U.S.-Austria Tax Treaty Technical Explanation
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TREASURY DEPARTMENT
TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN
THE UNITED STATES OF AMERICA
AND
THE REPUBLIC OF AUSTRIA
FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION
OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
SIGNED AT VIENNA ON MAY 31, 1996
INTRODUCTION
This document is a technical explanation of the Convention
between the Uni.ted States and Austria signed at Vienna on May 31,
1996 ("the Convention").
References are made to the Convention
between the United States of America and the Republic of Austria
for the Avoidance of Double Taxation with Respect to Taxes on
Income, signed on October 25, 1956 ("the 1956 Convention"). The
Convention replaces the 1956 Convention.
Negotiations took into
account the U.S. Treasury Department's current tax treaty policy,
the Model Double Taxation Convention on Income and Capital,
published by the organization for Economic Cooperation and
Development ("the OECD Model"), and recent United States and
Austrian treaties concluded.with third countries.
The Technical Explanation is an official guide to the
Convention.
It reflects the policies behind particular
Convention provisions, as well as understandings reached 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."
The Convention is supplemented by a detailed Memorandum of
Understanding. Although not part of the Convention, and not
subject to ratification, as made clear in diplomatic notes
exchanged at the time of signature of the Convention, the
Memorandum of Understanding presents agreed understandings as to.
the proper interpretation of certain provisions of the
Convention.
The explanations of each article include
explanations of any Memorandum of Understanding (MOU) provisions
relating to that article.
The first section of the Memorandum of Understanding relates
to a general matter of treaty interpretation
onvention, the
Memorandum of Understanding presents agreed understandings as to.
the proper interpretation of certain provisions of the
Convention.
The explanations of each article include
explanations of any Memorandum of Understanding (MOU) provisions
relating to that article.
The first section of the Memorandum of Understanding relates
to a general matter of treaty interpretation.
It states the
agreement of the Contracting States that, with the exceptions
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specified below, whenever a provision of the Convention
corresponds to a provision of the OECD Model, the interpretations
of that provision in the OECD Commentary should apply to the
comparable provision in the Convention.
The applicability of the
Commentary to the convention is consistent with the Vienna
Convention on the Law of Treaties of May 23, 1969.
The general rule stated above does not apply if either
Contracting State has entered a reservation to the OECD Model
or an observation to its
Commentary with respect to the provision
in question.
It
also does not apply if the Memorandum of
Understanding to the Convention contains a contrary
interpretation.
Similarly, if a published interpretation by
either Contracting State (such as this Technical Explanation),
that has been provided to the competent authority of the other
Contracting State prior to its publication, contains a contrary
interpretation, or if at any time after the entry into force of
the Convention, the competent authorities agree to a contrary
interpretation, the above rule does not apply.
This technical
explanation has been provided to the competent authority of
Austria. This technical explanation applies notwithstanding a
different interpretation in the Commentary on the OECD Model,
even where the interpretation in the OECD Model Commentary is
adopted after the issuance of this technical explanation
horities agree to a contrary
interpretation, the above rule does not apply.
This technical
explanation has been provided to the competent authority of
Austria. This technical explanation applies notwithstanding a
different interpretation in the Commentary on the OECD Model,
even where the interpretation in the OECD Model Commentary is
adopted after the issuance of this technical explanation.
The
use of the OECD Commentary as provided in the Memorandum of
Understanding can neither result in an amendment to the treaty as
approved by the Senate and ratified, nor can it result in an
interpretation contrary to the position of the United States.
Such Commentaries can be helpful,.as are interpretations by the
competent authorities of both states, in providing explanations
and interpretations of issues which arise during the life of the
treaty.
Article 1.
PERSONAL SCOPE
Article 1 provides that the Convention is applicable to
residents of the United States or Austria, except where the
Convention otherwise provides.
Under Article 4 (Residence) a
person is 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 the person's domicile, citizenship, place of management
or other similar criteria, subject to certain limitations, as
described in Article 4.
If, however, a person is, under those
criteria, a resident of both Contracting States, Article 4
assigns a single state of residence.
This definition governs for all provisions of the
Convention.
Certain provisions are applicable to persons who may
not be residents of either Contracting State.
For example,
Article 19 (Government Service) may apply to a citizen of a
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person is, under those
criteria, a resident of both Contracting States, Article 4
assigns a single state of residence.
This definition governs for all provisions of the
Convention.
Certain provisions are applicable to persons who may
not be residents of either Contracting State.
For example,
Article 19 (Government Service) may apply to a citizen of a
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Contracting State who is resident in neither State. Paragraph 1
of Article 23 (Nondiscrimination) applies to nationals (including
citizens) of the Contracting States.
Under Article 25 (Exchange
of Information and Administrative Assistance), information may be
exchanged with respect to residents of third states.
Residents
of a Contracting State are not automatically entitled to benefits
under the Convention; they must also satisfy one of the
requirements of Article 16 (Limitation on Benefits) establishing
the right to obtain treaty benefits.
Paragraph 2 makes explicit, on a reciprocal basis, the
generally accepted principle that no provision in the Convention
may restrict any exclusion, exemption, deduction, credit or other
allowance now or hereafter accorded by the laws of the Contract
ing States or by any other agreement between the Contracting
States.
Thus, for example, subparagraph 2(a) provides that if a
deduction would be allowed under the U.S. Internal Revenue Code
(the "Code") in computing the taxable income of a resident of
Austria, the deduction will remain available to that person in
computing taxable income under the treaty.
In no event may the
treaty increase the tax burden on residents of the Contracting
States.
Thus, a right to tax given by the treaty cannot be
exercised by the United States unless that right also exists
under the Code.
A taxpayer may always rely on the Code treatment.
This does
not mean, however, that a taxpayer may pick and choose among Code
and treaty provisions in an inconsistent manner in order to
minimize tax
rease the tax burden on residents of the Contracting
States.
Thus, a right to tax given by the treaty cannot be
exercised by the United States unless that right also exists
under the Code.
A taxpayer may always rely on the Code treatment.
This does
not mean, however, that a taxpayer may pick and choose among Code
and treaty provisions in an inconsistent manner in order to
minimize tax.
For example, assume a resident of Austria has
three separate businesses in the United States.
One is a profit
able permanent establishment.
The other twb are trades or
businesses, which would earn taxable income under the Code, but
whidh do not meet the permanent establishment threshold tests of
the Convention, one of which is profitable and the other which
incurs a loss.
Under the Convention, the income of the permanent
establishment is taxable, and both the profit and loss of the
other two businesses are ignored.
Under the Code, all three
would be taxable.
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 unprofitable trade or
business against the profit of the permanent establishment.
(See
Rev. Rul. 84-17 1984-1 C.B. 308)
However, if 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 that is not effectively connected
with any of his business activities in the United States.
Subject to the provisions of paragraph 3, subparagraph 2(b)
establishes that nothing in the Convention can be used to deny
any benefit granted by any other agreement between the United
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ed from invoking the Convention with respect, for
example, to any dividend income that is not effectively connected
with any of his business activities in the United States.
Subject to the provisions of paragraph 3, subparagraph 2(b)
establishes that nothing in the Convention can be used to deny
any benefit granted by any other agreement between the United
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States and Austria, regardless of any provisions to the contrary,
or silence, in this convention.
Paragraph 3 modifies the rule of subparagraph 2(b) with
respect to certain obligations undertaken by the Contracting
States under other agreements.
Subparagraph 3(a) provides that,
notwithstanding any other agreement to which the Contracting
States may be parties, a dispute concerning whether a measure
falls
within the scope of this Convention shall be considered
only by the competent authorities of the Contracting States as
defined under subparagraph 1(e) of Article 3 (General Defini
tions), and the procedures under this Convention exclusively
shall apply to the dispute. Thus, dispute resolution procedures-
provided in trade, investment, or other agreements between the
Contracting States (including multilateral agreements to which
both Contracting States are parties) shall not apply for the
purpose of determining the scope of this Convention.
Subparagraph 3(b) further provides that, unless the compe
tent authorities agree that a taxation measure is not within the
scope of this Convention, the nondiscrimination obligations of
this
Convention exclusively shall apply with respect to that
measure, except for such national treatment or most-favored
nation ("MFN") obligations as may apply to trade in.goods under
the General Agreement on Tariffs and Trade ("GATT").
No national
treatment or MFN obligation under any other agreement shall apply
with respect to that measure
nvention, the nondiscrimination obligations of
this
Convention exclusively shall apply with respect to that
measure, except for such national treatment or most-favored
nation ("MFN") obligations as may apply to trade in.goods under
the General Agreement on Tariffs and Trade ("GATT").
No national
treatment or MFN obligation under any other agreement shall apply
with respect to that measure. Thus, any national treatment and
MFN obligations undertaken by the Contracting States under
agreements other than the Convention, shall not apply to a taxa
tion measure, with the exception of GATT as applicable to trade
in goods.
*For purposes of paragraph 3, subparagraph 3(c) defines a
"measure" as a law, regulation, rule, procedure, decision,
administrative action, or any other form of measure.
Paragraph 4 contains the traditional saving clause while
paragraph 5 provides exceptions to the saving clause.
Under
paragraph 4, each Contracting State reserves its right, except as
provided in paragraph 5, to tax its residents (as determined
under Article 4) and citizens as if the Convention had not come
into effect and notwithstanding any Convention provisions to the
contrary.
If, for example, an Austrian resident performs inde
pendent personal services in the United States and the income
from the services is not attributable to a fixed base in the
United States, Article 14 (Independent Personal Services) would
normally prevent the United States from taxing the income.
If,
however, the Austrian resident 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.
(For special
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cle 14 (Independent Personal Services) would
normally prevent the United States from taxing the income.
If,
however, the Austrian resident 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.
(For special
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foreign tax credit rules applicable to the U.S. taxation of
certain U.S. income of its citizens resident in Austria see
paragraph 2 of Article 22 (Relief from Double Taxation)).
"Residence" for the purpose of the saving clause is deter
mined under Article 4.
Thus, for example, if
an individual who
is not a U.S. citizen is a resident of the United States under
the Code and is also a resident of Austria under Austrian law,
and that individual has a permanent home available to him in
Austria and not in the United States, he would be treated as a
resident of Austria under Article 4 and for purposes of the
saving clause.
The United States would not. be permitted to apply
its
statutory rules to that person if they are inconsistent with
the treaty.
Under paragraph 4 the Contracting States also reserve their
right to tax former citizens whose loss of citizenship had as one
of its principal purposes the avoidance of tax, but only for a
period of 10 years after the loss of citizenship.
Such former
citizen of the United States is taxable in accordance with the
provisions of section 877 of the Code.
Paragraph 5 sets forth exceptions to the saving clause in
cases where its application would contravene policies reflected
in the Convention that are intended to benefit a Contracting
State's citizens and residents
ly for a
period of 10 years after the loss of citizenship.
Such former
citizen of the United States is taxable in accordance with the
provisions of section 877 of the Code.
Paragraph 5 sets forth exceptions to the saving clause in
cases where its application would contravene policies reflected
in the Convention that are intended to benefit a Contracting
State's citizens and residents.
Subparagraph a) lists
certain
provisions that will apply to all
of the 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, and,
in particular, permits the override of the statute of limitations
for the purpose of refunding tax under such a correlative
adjustment.
(2) Paragraph 4 of Article 13 (Capital Gains) seeks
to blend the laws of the two Contracting States with respect to
the taxation of gains from the alienation of assets removed from
a permanent establishment or fixed base.
In doing soit
modifies, to some extent, the tax that the residence country may
impose on such gains.
(3) Paragraphs 1(b) and 3 of Article 18
(Pensions) deal with social security benefits and alimony.
Their.
inclusion in the exceptions to the saving clause means that such
payments will be exempt from tax in the country of residence of
the recipient, notwithstanding a statutory right of the residence
country to tax the recipient on the income.
(4) Article 22
(Relief from Double Taxation) confers the benefits of U.S. double
taxation relief on U.S. citizens and residents, and Austrian
benefits on its
residents.
To apply the saving clause to this
Article would render the Article meaningless.
the country of residence of
the recipient, notwithstanding a statutory right of the residence
country to tax the recipient on the income.
(4) Article 22
(Relief from Double Taxation) confers the benefits of U.S. double
taxation relief on U.S. citizens and residents, and Austrian
benefits on its
residents.
To apply the saving clause to this
Article would render the Article meaningless.
(5) Article 23
(Nondiscrimination) prohibits discriminatory taxation by one
Contracting State of the nationals and residents of the other
Contracting State.
These prohibitions are intended to apply even
if the national or resident of the other State is also a national
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or resident of the taxing State.
(6) Article 24 (Mutual
Agreement Procedure) may confer U.S. benefits on U.S. citizens
and residents and Austrian benefits on its
residents.
The
statute of limitations may be waived for refunds and the
competent authorities are permitted to use a definition of a term
that differs from the statutory definition in one or both
countries.
As with the foreign tax credit, these benefits are
intended to be granted by a Contracting State to its
citizens and
residents.
Subparagraph 5(b) provides a different set of exceptions to
the saving clause.
As applied to the United States, these
exceptions are available only to individuals who are neither U.S.
citizens nor lawful permanent residents (i.e.,
"green card"
holders) but who remain in the Unites States long enough to
become residents under the Code.
As applied to Austria, these
exceptions are available to individuals who are not citizens of
Austria
ceptions to
the saving clause.
As applied to the United States, these
exceptions are available only to individuals who are neither U.S.
citizens nor lawful permanent residents (i.e.,
"green card"
holders) but who remain in the Unites States long enough to
become residents under the Code.
As applied to Austria, these
exceptions are available to individuals who are not citizens of
Austria.
The benefits preserved by this paragraph are the host
country exemptions for the following items of income:
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
and consular officers under Article 26 (Diplomatic Agents and
Consular Officers).
Article 2.
TAXES COVERED
This Article identifies the U.S. and Austrian taxes to which
the Convention applies.
Paragraph 1 makes the general statement
that the Convention applies to taxes on income imposed on behalf
of a Contracting State.
Thus, except, as noted below, the
Convention does not apply to state and local taxes or to capital
taxes.
Paragraph 2 identifies the existing covered taxes.
Subpara
graph (a) identifies the U.S. taxes covered as the Federal income
taxes imposed by the Code.
The Convention does not apply to
social security taxes (Code sections 1401, 3101 and 3111).
U.S.
and Austrian social security taxes are dealt with in the bilater
al Social Security Totalization Agreement, which entered into
force on November 1, 1991.
Subparagraph 2(b) identifies the Austrian taxes covered as
the Einkommensteuer (income tax), and the Koerperschaftsteuer
(corporation tax).
The 1956 Convention also covers these taxes.
Paragraph 3 states that the Convention will apply to any
taxes that are identical, or substantially similar, to those
enumerated in paragraph 2, and which are imposed in addition to,
or in place of, the existing taxes after the date of signature of
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nkommensteuer (income tax), and the Koerperschaftsteuer
(corporation tax).
