaries.
    Subparagraph 1(d) defines the term ``enterprise'' as any 
activity or set of activities that constitutes the carrying on 
of a business. The term ``business'' is not defined, but 
subparagraph 1(e) provides that it includes the performance of 
professional services and other activities of an independent 
character. Both subparagraphs are identical to definitions 
added to the OECD Model in connection with the deletion of 
Article 14 (Independent Personal Services) from the OECD Model 
in 2000. The inclusion of the two definitions is intended to 
clarify that income from the performance of professional 
services or other activities of an independent character is 
dealt with under Article 7 (Business Profits) and not Article 
21 (Other Income).
    Subparagraph 1(f) defines the term ``international 
traffic.'' The term means any transport by a ship or aircraft 
except when such transport is solely between places within a 
Contracting State. This definition is applicable principally in 
the context of Article 8 (Shipping and Air Transport). The 
definition combines with paragraphs 2 and 3 of Article 8 to 
exempt from tax by the source State: profits from the rental of 
ships or aircraft on a full (time or voyage) basis; profits 
from the rental on a bareboat basis of ships or aircraft if the 
rental income is incidental to profits from the operation of 
ships or aircraft in international traffic; profits from the 
rental on a bareboat basis of ships or aircraft if such ships 
or aircraft are operated in international traffic by the 
lessee; and profits of an enterprise of a Contracting State 
from the use, maintenance, or rental of containers (including 
trailers, barges, and related equipment for the transport of 
containers), where such use, maintenance or rental, as the case 
may be, is incidental to the operation of ships or aircraft in 
international traffic.
    The exclusion from international traffic of transport 
solely between places within a Contracting State means, for 
example, that carriage of goods or passengers solely between 
New York and Chicago would not be treated as international 
traffic, whether carried by a U.S. or a foreign carrier. The 
substantive taxing rules of the Convention relating to the 
taxation of income from transport, principally Article 8, 
therefore, would not apply to income from such carriage. Thus, 
if the carrier engaged in internal U.S. traffic were a resident 
of Poland (assuming that were possible under U.S. law), the 
United States would not be required to exempt the income from 
that transport under Article 8. The income would, however, be 
treated as business profits under Article 7 (Business Profits), 
and therefore would be taxable in the United States only if 
attributable to a U.S. permanent establishment of the foreign 
carrier, and then only on a net basis. The gross basis U.S. tax 
imposed by section 887 would not apply under the circumstances 
described. If, however, goods or passengers are carried by a 
carrier resident in Poland from a non-U.S. port to, for 
example, New York, and some of the goods or passengers continue 
on to Chicago, the entire transport would be international 
traffic. This would be true if the international carrier 
transferred the goods at the U.S. port of entry from a ship to 
a land vehicle, from a ship to a lighter, or even if the 
overland portion of the trip in the United States was handled 
by an independent carrier under contract with the original 
international carrier, so long as both parts of the trip were 
reflected in original bills of lading. For this reason, the 
U.S. Model refers, in the definition of ``international 
traffic,'' to ``such transport'' being solely between places in 
the other Contracting State, while the OECD Model refers to the 
ship or aircraft being operated solely between such places. The 
U.S. Model language is intended to make clear that, as in the 
above example, even if the goods are carried on a different 
aircraft for the internal portion of the international voyage 
than is used for the overseas portion of the trip, the 
definition applies to that internal portion as well as the 
external portion.
    Finally, a ``cruise to nowhere,'' i.e., a cruise beginning 
and ending in a port in the same Contracting State with no 
stops in a foreign port, would not constitute international 
traffic.
    Subparagraph 1(g) defines the term ``competent 
authorities'' for Poland and the United States. The U.S. 
competent authority is the Secretary of the Treasury or his 
delegate. The Secretary of the Treasury has delegated the 
competent authority function to the Commissioner of Internal 
Revenue, who in turn has delegated the authority to the Deputy 
Commissioner (International) LB&I. With respect to 
interpretative issues, the Deputy Commissioner (International) 
LB&I acts with the concurrence of the Associate Chief Counsel 
(International) of the Internal Revenue Service. The competent 
authority in the case of Poland is the Minister of Finance or 
his authorized representative.
    The geographical scope of the Convention with respect to 
Poland is set out in subparagraph 1(h). The term ``Poland'' 
means the Republic of Poland, including the territorial sea 
thereof and any area outside the territorial sea of the 
Republic of Poland designated under its laws and in accordance 
with international law as an area within which the sovereign 
rights of the Republic of Poland with respect to the sea bed 
and sub-soil and their natural resources may be exercised.
    The geographical scope of the Convention with respect to 
the United States is set out in subparagraph 1(i). It 
encompasses the United States of America, including the states, 
the District of Columbia, and the territorial sea of the United 
States. The term does not include Puerto Rico, the United 
States Virgin Islands, Guam or any other U.S. possession or 
territory. For certain purposes, the term ``United States'' 
includes the sea bed and subsoil of undersea areas adjacent to 
the territorial sea of the United States. This extension 
applies to the extent that the United States may exercise 
sovereignty in accordance with international law for the 
purpose of natural resource exploration and exploitation of 
such areas. This extension of the definition applies, however, 
only if the person, property or activity to which the 
Convention is being applied is connected with such natural 
resource exploration or exploitation. Thus, it would not 
include any activity involving the sea floor of an area over 
which the United States exercised sovereignty for natural 
resource purposes if that activity was unrelated to the 
exploration and exploitation of natural resources. This result 
is consistent with the result that would be obtained under Code 
section 638, which treats the continental shelf as part of the 
United States for purposes of natural resource exploration and 
exploitation.
    The term ``national,'' as it relates to the United States 
and to Poland, is defined in subparagraph 1(j). This term is 
relevant for purposes of Article 4 (Resident), Article 19 
(Government Service) and Article 24 (Non-Discrimination). A 
national of one of the Contracting States is either an 
individual who is a citizen or national of that State, or any 
legal person, partnership or association deriving its status, 
as such, from the law in force in the State where it is 
established.
    Subparagraph 1(k) defines the term ``pension fund.'' The 
term means any person that is established in a Contracting 
State and satisfies two criteria. First, as provided in clause 
1(k)(i), the person must be generally exempt from income 
taxation in the Contracting State in which it is established. 
Second, as provided in clause 1(k)(ii), the person must be 
operated principally either to administer or provide pension or 
retirement benefits, or to earn income for the benefit of one 
or more persons established in the same Contracting State that 
are generally exempt from income taxation in that Contracting 
State and are operated principally to administer or provide 
pension or retirement benefits.
    The definition recognizes that pension funds sometimes 
administer or provide benefits other than pension or retirement 
benefits, such as death benefits. However, in order for the 
fund to be considered a pension fund for purposes of the 
Convention, the provision of any other such benefits must be 
merely incidental to the fund's principal activity of 
administering or providing pension or retirement benefits. The 
definition also ensures that if a fund is a collective fund 
that earns income for the benefit of other funds, then 
substantially all of the funds that participate in the 
collective fund must be residents of the same Contracting State 
as the collective fund and must be entitled to benefits under 
the Convention in their own right.
    In the case of the United States, the term ``pension fund'' 
includes the following: a trust providing pension or retirement 
benefits under a Code section 401(a) qualified pension plan 
(which includes a Code section 401(k) plan); a profit sharing 
or stock bonus plan; a Code section 403(a) qualified annuity 
plan; a Code section 403(b) plan; a trust that is an individual 
retirement account under Code section 408; a Roth individual 
retirement account under Code section 408A or a simple 
retirement account under Code section 408(p); a trust providing 
pension or retirement benefits under a simplified employee 
pension plan under Code section 408(k); a trust described in 
section 457(g) providing pension or retirement benefits under a 
Code section 457(b) plan; and the Thrift Savings Fund (section 
7701(j)). A group trust described in Rev. Rul. 81-100, as 
amended by Rev. Rul. 2004-67 and Rev. Rul. 2011-1, qualifies as 
a pension fund only if substantially all of its activity is to 
earn income for the benefit of pension funds that are 
themselves entitled to benefits under the Convention as a 
resident of the United States.

Paragraph 2

    Terms that are not defined in the Convention are dealt with 
in paragraph 2.
    Paragraph 2 provides that in the application of the 
Convention, any term used but not defined in the Convention 
will have the meaning that it has under the domestic law of the 
Contracting State whose tax is being applied, unless the 
context requires otherwise. If the term is defined under both 
the tax and non-tax laws of a Contracting State, the definition 
in the tax law will take precedence over the definition in the 
non-tax laws. Finally, there also may be cases where the tax 
laws of a State contain multiple definitions of the same term. 
In such a case, the definition used for purposes of the 
particular provision at issue, if any, should be used.
    The reference in paragraph 2 to the domestic law of a 
Contracting State means the law in effect at the time the 
treaty is being applied, not the law as in effect at the time 
the treaty was signed. The use of ``ambulatory'' definitions, 
however, may lead to results that are at variance with the 
intentions of the negotiators and of the Contracting States 
when the treaty was negotiated and ratified. The inclusion in 
both paragraphs 1 and 2 of an exception to the generally 
applicable definitions where the ``context otherwise requires'' 
is intended to address this circumstance. Where reflecting the 
intent of the Contracting States requires the use of a 
definition that is different from a definition under paragraph 
1 or the law of the Contracting State applying the Convention, 
that definition will apply. Thus, flexibility in defining terms 
is necessary and permitted.

                          ARTICLE 4 (RESIDENT)

    This Article sets forth rules for determining whether a 
person is a resident of a Contracting State for purposes of the 
Convention. As a general matter, only residents of the 
Contracting States may claim the benefits of the Convention. 
The treaty definition of residence is to be used only for 
purposes of the Convention. The fact that a person is 
determined to be a resident of a Contracting State under 
Article 4 does not automatically entitle that person to the 
benefits of the Convention. In order to obtain the benefits of 
the Convention, such person must satisfy all applicable 
requirements specified in the Convention, including other 
applicable requirements of Article 1 (General Scope), 
beneficial ownership and Article 22 (Limitation on Benefits).
    The determination of residence for treaty purposes looks 
first to a person's liability to tax as a resident under the 
respective taxation laws of the Contracting States. As a 
general matter, a person is liable to tax as a resident under 
the domestic laws of one Contracting State and not of the other 
need look no further. For purposes of the Convention, that 
person is a resident of the State in which he is liable to tax 
as resident under domestic law. If, however, a person is liable 
to tax as a resident under the domestic laws of both 
Contracting States, the Article uses tie-breaker rules to 
assign a single State of residence (or no State of residence) 
to such a person for purposes of the Convention.

Paragraph 1

    The term ``resident of a Contracting State'' is defined in 
paragraph 1. In general, this definition incorporates the 
definitions of residence in U.S. and Polish law by referring to 
a resident as a person who, under the laws of a Contracting 
State, is liable to tax therein by reason of his domicile, 
residence, citizenship, place of management, place of 
incorporation or any other similar criterion. Thus, residents 
of the United States include aliens who are considered U.S. 
residents under Code section 7701(b), entities organized in the 
United States and that have elected under Treas. Reg. 301.7701-
2 to be taxed by the United States as a corporation, and 
companies that are treated as domestic corporations under Code 
section 7874(b). Paragraph 1 also specifically includes the two 
Contracting States, and political subdivisions and local 
authorities of the two States, as residents for purposes of the 
Convention.
    The fact that a particular entity does not pay tax in 
practice will not necessarily mean that the entity is not a 
resident. An entity that is not fiscally transparent in its 
Contracting State of residence for purposes of paragraph 6 of 
Article 1 (General Scope), and is not unconditionally exempt 
from tax, will generally be treated as a resident for purposes 
of the Convention. This is generally true even for an entity 
that, in practice, is not required to pay tax if it meets 
certain requirements with respect to its activities, types of 
income, or distribution practices. For example, a U.S. 
Regulated Investment Company (RIC) and a U.S. Real Estate 
Investment Trust (REIT) are residents of the United States for 
purposes of the treaty. These entities are taxable to the 
extent that they do not currently distribute their profits, and 
therefore may be regarded as liable to tax, even though these 
entities do not generally have taxable income in practice. They 
also must satisfy a number of requirements under the Code in 
order to be entitled to their particular tax treatment.
    A person who is liable to tax in a Contracting State only 
in respect of income from sources within that State or of 
profits attributable to a permanent establishment in that State 
will not be treated as a resident of that Contracting State for 
purposes of the Convention. Thus, a consular official of the 
other Contracting State who is posted in the United States, who 
may be subject to U.S. tax on U.S. source investment income, 
but is not taxable in the United States on non-U.S. source 
income (see Code section 7701(b)(5)(B)), would not be 
considered a resident of the United States for purposes of the 
Convention. Similarly, an enterprise of Poland with a permanent 
establishment in the United States is not, by virtue of that 
permanent establishment, a resident of the United States. The 
enterprise generally is subject to U.S. tax only with respect 
to its income that is attributable to the U.S. permanent 
establishment, not with respect to its worldwide income, as it 
would be if it were a U.S. resident.

Paragraph 2

    Paragraph 2 provides that entities such as pension funds as 
defined in Article 3 (General Definitions) and legal persons 
organized under the laws of a Contracting State and established 
exclusively for religious, charitable, scientific, artistic, 
cultural, or educational purposes are residents of the 
Contracting State in which they are established or organized. 
Such persons are liable to tax, notwithstanding that all or 
part of its income or gains may be exempt from tax under the 
domestic laws of that State. Thus, a section 501(c) 
organization organized in the United States (such as a U.S. 
charity) that is generally exempt from tax under U.S. law is 
nevertheless a resident of the United States for all purposes 
of the Convention.

Paragraph 3

    If, under the domestic law of both Contracting States, and, 
thus, under paragraph 1, an individual is a resident of both 
Contracting States, a series of tie-breaker rules are provided 
in paragraph 3 to determine a single State of residence for 
that individual. These tests are to be applied in the order in 
which they are stated. The first test is based on where the 
individual has a permanent home. If that test is inconclusive 
because the individual has a permanent home available to him in 
both States, he will be considered to be a resident of the 
Contracting State where his personal and economic relations are 
closest (i.e., the location of his ``center of vital 
interests.'' If that test is also inconclusive, or if he does 
not have a permanent home available to him in either State, he 
will be treated as a resident of the Contracting State where he 
maintains a habitual abode. If he has a habitual abode in both 
States or in neither of them, he will be treated as a resident 
of the Contracting State of which he is a national. If he is a 
national of both States or of neither, the competent 
authorities shall endeavor to settle the question by mutual 
agreement.

Paragraph 4

    Paragraph 4 addresses dual residence issues for companies. 
A company is treated as resident in the United States if it is 
created or organized under the laws of the United States or a 
political subdivision. If, as is frequently the case, a company 
is treated as a resident of Poland if it is either incorporated 
or managed and controlled there, dual residence can arise in 
the case of a U.S. company that is managed and controlled in 
Poland. In other cases, a company may be a dual resident 
because it was originally incorporated in one Contracting State 
but has ``continued'' into the other Contracting State. 
Paragraph 4 thus attempts to deal with each of these 
situations.
    Under paragraph 4, the residence of a dual resident company 
will be in the Contracting State under the laws of which it is 
created or organized if it is created or organized under the 
laws of only one of the other Contracting States. Thus, if a 
company is a resident of the United States because it is 
incorporated under the laws of one of the states and is a 
resident of Poland because its place of effective management is 
in Poland, then it will be a resident only of the United 
States. However, if the incorporation test does not resolve the 
question because, for example, the company was incorporated in 
one Contracting State and continued into the other Contracting 
State, but the first-mentioned Contracting State does not 
recognize the migration and continues to treat the company as a 
resident, the case would then be addressed by paragraph 5.

Paragraph 5

    Paragraph 5 addresses situations when by reason of the 
provisions of paragraph 1, 2 or 4, a person other than an 
individual is a resident of both Contracting States. In such 
cases, the competent authorities of the Contracting States may, 
but are not required to, use the mutual agreement procedure to 
endeavor to determine the mode of application to the dual 
resident person. If the competent authorities do not reach a 
mutual agreement regarding a single State of residence, such 
dual resident person cannot claim any benefit accorded to 
residents of a Contracting State by the Convention. The person 
may, however, claim any benefits that are not limited to 
residents, such as those provided by paragraph 1 of Article 24 
(Non-Discrimination). Thus, for example, a State cannot impose 
discriminatory taxation on a dual resident person.
    Regardless of the outcome under this paragraph, dual 
resident companies may be treated as a resident of a 
Contracting State for purposes other than that of obtaining 
benefits under the Convention. For example, if a dual resident 
company pays a dividend to a resident of Poland, the U.S. 
paying agent would withhold on that dividend at the appropriate 
treaty rate (assuming the payee is entitled to treaty 
benefits), because reduced withholding is a benefit enjoyed by 
the resident of Poland, not by the dual resident company. The 
dual resident company that paid the dividend would, for this 
purpose, be treated as a resident of the United States under 
the Convention. In addition, information relating to dual 
resident companies can be exchanged under the Convention 
because, by its terms, Article 26 (Exchange of Information) is 
not limited to residents of the Contracting States.

                  ARTICLE 5 (PERMANENT ESTABLISHMENT)

    This Article defines the term ``permanent establishment,'' 
a term that is significant for several articles of the 
Convention. The existence of a permanent establishment in a 
Contracting State is necessary under Article 7 (Business 
Profits) for the taxation by that State of the business profits 
of a resident of the other Contracting State. Articles 10 
(Dividends), 11 (Interest) and 13 (Royalties) provide for 
reduced rates of tax at source on payments of these items of 
income to a resident of the other State only when the income is 
not attributable to a permanent establishment that the 
recipient has in the source State. The concept is also relevant 
in determining which Contracting State may tax certain gains 
under Article 14 (Capital Gains) and certain ``other income'' 
under Article 21 (Other Income).

Paragraph 1

    The basic definition of the term ``permanent 
establishment'' is contained in paragraph 1. As used in the 
Convention, the term means a fixed place of business through 
which the business of an enterprise is wholly or partly carried 
on. As indicated in the OECD Commentary to Article 5 (see 
paragraphs 4 through 8), a general principle to be observed in 
determining whether a permanent establishment exists is that 
the place of business must be ``fixed'' in the sense that a 
particular building or physical location is used by the 
enterprise for the conduct of its business, and that it must be 
foreseeable that the enterprise's use of this building or other 
physical location will be more than temporary. If an enterprise 
carries on a business through a sub-contractor, a permanent 
establishment may also exist for the enterprise if all the 
requirements of Article 5 are met. For example, under paragraph 
1, a permanent establishment may exist where an enterprise 
carries on its business through sub-contractors at a fixed 
place of business of the enterprise. Factors that indicate that 
a location is a fixed place of business of the enterprise, 
(i.e., a general contractor) include legal possession of the 
site, controlling access to and use of the site, and overall 
responsibility for what happens at the location.

Paragraph 2

    Paragraph 2 lists a number of types of fixed places of 
business that constitute a permanent establishment. This list 
is illustrative and non-exclusive. According to paragraph 2, 
the term permanent establishment includes a place of 
management, a branch, an office, a factory, a workshop, and a 
mine, oil or gas well, quarry or other place of extraction of 
natural resources.

Paragraph 3

    This paragraph provides rules to determine whether a 
building site or a construction, assembly or installation 
project, or an installation or drilling rig or ship used for 
the exploration of natural resources constitutes a permanent 
establishment for the contractor, driller, etc. Such a site or 
activity does not create a permanent establishment unless the 
site, project, etc. lasts, or the exploration activity 
continues, for more than twelve months. It is only necessary to 
refer to ``exploration'' and not ``exploitation'' in this 
context because exploitation activities are defined to 
constitute a permanent establishment under subparagraph (f) of 
paragraph 2. Thus, a drilling rig does not constitute a 
permanent establishment if a well is drilled in twelve months 
or less. However, the well becomes a permanent establishment as 
of the date that production begins.
    The twelve-month test applies separately to each site or 
project. The twelve-month period begins when work (including 
preparatory work carried on by the enterprise) physically 
begins in a Contracting State. A series of contracts or 
projects by a contractor that are interdependent both 
commercially and geographically are to be treated as a single 
project for purposes of applying the twelve-month threshold 
test. For example, the construction of a housing development 
would be considered as a single project even if each house were 
constructed for a different purchaser.
    In applying this paragraph, time spent by a sub-contractor 
on a building site is counted as time spent by the general 
contractor at the site for purposes of determining whether the 
general contractor has a permanent establishment. However, for 
the sub-contractor itself to be treated as having a permanent 
establishment, the sub-contractor's activities at the site must 
last for more than twelve months. For purposes of applying the 
twelve-month rule, time is measured from the first day the sub-
contractor is on the site until the last day. Thus, if a sub-
contractor is on a site intermittently, intervening days that 
the sub-contractor is not on the site are counted.
    These interpretations of the Article are based on the 
Commentary to paragraph 3 of Article 5 of the OECD Model, which 
contains language that is substantially the same as that in the 
Convention. These interpretations are consistent with the 
generally accepted international interpretation of the relevant 
language in paragraph 3 of Article 5 of the Convention.
    If the twelve-month threshold is exceeded, the site or 
project constitutes a permanent establishment from the first 
day of activity.

Paragraph 4

    This paragraph contains exceptions to the general rule of 
paragraph 1, listing a number of activities that may be carried 
on through a fixed place of business but which nevertheless do 
not create a permanent establishment. The use of facilities 
solely to store, display or deliver merchandise belonging to an 
enterprise does not constitute a permanent establishment of 
that enterprise. The maintenance of a stock of goods belonging 
to an enterprise solely for the purpose of storage, display or 
delivery, or solely for the purpose of processing by another 
enterprise does not give rise to a permanent establishment of 
the first-mentioned enterprise. The maintenance of a fixed 
place of business solely for the purpose of purchasing goods or 
merchandise, or for collecting information, for the enterprise, 
or for other activities that have a preparatory or auxiliary 
character for the enterprise, such as advertising, or the 
supply of information, do not constitute a permanent 
establishment of the enterprise. Moreover, subparagraph 4(f) 
provides that a combination of the activities described in the 
other subparagraphs of paragraph 4 will not give rise to a 
permanent establishment if the combination results in an 
overall activity that is of a preparatory or auxiliary 
character.

Paragraph 5

    Paragraphs 5 and 6 specify when activities carried on by an 
agent or other person acting on behalf of an enterprise create 
a permanent establishment of that enterprise. Under paragraph 
5, a person is deemed to create a permanent establishment of 
the enterprise if that person has and habitually exercises an 
authority to conclude contracts on behalf of the enterprise. 
If, however, his activities are limited to those activities 
specified in paragraph 4 which would not constitute a permanent 
establishment if carried on by the enterprise through a fixed 
place of business, the person does not create a permanent 
establishment of the enterprise.
    The reference to the ability to habitually exercising an 
authority to conclude contracts ``on behalf of'' an enterprise 
should be interpreted consistently with the analogous terms 
found in the OECD Model ``in the name of that enterprise'' and 
the U.S. Model ``binding on the enterprise.'' As indicated in 
paragraph 32 to the OECD Commentaries on Article 5, paragraph 5 
of the Article is intended to encompass persons who have 
``sufficient authority to bind the enterprise's participation 
in the business activity in the State concerned.''

Paragraph 6

    Under paragraph 6, an enterprise is not deemed to have a 
permanent establishment in a Contracting State merely because 
it carries on business in that State through an independent 
agent, including a broker or general commission agent, if the 
agent is acting in the ordinary course of his business. Thus, 
there are two conditions that must be satisfied: the agent must 
be both legally and economically independent of the enterprise; 
and the agent must be acting in the ordinary course of its 
business in carrying out activities on behalf of the 
enterprise.
    Whether the agent and the enterprise are independent is a 
factual determination. Among the questions to be considered is 
the extent to which the agent operates on the basis of 
instructions from the enterprise. An agent that is subject to 
detailed instructions regarding the conduct of its operations 
or to comprehensive control by the enterprise is not legally 
independent.
    In determining whether the agent is economically 
independent, a relevant factor is the extent to which the agent 
bears business risk. Business risk refers primarily to risk of 
loss. An independent agent typically bears risk of loss from 
its own activities. In the absence of other factors that would 
establish dependence, an agent that shares business risk with 
the enterprise, or has its own business risk, is economically 
independent because its business activities are not integrated 
with those of the principal. Conversely, an agent that bears 
little or no risk from the activities it performs is not 
economically independent and therefore is not described in 
paragraph 6.
    Another relevant factor in determining whether an agent is 
economically independent is whether the agent acts exclusively 
or nearly exclusively for the principal. Such a relationship 
may indicate that the principal has economic control over the 
agent. A number of principals acting in concert also may have 
economic control over an agent. The limited scope of the 
agent's activities and the agent's dependence on a single 
source of income may indicate that the agent lacks economic 
independence. It should be borne in mind, however, that 
exclusivity is not in itself a conclusive test; an agent may be 
economically independent notwithstanding an exclusive 
relationship with the principal if it has the capacity to 
diversify and acquire other clients without substantial 
modifications to its current business and without substantial 
harm to its business profits. Thus, exclusivity should be 
viewed merely as a pointer to further investigation of the 
relationship between the principal and the agent. Each case 
must be addressed on the basis of its own facts and 
circumstances.

Paragraph 7

    This paragraph clarifies that a company that is a resident 
of a Contracting State is not deemed to have a permanent 
establishment in the other Contracting State merely because it 
controls, or is controlled by, a company that is a resident of 
that other Contracting State, or that carries on business in 
that other Contracting State. The determination of whether a 
permanent establishment exists is made solely on the basis of 
the factors described in paragraphs 1 through 6 of the Article. 
Whether a company is a permanent establishment of a related 
company, therefore, is based solely on those factors and not on 
the ownership or control relationship between the companies.

                 ARTICLE 6 (INCOME FROM REAL PROPERTY)

Paragraph 1

    The first paragraph of Article 6 states the general rule 
that income of a resident of a Contracting State derived from 
real property situated in the other Contracting State may be 
taxed in the Contracting State in which the property is 
situated. The paragraph specifies that income from real 
property includes income from agriculture and forestry.
    This Article does not grant an exclusive taxing right to 
the situs State; the situs State is merely given the primary 
right to tax. The Article does not impose any limitation in 
terms of rate or form of tax on the situs State.

Paragraph 2

    The term ``real property'' is defined in paragraph 2 by 
reference to the domestic law definition in the situs State. In 
the case of the United States, the term has the meaning given 
to it by Treas. Reg. 1.897-1(b). In addition to the statutory 
definitions in the two Contracting States, the paragraph 
specifies certain additional classes of property that, 
regardless of domestic law definitions are within the scope of 
the term for purposes of the Convention. This expanded 
definition conforms to that in the OECD Model. With respect to 
the United States, the definition of ``real property'' for 
purposes of Article 6 is more limited than the reference to a 
``United States real property interest'' in paragraph 2 of 
Article 14 (Capital Gains). The Article 14 term includes not 
only real property as defined in Article 6 but certain other 
interests in real property.

Paragraph 3

    Paragraph 3 makes clear that all forms of income derived 
from the exploitation of real property are taxable in the 
Contracting State in which the property is situated. This 
includes income from any use of real property, including, but 
not limited to, income from direct use by the owner (in which 
case income may be imputed to the owner for tax purposes) and 
rental income from the letting of real property. In the case of 
a net lease of real property, if a net election has not been 
made, the gross rental payment (before deductible expenses 
incurred by the lessee) is treated as income from the property.
    Other income closely associated with real property is 
covered by other Articles of the Convention, however, and not 
Article 6. For example, income from the disposition of an 
interest in real property is not considered ``derived'' from 
real property; taxation of that income is addressed in Article 
14. Interest paid on a mortgage on real property would be 
covered by Article 11 (Interest). Distributions by a U.S. 
REITor certain regulated investment companies would fall under 
Article 14 in the case of distributions of U.S. real property 
gain or Article 10 (Dividends) in the case of distributions 
treated as dividends. Finally, distributions from a United 
States Real Property Holding Corporation as defined under Code 
section 897(c)(2) are not considered to be income from the 
exploitation of real property; such payments would fall under 
Article 10 or Article 14.

Paragraph 4

    This paragraph specifies that the basic rule of paragraph 1 
(as elaborated in paragraph 3) applies to income from real 
property of an enterprise. This clarifies that the situs 
country may tax the real property income (including rental 
income) of a resident of the other Contracting State in the 
absence of attribution to a permanent establishment in the 
situs State. This provision represents an exception to the 
general rule under Articles 7 (Business Profits) that income 
must be attributable to a permanent establishment in order to 
be taxable in the situs state.

                      ARTICLE 7 (BUSINESS PROFITS)

    This Article provides rules for the taxation by a 
Contracting State of the business profits of an enterprise of 
the other Contracting State.

