U.S.-Bangladesh Tax Treaty Technical Explanation

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DEPARTMENT OF THE TREASURY

TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN

THE GOVERNMENT OF THE UNITED STATES OF AMERICA

AND

THE GOVERNMENT OF THE PEOPLE'S REPUBLIC OF BANGLADESH

FOR THE AVOIDANCE OF DOUBLE TAXATION AND

THE PREVENTION OF FISCAL EVASION

WITH RESPECT TO TAXES ON INCOME

SIGNED AT DHAKA, SEPTEMBER 26, 2004

This is a technical explanation of the Convention between the United States and

Bangladesh signed at Dhaka on September 26, 2004(the “Convention”). Negotiations

with respect to the Protocol took into account the U.S. Department of the Treasury's

current tax treaty policy and Treasury's Model Income Tax Convention published

September 20, 1996 (the “U.S. Model”).

Negotiations also took into account the Model Income Tax Convention on Income

and on Capital, published by the Organization for Economic Cooperation and

Development (the “OECD Model”), the United Nations Model Double Taxation

Convention Between Developed and Developing Countries (the “UN Model”), and recent

tax treaties concluded by both 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” and “his or

her.”

ARTICLE 1 (PERSONAL SCOPE)

Paragraph 1

Paragraph 1 of Article 1 provides that the Convention applies to residents of the

United States or Bangladesh except where the terms of the Convention provide

otherwise. Under Article 4 (Fiscal Domicile) a person is generally treated as a resident of

a Contracting State if that person is, under the laws of that State, liable to tax therein by

reason of his domicile or other similar criteria. If, however, a person is considered a

resident of both Contracting States, a single state of residence is assigned under Article 4

rms of the Convention provide

otherwise. Under Article 4 (Fiscal Domicile) a person is generally treated as a resident of

a Contracting State if that person is, under the laws of that State, liable to tax therein by

reason of his domicile or other similar criteria. If, however, a person is considered a

resident of both Contracting States, a single state of residence is assigned under Article 4.

This definition governs for all purposes of the Convention.

Certain provisions are applicable to persons who may not be residents of either

Contracting State. For example, Article 20 (Government Service) may apply to an

employee of a Contracting State who is resident in neither State. Paragraph 1 of Article

24 (Nondiscrimination) applies to nationals of the Contracting States. Under Article 26

(Exchange of Information and Administrative Assistance), information may be

exchanged with respect to residents of third states.

Paragraph 2

Paragraph 2 contains the traditional saving clause found in all U.S. treaties. Under

subparagraph (a) of paragraph 2, Contracting States reserve their rights, except as

provided in paragraph 3, to tax their residents and citizens as provided in their internal

laws, notwithstanding any provisions of the Convention to the contrary. For example, if a

resident of Bangladesh performs independent personal services in the United States and

the individual is not present in the United States for 183 days in a 12-month period, and

the income from the services is not attributable to a fixed base in the United States,

Article 15 (Independent Personal Services) would normally prevent the United States

from taxing the income. If, however, the resident of Bangladesh 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 individual and subject it to tax under the Internal Revenue

Code of 1986 (“Code”) rules (i.e., without regard to Code section 894(a))

onal Services) would normally prevent the United States

from taxing the income. If, however, the resident of Bangladesh 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 individual and subject it to tax under the Internal Revenue

Code of 1986 (“Code”) rules (i.e., without regard to Code section 894(a)). For special

foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its

citizens resident in Bangladesh, see paragraph 3 of Article 23 (Relief from Double

Taxation).

For purposes of the saving clause, “residence” is determined under Article 4

(Fiscal Domicile). Thus, 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 Bangladesh under its law, and that

individual has a permanent home available to him in Bangladesh and not in the United

States, he would be treated as a resident of Bangladesh 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. Thus, an individual who is a U.S.

resident under the Code but who is deemed to be a resident of Bangladesh under the tie-

breaker rules of Article 4 (Fiscal Domicile) would be subject to U.S. tax only to the

extent permitted by the Convention. However, the person would be treated as a U.S.

resident for U.S. tax purposes other than determining the individual's U.S. tax liability.

For example, in determining under Code section 957 whether a foreign corporation is a

controlled foreign corporation, shares in that corporation held by the individual would be

considered to be held by a U.S. resident. As a result, other U.S. citizens or residents

might be deemed to be United States shareholders of a controlled foreign corporation

subject to current inclusion of Subpart F income recognized by the corporation. See,

Treas. Reg

whether a foreign corporation is a

controlled foreign corporation, shares in that corporation held by the individual would be

considered to be held by a U.S. resident. As a result, other U.S. citizens or residents

might be deemed to be United States shareholders of a controlled foreign corporation

subject to current inclusion of Subpart F income recognized by the corporation. See,

Treas. Reg. section 301.7701(b)-7(a)(3).

Under subparagraph (b) of paragraph 2 each Contracting State also reserves its

right to tax former citizens and long-term residents whose loss of citizenship or long-term

residence had as one of its principal purposes the avoidance of tax. The subparagraph

defines “long-term resident”, consistent with U.S. law, as an individual (other than a U.S.

citizen) who is a lawful permanent resident of the United States in at least 8 of the prior

15 taxable years. An individual shall not be treated as a lawful permanent resident for any

taxable year if such individual is treated as a resident of a foreign country under the

provisions of a tax treaty between the United States and the foreign country and the

individual does not waive the benefits of such treaty applicable to residents of the foreign

country.

In the United States, such a former citizen or long-term resident is taxable in

accordance with the provisions of section 877 of the Code. Section 877 provides for

special tax treatment of former U.S. citizens and long-term residents who gave up their

citizenship or long-term resident status to avoid U.S. tax. Prior to its amendment by the

American Jobs Creation Act of 2004 (AJCA), section 877 applied to individuals that

relinquished U.S. citizenship or terminated long-term residency with a principal purpose

(i.e., subjective intent) of tax avoidance. An individual was generally presumed to have a

tax avoidance purpose if their net worth or average annual net income tax liability

exceeded specified thresholds

s amendment by the

American Jobs Creation Act of 2004 (AJCA), section 877 applied to individuals that

relinquished U.S. citizenship or terminated long-term residency with a principal purpose

(i.e., subjective intent) of tax avoidance. An individual was generally presumed to have a

tax avoidance purpose if their net worth or average annual net income tax liability

exceeded specified thresholds. AJCA replaced the subjective determination of tax

avoidance as a principal purpose for relinquishment of citizenship or termination of

residency with objective rules. Former citizens or long-term residents are now subject to

U.S. tax for the 10-year period following loss of such status, unless they fall below

certain net income and net worth thresholds or satisfy certain limited exceptions for dual

citizens and minors who have had no substantial contact with the U.S.

Thus, section 877 now treats individuals who expatriate and meet the objective

tests as having expatriated for tax avoidance purposes. Accordingly, the objective tests in

section 877 represent the administrative means by which the United States determines

whether a taxpayer has a tax avoidance purpose for purposes of the reservation of taxing

rights contained in subparagraph (b) of paragraph 2.

Paragraph 3

Some treaty provisions are intended to provide benefits to citizens and residents

that do not exist under internal law. Paragraph 3 sets forth certain exceptions to the

saving clause that preserve these benefits for citizens and residents of the Contracting

States.

Subparagraph (a) lists certain provisions of the Convention that are applicable to

all citizens and residents of a Contracting State, despite the general saving clause rule of

paragraph 2:

(1) Paragraph 2 of Article 9(Associated Enterprises) grants the right to a

correlative adjustment with respect to income tax due on profits reallocated under Article

sidents of the Contracting

States.

Subparagraph (a) lists certain provisions of the Convention that are applicable to

all citizens and residents of a Contracting State, despite the general saving clause rule of

paragraph 2:

(1) Paragraph 2 of Article 9(Associated Enterprises) grants the right to a

correlative adjustment with respect to income tax due on profits reallocated under Article

(2) Paragraphs 2 and 5 of Article 19(Pensions, Et Cetera) deal with social security

benefits and child support payments, respectively. The inclusion of paragraph 2 in the

exceptions to the saving clause means that the grant of exclusive taxing right of social

security benefits to the paying country applies to deny, for example, to the United States

the right to tax its citizens and residents on social security benefits paid by Bangladesh.

The inclusion of paragraph 5, which exempts child-support-payments from taxation by

the State of residence of the recipient, means that if a resident of Bangladesh pays child

support to a citizen or resident of the United States, the United States may not tax the

recipient.

(3) Article 23 (Relief from Double Taxation) confirms the benefit of a credit to

citizens and residents of one Contracting State for income taxes paid to the other, even if

such a credit is not available under the domestic law of the first State.

(4) Article 24(Nondiscrimination) requires one Contracting State to grant national

treatment to residents and citizens of the other Contracting State in certain circumstances.

Excepting this Article from the saving clause requires, for example, that the United States

give such benefits to a resident or citizen of Bangladesh even if that person is also a

citizen of the United States.

t State.

(4) Article 24(Nondiscrimination) requires one Contracting State to grant national

treatment to residents and citizens of the other Contracting State in certain circumstances.

Excepting this Article from the saving clause requires, for example, that the United States

give such benefits to a resident or citizen of Bangladesh even if that person is also a

citizen of the United States.

(5) Article 25 (Mutual Agreement Procedure) may confer benefits on citizens and

residents of the Contracting States. For example, 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 internal law definition. As with the foreign tax credit, these benefits are

intended to be granted by a Contracting State to its citizens and residents.

Subparagraph (b) of paragraph 3 provides a different set of exceptions to the

saving clause. The benefits referred to are all intended to be granted to temporary

residents of a Contracting State (for example, in the case of the United States, holders of

non-immigrant visas), but not to citizens or to persons who have acquired permanent

residence in that State. If beneficiaries of these provisions travel from one of the

Contracting States to the other, and remain in the other long enough to become residents

under its internal law, but do not acquire permanent residence status (i.e., in the U.S.

context, they do not become “green card” holders) and are not citizens of that State, the

host State will continue to grant these benefits even if they conflict with their statutory

rules

isions travel from one of the

Contracting States to the other, and remain in the other long enough to become residents

under its internal law, but do not acquire permanent residence status (i.e., in the U.S.

context, they do not become “green card” holders) and are not citizens of that State, the

host State will continue to grant these benefits even if they conflict with their statutory

rules. The benefits preserved by this paragraph are the host country exemptions for the

following items of income: government service salaries and pensions under Article 20

(Government Service); certain income of visiting teachers, students and trainees under

Article 21 (Teachers, Students and Trainees); and the income of diplomatic agents and

consular officers under Article 27 (Effect of Convention on Diplomatic Agents and

Consular Officers, Domestic Laws and Other Treaties).

The provisions dealing with the relationship between the Convention and other

laws and treaties of the Contracting States, normally dealt with in Article 1 of U.S.

treaties are found in Article 27 (Effect of Convention on Diplomatic Agents and Consular

Officers, Domestic Laws and Other Treaties) of the Convention.

