[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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