The 1956 Convention also covers these taxes.
Paragraph 3 states that the Convention will apply to any
taxes that are identical, or substantially similar, to those
enumerated in paragraph 2, and which are imposed in addition to,
or in place of, the existing taxes after the date of signature of
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the Convention.
The paragraph also provides that the U.S. and
Austrian competent authorities shall notify each other of any
changes in their taxation laws that are significant to the
operation of the Convention.
They are also to notify each other
of any official published materials concerning the application
of the Convention.
Such materials include explanations,
regulations, rulings or judicial decisions.
.Paragraph 4 expands the type of taxes covered for certain
specific purposes.
With respect to Article 23 (Non-Discrimi
nation), the Convention applies in both Contracting States to all
taxes imposed by a Contracting State or a political subdivision
or local authority thereof.
Thus, although state and local taxes
in the United States are not, for any other purpose, covered by
the Convention, they must be imposed in a non-discriminatory
manner, consistent with the rules of Article 23.
The 1956
Convention applies the same scope of taxes covered for
nondiscrimination purposes.
Paragraph 4 also provides that for
purposes of applying paragraphs 1 through 5 of Article 25
(Exchange of Information and Administrative Assistance), the
Convention applies to all taxes imposed by the Contracting
States.
Thus, for example, the United States can request
information from Austria for the purpose of enforcing the Federal
estate tax or Federal excise taxes.
Information cannot be
requested, however, for state and local tax purposes.
Article 3.
GENERAL DEPFINITIONS
Article 3 defines terms used in the Convention.
Paragraph 1
defines a number of basic terms used in the Convention
cting
States.
Thus, for example, the United States can request
information from Austria for the purpose of enforcing the Federal
estate tax or Federal excise taxes.
Information cannot be
requested, however, for state and local tax purposes.
Article 3.
GENERAL DEPFINITIONS
Article 3 defines terms used in the Convention.
Paragraph 1
defines a number of basic terms used in the Convention.
Para
graph 2 addresses terms that are not defined in the Convention.
Other articles define certain other terms.
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).
The terms "dividends",
"interest" and "royalties" are defined in Articles 10, 11, and
12, respectively, which deal with the taxation of those items of
income.
Subparagraph 1(a) defines the term "person" to include an
individual, an estate, a trust, a company and any other body or
persons.
Subparagraph 1(b) defines the term "company" as a body
corporate or an entity treated as a body corporate for tax
purposes.
Subparagraph 1(c) defines the terms "enterprise of a
Contracting State" and "enterprise of the other Contracting
State" 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, respectively.
Since the terms "body corpo-
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r an entity treated as a body corporate for tax
purposes.
Subparagraph 1(c) defines the terms "enterprise of a
Contracting State" and "enterprise of the other Contracting
State" 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, respectively.
Since the terms "body corpo-
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rate" and "enterprise, are not defined in the Convention, in
accordance with paragraph 2 of this Article, they have the
meaning that they have under the laws of the Contracting State
whose tax is being applied..
Subparagraph 1(d) defines the term "international traffic"
as any transport by a ship or aircraft, except when such trans
port is solely between places in the other Contracting State.
The meaning of the term "other Contracting State" becomes clear
in the context of Article 8 (Shipping and Air Transport), which
refers to the profits of an enterprise of a Contracting State
related to activities carried on in international traffic.
The
reference to the "other Contracting State," therefore, refers to
the State other than the one in which the enterprise is resident.
The exclusion from international traffic of transport solely
between places within the other Contracting State means, for
example, that a carriage of goods or passengers solely between
New York and Chicago by an Austrian carrier (if that were possi
ble under U.S. law) would not be treated as international
traffic.
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, and the
United States would not be required to exempt the income under
Article 8.
The income would, however, be treated as business
profits under Article 7 (Business Profits) and would, therefore,
be taxable in the United States only if attributable to a U.S.
permanent establishment, and then only on a net basis
incipally Article 8,
therefore, would not apply to income from such carriage, and the
United States would not be required to exempt the income under
Article 8.
The income would, however, be treated as business
profits under Article 7 (Business Profits) and would, therefore,
be taxable in the United States only if attributable to a U.S.
permanent establishment, and then only on a net basis.
If,
however, goods or passengers are carried by an Austrian carrier
from Vienna to New York, with some of the. goods or passengers
carried only to New York, and the rest taken to Chicago, the
entire transport would be international traffic.
Subparagraphs 1(e) (i) and 1(e) (ii)
define the term "compe
tent authority" for the United States and Austria, respectively.
The U.S. competent authority is the Secretary of the Treasury or
his delegate.
The Secretary of the Treasury has delegated the
competent authority function to the Commissioner of Internal
Revenue, who has, in turn, re-delegated the authority to the
Assistant Commissioner (International).
With respect to
interpretative issues, the Assistant Commissioner acts with the
concurrence of the Associate Chief Counsel (International) of the
Internal Revenue Service.
In Austria the competent authority is
the Minister of Finance or his delegate.
The routine relief
from
source taxation on dividends in Austria is carried out by the
Regional Directorate for Vienna.
The terms "United States" and "Austria" are defined in sub-
paragraphs 1(f) and 1(g), respectively.
The term "United States"
is defined to mean the United States of America.
The term does
not include Puerto Rico, the Virgin Islands, Guam or any other
U.S. possession or territory.
When used geographically, the term
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ut by the
Regional Directorate for Vienna.
The terms "United States" and "Austria" are defined in sub-
paragraphs 1(f) and 1(g), respectively.
The term "United States"
is defined to mean the United States of America.
The term does
not include Puerto Rico, the Virgin Islands, Guam or any other
U.S. possession or territory.
When used geographically, the term
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includes the states of the United States and the District of
Columbia.
The Convention also explicitly includes the U.S.
continental shelf within the definition of the United States to
the extent that; under international law, the United States has
sovereign right to explore for and exploit the natural resources
of the continental shelf and the waters above it.
The term
"Austria" is defined to mean the Republic of Austria.
Subparagraph 1(h) defines the term "nationals" of a
Contracting State.
A national is an individual possessing the
nationality of a Contracting State (i.., a citizen), and any
legal person, partnership or association deriving its status, as
such, from the laws in force in a Contracting State.
Paragraph 2 provides that, in applying the Convention, any
term used but not defined in the Convention, unless the context
otherwise requires, will have the meaning it has under the laws
of the Contracting State concerning the taxes to which the
convention applies.
Under the U.S. and Austrian interpretation
of this provision, any meaning under the applicable tax laws of
that State prevails over a meaning given to the term under other
laws of that State
but not defined in the Convention, unless the context
otherwise requires, will have the meaning it has under the laws
of the Contracting State concerning the taxes to which the
convention applies.
Under the U.S. and Austrian interpretation
of this provision, any meaning under the applicable tax laws of
that State prevails over a meaning given to the term under other
laws of that State.
If, however, the meaning of a term cannot be
readily determined under the laws of a Contracting State, or if
there is a conflict in meaning under the laws of the two States
that creates problems in the application of the Convention, the
competent authorities may, pursuant to the provisions of
paragraph 3(e) of Article 24 (Mutual Agreement Procedure),
establish a common meaning in order to prevent double taxation or
to further any other purpose of the Convention.
This common
meaning need not conform to the meaning of the term under the
laws of either Contracting State.
It is understood that, when reference is made in paragraph 2
in the internal law of a Contracting State for purposes of
defining a term, it means the law as in effect at the time the
treaty is being applied, not the law as in effect at the time the
treaty was signed.
This use of "ambulatory definitions" is
generally accepted within the OECD. The use of an ambulatory
definition, however, may lead to results that are at variance
with the intentions of the negotiators and of the Contracting
States when ratifying the treaty.
The reference in paragraph 2
to "unless the context otherwise requires" a definition different
from the internal law definition of the Contracting State whose
tax is being imposed refers to a circumstance where the result
intended by the negotiators or by the Contracting States is
different from the result that would obtain under the statutory
definition
ates when ratifying the treaty.
The reference in paragraph 2
to "unless the context otherwise requires" a definition different
from the internal law definition of the Contracting State whose
tax is being imposed refers to a circumstance where the result
intended by the negotiators or by the Contracting States is
different from the result that would obtain under the statutory
definition.
The first section of the Memorandum of Understanding,
described in the introductory section of this Technical
Explanation, is relevant for the application of paragraph 2 of
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this article.
It provides that, with certain exceptions,
interpretations found in the Commentary to the OECD Model will be
relevant for understanding the meaning of terms in this
Convention, when those terms are also used in the OECD Model.
Article 4.
RESIDENT
Article 4 sets forth rules for determining whether a
person is a resident of a Contracting State for purposes of the
Convention.
The treaty definition of residence is to be used
only for purposes of the Convention.
The 1956 Convention does
not contain a comprehensive definition of residence.
Determination of residence is important because, as noted in
the explanation to Article 1 (General Scope), as a general matter
only residents of the Contracting States may claim the benefits
of the Convention.
Any entitlement to benefits of a resident of
a Contracting State is, however, subject to the requirements of
Article 16 (Limitation on Benefits).
The determination of residence for treaty purposes looks to a
person's liability to tax under the laws of the Contracting
States.
A person who, under those laws, is a resident of one
Contracting State and not of the other need look no further.
Except as specifically provided in the Article (e.g., subpara
graph 1(c)) for purposes of the Convention that person will be
treated as a resident of the State in which he is resident under
internal law
ks to a
person's liability to tax under the laws of the Contracting
States.
A person who, under those laws, is a resident of one
Contracting State and not of the other need look no further.
Except as specifically provided in the Article (e.g., subpara
graph 1(c)) for purposes of the Convention that person will be
treated as a resident of the State in which he is resident under
internal law.
If, however, a person is resident in both
Contracting States under their respective taxation laws, the
tie-breaker rules attempt to assign one State of residence to
such a person.
Paragraph 1 defines a "resident of a Contracting State."
In general, this definition incorporates the definitions of resi
dence in U.S. and Austrian law, by defining a resident as a
person who, under the laws of a Contracting State, is subject to
tax there by reason of his domicile, residence, citizenship,
place of management, place of incorporation, or any other similar
criterion.
Thus, as a general matter, residents of the United
States include U.S. citizens as well as aliens who are considered
U.S. residents under U.S. law.
Paragraph 1 provides certain exceptions to this general
rule.
Under subparagraph 1(a), if a person is liable to tax only
in respect of income from sources within a State, the person will
not be treated as a resident of that Contracting State for
purposes of the Convention.
Thus, for example, an Austrian
consular official in the United States, who may be subject to
U.S. tax on U.S. source investment income, but who is not taxable
in the United States on non-U.S. income, would not be considered
a resident of the United States for purposes of the Convention
AUSTRIA 330
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a resident of that Contracting State for
purposes of the Convention.
Thus, for example, an Austrian
consular official in the United States, who may be subject to
U.S. tax on U.S. source investment income, but who is not taxable
in the United States on non-U.S. income, would not be considered
a resident of the United States for purposes of the Convention
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- 11
(See Code section 7701(b)(5)(B)).
Similarly, an Austrian enter
prise with a permanent establishment in the United States is not,
by virtue of that permanent establishment, a resident of the
United States.
The enterprise 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.
Subparagraph 1(b) provides that the income of a partnership,
estate or trust will be treated as the income of a resident of a
Contracting State only to the extent that the income derived or
paid by such person is subject to tax in that State as the income
of a resident, either in the hands of the person deriving the
income or in the hands of its partners, beneficiaries or grantor.
The Memorandum of Understanding describes the treatment of pass-
through entities, such as limited liability companies, not
explicitly referred to in the Article.
Under U.S. law, any organization classified as a partnership
for tax purposes is taxable on a transparent basis.
(Certain
publicly-traded partnerships, however, will be classified for tax
purposes as corporations taxable at the entity level.)
Thus,
under paragraph 1(b) of Article 4, Austrian source income
received by an entity classified as a partnership for U.S. tax
purposes will generally be treated as income of a U.S. resident
to the extent the income is included in the distributive share of
partners or members that are themselves U.S
, however, will be classified for tax
purposes as corporations taxable at the entity level.)
Thus,
under paragraph 1(b) of Article 4, Austrian source income
received by an entity classified as a partnership for U.S. tax
purposes will generally be treated as income of a U.S. resident
to the extent the income is included in the distributive share of
partners or members that are themselves U.S. residents (looking
through any partnerships that are themselves partners or members
and applying the provisions of Article 16 (Limitation on
Benefits).
Certain limited liability companies are classified as
partnerships for U.S. tax purposes.
Under the Memorandum of
Understanding, the residence of entities treated as pass-throughs
for tax purposes is determined on the same basis as for a
partnership.
Similarly, the treatment under the Convention of
income received by a trust or estate will be determined by the
residence for taxation purposes of the person subject to tax on
such income, which may be the grantor, the beneficiaries or the
estate or trust itself, depending on the circumstances.
Subparagraph 1(c) specifies additional conditions for
determining whether a U.S. citizen or an alien lawfully admitted
for permanent residence in the United States (i..,
a "green
card" holder) will be treated as a U.S. resident for purposes of
the Convention.
If such an individual is not also a resident of
Austria under paragraph 1, he will be treated as a resident of
the United States only if he has a substantial presence, perma
nent home or habitual abode in the United States.
Substantial
presence for this purpose is a similar concept to "substantial
presence" under section 7701(b) of the U.S. Internal Revenue code
and the regulations thereunder (a minimum physical presence of
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Supp. No. 6 (1998)
raph 1, he will be treated as a resident of
the United States only if he has a substantial presence, perma
nent home or habitual abode in the United States.
Substantial
presence for this purpose is a similar concept to "substantial
presence" under section 7701(b) of the U.S. Internal Revenue code
and the regulations thereunder (a minimum physical presence of
AUSTRIA 331
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- 12
more than 30 days in the calendar year for which the
determination is relevant and a total of at least 183 days in the
current and previous two calendar years).
Thus, for example, an
individual resident of Mexico who is a U.S. citizen by birth, or
who is a Mexican citizen and holds a U.S. green card, but who, in
either case, does not live in the United States, would not be
entitled to benefits under the treaty.
On the other hand, a U.S.
citizen who is transferred to Mexico for two years but who
maintains a permanent home or habitual abode in the United States
would be entitled to treaty benefits.
However, the residence of
a U.S. citizen or green card holder who is also a resident of
Austria under Austrian law will be determined by application of
the tie-breaker rules of paragraph 2.
Subparagraph 1(d) clarifies that a Contracting State, and
its political subdivisions or local authorities, or agencies or
instrumentalities of such governments, subdivisions, etc., will
be treated as residents of that State.
Thus, such governmental
entities
are entitled to treaty benefits as residents of a
Contracting State.