ARTICLE 2 (TAXES COVERED)

This Article specifies the U.S. taxes and the taxes of Bangladesh to which the

convention applies. With one exception, the taxes specified in Article 2 are the covered

taxes for all purposes of the Convention. A broader coverage applies, however, for

purposes of Article 24 (Nondiscrimination). Article 24 applies with respect to all taxes,

including those imposed by state and local governments.

Article specifies the U.S. taxes and the taxes of Bangladesh to which the

convention applies. With one exception, the taxes specified in Article 2 are the covered

taxes for all purposes of the Convention. A broader coverage applies, however, for

purposes of Article 24 (Nondiscrimination). Article 24 applies with respect to all taxes,

including those imposed by state and local governments.

Paragraph 1

Paragraph 1 is based on the OECD Model and provides that the Convention

applies to income taxes imposed on behalf of either Contracting State; this covers taxes

on total income or any part of income and includes tax on gains derived from property.

The Convention does not apply to payroll taxes. Nor does it apply to property taxes,

except with respect to Article 24 (NonDiscrimination).

Paragraph 2

Subparagraph 2(a) provides that the United States covered taxes are the Federal

income taxes imposed by the Code. Social security taxes (Code sections 1401, 3101,

3111 and 3301) are not covered taxes. Although, unlike the U.S. Model, the Convention

does not specify the exclusion of social security taxes, the Commentary to Article 2 of the

OECD Model state that social security taxes are not income taxes for these purposes.

Except with respect to Article 24 (Nondiscrimination), state and local taxes in the United

States are not covered by the Convention.

Subparagraph 1(b) specifies the existing taxes of

Bangladesh that are covered by the Convention. This is the income tax, and it includes

any surcharges that are calculated by reference to the income taxes.

Paragraph 3

Under paragraph 3, 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 the Convention

the Convention. This is the income tax, and it includes

any surcharges that are calculated by reference to the income taxes.

Paragraph 3

Under paragraph 3, 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 the Convention.

The paragraph also provides that the competent authorities of the Contracting States will

notify each other of changes in their taxation laws or of other laws that significantly

affect their obligations under the Convention. The use of the term “significantly” means

that changes must be reported that are of significance to the operation of the Convention.

Other laws that may affect a Contracting State's obligations under the Convention may

include, for example, laws affecting bank secrecy.

ARTICLE 3 (GENERAL DEFINITIONS)

Paragraph 1

Paragraph 1 defines a number of basic terms used in the Convention. Certain

others are defined in other articles of the Convention. For example, the term “resident of

a Contracting State” is defined in Article 4 (Fiscal Domicile). 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. The

introduction to paragraph 1 makes clear that the definitions in this paragraph apply for all

purposes of the Convention, unless the context requires otherwise. This latter condition

iscal Domicile). 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. The

introduction to paragraph 1 makes clear that the definitions in this paragraph apply for all

purposes of the Convention, unless the context requires otherwise. This latter condition

allows flexibility in the interpretation of the treaty in order to avoid unintended results.

Terms that are not defined in the Convention are dealt with in paragraph 2.

Subparagraph 1(a) defines the term “person” to include an individual, a

partnership, a company, an estate, a trust, and any other body of persons. The definition is

significant for a variety of reasons. For example, under Article 4 (Fiscal Domicile), only

a “person” can be a “resident” and therefore eligible for most benefits under the treaty.

Also, all “persons” are eligible to claim relief under Article 25 (Mutual Agreement

Procedure).

The term “company” is defined in subparagraph 1(b) as a body corporate or an

entity treated as a body corporate for tax purposes in the state where it is organized or has

its place of effective management.

The terms “enterprise of a Contracting State” and “enterprise of the other

Contracting State” are defined in subparagraph 1(c) as an enterprise carried on by a

resident of a Contracting State and an enterprise carried on by a resident of the other

Contracting State. The term “enterprise” is not defined in the Convention. The OECD

Model defines the term as applying to the carrying on of any business. This meaning of

the term applies for purposes of the Convention as well.

Although subparagraph 1(c) does not include the U.S

enterprise carried on by a

resident of a Contracting State and an enterprise carried on by a resident of the other

Contracting State. The term “enterprise” is not defined in the Convention. The OECD

Model defines the term as applying to the carrying on of any business. This meaning of

the term applies for purposes of the Convention as well.

Although subparagraph 1(c) does not include the U.S. Model's explicit reference

to fiscally transparent enterprises, it is understood that the terms “enterprise of a

Contracting State” and “enterprise of the other Contracting State” encompass an

enterprise conducted through an entity (such as a partnership) that is treated as fiscally

transparent in the Contracting State where the entity's owner is resident. In accordance

with Article 4 (Fiscal Domicile), entities that are fiscally transparent in the country in

which their owners are resident are not considered to be residents of a Contracting State

(although income derived by such entities may be taxed as the income of a resident, if

taxed in the hands of resident partners or other owners). This treatment ensures that an

enterprise conducted by such an entity will be treated as carried on by a resident of a

Contracting State to the extent its partners or other owners are residents. This approach is

consistent with the Code, which under section 875 attributes a trade or business

conducted by a partnership to its partners and a trade or business conducted by an estate

or trust to its beneficiaries.

An enterprise of a Contracting State need not be carried on in that State. It may be

carried on in the other Contracting State or a third state (e.g., a U.S. corporation doing all

of its business in Bangladesh would still be a U.S. enterprise).

Subparagraph 1(d) defines the term “international traffic.” The term means any

transport by a ship or aircraft except when the vessel is operated solely between places

within a Contracting State

t be carried on in that State. It may be

carried on in the other Contracting State or a third state (e.g., a U.S. corporation doing all

of its business in Bangladesh would still be a U.S. enterprise).

Subparagraph 1(d) defines the term “international traffic.” The term means any

transport by a ship or aircraft except when the vessel is operated solely between places

within a Contracting State. This definition is applicable principally in the context of

Article 8 (Shipping and Air Transport). The definition in the OECD Model refers to the

operator of the ship, or aircraft having its place of effective management in a Contracting

State (i.e., being a resident of that State). The U.S. Model does not include this limitation.

The broader definition combines with paragraphs 2 and 4 of Article 8 to exempt from tax

by the source State income from the rental of aircraft or containers that is earned both by

lessors that are operators of aircraft and by those lessors that are not (e.g., a bank or a

container leasing company).

The exclusion from international traffic of transport solely between places within

a Contracting State means, for example, that carriage of goods or passengers solely

between New York and Chicago would not be treated as international traffic, whether

carried by a U.S. or a Bangladesh carrier. If, however, goods or passengers are carried by

a carrier resident in Bangladesh from a non-U.S. port to, for example, New York, and

some of the goods or passengers continue on to Chicago, the entire transport would be

international traffic. This would be true if the international carrier transferred the goods at

the U.S. port of entry from an aircraft to a land vehicle, or even if the overland portion of

the trip in the United States was handled by an independent carrier under contract with

the original Bangladesh carrier, so long as both parts of the trip were reflected in original

bills of lading

ould be

international traffic. This would be true if the international carrier transferred the goods at

the U.S. port of entry from an aircraft to a land vehicle, or even if the overland portion of

the trip in the United States was handled by an independent carrier under contract with

the original Bangladesh carrier, so long as both parts of the trip were reflected in original

bills of lading. For this reason, the Convention refers, in the definition of “international

traffic,” to “such transport” being solely between places in a Contracting State, while the

OECD Model refers to the ship or aircraft being operated solely between such places.

The language in the Convention is intended to make clear that, as in the above example,

even if the goods are carried on a different aircraft for the internal portion of the

international voyage than is used for the overseas portion of the trip the definition applies

to that internal portion as well as the external portion.

Finally, a “cruise to nowhere,” i.e., a cruise beginning and ending in a port in the

same Contracting State with no stops in a foreign port, would not constitute international

traffic.

Subparagraphs 1(e)(i) and (ii) define the term “competent authority” for the

United States and Bangladesh, 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 in turn has

delegated the authority to the Director, International (LMSB) and, with respect to

interpretative issues, the Director, International (LMSB) with the concurrence of the

Associate Chief Counsel (International) of the Internal Revenue Service.

The term “United States” is defined in subparagraph 1(f) to mean the United

States of America, including the states, the District of Columbia and the territorial sea of

the United States. The term does not include Puerto Rico, the Virgin Islands, Guam or

any other U.S

tor, International (LMSB) with the concurrence of the

Associate Chief Counsel (International) of the Internal Revenue Service.

The term “United States” is defined in subparagraph 1(f) to mean the United

States of America, including the states, the District of Columbia and the territorial sea of

the United States. The term does not include Puerto Rico, the Virgin Islands, Guam or

any other U.S. possession or territory. This Convention explicitly includes certain areas

under the sea within the definition of the United States. For certain purposes, the

definition is extended to include the sea bed and subsoil of undersea areas adjacent to the

territorial sea of the United States. This extension applies to the extent that the United

States exercises sovereignty in accordance with international law for the purpose of

natural resource exploration and exploitation of such areas. This extension of the

definition applies, however, only if the person, property or activity to which the

Convention is being applied is connected with such natural resource exploration or

exploitation. Thus, it would not include any activity involving the sea floor of an area

over which the United States exercised sovereignty for natural resource purposes if that

activity was unrelated to the exploration and exploitation of natural resources.

The term “Bangladesh” is defined in subparagraph 1(g) to mean the People's

Republic of Bangladesh. The term is defined to include the territorial sea, sea bed and

subsoil adjacent to the territorial sea over which Bangladesh exercises its sovereign rights

in accordance with international law.

The term “national” as it relates to Bangladesh and to the United States, is defined

in subparagraphs 1(h)(i) and (ii), respectively. This term is relevant for purposes of

Articles 20 (Government Service) and 24 (Nondiscrimination)

the territorial sea, sea bed and

subsoil adjacent to the territorial sea over which Bangladesh exercises its sovereign rights

in accordance with international law.

The term “national” as it relates to Bangladesh and to the United States, is defined

in subparagraphs 1(h)(i) and (ii), respectively. This term is relevant for purposes of

Articles 20 (Government Service) and 24 (Nondiscrimination). A national of one of the

Contracting States is (1) an individual who is a citizen or national of that State, and (2)

any legal person, partnership or association deriving its status, as such, from the law in

force in the State where it is established.

Paragraph 2

Paragraph 2 provides that in the application of the Convention, any term used but

not defined in the Convention will have the meaning that it has under the law of the

Contracting State whose tax is being applied, unless the context requires otherwise. If the

term is defined under both the tax and nontax laws of a Contracting State, the definition

in the tax law will take precedence over the definition in the non-tax laws.

Finally, there also may be cases where the tax laws of a State contain multiple

definitions of the same term. In such a case, the definition used for purposes of the

particular provision at issue, if any, should be used.

If the meaning of a term cannot be readily determined under the law of a

Contracting State, or if there is a conflict in meaning under the laws of the two States that

creates difficulties in the application of the Convention, the competent authorities, as

indicated in paragraph 3(e) of Article 25 (Mutual Agreement Procedure), may 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

ates that

creates difficulties in the application of the Convention, the competent authorities, as

indicated in paragraph 3(e) of Article 25 (Mutual Agreement Procedure), may 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.