Paragraph 1

    Paragraph 1 states the general rule that business profits 
of an enterprise of one Contracting State may not be taxed by 
the other Contracting State unless the enterprise carries on 
business in that other Contracting State through a permanent 
establishment (as defined in Article 5 (Permanent 
Establishment)) situated there. When that condition is met, the 
State in which the permanent establishment is situated may tax 
the enterprise on the income that is attributable to the 
permanent establishment.
    Although the Convention does not include a definition of 
``business profits,'' the term is intended to cover income 
derived from any trade or business. In accordance with this 
broad definition, the term ``business profits'' includes income 
attributable to notional principal contracts and other 
financial instruments to the extent that the income is 
attributable to a trade or business of dealing in such 
instruments or is otherwise related to a trade or business (as 
in the case of a notional principal contract entered into for 
the purpose of hedging currency risk arising from an active 
trade or business). Any other income derived from such 
instruments is, unless specifically covered in another article, 
dealt with under Article 21 (Other Income).
    In addition, as a result of the definitions of 
``enterprise'' and ``business'' in Article 3 (General 
Definitions), the term includes income derived from the 
furnishing of personal services. Thus, a consulting firm 
resident in one State whose employees or partners perform 
services in the other State through a permanent establishment 
may be taxed in that other State on a net basis under Article 
7, and not under Article 15 (Income from Employment), which 
applies only to income of employees. With respect to the 
enterprise's employees themselves, however, their salary 
remains subject to Article 15.
    Because this Article applies to income earned by an 
enterprise from the furnishing of personal services, the 
Article also applies to income derived by a partner resident in 
a Contracting State that is attributable to personal services 
performed in the other Contracting State through a partnership 
with a permanent establishment in that other State. Income 
which may be taxed under this Article includes all income 
attributable to the permanent establishment in respect of the 
performance of the personal services carried on by the 
partnership (whether by the partner himself, other partners in 
the partnership, or by employees assisting the partners) and 
any income from activities ancillary to the performance of 
those services (e.g., charges for facsimile services).
    The application of Article 7 to a service partnership may 
be illustrated by the following example: a partnership formed 
in Poland has five partners (who agree to split profits 
equally), four of whom are resident and perform personal 
services only in Poland at Office A, and one of whom is a 
resident and performs personal services at Office B, a 
permanent establishment in the United States. In this case, the 
four partners of the partnership resident in Poland may be 
taxed in the United States in respect of their share of the 
income attributable to the permanent establishment, Office B. 
The services giving rise to income which may be attributed to 
the permanent establishment would include not only the services 
performed by the one resident partner, but also, for example, 
if one of the four other partners came to the United States and 
worked on an Office B matter there, the income in respect of 
those services. Income from the services performed by the 
visiting partner would be subject to tax in the United States 
regardless of whether the visiting partner actually visited or 
made use of Office B while performing services in the United 
States.

Paragraph 2

    Paragraph 2 provides rules for the attribution of business 
profits to a permanent establishment under which the attributed 
business profits are determined as if the permanent 
establishment were a separate enterprise that is independent 
from the rest of the enterprise of which it is a part, as well 
as from any other person. The Contracting States will attribute 
to a permanent establishment the profits that it would have 
earned had it been a distinct and separate enterprise engaged 
in the same or similar activities under the same or similar 
conditions and dealing wholly independently with the enterprise 
of which it is a permanent establishment. However, the business 
profits attributable to a permanent establishment are limited 
to those profits derived from the functions performed, assets 
used and risks assumed by the permanent establishment.
    Whereas paragraph 2 of Article 7 of the OECD Model provides 
that the paragraph applies ``[F]or the purposes of this Article 
and Article [23A][23B],'' paragraph 2 Article 7 applies only 
for purposes of attributing business profits, and does not have 
relevance for purposes of relief from double taxation, other 
than the narrow circumstances as provided in paragraph 3 of 
this Article (described below).
    The ``attributable to'' concept of paragraph 2 employs the 
arm's length principle reflected in the report of the OECD 
``2010 Report on the Attribution of Profits to Permanent 
Establishments'' (the ``2010 Report'') for determining the 
amount of business profits that shall be taxable to a permanent 
establishment, in place of the analogous principles in Code 
section 864(c). In effect, paragraph 2 allows the United States 
to tax only the lesser of two amounts of income: the amount 
determined by applying U.S. rules regarding the calculation of 
effectively connected income and the amount determined under 
Article 7 of the Convention. That is, a taxpayer may choose the 
set of rules that results in the lowest amount of taxable 
income, but may not combine both treaty and Code rules in a way 
that would be inconsistent with the intent of either set of 
rules.
    Because the purpose of paragraph 2 is to determine the 
profits that are attributable to a permanent establishment, 
paragraph 2 applies in place only of Code section 864(c), which 
has an analogous function. The amount of income ``attributable 
to'' a permanent establishment under Article 7 may be greater 
or lesser than the amount of income that would be treated as 
``effectively connected'' to a U.S. trade or business under 
section 864. Moreover, the profits attributable to a permanent 
establishment may be from sources within or without a 
Contracting State. However, as stated in paragraph 2, the 
business profits attributable to a permanent establishment 
include only those profits derived from the functions 
performed, assets used and risks assumed by the permanent 
establishment. For example, a foreign corporation that has a 
significant amount of third party foreign source royalty income 
attributable to a U.S. permanent establishment may find that it 
will pay less tax in the United States by applying section 
864(c) of the Code, rather than Article 7, if the royalty 
income is not derived in the active conduct of a trade or 
business in the United States under Code section 
864(c)(4)(B)(i). But, as described in the Technical Explanation 
to paragraph 2 of Article 1 (General Scope), if the foreign 
corporation chooses to apply Code Section 864(c) to determine 
its effectively connected income, it may not also use Article 7 
principles to reduce its third party royalty income by 
interbranch royalty expense, since doing so would be 
inconsistent with either the principles of the Code or the 
Convention. (See Rev. Rul. 84-17, 1984-1 C.B. 308.). 
Conversely, if the taxpayer opts to use Article 7 to calculate 
the amount of business profits attributable to its U.S. 
permanent establishment, it must include all foreign-source 
income, from third parties and interbranch income in its 
business profits whether or not such income would be 
effectively connected income under the Code, if attributable to 
functions performed, assets used or risks assumed by the 
permanent establishment. Then, as stated above, the foreign 
corporation may elect to be taxed on the lower of the two 
amounts. Article 7 can only be used to reduce the amount of tax 
that would have otherwise been calculated using Code section 
864(c) principles.
    Paragraph 2 refers specifically to the dealings between the 
permanent establishment and other parts of the enterprise of 
which the permanent establishment is a part in order to 
emphasize that the separate and independent enterprise fiction 
of the paragraph requires that these dealings be treated the 
same way as similar transactions taking place between 
independent enterprises. That specific reference to dealings 
between the permanent establishment and other parts of the 
enterprise does not, however, restrict the scope of the 
paragraph. Where a transaction that takes place between the 
enterprise and an associated enterprise affects directly the 
determination of the profits attributable to the permanent 
establishment (e.g. the acquisition by the permanent 
establishment from an associated enterprise of goods that will 
be sold through the permanent establishment), paragraph 2 also 
requires that, for the purpose of computing the profits 
attributable to the permanent establishment, the conditions of 
the transaction be adjusted, if necessary, to reflect the 
conditions of a similar transaction between independent 
enterprises. Assume, for instance, that the permanent 
establishment situated in State S of an enterprise of State R 
acquires property from an associated enterprise of State T. If 
the price provided for in the contract between the two 
associated enterprises exceeds what would have been agreed to 
between independent enterprises, paragraph 2 of Article 7 of 
the treaty between State R and State S will authorize State S 
to adjust the profits attributable to the permanent 
establishment to reflect what a separate and independent 
enterprise would have paid for the property. In such case, Sate 
R will also be able to adjust the profits of the enterprise of 
State R under paragraph 1 of Article 9 of the treaty between 
State R and State T, which will trigger the application of the 
corresponding adjustment mechanism of paragraph 2 of Article 9 
of that treaty.
    Computation of the profits attributable to a permanent 
establishment under paragraph 2 takes into account the profits 
from all its activities, transactions with both associated and 
independent enterprises, and dealings with other parts of the 
enterprise. This analysis involves two steps. The first step 
requires a functional factual analysis to determine:

   the attribution to the permanent establishment of the 
        rights and obligations arising out of transactions 
        between the enterprise of which the permanent 
        establishment is a part and separate enterprises;
    the identification of significant people functions 
        relevant to the attribution of economic ownership of 
        assets, and the attribution of economic ownership of 
        assets to the permanent establishment;
    the identification of significant people functions 
        relevant to the assumption of risks, and the 
        attribution of risks to the permanent establishment;
   the identification of other functions of the permanent 
        establishment;
   the recognition of dealings between the permanent 
        establishment and other parts of the enterprise; and
   the attribution of capital based on the assets and risks 
        attributed to the permanent establishment.

    The second step is to price any such dealings that are 
attributed to the permanent establishment in accordance with 
the 2010 Report. Thus, any of the methods permitted in the 2010 
Report, including profits methods, may be used as appropriate 
and in accordance with the principles of the OECD's Transfer 
Pricing Guidelines. However, the attribution methods apply only 
for purposes of attributing profits within the legal entity. It 
does not create legal obligations or other tax consequences 
that would result from transactions having independent legal 
significance. In order to facilitate the administration of the 
two step process, taxpayers are encouraged to provide 
documentation supporting the conclusions reached in the first 
step, and demonstrating the appropriateness of the dealings and 
the associated prices.
    An entity that operates through branches rather than 
separate subsidiaries will typically have lower capital 
requirements because the capital of the entity is available to 
support all of the entity's liabilities (with some exceptions 
attributable to local regulatory restrictions). This is the 
reason most commercial banks and some insurance companies 
operate through branches rather than through subsidiaries. The 
benefit that comes from such lower capital costs must be 
allocated among the branches in an appropriate manner. This 
issue does not arise in the case of an enterprise that operates 
through separate entities, since each entity will have to be 
separately capitalized or will have to compensate another 
entity for providing capital (usually through a guarantee).
    Under U.S. domestic regulations, internal ``transactions'' 
generally are not recognized because they do not have legal 
significance. In contrast, paragraph 2 provides that such 
internal dealings may be used to allocate income in cases where 
the dealings accurately reflect the allocation of risk within 
the enterprise. One example is global trading in securities. In 
many cases, banks use internal swap transactions to transfer 
risk from one branch to a central location where traders have 
the expertise to manage that particular type of risk. Under the 
Convention, such a bank may also use such swap transactions as 
a means of allocating income between the branches, if use of 
that method is the ``best method'' within the meaning of 
regulation section 1.482-1(c). The books of a branch will not 
be respected, however, when the results are inconsistent with a 
functional analysis. So, for example, income from a transaction 
that is booked in a particular branch (or home office) will not 
be treated as attributable to that location if the sales and 
risk management functions that generate the income are 
performed in another location.
    In the case of financial institutions, the use of internal 
dealings to allocate income within an enterprise may produce 
results under Article 7 that are significantly different than 
the results under the effectively connected income rules of 
Code section 864(c). For example, income from interbranch 
notional principal contracts may be taken into account under 
Article 7, notwithstanding that such transactions may be 
ignored for purposes of U.S. domestic law. Under the 
consistency rule described above, a financial institution that 
conducts different lines of business through its U.S. permanent 
establishment may not choose to apply the rules of the Code 
with respect to some lines of business and Article 7 of the 
Convention with respect to others. If it chooses to use the 
rules of Article 7 to allocate its income from its trading 
book, it may not then use U.S. domestic rules to allocate 
income from its loan portfolio.
    Paragraph 2 provides that deductions shall be allowed for 
expenses incurred for purposes of a permanent establishment, 
ensuring that business profits will be taxed on a net basis. 
These deductions may include compensation to other parts of the 
enterprise for functions performed for the branch's benefit, if 
they are functions that would be compensated at arm's length. 
Thus, deductions against business profits may be allowed when 
an accounting unit of the enterprise books third-party expenses 
for purposes of the permanent establishment. However, the 
amount deducted to determine net business profits is not the 
actual amount of third-party expense booked, but rather the 
amount of compensation that would be paid at arm's length by 
the branch for the function performed.
    For example, when the home office of an enterprise books 
interest expense that is used in part to fund the permanent 
establishment, the permanent establishment may deduct an arm's 
length amount of interest paid to the home office to compensate 
it for an appropriate amount of debt-funding. The permanent 
establishment may also take into account arm's length fees to 
an enterprise's treasury center for functions performed for its 
benefit. In each case, the amount of expense allowed as a 
deduction is determined by applying the arm's length principle. 
Similarly, where the branch and other parts of the enterprise 
share benefits of centralized functions, such as research and 
development or headquarters services, the deduction allowed to 
the permanent establishment would be its appropriate share of 
the arm's length compensation for such shared functions. The 
method to be used in calculating that compensation, and the 
permanent establishment's appropriate share thereof, will 
depend on the facts and circumstances, including the terms of 
the arrangements between the branches and head office. The 
amount of deduction could be computed as a share of either the 
total costs, or other value indicator, of the centralized 
function, depending on which provides the most reliable measure 
of the arm's length charge for sharing in the centralized 
functions in the facts and circumstances. The permanent 
establishment's appropriate share of such compensation for 
these functions will depend on the benefits it reasonably 
expects to receive from the arrangement as a proportion of the 
total reasonably expected benefits of all parts of the 
enterprise.
    A permanent establishment cannot be funded entirely with 
debt, and must have sufficient capital to carry on its 
activities as if it were a distinct and separate enterprise. To 
the extent that the permanent establishment has not booked 
adequate capital, a Contracting State may attribute such 
capital to the permanent establishment and deny an interest 
deduction to the extent necessary to reflect that capital 
attribution. The method prescribed by U.S. domestic law for 
making this attribution is found in Treas. Reg. 1.882-5. Both 
Treas. Reg. 1.882-5 and the method prescribed in this paragraph 
start from the premise that all of the capital of the 
enterprise supports all of the assets and risks of the 
enterprise, and therefore the entire capital of the enterprise 
must be allocated to its various businesses and offices.
    However, Treas. Reg. 1.882-5 does not take into account the 
fact that there is more risk associated with some assets than 
others. For instance, an independent enterprise would need less 
capital to support a floating rate U.S. Treasury security than 
it would need to support an equity security or other asset with 
significant market and/or credit risk. Accordingly, in some 
cases Treas. Reg. 1.882-5 would require a taxpayer to allocate 
more capital to the United States, and therefore would reduce 
the taxpayer's interest deduction more, than is appropriate. To 
address these cases, the Convention allows a taxpayer to apply 
a more flexible approach that takes into account the relative 
risk of its assets in the various jurisdictions in which it 
does business. In particular, in the case of financial 
institutions other than insurance companies, the amount of 
capital attributable to a permanent establishment is determined 
by allocating the institution's total capital between its 
offices on the basis of the proportion of the financial 
institution's risk-weighted assets attributable to each office. 
This recognizes the fact that financial institutions are in 
many cases required to risk-weight their assets for regulatory 
purposes and, in other cases, will do so for business reasons 
even if not required to do so by regulators. However, risk-
weighting is more complicated than the method prescribed by 
Treas. Reg. 1.882-5. Accordingly, to ease this administrative 
burden, taxpayers may choose to apply the principles of Treas. 
Reg. 1.882-5(c) to determine the amount of capital allocable to 
its U.S. permanent establishment, in lieu of determining its 
allocable capital under the risk-weighted capital allocation 
method provided by the Convention, even if it has otherwise 
chosen to apply the principles of Article 7 rather than the 
effectively connected income rules of U.S. domestic law.

Paragraph 3

    Paragraph 3 provides that where, in accordance with 
paragraph 2, a Contracting State adjusts the profits that are 
attributable to a permanent establishment of an enterprise of 
one of the Contracting States and taxes accordingly profits of 
the enterprise that have been charged to tax in the other 
State, the other Contracting State shall, to the extent 
necessary to eliminate double taxation, make an appropriate 
adjustment if it agrees with the adjustment made by the first-
mentioned State. If the other Contracting state does not so 
agree, the Contracting States shall eliminate any double 
taxation resulting therefrom by mutual agreement.

Paragraph 4

    Paragraph 4 coordinates the provisions of Article 7 and 
other provisions of the Convention. Under this paragraph, when 
business profits include items of income that are dealt with 
separately under other articles of the Convention, the 
provisions of those articles will, except when they 
specifically provide to the contrary, take precedence over the 
provisions of Article 7. For example, the taxation of dividends 
will be determined by the rules of Article 10 (Dividends), and 
not by Article 7, except where, as provided in paragraph 6 of 
Article 10, the dividend is attributable to a permanent 
establishment. In the latter case the provisions of Article 7 
apply. Thus, an enterprise of one State deriving dividends from 
the other State may not rely on Article 7 to exempt those 
dividends from tax at source if they are not attributable to a 
permanent establishment of the enterprise in the other State. 
By the same token, if the dividends are attributable to a 
permanent establishment in the other State, the dividends may 
be taxed on a net income basis at the source State full 
corporate tax rate, rather than on a gross basis under Article 
10.
    As provided in Article 8 (Shipping and Air Transport), 
income derived from shipping and air transport activities in 
international traffic described in that Article is taxable only 
in the country of residence of the enterprise regardless of 
whether it is attributable to a permanent establishment 
situated in the source State.

Paragraph 5

    Paragraph 5 incorporates into the Convention the principles 
of Code section 864(c)(6), but not section 864(c)(7). Like the 
Code section on which it is based, paragraph 5 provides that 
any income or gain attributable to a permanent establishment 
during its existence, following the rules of paragraph 2 and 3, 
is taxable in the Contracting State where the permanent 
establishment is situated, even if the payment of that income 
or gain is deferred until after the permanent establishment 
ceases to exist. This rule applies with respect to paragraphs 1 
and 2 of Article 7(Business Profits), paragraph 6 of Article 10 
(Dividends), paragraph 6 of Article 11 (Interest), paragraph 4 
of Articles 13 (Royalties) and 14 (Gains) and paragraph 2 of 
Article 21 (Other Income).
    The effect of this rule can be illustrated by the following 
example. Assume a company that is a resident of the other 
Contracting State and that maintains a permanent establishment 
in the United States winds up the permanent establishment's 
business and sells the permanent establishment's inventory to a 
U.S. buyer prior to winding up in exchange for an interest-
bearing installment obligation payable in full at the end of 
year 3. Despite the fact that Article 14's threshold 
requirement for U.S. taxation is not met in year 3 because the 
company has no permanent establishment in the United States, 
the United States may tax the deferred income recognized by the 
company in year 3.
            Relationship to Other Articles
    This Article is subject to the saving clause of paragraph 4 
of Article 1 (General Scope) of the Model. Thus, if a citizen 
of the United States who is a resident of the other Contracting 
State under the treaty derives business profits from the United 
States that are not attributable to a permanent establishment 
in the United States, the United States may, subject to the 
special foreign tax credit rules of paragraph 4 of Article 23 
(Relief from Double Taxation), tax those profits, 
notwithstanding the provision of paragraph 1 of this Article 
which would exempt the income from U.S. tax.
    The benefits of this Article are also subject to Article 22 
(Limitation on Benefits). Thus, an enterprise of the other 
Contracting State and that derives income effectively connected 
with a U.S. trade or business may not claim the benefits of 
Article 7 unless the resident carrying on the enterprise 
qualifies for such benefits under Article 22.

                 ARTICLE 8 (SHIPPING AND AIR TRANSPORT)

    This Article governs the taxation of profits from the 
operation of ships and aircraft in international traffic. The 
term ``international traffic'' is defined in subparagraph 1(f) 
of Article 3 (General Definitions).

Paragraph 1

    Paragraph 1 provides that profits derived by an enterprise 
of a Contracting State from the operation in international 
traffic of ships or aircraft are taxable only in that 
Contracting State. Because paragraph 4 of Article 7 (Business 
Profits) defers to Article 8 with respect to taxation of 
shipping income, such income derived by a resident of one of 
the Contracting States may not be taxed in the other State even 
if the enterprise has a permanent establishment in that other 
State. Thus, if a U.S. airline has a ticket office in Poland, 
Poland may not tax the airline's profits attributable to that 
office under Article 7. Since entities engaged in international 
transportation activities normally will have many permanent 
establishments in a number of countries, the rule avoids 
difficulties that would be encountered in attributing income to 
multiple permanent establishments if the income were covered by 
Article 7.

Paragraph 2

    The income from the operation of ships or aircraft in 
international traffic that is exempt from tax under paragraph 1 
is defined in paragraph 2.
    In addition to income derived directly from the operation 
of ships and aircraft in international traffic, this definition 
also includes certain items of rental income. First, income of 
an enterprise of a Contracting State from the rental of ships 
or aircraft on a full basis (i.e., with crew) is income of the 
lessor from the operation of ships and aircraft in 
international traffic and, therefore, is exempt from tax in the 
other Contracting State under paragraph 1. Also, paragraph 2 
encompasses income from the lease of ships or aircraft on a 
bareboat basis (i.e., without crew), either when the income is 
incidental to other income of the lessor from the operation of 
ships or aircraft in international traffic, or when the ships 
or aircraft are operated in international traffic by the 
lessee. If neither of those two conditions apply, income from 
the bareboat rentals would constitute business profits. The 
coverage of Article 8 is therefore broader than that of Article 
8 of the OECD Model, which covers bareboat leasing only when it 
is incidental to other income of the lessor from the operation 
of ships of aircraft in international traffic.
    Paragraph 2 also clarifies, consistent with the Commentary 
to Article 8 of the OECD Model, that income earned by an 
enterprise from the inland transport of property or passengers 
within either Contracting State falls within Article 8 if the 
transport is undertaken as part of the international transport 
of property or passengers by the enterprise. Thus, if a U.S. 
shipping company contracts to carry property from Poland to a 
U.S. city and, as part of that contract, it transports the 
property by truck from its point of origin to an airport in 
Poland (or it contracts with a trucking company to carry the 
property to the airport) the income earned by the U.S. shipping 
company from the overland leg of the journey would be taxable 
only in the United States. Similarly, Article 8 also would 
apply to all of the income derived from a contract for the 
international transport of goods, even if the goods were 
transported to the port by a lighter, not by the vessel that 
carried the goods in international waters.
    Finally, certain non-transport activities that are an 
integral part of the services performed by a transport company, 
or are ancillary to the enterprise's operation of ships or 
aircraft in international traffic, are understood to be covered 
in paragraph 1, though they are not specified in paragraph 2. 
These include, for example, the provision of goods and services 
by engineers, ground and equipment maintenance and staff, cargo 
handlers, catering staff and customer services personnel. Where 
the enterprise provides such goods to, or performs services 
for, other enterprises and such activities are directly 
connected with or ancillary to the enterprise's operation of 
ships or aircraft in international traffic, the profits from 
the provision of such goods and services to other enterprises 
will fall under this paragraph.
    For example, enterprises engaged in the operation of ships 
or aircraft in international traffic may enter into pooling 
arrangements for the purposes of reducing the costs of 
maintaining facilities needed for the operation of their ships 
or aircraft in other countries. For instance, where an airline 
enterprise agrees (for example, under an International Airlines 
Technical Pool agreement) to provide spare parts or maintenance 
services to other airlines landing at a particular location 
(which allows it to benefit from these services at other 
locations), activities carried on pursuant to that agreement 
will be ancillary to the operation of aircraft in international 
traffic by the enterprise.
    Also, advertising that the enterprise may do for other 
enterprises in magazines offered aboard ships or aircraft that 
it operates in international traffic or at its business 
locations, such as ticket offices, is ancillary to its 
operation of these ships or aircraft. Profits generated by such 
advertising fall within this paragraph. Income earned by 
concessionaires, however, is not covered by Article 8. These 
interpretations of paragraph 1 also are consistent with the 
Commentary to Article 8 of the OECD Model.

Paragraph 3

    Under this paragraph, profits of an enterprise of a 
Contracting State from the use, maintenance or rental of 
containers (including equipment for their transport) are exempt 
from tax in the other Contracting State if such use, 
maintenance or rental, as the case may be, is incidental to the 
operation of ships or aircraft in international traffic. This 
treatment is consistent with the Commentary to Article 8 of the 
OECD Model, although it is narrower than the treatment under 
the U.S. Model, which provides for exclusive residence tax of 
such profits regardless of whether the recipient of the income 
is engaged in the operation of ships or aircraft in 
international traffic, and regardless of whether the enterprise 
has a permanent establishment in the other Contracting State.

Paragraph 4

    This paragraph clarifies that the provisions of paragraphs 
1 and 3 also apply to profits derived by an enterprise of a 
Contracting State from participation in a pool, joint business 
or international operating agency. This refers to various 
arrangements for international cooperation by carriers in 
shipping and air transport. For example, airlines from two 
countries may agree to share the transport of passengers 
between the two countries. They each will fly the same number 
of flights per week and share the revenues from that route 
equally, regardless of the number of passengers that each 
airline actually transports. Paragraph 4 makes clear that with 
respect to each carrier the income dealt with in the Article 
corresponds to that carrier's share of the total transport, not 
the income derived from the passengers actually carried by the 
airline. This paragraph corresponds to paragraph 4 of Article 8 
of the OECD Model.
            Relationship to Other Articles
    The taxation of gains from the alienation of ships, 
aircraft or containers is not dealt with in this Article but in 
paragraph 5 of Article 14 (Capital Gains).
    As with other benefits of the Convention, the benefit of 
exclusive residence country taxation under Article 8 is 
available to an enterprise only if it is entitled to benefits 
under Article 22 (Limitation on Benefits).
    This Article also is subject to the saving clause of 
paragraph 4 of Article 1 (General Scope) of the Model. Thus, if 
a citizen of the United States who is a resident of Poland 
derives profits from the operation of ships or aircraft in 
international traffic, notwithstanding the exclusive residence 
country taxation in paragraph 1 of Article 8, the United States 
may, subject to the special foreign tax credit rules of 
paragraph 4 of Article 23 (Relief from Double Taxation), tax 
those profits as part of the worldwide income of the citizen. 
(This is an unlikely situation, however, because non-tax 
considerations (e.g., insurance) generally result in shipping 
activities being carried on in corporate form.)

                   ARTICLE 9 (ASSOCIATED ENTERPRISES)

    This Article incorporates into the Convention the arm's-
length principle reflected in the U.S. domestic transfer 
pricing provisions, particularly Code section 482. It provides 
that when related enterprises engage in a transaction on terms 
that are not arm's-length, the Contracting States may make 
appropriate adjustments to the taxable income and tax liability 
of such related enterprises to reflect what the income and tax 
of these enterprises with respect to the transaction would have 
been had there been an arm's-length relationship between them.

Paragraph 1

    This paragraph is essentially the same as its counterpart 
in the OECD Model. It addresses the situation where an 
enterprise of a Contracting State is related to an enterprise 
of the other Contracting State, and there are arrangements or 
conditions imposed between the enterprises in their commercial 
or financial relations that are different from those that would 
have existed in the absence of the relationship. Under these 
circumstances, the Contracting States may adjust the income (or 
loss) of the enterprise to reflect what it would have been in 
the absence of such a relationship.
    The paragraph identifies the relationships between 
enterprises that serve as a prerequisite to application of the 
Article. As the Commentary to the OECD Model makes clear, the 
necessary element in these relationships is effective control, 
which is also the standard for purposes of Code section 482. 
Thus, the Article applies if an enterprise of one State 
participates directly or indirectly in the management, control, 
or capital of the enterprise of the other State. Also, the 
Article applies if any third person or persons participate 
directly or indirectly in the management, control or capital of 
enterprises of different States. For this purpose, all types of 
control are included, i.e., whether or not legally enforceable 
and however exercised or exercisable.
    The fact that a transaction is entered into between such 
related enterprises does not, in and of itself, mean that a 
Contracting State may adjust the income (or loss) of one or 
both of the enterprises under the provisions of this Article. 
If the conditions of the transaction are consistent with those 
that would be made between independent persons, the income 
arising from that transaction should not be subject to 
adjustment under this Article.
    Similarly, the fact that associated enterprises may have 
concluded arrangements, such as cost sharing arrangements or 
general services agreements, is not in itself an indication 
that the two enterprises have entered into a non-arm's-length 
transaction that should give rise to an adjustment under 
paragraph 1. Both related and unrelated parties enter into such 
arrangements (e.g., joint venturers may share some development 
costs). As with any other kind of transaction, when related 
parties enter into an arrangement, the specific arrangement 
must be examined to see whether or not it meets the arm's-
length standard. In the event that it does not, an appropriate 
adjustment may be made, which may include modifying the terms 
of the agreement or re-characterizing the transaction to 
reflect its substance.
    It is understood that the Code section 482 ``commensurate 
with income'' standard for determining appropriate transfer 
prices for intangibles operates consistently with the arm's-
length standard. The implementation of this standard in the 
regulations under Code section 482 is in accordance with the 
general principles of paragraph 1 of Article 9 of the 
Convention, as interpreted by the OECD Transfer Pricing 
Guidelines.
    This Article also permits tax authorities to deal with thin 
capitalization issues. They may, in the context of Article 9, 
scrutinize more than the rate of interest charged on a loan 
between related persons. They also may examine the capital 
structure of an enterprise, whether a payment in respect of 
that loan should be treated as interest, and, if it is treated 
as interest, under what circumstances interest deductions 
should be allowed to the payor. Paragraph 2 of the Commentary 
to Article 9 of the OECD Model, together with the U.S. 
observation set forth in paragraph 15, sets forth a similar 
understanding of the scope of Article 9 in the context of thin 
capitalization.

Paragraph 2

    When a Contracting State has made an adjustment that is 
consistent with the provisions of paragraph 1, and the other 
Contracting State agrees that the adjustment was appropriate to 
reflect arm's-length conditions, that other Contracting State 
is obligated to make a correlative adjustment (sometimes 
referred to as a ``corresponding adjustment'') to the tax 
liability of the related person in that other Contracting 
State. Although the OECD Model does not specify that the other 
Contracting State must agree with the initial adjustment before 
it is obligated to make the correlative adjustment, the 
Commentary makes clear that the paragraph is to be read as 
such.
    As explained in the Commentary to Article 9 of the OECD 
Model, Article 9 leaves the treatment of ``secondary 
adjustments'' to the laws of the Contracting States. When an 
adjustment under Article 9 has been made, one of the parties 
will have in its possession funds that it would not have had at 
arm's length. The question arises as to how to treat these 
funds. In the United States the general practice is to treat 
such funds as a dividend or contribution to capital, depending 
on the relationship between the parties. Under certain 
circumstances, the parties may be permitted to restore the 
funds to the party that would have the funds had the 
transactions been entered into on arm's length terms, and to 
establish an account payable pending restoration of the funds. 
See Rev. Proc. 99-32, 1999-2 C.B. 296.
    The Contracting State making a secondary adjustment will 
take the other provisions of the Convention, where relevant, 
into account. For example, if the effect of a secondary 
adjustment is to treat a U.S. corporation as having made a 
distribution of profits to its parent corporation in the other 
Contracting State, the provisions of Article 10 (Dividends) 
will apply, and the United States may impose a 5 percent 
withholding tax on the dividend. Also, if under Article 23 
(Elimination of Double Taxation), Poland generally gives a 
credit for taxes paid with respect to such dividends, it would 
also be required to do so in this case.
    The competent authorities are authorized by paragraph 3 of 
Article 25 (Mutual Agreement Procedure) to consult, if 
necessary, to resolve any differences in the application of 
these provisions. For example, there may be a disagreement over 
whether an adjustment made by a Contracting State under 
paragraph 1 was appropriate.
    If a correlative adjustment is made under paragraph 2, it 
is to be implemented, pursuant to paragraph 2 of Article 25 
(Mutual Agreement Procedure), notwithstanding any time limits 
or other procedural limitations in the law of the Contracting 
State making the adjustment. Thus, even if a statute of 
limitations has expired, a refund of tax can be made in order 
to implement a correlative adjustment (statutory or procedural 
limitations, however, cannot be overridden to impose additional 
tax, pursuant to paragraph 2 of Article 1 (General Scope)). If 
a taxpayer has entered a closing agreement (or other written 
settlement) with the United States prior to bringing a case to 
the competent authorities, the U.S. competent authority will 
endeavor only to obtain a correlative adjustment from the other 
Contracting State. See Rev Proc. 2006-54, 2006-2 C.B. 1035, ' 
7.05 (or any applicable successor procedures).
            Relationship to Other Articles
    The saving clause of paragraph 4 of Article 1 does not 
apply to paragraph 2 of Article 9 by virtue of an exception to 
the saving clause in subparagraph 5(a) of Article 1. This 
permits the competent authorities of the Contracting States to 
make any adjustments necessary to relieve double taxation 
pursuant to the mutual agreement procedure.