Although the Article does not deal explicitly with the
residence of a tax-exempt organization, including pension funds,
it is understood that such an organization that is established
under the laws of a Contracting State, and is, therefore, a
resident of that State under its
law, is to be treated as a
resident of that State for purposes of the Convention as well
of a
Contracting State.
Although the Article does not deal explicitly with the
residence of a tax-exempt organization, including pension funds,
it is understood that such an organization that is established
under the laws of a Contracting State, and is, therefore, a
resident of that State under its
law, is to be treated as a
resident of that State for purposes of the Convention as well.
The United States and Austrian negotiators agreed that such an
organization is "liable to the tax laws" of its State of resi
dence, under which it pays zero tax if it complies with certain
standards, and that if it does not comply with these standards it
will pay tax on its income. Thus, the United States and Austria
agree that the fact that a charitable organization or pension
fund is exempt from tax in its resident country is not to be
construed to deny such organization or fund resident status under
the Convention.
Paragraph 1(g) of Article 16 also affects the
treatment of such entities for purposes of the Convention.
Paragraph 2 provides a series of tie-breaker rules to
determine a single State of residence for an individual who,
under paragraph 1, would be a resident of both countries.
The
first
test
is where the individual has a permanent home.
If that
test
is inconclusive because the individual has a permanent home
available in both States or in neither State, his residence is in
the Contracting State where his personal and economic relations
are closest, i.e., his "center of vital interests".
The Memoran
dum of Understanding clarifies that a period of time beyond a
year may have to be examined to identify the center of vital
interests.
If the center of vital interests test is also inconclusive,
AUSTRIA 332
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n neither State, his residence is in
the Contracting State where his personal and economic relations
are closest, i.e., his "center of vital interests".
The Memoran
dum of Understanding clarifies that a period of time beyond a
year may have to be examined to identify the center of vital
interests.
If the center of vital interests test is also inconclusive,
AUSTRIA 332
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- 13
residence is in the Contracting State where the individual main
tains an habitual abode.
If he has an habitual abode in both
States or in neither of them, he will be treated as a resident of
his Contracting State of nationality.
If he is a national of
both States or of neither of them, the competent authorities
shall endeavor to assign a single State of residence by mutual
agreement.
Paragraph 3 resolves dual-residence issues for corporations.
Under U.S. law, a corporation 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.
Under Austrian law a
corporation is treated as a resident of Austria if it is regis
tered or managed and controlled there.
Dual residence, there
fore, can arise if a corporation organized in the U.S. is managed
and controlled in Austria.
Under paragraph 3, a dual-resident
corporation will be treated as a resident of a Contracting State
if it is created under the laws of that State, or political
subdivision thereof.
This provision conforms to U.S. law.
Paragraph 4 deals with persons other than individuals or
companies that are resident in both the United States and Austria
under paragraph 1.
The competent authorities are instructed to
determine by mutual agreement a single State of residence for
that person for purposes of the Convention and to determine the
mode of application of the Convention to such person.
Article S.
PERMANENT ESTABLISHMENT
This Article defines the term "permanent establishment,"
which is significant for several articles of the Convention
paragraph 1.
The competent authorities are instructed to
determine by mutual agreement a single State of residence for
that person for purposes of the Convention and to determine the
mode of application of the Convention to such person.
Article S.
PERMANENT ESTABLISHMENT
This Article defines the term "permanent establishment,"
which 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 taxation by that
State of the business profits of a resident of the other Con
tracting State.
Since the term "fixed base" in Article 14
(Independent Personal Services) is understood by reference to the
definition of "permanent establishment," this Article is also
relevant for purposes of Article 14.
Articles 10, 11, and 12
(dealing with dividends, interest, and royalties, respectively)
provide for reduced rates of tax at source on payments of these
items of income to a resident of the other State only when the
income is not attributable to a permanent establishment or fixed
base that the recipient has in the source State.
The concept is
also relevant in determining which Contracting State may tax
certain gains under Article 13 (Capital Gains) and certain "other
income" under Article 21 (Other Income).
This Article follows closely recent U.S. treaties and the
OECD Model provisions.
It is similar to the definition of a
permanent establishment in the 1956 Convention except that the
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oncept is
also relevant in determining which Contracting State may tax
certain gains under Article 13 (Capital Gains) and certain "other
income" under Article 21 (Other Income).
This Article follows closely recent U.S. treaties and the
OECD Model provisions.
It is similar to the definition of a
permanent establishment in the 1956 Convention except that the
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-14
exceptions from the definition of "permanent establishment" have
been broadened to include not only certain specified activities
but also any other activity of a preparatory or auxiliary
character.
Like other recent U.S. income tax conventions, it
adds a rule that treats drilling rigs or ships in the same manner
as construction sites.
Paragraph 1 provides the basic definition of the term
"permanent establishment." The term means a fixed place of
business through which the business of an enterprise is wholly or
partly carried on.
Paragraph 2 lists examples of fixed places of business that
constitute a permanent establishment.
The list
is illustrative
and non-exclusive and includes a place of management, a branch,
an office, a factory, a workshop, and a mine, an oil or gas well,
a quarry, or any other place of extraction of natural resources.
Paragraph 3 provides rules to determine when a building site
a construction, assembly or installation project, or an installa
tion or drilling rig or ship used to explore or develop natural
resources constitutes a permanent establishment.
The site,
project, etc., constitutes a permanent establishment only if it
lasts for more than 12 months.
The twelve-month test applies
separately to each individual site or project and the period
begins when work (including preparatory work carried on by the
enterprise) physically begins in a Contracting State
xplore or develop natural
resources constitutes a permanent establishment.
The site,
project, etc., constitutes a permanent establishment only if it
lasts for more than 12 months.
The twelve-month test applies
separately to each individual site or project and the period
begins when work (including preparatory work carried on by the
enterprise) physically begins in a Contracting State.
A series
of contracts or projects that are interdependent, both commer
cially 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 is constructed
for a different purchaser.
If the twelve-month threshold is
exceeded, the site or project constitutes a permanent establish
ment from its first day.
This interpretation is based on the
Commentaries to paragraph 3 of Article 5 (Permanent Establish
ment) of the OECD Model, which contains language almost identical
to that in this Convention with respect to construction activi
ties, and, therefore, conforms to the generally accepted interna
tional interpretation of the language in paragraph 3 of Article 5
of the Convention with respect to such activities.
Paragraph 3
applies the same twelve-month threshold test to drilling rigs,
both onshore and offshore.
Rigs must, therefore, be present in a
Contracting State for twelve months to constitute a permanent
establishment.
Paragraph 4 contains exceptions to the general rule of
paragraph 1 that a fixed place of business through which a
business is carried on constitutes a permanent establishment.
The paragraph lists a number of activities that may be carried on
through a fixed place of business, but that, nevertheless, will
AUSTRIA 334
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months to constitute a permanent
establishment.
Paragraph 4 contains exceptions to the general rule of
paragraph 1 that a fixed place of business through which a
business is carried on constitutes a permanent establishment.
The paragraph lists a number of activities that may be carried on
through a fixed place of business, but that, nevertheless, will
AUSTRIA 334
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- 15
not give rise to a permanent establishment.
The use of facili
ties solely to store, display or deliver merchandise belonging to
an enterprise will 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 will not give rise to a permanent establishment of the
first-mentioned enterprise.
The maintenance of a fixed place of
business solely for activities that have a preparatory or auxil
iary character for the enterprise, such as advertising or the
supply of information (but not including the carrying on of
scientific research), will not constitute a permanent establish
ment of the enterprise.
It is understood that a combination of
*
these activities will not give rise to a permanent establishment.
Paragraphs 5 and 6 specify when the use of an agent will
constitute a permanent establishment.
Under paragraph 5, a
dependent agent acting on behalf of an enterprise will be deemed
to be a permanent establishment of the enterprise, if the agent
has and habitually exercises an authority to conclude contracts
in the name of that enterprise.
The contracts referred to are
those relating to the essential business operations of the
enterprise; not those relating to ancillary activities
t.
Under paragraph 5, a
dependent agent acting on behalf of an enterprise will be deemed
to be a permanent establishment of the enterprise, if the agent
has and habitually exercises an authority to conclude contracts
in the name of that enterprise.
The contracts referred to are
those relating to the essential business operations of the
enterprise; not those relating to ancillary activities.
If,
however, the agent's activities are limited to those activities
specified in paragraph 4 that would not constitute a permanent
establishment if
carried on by the enterprise through a fixed
place of business, the agent will not be a permanent establish
ment of the enterprise.
Paragraph 6 provides that an enterprise will not be deemed
to have a permanent establishment in a Contracting State merely
because it carries on business in that State through an indepen
dent agent, including a broker or general commission agent, if
the agent is acting in the ordinary course of his business.
Paragraph 7 clarifies that a company that is
a resident of a
Contracting State will not be 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 or not a
permanent establishment exists will be made solely on the basis
of the factors described in paragraphs 1 through 6 of the Article
and not on the ownership or control relationship between the
companies.
Article 6.
INCOME FROM REAL PROPERTY
Paragraph 1 provides that income of a resident of a Con
tracting State derived from real property situated in the other
Contracting State may be taxed in the Contracting State in which
AUSTRIA 335
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the factors described in paragraphs 1 through 6 of the Article
and not on the ownership or control relationship between the
companies.
Article 6.
INCOME FROM REAL PROPERTY
Paragraph 1 provides that income of a resident of a Con
tracting State derived from real property situated in the other
Contracting State may be taxed in the Contracting State in which
AUSTRIA 335
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- 16
the property is situated.
Like the OECD Model, the paragraph
specifies that income from real property includes income from
agriculture or forestry.
This Article does not grant an exclu
sive taxing right to the situs State, but assigns it the primary
taxing right.
The Article does not impose any limitation in
terms of rate or form of tax on the situs State, although, as
discussed below in connection with paragraph 5, it does allow the
taxpayer the right to elect to be taxed on a net basis.
Paragraph 2 defines the term "real property" as having the
meaning that it has under the laws of the situs country.
In
addition, the paragraph specifies certain classes of property
which, regardless of internal law definitions, are to be included
within the meaning of the term for purposes of the Convention.
The definition conforms to that in the OECD Model.
Paragraph 3 elaborates on the general rule of paragraph 1 by
specifying that the income referred to in paragraph 1 means
income from any use of real property, including, but not limited
to, income from direct use by the owner and rental income from
the letting or sub-letting of real property.
The Memorandum of Understanding further elaborates on
paragraph 3.
It clarifies that Article 6 applies not only to
income earned through the use of real property owned by the
income recipient, but also to income from the exploitation of
rights in real property.
For example, consider a piece of real
property in Austria owned by a resident of Germany and leased by
the German owner to a U.S. corporation, which then sub-leases the
property
paragraph 3.
It clarifies that Article 6 applies not only to
income earned through the use of real property owned by the
income recipient, but also to income from the exploitation of
rights in real property.
For example, consider a piece of real
property in Austria owned by a resident of Germany and leased by
the German owner to a U.S. corporation, which then sub-leases the
property.
It is understood that the rules of Article 6 will
apply to the income earned by the U.S. corporation from its sub
lease of the property, even though the U.S. corporation does not
own the Austrian real property, and the property that it does own
(i e., the rights in the property) is technically movable
property.
Paragraph 4 specifies that the basic rule of paragraph 1 (as
elaborated in paragraph 3) applies to.income from real property
of an enterprise and to income from real property used for the
performance of independent personal services.
This provision
clarifies that the situs State may tax the real property income
of a resident of the other Contracting State in the absence of a
permanent establishment or fixed base in the situs State, not
withstanding the requirements of Articles 7 (Business Profits)
and 14 (Independent Personal Services) that to be taxable, income
must be attributable to a permanent establishment or fixed base,
respectively.
Paragraph 5 permits a taxpayer to elect to be taxed on real
property income on a net basis, that is, as if such income were
attributable to a permanent establishment.
The election is
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les 7 (Business Profits)
and 14 (Independent Personal Services) that to be taxable, income
must be attributable to a permanent establishment or fixed base,
respectively.
Paragraph 5 permits a taxpayer to elect to be taxed on real
property income on a net basis, that is, as if such income were
attributable to a permanent establishment.
The election is
AUSTRIA 336
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- 17
binding for the taxable year of the election and all subsequent
taxable years unless the competent authorities, upon request of
the taxpayer, agree to terminate the election.
In the United
States, revocation will be granted in accordance with the provi
sions of the relevant regulations under section 897.
Article 7.
BUSINESS PROFITS
This Article provides rules for taxation by a Contracting
State of the business profits of an enterprise of the other
Contracting State.
It
updates the corresponding Article in the
1956 Convention to conform more closely to current U.S. treaty
policy and to the OECD Model.
The general rule, found in paragraph 1, is that business
'profits of an enterprise of one Contracting State may be taxed by
the other Contracting State only if the enterprise carries on
business in that other Contracting State through a permanent
establishment (as defined in Article 5 (Permanent Establishment))
situated there.
Where that condition is met, the State in which
the permanent establishment is situated may tax only so much of
the income of the enterprise that is attributable to the perma
nent establishment.
This rule differs from the comparable rule
in the 1956 Convention, which contained a limited force of
attraction rule that permitted the State in which the permanent
establishment is located to tax income of the enterprise even if
not attributable to the permanent establishment, but only to the
extent that the income is derived from sources in that State.
Paragraph 2 provides rules for attributing business profits
to a permanent establishment
Convention, which contained a limited force of
attraction rule that permitted the State in which the permanent
establishment is located to tax income of the enterprise even if
not attributable to the permanent establishment, but only to the
extent that the income is derived from sources in that State.
Paragraph 2 provides rules for attributing business profits
to a permanent establishment.
The Contracting States will
attribute to a permanent establishment the profits that it
would
have been expected to earn had it been a distinct and independent
entity engaged in the same or similar activities under the same
or similar circumstances.
The computation of the business
profits attributable to a permanent establishment under this
paragraph is subject to the rules of paragraph 3 regarding
deductions for expenses incurred for the purposes of earning the
income.
The profits attributable to a permanent establishment may be
from sources within or without a Contracting State.
Thus, for
example, items of foreign source income described in section
864(c) (4) (B) of the Code may be attributed to a U.S. permanent
establishment of an Austrian enterprise and subject to tax in the
United States. The concept of "attributable to" in the Conven
tion is analogous to but narrower than the concept of "effective
ly connected with" in section 864(c) of the Code.
Thus, the
limited "force of attraction" rule of Code section 864(c) (3) is
not applicable under the Convention.
AUSTRIA 337
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nt
establishment of an Austrian enterprise and subject to tax in the
United States. The concept of "attributable to" in the Conven
tion is analogous to but narrower than the concept of "effective
ly connected with" in section 864(c) of the Code.
Thus, the
limited "force of attraction" rule of Code section 864(c) (3) is
not applicable under the Convention.