The reference in paragraph 2 to the internal law of a Contracting State means the

law in effect at the time the treaty is being applied, not the law as in effect at the time the

treaty was signed. This use of “ambulatory definitions” has been clarified in this

paragraph by the use of the phrase “at that time.”

The use of “ambulatory” definitions, however, may lead to results that are at

variance with the intentions of the negotiators and of the Contracting States when the

treaty was negotiated and ratified. The reference in both paragraphs 1 and 2 to the

“context otherwise requiring” a definition different from the treaty definition, in

paragraph 1, or from the internal law definition of the Contracting State whose tax is

being imposed, under paragraph 2, refers to a circumstance where the result intended by

the Contracting States is different from the result that would obtain under either the

paragraph 1 definition or the statutory definition. Thus, flexibility in defining terms is

necessary and permitted.

ARTICLE 4 (FISCAL DOMICILE)

This Article sets forth rules for determining whether a person is a resident of a

Contracting State for purposes of the Convention. As a general matter only residents of

the Contracting States may claim the benefits of the Convention. The treaty definition of

residence is to be used only for purposes of the Convention. The fact that a person is

determined to be a resident of a Contracting State under Article 4 does not necessarily

entitle that person to the benefits of the Convention

g State for purposes of the Convention. As a general matter only residents of

the Contracting States may claim the benefits of the Convention. The treaty definition of

residence is to be used only for purposes of the Convention. The fact that a person is

determined to be a resident of a Contracting State under Article 4 does not necessarily

entitle that person to the benefits of the Convention. In addition to being a resident, a

person also must qualify for benefits under Article 17 (Limitation on Benefits) in order to

receive benefits conferred on residents of a Contracting State.

The determination of residence for treaty purposes looks first to a person's

liability to tax as a resident under the respective taxation laws of the Contracting States.

As a general matter, a person who, under those laws, is a resident of one Contracting

State and not of the other need look no further. That person is a resident for purposes of

the Convention 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

Article provides tie-breaker rules pursuant to which a person is assigned, where possible,

a single State of residence for purposes of the Convention.

Paragraph 1

The term “resident of a Contracting State” is defined in paragraph 1. In general,

this definition incorporates the definitions of residence in U.S. law and that of

Bangladesh by referring to 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, residents of the

United States include aliens who are considered U.S. residents under Code section

7701(b).

Paragraph 1 also addresses special cases that may arise in the context of Article 4

on 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, residents of the

United States include aliens who are considered U.S. residents under Code section

7701(b).

Paragraph 1 also addresses special cases that may arise in the context of Article 4.

The paragraph makes explicit the generally understood practice of including

within the term “resident of a Contracting State” the Government of that state as well as

any political subdivisions or local authorities of that State.

Certain entities that are nominally subject to tax but that in practice rarely pay tax

also would generally be treated as residents and therefore accorded treaty benefits. For

example, a U.S. Regulated Investment Company (RIC), U.S. Real Estate Investment

Trust (REIT) and U.S. Real Estate Mortgage Investment Conduit (REMIC) are all

residents of the United States for purposes of the treaty. Although the income earned by

these entities normally is not subject to U.S. tax in the hands of the entity, they are

taxable to the extent that they do not currently distribute their profits, and therefore may

be regarded as “liable to tax.” They also must satisfy a number of requirements under the

Code in order to be entitled to special tax treatment.

Subparagraph (a) provides that a person who is liable to tax in a Contracting State

only in respect of income from sources within that State will not be treated as a resident

of that Contracting State for purposes of the Convention. Thus, a consular official of

Bangladesh who is posted in the United States, who may be subject to U.S. tax on U.S.

source investment income, but is not taxable in the United States on non-U.S. source

income, would not be considered a resident of the United States for purposes of the

Convention. (See Code section 7701(b)(5)(B))

resident

of that Contracting State for purposes of the Convention. Thus, a consular official of

Bangladesh who is posted in the United States, who may be subject to U.S. tax on U.S.

source investment income, but is not taxable in the United States on non-U.S. source

income, would not be considered a resident of the United States for purposes of the

Convention. (See Code section 7701(b)(5)(B)). Similarly, although not explicitly stated

in the Convention, an enterprise of Bangladesh with a permanent establishment in the

United States is not, by virtue of that permanent establishment, a resident of the United

States. The enterprise generally is subject to U.S. tax only with respect to its income that

is attributable to the U.S. permanent establishment, not with respect to its worldwide

income, as is a U.S. resident.

Subparagraph (b) addresses special problems presented by partnerships, trusts or

estates (i.e., fiscally transparent entities). This subparagraph applies to any resident of a

Contracting State who is entitled to income derived through an entity that is treated as an

entity that is a partnership, trust, or estate under the laws of either Contracting State.

Entities falling under this description in the United States would include partnerships,

common investment trusts under section 584 and grantor trusts. This paragraph also

applies to U.S. limited liability companies (“LLCs”) that are treated as partnerships for

U.S. tax purposes.

Subparagraph (b) provides that an item of income derived by such a fiscally

transparent entity is considered to be derived by a resident of a Contracting State to the

extent that the resident is treated under the taxation laws of the State where he is resident

as deriving the item of income. For example, if a corporation resident in Bangladesh

distributes a dividend to an entity that is treated as fiscally transparent for U.S

item of income derived by such a fiscally

transparent entity is considered to be derived by a resident of a Contracting State to the

extent that the resident is treated under the taxation laws of the State where he is resident

as deriving the item of income. For example, if a corporation resident in Bangladesh

distributes a dividend to an entity that is treated as fiscally transparent for U.S. tax

purposes, the dividend will be considered derived by a resident of the United States only

to the extent that the taxation laws of the United States treat one or more U.S. residents

(whose status as U.S. residents is determined, for this purpose, under U.S. tax laws) as

deriving the dividend income for U.S. tax purposes. In the case of a partnership, the

persons who are, under U.S. tax laws, treated as partners of the entity would normally be

the persons whom the U.S. tax laws would treat as deriving the dividend income through

the partnership. Thus, it also follows that persons whom the U.S. treats as partners but

who are not U.S. residents for U.S. tax purposes may not claim a benefit for the dividend

paid to the entity under the Convention. Although these partners are treated as deriving

the income for U.S. tax purposes, they are not residents of the United States for purposes

of the treaty. If, however, they are treated as residents of a third country under the

provisions of an income tax convention which that country has with Bangladesh, they

may be entitled to claim a benefit under that convention. In contrast, if an entity is

organized under U.S. laws and is classified as a corporation for U.S. tax purposes,

e not residents of the United States for purposes

of the treaty. If, however, they are treated as residents of a third country under the

provisions of an income tax convention which that country has with Bangladesh, they

may be entitled to claim a benefit under that convention. In contrast, if an entity is

organized under U.S. laws and is classified as a corporation for U.S. tax purposes,

dividends paid by a corporation resident in Bangladesh to the U.S. entity will be

considered derived by a resident of the United States since the U.S. corporation is treated

under U.S. taxation laws as a resident of the United States and as deriving the income.

These results would obtain even if the entity were viewed differently under the

tax laws of Bangladesh (e.g., as not fiscally transparent in the first example above where

the entity is treated as a partnership for U.S. tax purposes or as fiscally transparent in the

second example where the entity is viewed as not fiscally transparent for U.S. tax

purposes). These results also follow regardless of where the entity is organized, i.e., in

the United States, Bangladesh, or in a third country. For example, income from sources in

Bangladesh received by an entity organized under the laws of Bangladesh, which is

treated for U.S. tax purposes as a corporation and is owned by a U.S. shareholder who is

a U.S. resident for U.S. tax purposes, is not considered derived by the shareholder of that

corporation even if, under the tax laws of Bangladesh, the entity is treated as fiscally

transparent. Rather, for purposes of the treaty, the income is treated as derived by an

entity resident in Bangladesh. These results also follow regardless of whether the entity is

disregarded as a separate entity under the laws of one jurisdiction but not the other, such

as a single owner entity that is viewed as a branch for U.S. tax purposes and as a

corporation for tax purposes of in Bangladesh

parent. Rather, for purposes of the treaty, the income is treated as derived by an

entity resident in Bangladesh. These results also follow regardless of whether the entity is

disregarded as a separate entity under the laws of one jurisdiction but not the other, such

as a single owner entity that is viewed as a branch for U.S. tax purposes and as a

corporation for tax purposes of in Bangladesh.

Where income is derived through an entity organized in a third state that has

owners resident in one of the Contracting States, the characterization of the entity in that

third state is irrelevant for purposes of determining whether the resident is entitled to

treaty benefits with respect to income derived by the entity.

These principles also apply to trusts to the extent that they are fiscally transparent

in either Contracting State. For example, if X, a resident of Bangladesh, creates a

revocable trust and names persons resident in a third country as the beneficiaries of the

trust, X would be treated as the beneficial owner of income derived from the United

States under U.S. domestic law. If Bangladesh has no rules comparable to those in

sections 671 through 679, it is possible that under Bangladesh's law neither X nor the

trust would be taxed on the income derived from the United States. In these cases

subparagraph (d) provides that the U.S. source income is regarded as being derived by a

resident of Bangladesh only to the extent that the laws of Bangladesh treat residents of

Bangladesh as deriving the income for tax purposes.

The taxation laws of a Contracting State may treat an item of income as income of

a resident of that State even if the resident is not subject to tax on that particular item of

income

provides that the U.S. source income is regarded as being derived by a

resident of Bangladesh only to the extent that the laws of Bangladesh treat residents of

Bangladesh as deriving the income for tax purposes.

The taxation laws of a Contracting State may treat an item of income as income of

a resident of that State even if the resident is not subject to tax on that particular item of

income. For example, if a Contracting State has a participation exemption for certain

foreign-source dividends and capital gains, such income or gains would be regarded as

income or gain of a resident of that State who otherwise derived the income or gain,

despite the fact that the resident could be exempt from tax in that State on the income or

gain.

Subparagraph (c) provides that certain tax-exempt entities such as pension funds

and charitable organizations will be regarded as residents regardless of whether they are

generally liable for income tax in the State where they are established. An entity will be

described in this subparagraph if it is generally exempt from tax by reason of the fact that

it is organized and operated exclusively to perform a charitable or similar purpose or to

provide pension or similar benefits to employees. The reference to “similar benefits” is

intended to encompass employee benefits such as health and disability benefits.

The inclusion of this provision is intended to clarify the generally accepted

practice of treating an entity that would be liable for tax as a resident under the internal

law of a state but for a specific exemption from tax (either complete or partial) as a

resident of that state for purposes of paragraph 1. The reference to a general exemption is

intended to reflect the fact that under U.S. law, certain organizations that generally are

considered to be tax-exempt entities may be subject to certain excise taxes or to income

tax on their unrelated business income. Thus, a U.S. pension trust, or an exempt section

501(c) organization (such as a U.S

resident of that state for purposes of paragraph 1. The reference to a general exemption is

intended to reflect the fact that under U.S. law, certain organizations that generally are

considered to be tax-exempt entities may be subject to certain excise taxes or to income

tax on their unrelated business income. Thus, a U.S. pension trust, or an exempt section

501(c) organization (such as a U.S. charity) that is generally exempt from tax under U.S.

law is considered a resident of the United States for all purposes of the treaty.