                         ARTICLE 10 (DIVIDENDS)

    Article 10 provides rules for the taxation of dividends 
paid by a company that is a resident of one Contracting State 
to a beneficial owner that is a resident of the other 
Contracting State. The Article provides for full residence-
State taxation of such dividends and a limited source-State 
right to tax. Article 10 also provides rules for the imposition 
of a tax on branch profits by the State of source. Finally, the 
Article prohibits a State from imposing taxes on a company 
resident in the other Contracting State, other than a branch 
profits tax as provided in Article 12 (Branch Profits), on 
undistributed earnings.

Paragraph 1

    Paragraph 1 permits a Contracting State to tax its 
residents on dividends paid to them by a company that is a 
resident of the other Contracting State. For dividends from any 
other source paid to a resident, Article 21 (Other Income) 
grants the residence country exclusive taxing jurisdiction 
(other than for dividends attributable to a permanent 
establishment in the other State).

Paragraph 2

    The State of source also may tax dividends beneficially 
owned by a resident of the other State, subject to the 
limitations of paragraphs 2 and 3. Paragraph 2 generally limits 
the rate of withholding tax in the State of source on dividends 
paid by a company resident in that State to 15 percent of the 
gross amount of the dividend. If, however, the beneficial owner 
of the dividend is a company resident in the other State and 
owns directly shares representing at least 10 percent of the 
voting power of the company paying the dividend, then the rate 
of withholding tax in the State of source is limited to 5 
percent of the gross amount of the dividend. For application of 
this paragraph by the United States, shares are considered 
voting stock if they provide the power to elect, appoint or 
replace any person vested with the powers ordinarily exercised 
by the board of directors of a U.S. corporation.
    The determination of whether the ownership threshold for 
subparagraph 2(a) is met for purposes of the 5 percent maximum 
rate of withholding tax is made on the date on which 
entitlement to the dividend is determined. Thus, in the case of 
a dividend from a U.S. company, the determination of whether 
the ownership threshold is met generally would be made on the 
dividend record date.
    Paragraph 2 does not affect the taxation of the profits out 
of which the dividends are paid. The taxation by a Contracting 
State of the income of its resident companies is governed by 
the domestic law of the Contracting State, subject to the 
provisions of paragraph 4 of Article 24 (Non-Discrimination).
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, generally defined under the 
domestic law of the country imposing tax (i.e., the source 
country). The beneficial owner of the dividend for purposes of 
Article 10 is the person to which the income is attributable 
under the laws of the source State. Thus, if a dividend paid by 
a corporation that is a resident of one of the States (as 
determined under Article 4 (Residence)) is received by a 
nominee or agent that is a resident of the other State on 
behalf of a person that is not a resident of that other State, 
the dividend is not entitled to the benefits of this Article. 
However, a dividend received by a nominee on behalf of a 
resident of that other State would be entitled to benefits. 
These limitations are confirmed by paragraphs 12-12.2 of the 
Commentary to Article 10 of the OECD Model.
    Special rules apply to shares held through fiscally 
transparent entities both for purposes of determining whether 
the ownership threshold has been met and for purposes of 
determining the beneficial owner of the dividend. A company 
that is a resident of a Contracting State shall be considered 
to own directly the voting stock owned by an entity that is 
considered fiscally transparent under the laws of that State 
and that is not a resident of the other Contracting State of 
which the company paying the dividends is a resident, in 
proportion to the company's ownership interest in that entity. 
This is consistent with the rules of paragraph 6 of Article 1 
(General Scope), which provides that residence State principles 
shall be used to determine who derives the dividends, to assure 
that the dividends for which the source State grants benefits 
of the Convention will be taken into account for tax purposes 
by a resident of the residence State. For example, assume that 
FCo, a company that is a resident of Poland, owns a 50 percent 
interest in FP, a partnership that is organized in Poland. FP 
owns 100 percent of the sole class of stock of USCo, a company 
resident in the United States. Poland views FP as fiscally 
transparent under its domestic law, and taxes FCo currently on 
its distributive share of the income of FP and determines the 
character and source of the income received through FP in the 
hands of FCo as if such income were realized directly by FCo. 
In this case, FCo is treated as deriving 50 percent of the 
dividends paid by USCo under paragraph 6 of Article 1. 
Moreover, FCo is treated as owning 50 percent of the stock of 
USCo directly. The same result would be reached even if the tax 
laws of the United States would treat FP differently (e.g., if 
FP were not treated as fiscally transparent in the United 
States). If FP were organized in a third state, is not viewed 
as fiscally transparent under U.S. law, and would be eligible 
for benefits with respect to the dividend under a tax treaty 
between the United States and the third state, paragraph 6 of 
Article 1 provides that FCo is treated as deriving 50 percent 
of the dividends paid by USCo only if the applicable dividend 
withholding rate provided under the Convention (5 percent) is 
more favorable than the applicable dividend withholding rate 
that FP could claim with respect to the dividend in its own 
right under the tax treaty between the United States and the 
third country. While residence State principles control who is 
treated as owning voting stock of the company paying dividends 
through a fiscally transparent entity and, consequently, who 
derives the dividends, source State principles of beneficial 
ownership apply to determine whether the person who derives the 
dividends, or another resident of the other Contracting State, 
is the beneficial owner of the dividends. If the person who 
derives the dividends under paragraph 6 of Article 1 would not 
be treated as a nominee, agent, custodian, conduit, etc. under 
the source State's principles for determining beneficial 
ownership, that person will be treated as the beneficial owner 
of the dividends for purposes of the Convention. In the example 
above, FCo is required to satisfy the beneficial ownership 
principles of the United States with respect to the dividends 
it derives. If under the beneficial ownership principles of the 
United States, FCo is found not to be the beneficial owner of 
the dividends, FCo will not be entitled to the benefits of 
Article 10 with respect to such dividends. If FCo is found to 
be a nominee, agent, custodian, or conduit for a person who is 
a resident of Poland, that person may be entitled to benefits 
with respect to the dividends. Paragraph 3
    Paragraph 3 provides that dividends beneficially owned by a 
pension fund may not be taxed in the Contracting State of which 
the company paying the tax is a resident, unless such dividends 
are derived from the carrying on of a business, directly or 
indirectly, by the pension fund or through an associated 
enterprise. For purposes of application of this paragraph by 
the United States, the term ``trade or business'' shall be 
defined in accordance with Code section 513(c). The term 
``pension fund'' is defined in subparagraph 1(k) of Article 3 
(General Definitions). Paragraph 4 Paragraph 4 imposes 
limitations on the rate reductions provided by paragraphs 2 and 
3 in the case of dividends paid by a RIC or a REIT. The first 
sentence of subparagraph 4(a) provides that dividends paid by a 
RIC or REIT are not eligible for the 5 percent rate of 
withholding tax of subparagraph 2(a). The second sentence of 
subparagraph 4(a) provides that the 15 percent maximum rate of 
withholding tax of subparagraph 2(b) applies to dividends paid 
by RICs and that the elimination of source-country withholding 
tax of paragraph 3 applies to dividends paid by RICs and 
beneficially owned by a pension fund. The third sentence of 
subparagraph 4(a) provides that the 15 percent rate of 
withholding tax also applies to dividends paid by a REIT and 
that the elimination of source-country withholding tax of 
paragraph 3 applies to dividends paid by REITs and beneficially 
owned by a pension fund, provided that one of the three 
following conditions is met. First, the beneficial owner of the 
dividend is an individual or a pension fund, in either case 
holding an interest of not more than 10 percent in the REIT. 
Second, 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 shares. Third, the 
beneficial owner of the dividend holds an interest in the REIT 
of not more than 10 percent and the REIT is ``diversified.'' 
Subparagraph 4(b) provides a definition of the term 
``diversified.'' A REIT is diversified if the gross value of no 
single interest in real property held by the REIT exceeds 10 
percent of the gross value of the REIT's total interest in real 
property. Section 856(e) foreclosure property is not considered 
an interest in real property, and a REIT holding a partnership 
interest is treated as owning its proportionate share of any 
interest in real property held by the partnership. Subparagraph 
4(c) provides that the rules of paragraph 4 shall apply to 
dividends paid by companies resident in Poland that the 
competent authorities have determined by mutual agreement are 
similar to a RIC or a REIT. Paragraph 5
    Paragraph 5 defines the term dividends broadly and 
flexibly. The definition is intended to cover all arrangements 
that yield a return on an equity investment in a corporation as 
determined under the tax law of the state of source, as well as 
arrangements that might be developed in the future.
    The term includes income from shares, or other corporate 
rights that are not treated as debt under the law of the source 
State, that participate in the profits of the company. The term 
also includes income that is subjected to the same tax 
treatment as income from shares by the law of the State of 
source. Thus, a constructive dividend that results from a non-
arm's length transaction between a corporation and a related 
party is a dividend. In the case of the United States the term 
dividend includes amounts treated as a dividend under U.S. law 
upon the sale or redemption of shares or upon a transfer of 
shares in a reorganization. See Rev. Rul. 92-85, 1992-2 C.B. 69 
(sale of foreign subsidiary's stock to U.S. sister company is a 
deemed dividend to extent of the subsidiary's and sister 
company's earnings and profits). Further, a distribution from a 
U.S. publicly traded limited partnership, which is taxed as a 
corporation under U.S. law, is a dividend for purposes of 
Article 10. However, a distribution by a limited liability 
company is not taxable by the United States under Article 10, 
provided the limited liability company is not characterized as 
an association taxable as a corporation under U.S. law.
    Finally, a payment denominated as interest that is made by 
a thinly capitalized corporation may be treated as a dividend 
to the extent that the debt is recharacterized as equity under 
the laws of the source State.

Paragraph 6

    Paragraph 6 provides a rule for taxing dividends paid with 
respect to holdings that form part of the business property of 
a permanent establishment. In such case, the rules of Article 7 
(Business Profits) shall apply. Accordingly, the dividends will 
be taxed on a net basis using the rates and rules of taxation 
generally applicable to residents of the State in which the 
permanent establishment is located, as such rules may be 
modified by the Convention. An example of dividends paid with 
respect to the business property of a permanent establishment 
would be dividends derived by a dealer in stock or securities 
from stock or securities that the dealer held for sale to 
customers.

Paragraph 7

    The right of a Contracting State to tax dividends paid by a 
company that is a resident of the other Contracting State is 
restricted by paragraph 7 to cases in which the dividends are 
paid to a resident of that Contracting State or are 
attributable to a permanent establishment in that Contracting 
State. Thus, a Contracting State may not impose a ``secondary'' 
withholding tax on dividends paid by a nonresident company out 
of earnings and profits from that Contracting State. The 
paragraph also restricts the right of a Contracting State to 
impose corporate level taxes on undistributed profits, other 
than a branch profits tax. The paragraph does not restrict a 
State's right to tax its resident shareholders on undistributed 
earnings of a corporation resident in the other State. Thus, 
the authority of the United States to impose taxes on subpart F 
income and on earnings deemed invested in U.S. property, and 
its tax on income of a passive foreign investment company that 
is a qualified electing fund is in no way restricted by this 
provision.
            Relationship to Other Articles
    Notwithstanding the foregoing limitations on source country 
taxation of dividends, the saving clause of paragraph 4 of 
Article 1 permits the United States to tax its residents and 
citizens, subject to the special foreign tax credit rules of 
paragraph 4 of Article 23 (Elimination of Double Taxation), as 
if the Convention had not come into effect.
    Rules regarding the application of branch profits taxes are 
found in Article 12 (Branch Profits).
    The benefits of this Article are also subject to the 
provisions of Article 22 (Limitation on Benefits). Thus, if a 
resident of Poland is the beneficial owner of dividends paid by 
a U.S. corporation, that shareholder must qualify for treaty 
benefits under at least one of the tests of Article 22 in order 
to receive the benefits of this Article.

                         ARTICLE 11 (INTEREST)

    Article 11 specifies the taxing jurisdictions over interest 
income of the States of source and residence and defines the 
terms necessary to apply the Article.

Paragraph 1

    Paragraph 1 grants the Contracting State of residence the 
non-exclusive right to tax interest beneficially owned by its 
residence and arising in the other Contracting State.

Paragraph 2

    Paragraph 2 provides that the State of source may also tax 
interest beneficially owned by a resident of the other 
Contracting State, but limits the rate of tax to 5 percent of 
the gross amount of the interest.
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, defined under the domestic law 
of the State of source. The beneficial owner of the interest 
for purposes of Article 11 is the person to which the income is 
attributable under the laws of the source State. Thus, if 
interest arising in a Contracting State is received by a 
nominee or agent that is a resident of the other State on 
behalf of a person that is not a resident of that other State, 
the interest is not entitled to the benefits of Article 11. 
However, interest received by a nominee on behalf of a resident 
of that other State would be entitled to benefits. These 
limitations are confirmed by paragraph 9 of the OECD Commentary 
to Article 11.
    Special rules apply to interest derived through fiscally 
transparent entities for purposes of determining the beneficial 
owner of the interest. In such cases, residence State 
principles shall be used to determine who derives the interest, 
to assure that the interest for which the source State grants 
benefits of the Convention will be taken into account for tax 
purposes by a resident of the residence State. For example, 
assume that FCo, a company that is a resident of Poland, owns a 
50 percent interest in FP, a partnership that is organized in 
Poland. FP receives interest arising in the United States. 
Poland views FP as fiscally transparent under its domestic law, 
and taxes FCo currently on its distributive share of the income 
of FP and determines the character and source of the income 
received through FP in the hands of FCo as if such income were 
realized directly by FCo. In this case, FCo is treated as 
deriving 50 percent of the interest received by FP that arises 
in the United States under paragraph 6 of Article 1. The same 
result would be reached even if the tax laws of the United 
States would treat FP differently (e.g., if FP were not treated 
as fiscally transparent in the United States). If FP were 
organized in a third state, were not viewed as fiscally 
transparent under U.S. law, and would be eligible for benefits 
with respect to the interest under a tax treaty between the 
United States and the third state, paragraph 6 of Article 1 
provides that FCo is treated as deriving 50 percent of the 
interest paid by USCo only if the applicable interest 
withholding rate provided under the Convention is more 
favorable than the applicable interest withholding rate that FP 
could claim with respect to the interest in its own right under 
the tax treaty between the United States and the third country. 
While residence State principles control who is treated as 
deriving the interest, source State principles of beneficial 
ownership apply to determine whether the person who derives the 
interest, or another resident of the other Contracting State, 
is the beneficial owner of the interest. If the person who 
derives the interest under paragraph 6 of Article 1 would not 
be treated as a nominee, agent, custodian, conduit, etc. under 
the source State's principles for determining beneficial 
ownership, that person will be treated as the beneficial owner 
of the interest for purposes of the Convention. In the example 
above, FCo is required to satisfy the beneficial ownership 
principles of the United States with respect to the interest it 
derives. If under the beneficial ownership principles of the 
United States, FCo is found not to be the beneficial owner of 
the interest, FCo will not be entitled to the benefits of 
Article 11 with respect to such interest. If FCo is found to be 
a nominee, agent, custodian, or conduit for a person who is a 
resident of Poland, that person may be entitled to benefits 
with respect to the interest.

Paragraph 3

    Paragraph 3 provides that notwithstanding the provisions of 
paragraph 2, interest described in paragraph 1 shall be taxable 
only in the Contracting State in which the recipient is a 
resident if the beneficial owner of the interest is a resident 
of that State and either: (1) is that Contracting State or the 
central bank, a political subdivision, local authority or 
statutory body thereof; (2) the interest is paid by the 
Contracting State in which the interest arises or by the 
central bank, a political subdivision, local authority or 
statutory body thereof; (3) the interest is paid in respect of 
a loan, debt-claim or credit that is owed to, or made, 
provided, guaranteed or insured by that Contracting State or a 
political subdivision, local authority, statutory body or 
export financing agency thereof; (4) is a pension fund, but 
only if the pension fund does not derive the interest from the 
carrying on of a business, directly or indirectly, or is (5) 
either: (a) a bank; (b) an insurance company; (c) an enterprise 
(other than a bank) that is unrelated to the payer of the 
interest and that substantially derives its gross income from 
the active and regular conduct of a lending or finance 
business. Clause (iii) of subparagraph 3(e) provides the 
following non-exhaustive list of activities that for purposes 
of subparagraph 3(e) are considered a lending or finance 
business: (1) making loans; (2) purchasing or discounting 
accounts receivable, notes or installment obligations; (3) 
engaging in finance leasing (including purchasing, servicing, 
and disposing of finance leases and related leased assets); (4) 
issuing letters of credit or providing guarantees; or (5) 
providing charge and credit card services.

Paragraph 4

    Paragraph 4 provides anti-abuse exceptions to paragraphs 2 
and 3 for two classes of interest payments.
    The first class of interest, dealt with in subparagraph 
4(a), is so-called contingent interest. Under this provision, 
interest arising in one of the Contracting States that is 
determined with reference to receipts, sales, income, profits 
or other cash flows of the debtor or a related person, to any 
change in the value of any property of the debtor or a related 
person or to any dividend, partnership distribution or similar 
payment made by the debtor or a related person also may be 
taxed in the State in which it arises, and according to the 
laws of that State. If the beneficial owner is a resident of 
the other Contracting State, however, the gross amount of the 
interest may be taxed at a rate not exceeding 15 percent of the 
gross amount of the payment. With respect to such interest 
arising in the United States, subparagraph 4(a) refers to 
contingent interest of a type described in Code section 
871(h)(4)(C), including the exceptions of that section where 
applicable.
    The second class of interest that is dealt with in 
subparagraph 4(b), in the case of the United States, is excess 
inclusions from U.S. real estate mortgage investment conduits 
(``REMICs''). Subparagraph 4(b) serves as a backstop to Code 
section 860G(b). That section generally requires that a foreign 
person holding a residual interest in a REMIC take into account 
for U.S. tax purposes ``any excess inclusion'' and ``amounts 
includible.'' ... [under the REMIC provisions] when paid or 
distributed (or when the interest is disposed of) ... .''
    Without a full tax at source, non-U.S. transferees of 
residual interests would have a competitive advantage over U.S. 
transferees at the time these interests are initially offered. 
Absent this rule, the United States would suffer a revenue loss 
with respect to mortgages held in a REMIC because of 
opportunities for tax avoidance created by differences in the 
timing of taxable and economic income produced by such 
interests. In many cases, the transfer to the foreign person is 
simply disregarded under Treas. Reg. 1.860G-3. Subparagraph 
4(b) also provides that excess inclusions from REMICs are not 
considered ``other income'' subject to Article 21 (Other 
Income) of the Convention. Paragraph 5
    The term ``interest'' as used in Article 11 is defined in 
paragraph 5 to include, inter alia, income from debt claims of 
every kind, whether or not secured by a mortgage. Penalty 
charges for late payment are excluded from the definition of 
interest. Interest that is paid or accrued subject to a 
contingency is within the ambit of Article 11. This definition 
includes income from a debt obligation carrying the right to 
participate in profits. The term does not, however, include 
amounts treated as dividends under Article 10 (Dividends).
    The term interest also includes amounts which under the 
taxation law of the Contracting State in which the income 
arises are assimilated to income from money lent. This wording 
is to be interpreted consistently with the U.S. Model reference 
to ``amounts subject to the same tax treatment as income from 
money lent under the law of the State in which the income 
arises.'' Thus, for purposes of the Convention, amounts that 
the United States will treat as interest include (i) the 
difference between the issue price and the stated redemption 
price at maturity of a debt instrument (i.e., original issue 
discount (.''ID.''), which may be wholly or partially realized 
on the disposition of a debt instrument (section 1273), (ii) 
amounts that are imputed interest on a deferred sales contract 
(section 483), (iii) amounts treated as interest or OID under 
the stripped bond rules (section 1286), (iv) amounts treated as 
original issue discount under the below-market interest rate 
rules (section 7872), (v) a partner's distributive share of a 
partnership's interest income (section 702), (vi) the interest 
portion of periodic payments made under a ``finance lease'' or 
similar contractual arrangement that in substance is a 
borrowing by the nominal lessee to finance the acquisition of 
property, (vii) amounts included in the income of a holder of a 
residual interest in a REMIC (section 860E), because these 
amounts generally are subject to the same taxation treatment as 
interest under U.S. tax law, and (viii) interest with respect 
to notional principal contracts that are recharacterized as 
loans because of a ``substantial non-periodic payment.''

Paragraph 6

    Paragraph 6 provides an exception to paragraphs 1, 2 and 3 
in cases where the beneficial owner of the interest carries on 
business through a permanent establishment situated in that 
State and the debt-claim in respect of which the interest is 
paid is effectively connected with such permanent 
establishment. In such cases the provisions of Article 7 
(Business Profits) will apply and the State of source will 
retain the right to impose tax on such interest income.
    In the case of a permanent establishment that once existed 
in a Contracting State but no longer exists, the provisions of 
this paragraph apply, by virtue of paragraph 5 of Article 7 
(Business Profits), to interest paid with respect to a debt-
claim that would be effectively connected to such a permanent 
establishment if it did exist in the year of payment or 
accrual. See the Technical Explanation of paragraph 5 of 
Article 7. Accordingly, such interest would remain taxable 
under the provisions of Article 7, and not under this Article.

Paragraph 7

    Paragraph 7 provides a general source rule for interest. 
Interest is considered to arise in a Contracting State if paid 
by a resident of that State (including that State itself or one 
of its political subdivisions or local authorities). Interest 
that is borne by a permanent establishment in one of the 
Contracting States is considered to arise in that State. For 
this purpose, interest is considered to be borne by a permanent 
establishment if it is allocable to taxable income of that 
permanent establishment or fixed base. If the actual amount of 
interest on the books of a U.S. branch of a resident of Poland 
exceeds the amount of interest allocated to the branch under 
Treas. Reg. 1.882-5, the amount of such excess will not be 
considered U.S. source interest for purposes of this Article.

Paragraph 8

    Paragraph 8 provides that in cases involving special 
relationships between the payer and the beneficial owner of 
interest income, Article 11 applies only to that portion of the 
total interest payments that would have been made absent such 
special relationships (i.e., an arm's-length interest payment). 
Any excess amount of interest paid remains taxable according to 
the laws of the United States and the other Contracting State, 
respectively, with due regard to the other provisions of the 
Convention. Thus, if the excess amount would be treated under 
the source country's law as a distribution of profits by a 
corporation, such amount could be taxed as a dividend rather 
than as interest, but the tax would be subject, if appropriate, 
to the rate limitations of paragraph 2 of Article 10 
(Dividends).
    The term ``special relationship'' is not defined in the 
Convention. In applying this paragraph the United States 
considers the term to include the relationships described in 
Article 9, which in turn corresponds to the definition of 
``control'' for purposes of Code section 482.
    This paragraph does not address cases where, owing to a 
special relationship between the payer and the beneficial owner 
or between both of them and some other person, the amount of 
the interest is less than an arm's-length amount. In those 
cases a transaction may be characterized to reflect its 
substance and interest may be imputed consistent with the 
definition of ``interest'' in paragraph 3. The United States 
would apply Code section 482 or 7872 to determine the amount of 
imputed interest in those cases.
            Relationship to Other Articles
    Notwithstanding the foregoing limitations on source country 
taxation of interest, the saving clause of paragraph 4 of 
Article 1 permits the United States to tax its residents and 
citizens, subject to the special foreign tax credit rules of 
paragraph 4 of Article 23 (Relief from Double Taxation), as if 
the Convention had not come into force.
    Rules regarding the application of branch-level interest 
taxes are found in Article 12 (Branch Profits).
    As with other benefits of the Convention, the benefits of 
Article 11 are available to a resident of the other State only 
if that resident is entitled to those benefits under the 
provisions of Article 22 (Limitation on Benefits).

                      ARTICLE 12 (BRANCH PROFITS)

Paragraph 1

    Paragraph 1 permits a Contracting State to impose a branch 
profits tax on a company resident in the other Contracting 
State. The tax is in addition to other taxes permitted by the 
Convention. The term ``company'' is defined in subparagraph 
1(b) of Article 3 (General Definitions). A Contracting State 
may impose a branch profits tax on a company if the company has 
income attributable to a permanent establishment in that 
Contracting State, derives income from real property in that 
Contracting State that is taxed on a net basis under Article 6 
(Income from Real Property), or realizes gains taxable in that 
State under paragraph 1 of Article 14 (Capital Gains). In the 
case of the United States, the imposition of such tax is 
limited, however, to the portion of the aforementioned items of 
income that represents the amount of such income that is the 
``dividend equivalent amount.'' This is consistent with the 
relevant rules under the U.S. branch profits tax, and the term 
dividend equivalent amount is defined under U.S. law. Section 
884 defines the dividend equivalent amount as an amount for a 
particular year that is equivalent to the income described 
above that is included in the corporation's effectively 
connected earnings and profits for that year, after payment of 
the corporate tax under Articles 6, 7 (Business Profits) or 14, 
reduced for any increase in the branch's U.S. net equity during 
the year or increased for any reduction in its U.S. net equity 
during the year. U.S. net equity is U.S. assets less U.S. 
liabilities. See Treas. Reg. 1.884-1. The dividend equivalent 
amount for any year approximates the dividend that a U.S. 
branch office would have paid during the year if the branch had 
been operated as a separate U.S. subsidiary company. In the 
case that Poland also imposes a branch profits tax, the base of 
its tax must be limited to an amount that is analogous to the 
dividend equivalent amount, and the applicable rate would be 
subject to the limitations of clause (ii) of subparagraph 1(b).
    As discussed in the Technical Explanations to Articles 1(2) 
and 7(2), consistency principles prohibit a taxpayer from 
applying provisions of the Code and this Convention in an 
inconsistent manner in order to minimize tax. In the context of 
the branch profits tax, this consistency requirement means that 
if a company resident in Poland uses the principles of Article 
7 to determine its U.S. taxable income, it must then also use 
those principles to determine its dividend equivalent amount. 
Similarly, if the company instead uses the Code to determine 
its U.S. taxable income it must also use the Code to determine 
its dividend equivalent amount. As in the case of Article 7, if 
a company of Poland, for example, does not from year to year 
consistently apply the Code or the Convention to determine its 
dividend equivalent amount, then the company must make 
appropriate adjustments or recapture amounts that would 
otherwise be subject to U.S. branch profits tax if it had 
consistently applied the Code or the Convention to determine 
its dividend equivalent amount from year to year.
    Clause (ii) of subparagraph 1(b) provides that the branch 
profits tax shall not be imposed at a rate exceeding five 
percent, as provided in subparagraph 2(a) of Article 10 
(Dividends). Subparagraph 1(b) applies equally if a taxpayer 
determines its taxable income under the laws of a Contracting 
State or under the provisions of Article 7. For example, as 
discussed above, consistency principles require a company 
resident in Poland that determines its U.S. taxable income 
under the Code to also determine its dividend equivalent amount 
under the Code. In that case, the withholding rate reduction 
provided in subparagraph 2(a) of Article 10 would apply even 
though the company did not determine its dividend equivalent 
amount using the principles of Article 7.

Paragraph 2

    Paragraph 2 permits a Contracting State to impose its 
branch level interest tax on a company resident in the other 
Contracting State. The base of this tax is the excess, if any, 
of the interest allocable to the profits of the company that 
are either attributable to a permanent establishment in the 
first-mentioned State (including gains under paragraph 4 of 
Article 14 (Capital Gains)) or subject to tax in the first-
mentioned State under Article 6 (Income from Real Property) or 
paragraph 1 of Article 14, over the interest paid on 
indebtedness related to that permanent establishment, or in the 
case of profits subject to tax under Article 6 or paragraph 1 
of Article 14, over the interest paid by that trade or business 
in the first-mentioned State. Such excess interest may be taxed 
as if it were interest arising in the first-mentioned State and 
beneficially owned by the resident of the other State. Thus, 
such excess interest may be taxed by the first-mentioned State 
at a rate not to exceed the applicable rates provided in 
paragraph 2 of Article 11 (Interest).
            Relationship to Other Articles
    Notwithstanding the foregoing limitations on source country 
taxation, the saving clause of paragraph 4 of Article 1 permits 
the United States to tax its residents and citizens, subject to 
the special foreign tax credit rules of paragraph 4 of Article 
23 (Relief from Double Taxation), as if the Convention had not 
come into effect.
    The benefits of this Article are also subject to the 
provisions of Article 22 (Limitation on Benefits).