AUSTRIA 337
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- 18
Paragraph 3 provides that in determining the business
profits of a permanent establishment, deductions shall be allowed
for a reasonable allocation of expenses incurred for the purposes
of the permanent establishment, regardless of where the expenses
are incurred.
This rule ensures that business profits will be
taxed on a net basis.
Among the expenses that may be incurred
for the purposes of the permanent establishment are expenses for
research and development, interest and other similar expenses, as
well as executive and general administrative expenses.
The
paragraph specifies that the allocation of the enumerated expens
es made in determining the profits attributable to the permanent
establishment must be "reasonable."
This language allows the
United States to apply the types of expense allocations found in
U.S. law, for example, in Treasury Regulations sections 1.861-8
and 1.882-5.
This rule is not limited to expenses incurred exclusively for
the purposes of the permanent establishment, but includes
expenses incurred for the purposes of the enterprise as a whole,
or that part of the enterprise that includes the permanent
establishment.
Deductions are to be allowed regardless of which
accounting unit of the enterprise books the expenses, so long as
they are incurred for the purposes of the permanent establish
ment.
Thus, a portion of the interest expense recorded on the
books of the home office in one State may be deducted by a
permanent establishment in the other (or vice versa) if properly
allocable thereto
tablishment.
Deductions are to be allowed regardless of which
accounting unit of the enterprise books the expenses, so long as
they are incurred for the purposes of the permanent establish
ment.
Thus, a portion of the interest expense recorded on the
books of the home office in one State may be deducted by a
permanent establishment in the other (or vice versa) if properly
allocable thereto.
Paragraph 4 provides that no business profits will be
attributed to a permanent establishment merely because it pur
chases goods or merchandise for the enterprise of which it is a
permanent establishment.
This rule refers to a permanent estab
lishment that performs more than one function for the enterprise,
including purchasing.
For example, the permanent establishment
may purchase raw materials for the enterprise's manufacturing
operation and sell
the manufactured output.
While business
profits may be attributable to the permanent establishment with
respect to its
sales activities,
no profits are attributable with
respect to its
purchasing activities.
If the sole activity were
the purchasing of goods or merchandise for the enterprise, the
issue of the attribution of income would not arise, because,
under subparagraph 4(d) of Article 5 (Permanent Establishment),
there would be no permanent establishment.
Paragraph 5 states that, to assure continuous and consistent
tax treatment, the same method for determining the profits of a
permanent establishment is to be used from year to year, unless
there is good and sufficient reason to change.
In conformity
with current U.S. treaty policy and the OECD Model, the paragraph
applies "for the purposes of the preceding paragraphs."
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ates that, to assure continuous and consistent
tax treatment, the same method for determining the profits of a
permanent establishment is to be used from year to year, unless
there is good and sufficient reason to change.
In conformity
with current U.S. treaty policy and the OECD Model, the paragraph
applies "for the purposes of the preceding paragraphs."
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-19
Paragraph6 explains the relationship between the provisions
of this Article and other provisions of the Convention.
Where
business profits include items of income that are dealt with
separately under other articles of the Convention, the provisions
of those articles will, except where they specifically provide to
the contrary, take precedence over the provisions of this Arti
cle.
Thus, for example, the taxation of interest generally will
be determined by the rules of Article 11 (Interest), and not by
Article 7.
However, as provided in paragraph 3 of Article 11, if
the interest is attributable to a permanent establishment, the
provisions of Article 7 apply instead.
Under this paragraph, income derived from shipping and air
transport activities
that are described in Article 8 (Shipping
and Air Transport) 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.
For
example, an airline ticket office situated in the United States'
that constitutes a permanent establishment of an airline of
Austria will not be subject to tax in the United States with
respect to the profits attributable to that office, because such
income is encompassed by Article 8.
Paragraph 7 specifies that the term "business profits" as
used in the Convention includes income from the rental of tangi
ble personal property.
some countries subject this class of
income to gross basis taxation at source
e of
Austria will not be subject to tax in the United States with
respect to the profits attributable to that office, because such
income is encompassed by Article 8.
Paragraph 7 specifies that the term "business profits" as
used in the Convention includes income from the rental of tangi
ble personal property.
some countries subject this class of
income to gross basis taxation at source.
The inclusion of this
class of income in business profits means that such income earned
by a resident of a Contracting State can be taxed by the other
Contracting State only if the income is attributable to a perma
nent establishment maintained by the resident in that other
State, and, if the income is taxable, it can be taxed only on a
net basis.
Paragraph 8 contains a special rule relating to a particular
type of business entity, a sleeping partnership (Stille
Gesellschaft) under Austrian law.
A sleeping partnership is not
a commercial partnership in the usual sense.
It
is a contract
concluded under commercial law by which an investor (the sleeping
partner) contributes money or money's worth to the business of
his contracting partner in exchange for a share in the profits of
the business and under the entitlement to obtain specified
information about the development of the business.
Commercial
law provides only one type of contract (with the possibility of
arranging bilaterally various details in different ways, egg,
the exclusion of participation in the losses, as long as the
essential matters prescribed by law are observed).
In relation
to third parties (eg., customers, suppliers and other
contractors of the enterprise) only the owner of the business is
liable for the debts of the enterprise.
Internally, it depends
on the terms of the contract with the sleeping partner as to
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on of participation in the losses, as long as the
essential matters prescribed by law are observed).
In relation
to third parties (eg., customers, suppliers and other
contractors of the enterprise) only the owner of the business is
liable for the debts of the enterprise.
Internally, it depends
on the terms of the contract with the sleeping partner as to
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whether the sleeping partner participates only in profits or has
also to bear a portion of the losses; but, even in the latter
case, he is by law not obligated to increase his investment.
Under Austrian tax law, there are two kinds of sleeping
partnerships, the typical form and the non-typical form. In a
typical sleeping partnership, a partner whose interest is not
disclosed (a "sleeping partner") participates in (i) either the
profits and losses of the business, or (ii) only in its profits,
or (iii)
in its
profits up to a certain amount (and not in the
losses).
However, in a typical sleeping partnership, a sleeping
partner does not participate in the capital and assets of the
business, and his rights upon withdrawal from the partnership are
limited to the return of his investment.
Under Austrian tax law,
the profit of the sleeping partner in a typical sleeping
partnership is within the category of income from investment
activities.
In a non-typical sleeping partnership, a sleeping partner is
entitled to participate in the increase in net wealth of the
business property (that is, a certain portion of the business
value in case of termination of the contract) as well as in the
profits and losses of the business.
The economic position of a
sleeping partner in a non-typical sleeping partnership is rather
close to that of a partner in a partnership; thus, the sleeping
partnership contract is subjected to the Austrian partnership
taxation regime and the profit is considered to be income from
commercial activities
se of termination of the contract) as well as in the
profits and losses of the business.
The economic position of a
sleeping partner in a non-typical sleeping partnership is rather
close to that of a partner in a partnership; thus, the sleeping
partnership contract is subjected to the Austrian partnership
taxation regime and the profit is considered to be income from
commercial activities.
The taxation of the income of a sleeping partnership (both
the typical and the non-typical forms) under Austrian law is
illustrated by the following example.
The U.S. corporation (US)
invests 10,000 under a sleeping partnership contract in the
Austrian company (A).
US is granted a 10% share in the profits
of A.
In year 1 A makes a profit (before taxes and before
deduction of the sleeping partner's share) of 20,000.
In year 2,
after the finalization of the financial statements for year 1, US
receives a cash payment of 2,000.
Under Austrian domestic law, Austria's taxation of the
typical sleeping partnership is as follows:
In year 2, A must
withhold 25% of 2,000 (which is 500).
In year 3, US must file a
corporation tax return in Austria for year 1.
Assume that the
net income of US from its Austrian investment (e.g. after
deduction of refinancing cost, travel expenditure, etc.) is
1,000.
US will receive an assessment notice (probably also in
year 3) according to which the tax liability for year 2 is
determined to be 340.
The 500 previously withheld is credited
against that tax liability
so that, at the end, US has a claim
for refund of 160 against the Austrian government.
The taxable
income of A is 18,000 (in year 1) because A's income is reduced
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eceive an assessment notice (probably also in
year 3) according to which the tax liability for year 2 is
determined to be 340.
The 500 previously withheld is credited
against that tax liability
so that, at the end, US has a claim
for refund of 160 against the Austrian government.
The taxable
income of A is 18,000 (in year 1) because A's income is reduced
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by the 2,000 distributed to US.
Under Austrian domestic law, Austria's taxation of the non-
typical sleeping partnership is as follows:
Under the
partnership regime, the joint income of A and US is determined
for year 1 to be 20,000.
The portion of 2,000 which belongs to
US is reduced (in the declaration for the joint profit
determination) by special expenses incurred by the partner.
So
again the taxable profit of US for year 1 is 1,000.
The tax
liability
of US for year 1 is
340.
US has to settle
that tax
liability by making a cash payment to the Austrian tax
administration of 340.
If, in year 2, an amount of 2,000 is
transferred into the hands of US, then this is seen as a
withdrawal of property and does not constitute a taxable event.
No tax withholding applies.
The taxable income of A is 18,000
(in year 1) because A's income is reduced by the 2,000 allocated
to US.
In specific cases, it may be unclear as to the whether a
sleeping partnership should be categorized as the typical or the
non-typical form.
In order to avoid this classification issue
under the convention, paragraph 8 applies to income from both
forms; thus, the income derived by a U.S. sleeping partner with
respect to his interest in a sleeping partnership, whether
typical or non-typical, is considered business profits under the
Convention and subject to tax in Austria to the extent attribut
able to a permanent establishment in Austria
o avoid this classification issue
under the convention, paragraph 8 applies to income from both
forms; thus, the income derived by a U.S. sleeping partner with
respect to his interest in a sleeping partnership, whether
typical or non-typical, is considered business profits under the
Convention and subject to tax in Austria to the extent attribut
able to a permanent establishment in Austria.
Under paragraph 8,
if the activities carried on by the sleeping partnership
constitute a permanent establishment in Austria, the permanent
establishment of the partnership is attributed to a U.S. sleeping
partner.
Paragraph 9 elaborates on paragraphs 1 and 2 of Article 7,
and on the rules in a number of other articles of the Convention
that relate to permanent establishment's and fixed bases.
These
are paragraph 4 of Article 10 (Dividends), paragraph 3 of Article
11 (Interest), paragraph 4 of Article 12 (Royalties), paragraph 3
of Article 13 (Capital Gains), Article 14 (Independent Personal
Services) and paragraph 2 of Article 21 (Other Income).
Para
graph 9 incorporates the rule of Code section. 864(c) (6) into the
Convention.
It provides that any income or gain attributable to
a permanent establishment (or, in the context of the other arti
cles, a fixed base as well) during its
existence is taxable in
the Contracting State where the permanent establishment (or fixed
base) is or was situated even if
the payments are deferred until
after the permanent establishment (or fixed base) no longer
exists.
The effect of this rule can be illustrated by the following
example.
Assume a company that is a resident of Austria and that
maintains a permanent establishment in the United States winds up
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permanent establishment (or fixed
base) is or was situated even if
the payments are deferred until
after the permanent establishment (or fixed base) no longer
exists.
The effect of this rule can be illustrated by the following
example.
Assume a company that is a resident of Austria and that
maintains a permanent establishment in the United States winds up
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-22
the permanent establishment's affairs and sells the permanent
establishment's inventory and assets to a U.S. buyer at the end
of year 1, in exchange for an interest-bearing installment
obligation payable in full by the end of year 3.
Despite the
fact that Article 13's threshold requirement for U.S. taxation is
not met in years 2 or 3, because the company has no permanent
establishment in the United States, the United States may tax the
deferred income payment received by the company with respect to
the installment obligation in year 2 and year 3 under Article 7
(pursuant to the application of paragraph 3 of Article 11
(Interest)).
This Article is subject to the saving clause of paragraph 4
of Article 1 (Personal Scope). Thus, for example, if a citizen
of the United States who is a resident of Austria derives busi
ness 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
2 of Article 22 (Relief from Double Taxation), tax those profits
as part of the worldwide income of the citizen, notwithstanding
the provisions of this Article under which such income derived by
a resident of Austria is exempt from U.S. tax.
The business
profits are also subject to the provisions of Article 16 (Limita
tion on Benefits).
For example, assume an Austrian company is
doing business in the United States and is earning income effec
tively connected with a trade or business in the United States,
but does not have a permanent establishment in the United States
rived by
a resident of Austria is exempt from U.S. tax.
The business
profits are also subject to the provisions of Article 16 (Limita
tion on Benefits).
For example, assume an Austrian company is
doing business in the United States and is earning income effec
tively connected with a trade or business in the United States,
but does not have a permanent establishment in the United States.
Under the provisions of Article 7, that company would not be
subject to U.S. tax on its business profits.
If, however, the
company does not qualify for U.S. benefits under Article 16, its
income that is effectively connected with its
U.S. trade or
business would be subject to U.S. tax.
Article 8.
SHIPPING AND AIR TRANSPORT
This Article provides rules governing the taxation of
profits from the operation of ships and aircraft in international
traffic.
The term "international traffic" is defined in subpara
graph 1(d) of Article 3 (General Definitions) as any transport by
a ship or aircraft, except where such transport is solely between
places in the other Contracting State.
Paragraph 1 provides that profits of an enterprise of a
Contracting State from operating ships or aircraft in interna
tional traffic shall be taxable only in that Contracting State.
This rule is the same as the rule under the 1956 Convention. By
virtue of paragraph 6 of Article 7 (Business Profits), profits of
an enterprise of a Contracting State that are exempt in the other
Contracting State under this paragraph remain exempt even if the
enterprise has a permanent establishment in that other Contract-
AUSTRIA 342
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nly in that Contracting State.
This rule is the same as the rule under the 1956 Convention. By
virtue of paragraph 6 of Article 7 (Business Profits), profits of
an enterprise of a Contracting State that are exempt in the other
Contracting State under this paragraph remain exempt even if the
enterprise has a permanent establishment in that other Contract-
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-23
ing State.
Paragraph 2 extends the definition of profits from the
operation of ships or aircraft in international traffic to
include profits from the rental of ships or aircraft on a full
(i~e., equipped with crew and supplies) basis or on a bareboat
(i.e.,
without crew and supplies) basis if the ships or aircraft
are operated in international traffic by the lessee, or if the
rental profits are incidental to profits from the operation of
ships or aircraft in international traffic (as described in
paragraph 1).
It is understood, 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 con
tracting State falls within Article 8 if the transport is under
taken 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 Austria 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 Austria (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.
In addition, certain non-transport activities that are an
integral part of the services performed by a transport company
are understood, consistent with the Commentary to Article 8 of
the OECD Model, to be covered in paragraph 1, though they are not
specified in paragraph 2
me earned by the U.S. shipping company from the overland leg
of the journey would be taxable only in the United States.