Paragraph 2

If, under the laws of the two Contracting States, and,

thus, under paragraph 1, an individual is deemed to be a resident of both Contracting

States, a series of tie-breaker rules are provided in paragraph 2 to determine a single State

of residence for that individual. These tests are to be applied in the order in which they

are stated. The first test is based on where the individual has a permanent home. If that

test is inconclusive because the individual has a permanent home available to him in both

States, or in neither, he will be considered to be a resident of the Contracting State where

his personal and economic relations are closest (i.e., the location of his “center of vital

interests”). If that test is also inconclusive, he will be treated as a resident of the

Contracting State where he maintains 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 the Contracting State

of which he is a national. If he is a national of both States or of neither, the matter will be

considered by the competent authorities, who will assign a single State of residence.

Paragraph 3

Paragraph 3 provides a tie-breaker rule to settle dual-residence issues for

companies. A company is treated as resident in the United States if it is created or

organized in or under the laws of the United States or a political subdivision

national of both States or of neither, the matter will be

considered by the competent authorities, who will assign a single State of residence.

Paragraph 3

Paragraph 3 provides a tie-breaker rule to settle dual-residence issues for

companies. A company is treated as resident in the United States if it is created or

organized in or under the laws of the United States or a political subdivision. Under the

laws of Bangladesh, a company is treated as a resident of Bangladesh if it is either

incorporated there or managed and controlled there. Dual residence, therefore, can arise

in the case of a U.S. company that is managed and controlled in Bangladesh. Under

paragraph 3, the residence of such a company will be in the Contracting State under the

laws of which it is created or organized (i.e., the United States, in the example).

Paragraph 4

Dual residents other than individuals or companies (such as trusts or estates) are

addressed by paragraph 4. If such a person is, under the rules of paragraph 1, resident in

both Contracting States, the competent authorities shall seek to determine a single State

of residence for that person for purposes of the Convention.

ARTICLE 5 (PERMANENT ESTABLISHMENT)

This Article defines the term “permanent establishment,” a term that is significant

for several articles of the Convention. The existence of a permanent establishment in a

Contracting State is necessary under Article 7 (Business Profits) for the taxation by that

State of the business profits of a resident of the other Contracting State. Since the term

“fixed base” in Article 15 (Independent Personal Services) is understood by reference to

the definition of “permanent establishment,” this Article is also relevant for purposes of

Article 15

ent establishment in a

Contracting State is necessary under Article 7 (Business Profits) for the taxation by that

State of the business profits of a resident of the other Contracting State. Since the term

“fixed base” in Article 15 (Independent Personal Services) is understood by reference to

the definition of “permanent establishment,” this Article is also relevant for purposes of

Article 15. 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 22 (Other

Income).

Paragraph 1

The basic definition of the term “permanent establishment” is contained in

paragraph 1. As used in the Convention, the term means a fixed place of business through

which the business of an enterprise is wholly or partly carried on. As indicated in the

OECD Commentary to Article 5, a general principle to be observed in determining

whether a permanent establishment exists is that the place of business must be “fixed” in

the sense that a particular building or physical location is used by the enterprise for the

conduct of its business, and that it must be foreseeable that the enterprise's use of this

building or other physical location will be more than temporary.

Paragraph 2

Paragraph 2 lists a number of types of fixed places of business that constitute a

permanent establishment. This list is illustrative and non-exclusive

a particular building or physical location is used by the enterprise for the

conduct of its business, and that it must be foreseeable that the enterprise's use of this

building or other physical location will be more than temporary.

Paragraph 2

Paragraph 2 lists a number of types of fixed places of business that constitute a

permanent establishment. This list is illustrative and non-exclusive. According to

paragraph 2, the term permanent establishment includes a place of management, a

branch, an office, a factory, a workshop, a store or other sales outlet, a warehouse (in

relation to a person providing storage facilities for others) and a mine, oil or gas well,

quarry or other place of extraction of natural resources.

Paragraph 3

This paragraph provides rules to determine whether a building site or a

construction, assembly or installation project, or a drilling rig used for the exploration or

development of natural resources constitutes a permanent establishment for the

contractor, driller, etc. Such an activity does not create a permanent establishment under

paragraph 4(e) unless the site, project, etc. lasts or continues for more 183 days. It is only

necessary to refer to “exploration” and not “exploitation” in this context because

exploitation activities are defined to constitute a permanent establishment under

subparagraph (h) of paragraph 2. Thus, a drilling rig does not constitute a permanent

establishment if a well is drilled in only three months, but if production begins the next

month, the well becomes a permanent establishment as of that date under subparagraph

2(h), even though the 183-day threshold of paragraph 3 has not been met.

The 183-day test applies separately to each site or project. The 183-day period

begins when work (including preparatory work carried on by the enterprise) physically

begins in a Contracting State

months, but if production begins the next

month, the well becomes a permanent establishment as of that date under subparagraph

2(h), even though the 183-day threshold of paragraph 3 has not been met.

The 183-day test applies separately to each site or project. The 183-day period

begins when work (including preparatory work carried on by the enterprise) physically

begins in a Contracting State. A series of contracts or projects by a contractor that are

interdependent both commercially and geographically are to be treated as a single project

for purposes of applying the 183-day threshold test. For example, the construction of a

housing development would be considered as a single project even if each house were

constructed for a different purchaser. Several drilling rigs operated by a drilling

contractor in the same sector of the continental shelf also normally would be treated as a

single project.

If the 183-day threshold is exceeded, the site or project constitutes a permanent

establishment from the first day of activity. In applying this paragraph, time spent by a

subcontractor on a building site is counted as time spent by the general contractor at the

site for purposes of determining whether the general contractor has a permanent

establishment. However, for the sub-contractor itself to be treated as having a permanent

establishment, the sub-contractor's activities at the site must last for more than 183 days.

If a sub-contractor is on a site intermittently time is measured from the first day the

subcontractor is on the site until the last day (i.e., intervening days that the sub-contractor

is not on the site are counted) for purposes of applying the 183-day rule.

These interpretations of the Article are based on the Commentary to paragraph 3

of Article 5 of the OECD Model, which contains language almost identical to that in the

Convention (except for the length of the time threshold and the absence in the OECD

Model of a rule for drilling rigs)

ning days that the sub-contractor

is not on the site are counted) for purposes of applying the 183-day rule.

These interpretations of the Article are based on the Commentary to paragraph 3

of Article 5 of the OECD Model, which contains language almost identical to that in the

Convention (except for the length of the time threshold and the absence in the OECD

Model of a rule for drilling rigs). These interpretations are consistent with the generally

accepted international interpretation of the language in paragraph 3 of Article 5 of the

Convention.

Paragraph 4

This paragraph contains exceptions to the general rule of paragraph 1, listing a

number of activities that may be carried on through a fixed place of business, but which

nevertheless do not create a permanent establishment. The use of facilities solely to store

or display merchandise belonging to an enterprise does not constitute a permanent

establishment of that enterprise. The maintenance of a stock of goods belonging to an

enterprise solely for the purpose of storage or display, or solely for the purpose of

processing by another enterprise does not give rise to a permanent establishment of the

first-mentioned enterprise. The maintenance of a fixed place of business solely for the

purpose of purchasing goods or merchandise, or for collecting information, for the

enterprise, or for other activities that have a preparatory or auxiliary character for the

enterprise, such as advertising, or the supply of information do not constitute a permanent

establishment of the enterprise. Thus, for example, an employee of a U.S. manufacturer

gathering information as part of a market research project would not constitute a

permanent establishment of the manufacturer, even if the activity takes place through a

fixed place of business

iary character for the

enterprise, such as advertising, or the supply of information do not constitute a permanent

establishment of the enterprise. Thus, for example, an employee of a U.S. manufacturer

gathering information as part of a market research project would not constitute a

permanent establishment of the manufacturer, even if the activity takes place through a

fixed place of business. Similarly, as explained in paragraph 22 of the OECD

Commentary to Article 5, an employee of a news organization engaged merely in

gathering information would not constitute a permanent establishment of the news

organization.

Subparagraph 4(f) provides that a combination of the activities described in the

other subparagraphs of paragraph 4 will not give rise to a permanent establishment if the

combination results in an overall activity that is of a preparatory or auxiliary character.

This combination rule, derived from the OECD Model, differs from that in the U.S.

Model. In the U.S. Model, any combination of otherwise excepted activities is deemed

not to give rise to a permanent establishment, without the additional requirement that the

combination, as distinct from each constituent activity, be preparatory or auxiliary. It is

assumed that if preparatory or auxiliary activities are combined, the combination

generally will also be of a character that is preparatory or auxiliary. If, however, this is

not the case, a permanent establishment may result from a combination of such activities.

Paragraph 5

Unlike the U.S. and OECD Models, subparagraphs (a) and (b) of paragraph 4 do

not include the use of facilities or the maintenance of a stock of goods solely for the

purpose of delivery within the categories of preparatory and auxiliary functions that do

not constitute a permanent establishment

ot the case, a permanent establishment may result from a combination of such activities.

Paragraph 5

Unlike the U.S. and OECD Models, subparagraphs (a) and (b) of paragraph 4 do

not include the use of facilities or the maintenance of a stock of goods solely for the

purpose of delivery within the categories of preparatory and auxiliary functions that do

not constitute a permanent establishment. Paragraph 5, however, adds that the term

“permanent establishment” shall be deemed not to include the use of facilities or the

maintenance of a stock of goods or merchandise for the purpose of occasional delivery of

such goods or merchandise. A permanent establishment does exist if deliveries are made

on a regular basis from a warehouse or other storage facility.

Paragraph 6

Paragraphs 6 and 7 specify when activities carried on by an agent on behalf of an

enterprise create a permanent establishment of that enterprise. Paragraph 6 sets forth two

sets of conditions under which a dependent agent of an enterprise is deemed to constitute

a permanent establishment of the enterprise. Under subparagraph 6(a), a dependent agent

of an enterprise of a Contracting State will give rise to a permanent establishment of the

enterprise in the other Contracting State, if the agent has and habitually exercises in that

other State a general authority to conclude contracts on behalf of that enterprise, and his

activities are not limited to those activities specified in paragraphs 4 and 5 which would

not constitute a permanent establishment if carried on by the enterprise through a fixed

place of business

of the

enterprise in the other Contracting State, if the agent has and habitually exercises in that

other State a general authority to conclude contracts on behalf of that enterprise, and his

activities are not limited to those activities specified in paragraphs 4 and 5 which would

not constitute a permanent establishment if carried on by the enterprise through a fixed

place of business. Under subparagraph 6(b), even if the agent has no authority to

conclude contracts, he will give rise to a permanent establishment for the enterprise if he

habitually maintains a stock of goods or merchandise in the other State on behalf of the

enterprise and regularly makes deliveries from that stock, and there have been some

additional activities carried on in that other State on behalf of the enterprise which have

contributed to the sale. It is not necessary that these sales activities be carried out by the

agent. They may be carried out by the enterprise itself or by another agent.