                         ARTICLE 13 (ROYALTIES)

    Article 13 provides rules for the taxation of royalties 
arising in one Contracting State and paid to a beneficial owner 
that is a resident of the other Contracting State.

Paragraph 1

    Paragraph 1 grants to the State of residence the non-
exclusive right to tax royalties beneficially owned by its 
residents and arising in the other Contracting State.

Paragraph 2

    Paragraph 2 provides that the State of source may also tax 
royalties, but if the beneficial owner of the royalties is a 
resident of the other Contracting State, the rate of tax shall 
be limited to 5 percent of the gross amount of the royalties.
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, defined under the domestic law 
of the State of source. The beneficial owner of the royalties 
for purposes of Article 13 is the person to which the income is 
attributable under the laws of the source State. Thus, if 
royalties arising in a Contracting State are received by a 
nominee or agent that is a resident of the other State on 
behalf of a person that is not a resident of that other State, 
the royalties are not entitled to the benefits of Article 13. 
However, the royalties received by a nominee on behalf of a 
resident of that other State would be entitled to benefits. 
These limitations are confirmed by paragraph 4 of the OECD 
Commentary to Article 12 of the OECD Model.
    Special rules apply to royalties derived through fiscally 
transparent entities for purposes of determining the beneficial 
owner of the royalties. In such cases, residence State 
principles shall be used to determine who derives the 
royalties, to assure that the royalties for which the source 
State grants benefits of the Convention will be taken into 
account for tax purposes by a resident of the residence State. 
For example, assume that FCo, a company that is a resident of 
Poland, owns a 50 percent interest in FP, a partnership that is 
organized in Poland. FP receives royalties arising in the 
United States. Poland views FP as fiscally transparent under 
its domestic law, and taxes FCo currently on its distributive 
share of the income of FP and determines the character and 
source of the income received through FP in the hands of FCo as 
if such income were realized directly by FCo. In this case, FCo 
is treated as deriving 50 percent of the royalties received by 
FP that arise in the United States under paragraph 6 of Article 
1. The same result would be reached even if the tax laws of the 
United States would treat FP differently (e.g., if FP were not 
treated as fiscally transparent in the United States). If FP 
were organized in a third state, were not viewed as fiscally 
transparent under U.S. law, and would be eligible for benefits 
with respect to the royalty under a tax treaty between the 
United States and the third state, paragraph 6 of Article 1 
provides that FCo is treated as deriving 50 percent of the 
U.S.-source royalty only if the applicable royalty withholding 
rate provided under the Convention is more favorable than the 
applicable royalty withholding rate that FP could claim with 
respect to the royalty in its own right under the tax treaty 
between the United States and the third country. While 
residence State principles control who is treated as deriving 
the royalties, source State principles of beneficial ownership 
apply to determine whether the person who derives the 
royalties, or another resident of the other Contracting State, 
is the beneficial owner of the royalties. If the person who 
derives the royalties under paragraph 6 of Article 1 would not 
be treated as a nominee, agent, custodian, conduit, etc. under 
the source State's principles for determining beneficial 
ownership, that person will be treated as the beneficial owner 
of the royalties for purposes of the Convention. In the example 
above, FCo is required to satisfy the beneficial ownership 
principles of the United States with respect to the royalties 
it derives. If under the beneficial ownership principles of the 
United States, FCo is found not to be the beneficial owner of 
the royalties, FCo will not be entitled to the benefits of 
Article 13 with respect to such royalties. If FCo is found to 
be a nominee, agent, custodian, or conduit for a person who is 
a resident of Poland, that person may be entitled to benefits 
with respect to the royalties.

Paragraph 3

    Paragraph 3 defines the term ``royalties,'' as used in 
Article 13 with an exhaustive list of examples. Subparagraph 
3(a) first defines royalties to mean payments of any kind 
received as a consideration for the use of, or the right to 
use, any copyright of literary, artistic scientific or other 
work (including cinematographic films or radio or television 
broadcasting tapes), any patent, trademark, design or model, 
plan, secret formula or process, or for information concerning 
industrial, commercial, or scientific experience. Subparagraph 
3(b) also provides that ``royalties'' also include gain derived 
from the alienation of any right or property that would give 
rise to royalties, to the extent the gain is contingent on the 
productivity, use, or further alienation thereof. Gains that 
are not so contingent are dealt with under Article 14 (Capital 
Gains). Lastly, subparagraph 3(c) provides that ``royalties'' 
also include payments of any kind received as a consideration 
for the use of, or the right to use any industrial, commercial, 
or scientific equipment.
    The term royalties is defined in the Convention and 
therefore is generally independent of domestic law. Certain 
terms used in the definition are not defined in the Convention, 
but these may be defined under domestic tax law. For example, 
the term ``secret process or formula'' is found in the Code, 
and its meaning has been elaborated in the context of sections 
351 and 367. See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 
64-56, 1964-1 C.B. 133; Rev. Proc. 69-19, 1969-2 C.B. 301.
    Consideration for the use or right to use cinematographic 
films, or works on film, tape, or other means of reproduction 
in radio or television broadcasting is specifically included in 
the definition of royalties. It is intended that, with respect 
to any subsequent technological advances in the field of radio 
or television broadcasting, consideration received for the use 
of such technology will also be included in the definition of 
royalties.
    If an artist who is resident in one Contracting State 
records a performance in the other Contracting State, retains a 
copyrighted interest in a recording, and receives payments for 
the right to use the recording based on the sale or public 
playing of the recording, then the right of such other 
Contracting State to tax those payments is governed by Article 
13. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810 
F.2d 209 (D.C. Cir. 1986). By contrast, if the artist earns in 
the other Contracting State income covered by Article 17 
(Entertainers and Sportsmen), for example, endorsement income 
from the artist's attendance at a film screening, and if such 
income also is attributable to one of the rights described in 
Article 13 (e.g., the use of the artist's photograph in 
promoting the screening), Article 17 and not Article 13 is 
applicable to such income.
    Computer software generally is protected by copyright laws 
around the world. Under the Convention, consideration received 
for the use, or the right to use, computer software is treated 
either as royalties or as business profits, depending on the 
facts and circumstances of the transaction giving rise to the 
payment.
    The primary factor in determining whether consideration 
received for the use, or the right to use, computer software is 
treated as royalties or as business profits is the nature of 
the rights transferred. See Treas. Reg. 1.861-18. The fact that 
the transaction is characterized as a license for copyright law 
purposes is not dispositive. For example, a typical retail sale 
of ``shrink wrap'' software generally will not be considered to 
give rise to royalty income, even though for copyright law 
purposes it may be characterized as a license.
    The means by which the computer software is transferred are 
not relevant for purposes of the analysis. Consequently, if 
software is electronically transferred but the rights obtained 
by the transferee are substantially equivalent to rights in a 
program copy, the payment will be considered business profits.
    The term ``industrial, commercial, or scientific 
experience'' (sometimes referred to as ``know-how.'' has the 
meaning ascribed to it in paragraph 11 et seq. of the 
Commentary to Article 12 of the OECD Model. Consistent with 
that meaning, the term may include information that is 
ancillary to a right otherwise giving rise to royalties, such 
as a patent or secret process.
    Know-how also may include, in limited cases, technical 
information that is conveyed through technical or consultancy 
services. It does not include general educational training of 
the user's employees, nor does it include information developed 
especially for the user, such as a technical plan or design 
developed according to the user's specifications. Thus, as 
provided in paragraph 11.3 of the Commentary to Article 12 of 
the OECD Model, the term ``royalties'' does not include 
payments received as consideration for after-sales service, for 
services rendered by a seller to a purchaser under a warranty, 
or for pure technical assistance.
    The term ``royalties'' also does not include payments for 
professional services (such as architectural, engineering, 
legal, managerial, medical or software development services). 
For example, income from the design of a refinery by an 
engineer (even if the engineer employed know-how in the process 
of rendering the design) or the production of a legal brief by 
a lawyer is not income from the transfer of know-how taxable 
under Article 13, but is income from services taxable under 
either Article 7 (Business Profits) or Article 15 (Income from 
Employment) as applicable. Professional services may be 
embodied in property that gives rise to royalties, however. 
Thus, if a professional contracts to develop patentable 
property and retains rights in the resulting property under the 
development contract, subsequent license payments made for 
those rights would be royalties.

Paragraph 4

    This paragraph provides an exception to paragraphs 1 and 2 
in cases where the beneficial owner of the royalties carries on 
business through a permanent establishment in the state of 
source and the right or property in respect of which the 
royalties are paid is effectively connected with such permanent 
establishment. In such cases the provisions of Article 7 
(Business Profits) will apply.
    In the case of a permanent establishment that once existed 
in a Contracting State but that no longer exists, the 
provisions of this paragraph also apply, by virtue of paragraph 
5 of Article 7 (Business Profits) to royalties paid with 
respect to rights or property that would be effectively 
connected to such permanent establishment if it did exist in 
the year of payment or accrual. Accordingly, such royalties 
would remain taxable under the provisions of Article 7, and not 
under this Article.

Paragraph 5

    Paragraph 5 contains the source rule for royalties. Under 
paragraph 5, royalties are treated as arising in a Contracting 
State only to the extent that they are in consideration for the 
use of, or the right to use, property, information or 
experience in that State. This source rule parallels the source 
rule in Code section 861(a)(4).

Paragraph 6

    Paragraph 6 provides that in cases involving special 
relationships between the payer and beneficial owner of 
royalties, Article 13 applies only to the extent the royalties 
would have been paid absent such special relationships (i.e., 
an arm's-length royalty). Any excess amount of royalties paid 
remains taxable according to the laws of the two Contracting 
States, with due regard to the other provisions of the 
Convention. If, for example, the excess amount is treated as a 
distribution of corporate profits under domestic law, such 
excess amount will be taxed as a dividend rather than as 
royalties, but the tax imposed on the dividend payment will be 
subject to the rate limitations of paragraph 2 of Article 10 
(Dividends).
            Relationship to Other Articles
    Notwithstanding the foregoing limitations on source country 
taxation of royalties, the saving clause of paragraph 4 of 
Article 1 (General Scope) permits the United States to tax its 
residents and citizens, subject to the special foreign tax 
credit rules of paragraph 4 of Article 23 (Relief from Double 
Taxation), as if the Convention had not come into force.
    As with other benefits of the Convention, the benefits of 
exclusive residence State taxation of royalties under paragraph 
1 of Article 13 are available to a resident of the other State 
only if that resident is entitled to those benefits under 
Article 22 (Limitation on Benefits).

                       ARTICLE 14 (CAPITAL GAINS)

    Article 14 assigns either primary or exclusive taxing 
jurisdiction over gains from the alienation of property to the 
State of residence or the State of source.

Paragraph 1

    Paragraph 1 of Article 14 preserves the non-exclusive right 
of the State of source to tax gains from the alienation of real 
property situated in that State.

Paragraph 2

    Paragraph 2 allows the United States to tax in accordance 
with Code section 897 gains derived by a resident of Poland 
that are attributable to the alienation of a United States real 
property interest. Under Code section 897(c) the term ``United 
States real property interest'' includes shares in a U.S. 
corporation that owns sufficient U.S. real property interests 
to satisfy an asset-ratio test on certain testing dates. The 
term also includes certain foreign corporations that have 
elected to be treated as U.S. corporations for this purpose. 
See Code section 897(i). In addition, any distribution made by 
a REIT or certain RICs is taxable under paragraph 1 of Article 
14 (rather than under Article 10 (Dividends)) to the extent 
that it is attributable to gains derived from the alienation of 
U.S. real property interests. See Code section 897(h).

Paragraph 3

    Paragraph 3 permits Poland to tax gains derived by a 
resident of the United States from the alienation of two 
categories of property. The first category is described in 
subparagraph 3(a) as shares, including rights to acquire 
shares, deriving more than 50 percent of their value directly 
or indirectly from real property situated in Poland. The second 
category is described in subparagraph 3(b) as an interest in a 
partnership or trust to the extent that the assets of the 
partnership or trust consist in aggregate more than 50 percent 
of real property situated in Poland or of shares referred to in 
subparagraph 3(a).

Paragraph 4

    Paragraph 4 deals with the taxation of certain gains from 
the alienation of movable property forming part of the business 
property of a permanent establishment that an enterprise of a 
Contracting State has in the other Contracting State. This also 
includes gains from the alienation of such a permanent 
establishment (alone or with the whole enterprise). Such gains 
may be taxed in the State in which the permanent establishment 
is located.
    A resident of Poland that is a partner in a partnership 
doing business in the United States generally will have a 
permanent establishment in the United States as a result of the 
activities of the partnership, assuming that the activities of 
the partnership rise to the level of a permanent establishment. 
See Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under paragraph 
4, the United States generally may tax a partner's distributive 
share of income realized by a partnership on the disposition of 
movable property forming part of the business property of the 
partnership in the United States.
    Paragraph 5 of Article 7 (Business Profits) provides that 
gains subject to paragraph 4 may be taxed in the State in which 
the permanent establishment is located, regardless of whether 
the permanent establishment exists at the time of the 
alienation. This rule incorporates the rule of Code section 
864(c)(6). Accordingly, income that is attributable to a 
permanent establishment, but that is deferred and received 
after the permanent establishment no longer exists, may 
nevertheless be taxed by the State in which the permanent 
establishment was located.

Paragraph 5

    This paragraph limits the taxing jurisdiction of the State 
of source with respect to gains from the alienation of ships or 
aircraft operated in international traffic by the enterprise 
alienating the ship or aircraft and from property (other than 
real property) pertaining to the operation or use of such ships 
or aircraft.
    Under paragraph 5, such gains are taxable only in the 
Contracting State in which the alienator is resident. 
Notwithstanding paragraph 4, the rules of this paragraph apply 
even if the income is attributable to a permanent establishment 
maintained by the enterprise in the other Contracting State. 
This result is consistent with the allocation of taxing rights 
under Article 8 (Shipping and Air Transport).

Paragraph 6

    Paragraph 6 provides a rule similar to paragraph 5 with 
respect to gains from the alienation of containers and related 
personal property. Such gains derived by a enterprise of a 
Contracting State shall be taxable only in that Contracting 
State unless the containers were used for the transport of 
goods or merchandise solely within the other Contracting State. 
The other Contracting State may not tax even if the gain is 
attributable to a permanent establishment maintained by the 
enterprise in that other Contracting State.

Paragraph 7

    Paragraph 6 grants to the State of residence of the 
alienator the exclusive right to tax gains from the alienation 
of property other than property referred to in paragraphs 1 
through 6. For example, gain derived from the alienation of 
shares, other than shares described in paragraphs 2 or 3, debt 
instruments and various financial instruments, may be taxed 
only in the State of residence, to the extent such income is 
not otherwise characterized as income taxable under another 
article (e.g., Article 10 (Dividends) or Article 11 
(Interest)). Similarly gain derived from the alienation of 
tangible personal property, other than tangible personal 
property described in paragraph 3, may be taxed only in the 
State of residence of the alienator.
    Gain derived from the alienation of any property, such as a 
patent or copyright, that produces income covered by Article 13 
(Royalties) is governed by the rules of Article 13 and not by 
this article, provided that such gain is of the type described 
in paragraph 3(b) of Article 13 (i.e., it is contingent on the 
productivity, use, or disposition of the property).
    Gains derived by a resident of a Contracting State from 
real property located in a third state are not taxable in the 
other Contracting State, even if the sale is attributable to a 
permanent establishment located in the other Contracting State.
            Relationship to Other Articles
    Notwithstanding the foregoing limitations on taxation of 
certain gains by the State of source, the saving clause of 
paragraph 4 of Article 1 (General Scope) permits the United 
States to tax its citizens and residents as if the Convention 
had not come into effect. Thus, any limitation in this Article 
on the right of the United States to tax gains does not apply 
to gains of a U.S. citizen or resident.
    The benefits of this Article are also subject to the 
provisions of Article 22 (Limitation on Benefits). Thus, only a 
resident of a Contracting State that satisfies one of the 
conditions in Article 22 is entitled to the benefits of this 
Article.
    Paragraph 5 of Article 23 (Relief from Double Taxation) 
coordinates the tax systems of the Contracting States to avoid 
double taxation that could result from the imposition of exit 
tax regimes on individuals who relinquish citizenship or long-
term residence status.

                  ARTICLE 15 (INCOME FROM EMPLOYMENT)

    Article 15 apportions taxing jurisdiction over remuneration 
derived by a resident of a Contracting State as an employee 
between the States of source and residence.

Paragraph 1

    The general rule of Article 15 is contained in paragraph 1. 
Article 15 applies to any form of compensation for employment, 
including payments in kind. Remuneration derived by a resident 
of a Contracting State as an employee may be taxed by the State 
of residence, and the remuneration also may be taxed by the 
other Contracting State to the extent derived from employment 
exercised (i.e., services performed) in that other Contracting 
State. Paragraph 1 also provides that the more specific rules 
of Articles 16 (Directors' Fees), 18 (Pensions, Social 
Security, Annuities, Alimony and Child Support), and 19 
(Government Service) apply in the case of employment income 
described in one of those Articles. Thus, even though the State 
of source has a right to tax employment income under Article 
15, it may not have the right to tax that income under the 
Convention if the income is described, for example, in Article 
18 (Pensions, Social Security, Annuities, Alimony and Child 
Support) and is not taxable in the State of source under the 
provisions of that Article.
    Article 15 applies regardless of the timing of actual 
payment for services. Consequently, a person who receives the 
right to a future payment in consideration for services 
rendered in a Contracting State would be taxable in that State 
even if the payment is received at a time when the recipient is 
a resident of the other Contracting State. Thus, a bonus paid 
to a resident of a Contracting State with respect to services 
performed in the other Contracting State with respect to a 
particular taxable year would be subject to Article 15 for that 
year even if it was paid after the close of the year. An 
annuity received for services performed in a taxable year could 
be subject to Article 15 despite the fact that it was paid in 
subsequent years. In that case, it would be necessary to 
determine whether the payment constitutes deferred 
compensation, taxable under Article 15, or a qualified pension 
subject to the rules of Article 18. Article 15 also applies to 
income derived from the exercise of stock options granted with 
respect to services performed in the host State, even if those 
stock options are exercised after the employee has left the 
host State. If Article 15 is found to apply, whether such 
payments were taxable in the State where the employment was 
exercised would depend on whether the tests of paragraph 2 were 
satisfied in the year in which the services to which the 
payment relates were performed.

Paragraph 2

    Paragraph 2 sets forth an exception to the general rule 
that employment income may be taxed in the State where it is 
exercised. Under paragraph 2, the State where the employment is 
exercised may not tax the income from the employment if three 
conditions are satisfied: (a) the individual is present in the 
other Contracting State for a period or periods not exceeding 
183 days in any 12-month period that begins or ends during the 
relevant taxable year (i.e., in the United States, the calendar 
year in which the services are performed); (b) the remuneration 
is paid by, or on behalf of, an employer who is not a resident 
of that other Contracting State; and (c) the remuneration is 
not borne as a deductible expense by a permanent establishment 
that the employer has in that other State. In order for the 
remuneration to be exempt from tax in the source State, all 
three conditions must be satisfied. This exception is identical 
to that set forth in the OECD Model.
    The 183-day period in subparagraph 2(a) is to be measured 
using the ``days of physical presence'' method. Under this 
method, the days that are counted include any day in which a 
part of the day is spent in the host country. (See Rev. Rul. 
56-24, 1956-1 C.B. 851.) Thus, days that are counted include 
the days of arrival and departure; weekends and holidays on 
which the employee does not work but is present within the 
country; vacation days spent in the country before, during or 
after the employment period, unless the individual's presence 
before or after the employment can be shown to be independent 
of his presence there for employment purposes; and time during 
periods of sickness, training periods, strikes, etc., when the 
individual is present but not working. If illness prevented the 
individual from leaving the country in sufficient time to 
qualify for the benefit, those days will not count. Also, any 
part of a day spent in the host country while in transit 
between two points outside the host country is not counted. If 
the individual is a resident of the host country for part of 
the taxable year concerned and a non- resident for the 
remainder of the year, the individual's days of presence as a 
resident do not count for purposes of determining whether the 
183-day period is exceeded.
    Subparagraphs 2(b) and 2(c) are intended to ensure that a 
Contracting State will not be required to allow a deduction to 
the payor for compensation paid and at the same time to exempt 
the employee on the amount received. Accordingly, if a foreign 
person pays the salary of an employee who is employed in the 
host State, but a host State corporation or permanent 
establishment reimburses the payor with a payment that can be 
identified as a reimbursement, neither subparagraph 2(b) nor 
2(c), as the case may be, will be considered to have been 
fulfilled.
    The reference to remuneration ``borne by'' a permanent 
establishment is understood to encompass all expenses that 
economically are incurred and not merely expenses that are 
currently deductible for tax purposes. Accordingly, the 
expenses referred to include expenses that are capitalizable as 
well as those that are currently deductible. Further, salaries 
paid by residents that are exempt from income taxation may be 
considered to be borne by a permanent establishment 
notwithstanding the fact that the expenses will be neither 
deductible nor capitalizable since the payor is exempt from 
tax.
    For the purpose of determining the profits attributable to 
a permanent establishment pursuant to paragraph 2 of Article 7 
(Business Profits), the remuneration paid to an employee of an 
enterprise of a Contracting State for employment services 
rendered in the other State for the benefit of the permanent 
establishment of the enterprise situated in that other State 
may, given the circumstances, either give rise to a direct 
deduction or give rise to the deduction of a notional charge, 
e.g., for services rendered to the permanent establishment by 
another part of the enterprise. In the latter case, since the 
notional charge required by the legal fiction of the separate 
and independent enterprise that is applicable under paragraph 2 
of Article 7 is merely a mechanism provided for by that 
paragraph for the sole purpose of determining the profits 
attributable to the permanent establishment, this fiction does 
not affect the determination of whether or not the remuneration 
is borne by the permanent establishment.

Paragraph 3

    Paragraph 3 contains a special rule applicable to 
remuneration for services performed by a resident of a 
Contracting State as an employee aboard a ship or aircraft 
operated in international traffic. Such remuneration may be 
taxed only in the State of residence of the employee if the 
services are performed as a member of the regular complement of 
the ship or aircraft. The ``regular complement'' includes the 
crew. In the case of a cruise ship, for example, it may also 
include others, such as entertainers, lecturers, etc., employed 
by the shipping company to serve on the ship throughout its 
voyage. The use of the term ``regular complement'' is intended 
to clarify that a person who exercises his employment as, for 
example, an insurance salesman while aboard a ship or aircraft 
is not covered by this paragraph.
    If a U.S. citizen who is resident in Poland performs 
services as an employee in the United States and meets the 
conditions of paragraph 2 for source country exemption, he 
nevertheless is taxable in the United States by virtue of the 
saving clause of paragraph 4 of Article 1 (General Scope), 
subject to the special foreign tax credit rule of paragraph 4 
of Article 23 (Relief from Double Taxation).

                      ARTICLE 16 (DIRECTORS' FEES)

    This Article provides that a Contracting State may tax the 
fees and other compensation paid by a company that is a 
resident of that State to an individual resident of the other 
Contracting State in his capacity as a director of the company. 
This rule is an exception to the more general rules of Articles 
7 (Business Profits) and 15 (Income from Employment). Thus, for 
example, in determining whether a director's fee paid to a non-
employee director is subject to tax in the country of residence 
of the corporation, it is not relevant to establish whether the 
fee is attributable to a permanent establishment in that State.
            Relationship with other Articles
    This Article is subject to the saving clause of paragraph 4 
of Article 1 (General Scope).

                ARTICLE 17 (ENTERTAINERS AND SPORTSMEN)

    This Article deals with the taxation in a Contracting State 
of entertainers and sportsmen resident in the other Contracting 
State from the performance of their services as such. The 
Article applies both to the income of an entertainer or 
sportsman who performs services on his own behalf and one who 
performs services on behalf of another person, either as an 
employee of that person, or pursuant to any other arrangement. 
The rules of this Article take precedence, in some 
circumstances, over those of Articles 7 (Business Profits) and 
15 (Income from Employment).
    This Article applies only with respect to the income of 
entertainers and sportsmen. Others involved in a performance or 
athletic event, such as producers, directors, technicians, 
managers, coaches, etc., remain subject to the provisions of 
Articles 7 and 15. In addition, except as provided in paragraph 
2, income earned by juridical persons is not covered by Article 
17.

Paragraph 1

    Paragraph 1 describes the circumstances in which a 
Contracting State may tax the performance income of an 
entertainer or sportsman who is a resident of the other 
Contracting State. Under the paragraph, income derived by an 
individual resident of a Contracting State from activities as 
an entertainer or sportsman exercised in the other Contracting 
State may be taxed in that other State if the amount of the 
gross receipts derived by the performer exceeds $20,000 (or its 
equivalent in Polish legal tender) for the taxable year. The 
$20,000 includes expenses reimbursed to the individual or borne 
on his behalf. If the gross receipts exceed $20,000, the full 
amount, not just the excess, may be taxed in the State of 
performance.
    The OECD Model provides for taxation by the country of 
performance of the remuneration of entertainers or sportsmen 
with no dollar or time threshold. This Convention introduces 
the monetary threshold to distinguish between two groups of 
entertainers and athletes--those who are paid relatively large 
sums of money for very short periods of service, and who would, 
therefore, normally be exempt from host country tax under the 
standard personal services income rules, and those who earn 
relatively modest amounts and are, therefore, not easily 
distinguishable from those who earn other types of personal 
service income. The United States has entered a reservation to 
the OECD Model on this point.
    Tax may be imposed under paragraph 1 even if the performer 
would have been exempt from tax under Article 7 (Business 
Profits) or Article 15 (Income from Employment). On the other 
hand if the performer would be exempt from host-country tax 
under Article 17, but would be taxable under either Article 7 
or Article 15, tax may be imposed under either of those 
Articles. Thus, for example, if a performer derives 
remuneration from his activities in an independent capacity, 
and the performer does not have a permanent establishment in 
the host State, he may be taxed by the host State in accordance 
with Article 17 if his remuneration exceeds $20,000 annually, 
despite the fact that he generally would be exempt from host 
State taxation under Article 7. However, a performer who 
receives less than the $20,000 threshold amount and therefore 
is not taxable under Article 17 nevertheless may be subject to 
tax in the host country under Article 7 or Article 15 if the 
tests for host-country taxability under the relevant Article 
are met. For example, if an entertainer who is an independent 
contractor earns $14,000 of income in a State for the calendar 
year, but the income is attributable to his permanent 
establishment in the State of performance, that State may tax 
his income under Article 7.
    Since it frequently is not possible to know until year-end 
whether the income an entertainer or sportsman derived from 
performances in a Contracting State will exceed $20,000, 
nothing in the Convention precludes that Contracting State from 
withholding tax during the year and refunding it after the 
close of the year if the taxability threshold has not been met.
    As explained in paragraph 9 of the Commentary to Article 17 
of the OECD Model, Article 17 of the Convention applies to all 
income connected with a performance by the entertainer, such as 
appearance fees, award or prize money, and a share of the gate 
receipts. Income derived from a Contracting State by a 
performer who is a resident of the other Contracting State from 
other than actual performance, such as royalties from record 
sales and payments for product endorsements, is not covered by 
this Article, but by other articles of the Convention, such as 
Article 13 (Royalties) or Article 7. For example, if an 
entertainer receives royalty income from the sale of live 
recordings, the royalty income would be exempt from source 
State tax under Article 12, even if the performance was 
conducted in the source country, although the entertainer could 
be taxed in the source country with respect to income from the 
performance itself under Article 17 if the dollar threshold is 
exceeded.
    In determining whether income falls under Article 17 or 
another Article, the controlling factor will be whether the 
income in question is predominantly attributable to the 
performance itself or to other activities or property rights. 
For instance, a fee paid to a performer for endorsement of a 
performance in which the performer will participate would be 
considered to be so closely associated with the performance 
itself that it normally would fall within Article 17. 
Similarly, a sponsorship fee paid by a business in return for 
the right to attach its name to the performance would be so 
closely associated with the performance that it would fall 
under Article 17 as well. As indicated in paragraph 9 of the 
Commentary to Article 17 of the OECD Model, however, a 
cancellation fee would not be considered to fall within Article 
16 but would be dealt with under Article 7 or15.
    As indicated in paragraph 4 of the Commentary to Article 17 
of the OECD Model, where an individual fulfills a dual role as 
performer and non-performer (such as a player-coach or an 
actor-director), but his role in one of the two capacities is 
negligible, the predominant character of the individual's 
activities should control the characterization of those 
activities. In other cases there should be an apportionment 
between the performance-related compensation and other 
compensation.
    Consistent with Article 15, Article 17 also applies 
regardless of the timing of actual payment for services. Thus, 
a bonus paid to a resident of a Contracting State with respect 
to a performance in the other Contracting State during a 
particular taxable year would be subject to Article 17 for that 
year even if it was paid after the close of the year. The 
determination as to whether the $20,000 threshold has been 
exceeded is determined separately with respect to each year of 
payment. Accordingly, if an actor who is a resident of one 
Contracting State receives residual payments over time with 
respect to a movie that was filmed in the other Contracting 
State, the payments do not have to be aggregated from one year 
to another to determine whether the total payments have finally 
exceeded $20,000. Otherwise, residual payments received many 
years later could retroactively subject all earlier payments to 
tax by the other Contracting State.