In addition, certain non-transport activities that are an
integral part of the services performed by a transport company
are understood, consistent with the Commentary to Article 8 of
the OECD Model, to be covered in paragraph 1, though they are not
specified in paragraph 2.
These include, for example, the
performance of some maintenance or catering services by one
airline for another airline, if these services are incidental to
the -provision of those services by the airline for itself.
Income earned by concessionaires, however, is not covered by
Article 8.
Paragraph 3 provides that the profits of an enterprise of a
Contracting State from the use, rental, or maintenance of con
tainers (including equipment for their transport) used to trans
port goods in international traffic will be exempt from tax in
the other Contracting State.
This rule applies 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 3 applies to an enterprise of a
Contracting State regardless of the form of the enterprise.
Thus, it applies to a partnership or other pass-through entity to
the extent the entity is an enterprise of a Contracting State
under the Convention.
The shipping and air transport provisions of the 1956
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manent establishment in the other
Contracting State.
Paragraph 3 applies to an enterprise of a
Contracting State regardless of the form of the enterprise.
Thus, it applies to a partnership or other pass-through entity to
the extent the entity is an enterprise of a Contracting State
under the Convention.
The shipping and air transport provisions of the 1956
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-24
Convention do not deal with income from the leasing of ships or
aircraft, except when such leasing is an occasional source of
income for an enterprise engaged in the international operation
of ships or aircraft.
Also, the 1956 Convention does not deal
with income from the use, rental, or maintenance of containers
except when such container income is supplementary or incidental
to its international operation of ships or aircraft.
Paragraph 4 clarifies that the provisions of the preceding
paragraphs apply equally to profits derived by an enterprise of a
Contracting State from participation in a pool, joint business,
or international operating agency.
Therefore, the clarification
under paragraph 4 extends to profits from the participation by
the pool in the lease of containers which is supplementary or
incidental to its international operation of ships or aircraft.
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 13 (Capital Gains).
This Article is subject to the saving clause of paragraph 4
of Article 1 (Personal Scope).
The United States, therefore,
may, subject to the special foreign tax credit rules of paragraph
2 of Article 22 (Relief from Double Taxation), tax the shipping
or air transport profits of a resident of Austria if that
Austrian resident is a citizen of the United States.
As with any
benefit of the Convention, the enterprise claiming the benefit
must be entitled to the benefit under the provisions of Article
16 (Limitation on Benefits).
Article 9
gn tax credit rules of paragraph
2 of Article 22 (Relief from Double Taxation), tax the shipping
or air transport profits of a resident of Austria if that
Austrian resident is a citizen of the United States.
As with any
benefit of the Convention, the enterprise claiming the benefit
must be entitled to the benefit under the provisions of Article
16 (Limitation on Benefits).
Article 9.
ASSOCIATED ENTERPRISES
This Article incorporates into the Convention the general
principles of section 482 of the Code.
It provides that when
associated enterprises engage in transactions that are not at
arm's length, the Contracting States may make appropriate
adjustments to the taxable income and tax liability of such
enterprises to reflect what the income or tax of these
enterprises with respect to such transactions would have been had
an arm's-length relationship existed.
Paragraph 1 deals with circumstances where an enterprise of
a Contracting State is related to an enterprise of the other
Contracting State and those related enterprises make arrangements
or impose conditions between themselves in their commercial or
financial relations that differ from those that would be made
between independent persons. Under those circumstances, the
Contracting States may adjust the income (or loss) of the enter
prises to reflect the income that would have been taken into
account in the absence of such a relationship.
The paragraph
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conditions between themselves in their commercial or
financial relations that differ from those that would be made
between independent persons. Under those circumstances, the
Contracting States may adjust the income (or loss) of the enter
prises to reflect the income that would have been taken into
account in the absence of such a relationship.
The paragraph
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-25
specifies the meaning of the term "related enterprises" in this
context.
An enterprise of one Contracting State is related to an
enterprise of the other Contracting State if either enterprise
participates, directly or indirectly, in the management, control,
or capital of the other enterprise.
The enterprises are also
related if the same persons participate, directly or indirectly,
in the management, control, or capital of both enterprises.
The
term "control" includes any kind of control, whether or not
legally enforceable and however exercised or exercisable.
Paragraph 1 contains additional language that clarifies that
cost-sharing or general services agreements between associated
enterprises are not necessarily to be included among the condi
tions "made or imposed between two enterprises" referred to in
the first
sentence of paragraph 1.
Thus, the mere presence of a
cost-sharing, or similar, agreement between two related parties
does not by itself indicate that the two parties have entered
into a non-arm's length transaction giving rise to an adjustment
under paragraph 1.
However, any such arrangement may be examined
to determine whether,. in fact, it does constitute such a transac
tion.
Paragraph 2 provides that where a contracting State has made
an adjustment consistent with the provisions of paragraph 1 and
the other Contracting State agrees that the adjustment was
appropriate, that other Contracting State must make a corre
sponding adjustment to the tax liability of the related person in
that other Contracting State
,. in fact, it does constitute such a transac
tion.
Paragraph 2 provides that where a contracting State has made
an adjustment consistent with the provisions of paragraph 1 and
the other Contracting State agrees that the adjustment was
appropriate, that other Contracting State must make a corre
sponding adjustment to the tax liability of the related person in
that other Contracting State.
Where relevant, the Contracting
State making such an adjustment will take the other provisions of
the Convention into account.
For example, if the effect of a
corresponding adjustment is to treat an Austrian corporation as
having made a distribution of profits to its U.S. parent
corporation the provisions of Article 10 (Dividends) will apply,
and Austria may impose a 5 percent withholding tax on the
dividend.
The competent authorities are authorized to consult,
if necessary, to resolve any differences in the application of
these provisions.
If a corresponding adjustment is made under paragraph 2, it
is to be implemented, pursuant to paragraph 2 of Article 24
(Mutual Agreement Procedure), notwithstanding any time limits or
other procedural limitations in the law of the Contracting State
making the adjustment.
The saving clause of paragraph 4 of
Article 1 (Personal Scope) does not apply to paragraph 2 of
Article 9 (see the exceptions to the saving clause in subpara
graphs 5(a) of Article 1).
Thus, even if the statute of limita
tions has run, or there is a closing agreement between the
Internal Revenue Service and the taxpayer, a refund of tax can be
made for purposes of implementing a corresponding adjustment.
Statutory or procedural limitations, however, cannot be overrid
den to impose additional tax, because, under subparagraph 2(a) of
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cle 1).
Thus, even if the statute of limita
tions has run, or there is a closing agreement between the
Internal Revenue Service and the taxpayer, a refund of tax can be
made for purposes of implementing a corresponding adjustment.
Statutory or procedural limitations, however, cannot be overrid
den to impose additional tax, because, under subparagraph 2(a) of
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-26
Article 1 (General Scope), the Convention cannot restrict
any
statutory benefit.
Article 9 of the Convention does not contain a counterpart
to the paragraph 3 found in many other U.S. income tax treaties.
That paragraph is intended to clarify that the rights of the
Contracting States to apply internal law provisions relating to
adjustments between related parties are fully preserved.
Its
absence does not signal any change in U.S. law or in the U.S.
treaty position.
Such adjustments --
the distribution,
apportionment, or allocation of income, deductions, credits or
allowances, or the characterization of income under thin capital
ization rules --
are permitted even if they differ from, or go
beyond, those authorized by paragraph 1 of the Article, as long
as they accord with the general principles of paragraph 1, ie.,
that the adjustments reflect what would have transpired had the
related parties been acting at arm's length.
Thus, the absence
of paragraph 3 does not limit either State's right to implement
its own statutory rules related to adjustments intended to
reflect transactions between unrelated parties.
This conclusion
derives from the fact that paragraph 1 is to be interpreted in a
permissive, rather than exclusive, manner.
For example, while
paragraph 1 explicitly allows adjustments to deductions in
computing taxable income, it
does not preclude adjustments to tax
credits if such adjustments can be made under internal law,
despite the lack of express authority in Article 9 to make such
adjustments
n
derives from the fact that paragraph 1 is to be interpreted in a
permissive, rather than exclusive, manner.
For example, while
paragraph 1 explicitly allows adjustments to deductions in
computing taxable income, it
does not preclude adjustments to tax
credits if such adjustments can be made under internal law,
despite the lack of express authority in Article 9 to make such
adjustments.
It
is also understood that Article 9 does not limit the
rights of the Contracting States to allocate income between
related persons in cases where the relationship differs from that
described in paragraph 1.
This position conforms with the
Commentary to the OECD Model, which explicitly states that
further adjustments may be needed in circumstances outside of
paragraph 1.
This rule would apply, for example, if
a commercial
or contractual relationship allows one party to exercise a
controlling influence over another.
Any adjustments made pursu
ant to this provision must accord with the general principles of
paragraph 1 of Article 9.
The paragraph in the Memorandum of
Understanding relating to Article 16 (Limitation on Benefits) and
the anti-abuse concepts of the treaty is also relevant for
Article 9.
The paragraph makes clear that both Contracting
States agree that the explicit anti-abuse provisions of the
Convention do not limit the applicability of statutory
anti-abuse provisions of the Contracting States.
Article 10.
DIVIDENDS
Article 10 provides rules for the taxation of dividends and
similar amounts paid by a company resident in one Contracting
State to a resident of the other Contracting State.
Article 10
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that the explicit anti-abuse provisions of the
Convention do not limit the applicability of statutory
anti-abuse provisions of the Contracting States.
Article 10.
DIVIDENDS
Article 10 provides rules for the taxation of dividends and
similar amounts paid by a company resident in one Contracting
State to a resident of the other Contracting State.
Article 10
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-27
also provides rules for the imposition by the United States of a
tax on branch profits.
Although paragraph 1 establishes that
dividends "may be taxed" in the residence country, as noted in
the MOU, this rule does not prevent the source State from also
taxing such dividends.
Generally, the article limits the source
State's right to tax dividends and amounts treated as dividends
or dividend equivalents.
Under paragraph 1, dividends paid by a company that is a
resident of one Contracting State to a shareholder resident in
the other Contracting State may be taxed in the State of resi
dence of the recipient.
Thus, paragraph 1 preserves the right of
each Contracting State to tax dividends derived by its
residents-
from companies resident in the other Contracting State.
In the
case of the United States, this provision is consistent with the
saving clause of paragraph 5 of Article 1 (Personal Scope).
Under Austrian law, Austria generally exempts certain direct
investment dividends.
Dividends received by a resident company
from its
nonresident subsidiary are exempt from corporate income
tax in the hands of the former, subject to the condition that the
recipient company owned 25% or more of the share capital of the
distributing company directly and continuously for at least 12
months prior to the end of the taxable year in which the profit
distribution was received (KStG 1988. Sec. 10).
Dividends which
do not qualify for exemption under this participation exemption
are normally included in taxable income
subject to the condition that the
recipient company owned 25% or more of the share capital of the
distributing company directly and continuously for at least 12
months prior to the end of the taxable year in which the profit
distribution was received (KStG 1988. Sec. 10).
Dividends which
do not qualify for exemption under this participation exemption
are normally included in taxable income.
Paragraph 2 limits the right of the source State to tax
dividends paid by a company resident in that State if the benefi
cial owner of the dividends is a resident of the other Contract
ing State.
Under subparagraph 2(a), the source State tax is
generally limited to 5 percent of the gross amount of the divi
dends if
the beneficial owner is a company (other than a partner
ship) that holds directly at least 10 percent of the voting stock
of the company paying the dividend.
Under subparagraph 2(b), the
source State tax is limited to 15 percent of the gross amount of
the dividends in all
other cases.
Indirect ownership of voting
shares (e g., through tiers of corporations) and direct ownership
of nonvoting shares are not included for purposes of determining
eligibility
for the 5 percent direct dividend rate.
Shares are
considered voting shares if they provide the power to elect,
appoint or replace the person, or a majority of the board of
persons, exercising the powers ordinarily exercised by the board
of directors of a U.S. corporation.,
The Convention does not
require that the 10-percent voting interest be held for a minimum
period prior to the dividend payment date.
Under the 1956 Convention, direct investment dividends are
also taxable by the source State at a maximum rate of 5 percent
of the statutory rate of tax otherwise imposed on such dividends,
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directors of a U.S. corporation.,
The Convention does not
require that the 10-percent voting interest be held for a minimum
period prior to the dividend payment date.
Under the 1956 Convention, direct investment dividends are
also taxable by the source State at a maximum rate of 5 percent
of the statutory rate of tax otherwise imposed on such dividends,
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-28
but the 1956 Convention requires an ownership threshold of 95
percent for the 5 percent rate to apply.
Portfolio dividends are
subject to source State tax under the 1956 Convention at a rate
that is one-half of the rate otherwise applicable.
In the base
of the United States, this rule results in the application of a
15 percent rate.
Paragraph 2 imposes special limits on the rate of source
State taxation for dividends paid by U.S. Regulated Investment
Companies and Real Estate Investment Trusts ("RICs" and "REITs").
Because RICs and REITs are generally not liable to corporate tax
with respect to distributed amounts, the rate reduction from 15
to 5 percent cannot be justified as a means of relieving multiple
levels of corporate tax when the dividend recipient holds a
substantial interest in the payer.
Dividends paid by RICs are
denied the 5-percent direct dividend rate and are subject to the
15-percent portfolio dividend rate (which generally would be
applicable to a direct investment in the underlying corporate
stock), regardless of the percentage of voting shares held
directly by an Austrian corporate recipient of the dividend.
Dividends paid by a REIT are generally taxed at source at full
statutory rates (reflecting the source State taxation of real
property income under Article 6).
The fact that notwithstanding
paragraphs 1 and 2, the United States may tax most REIT dividends
at its statutory 30-percent rate is made clear in the Memorandum
of Understanding
ctly by an Austrian corporate recipient of the dividend.
Dividends paid by a REIT are generally taxed at source at full
statutory rates (reflecting the source State taxation of real
property income under Article 6).
The fact that notwithstanding
paragraphs 1 and 2, the United States may tax most REIT dividends
at its statutory 30-percent rate is made clear in the Memorandum
of Understanding.
However, dividends paid by REITs are taxed at
source at the 15-percent portfolio dividend rate if the benefi
cial,owner of the dividend is an Austrian individual who owns
less than a 10-percent interest in the REIT.
The denial of the 5-percent withholding rate at source to
all RIC and REIT shareholders, and the denial of the 15 percent
ratd to most shareholders of REITs, is intended to prevent the
use of these conduit entities to gain unjustifiable benefits for
certain shareholders.
For example, an Austrian corporation that
wishes to hold a diversified portfolio of U.S. corporate shares
may hold the portfolio directly and pay a U.S. withholding tax of
15 percent on all of the dividends that it receives.
Alterna
tively, it may place the portfolio of U.S. stocks in a RIC in
which the Austrian corporation owns more than 10 percent of the
shares, but in which the corporation has arranged to have a
sufficient number of small shareholders to satisfy the RIC
diversified ownership requirements.