The contracts referred to in paragraph 6 are those relating to the essential business

operations of the enterprise, rather than ancillary activities. For example, if the agent has

no authority to conclude contracts on behalf of the enterprise with its customers for, say,

the sale of the goods produced by the enterprise, but it can enter into service contracts on

behalf of the enterprise for the enterprise's business equipment used in the agent's office,

this contracting authority would not fall within the scope of the paragraph, even if

exercised regularly.

Paragraph 7

Under paragraph 7, an enterprise is not deemed to have a permanent

establishment in a Contracting State merely because it carries on business in that State

through an independent agent, including a broker or general commission agent, if the

agent is acting in the ordinary course of his business as an independent agent

ithin the scope of the paragraph, even if

exercised regularly.

Paragraph 7

Under paragraph 7, an enterprise is not deemed to have a permanent

establishment in a Contracting State merely because it carries on business in that State

through an independent agent, including a broker or general commission agent, if the

agent is acting in the ordinary course of his business as an independent agent. Thus, there

are two conditions that must be satisfied: the agent must be both legally and economically

independent of the enterprise, and the agent must be acting in the ordinary course of its

business in carrying out activities on behalf of the enterprise.

Whether an agent is independent of an enterprise is a factual determination.

Among the questions to be considered are the extent to which the agent operates on the

basis of instructions from the enterprise. An agent that is subject to detailed instructions

regarding the conduct of its operations or comprehensive control by the enterprise is not

legally independent.

In determining whether the agent is economically independent, a relevant factor is

the extent to which the agent bears business risk. Business risk refers primarily to risk of

loss. An independent agent typically bears risk of loss from its own activities. In the

absence of other factors that would establish dependence, an agent that shares business

risk with the enterprise, or has its own business risk, is economically independent

because its business activities are not integrated with those of the principal. Conversely,

an agent that bears little or no risk from those activities it performs is not economically

independent and therefore is not described in paragraph 6.

Another relevant factor in determining whether an agent is economically

independent is whether the agent has an exclusive or nearly exclusive relationship with

business activities are not integrated with those of the principal. Conversely,

an agent that bears little or no risk from those activities it performs is not economically

independent and therefore is not described in paragraph 6.

Another relevant factor in determining whether an agent is economically

independent is whether the agent has an exclusive or nearly exclusive relationship with

the principal. Such a relationship may indicate that the principal has economic control

over the agent. A number of principals acting in concert also may have economic control

over an agent. The limited scope of the agent's activities and the agent's dependence on a

single source of income may indicate that the agent lacks economic independence. It

should be borne in mind, however, that exclusivity is not in itself a conclusive test: An

agent may be economically independent notwithstanding an exclusive relationship with

the principal if it has the capacity to diversify and acquire other clients without

substantial modifications to its current business and without substantial harm to its

business profits. Thus, exclusivity should be viewed merely as a pointer to further

investigation of the relationship between the principal and the agent. Each case must be

addressed on the basis of its own facts and circumstances.

Paragraph 8

This paragraph clarifies that a company that is a resident of a Contracting State is

not deemed to have a permanent establishment in the other Contracting State merely

because it controls, or is controlled by, a company that is a resident of that other

Contracting State, or that carries on business in that other Contracting State. The

determination whether a permanent establishment exists is made solely on the basis of the

factors described in paragraphs 1 through 7 of the Article. Whether a company is a

permanent establishment of a related company, therefore, is based solely on those factors

and not on the ownership or control relationship between the companies

that carries on business in that other Contracting State. The

determination whether a permanent establishment exists is made solely on the basis of the

factors described in paragraphs 1 through 7 of the Article. Whether a company is a

permanent establishment of a related company, therefore, is based solely on those factors

and not on the ownership or control relationship between the companies.

ARTICLE 6 (INCOME FROM IMMOVABLE PROPERTY)

The term “immovable property” is used throughout the Article. It is intended to

have the same meaning as the term “real property.”

Paragraph 1

The first paragraph of Article 6 states the general rule that income of a resident of

a Contracting State derived from real property situated in the other Contracting State may

be taxed in the Contracting State in which the property is situated. The paragraph

specifies that income from real property includes income from agriculture and forestry.

Income from agriculture and forestry are dealt with in Article 6 rather than in Article 7

(Business Profits). However, both the United States and Bangladesh give taxpayers the

option to be taxed on such income on a net basis. Accordingly, taxpayers generally

should be able to obtain the same tax treatment in the situs country regardless of whether

the income is treated as business profits or real property income.

This Article does not grant an exclusive taxing right to the situs State. The situs

State is merely given the primary right to tax. The Article does not impose any limitation

in terms of rate or form of tax on the situs State.

rally

should be able to obtain the same tax treatment in the situs country regardless of whether

the income is treated as business profits or real property income.

This Article does not grant an exclusive taxing right to the situs State. The situs

State is merely given the primary right to tax. The Article does not impose any limitation

in terms of rate or form of tax on the situs State.

Paragraph 2

The term “immovable property” is defined in paragraph 2 by reference to the

internal law definition in the situs State. In the case of the United States, the term has the

meaning given to it by Reg. section 1.897-1(b). In addition to the statutory definitions in

the two Contracting States, the paragraph specifies certain additional classes of property

that, regardless of internal law definitions, are to be included within the meaning of the

term for purposes of the Convention. This expanded definition conforms to that in the

OECD Model. The definition of “immovable property” for purposes of Article 6 is more

limited than the expansive definition of “immovable property” in paragraph 1 of Article

13 (Capital Gains). The Article 13 term includes not only immovable property as defined

in Article 6 but certain other interests in real property.

Paragraph 3

Paragraph 3 makes clear that all forms of income derived from the exploitation of

real property are taxable in the Contracting State in which the property is situated. In the

case of a net lease of real property, if a net election has not been made, the gross rental

payment (before deductible expenses incurred by the lessee) is treated as income from the

property. Income from the disposition of an interest in real property, however, is not

considered “derived” from real property and is not dealt with in this Article. The taxation

of that income is addressed in Article 13 (Capital Gains). Also, the interest paid on a

mortgage on real property and distributions by a U.S. Real Estate Investment Trust are

not dealt with in Article 6

come from the

property. Income from the disposition of an interest in real property, however, is not

considered “derived” from real property and is not dealt with in this Article. The taxation

of that income is addressed in Article 13 (Capital Gains). Also, the interest paid on a

mortgage on real property and distributions by a U.S. Real Estate Investment Trust are

not dealt with in Article 6. Such payments fall under Articles 10 (Dividends), 11

(Interest) or 13 (Capital Gains). Finally, dividends paid by a United States Real Property

Holding Corporation are not considered to be income from the exploitation of real

property. Such payments would fall under Article 10 (Dividends) or 13 (Capital Gains).

Paragraph 3 clarifies that the income referred to in paragraph 1 also means

income from any use of real property, including, but not limited to, income from direct

use by the owner (in which case income may be imputed to the owner for tax purposes)

and rental income from the letting of real property.

Paragraph 4

This paragraph specifies that the basic rule of paragraph 1 (as elaborated in

paragraph 3) applies to income from real property of an enterprise and to income from

real property used for the performance of independent personal services. This clarifies

that the situs country may tax the real property income (including rental income) of a

resident of the other Contracting State in the absence of attribution to a permanent

establishment or fixed base in the situs State. This provision represents an exception to

the general rule under Articles 7 (Business Profits) and 15 (Independent Personal

Services) that income must be attributable to a permanent establishment or fixed base,

respectively, in order to be taxable in the situs state.

of the other Contracting State in the absence of attribution to a permanent

establishment or fixed base in the situs State. This provision represents an exception to

the general rule under Articles 7 (Business Profits) and 15 (Independent Personal

Services) that income must be attributable to a permanent establishment or fixed base,

respectively, in order to be taxable in the situs state.

ARTICLE 7 (BUSINESS PROFITS)

This Article provides rules for the taxation by a Contracting State of the business

profits of an enterprise of the other Contracting State.

Paragraph 1

Paragraph 1 states the general rule that business profits (as defined in paragraph

7) of an enterprise of one Contracting State may not be taxed by the other Contracting

State unless the enterprise carries on business in that other Contracting State through a

permanent establishment (as defined in Article 5 (Permanent Establishment)) situated

there. When that condition is met, the State in which the permanent establishment is

situated may tax the enterprise, but only on a net basis and only on the income that is

attributable to the permanent establishment.

Paragraph 2

Paragraph 2 provides rules for the attribution of business profits to a permanent

establishment. The Contracting States will attribute to a permanent establishment the

profits that it would have earned had it been an independent enterprise engaged in the

same or similar activities under the same or similar circumstances. This language

incorporates the arm's-length standard for purposes of determining the profits attributable

to a permanent establishment. The computation of business profits attributable to a

permanent establishment under this paragraph is subject to the rules of paragraph 3 for

the allowance of expenses incurred for the purposes of earning the profits

es under the same or similar circumstances. This language

incorporates the arm's-length standard for purposes of determining the profits attributable

to a permanent establishment. The computation of business profits attributable to a

permanent establishment under this paragraph is subject to the rules of paragraph 3 for

the allowance of expenses incurred for the purposes of earning the profits.

An exchange of notes between the Contracting States, signed at the time of the

signing of the Convention, provides that if the information available to the tax authority

of a Contracting State is not adequate to measure accurately the profits of a permanent

establishment, the determination of profits in such cases may be made on a reasonable

basis, based on the available information. This determination must be done consistently

with the principles of this Article, i.e., it must seek to reflect arm’s-length pricing and

appropriate deductions of expenses.

The “attributable to” concept of paragraph 2 is analogous but not entirely

equivalent to the “effectively connected” concept in Code section 864(c). The profits

attributable to a permanent establishment may be from sources within or without a

Contracting State.

It is understood that the business profits attributed to a permanent establishment

include only those profits derived from that permanent establishment's assets or activities.

This rule is consistent with the “asset-use” and “business activities” test of Code section

864(c)(2). Thus, the limited force of attraction rule of Code section 864(c)(3) is not

incorporated into paragraph 2.

ate.

It is understood that the business profits attributed to a permanent establishment

include only those profits derived from that permanent establishment's assets or activities.

This rule is consistent with the “asset-use” and “business activities” test of Code section

864(c)(2). Thus, the limited force of attraction rule of Code section 864(c)(3) is not

incorporated into paragraph 2.

This Article does not contain a provision corresponding to paragraph 4 of Article

7 of the OECD Model. That paragraph provides that a Contracting State in certain

circumstances may determine the profits attributable to a permanent establishment on the

basis of an apportionment of the total profits of the enterprise. This paragraph has not

been included in the Model because it is unnecessary. The OECD Commentary to

paragraphs 2 and 3 of Article 7 authorize the use of profits methods independently of

paragraph 4 of Article 7 of the OECD Model. Any such approach, however, must be

designed to approximate an arm's-length result.