Paragraph 2

    Paragraph 2 is intended to address the potential for 
circumvention of the rule in paragraph 1 when a performer's 
income does not accrue directly to the performer himself, but 
to another person. Foreign performers frequently perform in the 
United States as employees of, or under contract with, a 
company or other person.
    The relationship may truly be one of employee and employer, 
with no circumvention of paragraph 1 either intended or 
realized. On the other hand, the ``employer'' may, for example, 
be a company established and owned by the performer, which is 
merely acting as the nominal income recipient in respect of the 
remuneration for the performance (a ``star company''). The 
performer may act as an ``employee,'' receive a modest salary, 
and arrange to receive the remainder of the income from his 
performance from the company in another form or at a later 
time. In such case, absent the provisions of paragraph 2, the 
income arguably could escape host-country tax because the 
company earns business profits but has no permanent 
establishment in that country. The performer may largely or 
entirely escape host-country tax by receiving only a small 
salary, perhaps small enough to place him below the dollar 
threshold in paragraph 1. The performer might arrange to 
receive further payments in a later year, when he is not 
subject to host-country tax, perhaps as dividends or 
liquidating distributions.
    Paragraph 2 seeks to prevent this type of abuse while at 
the same time protecting the taxpayers' rights to the benefits 
of the Convention when there is a legitimate employee-employer 
relationship between the performer and the person providing his 
services. Under paragraph 2, when the income accrues to a 
person other than the performer, the income may be taxed in the 
Contracting State where the performer's services are exercised, 
without regard to the provisions of Article 7 or Article 15, 
unless the contract pursuant to which the personal activities 
are performed allows such other person other than the performer 
to designate the individual who is to perform the personal 
activities. This rule is based on the U.S. domestic law 
provision characterizing income from certain personal service 
contracts as foreign personal holding company income in the 
context of the foreign personal holding company provisions. See 
Code section 954(c)(1)(I). The premise of this rule is that, in 
a case where a performer is using another person in an attempt 
to circumvent the provisions of paragraph 1, the recipient of 
the services of the performer would contract with a person 
other than that performer (i.e., a company employing the 
performer) only if the recipient of the services were certain 
that the performer himself would perform the services. If 
instead the person is allowed to designate the individual who 
is to perform the services, then likely the person is a service 
company not formed to circumvent the provisions of paragraph 1. 
The following example illustrates the operation of this rule.
    Example. Company O, a resident of Poland, is engaged in the 
business of operating an orchestra. Company O enters into a 
contract with Company A pursuant to which Company O agrees to 
carry out two performances in the United States in 
consideration of which Company A will pay Company O $200,000. 
The contract designates two individuals, a conductor and a 
flutist, that must perform as part of the orchestra, and allows 
Company O to designate the other members of the orchestra. 
Because the contract does not give Company O any discretion to 
determine whether the conductor or the flutist perform personal 
services under the contract, the portion of the $200,000 which 
is attributable to the personal services of the conductor and 
the flutist may be taxed by the United States pursuant to 
paragraph 2. The remaining portion of the $200,000, which is 
attributable to the personal services of performers that 
Company O may designate, is not subject to tax by the United 
States pursuant to paragraph 2.
    In cases where paragraph 2 is applicable, the income of the 
``employer'' may be subject to tax in the host Contracting 
State even if it has no permanent establishment in the host 
country. Taxation under paragraph 2 is on the person providing 
the services of the performer. This paragraph does not affect 
the rules of paragraph 1, which apply to the performer himself. 
The income taxable by virtue of paragraph 2 is reduced to the 
extent of salary payments to the performer, which fall under 
paragraph 1.
    For purposes of paragraph 2, income is deemed to accrue to 
another person (i.e., the person providing the services of the 
performer) if that other person has control over, or the right 
to receive, gross income in respect of the services of the 
performer.
    Since pursuant to Article 1 (General Scope) the Convention 
only applies to persons who are residents of one of the 
Contracting States, income of the star company would not be 
eligible for benefits of the Convention if the company is not a 
resident of one of the Contracting States.
            Relationship to Other Articles
    This Article is subject to the provisions of the saving 
clause of paragraph 4 of Article 1(General Scope). Thus, if an 
entertainer or a sportsman who is resident in Poland is a 
citizen of the United States, the United States may tax all of 
his income from performances in the United States without 
regard to the provisions of this Article, subject, however, to 
the special foreign tax credit provisions of paragraph 4 of 
Article 23 (Relief from Double Taxation). In addition, benefits 
of this Article are subject to the provisions of Article 22 
(Limitation on Benefits).

           ARTICLE 18 (PENSIONS, SOCIAL SECURITY, ANNUITIES, 
                      ALIMONY, AND CHILD SUPPORT)

    This Article deals with the taxation of private (i.e., non-
government service) pensions and annuities, social security 
benefits, alimony and child support payments.

Paragraph 1

    Paragraph 1 provides that distributions from pensions, 
annuities and other similar payments beneficially owned by a 
resident of a Contracting State in consideration of past 
employment are taxable only in the State of residence of the 
beneficiary. The terms ``pensions'' and ``other similar 
payments'' include both periodic and single sum payments.
    The terms ``pensions'' and ``other similar payments'' are 
intended to encompass payments made by qualified private 
retirement plans. In the United States, the plans encompassed 
by paragraph 1 include: qualified plans under section 401(a), 
individual retirement plans (including individual retirement 
plans that are part of a simplified employee pension plan that 
satisfies section 408(k), individual retirement accounts and 
section 408(p) accounts), section 403(a) qualified annuity 
plans, and section 403(b) plans. Distributions from section 457 
plans may also fall under paragraph 1 if they are not paid with 
respect to government services covered by Article 19 
(Government Service).
    Pensions in respect of government services covered by 
Article 19 are not covered by this paragraph. They are covered 
either by paragraph 2 of this Article if they are in the form 
of social security benefits, or by paragraph 2 of Article 19. 
Thus, Article 19 generally covers section 457(g), 401(a), 
403(a) and 403(b) plans established for government employees, 
including the Thrift Savings Plan (section 7701(j)).

Paragraph 2

    Paragraph 2 contains an exception to the residence State's 
right to tax pensions and other similar remuneration under 
paragraph 1. Under paragraph 2, the State of residence must 
exempt from tax any amount of such pensions or other similar 
remuneration that would be exempt from tax in the Contracting 
State in which the pension fund is established if the recipient 
were a resident of that State. Thus, for example, a 
distribution from a U.S. ``Roth IRA'' to a resident of Poland 
would be exempt from tax in Poland to the same extent the 
distribution would be exempt from tax in the United States if 
it were distributed to a U.S. resident. The same is true with 
respect to distributions from a traditional IRA to the extent 
that the distribution represents a return of non-deductible 
contributions. Similarly, if the distribution were not subject 
to tax when it was ``rolled over'' into another U.S. IRA (but 
not, for example, to a pension fund in the other Contracting 
State), then the distribution would be exempt from tax in 
Poland.

Paragraph 3

    The treatment of social security benefits is dealt with in 
paragraph 3. This paragraph provides that, notwithstanding the 
provision of paragraph 1 under which private pensions are 
taxable exclusively in the State of residence of the beneficial 
owner, payments made by one of the Contracting States under the 
provisions of its social security or similar legislation to a 
resi-dent of the other Contracting State or to a citizen of the 
United States will be taxable only in the Contracting State 
making the payment. The reference to U.S. citizens is necessary 
to ensure that a social security payment by Poland to a U.S. 
citizen who is not resident in the United States will not be 
taxable by the United States.
    This paragraph applies to social security beneficiaries 
whether they have contributed to the system as private sector 
or Government employees. The phrase ``similar legislation'' is 
intended to refer to United States tier 1 Railroad Retirement 
benefits.

Paragraph 4

    Paragraph 4 provides that, if a resident of a Contracting 
State participates in a pension fund established in the other 
Contracting State, the State of residence will not tax the 
income of the pension fund with respect to that resident until 
a distribution is made from the pension fund. Thus, for 
example, if a U.S. citizen contributes to a U.S. qualified plan 
while working in the United States and then establishes 
residence in Poland, paragraph 1 prevents Poland from taxing 
currently the plan's earnings and accretions with respect to 
that individual. When the resident receives a distribution from 
the pension fund, that distribution may be subject to tax in 
Poland, the State of residence, under paragraph 1 of Article 
18. Paragraph 4 also provides that a transfer from a pension 
fund located in a Contracting State to another pension fund 
located in that same State shall not be taxed by either 
Contracting State.

Paragraph 5

    Paragraph 5 provides that alimony and periodic payments for 
the support of a child made pursuant to a written agreement or 
a decree of divorce, separate maintenance, or compulsory 
support paid by a resident of a Contracting State to a resident 
of the other Contracting State shall be exempt from tax in both 
Contracting States. The term ``alimony'' as used in this 
paragraph means periodic payments made pursuant to a written 
separation agreement or a decree of divorce, separate 
maintenance or compulsory support which are taxable to the 
recipient under the laws of the State of which he is a 
resident.
            Relationship to Other Articles
    Paragraphs 1 and 4 of Article 18 are subject to the saving 
clause of paragraph 4 of Article 1 (General Scope). Thus, a 
U.S. citizen who is resident in Poland, and receives a pension 
distribution from the United States, may be subject to U.S. tax 
on the payment, notwithstanding the rules in the paragraphs 
that give the State of residence of the recipient the exclusive 
taxing right. Paragraphs 2, 3 and 5 are excepted from the 
saving clause by virtue of subparagraph 5(a) of Article 1. 
Thus, the United States will not tax U.S. citizens and 
residents on the income described in those paragraphs even if 
such amounts otherwise would be subject to tax under U.S. law.

                    ARTICLE 19 (GOVERNMENT SERVICE)

Paragraph 1

    Subparagraphs 1(a) and 1(b) deal with the taxation of 
government compensation (other than a pension addressed in 
paragraph 2). Subparagraph 1(a) provides that remuneration paid 
to any individual who is rendering services to that State, 
political subdivision or local authority is exempt from tax by 
the other State. Under subparagraph 1(b), such payments are, 
however, taxable exclusively in the other State (i.e., the host 
State) if the services are rendered in that other State and the 
individual is a resident of that State who is either a national 
of that State or a person who did not become resident of that 
State solely for purposes of rendering the services. The 
paragraph applies to anyone performing services for a 
government, whether as a government employee, an independent 
contractor, or an employee of an independent contractor.

Paragraph 2

    Paragraph 2 deals with the taxation of pensions paid by, or 
out of funds created by, one of the States, or a political 
subdivision or a local authority thereof, to an individual in 
respect of services rendered to that State or subdivision or 
authority. Subparagraph 2(a) provides that such pensions are 
taxable only in that State. Subparagraph 2(b) provides an 
exception under which such pensions are taxable only in the 
other State if the individual is a resident of, and a national 
of, that other State.
    Pensions paid to retired civilian and military employees of 
a Government of either State are intended to be covered under 
paragraph 2. When benefits paid by a State in respect of 
services rendered to that State or a subdivision or authority 
are in the form of social security benefits, however, those 
payments are covered by paragraph 3 of Article 18 (Pensions, 
Social Security, Annuities, Alimony, and Child Support). As a 
general matter, the result will be the same whether Article 18 
or Article 19 applies, since social security benefits are 
taxable exclusively by the source country and so are government 
pensions. The result will differ only when the payment is made 
to a citizen and resident of the other Contracting State, who 
is not also a citizen of the paying State. In such a case, 
social security benefits continue to be taxable at source while 
government pensions become taxable only in the residence 
country.

Paragraph 3

    Paragraph 3 provides that the remuneration described in 
paragraph 1 will be subject to the rules of Articles 15 (Income 
from Employment), 16 (Directors' Fees), 17 (Entertainers and 
Sportsmen) or 18 (Pensions, Social Security, Annuities, 
Alimony, and Child Support) if the recipient of the income is 
employed by a business conducted by a government.
            Relationship to Other Articles
    Under paragraph 5(b) of Article 1 (General Scope), the 
saving clause (paragraph 4 of Article 1) does not apply to the 
benefits conferred by one of the States under Article 19 if the 
recipient of the benefits is neither a citizen of that State, 
nor a person who has been admitted for permanent residence 
there (i.e., in the United States, a ``green card'' holder). 
Thus, a resident of a Contracting State who in the course of 
performing functions of a governmental nature becomes a 
resident of the other State (but not a permanent resident), 
would be entitled to the benefits of this Article. However, an 
individual who receives a pension paid by the Government of 
Poland in respect of services rendered to the Government of 
Poland shall be taxable on this pension only in Poland unless 
the individual is a U.S. citizen or acquires a U.S. green card.

                   ARTICLE 20 (STUDENTS AND TRAINEES)

    This Article provides rules for host-country taxation of 
visiting students (including pupils) and business trainees. 
Persons who meet the tests of the Article will be exempt from 
tax in the State that they are visiting with respect to 
designated classes of income. Several conditions must be 
satisfied in order for an individual to be entitled to the 
benefits of this Article.
    First, the visitor must have been, either at the time of 
his arrival in the host State or immediately before, a resident 
of the other Contracting State.
    Second, the primary purpose of the visit must be the 
education or training of the visitor. Thus, if the visitor 
comes principally to work in the host State but also is a part-
time student, he would not be entitled to the benefits of this 
Article, even with respect to any payments he may receive from 
abroad for his maintenance or education, and regardless of 
whether or not he is in a degree program. If the student is 
engaged in full time study, the primary purpose of his visit to 
the host State will be deemed to have as its primary purpose 
education. Whether a student is to be considered full-time will 
be determined by the rules of the educational institution at 
which he is studying.

Paragraph 1

    The host-country exemption in paragraph 1 applies to 
payments received by the student (including a pupil) or 
business trainee for the purpose of his maintenance, education 
or training that arise outside the host State. A payment will 
be considered to arise outside the host State if the payer is 
located outside the host State. Thus, if an employer from one 
of the Contracting States sends an employee to the other 
Contracting State for training, the payments the trainee 
receives from abroad from his employer for his maintenance or 
training while he is present in the host State will be exempt 
from tax in the host State. Where appropriate, substance 
prevails over form in determining the identity of the payer. 
Thus, for example, payments made directly or indirectly by a 
U.S. person with whom the visitor is training, but which have 
been routed through a source outside the United States (e.g., a 
foreign subsidiary), are not treated as arising outside the 
United States for this purpose.
    In the case of a business trainee, the benefits of 
paragraph 1 will extend only for a period of one year from the 
time that the visitor first arrives in the host country. If, 
however, a trainee remains in the host country for a second 
year, thus losing the benefits of paragraph 1, he would not 
retroactively lose the benefits of the paragraph for the first 
year.

Paragraph 2

    Paragraph 2 provides a limited exemption for remuneration 
from personal services rendered in the host State up to $9,000 
United States dollars (or its equivalent in Polish legal 
tender) per taxable year. The specified amount is intended to 
equalize the position of a U.S. resident who is entitled to the 
standard deduction and the personal exemption with that of a 
student who files as a non-resident alien and therefore is not 
entitled to such statutory benefits.

Paragraph 3

    The term ``business trainee'' is defined as a person who is 
in the host State temporarily for the purpose of securing 
training that is necessary to qualify to pursue a profession or 
professional specialty. Moreover, the person must be employed 
or under contract with a resident of the other Contracting 
State and must be receiving the training from someone who is 
not related to its employer. Thus, a business trainee might 
include a lawyer employed by a law firm in one Contracting 
State who works for one year as a stagiaire in an unrelated law 
firm in the other Contracting State. However, the term would 
not include a manager who normally is employed by a parent 
company in one Contracting State who is sent to the other 
Contracting State to run a factory owned by a subsidiary of the 
parent company.
            Relationship to Other Articles
    The saving clause of paragraph 4 of Article 1 (General 
Scope) does not apply to this Article with respect to an 
individual who is neither a citizen of the host State nor has 
been admitted for permanent residence there. The saving clause, 
however, does apply with respect to citizens and permanent 
residents of the host State. Thus, a U.S. citizen who is a 
resident of Poland and who visits the United States as a full-
time student at an accredited university will not be exempt 
from U.S. tax on remittances from abroad that otherwise 
constitute U.S. taxable income. A person, however, who is not a 
U.S. citizen, and who visits the United States as a student and 
remains long enough to become a resident under U.S. law, but 
does not become a permanent resident (i.e., does not acquire a 
green card), will be entitled to the full benefits of the 
Article.

                       ARTICLE 21 (OTHER INCOME)

    Article 21 generally assigns taxing jurisdiction over 
income not dealt with in the other Articles (Articles 6 (Income 
from Real Property) through Article 20 (Students and Trainees)) 
of the Convention to the State of residence of the beneficial 
owner of the income. In order for an item of income to be 
``dealt with'' in another article it must be the type of income 
described in the article and, in most cases, it must have its 
source in a Contracting State. For example, all royalty income 
that arises in a Contracting State and that is beneficially 
owned by a resident of the other Contracting State is ``dealt 
with'' in Article 13 (Royalties). However, profits derived in 
the conduct of a business are ``dealt with'' in Article 7 
(Business Profits) whether or not they have their source in one 
of the Contracting States.
    Examples of items of income covered by Article 21 include 
income from gambling, punitive (but not compensatory) damages 
and covenants not to compete. Article 21 would also apply to 
income from a variety of financial transactions, where such 
income does not arise in the course of the conduct of a trade 
or business. For example, income from notional principal 
contracts and other derivatives would fall within Article 21 if 
derived by persons not engaged in the trade or business of 
dealing in such instruments, unless such instruments were being 
used to hedge risks arising in a trade or business. It would 
also apply to securities lending fees derived by an 
institutional investor. Further, in most cases guarantee fees 
paid within an intercompany group would be covered by Article 
21, unless the guarantor were engaged in the business of 
providing such guarantees to unrelated parties.
    Article 21 also applies to items of income that are not 
``dealt with'' in the other articles because of their source or 
some other characteristic. For example, Article 11 (Interest) 
addresses only the taxation of interest arising in a 
Contracting State. Interest arising in a third State that is 
not attributable to a permanent establishment, therefore, is 
subject to Article 21.
    Distributions from partnerships are not generally ``dealt 
with'' under Article 21 because partnership distributions 
generally do not constitute income. Under the Code, partners 
include in income their distributive share of partnership 
income annually, and partnership distributions themselves 
generally do not give rise to income. This would also be the 
case under U.S. law with respect to distributions from trusts. 
Trust income and distributions that, under the Code, have the 
character of the associated distributable net income would 
generally be covered by another article of the Convention. See 
Code section 641 et seq.

Paragraph 1

    The general rule of Article 21 is contained in paragraph 1. 
Items of income not dealt with in other articles and 
beneficially owned by a resident of a Contracting State will be 
taxable only in the State of residence. This exclusive right of 
taxation applies whether or not the residence State exercises 
its right to tax the income covered by the Article.
    The reference in this paragraph to ``items of income 
beneficially owned by a resident of a Contracting State'' 
rather than simply ``items of income of a resident of a 
Contracting State,'' as in the OECD Model, is intended merely 
to make explicit the understanding in other treaties that the 
exclusive residence taxation provided by paragraph 1 applies 
only when a resident of a Contracting State is the beneficial 
owner of the income. Thus, source taxation of income not dealt 
with in other articles of the Convention is not limited by 
paragraph 1 if it is nominally paid to a resident of the other 
Contracting State, but is beneficially owned by a resident of a 
third State. However, income received by a nominee on behalf of 
a resident of that other State would be entitled to benefits.
    The term ``beneficially owned'' is not defined in the 
Convention, and is, therefore, defined as under the internal 
law of the country imposing tax (i.e., the source country). The 
person who beneficially owns the income for purposes of Article 
21 is the person to which the income is attributable for tax 
purposes under the laws of the source State.

Paragraph 2

    This paragraph provides an exception to the general rule of 
paragraph 1 for income from a right or property that is 
effectively connected to a permanent establishment maintained 
in a Contracting State by a resident of the other Contracting 
State. The taxation of such income is governed by the 
provisions of Article 7 (Business Profits). Therefore, income 
arising outside the United States from a right or property that 
is effectively connected to a permanent establishment 
maintained in the United States by a resident of the other 
Contracting State generally would be taxable by the United 
States under the provisions of Article 7. This would be true 
even if the income is sourced in a third State.
            Relationship to Other Articles
    This Article is subject to the saving clause of paragraph 4 
of Article 1 (General Scope). Thus, the United States may tax 
the income of a resident of Poland that is not dealt with 
elsewhere in the Convention, if that resident is a citizen of 
the United States. The Article is also subject to the 
provisions of Article 22 (Limitation on Benefits). Thus, if a 
resident of Poland earns income that falls within the scope of 
paragraph 1 of Article 21, but that is taxable by the United 
States under U.S. law, the income would be exempt from U.S. tax 
under the provisions of Article 21 only if the resident 
satisfies one of the tests of Article 22 for entitlement to 
benefits.

                  ARTICLE 22 (LIMITATION ON BENEFITS)

    Article 22 contains anti-treaty-shopping provisions that 
are intended to prevent residents of third countries from 
benefiting from what is intended to be a reciprocal agreement 
between two countries. In general, the provision does not rely 
on a determination of purpose or intention but instead sets 
forth a series of objective tests. A resident of a Contracting 
State that satisfies one of the tests will receive benefits 
regardless of its motivations in choosing its particular 
business structure.
    The structure of the revised Article is as follows: 
Paragraph 1 states the general rule that residents are entitled 
to benefits otherwise accorded to residents only to the extent 
provided in the Article. Paragraph 2 lists a series of 
attributes of a resident of a Contracting State, the presence 
of any one of which will entitle that person to all the 
benefits of the Convention. Paragraph 3 provides a derivative 
benefits rule. Paragraph 4 provides that, regardless of whether 
a person qualifies for benefits under paragraph 2, benefits may 
be granted to that person with regard to certain income earned 
in the conduct of an active trade or business. Paragraph 5 
provides a test for headquarters companies. Paragraph 6 
provides a special rule for so-called ``triangular cases'' 
notwithstanding the other provisions of the Article. Paragraph 
7 provides that benefits also may be granted if the competent 
authority of the State from which benefits are claimed 
determines that it is appropriate to provide benefits in that 
case. Paragraph 8 defines certain terms used in the Article.

Paragraph 1

    Paragraph 1 provides that a resident of a Contracting State 
will be entitled to the benefits otherwise accorded to 
residents of a Contracting State under the Convention only to 
the extent provided in the Article. The benefits otherwise 
accorded to residents under the Convention include all 
limitations on source-based taxation under Articles 6 (Income 
from Real Property) through Article 21 (Other Income), the 
treaty-based relief from double taxation provided by Article 23 
(Relief from Double Taxation), and the protection afforded to 
residents of a Contracting State under Article 24 (Non-
Discrimination). Some provisions do not require that a person 
be a resident in order to enjoy the benefits of those 
provisions. For example, Article 25 (Mutual Agreement 
Procedure) is not limited to residents of the Contracting 
States, and Article 27 (Members of Diplomatic Missions and 
Consular Posts) applies to diplomatic agents or consular 
officials regardless of residence. Article 22 accordingly does 
not limit the availability of treaty benefits under these 
provisions.
    Article 22 and the anti-abuse provisions of domestic law 
complement each other, as Article 22 effectively determines 
whether an entity has a sufficient nexus to the Contracting 
State to be treated as a resident for treaty purposes, while 
domestic anti-abuse provisions (e.g., business purpose, 
substance-over-form, step transaction or conduit principles) 
determine whether a particular transaction should be recast in 
accordance with its substance. Thus, domestic law principles of 
the source Contracting State may be applied to identify the 
beneficial owner of an item of income, and Article 22 then will 
be applied to the beneficial owner to determine if that person 
is entitled to the benefits of the Convention with respect to 
such income.