Since the RIC is a pure
conduit, there are no U.S. tax costs to the Austrian corporation
of interposing the RIC as an intermediary in the chain of owner
ship.
In the absence of the special rules in paragraph 2,
however, the interposition would transform portfolio dividends
into direct investment dividends, which are taxable at source by
the United States at only 5 percent.
Similarly, a resident of Austria may hold U.S. real property
AUSTRIA 348
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poration
of interposing the RIC as an intermediary in the chain of owner
ship.
In the absence of the special rules in paragraph 2,
however, the interposition would transform portfolio dividends
into direct investment dividends, which are taxable at source by
the United States at only 5 percent.
Similarly, a resident of Austria may hold U.S. real property
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-29
directly and pay U.S. tax either at a 30-percent rate on the
gross income or at the ordinary income tax rates specified in
Code sections 1 or 11 on net income.
As in the preceding exam
ple, by placing the real estate holding in a REIT, the Austrian
investor could transform real estate income into dividend income,
and in the process, absent the special rule, transform, at no tax
cost, high-taxed income into much lower-taxed income.
In the
absence of the special rule, if the REIT shareholder is an
Austrian corporation that owns at least a 10-percent interest in
the REIT, the withholding rate would be 5 percent; in .all other
cases it would be 15 percent.
In either event, with one excep
tion, a tax of 30 percent or more would be significantly reduced.
The exception is the relatively small individual investor who
might be subject to a U.S. tax of 15 percent of net income even
if he earned the real estate income directly.
Under the special
rule in paragraph 2, such individuals, defined as those holding
less than a 10-percent interest in the REIT, remain taxable at
source at a 15-percent rate.
The term "beneficial owner," as used in paragraph 2, is not
defined in the Convention, and is, therefore, defined as under
the internal law of the country imposing tax (._e, the source
country).
The beneficial owner of a U.S. source dividend for
purposes of Article 10 is the person to which the dividend income
is attributable for tax purposes under the laws of the source
state.
Thus, if a dividend paid by a U.S
as used in paragraph 2, is not
defined in the Convention, and is, therefore, defined as under
the internal law of the country imposing tax (._e, the source
country).
The beneficial owner of a U.S. source dividend for
purposes of Article 10 is the person to which the dividend income
is attributable for tax purposes under the laws of the source
state.
Thus, if a dividend paid by a U.S. corporation is re
ceived by a nominee or an agent that is a resident of Austria on
behalf of a person that is not a resident of Austria the dividend
is not entitled to the benefits of this Article.
However, a
dividend received by the nominee on behalf of a resident of
Austria would be entitled to the U.S. benefits.
Paragraph 2 does not affect the taxation of the profits of
the corporation out of which the dividends are paid.
Paragraph 3 defines the term dividends as used in Article 10
to mean income from shares or other rights, not being debt
claims, participating in profits, as well as other income derived
from other rights that is subjected to the same taxation treat
ment as income from shares by the laws of the Contracting State
of which the company making the distribution is a resident.
The
definition of dividends also includes income from arrangements,
including debt obligations, that carry the right to participate
in profits, or that are determined by reference to profits, to
the extent that such income is characterized as a dividend under
the tax law of the source State.
Thus, a constructive dividend
that results from a non-arm's-length transaction between a
corporation and a related party is a dividend.
In the case of
the United States the term dividend includes amounts treated as a
dividend under U.S. law upon the sale or redemption of shares or
upon a transfer of shares in a reorganization.
See, e.g., Rev.
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State.
Thus, a constructive dividend
that results from a non-arm's-length transaction between a
corporation and a related party is a dividend.
In the case of
the United States the term dividend includes amounts treated as a
dividend under U.S. law upon the sale or redemption of shares or
upon a transfer of shares in a reorganization.
See, e.g., Rev.
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-30
Rul. 92-85, 1992-2 CB 69 (sale of foreign subsidiary to U.S.
sister
company is a deemed dividend to extent of subsidiary's and
sister's
earnings and profits).
Further, a distribution from a
U.S. publicly traded limited partnership, which is taxed as a
corporation under U.S. law, is a dividend for purposes of Article
10.
Under Austrian law, the income from Austrian bonds
participating in profits is not characterized as a dividend but
rather as interest.
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.
Further, if a shareholder lends shares to a
third party, the payments by the borrower to the lender in
substitution for dividends the lender otherwise would have
received also would be treated as dividends.
Paragraph 4 excludes from the rules of paragraphs 1 and 2
dividends effectively connected with a permanent establishment or
fixed base of the recipient in the source State.
Such dividends
will be included in the taxable income of the permanent
establishment and taxed on a net basis under the rules of Article
7 (Business Profits) or Article 14 (Independent Personal
Services).
This rule conforms to the OECD Model
the rules of paragraphs 1 and 2
dividends effectively connected with a permanent establishment or
fixed base of the recipient in the source State.
Such dividends
will be included in the taxable income of the permanent
establishment and taxed on a net basis under the rules of Article
7 (Business Profits) or Article 14 (Independent Personal
Services).
This rule conforms to the OECD Model.
The rule in
paragraph 9 of Article 7 (Business Profits) applies to this
paragraph as well, so that dividends attributable to a permanent
establishment or fixed base, but received after the permanent
establishment or fixed base no longer exists, will, nevertheless,
be taxable in the Contracting State in which the permanent
establishment or fixed base existed.
Paragraph 5 generally bars one Contracting State from impos
ing any tax on dividends paid by a company resident in the other
Contracting State or on the undistributed profits of such compa
ny, even if
the dividends or profits consist wholly or partly of
profits or income arising in that first
State.
However, excep
tions to this rule apply if such dividends are paid to a resident
of the first-mentioned Contracting State, or if the holding in
respect of which the dividends are paid is effectively connected
with a permanent establishment or fixed base situated in the
first-mentioned State.
Paragraph 6 provides for the imposition of a branch profits
tax by the United States.
The paragraph permits the United
States to impose an additional tax (i e., its branch profits tax
imposed by section 884(a) of the Code) on a company that is
resident in Austria and that has a permanent establishment in the
United States, or that is subject to net basis taxation in the
United States under Article 6 (Income from Real Property) because
the Austrian corporation has elected under Code section 882(d) to
treat income from real property not otherwise taxed on a net
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84(a) of the Code) on a company that is
resident in Austria and that has a permanent establishment in the
United States, or that is subject to net basis taxation in the
United States under Article 6 (Income from Real Property) because
the Austrian corporation has elected under Code section 882(d) to
treat income from real property not otherwise taxed on a net
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-31
basis as effectively connected income, or because the gain arises
from the disposition of a United States Real Property -Interest
other than an interest in a United States corporation.
Such
additional tax may be imposed only on the portion of the business
profits of the Austria company that is attributable to the
permanent establishment and the portion of net income that is
subject to tax under Article 6 or paragraph 1 of Article 13 that
represents the dividend equivalent amount.
For this
purpose,
"dividend equivalent amount" has the same meaning it
has under
U.S. law, as amended from time to time without changing the
general principle thereof.
It is understood that the concept of
dividend equivalent amount is intended to approximate the portion
of the income referred to above that would be distributed as a
dividend if such income were earned by a U.S. subsidiary of the
Austrian company.
The United States may not impose its
branch
tax on the business profits of an Austrian corporation that are
effectively connected with a U.S. trade or business but that are
not attributable to a permanent establishment and are not other
wise subject to U.S. taxation under Article 6 or paragraph 1 of
Article 13.
Austria does not impose a branch tax under its
law, and,
therefore, saw no need to preserve an Austrian right to impose
such a tax under the treaty.
Paragraph 7 provides that the branch profits tax permitted
by paragraph 6 shall not be imposed at a rate exceeding the
direct dividend withholding rate specified in subparagraph 2(a),
which is five percent
6 or paragraph 1 of
Article 13.
Austria does not impose a branch tax under its
law, and,
therefore, saw no need to preserve an Austrian right to impose
such a tax under the treaty.
Paragraph 7 provides that the branch profits tax permitted
by paragraph 6 shall not be imposed at a rate exceeding the
direct dividend withholding rate specified in subparagraph 2(a),
which is five percent.
Notwithstanding the foregoing limitations on source State
taxation of dividends, the saving clause of paragraph 4 of
Article 1 (Personal Scope) permits the United States to tax
dividends received by its
residents and citizens, subject to the
special foreign tax credit rules of paragraph 2 of Article 22
(Relief from Double Taxation), as if the Convention had not come
into effect.
The benefits of this Article are available to a
resident of a Contracting State only if
that resident qualifies
for benefits under the provisions of Article 16 (Limitation on
Benefits).
Article 11.
INTEREST
Article 11 provides rules for source and residence State
taxation of interest.
Paragraph 1 grants to the residence State the exclusive
right to tax interest derived and beneficially owned by its
residents.
Thus, this Convention generally preserves the exemp
tion at source for interest provided in the 1956 Convention.
As
in the case of Article 10 (Dividends), the source State shall
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source and residence State
taxation of interest.
Paragraph 1 grants to the residence State the exclusive
right to tax interest derived and beneficially owned by its
residents.
Thus, this Convention generally preserves the exemp
tion at source for interest provided in the 1956 Convention.
As
in the case of Article 10 (Dividends), the source State shall
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-32
treat as the beneficial owner of such income the person to which
the income is attributable for tax purposes under the laws of the
source State.
Interest arising in a Contracting State and paid
to a nominee or agent that is a resident of the other Contracting
State therefore may be taxed in the State of source if the
beneficial owners are not residents of the other Contracting
State (subject to the provisions of any applicable treaty between
the State of source and the State of residence of the beneficial
owner).
Paragraph 2 defines the term "interest" as used in the
Convention to include, inter Alia, income from debt claims of
every kind, whether or not secured by a mortgage, and whether or
not carrying a right to participate in the debtor's profits.
The
term includes, in particular, income from government securities
and income from bonds or debentures, including premiums or prizes
attaching to these instruments.
Penalty charges for late payment
are not defined as interest, but an excess inclusion with respect
to a residual interest in a real estate mortgage investment
conduit is defined as interest (see paragraph 5). Any income
dealt with in Article 10 is also excluded from the definition of
interest.
Thus, for example, if under domestic law of the source
State, income from a debt obligation carrying the right to
participate in profits is treated as a dividend, it is also
treated as a dividend under paragraph 3 of Article 10 and is not
covered by Article 11
duit is defined as interest (see paragraph 5). Any income
dealt with in Article 10 is also excluded from the definition of
interest.
Thus, for example, if under domestic law of the source
State, income from a debt obligation carrying the right to
participate in profits is treated as a dividend, it is also
treated as a dividend under paragraph 3 of Article 10 and is not
covered by Article 11.
Such income that is not treated as a
dividend under the law of the source State, however, remains
within the definition of interest Under Article 11.
Paragraph 3 provides an exception from the source-State
exemption rule of paragraph 1 in cases where the beneficial owner
of the interest carries on business through a permanent estab
lishment in the source State or performs independent personal
services from a fixed base situated in the source State and the
debt claim in respect of which the interest is effectively
connected with the permanent establishment or fixed base.
In
such cases, the provisions of Article 7 (Business Profits) or
Article 14 (Independent Personal Services) will apply and the
source.State will generally retain the right to impose tax on a
net basis on such interest income.
This rule conforms to the
OECD Model.
The rule in paragraph 9 of Article 7 (Business
Profits) applies to this paragraph as well, so that interest
attributable to a permanent establishment or fixed base, but
received after the permanent establishment or fixed base no
longer exists, will, nevertheless, be taxable in the Contracting
State in which the permanent establishment or fixed base existed.
Paragraph 4 limits the benefits of this Article to interest
amounts that reflect arm's length transactions.
If the interest
paid exceeds an arm's length amount due to a special relationship
between the debtor and creditor, then any excess amount of
AUSTRIA 352
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nevertheless, be taxable in the Contracting
State in which the permanent establishment or fixed base existed.
Paragraph 4 limits the benefits of this Article to interest
amounts that reflect arm's length transactions.
If the interest
paid exceeds an arm's length amount due to a special relationship
between the debtor and creditor, then any excess amount of
AUSTRIA 352
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-33
interest paid remains taxable according to the laws of the source
State with due regard to the other provisions of the Convention.
Thus, for example, if the excess amount would be treated as a
distribution of profits, such amount could be taxed as a dividend
rather than as interest, but the tax would be subject to the rate
limitations of paragraph 2 of Article 10 (Dividends).
Paragraph .5provides exceptions to the general exemption from
source-State taxation of interest. Paragraph 5(a) permits the
United States to impose its statutory rate of tax (currently 30
percent) on an excess inclusion with respect to a residual
interest of an Austrian resident in a U.S. real estate mortgage
investment conduit (REMIC), notwithstanding the provisions of
paragraphs 1 and 2 that generally exempt interest from taxation
at source.
The legislation that created REMICs in 1986 provided
that such excess inclusions were to be taxed at the full 30
percent statutory rate, regardless of any then-existing treaty
provisions to the contrary.
Providing for the 30-percent rate in
the Convention, therefore, conforms to Congressional intent the
treatment of excess inclusions with respect to residents of
Austria.
It is consistent with the policy of Code sections
860E(e) and 860G(b) that excess inclusions with respect to a real
estate mortgage investment conduit (REMIC) should bear full U.S.
tax in all cases. Without a full tax at source, foreign
purchasers of residual interests would have a competitive
advantage over U.S. purchasers at the time these interests.are
initially offered
Austria.
It is consistent with the policy of Code sections
860E(e) and 860G(b) that excess inclusions with respect to a real
estate mortgage investment conduit (REMIC) should bear full U.S.
tax in all cases. Without a full tax at source, foreign
purchasers of residual interests would have a competitive
advantage over U.S. purchasers at the time these interests.are
initially offered. Also, absent this rule, the U.S. would suffer
a revenue loss with respect to mortgages held in a REMIC because
of opportunities for tax avoidance created by differences in the
timing of taxable and economic income produced by these
interests.
The second exception, in subparagraph 5(b), deals with
contingent interest of the type that does not qualify as
portfolio interest under U.S. law and to analogous types of
interest under Austrian law.
Under this provision, interest
arising in one of the Contracting States that is determined by
reference to the receipts, sales, income, profits or other cash
flow of the debtor or a related person, to any change in the
value of any property of the debtor or a related person or to any
dividend, partnership distribution or similar payment made by the
debtor to a related person, and paid to a resident of the other
State may also be taxed in the Contracting State in which it
arises, and according to the laws of that State, but if the
beneficial owner is a resident of the other Contracting State,
the gross amount of the interest may be taxed at a rate not
exceeding the rate prescribed in subparagraph (b) of paragraph 2
of Article 10 (Dividends).