Paragraph 3

Paragraph 3 provides that in determining the business profits of a permanent

establishment, deductions shall be allowed for the expenses incurred for the purposes of

the permanent establishment, ensuring that business profits will be taxed on a net basis.

This rule is not limited to expenses incurred exclusively for the purposes of the

permanent establishment, but includes a reasonable allocation of 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 establishment. For example, 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 if properly allocable thereto

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 establishment. For example, 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 if properly allocable thereto.

The paragraph specifies that the expenses that may be considered to be incurred

for the purposes of the permanent establishment are expenses for research and

development, interest and other similar expenses, as well as a reasonable amount of

executive and general administrative expenses. This rule permits (but does not require)

each Contracting State to apply the type of expense allocation rules provided by U.S. law

such as in Treas. Reg. sections 1.861-8 and 1.882-5).

Paragraph 3 does not permit a deduction for expenses charged to a permanent

establishment by another unit of the enterprise. Thus, a permanent establishment may not

deduct a royalty deemed paid to the head office. Similarly, a permanent establishment

may not increase its business profits by the amount of any notional fees for ancillary

services performed for another unit of the enterprise, but also should not receive a

deduction for the expense of providing such services, since those expenses would be

incurred for purposes of a business unit other than the permanent establishment.

Paragraph 4

Paragraph 4 provides that no business profits can be attributed to a permanent

establishment merely because it purchases goods or merchandise for the enterprise of

which it is a part. This rule applies only to an office that performs functions for the

enterprise in addition to purchasing. The income attribution issue does not arise if the

sole activity of the permanent establishment is the purchase of goods or merchandise

because such activity does not give rise to a permanent establishment under Article 5

goods or merchandise for the enterprise of

which it is a part. This rule applies only to an office that performs functions for the

enterprise in addition to purchasing. The income attribution issue does not arise if the

sole activity of the permanent establishment is the purchase of goods or merchandise

because such activity does not give rise to a permanent establishment under Article 5

(Permanent Establishment). A common situation in which paragraph 4 is relevant is one

in which a permanent establishment purchases raw materials for the enterprise's

manufacturing operation conducted outside the United States and sells the manufactured

product. While business profits may be attributable to the permanent establishment with

respect to its sales activities, no profits are attributable to it with respect to its purchasing

activities.

Paragraph 5

This paragraph provides that profits shall be determined by the same method each

year, unless there is good reason to change the method used. This rule assures consistent

tax treatment over time for permanent establishments. It limits the ability of both the

Contracting State and the enterprise to change accounting methods to be applied to the

permanent establishment. It does not, however, restrict a Contracting State from

imposing additional requirements, such as the rules under Code section 481, to prevent

amounts from being duplicated or omitted following a change in accounting method.

Paragraph 6

Paragraph 6 coordinates the provisions of Article 7 and other provisions of the

Convention. Under this paragraph, when business profits include items of income that are

dealt with separately under other articles of the Convention, the provisions of those

articles will, except when they specifically provide to the contrary, take precedence over

the provisions of Article 7

method.

Paragraph 6

Paragraph 6 coordinates the provisions of Article 7 and other provisions of the

Convention. Under this paragraph, when business profits include items of income that are

dealt with separately under other articles of the Convention, the provisions of those

articles will, except when they specifically provide to the contrary, take precedence over

the provisions of Article 7. For example, the taxation of dividends will be determined by

the rules of Article 10 (Dividends), and not by Article 7, except where, as provided in

paragraph 5 of Article 10, the dividend is attributable to a permanent establishment or

fixed base. In the latter case the provisions of Articles 7 or 15 (Independent Personal

Services) apply. Thus, an enterprise of one State deriving dividends from the other State

may not rely on Article 7 to exempt those dividends from tax at source if they are not

attributable to a permanent establishment of the enterprise in the other State. By the same

token, if the dividends are attributable to a permanent establishment in the other State, the

dividends may be taxed on a net income basis at the source State's full corporate tax rate,

rather than on a gross basis under Article 10 (Dividends).

As provided in Article 8 (Shipping and Air Transport), income derived from

shipping and air transport activities in international traffic described in that Article is

taxable only in the country of residence of the enterprise regardless of whether it is

attributable to a permanent establishment situated in the source State.

Paragraph 7

The term “business profits" is defined in paragraph 7 to mean income derived

from any trade or business

sport), income derived from

shipping and air transport activities in international traffic described in that Article is

taxable only in the country of residence of the enterprise regardless of whether it is

attributable to a permanent establishment situated in the source State.

Paragraph 7

The term “business profits" is defined in paragraph 7 to mean income derived

from any trade or business. In accordance with this broad definition, the term “business

profits” includes income attributable to notional principal contracts and other financial

instruments to the extent that the income is attributable to a trade or business of dealing in

such instruments, or is otherwise related to a trade or business (as in the case of a notional

principal contract entered into for the purpose of hedging currency risk arising from an

active trade or business). Any other income derived from such instruments is, unless

specifically covered in another article, dealt with under Article 22 (Other Income).

The paragraph states the longstanding U.S. view that income earned by an

enterprise from the furnishing of personal services is business profits. Thus, a consulting

firm resident in one State whose employees perform services in the other State through a

permanent establishment may be taxed in that other State on a net basis under Article 7,

and not under Article 15 (Independent Personal Services), which applies only to

individuals. The salaries of the employees would be subject to the rules of Article 16

(Dependent Personal Services).

The paragraph also specifies that the term “business profits” includes income

derived by an enterprise from the rental of tangible personal property

that other State on a net basis under Article 7,

and not under Article 15 (Independent Personal Services), which applies only to

individuals. The salaries of the employees would be subject to the rules of Article 16

(Dependent Personal Services).

The paragraph also specifies that the term “business profits” includes income

derived by an enterprise from the rental of tangible personal property. The inclusion of

income derived by an enterprise from the rental of tangible personal property 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 permanent

establishment maintained by the resident in that other State, and, if the income is taxable,

it can be taxed only on a net basis. Income from the rental of tangible personal property

that is not derived in connection with a trade or business is dealt with in Article 22 (Other

Income).

Paragraph 8

Paragraph 8 incorporates into the Convention the rule of Code section 864(c)(6).

Like the Code section on which it is based, paragraph 8 provides that any income or gain

attributable to a permanent establishment or a fixed base during its existence is taxable in

the Contracting State where the permanent establishment or fixed base is situated, even if

the payment of that income or gain is deferred until after the permanent establishment or

fixed base ceases to exist. Paragraph 8 also provides that expenses attributable to the

permanent establishment or fixed base during its existence may be deducted from the

deferred income at such time as that income is subject to tax. This rule applies with

respect to paragraphs 1 and 2 of Article 7 (Business Profits), paragraph 5 of Article 10

(Dividends), paragraph 4 of Articles 11 (Interest) and 12 (Royalties), paragraph 2 of

Article 13 (Capital Gains), Article 15 (Independent Personal Services) and paragraph 2 of

Article 22 Other Income)

e deducted from the

deferred income at such time as that income is subject to tax. This rule applies with

respect to paragraphs 1 and 2 of Article 7 (Business Profits), paragraph 5 of Article 10

(Dividends), paragraph 4 of Articles 11 (Interest) and 12 (Royalties), paragraph 2 of

Article 13 (Capital Gains), Article 15 (Independent Personal Services) and paragraph 2 of

Article 22 Other Income).

The effect of this rule can be illustrated by the following example. Assume a

company that is a resident of Bangladesh and that maintains a permanent establishment in

the United States winds up the permanent establishment's business 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 at the end of year

3. Despite the fact that Article 13's threshold requirement for U.S. taxation is not met in

year 3 because the company has no permanent establishment in the United States, the

United States may tax the deferred income payment recognized by the company in year

Relation to Other Articles

This Article is subject to the saving clause of paragraph 2 of Article 1 (Personal

Scope) of the Model. Thus, if a citizen of the United States who is a resident of

Bangladesh under the treaty derives business profits from the United States that are not

attributable to a permanent establishment in the United States, the United States may,

subject to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief from

Double Taxation), tax those profits, notwithstanding the provision of paragraph 1 of this

Article that would exempt the income from U.S. tax.

The benefits of this Article are also subject to Article 17 (Limitation on Benefits).

Thus, an enterprise of Bangladesh that derives income effectively connected with a U.S

to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief from

Double Taxation), tax those profits, notwithstanding the provision of paragraph 1 of this

Article that would exempt the income from U.S. tax.

The benefits of this Article are also subject to Article 17 (Limitation on Benefits).

Thus, an enterprise of Bangladesh that derives income effectively connected with a U.S.

trade or business may not claim the benefits of Article 7 (Business Profits) unless the

resident carrying on the enterprise qualifies for such benefits under Article 17.

ARTICLE 8 (SHIPPING AND AIR TRANSPORT)

This Article governs the taxation of profits from the operation of ships and

aircraft in international traffic. The term “international traffic” is defined in subparagraph

1(d) of Article 3 (General Definitions).

Paragraph 1

Paragraph 1 provides that profits derived by an enterprise of a Contracting State

from the operation in international traffic of ships or aircraft are taxable only in that

Contracting State. Because paragraph 6 of Article 7 (Business Profits) defers to Article 8

with respect to shipping and air transport income, shipping and air transport income

derived by a resident of one of the Contracting States may not be taxed in the other State

even if the enterprise has a permanent establishment in that other State. Thus, if a U.S.

airline has a ticket office in Bangladesh, Bangladesh may not tax the airline's profits

attributable to that office under Article 7. Since entities engaged in international

transportation activities normally will have many permanent establishments in a number

of countries, the rule avoids difficulties that would be encountered in attributing income

to multiple permanent establishments if the income were covered by Article 7.

Paragraph 2

The income from the operation of ships or aircraft in international traffic that is

exempt from tax under paragraph 1 is defined in paragraph 2

ctivities normally will have many permanent establishments in a number

of countries, the rule avoids difficulties that would be encountered in attributing income

to multiple permanent establishments if the income were covered by Article 7.

Paragraph 2

The income from the operation of ships or aircraft in international traffic that is

exempt from tax under paragraph 1 is defined in paragraph 2.

In addition to income derived directly from the operation of ships or aircraft in

international traffic, this definition also includes certain items of rental income that are

closely related to those activities. Income of an enterprise of a Contracting State from the

rental of ships or aircraft on a full basis (i.e., with crew) or bareboat basis is exempt from

tax in the other Contracting State under paragraph 1, when such ships or aircraft are

operated in international traffic by the lessee, or when the income is incidental to other

income of the lessor from the operation of ships or aircraft in international traffic. The

exemption under paragraph 1 of income from the operation of ships or aircraft in

international traffic is broader than that of the OECD Model as it covers rentals from

bareboat leasing that are not incidental to the operation of aircraft by the resident itself.

Finally, certain non-transport activities that are an integral part of the services

performed by a transport company are understood 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. See paragraphs 4 of the

Commentary to Article 8 of the OECD Model

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. See paragraphs 4 of the

Commentary to Article 8 of the OECD Model.