Paragraph 2

    Paragraph 2 has five subparagraphs, each of which describes 
a category of residents that will be considered qualified 
persons.
    It is intended that the provisions of paragraph 2 will be 
self-executing. Unlike the provisions of paragraph 7, discussed 
below, claiming benefits under paragraph 2 does not require 
advance competent authority ruling or approval. The tax 
authorities may, of course, on review, determine that the 
taxpayer has improperly interpreted the paragraph and is not 
entitled to the benefits claimed.
            Individuals--Subparagraph 2(a)
    Subparagraph 2(a) provides that individual residents of a 
Contracting State will be considered qualified persons. If such 
an individual receives income as a nominee on behalf of a third 
country resident, benefits may be denied under the respective 
articles of the Convention by the requirement that the 
beneficial owner of the income be a resident of a Contracting 
State.
            Governments--Subparagraph 2(b)
    Subparagraph 2(b) provides that the Contracting States and 
any political subdivision or local authority or instrumentality 
thereof will be considered qualified persons.
            Publicly-Traded Corporations--Subparagraph 2(c)(i)
    Subparagraph 2(c) applies to two categories of companies: 
publicly traded companies and subsidiaries of publicly traded 
companies. A company resident in a Contracting State will be 
considered a qualified person under clause (i) of subparagraph 
(c) if the principal class of its shares, and any 
disproportionate class of shares, is regularly traded on one or 
more recognized stock exchanges and the company satisfies at 
least one of the following additional requirements. First, 
under clause (A) in the case of a company resident in Poland, 
the company's principal class of shares must be primarily 
traded on one or more recognized stock exchanges located either 
in Poland or within the European Union, and in the case of a 
company resident in the United States, the company's principal 
class or shares must be primarily traded on a recognized stock 
exchange located either in the United States or in another 
state that is a party to the North American Free Trade 
Agreement. If the company's principal class of shares does not 
satisfy the trading requirement set forth in clause (A), clause 
(B) provides that the regularly-traded company can nevertheless 
satisfy the requirements of clause (i) if the company's primary 
place of management and control is in its State of residence. 
The term ``recognized stock exchange'' is defined in 
subparagraph 8(a). It includes (i) any stock exchange 
registered with the Securities and Exchange Commission as a 
national securities exchange for purposes of the Securities 
Exchange Act of 1934; (ii) the Warsaw Stock Exchange; (iii) the 
stock exchanges of Amsterdam, Brussels, Budapest, Frankfurt, 
London, Mexico City, Montreal, Paris, Toronto, Vienna and 
Zurich, and (iv) any other stock exchange agreed upon by the 
competent authorities of the Contracting States.
    If a company has only one class of shares, it is only 
necessary to consider whether the shares of that class meet the 
relevant trading requirements. If the company has more than one 
class of shares, it is necessary as an initial matter to 
determine which class or classes constitute the ``principal 
class of shares.'' The term ``principal class of shares'' is 
defined in subparagraph 8(b) to mean the ordinary or common 
shares of the company representing the majority of the 
aggregate voting power and value of the company. If the company 
does not have a class of ordinary or common shares representing 
the majority of the aggregate voting power and value of the 
company, then the ``principal class of shares'' is that class 
or any combination of classes of shares that represents, in the 
aggregate, a majority of the voting power and value of the 
company. Although in a particular case involving a company with 
several classes of shares it is conceivable that more than one 
group of classes could be identified that account for more than 
50% of the shares, it is only necessary for one such group to 
satisfy the requirements of this subparagraph in order for the 
company to be entitled to benefits. Benefits would not be 
denied to the company even if a second, non-qualifying, group 
of shares with more than half of the company's voting power and 
value could be identified. A company whose principal class of 
shares is regularly traded on a recognized stock exchange will 
nevertheless not be considered a qualified person under 
subparagraph 2(c) if it has a disproportionate class of shares 
that is not regularly traded on a recognized stock exchange. 
The term ``disproportionate class of shares'' is defined in 
subparagraph 8(c). A company has a disproportionate class of 
shares if it has outstanding a class of shares which is subject 
to terms or other arrangements that entitle the holder to a 
larger portion of the company's income, profit, or gain in the 
other Contracting State than that to which the holder would be 
entitled in the absence of such terms or arrangements. Thus, 
for example, a company resident in Poland has a 
disproportionate class of shares if it has outstanding a class 
of ``tracking stock'' that pays dividends based upon a formula 
that approximates the company's return on its assets employed 
in the United States. The following example illustrates this 
result. Example. OCo is a corporation resident in Poland. OCo 
has two classes of shares: Common and Preferred. The Common 
shares are listed and regularly traded on the Warsaw Stock 
Exchange. The Preferred shares have no voting rights and are 
entitled to receive dividends equal in amount to interest 
payments that OCo receives from unrelated borrowers in the 
United States. The Preferred shares are owned entirely by a 
single investor that is a resident of a country with which the 
United States does not have a tax treaty. The Common shares 
account for more than 50 percent of the value of OCo and for 
100 percent of the voting power. Because the owner of the 
Preferred shares is entitled to receive payments corresponding 
to the U.S. source interest income earned by OCo, the Preferred 
shares are a disproportionate class of shares. Because the 
Preferred shares are not regularly traded on a recognized stock 
exchange, OCo will not qualify for benefits under subparagraph 
(c) of paragraph 2. The term ``regularly traded'' is not 
defined in the Convention. In accordance with paragraph 2 of 
Article 3 (General Definitions), this term will be defined by 
reference to the domestic tax laws of the State from which 
treaty benefits are sought, generally the source State. In the 
case of the United States, this term is understood to have the 
meaning it has under Treas. Reg. section 1.884-5(d)(4)(i)(B), 
relating to the branch tax provisions of the Code. Under these 
regulations, a class of shares is considered to be ``regularly 
traded'' if two requirements are met: trades in the class of 
shares are made in more than de minimis quantities on at least 
60 days during the taxable year, and the aggregate number of 
shares in the class traded during the year is at least 10 
percent of the average number of shares outstanding during the 
year. Sections 1.884-5(d)(4)(i)(A), (ii) and (iii) will not be 
taken into account for purposes of defining the term 
``regularly traded'' under the Convention.
    The regular trading requirement can be met by trading on 
any recognized exchange or exchanges located in either State. 
Trading on one or more recognized stock exchanges may be 
aggregated for purposes of this requirement. Thus, a U.S. 
company could satisfy the regularly traded requirement through 
trading, in whole or in part, on any recognized stock exchange. 
Authorized but unissued shares are not considered for purposes 
of this test.
    The term ``primarily traded'' is defined in subparagraph 
8(d). The shares of a company shall be considered ``primarily 
traded'' on a recognized stock exchange if the number of shares 
in the company's principal class of shares that are traded 
during the taxable year on all recognized stock exchanges in 
the Contracting State of which the company is a resident (or in 
the case of a company resident in Poland, on a recognized stock 
exchange located within the European Union or in any other 
European Free Trade Association (EFTA) state, or in the case of 
a company resident in the United States, on a recognized stock 
exchange located in another state that is a party to the North 
American Free Trade Agreement (NAFTA)) exceeds the number of 
shares in the company's principal class of shares that are 
traded during that year on established securities markets in 
any other single foreign country. This treaty-based definition 
is consistent with meaning of the term under Treas. Reg. 
section 1.884-5(d)(3), relating to the branch tax provisions of 
the Code.
    A company whose principal class of shares is regularly 
traded on a recognized exchange but cannot meet the primarily 
traded test may claim treaty benefits if its primary place of 
management and control is in its country of residence. This 
test is distinct from the ``place of effective management'' 
test which is used in the OECD Model and by many other 
countries to establish residence. In some cases, the place of 
effective management test has been interpreted to mean the 
place where the board of directors meets. By contrast, the 
primary place of management and control test looks to where 
day-to-day responsibility for the management of the company 
(and its subsidiaries) is exercised. The company's primary 
place of management and control will be located in the State in 
which the company is a resident only if the executive officers 
and senior management employees exercise day-to-day 
responsibility for more of the strategic, financial and 
operational policy decision making for the company (including 
direct and indirect subsidiaries) in that State than in the 
other State or any third state, and the staff that support the 
management in making those decisions are also based in that 
State. Thus, the test looks to the overall activities of the 
relevant persons to see where those activities are conducted. 
In most cases, it will be a necessary, but not a sufficient, 
condition that the headquarters of the company (that is, the 
place at which the CEO and other top executives normally are 
based) be located in the Contracting State of which the company 
is a resident. To apply the test, it will be necessary to 
determine which persons are to be considered ``executive 
officers and senior management employees.'' In most cases, it 
will not be necessary to look beyond the executives who are 
members of the Board of Directors (the ``inside directors'') in 
the case of a U.S. company. That will not always be the case, 
however; in fact, the relevant persons may be employees of 
subsidiaries if those persons make the strategic, financial and 
operational policy decisions. Moreover, it would be necessary 
to take into account any special voting arrangements that 
result in certain board members making certain decisions 
without the participation of other board members.
            Subsidiaries of Publicly-Traded Corporations--Subparagraph 
                    2(c)(ii)
    A company resident in a Contracting State is entitled to 
all the benefits of the Convention under clause (ii) of 
subparagraph (c) of paragraph 2 if five or fewer publicly 
traded companies described in clause (i) are the direct or 
indirect owners of at least 50 percent of the aggregate vote 
and value of the company's shares (and at least 50 percent of 
any disproportionate class of shares). If the publicly-traded 
companies are indirect owners, however, each of the 
intermediate companies must be a resident of one of the 
Contracting States. Thus, for example, a company that is a 
resident of Poland, all the shares of which are owned by 
another company that is a resident of Poland, would qualify for 
benefits under the Convention if the principal class of shares 
(and any disproportionate classes of shares) of the parent 
company are regularly and primarily traded on a recognized 
stock exchange in Poland (or within the European Union or 
EFTA). However, such a subsidiary would not qualify for 
benefits under clause (ii) if the publicly traded parent 
company were a resident of a third state, for example, and not 
a resident of the United States or Poland. Furthermore, if a 
parent company in Poland indirectly owned the bottom-tier 
company through a chain of subsidiaries, each such subsidiary 
in the chain, as an intermediate owner, must be a resident of 
the United States or Poland in order for the subsidiary to meet 
the test in clause (ii).
            Tax Exempt Organizations--Subparagraph 2(d)
    Subparagraph 2(d) provides rules by which the tax exempt 
organizations described in paragraph 2 of Article 4 (Resident) 
will be considered qualified persons. A pension fund will 
qualify for benefits if more than fifty percent of the 
beneficiaries, members or participants of the organization are 
individuals resident in either Contracting State. For purposes 
of this provision, the term ``beneficiaries'' should be 
understood to refer to the persons receiving benefits from the 
organization. On the other hand, a tax-exempt organization 
other than a pension fund automatically qualifies for benefits, 
without regard to the residence of its beneficiaries or 
members. Entities qualifying under this rule generally are 
those that are exempt from tax in their State of residence and 
that are organized and operated exclusively to fulfill 
religious, charitable, scientific, artistic, cultural, or 
educational purposes.
            Ownership/Base Erosion--Subparagraph 2(e)
    Subparagraph 2(e) provides an additional method to qualify 
for treaty benefits that applies to any form of legal entity 
that is a resident of a Contracting State. The test provided in 
subparagraph (e), the so-called ownership and base erosion 
test, is a two-part test. Both prongs of the test must be 
satisfied for the resident to be entitled to treaty benefits 
under subparagraph 2(e). The ownership prong of the test, under 
clause (i), requires that 50 percent or more of each class of 
shares or other beneficial interests in the person is owned, 
directly or indirectly, on at least half the days of the 
person's taxable year by persons who are residents of the 
Contracting State of which that person is a resident and that 
are themselves entitled to treaty benefits under subparagraphs 
(a), (b), (d) or clause (i) of subparagraph (c) of paragraph 2. 
In the case of indirect owners, however, each of the 
intermediate owners must be a resident of that Contracting 
State. Trusts may be entitled to benefits under this provision 
if they are treated as residents under Article 4 (Residence) 
and they otherwise satisfy the requirements of this 
subparagraph. For purposes of this subparagraph, the beneficial 
interests in a trust will be considered to be owned by its 
beneficiaries in proportion to each beneficiary's actuarial 
interest in the trust. The interest of a remainder beneficiary 
will be equal to 100 percent less the aggregate percentages 
held by income beneficiaries. A beneficiary's interest in a 
trust will not be considered to be owned by a person entitled 
to benefits under the other provisions of paragraph 2 if it is 
not possible to determine the beneficiary's actuarial interest. 
Consequently, if it is not possible to determine the actuarial 
interest of the beneficiaries in a trust, the ownership test 
under clause (i) cannot be satisfied, unless all possible 
beneficiaries are persons entitled to benefits under the other 
subparagraphs of paragraph 2. The base erosion prong of clause 
(ii) of subparagraph (e) is satisfied with respect to a person 
if less than 50 percent of the person's gross income for the 
taxable year, as determined under the tax law in the person's 
State of residence, is paid or accrued to persons who are not 
residents of either Contracting State entitled to benefits 
under subparagraphs (a), (b), (d) or clause (i) of subparagraph 
(c) of paragraph 2, in the form of payments deductible for tax 
purposes in the payer's State of residence. These amounts do 
not include arm's-length payments in the ordinary course of 
business for services or tangible property. To the extent they 
are deductible from the taxable base, trust distributions are 
deductible payments. However, depreciation and amortization 
deductions, which do not represent payments or accruals to 
other persons, are disregarded for this purpose. Paragraph 3
    Paragraph 3 sets forth a ``derivative benefits'' test that 
is potentially applicable to all treaty benefits, although the 
test is applied to individual items of income. In general, a 
derivative benefits test entitles certain companies that are 
residents of a Contracting State to treaty benefits if the 
owner of the company would have been entitled to the same 
benefit had the income in question flowed directly to that 
owner. To qualify under this paragraph, the company must meet 
an ownership test and a base erosion test. Subparagraph 3(a) 
sets forth the ownership test. Under this test, seven or fewer 
equivalent beneficiaries must own shares representing at least 
95 percent of the aggregate voting power and value of the 
company and at least 50 percent of any disproportionate class 
of shares. Ownership may be direct or indirect. The term 
``equivalent beneficiary'' is defined in subparagraph 8(f). 
This definition may be met in two alternative ways. Under the 
first alternative, a person may be an equivalent beneficiary 
because it is entitled to equivalent benefits under a tax 
treaty between the country of source and the country in which 
the person is a resident. This alternative has two 
requirements. The first requirement as set forth in clause (i) 
of subparagraph 8(f) is that the person must be a resident of a 
member state of the European Union or any other European Free 
Trade Association (EFTA) state or of a party to the North 
American Free Trade Agreement (collectively, ``qualifying 
States''). In addition, the person must be entitled to all the 
benefits of a comprehensive tax treaty between the Contracting 
State from which benefits of the Convention are claimed and a 
qualifying state under provisions that are analogous to the 
rules in subparagraphs 2(a), 2(b), 2(c)(i), or 2(d) of this 
Article. If the treaty in question does not have a 
comprehensive limitation on benefits article, this requirement 
is met only if the person would be entitled to treaty benefits 
under the tests in subparagraphs 2(a), 2(b), 2(c)(i), or 2(d) 
of this Article if the person were a resident of one of the 
Contracting States. Clause (i)(B) of subparagraph 8(f) requires 
that with respect to, dividends, interest, and royalties, the 
person must be entitled to a rate of tax that is at least as 
low as the tax rate that would apply under the Convention to 
such income. Thus, the rates to be compared are: (1) the rate 
of tax that the source State would have imposed if a qualified 
resident of the other Contracting State was the beneficial 
owner of the income; and (2) the rate of tax that the source 
State would have imposed if the third state resident had 
received the income directly from the source State. 
Subparagraph 8(g) provides a special rule to take account of 
the fact that withholding taxes on many inter-company 
dividends, interest and royalties are exempt within the 
European Union by reason of various EU directives, rather than 
by tax treaty. If a U.S. company receives such payments from a 
Polish company, and that U.S. company is owned by a company 
resident in a member state of the European Union that would 
have qualified for an exemption from withholding tax if it had 
received the income directly, the parent company will be 
treated as an equivalent beneficiary. This rule is necessary 
because many European Union member countries have not re-
negotiated their tax treaties to reflect the exemptions 
available under the directives. The requirement that a person 
be entitled to ``all the benefits'' of a comprehensive tax 
treaty eliminates those persons that qualify for benefits with 
respect to only certain types of income. Accordingly, the fact 
that a French parent of a Polish company is engaged in the 
active conduct of a trade or business in France and therefore 
would be entitled to the benefits of the U.S.-France treaty if 
it received dividends directly from a U.S. subsidiary of the 
Polish company will not qualify such French company as an 
equivalent beneficiary. Further, the French company cannot be 
an equivalent beneficiary if it qualifies for benefits only 
with respect to certain income as a result of a ``derivative 
benefits'' provision in the U.S.-France treaty. However, 
because such French company is a resident of a qualifying 
state, it would be possible to look through the French company 
to its parent company to determine whether the parent company 
is an equivalent beneficiary. The second alternative for 
satisfying the ``equivalent beneficiary'' test is available 
only to residents of one of the two Contracting States. U.S. or 
Polish residents who are eligible for treaty benefits by reason 
of subparagraphs 2(a), 2(b), 2(c)(i), or 2(d) are equivalent 
beneficiaries for purposes of the relevant tests in this 
Article. Thus, a Polish individual will be an equivalent 
beneficiary without regard to whether the individual would have 
been entitled to receive the same benefits if it received the 
income directly. A resident of a third country cannot qualify 
for treaty benefits under these provisions by reason of those 
paragraphs or any other rule of the treaty, and therefore does 
not qualify as an equivalent beneficiary under this 
alternative. Thus, a resident of a third country can be an 
equivalent beneficiary only if it would have been entitled to 
equivalent benefits had it received the income directly. The 
second alternative was included in order to clarify that 
ownership by certain residents of a Contracting State would not 
disqualify a U.S. or Polish company under this paragraph. Thus, 
for example, if 90 percent of a Polish company is owned by five 
companies that are resident in member states of the European 
Union who satisfy the requirements of subparagraph 8(g)(i), and 
10 percent of the Polish company is owned by a U.S. or Polish 
individual, then the Polish company still can satisfy the 
requirements of subparagraph 3(a). Subparagraph 3(b) sets forth 
the base erosion test. A company meets this base erosion test 
if less than 50 percent of its gross income (as determined in 
the company's State of residence) for the taxable period is 
paid or accrued, directly or indirectly, to a person or persons 
who are not equivalent beneficiaries in the form of payments 
deductible for tax purposes in company's State of residence. 
These amounts do not include arm's-length payments in the 
ordinary course of business for services or tangible property. 
This test is qualitatively the same as the base erosion test in 
subparagraph 2(e)(ii), except that the test in paragraph 3(b) 
focuses on base-eroding payments to persons who are not 
equivalent beneficiaries.

Paragraph 4

    Paragraph 4 sets forth an alternative test under which a 
resident of a Contracting State may receive treaty benefits 
with respect to certain items of income that are connected to 
an active trade or business conducted in its State of 
residence. A resident of a Contracting State may qualify for 
benefits under paragraph 4 whether or not it also qualifies 
under paragraph 2 or 3. Subparagraph 4(a) sets forth the 
general rule that a resident of a Contracting State engaged in 
the active conduct of a trade or business in that State may 
obtain the benefits of the Convention with respect to an item 
of income derived in the other Contracting State. The item of 
income, however, must be derived in connection with or 
incidental to that trade or business. The term ``trade or 
business'' is not defined in the Convention. Pursuant to 
paragraph 2 of Article 3 (General Definitions), when 
determining whether a resident of Poland is entitled to the 
benefits of the Convention under paragraph 3 of this Article 
with respect to an item of income derived from sources within 
the United States, the United States will ascribe to this term 
the meaning that it has under the law of the United States. 
Accordingly, the U.S. competent authority will refer to the 
regulations issued under Code section 367(a) for the definition 
of the term ``trade or business.'' In general, therefore, a 
trade or business will be considered to be a specific unified 
group of activities that constitutes or could constitute an 
independent economic enterprise carried on for profit. 
Furthermore, a corporation generally will be considered to 
carry on a trade or business only if the officers and employees 
of the corporation conduct substantial managerial and 
operational activities. The business of making or managing 
investments for the resident's own account will be considered 
to be a trade or business only when part of banking, insurance 
or securities activities conducted by a bank, an insurance 
company, or a registered securities dealer respectively. Such 
activities conducted by a person other than a bank, insurance 
company or registered securities dealer will not be considered 
to be the conduct of an active trade or business, nor would 
they be considered to be the conduct of an active trade or 
business if conducted by a bank, insurance company or 
registered securities dealer but not as part of the company's 
banking, insurance or dealer business. Because a headquarters 
operation is in the business of managing investments, a company 
that functions solely as a headquarters company will not be 
considered to be engaged in an active trade or business for 
purposes of paragraph 4.
    An item of income is derived in connection with a trade or 
business if the income-producing activity in the State of 
source is a line of business that ``forms a part of'' or is 
``complementary'' to the trade or business conducted in the 
State of residence by the income recipient. A business activity 
generally will be considered to form part of a business 
activity conducted in the State of source if the two activities 
involve the design, manufacture or sale of the same products or 
type of products, or the provision of similar services. The 
line of business in the State of residence may be upstream, 
downstream, or parallel to the activity conducted in the State 
of source. Thus, the line of business may provide inputs for a 
manufacturing process that occurs in the State of source, may 
sell the output of that manufacturing process, or simply may 
sell the same sorts of products that are being sold by the 
trade or business carried on in the State of source. Example 1. 
USCo is a corporation resident in the United States. USCo is 
engaged in an active manufacturing business in the United 
States. USCo owns 100 percent of the shares of FCo, a 
corporation resident in Poland. FCo distributes USCo products 
in Poland. Since the business activities conducted by the two 
corporations involve the same products, FCo's distribution 
business is considered to form a part of USCo's manufacturing 
business.
    Example 2. The facts are the same as in Example 1, except 
that USCo does not manufacture. Rather, USCo operates a large 
research and development facility in the United States that 
licenses intellectual property to affiliates worldwide, 
including FCo. FCo and other USCo affiliates then manufacture 
and market the USCo-designed products in their respective 
markets. Since the activities conducted by FCo and USCo involve 
the same product lines, these activities are considered to form 
a part of the same trade or business.
    For two activities to be considered to be 
``complementary,'' the activities need not relate to the same 
types of products or services, but they should be part of the 
same overall industry and be related in the sense that the 
success or failure of one activity will tend to result in 
success or failure for the other. Where more than one trade or 
business is conducted in the State of source and only one of 
the trades or businesses forms a part of or is complementary to 
a trade or business conducted in the State of residence, it is 
necessary to identify the trade or business to which an item of 
income is attributable. Royalties generally will be considered 
to be derived in connection with the trade or business to which 
the underlying intangible property is attributable. Dividends 
will be deemed to be derived first out of earnings and profits 
of the treaty-benefited trade or business, and then out of 
other earnings and profits. Interest income may be allocated 
under any reasonable method consistently applied. A method that 
conforms to U.S. principles for expense allocation will be 
considered a reasonable method.
    Example 3. Americair is a corporation resident in the 
United States that operates an international airline. FSub is a 
wholly-owned subsidiary of Americair resident in Poland. FSub 
operates a chain of hotels in Poland that are located near 
airports served by Americair flights. Americair frequently 
sells tour packages that include air travel to Polnd and 
lodging at FSub hotels. Although both companies are engaged in 
the active conduct of a trade or business, the businesses of 
operating a chain of hotels and operating an airline are 
distinct trades or businesses. Therefore FSub's business does 
not form a part of Americair's business. However, FSub's 
business is considered to be complementary to Americair's 
business because they are part of the same overall industry 
(travel) and the links between their operations tend to make 
them interdependent.
    Example 4. The facts are the same as in Example 3, except 
that FSub owns an office building in Poland instead of a hotel 
chain. No part of Americair's business is conducted through the 
office building. FSub's business is not considered to form a 
part of or to be complementary to Americair's business. They 
are engaged in distinct trades or businesses in separate 
industries, and there is no economic dependence between the two 
operations.
    Example 5. USFlower is a corporation resident in the United 
States. USFlower produces and sells flowers in the United 
States and other countries. USFlower owns all the shares of 
ForHolding, a corporation resident in Poland. ForHolding is a 
holding company that is not engaged in a trade or business. 
ForHolding owns all the shares of three corporations that are 
resident in Poland: ForFlower, ForLawn, and ForFish. ForFlower 
distributes USFlower flowers under the USFlower trademark in 
Poland. ForLawn markets a line of lawn care products in Poland 
under the USFlower trademark. In addition to being sold under 
the same trademark, ForLawn and ForFlower products are sold in 
the same stores and sales of each company's products tend to 
generate increased sales of the other's products. ForFish 
imports fish from the United States and distributes it to fish 
wholesalers in Poland. For purposes of paragraph 3, the 
business of ForFlower forms a part of the business of USFlower, 
the business of ForLawn is complementary to the business of 
USFlower, and the business of ForFish is neither part of nor 
complementary to that of USFlower.
    An item of income derived from the State of source is 
``incidental to'' the trade or business carried on in the State 
of residence if production of the item facilitates the conduct 
of the trade or business in the State of residence. An example 
of incidental income is the temporary investment of working 
capital of a person in the State of residence in securities 
issued by persons in the State of source.
    Subparagraph (b) of paragraph 4 states a further condition 
to the general rule in subparagraph (a) in cases where the 
trade or business generating the item of income in question is 
carried on either by the person deriving the income or by any 
associated enterprises. Subparagraph (b) states that the trade 
or business carried on in the State of residence, under these 
circumstances, must be substantial in relation to the activity 
in the State of source. The substantiality requirement is 
intended to prevent a narrow case of treaty-shopping abuses in 
which a company attempts to qualify for benefits by engaging in 
de minimis connected business activities in the treaty country 
in which it is resident (i.e., activities that have little 
economic cost or effect with respect to the company business as 
a whole).
    The determination of substantiality is made based upon all 
the facts and circumstances and takes into account the 
comparative sizes of the trades or businesses in each 
Contracting State, the nature of the activities performed in 
each Contracting State and the relative contributions made to 
that trade or business in each Contracting State. In any case, 
in making each determination or comparison, due regard will be 
given to the relative sizes of the economies in the two 
Contracting States.
    The determination in subparagraph (b) also is made 
separately for each item of income derived from the State of 
source. It therefore is possible that a person would be 
entitled to the benefits of the Convention with respect to one 
item of income but not with respect to another. If a resident 
of a Contracting State is entitled to treaty benefits with 
respect to a particular item of income under paragraph 4, the 
resident is entitled to all benefits of the Convention insofar 
as they affect the taxation of that item of income in the State 
of source.
    The application of the substantiality requirement only to 
income from related parties focuses only on potential abuse 
cases, and does not hamper certain other kinds of non-abusive 
activities, even though the income recipient resident in a 
Contracting State may be very small in relation to the entity 
generating income in the other Contracting State. For example, 
if a small U.S. research firm develops a process that it 
licenses to a very large, unrelated, pharmaceutical 
manufacturer in Poland, the size of the U.S. research firm 
would not have to be tested against the size of the 
manufacturer. Similarly, a small U.S. bank that makes a loan to 
a very large unrelated company operating a business in Poland 
would not have to pass a substantiality test to receive treaty 
benefits under paragraph 4.
    Subparagraph (c) of paragraph 3 provides special 
attribution rules for purposes of applying the substantive 
rules of subparagraphs (a) and (b). Thus, these rules apply for 
purposes of determining whether a person meets the requirement 
in subparagraph (a) that it be engaged in the active conduct of 
a trade or business and that the item of income is derived in 
connection with that active trade or business, and for making 
the comparison required by the ``substantiality'' requirement 
in subparagraph (b). Subparagraph (c) attributes to a person 
activities conducted by persons ``connected'' to such person. A 
person (``X'') is connected to another person (``Y'') if X 
possesses 50 percent or more of the beneficial interest in Y 
(or if Y possesses 50 percent or more of the beneficial 
interest in X). For this purpose, X is connected to a company 
if X owns shares representing fifty percent or more of the 
aggregate voting power and value of the company or fifty 
percent or more of the beneficial equity interest in the 
company. X also is connected to Y if a third person possesses 
fifty percent or more of the beneficial interest in both X and 
Y. For this purpose, if X or Y is a company, the threshold 
relationship with respect to such company or companies is fifty 
percent or more of the aggregate voting power and value or 
fifty percent or more of the beneficial equity interest. 
Finally, X is connected to Y if, based upon all the facts and 
circumstances, X controls Y, Y controls X, or X and Y are 
controlled by the same person or persons.

Paragraph 5

    Paragraph 5 provides that a resident of one of the 
Contracting States is entitled to all the benefits of the 
Convention if that person functions as a recognized 
headquarters company for a multinational corporate group. The 
provisions of this paragraph are consistent with the other U.S. 
tax treaties where this provision has been adopted. For this 
purpose, the multinational corporate group includes all 
corporations that the headquarters company supervises, and 
excludes affiliated corporations not supervised by the 
headquarters company. The headquarters company does not have to 
own shares in the companies that it supervises. In order to be 
considered a headquarters company, the person must meet several 
requirements that are enumerated in paragraph 5. These 
requirements are discussed below.
            Overall Supervision and Administration
    Subparagraph 5(a) provides that the person must provide a 
substantial portion of the overall supervision and 
administration of the group. This activity may include group 
financing, but group financing may not be the principal 
activity of the person functioning as the headquarters company. 
A person only will be considered to engage in supervision and 
administration if it engages in a number of the following 
activities: group financing, pricing, marketing, internal 
auditing, internal communications, and management. Other 
activities also could be part of the function of supervision 
and administration.
    In determining whether a ``substantial portion'' of the 
overall supervision and administration of the group is provided 
by the headquarters company, its headquarters-related 
activities must be substantial in relation to the same 
activities for the same group performed by other entities. 
Subparagraph 5(a) does not require that the group that is 
supervised include persons in the other State. However, it is 
anticipated that in most cases the group will include such 
persons, due to the requirement in subparagraph 5(g), discussed 
below, that the income derived in the other Contracting State 
by the headquarters company be derived in connection with or be 
incidental to an active trade or business supervised by the 
headquarters company.
            Active Trade or Business
    Subparagraph 5(b) is the first of several requirements 
intended to ensure that the relevant group is truly 
``multinational.'' This subparagraph provides that the 
corporate group supervised by the headquarters company must 
consist of corporations resident in, and engaged in active 
trades or businesses in, at least five countries. Furthermore, 
at least five countries must each contribute substantially to 
the income generated by the group, as the rule requires that 
the business activities carried on in each of the five 
countries (or groupings of countries) generate at least 10 
percent of the gross income of the group. For purposes of the 
10 percent gross income requirement, the income from multiple 
countries may be aggregated into non-overlapping groupings, as 
long as there are at least five individual countries or 
groupings that each satisfies the 10 percent requirement. If 
the gross income requirement under this subparagraph is not met 
for a taxable year, the taxpayer may satisfy this requirement 
by applying the 10 percent gross income test to the average of 
the gross incomes for the four years preceding the taxable 
year.
    Example. PHQ is a corporation resident in Poland. PHQ 
functions as a headquarters company for a group of companies. 
These companies are resident in the United States, Canada, New 
Zealand, the United Kingdom, Malaysia, the Philippines, 
Singapore, and Indonesia. The gross income generated by each of 
these companies for 2012 and 2013 is as follows:

------------------------------------------------------------------------
             Country                     2012                2013
------------------------------------------------------------------------
United States                                   $40                 $45
Canada                                           25                  15
New Zealand                                      10                  20
United Kingdom                                   30                  35
Malaysia                                         10                  12
Philippines                                       7                  10
Singapore                                        10                   8
Indonesia                                         5                  10
------------------------------------------------------------------------
  Total                                         137                 155
------------------------------------------------------------------------

    For 2012, 10 percent of the gross income of this group is 
equal to $13.70. Only the United States, Canada, and the United 
Kingdom satisfy this requirement for that year. The other 
countries may be aggregated to meet this requirement. Because 
New Zealand and Malaysia have a total gross income of $20, and 
the Philippines, Singapore, and Indonesia have a total gross 
income of $22, these two groupings of countries may be treated 
as the fourth and fifth members of the group for purposes of 
subparagraph 5(b).
    In the following year, 10 percent of the gross income is 
$15.50. Only the United States, New Zealand, and the United 
Kingdom satisfy this requirement. Because Canada and Malaysia 
have a total gross income of $27, and the Philippines, 
Singapore, and Indonesia have a total gross income of $28, 
these two groupings of countries may be treated as the fourth 
and fifth members of the group for purposes of subparagraph 
5(b). The fact that Canada replaced New Zealand in a group is 
not relevant for this purpose. The composition of the grouping 
may change from year to year.
            Single Country Limitation
    Subparagraph 5(c) provides that the business activities 
carried on in any one country other than the headquarters 
company's State of residence must generate less than 50 percent 
of the gross income of the group. If the gross income 
requirement under this subparagraph is not met for a taxable 
year, the taxpayer may satisfy this requirement by applying the 
50 percent gross income test to the average of the gross 
incomes for the four years preceding the taxable year. The 
following example illustrates the application of this clause.
    Example. PHQ is a corporation resident in Poland. PHQ 
functions as a headquarters company for a group of companies. 
PHQ derives dividend income from a United States subsidiary in 
the 2008 taxable year. The state of residence of each of these 
companies, the situs of their activities and the amounts of 
gross income attributable to each for the years 2008 through 
2012 are set forth below.

----------------------------------------------------------------------------------------------------------------
                    Country                               Situs            2012    2011    2010    2009    2008
----------------------------------------------------------------------------------------------------------------
United States                                    U.S.                       $100    $100     $95     $90     $85
Mexico                                           U.S.                         10       8       5       0       0
Canada                                           U.S.                         20      18      16      15      12
United Kingdom                                   U.K                          30      32      30      28      27
New Zealand                                      N.Z.                         35      42      38      36      35
Japan                                            Japan                        35      32      30      30      28
Singapore                                        Singapore                    30      25      24      22      20
----------------------------------------------------------------------------------------------------------------
  Total                                                                     $260    $257    $238    $221    $207
----------------------------------------------------------------------------------------------------------------

    Because the United States' total gross income of $130 in 
2012 is not less than 50 percent of the gross income of the 
group, subparagraph 5(c) is not satisfied with respect to 
dividends derived in 2012. However, the United States' average 
gross income for the preceding four years may be used in lieu 
of the preceding year's average. The United States' average 
gross income for the years 2008-11 is $111.00 ($444/4). The 
group's total average gross income for these years is $230.75 
($923/4). Because $111 represents 48.1 percent of the group's 
average gross income for the years 2008 through 2011, the 
requirement under subparagraph 5(c) is satisfied.
            Other State Gross Income Limitation
    Subparagraph 5(d) provides that no more than 25 percent of 
the headquarters company's gross income may be derived from the 
other Contracting State. Thus, if the headquarters company's 
gross income for the taxable year is $200, no more than $50 of 
this amount may be derived from the other Contracting State. If 
the gross income requirement under this subparagraph is not met 
for a taxable year, the taxpayer may satisfy this requirement 
by applying the 25 percent gross income test to the average of 
the gross incomes for the four years preceding the taxable 
year.
            Independent Discretionary Authority
    Subparagraph 5(e) requires that the headquarters company 
have and exercise independent discretionary authority to carry 
out the functions referred to in subparagraph 5(a). Thus, if 
the headquarters company was nominally responsible for group 
financing, pricing, marketing and other management functions, 
but merely implemented instructions received from another 
entity, the headquarters company would not be considered to 
have and exercise independent discretionary authority with 
respect to these functions. This determination is made 
individually for each function. For instance, a headquarters 
company could be nominally responsible for group financing, 
pricing, marketing and internal auditing functions, but another 
entity could be actually directing the headquarters company as 
to the group financing function. In such a case, the 
headquarters company would not be deemed to have independent 
discretionary authority for group financing, but it might have 
such authority for the other functions. Functions for which the 
headquarters company does not have and exercise independent 
discretionary authority are considered to be conducted by an 
entity other than the headquarters company for purposes of 
subparagraph 5(a).
            Income Taxation Rules
    Subparagraph 2(f) requires that the headquarters company be 
subject to the generally applicable income taxation rules in 
its country of residence. This reference should be understood 
to mean that the company must be subject to the income taxation 
rules to which a company engaged in the active conduct of a 
trade or business would be subject. Thus, if one of the 
Contracting States has or introduces special taxation 
legislation that imposes a lower rate of income tax on 
headquarters companies than is imposed on companies engaged in 
the active conduct of a trade or business, or provides for an 
artificially low taxable base for such companies, a 
headquarters company subject to these rules is not entitled to 
the benefits of the Convention under paragraph 5.
            In Connection With or Incidental to Trade or Business
    Subparagraph 5(g) requires that the income derived in the 
other Contracting State be derived in connection with or be 
incidental to the active business activities referred to 
subparagraph 5(b). This determination is made under the 
principles set forth in paragraph 3. For instance, assume that 
a Polish company satisfies the other requirements in paragraph 
5 and acts as a headquarters company for a group that includes 
a U.S. corporation. If the group is engaged in the design and 
manufacture of computer software, but the U.S. corporation is 
also engaged in the design and manufacture of photocopying 
machines, the income that the Polish company derives from the 
United States would have to be derived in connection with or be 
incidental to the income generated by the computer business in 
order to be entitled to the benefits of the Convention under 
paragraph 5. Interest income received from the U.S. corporation 
also would be entitled to the benefits of the Convention under 
this subparagraph as long as the interest was attributable to 
the computer business supervised by the headquarters company. 
Interest income derived from an unrelated party would normally 
not, however, satisfy the requirements of this clause.