The Article does not refer to the excess of the amount of
interest deductible by a permanent establishment of an Austrian
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tate, but if the
beneficial owner is a resident of the other Contracting State,
the gross amount of the interest may be taxed at a rate not
exceeding the rate prescribed in subparagraph (b) of paragraph 2
of Article 10 (Dividends).
The Article does not refer to the excess of the amount of
interest deductible by a permanent establishment of an Austrian
AUSTRIA 353
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-34
company in the United States over the interest actually paid by
such permanent establishment (i..,
the excess interest portion
of the branch level interest taxes imposed by section 884(f) of
the Code).
Since this amount is treated as .interest derived and
beneficially owned by the resident of Austria, the Article 11
exemption from source country taxation will generally prevent the
collection of this excess interest tax.
Notwithstanding the foregoing limitations on source State
taxation of interest, the saving clause of paragraph 4 of Article
1 (Personal Scope) permits the United States to tax its
residents
and citizens, subject to the special foreign tax credit rules of
paragraph 2 of Article 22 (Relief from Double Taxation, as if
the
Convention had not come into force.
As with all
benefits under
this Convention, the granting of benefits under this Article is
subject to the requirement that the beneficial owner of the
interest income qualify for benefits under the provisions of
Article 16 (Limitation on Benefits).
Article 12.
ROYALTIES
Article 12 provides rules for source and residence country
taxation of royalties.
Paragraph 1 provides the general rule that royalties derived
and beneficially owned by a resident of a Contracting State shall
be taxable only in that State.
Except for motion picture royal
ties, which are dealt with in paragraph 2, the residence state
has the exclusive right to tax royalties derived and beneficially
owned by its
residents
ce and residence country
taxation of royalties.
Paragraph 1 provides the general rule that royalties derived
and beneficially owned by a resident of a Contracting State shall
be taxable only in that State.
Except for motion picture royal
ties, which are dealt with in paragraph 2, the residence state
has the exclusive right to tax royalties derived and beneficially
owned by its
residents.
The source State shall treat
the recipi
ent of royalties as the beneficial owner of such royalties for
purposes of Article 12 if the recipient is the person to which
the income is attributable for tax purposes under the laws of the
source State.
Paragraph 2 contains an exception to the exemption at source
provided in paragraph 1.
The source State may tax royalties that
constitute consideration for the use of, or the right to use,
motion picture films, or films, tapes or other means of reproduc
tion used for radio or television broadcasting, but at a rate not
above 10 percent of the gross amount of the royalty.
The refer
ence to "other means of reproduction" clarifies
that the 10
percent tax at source will apply to payments resulting from the
use of means of reproduction that reflect future technological
advances in the field of radio and television broadcasting.
The source treatment for royalties in the 1956 Convention
(ije., exemption at source for most royalties and source taxation
at a rate of 10 percent for motion picture royalties) is carried
forward to the Convention.
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sulting from the
use of means of reproduction that reflect future technological
advances in the field of radio and television broadcasting.
The source treatment for royalties in the 1956 Convention
(ije., exemption at source for most royalties and source taxation
at a rate of 10 percent for motion picture royalties) is carried
forward to the Convention.
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-35
Paragraph 3 defines the term "royalties" as used in the
convention as payments of any kind received as a consideration
for the use of, or the right to use, any copyright of a literary,
artistic, or scientific work; for the use of, or the right to
use, any patent, trademark, design or model, plan, secret formula
or process, or other like right or property;.or for the use of,
or the right to use, information concerning industrial, commer
cial, or scientific experience.
Royalties also include gains
derived from the alienation of any such right or property that
are contingent on the productivity, use, or further alienation
thereof.
The term royalties is defined in the Convention and therefore
is generally independent of domestic law.
Certain terms used in
the definition are not defined in the Convention, but these may
be defined under domestic tax law.
For example, the term "secret
process or formulas" is found in the Code, and its meaning has
been elaborated in the context of sections 351 and 367.
See Rev.
Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 64-56, 1964-1 C.B. 133;
Rev. Proc. 69-19, 1969-2 C.B. 301.
The term "industrial, commercial, or scientific experience"
(sometimes referred to as "know-how") has the meaning ascribed to
it in the paragraph 11 of the Commentary to Article 12 of the
OECD Model Convention.
Consistent with that meaning, the term
may include information that is ancillary to a right otherwise
giving rise to royalties, such as a patent or secret process.
Computer software generally is protected by copyright laws
around the world
"
(sometimes referred to as "know-how") has the meaning ascribed to
it in the paragraph 11 of the Commentary to Article 12 of the
OECD Model Convention.
Consistent with that meaning, the term
may include information that is ancillary to a right otherwise
giving rise to royalties, such as a patent or secret process.
Computer software generally is protected by copyright laws
around the world.
Under the Convention, whether payments for the
use or the right to use computer software are treated as
royalties or as business profits will depend on the facts and
circumstances of the transaction.
Payments received in
connection with the transfer of so-called "shrink-wrap" computer
software are treated as business profits.
Paragraph 4 excludes from the scope of this Article royal
ties effectively connected with a permanent establishment or
fixed base of the beneficial owner in the source State.
In such
cases the provisions of Article 7 (Business Profits) or Article
14 (Independent Personal Services) will apply and the source
State will generally retain the right to tax such royalties.
The
rule in paragraph 9 of Article 7 (Business Profits) applies to
this paragraph as well, so that royalties attributable to a
permanent establishment or fixed base, but received after the
permanent establishment or fixed base no longer exists, will,
nevertheless, be taxable in the Contracting State in which the
permanent establishment or fixed base existed.
Paragraph 5 limits the benefits of this Article to royalty
amounts that reflect arm's-length transactions.
It provides that
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permanent establishment or fixed base, but received after the
permanent establishment or fixed base no longer exists, will,
nevertheless, be taxable in the Contracting State in which the
permanent establishment or fixed base existed.
Paragraph 5 limits the benefits of this Article to royalty
amounts that reflect arm's-length transactions.
It provides that
AUSTRIA 355
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-36
in cases involving special relationships between the payor and
beneficial owner of a royalty, Article 12 applies only to the
extent of royalty payments that would have been made absent such
special relationships.
Any excess amount of royalties paid
remains taxable according to the laws of the source State with
due regard to the other provisions of the Convention. If, for
example, the excess amount is treated as a distribution of
profits under the national law of the source State, such excess
amount will be taxed as a dividend rather than as a royalty
payment, and the tax imposed on the dividend will be subject to
the rate provided in subparagraph 2(a) of Article 10 (Dividends).
Paragraph 6 contains the source rule for royalty payments.
Under this rule, a royalty arises in a Contracting State to the
extent it
is a payment for the use of, or the right to use,
rights or property within that State.
This source rule is
relevant for the implementation of paragraph 2.
If, for example,
a U.S. resident is the beneficial owner of a royalty paid by a
resident of Austria for the exhibition of a motion picture in
Austria, that royalty is sourced in Austria and is subject to a
10 percent withholding tax in Austria.
If, however, the payment,
even if made by an Austrian resident, is for the exhibition of a
motion picture in Germany, or in the United States, the royalty
would not be Austria source income, and would not be subject to
Austrian tax
t of Austria for the exhibition of a motion picture in
Austria, that royalty is sourced in Austria and is subject to a
10 percent withholding tax in Austria.
If, however, the payment,
even if made by an Austrian resident, is for the exhibition of a
motion picture in Germany, or in the United States, the royalty
would not be Austria source income, and would not be subject to
Austrian tax.
Notwithstanding the foregoing limitations on source State
taxation of royalties, the saving clause of paragraph 4 of
Article 1 (Personal Scope) permits the United States to tax its
citizens, subject to the special foreign tax credit rules of
paragraph 2 of Article 22 (Relief from Double Taxation), and its
residents as if the Convention had not come into effect.
As with
all *benefits under this Convention, the granting of benefits
under this Article is subject to the requirements that the
beneficial owner of the royalty income qualify for benefits under
the provisions of Article 16 (Limitation on Benefits).
Article 13.
GAINS
Article 13 provides rules for source and residence country
taxation of gains from the alienation of property.
Paragraph 1 preserves the source country right to tax gains
derived from the alienation of real .property situated in the
source (ie.,
situs) state.
Thus, paragraph 1 permits gains
derived by a resident of one Contracting State from the alien
ation of real property, referred to in Article 6 (Income from
Real Property) and situated in the other Contracting State to be
taxed by such other Contracting State.
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x gains
derived from the alienation of real .property situated in the
source (ie.,
situs) state.
Thus, paragraph 1 permits gains
derived by a resident of one Contracting State from the alien
ation of real property, referred to in Article 6 (Income from
Real Property) and situated in the other Contracting State to be
taxed by such other Contracting State.
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-37
For purposes of paragraph 1, paragraph 2 defines "real
property situated in the other Contracting State" to include real
property referred to in Article 6 (i._,
interests in the real
property itself)
and certain indirect interests in real property.
The term is defined separately for the United States and Austria,
to allow use of the U.S. statutory term "United States real
property interest."
Indirect interests include shares or
comparable interests in a company the assets of which consist or
consisted wholly or principally of real property situated in the
source state.
In addition, for United States, but not Austrian,
purposes, interests in a partnership, trust, or estate, to the
extent that the assets of such entity consist of real property
situated in the source state, are included in this definition of
real property situated in the other Contracting State.
It is
clear that in all events the term "real property situated in the
other Contracting State" includes a United States real property
interest, and the specified partnership, trust or estate inter
ests, when the United States is the other Contracting State.
Thus, the United States preserves its right to collect the tax
imposed under the ForeignInvestment in Real Property Tax Act
(section 897 of the Code) on gains derived by foreign persons
from the disposition of United States real property interests.
For this purpose, the source rules of section 861(a)(5) of the
Code shall determine whether a United States real property.
interest is situated in the United States
preserves its right to collect the tax
imposed under the ForeignInvestment in Real Property Tax Act
(section 897 of the Code) on gains derived by foreign persons
from the disposition of United States real property interests.
For this purpose, the source rules of section 861(a)(5) of the
Code shall determine whether a United States real property.
interest is situated in the United States.
Because the definition of "real property situated in the
other Contracting State" contained in paragraph 2 is specifically
limited to the interpretation of.paragraph 1, such definition has
no effect on the right to tax income covered in other articles.
For example, the inclusion of interests in certain corporations
in the definition of real property situated in the other Con
tracting state for purposes of permitting source country taxation
of gains derived from dispositions of such interests under this
Article does not affect the treatment of dividends paid by such
corporations.
Such dividends remain subject to the limitations
on source country taxation contained in Article 10 (Dividends)
and are not governed by the unlimited source country taxation
right contained in Article 6 with respect to immovable property.
Paragraph 3 preserves the source country's right to tax
gains from the alienation of personal property in certain circum
stances.
It provides that the other Contracting State (the
source state) may tax gains from the alienation of personal
property forming part of the business property of a permanent
establishment that an enterprise of a Contracting State has in
the other State or of personal property pertaining to a fixed
base available to a resident of a Contracting State in the other
State for the purpose of performing independent personal servic
es, including such gains from the alienation of such a permanent
establishment (alone or with the whole enterprise) or of such
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terprise of a Contracting State has in
the other State or of personal property pertaining to a fixed
base available to a resident of a Contracting State in the other
State for the purpose of performing independent personal servic
es, including such gains from the alienation of such a permanent
establishment (alone or with the whole enterprise) or of such
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-38
fixed base.
The rule in paragraph 9 of Article 7 (Business
Profits) applies to paragraph 3 as well, so that the Contracting
State in which the permanent establishment existed may tax gains
from the alienation of personal property forming part of the
business property of a permanent establishment or pertaining to a
fixed base that are received after the permanent establishment or
fixed base no longer exists.
This provision permits gains from the alienation.by a
resident of a Contracting State of an interest in a partnership,
trust, or estate that has a permanent establishment situated in
the other Contracting State to be taxed as gains attributable to
such permanent establishment under paragraph 3.
Thus, for
example, the United States may tax gains derived from the dispo
sition of an interest in a partnership that has a permanent
establishment in the United States, whether or not the assets of
the partnership consist of real property as defined in Article
13.
Paragraph 4 contains a rule to coordinate the interaction of
Code section 864(c) (7) with the analogous provision of Austrian
law.
Under the Code rule, if an asset which had been part of the
business property of a U.S. trade or business (or, in a treaty
context, of a permanent establishment or fixed base in the United
States) is alienated within ten years of its removal from the
U.S. trade or business (or permanent establishment/fixed base),
the gain realized on such alienation is subject to U.S. tax
f Austrian
law.
Under the Code rule, if an asset which had been part of the
business property of a U.S. trade or business (or, in a treaty
context, of a permanent establishment or fixed base in the United
States) is alienated within ten years of its removal from the
U.S. trade or business (or permanent establishment/fixed base),
the gain realized on such alienation is subject to U.S. tax.
Austria's income tax act (Section 6, subparagraph 6)
provides that a transfer of property used in a permanent
establishment in Austria to a permanent establishment outside of
Austria is a taxable event.
Paragraph 4 provides that gain that accrued during the time
an asset formed part of the business property of a permanent
establishment or fixed base that a resident of a Contracting
State has or had in the other Contracting State may be taxed in
the other State, but only to the extent of the gain that accrued
during the time the asset formed part of the business property of
a permanent establishment or fixed base that the resident has or
had in that other State.
Thus, for example, with regard to the
transfer of appreciated assets from a U.S. company's permanent
establishment in Austria to a permanent establishment in a third
country, paragraph 4 would coordinate and modify the application
of U.S. and Austrian law.
With regard to the sale of appreciated assets by an Austrian
company, the U.S. may tax the gain to the extent accrued during
the time the asset formed part of the business property of a
permanent establishment that the Austrian company has or had in
the United States. This is a limitation on the amount of the
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ify the application
of U.S. and Austrian law.
With regard to the sale of appreciated assets by an Austrian
company, the U.S. may tax the gain to the extent accrued during
the time the asset formed part of the business property of a
permanent establishment that the Austrian company has or had in
the United States. This is a limitation on the amount of the
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-39
gain that is taxable under section 864(c)(7) of the Code.
Further, although this rule does not impose a time limitation to
the U.S. right to tax the gain, under section 864(c)(7), the
United States may not tax a gain that is realized after the ten-
year period has lapsed.
The provision also restricts the application of U.S. laws to
U.S. citizens and residents that had property in an Austrian
permanent establishment or fixed base to the extent that Austria
taxed the gain in accordance with this paragraph.
Under the
provision, the residence State of the taxpayer must exclude from
the income that it subjects to tax any amount of gain that has
been taxed, in accordance with paragraph 4, by the State in which
the permanent establishment or fixed base is, or was, located.
Thus, for example, if a U.S. person alienates an asset that at
one time formed part of the business property of a permanent
establishment of that person in Austria, and if the total gain is
$100, and $25 of that gain accrued during the time that the asset
was part of the Austrian permanent establishment, Austria will
have taxed $25 of the gain at the time the asset was removed from
Austria, and the United States may tax the remaining $75 of gain
at the time of alienation.