Paragraph 3

Under this paragraph, profits of an enterprise of a Contracting State from the rental or

maintenance of containers (including trailers, barges and related equipment for the

transport of containers) that are used for the transport of goods in international traffic are

exempt from tax in the other Contracting State. This result obtains under paragraph 3

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. By contrast, Article 8 of the OECD Model

covers only income from the use, maintenance or rental of containers that is incidental to

other income from international traffic.

Paragraph 4

This paragraph clarifies that the provisions of paragraphs 1, 3 and 4 also apply to

profits derived by an enterprise of a Contracting State from participation in a pool, joint

business or international operating agency. This refers to various arrangements for

international cooperation by carriers in shipping and air transport. For example, airlines

from two countries may agree to share the transport of passengers between the two

countries. They each will fly the same number of flights per week and share the revenues

from that route equally, regardless of the number of passengers that each airline actually

transports. Paragraph 4 makes clear that with respect to each carrier the income dealt with

in the Article is that carrier's share of the total transport, not the income derived from the

passengers actually carried by the airline

ey each will fly the same number of flights per week and share the revenues

from that route equally, regardless of the number of passengers that each airline actually

transports. Paragraph 4 makes clear that with respect to each carrier the income dealt with

in the Article is that carrier's share of the total transport, not the income derived from the

passengers actually carried by the airline.

Relation to Other Articles

The taxation of gains from the alienation of ships, aircraft or containers is not

dealt with in this Article but in paragraph 4 of Article 13 (Capital Gains).

As with other benefits of the Convention, the benefit of exclusive residence

country taxation or limited source country taxation under Article 8 is available to an

enterprise only if it is entitled to benefits under Article 17 (Limitation on Benefits).

This Article also is subject to the saving clause of paragraph 2 of Article 1

(Personal Scope) of the Model. Thus, if a citizen of the United States who is a resident of

Bangladesh derives profits from the operation of aircraft in international traffic,

notwithstanding the exclusive residence country taxation in paragraph 1 of Article 8, the

United States may, subject to the special foreign tax credit rules of paragraph 3 of Article

23 (Relief from Double Taxation), tax those profits as part of the worldwide income of

the citizen. (This is an unlikely situation, however, because non-tax considerations (e.g.,

insurance) generally result in shipping activities being carried on in corporate form.)

ARTICLE 9 (ASSOCIATED ENTERPRISES)

This Article incorporates in the Convention the arm’s-length principle reflected in

the U.S. domestic transfer pricing provisions, particularly Code section 482

worldwide income of

the citizen. (This is an unlikely situation, however, because non-tax considerations (e.g.,

insurance) generally result in shipping activities being carried on in corporate form.)

ARTICLE 9 (ASSOCIATED ENTERPRISES)

This Article incorporates in the Convention the arm’s-length principle reflected in

the U.S. domestic transfer pricing provisions, particularly Code section 482. It provides

that when related enterprises engage in a transaction on terms that are not arm's-length,

the Contracting States may make appropriate adjustments to the taxable income and tax

liability of such related enterprises to reflect what the income and tax of these enterprises

with respect to the transaction would have been had there been an arm's-length

relationship between them.

Paragraph 1

This paragraph is essentially the same as its counterpart in the OECD Model. It

addresses the situation where an enterprise of a Contracting State is related to an

enterprise of the other Contracting State, and there are arrangements or conditions

imposed between the enterprises in their commercial or financial relations that are

different from those that would have existed in the absence of the relationship. Under

these circumstances, the Contracting States may adjust the income (or loss) of the

enterprise to reflect what it would have been in the absence of such a relationship.

The paragraph identifies the relationships between enterprises that serve as a

prerequisite to application of the Article. As the Commentary to the OECD Model makes

clear, the necessary element in these relationships is effective control, which is also the

standard for purposes of section 482. Thus, the Article applies if an enterprise of one

State participates directly or indirectly in the management, control, or capital of the

enterprise of the other State. Also, the Article applies if any third person or persons

participate directly or indirectly in the management, control, or capital of enterprises of

different States

rol, which is also the

standard for purposes of section 482. Thus, the Article applies if an enterprise of one

State participates directly or indirectly in the management, control, or capital of the

enterprise of the other State. Also, the Article applies if any third person or persons

participate directly or indirectly in the management, control, or capital of enterprises of

different States. For this purpose, all types of control are included, i.e., whether or not

legally enforceable and however exercised or exercisable.

The fact that a transaction is entered into between such related enterprises does

not, in and of itself, mean that a Contracting State may adjust the income (or loss) of one

or both of the enterprises under the provisions of this Article. If the conditions of the

transaction are consistent with those that would be made between independent persons,

the income arising from that transaction should not be subject to adjustment under this

Article.

Similarly, the fact that associated enterprises may have concluded arrangements,

such as cost sharing arrangements or general services agreements, is not in itself an

indication that the two enterprises have entered into a non-arm's-length transaction that

should give rise to an adjustment under paragraph 1. Both related and unrelated parties

enter into such arrangements (e.g., joint ventures may share some development costs). As

with any other kind of transaction, when related parties enter into an arrangement, the

specific arrangement must be examined to see whether or not it meets the arm's-length

standard. In the event that it does not, an appropriate adjustment may be made, which

may include modifying the terms of the agreement or recharacterizing the transaction to

reflect its substance

me development costs). As

with any other kind of transaction, when related parties enter into an arrangement, the

specific arrangement must be examined to see whether or not it meets the arm's-length

standard. In the event that it does not, an appropriate adjustment may be made, which

may include modifying the terms of the agreement or recharacterizing the transaction to

reflect its substance.

It is understood that the “commensurate with income” standard for determining

appropriate transfer prices for intangibles, added to Code section 482 by the Tax Reform

Act of 1986, was designed to operate consistently with the arm's-length standard. The

implementation of this standard in the section 482 regulations is in accordance with the

general principles of paragraph 1 of Article 9 of the Convention, as interpreted by the

OECD Transfer Pricing Guidelines.

This Article also permits tax authorities to deal with thin capitalization issues.

They may in the context of Article 9, scrutinize more than the rate of interest charged on

a loan between related persons. They also may examine the capital structure of an

enterprise, whether a payment in respect of that loan should be treated as interest, and, if

it is treated as interest, under what circumstances interest deductions should be allowed to

the payor. Paragraph 2 of the Commentary to Article 9 of the OECD Model, together

with the U.S. observation set forth in paragraph 15, sets forth a similar understanding of

the scope of Article 9 in the context of thin capitalization.

Paragraph 2

When a Contracting State has made an adjustment that is consistent with the

provisions of paragraph 1, and the other Contracting State agrees that the adjustment was

appropriate to reflect arm's-length conditions, that other Contracting State is obligated to

make a correlative adjustment (sometimes referred to as a “corresponding adjustment”) to

the tax liability of the related person in that other Contracting State

e has made an adjustment that is consistent with the

provisions of paragraph 1, and the other Contracting State agrees that the adjustment was

appropriate to reflect arm's-length conditions, that other Contracting State is obligated to

make a correlative adjustment (sometimes referred to as a “corresponding adjustment”) to

the tax liability of the related person in that other Contracting State. Although the OECD

Model does not specify that the other Contracting State must agree with the initial

adjustment before it is obligated to make the correlative adjustment, the Commentary to

Article 9 makes clear that the paragraph is to be read that way.

As explained in the OECD Commentary, Article 9 leaves the treatment of

“secondary adjustments” to the laws of the Contracting States. When an adjustment under

Article 9 has been made, one of the parties will have in its possession funds that it would

not have had at arm's length. The question arises as to how to treat these funds. In the

United States the general practice is to treat such funds as a dividend or contribution to

capital, depending on the relationship between the parties. Under certain circumstances,

the parties may be permitted to restore the funds to the party that would have the funds at

arm's length, and to establish an account payable pending restoration of the funds. See,

Rev. Proc. 99-32, 1999-2 C.B. 296.

The Contracting State making a secondary adjustment will take the other

provisions of the Convention, where relevant, into account. For example, if the effect of a

secondary adjustment is to treat a U.S. corporation as having made a distribution of

profits to its parent corporation in Bangladesh, the provisions of Article 10 (Dividends)

will apply, and the United States may impose a 10 percent withholding tax on the

dividend. Also since under Article 23 (Relief from Double Taxation) Bangladesh is

required to give a credit for taxes paid with respect to such dividends, it would also be

required to do so in this case

ade a distribution of

profits to its parent corporation in Bangladesh, the provisions of Article 10 (Dividends)

will apply, and the United States may impose a 10 percent withholding tax on the

dividend. Also since under Article 23 (Relief from Double Taxation) Bangladesh is

required to give a credit for taxes paid with respect to such dividends, it would also be

required to do so in this case.

The competent authorities are authorized by paragraph 2 to consult, if necessary,

to resolve any differences in the application of these provisions. For example, there may

be a disagreement over whether an adjustment made by a Contracting State under

paragraph 1 was appropriate.

If a correlative adjustment is made under paragraph 2, it is to be implemented,

pursuant to paragraph 2 of Article 25(Mutual Agreement Procedure), notwithstanding

any time limits or other procedural limitations in the law of the contracting State making

the adjustment. If a taxpayer has entered a closing agreement (or other written settlement)

with the United States prior to bringing a case to the competent authorities, the U.S.

competent authority will endeavor only to obtain a correlative adjustment from the other

Contracting State. See, Rev. Proc. 2002-52, 2002-31 I.R.B. 242, Section 7.04.

Paragraph 3

Paragraph 3 preserves the right of Contracting States to apply internal law

provisions relating to adjustments between related parties. They also reserve the right to

make adjustments in cases involving tax evasion or fraud. Such adjustments -- the

distribution, apportionment, or allocation of income, deductions, credits or allowances --

are permitted even if they are different from, or go beyond, those authorized by paragraph

1 of the Article, as long as they accord with the general principles of paragraph 1 (i.e.,

that the adjustment reflects what would have transpired had the related parties been

acting at arm's length)

stments -- the

distribution, apportionment, or allocation of income, deductions, credits or allowances --

are permitted even if they are different from, or go beyond, those authorized by paragraph

1 of the Article, as long as they accord with the general principles of paragraph 1 (i.e.,

that the adjustment reflects what would have transpired had the related parties been

acting at arm's length). For example, while paragraph 1 explicitly allows adjustments of

deductions in computing taxable income, it does not deal with adjustments to tax credits.

It does not, however, preclude such adjustments if they can be made under internal law.

The provision does not grant authority not otherwise present under internal law. The

OECD Model reaches the same result. See paragraph 4 of the Commentary to Article 9.

Relationship to other Articles

The saving clause of paragraph 2 of Article 1 (Personal Scope) does not apply to

paragraph 2 of Article 9 by virtue of the exceptions to the saving clause in paragraph 3

(a) of Article 1. Thus, even if the statute of limitations has run, a refund of tax can be

made in order to implement a correlative adjustment. Statutory or procedural limitations,

however, cannot be overridden to impose additional tax, because paragraph 2 of Article

27 (Effect of Convention on Diplomatic Agents and Consular Officers, Domestic Laws

and Other Treaties) provides that the Convention cannot restrict any statutory benefit.