Paragraph 6

    Paragraph 6 deals with the treatment of income in the 
context of a so-called ``triangular case.'' The term 
``triangular case'' refers to the use of a structure like the 
one described in the following paragraph by a resident of 
Poland to earn income from the United States:

          A resident of Poland, who would, absent paragraph 6, 
        qualify for benefits under one or more of the 
        provisions of this Article, sets up a permanent 
        establishment in a third state that imposes a low or 
        zero rate of tax on the income of the permanent 
        establishment. The resident of Poland lends funds into 
        the United States through the permanent establishment. 
        The permanent establishment, despite its third-
        jurisdiction location, is an integral part of the 
        resident of Poland. Therefore, the income that it earns 
        on those loans, absent the provisions of paragraph 6, 
        is entitled to exemption from U.S. withholding tax 
        under the Convention. Under a current income tax treaty 
        between Poland and the host jurisdiction of the 
        permanent establishment, the income of the permanent 
        establishment is exempt from tax by Poland 
        (alternatively, Poland may choose to exempt the income 
        of the permanent establishment from income tax). Thus, 
        the interest income, absent paragraph 6, would be 
        exempt from U.S. tax, subject to little or no tax in 
        the host jurisdiction of the permanent establishment, 
        and exempt from tax in Poland.

    Paragraph 6 provides that the tax benefits that would 
otherwise apply under the Convention will not apply to any item 
of income if the combined aggregate effective tax rate in the 
residence State and the third state is less than 60 percent of 
the general rate of company tax applicable in the residence 
State. In the case of dividends, interest and royalties to 
which this paragraph applies, the withholding tax rates under 
the Convention are replaced with a 15 percent withholding tax. 
Any other income to which the provisions of paragraph 6 apply 
is subject to tax under the domestic law of the source State, 
notwithstanding any other provisions of the Convention.
    In general, the principles employed under Code section 
954(b)(4) will be employed to determine whether the profits are 
subject to an effective rate of taxation that is above the 
specified threshold.
    Notwithstanding the level of tax on interest and royalty 
income of the permanent establishment, paragraph 6 will not 
apply under certain circumstances. In the case of royalties, 
paragraph 6 will not apply if the royalties are received as 
compensation for the use of, or the right to use, intangible 
property produced or developed by the permanent establishment 
itself. In the case of any other income, paragraph 6 will not 
apply if that income is derived in connection with, or is 
incidental to, the active conduct of a trade or business 
carried on by the permanent establishment in the third state. 
The business of making, managing or simply holding investments 
is not considered to be an active trade or business, unless 
these are securities activities carried on by a registered 
securities dealer.
    Paragraph 6 applies reciprocally. However, the United 
States does not exempt the profits of a third-jurisdiction 
permanent establishment of a U.S. resident from U.S. tax, 
either by statute or by treaty.

Paragraph 7

    Paragraph 7 provides that a resident of one of the States 
that is not entitled to the benefits of the Convention as a 
result of paragraphs 1 through 3 still may be granted benefits 
under the Convention at the discretion of the competent 
authority of the State from which benefits are claimed if the 
resident demonstrates that neither its establishment, 
acquisition, or maintenance, nor the conduct of its operations, 
has or had as one of its principal purposes the obtaining of 
benefits under the Convention. Thus, persons that establish 
operations in one of the Contracting States with a principal 
purpose of obtaining the benefits of the Convention will not be 
granted benefits of the Convention under paragraph 7. In order 
to be granted benefits under paragraph 7, a company must 
establish to the satisfaction of the competent authority of the 
State from which benefits are being claimed clear non-tax 
business reasons for its formation, acquisition, or maintenance 
in the other Contracting State, which demonstrate a sufficient 
nexus or relationship to the other Contracting State, taking 
into account considerations other than those addressed through 
the objective tests in paragraphs 1 through 3, and that the 
allowance of benefits would not otherwise be contrary to the 
purposes of the Convention. For example, in the case of a 
resident subsidiary company with a parent in a third state, the 
fact that the relevant withholding rate provided in the 
Convention is at least as low as the corresponding withholding 
rate in the tax treaty between the State of source and the 
third state is not by itself evidence of a nexus or 
relationship to the other Contracting State. Similarly, where a 
foreign corporation is engaged in a portable business such as 
financing, or where the domestic law of a Contracting State 
provides a special tax treatment for certain activities 
conducted offshore (e.g., licensing intangibles) or in special 
zones, those factors will not be evidence of a non-tax business 
reason for locating in that State. In such cases, additional 
favorable business factors must be present to establish a nexus 
to that State.
    The competent authority's discretion is quite broad. It may 
grant all of the benefits of the Convention to the taxpayer 
making the request, or it may grant only certain benefits. For 
instance, it may grant benefits only with respect to a 
particular item of income in a manner similar to paragraph 3. 
Further, the competent authority may establish conditions, such 
as setting time limits on the duration of any relief granted.
    For purposes of implementing paragraph 7, a taxpayer will 
be permitted to present his case to the relevant competent 
authority for an advance determination based on the facts. In 
these circumstances, it is also expected that, if the competent 
authority determines that benefits are to be allowed, they will 
be allowed retroactively to the time of entry into force of the 
relevant treaty provision or the establishment of the structure 
in question, whichever is later.
    Finally, there may be cases in which a resident of a 
Contracting State may apply for discretionary relief to the 
competent authority of his State of residence. This would 
arise, for example, if the benefit it is claiming is provided 
by the residence country, and not by the source country. So, 
for example, if a company that is a resident of the United 
States would like to claim the benefit of the re-sourcing rule 
of paragraph 3 of Article 23, but it does not meet any of the 
objective tests of paragraphs 2 and 3, it may apply to the U.S. 
competent authority for discretionary relief.

Paragraph 8

    Paragraph 8 defines several key terms for purposes of the 
Article. Each of the defined terms is discussed above in the 
context in which it is used.

                ARTICLE 23 (RELIEF FROM DOUBLE TAXATION)

    This Article describes the manner in which each Contracting 
State undertakes to relieve double taxation. The United States 
uses the foreign tax credit method under its domestic law and 
by treaty.

Paragraph 1

    Paragraph 1 provides that Poland will apply two rules to 
avoid double taxation. First, under subparagraph 1(a), where a 
resident of Poland derives income which, in accordance with the 
provisions of this Convention may be taxed in the United 
States, Poland shall, subject to the provisions of subparagraph 
1(b), exempt such income from tax. Second, under subparagraph 
1(b), where a resident of Poland derives income or capital 
gains which, in accordance with the provisions of Articles 10 
(Dividends), 11 (Interest), 13 (Royalties), 14 (Capital Gains) 
or 21 (Other Income) may be taxed in the United States, Poland 
shall allow as a deduction from the tax on the income or 
capital gains of that resident an amount equal to the tax paid 
to the United States. Such deduction shall not, however, exceed 
that part of the tax, as computed before the deduction is 
given, which is attributable to such income or capital gains 
derived from the United States. Subparagraph 1(c) provides a 
so-called ``exemption with progression'' rule. Where in 
accordance with any provision of this Convention, income 
derived by a resident of Poland is exempt from tax in Poland, 
Poland may nevertheless, in calculating the amount of tax on 
the remaining income of such resident, take into account the 
exempted income.

Paragraph 2

    The United States agrees, in paragraph 2, to allow to its 
citizens and residents a credit against U.S. tax for income 
taxes paid or accrued to Poland. Paragraph 2 also provides that 
the other Contracting State's covered taxes are income taxes 
for U.S. purposes.
    Subparagraph 2(b) provides for a deemed-paid credit, 
consistent with section 902 of the Code, to a U.S. corporation 
in respect of dividends received from a corporation resident in 
Poland of which the U.S. corporation owns at least 10 percent 
of the voting stock. This credit is for the tax paid by the 
corporation to the other Contracting State on the profits out 
of which the dividends are considered paid.
    The credits allowed under paragraph 2 are in accordance 
with the provisions and subject to the limitations of U.S. law, 
as that law may be amended over time, so long as the general 
principle of the Article, that is, the relief of double 
taxation, is retained. Thus, although the Convention provides 
for a foreign tax credit, the terms of the credit are generally 
determined by the U.S. domestic law in effect for the taxable 
year for which the credit is allowed. See, e.g., Code sections 
901-909 and the regulations thereunder. For example, the credit 
against U.S. tax generally is limited to the amount of U.S. tax 
due with respect to net foreign source income within the 
relevant foreign tax credit limitation category (see, Code 
section 904(a) and (d)), and the dollar amount of the credit is 
determined in accordance with U.S. currency translation rules 
(see, e.g., Code section 986). Similarly, U.S. law applies to 
determine carryover periods for excess credits and other inter-
year adjustments.

Paragraph 3

    Paragraph 3 provides that certain items of gross income 
that would be otherwise treated as from sources within the 
United States will be treated as from sources within Poland for 
purposes of paragraph 2. Paragraph 3 is intended to ensure that 
a U.S. resident can obtain an appropriate amount of U.S. 
foreign tax credit for income taxes paid to Poland when the 
Convention assigns to Poland primary taxing rights over an item 
of gross income.
    Accordingly, if the Convention allows Poland to tax an item 
of gross income (as defined under U.S. law) derived by a 
resident of the United States, the United States will treat 
that item of gross income as gross income from sources within 
Poland for U.S. foreign tax credit purposes. In the case of a 
U.S.-owned foreign corporation, however, section 904(h)(10) may 
apply for purposes of determining the U.S. foreign tax credit 
with respect to income subject to this re-sourcing rule. 
Section 904(h)(10) generally applies the foreign tax credit 
limitation separately to re-sourced income. See also, Code 
sections 865(h) and 904(d)(6). Because paragraph 3 applies to 
items of gross income, not net income, U.S. expense allocation 
and apportionment rules (see, e.g., Treas. Reg. 1.861-9 and -
9T) continue to apply to income resourced under paragraph 3.

Paragraph 4

    Paragraph 4 provides special rules for the tax treatment in 
both States of certain types of income derived from U.S. 
sources by U.S. citizens who are residents of Poland. Since 
U.S. citizens, regardless of residence, are subject to United 
States tax at ordinary progressive rates on their worldwide 
income, the U.S. tax on the U.S.-source income of a U.S. 
citizen resident in Poland may exceed the U.S. tax that may be 
imposed under the Convention on an item of U.S.-source income 
derived by a resident of Poland who is not a U.S. citizen. The 
provisions of paragraph 4 ensure that Poland does not bear the 
cost of U.S. taxation of its citizens who are residents of 
Poland.
    Subparagraph 4(a) provides, with respect to items of income 
from sources within the United States, special credit rules for 
the other Contracting State. These rules apply to items of 
U.S.-source income that would be either exempt from U.S. tax or 
subject to reduced rates of U.S. tax under the provisions of 
the Convention if they had been received by a resident of 
Poland who is not a U.S. citizen. The tax credit allowed under 
paragraph 4 with respect to such items need not exceed the U.S. 
tax that may be imposed under the Convention, other than tax 
imposed solely by reason of the U.S. citizenship of the 
taxpayer under the provisions of the saving clause of paragraph 
4 of Article 1 (General Scope).
    For example, if a U.S. citizen resident in Poland receives 
portfolio dividends from sources within the United States, the 
foreign tax credit granted by Poland would be limited to 15 
percent of the dividend--the U.S. tax that may be imposed under 
subparagraph 2(b) of Article 10 (Dividends)--even if the 
shareholder is subject to U.S. net income tax because of his 
U.S. citizenship.
    Subparagraph 4(b) eliminates the potential for double 
taxation that can arise because subparagraph 4(a) provides that 
Poland need not provide full relief for the U.S. tax imposed on 
its citizens resident in the other Contracting State. The 
subparagraph provides that the United States will credit the 
income tax paid or accrued to Poland, after the application of 
subparagraph 4(a). It further provides that in allowing the 
credit, the United States will not reduce its tax below the 
amount that is taken into account in Poland in applying 
subparagraph 4(a).
    Since the income described in paragraph 4(a) generally will 
be U.S. source income, special rules are required to re-source 
some of the income to Poland in order for the United States to 
be able to credit the tax paid to the other Contracting State. 
This re-sourcing is provided for in subparagraph 4(c), which 
deems the items of income referred to in subparagraph 4(a) to 
be from foreign sources to the extent necessary to avoid double 
taxation under paragraph 4(b).
    The following two examples illustrate the application of 
paragraph 4 in the case of a U.S.-source portfolio dividend 
received by a U.S. citizen resident in Poland. In both 
examples, the U.S. rate of tax on residents of the Poland, 
under subparagraph 2(b) of Article 10 (Dividends) of the 
Convention, is 15 percent. In both examples, the U.S. income 
tax rate on the U.S. citizen is 35 percent. In example 1, the 
rate of income tax imposed in Poland on its resident (the U.S. 
citizen) is 25 percent (below the U.S. rate), and in example 2, 
the rate imposed on its resident is 40 percent (above the U.S. 
rate).

------------------------------------------------------------------------
                                                 Example 1    Example 2
------------------------------------------------------------------------
Subparagraph (a)
  U.S. dividend declared......................      $100.00      $100.00
  Notional U.S. withholding tax (Article              15.00        15.00
   10(2)(b))..................................
  Taxable income in Poland....................       100.00       100.00
  Polish tax before credit....................        25.00        40.00
  Less: tax credit for notional U.S.                  15.00        15.00
   withholding tax............................
  Net post-credit tax paid to Poland..........        10.00        25.00
 
Subparagraphs (b) and (c)
  U.S. pre-tax income $100.00 $100.00.........
  U.S. pre-credit citizenship tax.............        35.00        35.00
  Notional U.S. withholding tax...............        15.00        15.00
  U.S. tax eligible to be offset by credit....        20.00        20.00
  Tax paid to Poland..........................        10.00        25.00
  Income re-sourced from U.S. to foreign              28.57        57.14
   source (see below).........................
  U.S. pre-credit tax on re-sourced income....        10.00        20.00
  U.S. credit for tax paid to Poland..........        10.00        20.00
  Net post-credit U.S. tax....................        10.00         0.00
------------------------------------------------------------------------
    Total U.S. tax............................       $25.00       $15.00
------------------------------------------------------------------------

    In both examples, in the application of subparagraph 4(a), 
Poland credits a 15 percent U.S. tax against its residence tax 
on the U.S. citizen. In the first example, the net tax paid to 
Poland after the foreign tax credit is $10.00; in the second 
example, it is $25.00. In the application of subparagraphs 4(b) 
and 4(c), from the U.S. tax due before credit of $35.00, the 
United States subtracts the amount of the U.S. source tax of 
$15.00, against which no U.S. foreign tax credit is allowed. 
This subtraction ensures that the United States collects the 
tax that it is due under the Convention as the State of source.
    In both examples, given the 35 percent U.S. tax rate, the 
maximum amount of U.S. tax against which credit for the tax 
paid to Poland may be claimed is $20 ($35 U.S. tax minus $15 
U.S. withholding tax). Initially, all of the income in both 
examples was from sources within the United States. For a U.S. 
foreign tax credit to be allowed for the full amount of the tax 
paid to Poland, an appropriate amount of the income must be re-
sourced to Poland under subparagraph 4(c).
    The amount that must be re-sourced depends on the amount of 
tax for which the U.S. citizen is claiming a U.S. foreign tax 
credit. In example 1, the tax paid to Poland was $10. For this 
amount to be creditable against U.S. tax, $28.57 ($10 tax 
divided by 35 percent U.S. tax rate) must be resourced to 
Poland. When the tax is credited against the $10 of U.S. tax on 
this resourced income, there is a net U.S. tax of $10 due after 
credit ($20 U.S. tax eligible to be offset by credit, minus $10 
tax paid to the other Contracting State). Thus, in example 1, 
there is a total of $25 in U.S. tax ($15 U.S. withholding tax 
plus $10 residual U.S. tax).
    In example 2, the tax paid to Poland was $25, but, because 
the United States subtracts the U.S. withholding tax of $15 
from the total U.S. tax of $35, only $20 of U.S. taxes may be 
offset by taxes paid to Poland. Accordingly, the amount that 
must be resourced to Poland is limited to the amount necessary 
to ensure a U.S. foreign tax credit for $20 of tax paid to 
Poland, or $57.14 ($20 tax paid to Poland divided by 35 percent 
U.S. tax rate). When the tax paid to Poland is credited against 
the U.S. tax on this re-sourced income, there is no residual 
U.S. tax ($20 U.S. tax minus $25 tax paid to the other 
Contracting State, subject to the U.S. limit of $20). Thus, in 
example 2, there is a total of $15 in U.S. tax ($15 U.S. 
withholding tax plus $0 residual U.S. tax). Because the tax 
paid to Poland was $25 and the U.S. tax eligible to be offset 
by credit was $20, there is $5 of excess foreign tax credit 
available for carryover.
    The above examples illustrate the application of paragraph 
4 to a single item of gross income. However, taxpayers may 
encounter situations in which they may have to calculate the 
foreign tax credit on net income, in which case other 
methodologies could be applied to achieve the intent of 
paragraph 4.

Paragraph 5

    Paragraph 5 coordinates the tax systems of the Contracting 
States to avoid double taxation that could result from the 
imposition of exit tax regimes on individuals who relinquish 
citizenship or long-term residence status. In the case of the 
United States, paragraph 5 addresses the mark-to-market exit 
tax regime applicable to ``covered expatriates'' within the 
meaning of Code section 877A(g)(1). Paragraph 5 would also 
address any analogous taxes imposed by Poland. This rule is 
intended to coordinate taxation by the United States and Poland 
of taxable gains in the case of a timing mismatch. Such a 
mismatch may occur, for example, where a U.S. citizen or long-
term resident (within the meaning of Code section 877(e)(2)) 
recognizes, for U.S. tax purposes, taxable gain on a deemed 
sale of all property on the day before the individual 
expatriates to Poland.
    To avoid double taxation, paragraph 5 provides that where 
an individual who, upon ceasing to be a resident (as determined 
under paragraph 1 of Article 4 (Resident)) of one Contracting 
State, is treated for purposes of taxation by that State as 
having alienated property and is taxed by that State by reason 
thereof, the individual may elect to be treated for the 
purposes of taxation by the other Contracting State as having 
sold and repurchased the property for its fair market value on 
the day before the expatriation date. The election in paragraph 
5 therefore may be available to any U.S. citizen or long-term 
resident who expatriates from the United States to Poland. The 
effect of the election will be to give the individual an 
adjusted basis in Poland for tax purposes equal to the fair 
market value of the property as of the date of the deemed 
alienation in the United States, with the result that only 
post-emigration gain will be subject to tax in Poland when 
there is an actual alienation of the property while the 
individual is a resident of Poland.
    Individuals may make the election provided by paragraph 5 
only with respect to property that is subject to a Contracting 
State's deemed disposition rules and only with respect to which 
gain on a deemed alienation is recognized for that Contracting 
State's tax purposes in the taxable year of the deemed 
alienation. In the United States, the following types of 
property are excluded from the deemed disposition rules in the 
case of individuals who cease to be citizens or long term 
residents of the United States: (1) an eligible deferred 
compensation item as defined under Code section 877A(d)(3), and 
(2) an interest in a non-grantor trust as defined under Code 
section 877A(f)(3) (unless the individual elects to take the 
value of the interest in the trust into account pursuant to 
procedures prescribed by the IRS pursuant to Code section 
877A(f)(4)(B)).
    If an individual recognizes in one Contracting State losses 
and gains from the deemed alienation of multiple properties, 
then the individual must apply this paragraph consistently with 
respect to all such properties in both Contracting States. An 
individual who is deemed to have alienated multiple properties 
may only make the election under this paragraph if the deemed 
alienation of all such properties results in a net taxable 
gain. If the deemed alienation of the multiple properties 
results in a net loss, then an election under this paragraph 
may not be made with respect to any such properties.
    The other Contracting State is only required to provide a 
basis adjustment to the extent that tax is actually paid in the 
first-mentioned Contracting State. Thus, to the extent that the 
deemed alienation of properties results in a net gain, but no 
tax is actually paid on such gain due to an exclusion provision 
or other mechanism provided under the domestic law of the 
first-mentioned Contracting State, the other Contracting State 
is not required to provide a basis adjustment. Under the 
domestic law of the United States, Code section 877A(a)(3) 
provides an exclusion for certain gain up to $600,000 (as 
indexed for inflation). Poland also is not required to provide 
a basis adjustment with respect to tax that is deferred 
pursuant to Code section 877A(b).
            Relationship to Other Articles
    By virtue of subparagraph 5(a) of Article 1 (General 
Scope), Article 23 is not subject to the saving clause of 
paragraph 4 of Article 1. Thus, the United States will allow a 
credit to its citizens and residents in accordance with the 
Article, even if such credit were to provide a benefit not 
available under the Code (such as the re-sourcing provided by 
paragraph 3 and subparagraph 4(c)). In addition, even though 
the United States is explicitly granting U.S. citizens and 
residents a benefit under paragraph 5, the exception to the 
saving clause clarifies that under paragraph 5, the United 
States will not tax individuals that become U.S. citizens or 
residents on certain pre-emigration gain that it couldn't 
otherwise tax under the Convention at the time of the deemed 
disposition pursuant to a paragraph 5 election.

                    ARTICLE 24 (NON-DISCRIMINATION)

    This Article ensures that nationals of a Contracting State, 
in the case of paragraph 1, and residents of a Contracting 
State, in the case of paragraphs 2 through 5, will not be 
subject, directly or indirectly, to discriminatory taxation in 
the other Contracting State. Not all differences in tax 
treatment, either as between nationals of the two States, or 
between residents of the two States, are violations of the 
prohibition against discrimination. Rather, the non-
discrimination obligations of this Article apply only if the 
nationals or residents of the two States are comparably 
situated.
    Each of the relevant paragraphs of the Article provides 
that two persons that are comparably situated must be treated 
similarly. Although the actual words differ from paragraph to 
paragraph (e.g., paragraph 1 refers to two nationals ``in the 
same circumstances,'' paragraph 2 refers to two enterprises 
``carrying on the same activities,'' and paragraph 4 refers to 
two enterprises that are ``similar,'' the common underlying 
premise is that if the difference in treatment is directly 
related to a tax-relevant difference in the situations of the 
domestic and foreign persons being compared, that difference is 
not to be treated as discriminatory (i.e., if one person is 
taxable in a Contracting State on worldwide income and the 
other is not, or tax may be collectible from one person at a 
later stage, but not from the other, distinctions in treatment 
would be justified under paragraph 1). Other examples of such 
factors that can lead to non-discriminatory differences in 
treatment are noted in the discussions of each paragraph.
    The operative paragraphs of the Article also use different 
language to identify the kinds of differences in taxation 
treatment that will be considered discriminatory. For example, 
paragraphs 1 and 4 speak of ``any taxation or any requirement 
connected therewith that is more burdensome,'' while paragraph 
2 specifies that a tax ``shall not be less favorably levied.'' 
Regardless of these differences in language, only differences 
in tax treatment that materially disadvantage the foreign 
person relative to the domestic person are properly the subject 
of the Article.

Paragraph 1

    Paragraph 1 provides that a national of one Contracting 
State may not be subject to taxation or connected requirements 
in the other Contracting State that are more burdensome than 
the taxes and connected requirements imposed upon a national of 
that other State in the same circumstances. Since paragraph 1 
prevents different treatment based on nationality, but only 
with respect to persons ``in the same circumstances, in 
particular with respect to residence,'' it is important to 
distinguish, for purposes of the paragraph, a different 
treatment that is solely based on nationality from a different 
treatment that relates to other circumstances and, in 
particular, taxation on worldwide income.
    The term ``national'' in relation to a Contracting State is 
defined in subparagraph 1(j) of Article 3 (General 
Definitions). The term includes both individuals and juridical 
persons. A national of a Contracting State is afforded 
protection under this paragraph even if the national is not a 
resident of either Contracting State. Thus, a U.S. citizen who 
is resident in a third country is entitled, under this 
paragraph, to the same treatment in Poland as a national of 
Poland who is in similar circumstances (i.e., presumably one 
who is resident in a third State).
    As noted above, whether or not the two persons are both 
taxable on worldwide income is a significant circumstance for 
this purpose. Accordingly, the United States is not obligated 
to apply the same taxing regime to a national of Poland who is 
not resident in the United States as it applies to a U.S. 
national who is not resident in the United States. 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 
citizens of Poland who are not U. S. residents. Thus, for 
example, Article 24 would not entitle a national of Poland 
resident in a third country to taxation at graduated rates on 
U.S. source dividends or other investment income that applies 
to a U.S. citizen resident in the same third country.

Paragraph 2

    Paragraph 2 of the Article, provides that a Contracting 
State may not tax a permanent establishment of an enterprise of 
the other Contracting State less favorably than an enterprise 
of that first-mentioned State that is carrying on the same 
activities.
    The fact that a U.S. permanent establishment of an 
enterprise of Poland is subject to U.S. tax only on income that 
is attributable to the permanent establishment, while a U.S. 
corporation engaged in the same activities is taxable on its 
worldwide income is not, in itself, a sufficient difference to 
provide different treatment for the permanent establishment. 
There are cases, however, where the two enterprises would not 
be similarly situated and differences in treatment may be 
warranted. For instance, it would not be a violation of the 
non-discrimination protection of paragraph 2 to require the 
foreign enterprise to provide information in a reasonable 
manner that may be different from the information requirements 
imposed on a resident enterprise, because information may not 
be as readily available to the Internal Revenue Service from a 
foreign as from a domestic enterprise. Similarly, it would not 
be a violation of paragraph 2 to impose penalties on persons 
who fail to comply with such a requirement (see, e.g., sections 
874(a) and 882(c)(2)). Further, a determination that income and 
expenses have been attributed or allocated to a permanent 
establishment in conformity with the principles of Article 7 
(Business Profits) implies that the attribution or allocation 
was not discriminatory.
    Section 1446 of the Code imposes the obligation to withhold 
tax on amounts allocable to a foreign partner on any 
partnership with income that is effectively connected with a 
U.S. trade or business. In the context of the Convention, this 
obligation applies with respect to a share of the partnership 
income of a partner resident in Poland, and attributable to a 
U.S. permanent establishment. There is no similar obligation 
with respect to the distributive shares of U.S. resident 
partners. It is understood, however, that this distinction is 
not a form of discrimination within the meaning of paragraph 2 
of the Article. No distinction is made between U.S. and non-
U.S. partnerships, since the law requires that partnerships of 
both U.S. and non-U.S. domicile withhold tax in respect of the 
partnership shares of non-U.S. partners. Furthermore, in 
distinguishing between U.S. and non-U.S. partners, the 
requirement to withhold on the non-U.S. but not the U.S. 
partner's share is not discriminatory taxation, but, like other 
withholding on nonresident aliens, is merely a reasonable 
method for the collection of tax from persons who are not 
continually present in the United States, and as to whom it 
otherwise may be difficult for the United States to enforce its 
tax jurisdiction. If tax has been over-withheld, the partner 
can, as in other cases of over-withholding, file for a refund.

Paragraph 3

    Paragraph 3 makes clear that the provisions of paragraphs 1 
and 2 do not obligate a Contracting State to grant to a 
resident of the other Contracting State any tax allowances, 
reliefs, etc., that it grants to its own residents on account 
of their civil status or family responsibilities. Thus, if a 
sole proprietor who is a resident of Poland has a permanent 
establishment in the United States, in assessing income tax on 
the profits attributable to the permanent establishment, the 
United States is not obligated to allow to the resident of 
Poland the personal allowances for himself and his family that 
he would be permitted to take if the permanent establishment 
were a sole proprietorship owned and operated by a U.S. 
resident, despite the fact that the individual income tax rates 
would apply.

Paragraph 4

    Paragraph 4 prohibits discrimination in the allowance of 
deductions. When a resident or an enterprise of a Contracting 
State pays interest, royalties or other disbursements to a 
resident of the other Contracting State, the first-mentioned 
Contracting State must allow a deduction for those payments in 
computing the taxable profits of the resident or enterprise as 
if the payment had been made under the same conditions to a 
resident of the first-mentioned Contracting State. Paragraph 3, 
however, does not require a Contracting State to give non-
residents more favorable treatment than it gives to its own 
residents. Consequently, a Contracting State does not have to 
allow non-residents a deduction for items that are not 
deductible under its domestic law (for example, expenses of a 
capital nature).
    The term ``other disbursements'' is understood to include a 
reasonable allocation of executive and general administrative 
expenses, research and development expenses and other expenses 
incurred for the benefit of a group of related persons that 
includes the person incurring the expense.
    An exception to the rule of paragraph 4 is provided for 
cases where the provisions of paragraph 1 of Article 9 
(Associated Enterprises), paragraph 8 of Article 11 (Interest) 
or paragraph 6 of Article 13 (Royalties) apply. All of these 
provisions permit the denial of deductions in certain 
circumstances in respect of transactions between related 
persons. Neither State is forced to apply the non-
discrimination principle in such cases. The exception with 
respect to paragraph 8 of Article 11 would include the denial 
or deferral of certain interest deductions under Code section 
163(j).
    Paragraph 4 also provides that any debts of an enterprise 
of a Contracting State to a resident of the other Contracting 
State are deductible in the first-mentioned Contracting State 
for purposes of computing the capital tax of the enterprise 
under the same conditions as if the debt had been contracted to 
a resident of the first-mentioned Contracting State. Even 
though, for general purposes, the Convention covers only income 
taxes, under paragraph 7 of this Article, the non-
discrimination provisions apply to all taxes levied in both 
Contracting States, at all levels of government. Thus, this 
provision may be relevant for both States. The other 
Contracting State may have capital taxes and in the United 
States such taxes frequently are imposed by local governments.