Paragraph 5 provides that gains derived by an enterprise of
a Contracting State from the alienation of ships, aircraft or
containers used in international traffic shall be taxable only in
that Contracting State
shment, Austria will
have taxed $25 of the gain at the time the asset was removed from
Austria, and the United States may tax the remaining $75 of gain
at the time of alienation.
Paragraph 5 provides that gains derived by an enterprise of
a Contracting State from the alienation of ships, aircraft or
containers used in international traffic shall be taxable only in
that Contracting State.
Consistent with the definition of
containers provided in paragraph 3 of Article 8, containers
include trailers, barges, and related equipment for the transport
of containers.
Thus, such gains are taxable on the same basis as
income from the operation of ships or aircraft under Article 8
(Shipping and Air Transport).
Paragraph 5 also provides that those gains that are included
within the definition of royalties in paragraph 3 of Article 12
(Royalties) will be subject to the rules of that Article, and not
Article 13.
The gains referred to are those derived from the
alienation of any right or property that gives rise to royalties
that are contingent on the productivity, use, or further alien
ation thereof.
The source country will either exempt such gains
or tax them at not more than 10 percent, in accordance with
Article 12.
Paragraph 6 provides that gains from the alienation of
property other than property referred to in paragraphs 1 through
5 are taxable only in the Contracting State of which the alien
ator is a resident.
Thus, gain from the sale of corporate
securities or other tangible personal property not covered in
paragraphs 3 and 4 is exempt from tax at source.
Under the Austrian tax law for the reorganization of
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of
property other than property referred to in paragraphs 1 through
5 are taxable only in the Contracting State of which the alien
ator is a resident.
Thus, gain from the sale of corporate
securities or other tangible personal property not covered in
paragraphs 3 and 4 is exempt from tax at source.
Under the Austrian tax law for the reorganization of
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-40
enterprises, if
a foreign corporation has a permanent
establishment in Austria and transfers permanent establishment
assets into a subsidiary, Austria will tax the appreciation in
the assets on incorporation unless the shares remain subject to
Austrian tax.
This is consistent with paragraph 3, which permits
the Contracting State in which the permanent establishment is
located to tax gains on the alienation of personal property
forming part of the business property of the permanent
establishment.
In the reverse case, with regard to the transfer of
appreciated assets of an Austrian company's permanent
establishment in the United States to a U.S. subsidiary,
paragraph 3 also would permit the United States to tax such
gains.
However, the transaction may not be taxable under the
.corporate reorganization provisions of the Internal Revenue Code
(section 351 and related provisions).
Paragraph 7 provides that where property was transferred by
a resident of the United States to an Austrian company as a
capital contribution and, in application of the Austrian
Reorganization Tax Act (Umgruendungssteuergesetz), no capital
gains taxation took place, a subsequent alienation of the
respective shares in the Austrian company that takes place
through the year 2010 shall remain taxable in Austria.
This rule
applies to the disposition of stock that was received on the
incorporation of a permanent establishment in Austria if the
capital gains were not taxed on the incorporation of the
subsidiary.
The operation of paragraph 7 is illustrated by the following
example.
A U.S
pective shares in the Austrian company that takes place
through the year 2010 shall remain taxable in Austria.
This rule
applies to the disposition of stock that was received on the
incorporation of a permanent establishment in Austria if the
capital gains were not taxed on the incorporation of the
subsidiary.
The operation of paragraph 7 is illustrated by the following
example.
A U.S. corporation
(A) has a permanent establishment in
Austria, with assets having a tax basis of 1,000 and a net market
value of 5,000..
Thus, the permanent establishment represents a
business with untaxed (hidden) reserves of 4,000.
Assume that,
in 1996 (or in any year thereafter before 2011), the Austrian
permanent establishment is transformed into an Austrian company
(B).
This can be arranged under the current Austrian tax regime
tax free, which means that the assets of the permanent
establishment will be incorporated into the financial accounts of
the new company at 1,000.
Correspondingly, the shares held by A
in the newly created Austrian company B will be valued for tax
purposes at 1,000.
If the shares were sold in 1999 (assume for
5,500), then this
transaction would be taxable in Austria
(capital gain: 4,500).
In case the sales price is only 4,000,
the capital gain would be 3,000.
Under these same facts, except that another form of
alienation is chosen, such as a contribution of the shares into
the U.S. or Austrian company
(X) before the year 2011, the result
would be the same; the capital gain would be taxable in Austria
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le in Austria
(capital gain: 4,500).
In case the sales price is only 4,000,
the capital gain would be 3,000.
Under these same facts, except that another form of
alienation is chosen, such as a contribution of the shares into
the U.S. or Austrian company
(X) before the year 2011, the result
would be the same; the capital gain would be taxable in Austria
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-41
because, if
X subsequently sells its
stock to company Z, this
transaction could not be taxed any more under the new treaty even
within the interim period ending in 2010.
Under these same facts, except that the stock of B is
sold
or otherwise alienated after year 2010, the transaction would not
be taxable in Austria.
In the event that a transfer of stock is treated as an
"alienation" for Austrian tax purposes and double taxation
results, it is expected that any such double taxation would be
addressed under competent authority procedures.
Notwithstanding the foregoing limitations on source State
taxation of certain gains, the saving clause of paragraph 4 of
Article 1 (Personal Scope) permits the Contracting States to tax
their citizens and residents as if the Convention had not come
into effect.
The rules of paragraph 4 of this Article, however,
continue to apply to the citizens and residents of a Contracting
State by virtue of the exceptions to the saving clause of para
graph 5 of Article 1.
As with all
benefits under this
Convention the granting of benefits under this Article is subject
to the requirement that the beneficial owner of the income
qualify for benefits under the provisions of Article 16
(Limitation on Benefits).
Article 14.
INDEPENDENT PERSONAL SERVICES
The Convention provides separate articles dealing with
different classes of income from personal services.
Article 14
deals with the general class of income from independent personal
services, and Article 15 deals with the general class of income
from dependent personal services
nefits under the provisions of Article 16
(Limitation on Benefits).
Article 14.
INDEPENDENT PERSONAL SERVICES
The Convention provides separate articles dealing with
different classes of income from personal services.
Article 14
deals with the general class of income from independent personal
services, and Article 15 deals with the general class of income
from dependent personal services.
Modifications to these general
rules are provided for the performance income of artistes and
athletes (Article 17); pensions in respect of personal service
income, social security benefits, annuities, alimony, and child
support payments (Article 18); government service salaries
(Article 19); and income of students and business trainees
(Article 20).
Article 14 provides the general rule that income derived by
an individual who is a resident of a Contracting State from the
performance of personal services in an independent capacity shall
generally be taxable only in that State.
However, such income
may be taxed in the other Contracting State if the services are
performed there and the income is attributable to a fixed base
that is regularly available to the individual in that other State
for the purpose of performing his activities.
The Convention does not define the term "fixed base," but its
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-42
meaning is understood to be analogous to that of the term
"permanent establishment," as defined in Article 5 (Permanent
Establishment) similarly, the rules of Article 7 (Business
Profits) for attributing income and expenses to a permanent
establishment are generally relevant for attributing income to a
fixed base.
However, the taxing right conferred by this Article
with respect to income from independent personal services is
somewhat more limited than that provided in Article 7 for the
taxation of business profits
ment) similarly, the rules of Article 7 (Business
Profits) for attributing income and expenses to a permanent
establishment are generally relevant for attributing income to a
fixed base.
However, the taxing right conferred by this Article
with respect to income from independent personal services is
somewhat more limited than that provided in Article 7 for the
taxation of business profits.
In both articles the income of a
resident of one Contracting State must be attributable to a
permanent establishment or fixed base in the other for that other
State to have a taxing right.
In Article 14, in addition, the
income must be attributable to services performed in that other
State, while Article 7 does not require that all of the income
generating activities be performed in the State where the
permanent establishment is located.
The Article does not define the term "personal services in an
independent capacity."
The term, however, is
understood to
include all personal services performed by an individual for his
own account, whether as a sole proprietor or a partner, where he
receives the income and bears the risk of loss arising from the
services.
Income from services in which capital is a material
income producing factor will, however, generally be governed by
the provisions of Article 7 (Business Profits). The taxation of
income of an individual from those types of independent services
that are covered by Articles 17 through 20 is governed by the
provisions of those articles.
There is no Article in the
Convention that deals specifically with directors' fees.
Such
fees paid to "outside-directors" are covered by this Article.
The rule in paragraph 9 of Article 7 (Business Profits)
applies to Article 14 as well.
That rule clarifies,
in the
context of Article 14, that income which is attributable to, a
fixed base but is deferred and received after the fixed base no
longer exists, may nevertheless be taxed by the State in which
the fixed base was located
paid to "outside-directors" are covered by this Article.
The rule in paragraph 9 of Article 7 (Business Profits)
applies to Article 14 as well.
That rule clarifies,
in the
context of Article 14, that income which is attributable to, a
fixed base but is deferred and received after the fixed base no
longer exists, may nevertheless be taxed by the State in which
the fixed base was located.
Thus, the tax cannot be avoided by
deferring the payment.
The taxing rule in paragraph 1 of the Article differs
significantly from that in the 1956 Convention.
Under Article X
of that Convention, the host State exempted from tax income from
independent personal services performed by a resident of the
other State if the person performing the services was present in
the host State for a period or periods aggregating not more than
183 days in the taxable year, and either the individual was
performing his services under contract with a resident of the
individual's State of residence, and the compensation was borne
by that person, or the compensation did not exceed $3,000.
The
new Convention does not examine the length of time or compensa
tion received but, instead, considers whether the income received.
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-43
from independent personal services performed is attributable to a
fixed base.
If the individual is an Austrian resident who performs
independent personal services in the United States, and the
individual is also a U.S. citizen, the United States may, by
virtue of the saving clause of paragraph 4 of Article 1 (Personal
Scope) tax the individual's income without regard to the restric
tions of this Article, subject to the special foreign tax credit
rules of paragraph 2 of Article 22 (Relief from Double Taxation).
Article 15.
DEPENDENT PERSONAL SERVICES
This Article deals with the taxation of remuneration derived
by a resident of a Contracting State as an employee
use of paragraph 4 of Article 1 (Personal
Scope) tax the individual's income without regard to the restric
tions of this Article, subject to the special foreign tax credit
rules of paragraph 2 of Article 22 (Relief from Double Taxation).
Article 15.
DEPENDENT PERSONAL SERVICES
This Article deals with the taxation of remuneration derived
by a resident of a Contracting State as an employee.
Under paragraph 1, employment income derived by an individual
who is a resident of a contracting State may be taxed in the
State of residence.
To the extent the remuneration is derived
from an employment exercised in the other Contracting State (the
"host country"), the remuneration may also be taxed by the host
country, subject to the conditions specified in paragraph 2.
The provisions of this paragraphs apply, subject to the
provisions of Articles 18 (Pensions) and 19 (Government Service).
Thus, if a person is exempt from tax in the host country under
the provisions of Articles 18 or 19 (eg.L, the person is perform
ing Government service on behalf of one State in the other) he
cannot be subject to host country tax under paragraph 1 of this
Article even though his employment is exercised in the host
country.
Article 17 (Artistes and Athletes) specifies that its
provisions apply notwithstanding the provisions of this Article.
Thus, for example, a resident of one Contracting State, who is a
member of a football team that plays in the other Contracting
State, and who earns over S20,000 in a taxable year from his
performances in the other State will be subject to host country
tax on his employment income even if he would otherwise be exempt
under Article 15.
Paragraph 2 specifies the conditions under which, even where
the remuneration of a resident of a Contracting State (described
in paragraph 1) is derived from sources within the other Con
tracting state (ie.,
the services are performed there), that
other State may not tax the remuneration
to host country
tax on his employment income even if he would otherwise be exempt
under Article 15.
Paragraph 2 specifies the conditions under which, even where
the remuneration of a resident of a Contracting State (described
in paragraph 1) is derived from sources within the other Con
tracting state (ie.,
the services are performed there), that
other State may not tax the remuneration.
The host country may
not tax if three conditions are satisfied: (1) the individual is
present there for a period or periods not exceeding, in the
aggregate, 183 days in any 12-month period beginning or ending in
the fiscal year concerned; (2) the remuneration is paid by, or on
behalf of, an employer who is not a resident of the host country;
and (3) the remuneration is not borne as a deductible expense by
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-44
a permanent establishment or fixed base that the employer has in
the host country.
The first condition is taken from the 1992 OECD Model.
In
previous OECD Models, the 183-day period covered only the fiscal
year concerned.
This permitted an abuse under which an employee
could remain in a country for the last 5 1/2 months of one fiscal
year and the first 5 1/2 months of the next and fail to meet the
test for taxability in the host country.
The language of sub
paragraph 2(a) prevents that abuse.
The 183-day period in condition (a) is to be measured using
the "days of physical presence" method.
Under this method, the
days that are counted include any day in which a part of the day
is spent in the host country.
(Rev. Rul. 56-24, 1956-1 C.B
/2 months of the next and fail to meet the
test for taxability in the host country.
The language of sub
paragraph 2(a) prevents that abuse.
The 183-day period in condition (a) is to be measured using
the "days of physical presence" method.
Under this method, the
days that are counted include any day in which a part of the day
is spent in the host country.
(Rev. Rul. 56-24, 1956-1 C.B.
851.)
Thus, days that are counted include the days of arrival
and departure; weekends and holidays on which the employee does
not work but is present within the country; vacation days spent
in the country before, during or after the employment period,
unless the individual's presence before or after the employment
can be shown to be independent of his presence there for employ
ment purposes; and time during periods of sickness, training
periods, strikes etc., when the individual is present but not
working.
If illness prevented the individual from leaving the
country in sufficient time to qualify for the benefit, those days
will not count.
Also, any part of a day spent in the host
country while in transit between two points outside the host
country is not counted.
These rules are consistent with the
description of the 183-day period in paragraph 5 of the Commen
tary to Article 15 in the OECD Model.
Conditions (2) and (3) are intended to assure that a Con
tracting State will not be required both to allow a deduction to
the employer for the salary paid and to exempt the employee on
the amount received.
If a foreign employer pays the salary of an
employee, but a host country corporation or permanent establish
ment reimburses the foreign employer in a deductible payment that
can be identified as a reimbursement, neither condition (2) nor
tracting State will not be required both to allow a deduction to
the employer for the salary paid and to exempt the employee on
the amount received.
If a foreign employer pays the salary of an
employee, but a host country corporation or permanent establish
ment reimburses the foreign employer in a deductible payment that
can be identified as a reimbursement, neither condition (2) nor
(3), as the case may be, will be considered to have been ful
filled.
For the remuneration to be exempt from tax
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