Paragraph 5

    Paragraph 5 requires that a Contracting State not impose 
more burdensome taxation or connected requirements on an 
enterprise of that State that is wholly or partly owned or 
controlled, directly or indirectly, by one or more residents of 
the other Contracting State than the taxation or connected 
requirements that it imposes on other similar enterprises of 
that first-mentioned Contracting State. For this purpose it is 
understood that ``similar'' refers to similar activities or 
ownership of the enterprise.
    This rule, like all non-discrimination provisions, does not 
prohibit differing treatment of entities that are in differing 
circumstances. Rather, a protected enterprise is only required 
to be treated in the same manner as other enterprises that, 
from the point of view of the application of the tax law, are 
in substantially similar circumstances both in law and in fact. 
The taxation of a distributing corporation under section 367(e) 
on an applicable distribution to foreign shareholders does not 
violate paragraph 5 of the Article because a foreign-owned 
corporation is not similar to a domestically-owned corporation 
that is accorded non-recognition treatment under sections 337 
and 355.
    For the reasons given above in connection with the 
discussion of paragraph 2 of the Article, it is also understood 
that the provision in section 1446 of the Code for withholding 
of tax on non-U.S. partners does not violate paragraph 5 of the 
Article.
    It is further understood that the ineligibility of a U.S. 
corporation with nonresident alien shareholders to make an 
election to be an ``S'' corporation does not violate paragraph 
5 of the Article. If a corporation elects to be an S 
corporation, it is generally not subject to income tax and the 
shareholders take into account their pro rata shares of the 
corporation's items of income, loss, deduction or credit. A 
nonresident alien does not pay U.S. tax on a net basis, and, 
thus, does not generally take into account items of loss, 
deduction or credit. Therefore, the S corporation provisions do 
not exclude corporations with nonresident alien shareholders 
because such shareholders are foreign, but only because they 
are not net-basis taxpayers. Similarly, the provisions exclude 
corporations with other types of shareholders where the purpose 
of the provisions cannot be fulfilled or their mechanics 
implemented. For example, corporations with corporate 
shareholders are excluded because the purpose of the provision 
to permit individuals to conduct a business in corporate form 
at individual tax rates would not be furthered by their 
inclusion.
    Finally, it is understood that paragraph 5 does not require 
a Contracting State to allow foreign corporations to join in 
filing a consolidated return with a domestic corporation or to 
allow similar benefits between domestic and foreign 
enterprises.

Paragraph 6

    Paragraph 6 of the Article confirms that no provision of 
the Article will prevent either Contracting State from imposing 
the branch profits tax described in paragraph 1 of Article 12 
(Branch Profits).

Paragraph 7

    As noted above, notwithstanding the specification of taxes 
covered by the Convention in Article 2 (Taxes Covered) for 
general purposes, for purposes of providing nondiscrimination 
protection this Article applies to taxes of every kind and 
description imposed by a Contracting State or a political 
subdivision or local authority thereof. Customs duties are not 
considered to be taxes for this purpose.
            Relationship to Other Articles
    The saving clause of paragraph 4 of Article 1 (General 
Scope) does not apply to this Article by virtue of the 
exceptions in subparagraph 5(a) of Article 1. Thus, for 
example, a U.S. citizen who is a resident of the other 
Contracting State may claim benefits in the United States under 
this Article.
    Nationals of a Contracting State may claim the benefits of 
paragraph 1 regardless of whether they are entitled to benefits 
under Article 22 (Limitation on Benefits), because that 
paragraph applies to nationals and not residents. They may not 
claim the benefits of the other paragraphs of this Article with 
respect to an item of income unless they are generally entitled 
to treaty benefits with respect to that income under a 
provision of Article 22.

                ARTICLE 25 (MUTUAL AGREEMENT PROCEDURE)

    This Article provides the mechanism for taxpayers to bring 
to the attention of competent authorities issues and problems 
that may arise under the Convention. It also provides the 
authority for cooperation between the competent authorities of 
the Contracting States to resolve disputes and clarify issues 
that may arise under the Convention and to resolve cases of 
double taxation not provided for in the Convention. The 
competent authorities of the two Contracting States are 
identified in paragraph 1(g) of Article 3 (General 
Definitions).

Paragraph 1

    This paragraph provides that, where a resident of a 
Contracting State considers that the actions of one or both 
Contracting States will result in taxation that is not in 
accordance with the Convention, he may, irrespective of the 
remedies provided by the domestic laws of the two Contracting 
States including any prescribed times limits for presenting 
claims for refund, present his case to the competent authority 
of the Contracting State of which he is a resident, or if his 
case comes under paragraph 1 of Article 24 (Non-
Discrimination), to that of the Contracting State of which he 
is a national. Paragraph 1 requires that the case must be 
presented within three years from the first notification of the 
action resulting in taxation not in accordance with the 
provisions of the Convention.
    Although the typical cases brought under this paragraph 
will involve economic double taxation arising from transfer 
pricing adjustments, the scope of this paragraph is not limited 
to such cases. For example, a taxpayer could request assistance 
from the competent authority if one Contracting State 
determines that the taxpayer has received deferred compensation 
taxable at source under Article 14 (Income from Employment), 
while the taxpayer believes that such income should be treated 
as a pension that is taxable only in his country of residence 
pursuant to Article 18 (Pensions, Social Security, Annuities, 
Alimony, and Child Support).

Paragraph 2

    Paragraph 2 sets out the framework within which the 
competent authorities will deal with cases brought by taxpayers 
under paragraph 1. It provides that, if the competent authority 
of the Contracting State to which the case is presented judges 
the case to have merit, and cannot reach a unilateral solution, 
it shall seek an agreement with the competent authority of the 
other Contracting State pursuant to which taxation not in 
accordance with the Convention will be avoided.
    Any agreement is to be implemented even if such 
implementation otherwise would be barred by the statute of 
limitations or by some other procedural limitation, such as a 
closing agreement. Paragraph 2, however, does not prevent the 
application of domestic-law procedural limitations that give 
effect to the agreement (e.g., a domestic-law requirement that 
the taxpayer file a return reflecting the agreement within one 
year of the date of the agreement).
    Where the taxpayer has entered a closing agreement (or 
other written settlement) with the United States before 
bringing a case to the competent authorities, the U.S. 
competent authority will endeavor only to obtain a correlative 
adjustment from the other Contracting State. See Rev. Proc. 
2002-52, 2002-31 I.R.B. 242, ' 7.04 (or any similarly 
applicable or successor procedures). Because, as specified in 
paragraph 2 of Article 1 (General Scope), the Convention cannot 
operate to increase a taxpayer's liability, temporal or other 
procedural limitations can be overridden only for the purpose 
of making refunds and not to impose additional tax. Thus, even 
if the statute of limitations has expired, a refund of tax can 
be made in order to implement a correlative adjustment.

Paragraph 3

    Paragraph 3 authorizes the competent authorities to resolve 
difficulties or doubts that may arise as to the application or 
interpretation of the Convention.
    The competent authorities may, for example, agree to the 
same allocation of income, deductions, credits or allowances 
between an enterprise in one Contracting State and its 
permanent establishment in the other or between related 
persons. These allocations are to be made in accordance with 
the arm's length principle underlying Article 7 (Business 
Profits) and Article 9 (Associated Enterprises). Agreements 
reached under these subparagraphs may include agreement on a 
methodology for determining an appropriate transfer price, on 
an acceptable range of results under that methodology, or on a 
common treatment of a taxpayer's cost sharing arrangement.
    The competent authorities also may agree to settle a 
variety of conflicting applications of the Convention. They may 
agree to settle conflicts regarding the characterization of 
particular items of income, the characterization of persons, 
the application of source rules to particular items of income, 
the meaning of a term, or the timing of an item of income.
    The competent authorities may agree as to advance pricing 
arrangements. They also may agree as to the application of the 
provisions of domestic law regarding penalties, fines, and 
interest in a manner consistent with the purposes of the 
Convention.
    The competent authorities may seek agreement on a uniform 
set of standards for the use of exchange rates. Agreements 
reached by the competent authorities under paragraph 3 need not 
conform to the internal law provisions of either Contracting 
State.
    Paragraph 3 authorizes the competent authorities to consult 
for the purpose of eliminating double taxation in cases not 
provided for in the Convention and to resolve any difficulties 
or doubts arising as to the interpretation or application of 
the Convention. This provision is intended to permit the 
competent authorities to implement the treaty in particular 
cases in a manner that is consistent with its expressed general 
purposes. It permits the competent authorities to deal with 
cases that are within the spirit of the provisions but that are 
not specifically covered. An example of such a case might be 
double taxation arising from a transfer pricing adjustment 
between two permanent establishments of a third-country 
resident, one in the United States and one in Poland. Since no 
resident of a Contracting State is involved in the case, the 
Convention does not apply, but the competent authorities 
nevertheless may use the authority of this Article to prevent 
the double taxation of income.

Paragraph 4

    Paragraph 4 provides that the competent authorities may 
communicate with each other for the purpose of reaching an 
agreement. This makes clear that the competent authorities of 
the two Contracting States may communicate without going 
through diplomatic channels. Such communication may be in 
various forms, including, where appropriate, through a joint 
commission consisting of themselves or their representatives.
            Treaty Termination in Relation to Competent Authority 
                    Dispute Resolution
    A case may be raised by a taxpayer under a treaty with 
respect to a year for which a treaty was in force after the 
treaty has been terminated. In such a case the ability of the 
competent authorities to act is limited. They may not exchange 
confidential information, nor may they reach a solution that 
varies from that specified in its law.
            Triangular Competent Authority Solutions
    International tax cases may involve more than two taxing 
jurisdictions (e.g., transactions among a parent corporation 
resident in country A and its subsidiaries resident in 
countries B and C). As long as there is a complete network of 
treaties among the three countries, it should be possible, 
under the full combination of bilateral authorities, for the 
competent authorities of the three States to work together on a 
three-sided solution. Although country A may not be able to 
give information received under Article 26 (Exchange of 
Information) from country B to the authorities of country C, if 
the competent authorities of the three countries are working 
together, it should not be a problem for them to arrange for 
the authorities of country B to give the necessary information 
directly to the tax authorities of country C, as well as to 
those of country A. Each bilateral part of the trilateral 
solution must, of course, not exceed the scope of the authority 
of the competent authorities under the relevant bilateral 
treaty.
            Relationship to Other Articles
    This Article is not subject to the saving clause of 
paragraph 4 of Article 1 (General Scope) by virtue of the 
exceptions in paragraph 5(a) of that Article. Thus, rules, 
definitions, procedures, etc. that are agreed upon by the 
competent authorities under this Article may be applied by the 
United States with respect to its citizens and residents even 
if they differ from the comparable Code provisions. Similarly, 
as indicated above, U.S. law may be overridden to provide 
refunds of tax to a U.S. citizen or resident under this 
Article. A person may seek relief under this Article regardless 
of whether he is generally entitled to benefits under Article 
22 (Limitation on Benefits). As in all other cases, the 
competent authority is vested with the discretion to decide 
whether the claim for relief is justified.

                  ARTICLE 26 (EXCHANGE OF INFORMATION)

    This Article provides for the exchange of information and 
administrative assistance between the competent authorities of 
the Contracting States. While mutual agreement procedures are 
addressed in Article 25 (Mutual Agreement Procedure), exchanges 
of information for purposes of the mutual agreement procedures 
are governed by this Article.

Paragraph 1

    The obligation to obtain and provide information to the 
other Contracting State is set out in Paragraph 1. The 
information to be exchanged is that which is foreseeably 
relevant for carrying out the provisions of the Convention or 
the domestic laws of the United States or Poland concerning 
taxes of every kind applied at the national level. This 
language incorporates the standard of the OECD Model. The 
Contracting States intend for the phrase ``is foreseeably 
relevant'' to be interpreted to permit the exchange of 
information that ``may be relevant'' for purposes of Section 
7602 of the Code, which authorizes the IRS to examine ``any 
books, papers, records, or other data which may be relevant or 
material'' (emphasis added). In United States v. Arthur Young & 
Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that 
the language ``may be'' reflects Congress's express intention 
to allow the IRS to obtain ``items of even potential relevance 
to an ongoing investigation, without reference to its 
admissibility'' (emphasis in original.) However, the language 
``may be'' would not support a request in which a Contracting 
State simply asked for information regarding all bank accounts 
maintained by residents of that Contracting State in the other 
Contracting State. Thus, the language of paragraph 1 is 
intended to provide for exchange of information in tax matters 
to the widest extent possible, while clarifying that 
Contracting States are not at liberty to engage in ``fishing 
expeditions'' or otherwise to request information that is 
unlikely to be relevant to the tax affairs of a given taxpayer.
    Consistent with the OECD Model, a request for information 
does not constitute a ``fishing expedition'' solely because it 
does not provide the name or address (or both) of the taxpayer 
under examination or investigation. In cases where the 
requesting State does not provide the name or address (or both) 
of the taxpayer under examination or investigation, the 
requesting State must provide other information sufficient to 
identify the taxpayer. Similarly, paragraph 1 does not 
necessarily require the request to include the name and/or 
address of the person believed to be in possession of the 
information.
    The standard of ``foreseeable relevance'' can be met in 
cases dealing with both one taxpayer (whether identified by 
name or otherwise) or several taxpayers (whether identified by 
name or otherwise). Where a Contracting State undertakes an 
investigation into an ascertainable group or category of 
persons in accordance with its laws, any request related to the 
investigation will typically serve the objective of carrying 
out the domestic tax laws of the requesting State and thus will 
comply with the requirements of paragraph 1, provided it meets 
the standard of ``foreseeable relevance.'' In such cases, the 
requesting State should provide, supported by a clear factual 
basis, a detailed description of the group or category of 
persons and of the specific facts and circumstances that have 
led to the request, as well as an explanation of the applicable 
law and why there is reason to believe that the taxpayers in 
the group or category of persons for whom information is 
requested have been non-compliant with that law. The requesting 
State should further show that the requested information would 
assist in determining compliance by the taxpayers in the group 
or category of persons.
    Exchange of information with respect to each State's 
domestic law is authorized to the extent that taxation under 
domestic law is not contrary to the Convention. Thus, for 
example, information may be exchanged under this Article even 
if the transaction to which the information relates is a purely 
domestic transaction in the requesting State and, therefore, 
the exchange is not made to carry out the Convention. An 
example of such a case is provided in subparagraph 8(b) of the 
OECD Commentary: a company resident in one Contracting State 
and a company resident in the other Contracting State transact 
business between themselves through a third-country resident 
company. Neither Contracting State has a treaty with the third 
state. To enforce their internal laws with respect to 
transactions of their residents with the third-country company 
(since there is no relevant treaty in force), the Contracting 
States may exchange information regarding the prices that their 
residents paid in their transactions with the third-country 
resident.
    Paragraph 1 clarifies that information may be exchanged 
that relates to the assessment or collection of, the 
enforcement or prosecution in respect of, or the determination 
of appeals in relation to, taxes of every kind imposed by a 
Contracting State at the national level. Accordingly, the 
competent authorities may request and provide information for 
cases under examination or criminal investigation, in 
collection, on appeals, or under prosecution, and information 
may be exchanged with respect to U.S. estate and gift taxes.
    Information exchange is not restricted by paragraph 1 of 
Article 1 (General Scope). Accordingly, information may be 
requested and provided under this Article with respect to 
persons who are not residents of either Contracting State. For 
example, if a third-country resident has a permanent 
establishment in the other Contracting State, and that 
permanent establishment engages in transactions with a U.S. 
enterprise, the United States could request information with 
respect to that permanent establishment, even though the third-
country resident is not a resident of either Contracting State. 
Similarly, if a third-country resident maintains a bank account 
in the other Contracting State, and the Internal Revenue 
Service has reason to believe that funds in that account should 
have been reported for U.S. tax purposes but have not been so 
reported, information can be requested from the other 
Contracting State with respect to that person's account, even 
though that person is not the taxpayer under examination.
    Although the term ``United States'' does not encompass U.S. 
possessions or territories for most purposes of the Convention, 
section 7651 of the Code authorizes the Internal Revenue 
Service to utilize the administrative and enforcement 
provisions of the Code in the U.S. possessions or territories, 
including to obtain information pursuant to a proper request 
made under Article 26. If necessary to obtain requested 
information, the Internal Revenue Service could issue and 
enforce an administrative summons to the taxpayer, a tax 
authority (or other U.S. possession or territory government 
agency), or a third party located in a U.S. possession or 
territory.

Paragraph 2

    Paragraph 2 provides assurances that any information 
exchanged will be treated as secret, subject to the same 
disclosure constraints as information obtained under the laws 
of the requesting State. The confidentiality rules cover 
communications between the competent authorities (including the 
letter requesting information) as well as references to 
exchanged information that may occur in other documents, such 
as advice by government attorneys to their respective competent 
authorities. At the same time, it is understood that the 
requested State can disclose the minimum information contained 
in a competent authority letter (but not the letter itself) 
necessary for the requested State to be able to obtain or 
provide the requested information to the requesting State, 
without frustrating the efforts of the requesting State. If, 
however, court proceedings or the like under the domestic laws 
of the requested State necessitate the disclosure of the 
competent authority letter itself, the competent authority of 
the requested State may disclose such a letter unless the 
requesting State otherwise specifies.
    Information received may be disclosed only to persons or 
authorities, including courts and administrative bodies, 
involved in the assessment, collection, or administration of, 
the enforcement or prosecution in respect of, or the 
determination of appeals in relation to, the taxes referred to 
in paragraph 1. Under this standard, information may be 
communicated to the taxpayer or his proxy. The information must 
be used by these persons only for the purposes mentioned in 
paragraph 2. Information may also be disclosed to legislative 
bodies, such as the tax-writing committees of the U.S. Congress 
and the U.S. Government Accountability Office, engaged in the 
oversight of the preceding activities. Information received by 
these bodies must be for use in the performance of their role 
in overseeing the administration of U.S. tax laws. Information 
received may be disclosed in public court proceedings or in 
judicial decisions.
    In situations in which the requested State determines that 
the requesting State does not comply with its duties regarding 
the confidentiality of the information exchanged under this 
Article, the requested State may suspend assistance under this 
Article until such time as proper assurance is given by the 
requesting State that those duties will indeed be respected. If 
necessary, the competent authorities may enter into specific 
arrangements or memoranda of understanding regarding the 
confidentiality of the information exchanged under this 
Article.

Paragraph 3

    Paragraph 3 provides that the obligations undertaken in 
paragraphs 1 and 2 to exchange information do not require a 
Contracting State to carry out administrative measures that are 
at variance with the laws or administrative practice of either 
State. Nor is a Contracting State required to supply 
information not obtainable under the laws or administrative 
practice of either State, or to disclose trade secrets or other 
information, the disclosure of which would be contrary to 
public policy.
    Thus, a requesting State may be denied information from the 
other State if the information would be obtained pursuant to 
procedures or measures that are broader than those available in 
the requesting State. However, the statute of limitations of 
the Contracting State making the request for information should 
govern a request for information. Thus, the Contracting State 
of which the request is made should attempt to obtain the 
information even if its own statute of limitations has passed. 
In many cases, relevant information will still exist in the 
business records of the taxpayer or a third party, even though 
it is no longer required to be kept for domestic tax purposes.
    While paragraph 3 states conditions under which a 
Contracting State is not obligated to comply with a request 
from the other Contracting State for information, the requested 
State is not precluded from providing such information, and 
may, at its discretion, do so subject to the limitations of its 
internal law.

Paragraph 4

    Paragraph 4 provides that when information is requested by 
a Contracting State in accordance with this Article, the other 
Contracting State is obligated to obtain the requested 
information as if the tax in question were the tax of the 
requested State, even if that State has no direct tax interest 
in the case to which the request relates. In the absence of 
such a paragraph, some taxpayers have argued that paragraph 
3(a) prevents a Contracting State from requesting information 
from a bank or fiduciary that the Contracting State does not 
need for its own tax purposes. This paragraph clarifies that 
paragraph 3 does not impose such a restriction and that a 
Contracting State is not limited to providing only the 
information that it already has in its own files.

Paragraph 5

    Paragraph 5 provides that a Contracting State may not 
decline to provide information because that information is held 
by banks, other financial institutions, nominees or persons 
acting in an agency or fiduciary capacity or because it relates 
to ownership interests in a person. Thus, paragraph 5 would 
effectively prevent a Contracting State from relying on 
paragraph 3 to argue that its domestic bank secrecy laws (or 
similar legislation relating to disclosure of financial 
information by financial institutions or intermediaries) 
override its obligation to provide information under paragraph 
1. This paragraph also requires the disclosure of information 
regarding the beneficial owner of an interest in a person, such 
as the identity of a beneficial owner of bearer shares.
    Subparagraphs (3)(a) and (b) do not permit the requested 
State to decline a request where paragraph 4 or 5 applies. 
Paragraph 5 would apply, for instance, in situations in which 
the requested State's inability to obtain the information was 
specifically related to the fact that the requested information 
was believed to be held by a bank or other financial 
institution. Thus, the application of paragraph 5 includes 
situations in which the tax authorities' information gathering 
powers with respect to information held by banks and other 
financial institutions are subject to different requirements 
than those that are generally applicable with respect to 
information held by persons other than banks or other financial 
institutions. This would, for example, be the case where the 
tax authorities can only exercise their information gathering 
powers with respect to information held by banks and other 
financial institutions in instances where specific information 
on the taxpayer under examination or investigation is 
available. This would also be the case where, for example, the 
use of information gathering measures with respect to 
information held by banks and other financial institutions 
requires a higher probability that the information requested is 
held by the person believed to be in possession of the 
requested information than the degree of probability required 
for the use of information gathering measures with respect to 
information believed to be held by persons other than banks or 
financial institutions.

Paragraph 6

    Paragraph 6 provides that the requesting State may specify 
the form in which information is to be provided (e.g., 
depositions of witnesses and authenticated copies of original 
documents). The intention is to ensure that the information may 
be introduced as evidence in the judicial proceedings of the 
requesting State. The requested State should, if possible, 
provide the information in the form requested to the same 
extent that it can obtain information in that form under its 
own laws and administrative practices with respect to its own 
taxes.

Paragraph 7

    Paragraph 7 states that the competent authorities of the 
Contracting States may develop an agreement upon the mode of 
application of the Article. The Article authorizes the 
competent authorities to exchange information on an automatic 
basis, on request in relation to a specific case, or 
spontaneously. It is contemplated that the Contracting States 
will utilize this authority to engage in all of these forms of 
information exchange, as appropriate.
    The competent authorities may also agree on specific 
procedures and timetables for the exchange of information. In 
particular, the competent authorities may agree on minimum 
thresholds regarding tax at stake or take other measures aimed 
at ensuring some measure of reciprocity with respect to the 
overall exchange of information between the Contracting States.
            Treaty Effective Dates and Termination in Relation to 
                    Exchange of Information
    Once the Convention is in force, the competent authority 
may seek information under the Convention with respect to a 
year prior to the entry into force of the Convention. Even if 
an earlier Convention with more restrictive provisions, or even 
no Convention, was in effect during the years in which the 
transaction at issue occurred, the exchange of information 
provisions of the Convention apply. In that case, the competent 
authorities have available to them the full range of 
information exchange provisions afforded under this Article.
    In contrast, if the Convention is terminated in accordance 
with the provisions of Article 29 (Termination), it would cease 
to authorize, as of the date of termination, any exchange of 
information, even with respect to a year for which the 
Convention was in force. In such case, the tax administrations 
of the two countries would only be able to exchange information 
to the extent allowed under either domestic law or another 
international agreement or arrangement.

     ARTICLE 27 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS)

    This Article confirms that any fiscal privileges to which 
diplomatic or consular officials are entitled under general 
provisions of international law or under special agreements 
will apply notwithstanding any provisions to the contrary in 
the Convention. The agreements referred to include any 
bilateral agreements, such as consular conventions, that affect 
the taxation of diplomats and consular officials and any 
multilateral agreements dealing with these issues, such as the 
Vienna Convention on Diplomatic Relations and the Vienna 
Convention on Consular Relations. The U.S. generally adheres to 
the latter because its terms are consistent with customary 
international law.
    The Article does not independently provide any benefits to 
diplomatic agents and consular officers. Article 19 (Government 
Service) does so, as do Code section 893 and a number of 
bilateral and multilateral agreements. In the event that there 
is a conflict between the Convention and international law or 
such other treaties, under which the diplomatic agent or 
consular official is entitled to greater benefits under the 
latter, the latter laws or agreements shall have precedence. 
Conversely, if the Convention confers a greater benefit than 
another agreement, the affected person could claim the benefit 
of the tax treaty.
    Pursuant to subparagraph 5(b) of Article 1, the saving 
clause of paragraph 4 of Article 1 (General Scope) does not 
apply to override any benefits of this Article available to an 
individual who is neither a citizen of the United States nor 
has immigrant status in the United States.

                     ARTICLE 28 (ENTRY INTO FORCE)

    This Article contains the rules for bringing the Convention 
into force and giving effect to its provisions.

Paragraph 1

    Paragraph 1 provides for the ratification of the Convention 
by both Contracting States according to their constitutional 
and statutory requirements. This paragraph requires the 
Contracting States to notify each other in writing, through 
diplomatic channel, when their respective applicable procedures 
have been satisfied.
    In the United States, the process leading to ratification 
and entry into force is as follows: Once a treaty has been 
signed by authorized representatives of the two Contracting 
States, the Department of State sends the treaty to the 
President who formally transmits it to the Senate for its 
advice and consent to ratification, which requires approval by 
two-thirds of the Senators present and voting. Prior to this 
vote, however, it generally has been the practice for the 
Senate Committee on Foreign Relations to hold hearings on the 
treaty and make a recommendation regarding its approval to the 
full Senate. Both Government and private sector witnesses may 
testify at these hearings. After the Senate gives its advice 
and consent to ratification of the protocol or treaty, an 
instrument of ratification is drafted for the President's 
signature. The President's signature completes the process in 
the United States.

Paragraph 2

    Paragraph 2 provides that the Convention will enter into 
force on the date of the later of the diplomatic notes referred 
to in paragraph 1. The date on which a treaty enters into force 
is not necessarily the date on which its provisions take 
effect. Paragraph 2, therefore, also contains rules that 
determine when the provisions of the treaty will have effect.
    Under subparagraph 2(a), the Convention will have effect 
with respect to taxes withheld at source (principally 
dividends, interest and royalties) for amounts paid or credited 
on or after the first day of the second month following the 
date on which the Convention enters into force. For example, if 
instruments of ratification are exchanged on April 25 of a 
given year, the withholding rates specified in paragraph 2 of 
Article 10 (Dividends) would be applicable to any dividends 
paid or credited on or after June 1 of that year. This rule 
allows the benefits of the withholding reductions to be put 
into effect as soon as possible, without waiting until the 
following year. The delay of one to two months is required to 
allow sufficient time for withholding agents to be informed 
about the change in withholding rates. If for some reason a 
withholding agent withholds at a higher rate than that provided 
by the Convention (perhaps because it was not able to re-
program its computers before the payment is made), a beneficial 
owner of the income that is a resident of the other Contracting 
State may make a claim for refund pursuant to section 1464 of 
the Code.
    For all other taxes, subparagraph 2(b) specifies that the 
Convention will have effect for any taxable period beginning on 
or after January 1 of the year following entry into force.

Paragraph 3

    Paragraph 3 provides that the Convention between the 
Government of the United States of America and the Government 
of the Polish People's Republic for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to 
Taxes on Income signed at Washington on October 8, 1974 
(hereinafter referred to as ``the 1974 convention'') shall 
cease to have effect in relation to any tax from the date upon 
which this Convention has effect in respect of such tax in 
accordance with the provisions of paragraph 2 of this Article. 
The 1974 convention shall terminate on the last date on which 
it has effect in relation to any tax in accordance with the 
foregoing provisions of this paragraph.

Paragraph 4

    Paragraph 4 provides that notwithstanding the entry into 
force of this Convention, an individual who was entitled to 
benefits of Article 17 (Teachers), Article 18 (Students and 
Trainees) or Article 19 (Government Functions) of the 1974 
convention at the time of the entry into force of this 
Convention shall continue to be entitled to such benefits until 
such time as the individual would cease to be entitled to such 
benefits if the 1974 convention remained in force.

                        ARTICLE 29 (TERMINATION)

    The Convention is to remain in effect indefinitely, unless 
terminated by one of the Contracting States in accordance with 
the provisions of Article 29. The Convention may be terminated 
at any time after the year in which the Convention enters into 
force. The Article requires that any notices of termination 
must be given through diplomatic channels, and must be 
delivered on or before June 30 in any calendar beginning after 
the year in which the Convention enters into force. If such 
notice of termination is given, the provisions of the 
Convention with respect to withholding at source will cease to 
have effect on or after the first day of January of the 
calendar year next following the date on which the notice has 
been given. For other taxes, the Convention will cease to have 
effect as of taxable periods beginning on or after the first 
day of January of the calendar year next following the date on 
which the notice is given.
    Article 29 relates only to unilateral termination of the 
Convention by a Contracting State. Nothing in that Article 
should be construed as preventing the Contracting States from 
concluding a new bilateral agreement, subject to ratification, 
that supersedes, amends or terminates provisions of the 
Convention without the six-month notification period.
    Customary international law observed by the United States 
and other countries, as reflected in the Vienna Convention on 
Treaties, allows termination by one Contracting State at any 
time in the event of a ``material breach'' of the agreement by 
the other Contracting State.

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