ARTICLE 10 (DIVIDENDS)

Article 10 provides rules for the taxation of dividends paid by a resident of one

Contracting State to a beneficial owner that is a resident of the other Contracting State.

Paragraph 1

The right of a shareholder's country of residence to tax dividends arising in the

source country is preserved by paragraph 1, which permits a Contracting State to tax its

residents on dividends paid to them by a resident of the other Contracting State

n of dividends paid by a resident of one

Contracting State to a beneficial owner that is a resident of the other Contracting State.

Paragraph 1

The right of a shareholder's country of residence to tax dividends arising in the

source country is preserved by paragraph 1, which permits a Contracting State to tax its

residents on dividends paid to them by a resident of the other Contracting State. For

dividends from any other source paid to a resident, Article 22 (Other Income) grants the

residence country exclusive taxing jurisdiction (other than for dividends attributable to a

permanent establishment or fixed base in the other State).

Paragraph 2

The State of source may also tax dividends beneficially owned by a resident of the

other State, subject to the limitations in paragraph 2. Generally, the source State's tax is

limited to 15 percent of the gross amount of the dividend paid. If, however, the beneficial

owner of the dividends is a company resident in the other State that owns at least 10

percent of the voting stock of the company paying the dividend, then the source State's

tax is limited to 10 percent of the gross amount of the dividend. Indirect ownership of

voting shares (through tiers of corporations) are taken into account for purposes of

determining eligibility for the 10 percent direct dividend rate.

Shares are considered voting shares if they provide the power to elect, appoint or

replace any person vested with the powers ordinarily exercised by the board of directors

of a U.S. corporation.

The benefits of paragraph 2 may be granted at the time of payment by means of

reduced withholding at source. It also is consistent with the paragraph for tax to be

withheld at the time of payment at full statutory rates, and the treaty benefit to be granted

by means of a subsequent refund so long as such procedures are applied in a reasonable

manner.

Paragraph 2 does not affect the taxation of the profits out of which the dividends

are paid

time of payment by means of

reduced withholding at source. It also is consistent with the paragraph for tax to be

withheld at the time of payment at full statutory rates, and the treaty benefit to be granted

by means of a subsequent refund so long as such procedures are applied in a reasonable

manner.

Paragraph 2 does not affect the taxation of the profits out of which the dividends

are paid. The taxation by a Contracting State of the income of its resident companies is

governed by the internal law of the Contracting State, subject to the provisions of

paragraph 4 of Article 24 (Nondiscrimination).

The term “beneficial owner" is not defined in the Convention, and is, therefore,

defined as under the internal law of the country imposing tax (i.e., the source country).

The beneficial owner of the 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 corporation that is a resident of one of the States (as determined

under Article 4 (Fiscal Domicile)) is received by a nominee or agent that is a resident of

the other State on behalf of a person that is not a resident of that other State, the dividend

is not entitled to the benefits of this Article. However, a dividend received by a nominee

on behalf of a resident of that other State would be entitled to benefits. These limitations

are confirmed by paragraph 12 of the OECD Commentary to Article 10. See also

paragraph 24 of the OECD Commentary to Article 1 (Personal Scope).

Companies holding shares through fiscally transparent entities such as

partnerships are considered for purposes of this paragraph to hold their proportionate

interest in the shares held by the intermediate entity. As a result, companies holding

shares through such entities may be able to claim the benefits of subparagraph (a) under

certain circumstances

mmentary to Article 1 (Personal Scope).

Companies holding shares through fiscally transparent entities such as

partnerships are considered for purposes of this paragraph to hold their proportionate

interest in the shares held by the intermediate entity. As a result, companies holding

shares through such entities may be able to claim the benefits of subparagraph (a) under

certain circumstances. The lower rate applies when the company's proportionate share of

the shares held by the intermediate entity meets the 10 percent voting stock threshold.

Whether this ownership threshold is satisfied may be difficult to determine and often will

require an analysis of the partnership or trust agreement.

Paragraph 3

Paragraph 3 provides rules that modify the maximum rates of tax at source

provided in paragraph 2 in particular cases. The first sentence of paragraph 3 denies the

lower direct investment withholding rate of paragraph 2(a) for dividends paid by a RIC or

a REIT. The second sentence states that dividends paid by a RIC will qualify for the 15

percent rate provided by subparagraph 2(b).

The third sentence denies the benefits of both subparagraphs (a) and (b) of

paragraph 2 to dividends paid by REITs in certain circumstances, allowing them to be

taxed at the U.S. statutory rate (30 percent). The United States limits the source tax on

dividends paid by a REIT to the 15 percent rate only when the beneficial owner of the

dividend satisfies one or more of three criteria. First, the dividend may qualify if the

beneficial owner is an individual resident of the other State who owns not more than 10

percent interest in the REIT. Second, the dividend may qualify for the 15 percent rate if it

is paid with respect to a class of stock that is publicly traded and the beneficial owner of

the dividends is a person holding an interest of not more than 5 percent of any class of the

REIT's stock

qualify if the

beneficial owner is an individual resident of the other State who owns not more than 10

percent interest in the REIT. Second, the dividend may qualify for the 15 percent rate if it

is paid with respect to a class of stock that is publicly traded and the beneficial owner of

the dividends is a person holding an interest of not more than 5 percent of any class of the

REIT's stock. Finally, the dividend may qualify for the 15 percent rate if the beneficial

owner of the dividend is a person holding an interest of not more than 10 percent of the

REIT and the REIT is diversified.

For this purpose, a REIT will be considered diversified if the value of no single

interest in the REIT's real property exceeds 10 percent of the REIT's total interests in real

property. For the purposes of this rule, foreclosure property shall not be considered an

interest in real property. Where a REIT holds an interest in a partnership, it shall be

treated as owning directly a proportion of the partnership's interests in real property

corresponding to its interest in the partnership. Mortgages will not be considered an

interest in real property unless, in the case of a mortgage, it has substantial equity

components.

The denial of the 10 percent withholding rate at source to all RIC and REIT

shareholders, and the denial of the 15 percent rate to REIT shareholders that do not meet

one of the 3 tests described above, is intended to prevent the use of these entities to gain

unjustifiable source taxation benefits for certain shareholders resident in the other

Contracting State. For example, a corporation resident in Bangladesh 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. Alternatively, it

may acquire a diversified portfolio by purchasing a 10 percent or more of the interests in

a RIC. Since the RIC may be a pure conduit, there may be no U.S

corporation resident in Bangladesh 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. Alternatively, it

may acquire a diversified portfolio by purchasing a 10 percent or more of the interests in

a RIC. Since the RIC may be a pure conduit, there may be no U.S. tax costs to

interposing the RIC in the chain of ownership. Absent the special rule in paragraph 3,

such use of the RIC could transform portfolio dividends, taxable in the United States

under the Convention at 15 percent, into direct investment dividends taxable only at 10

percent.

Similarly, a resident of Bangladesh directly holding U.S. real property would pay

U.S. tax either at a 30 percent rate on the gross income or at graduated rates on the net

income. As in the preceding example, by placing the real property in a REIT, the investor

could transform real estate income into dividend income, taxable at the rates provided in

Article 10, significantly reducing the U.S. tax that otherwise would be imposed. This

policy avoids a disparity between the taxation of direct real estate investments and real

estate investments made through REIT conduits. In the cases covered by the exceptions,

the holding in the REIT is not considered the equivalent of a direct holding in the

underlying real property.

Paragraph 4

Paragraph 4 defines the term dividends broadly and flexibly. The definition is

intended to cover all arrangements that yield a return on an equity investment in a

corporation as determined under the tax law of the state of source, as well as

arrangements that might be developed in the future.

The term dividends include income from shares or other rights that are not debt-

claims and that participate in profits

es the term dividends broadly and flexibly. The definition is

intended to cover all arrangements that yield a return on an equity investment in a

corporation as determined under the tax law of the state of source, as well as

arrangements that might be developed in the future.

The term dividends include income from shares or other rights that are not debt-

claims and that participate in profits. It also includes income derived from other corporate

rights that is subjected to the same taxation treatment as income from shares by the

domestic taxation laws of the Contracting State of which the company making the

distribution is a resident. Thus, a constructive dividend that results from a non-arm's-

length transaction between a corporation and a related party is a dividend. The term

“dividends" further specifically includes income from arrangements (including

instruments denominated as debt claims) that carry the right to participate in profits, or

that are determined by reference to profits, to the extent the income from the arrangement

is characterized as a dividend under the law of the Contracting State in which the income

arises.

In general, this definition has the effect of deferring to the source State's

characterization of income as a dividend. It ensures, for example, that 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. In the case of the United States, the term “dividend” also 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. Rul. 92-85, 1992-40 I.R.B. 10 (sale

of foreign subsidiary's stock 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 upon the sale or redemption of shares or upon a

transfer of shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-40 I.R.B. 10 (sale

of foreign subsidiary's stock 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, However, a distribution by a limited liability company

(“LLC”) is not recognized by the United States as a dividend and, therefore, is not a

dividend for purposes of Article 10, provided the LLC is not characterized as an

association taxable as a corporation under U.S. law.

Paragraph 5

Paragraph 5 excludes from the general source country limitations under paragraph

2 dividends paid with respect to holdings that form part of the business property of a

permanent establishment or a fixed base. Such dividends will be taxed on a net basis

using the rates and rules of taxation generally applicable to residents of the State in which

the permanent establishment or fixed base is situated, as modified by the Convention. An

example of dividends paid with respect to the business property of a permanent

establishment would be dividends derived by a dealer in stock or securities from stock or

securities that the dealer held for sale to customers. In the case of a permanent

establishment or fixed base that once existed in the State but that no longer exists, the

provisions of this paragraph 5 also apply, by virtue of paragraph 8 of Article 7 (Business

Profits), to dividends that would be attributable to such a permanent establishment or

fixed base if it did exist in the year of payment or accrual. See the Technical Explanation

of paragraph 8 of Article 7

rmanent

establishment or fixed base that once existed in the State but that no longer exists, the

provisions of this paragraph 5 also apply, by virtue of paragraph 8 of Article 7 (Business

Profits), to dividends that would be attributable to such a permanent establishment or

fixed base if it did exist in the year of payment or accrual. See the Technical Explanation

of paragraph 8 of Article 7.

Relation to Other Articles

Notwithstanding the foregoing limitations on source country taxation of

dividends, the saving clause of paragraph 2 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 3 of Article 23 (Relief from Double Taxation), as if

the Convention had not come into effect.

The benefits of this Article are also subject to the provisions of Article 17

(Limitation on Benefits). Thus, if a resident of Bangladesh is the beneficial owner of

dividends paid by a U.S. corporation, the shareholder must qualify for treaty benefits

under at least one of the tests of Article 17 in order to receive the benefits of this Article.

The branch tax, normally dealt with in Article 10, is dealt with in Article 14

(Branch Tax) in this Convention.

ARTICLE 11 (INTEREST)

Article 11 provides rules for the taxation of interest income arising in one

Contracting State and paid to a beneficial owner that is a resident of the other Contracting

State.

Paragraph 1

Paragraph 1 grants to both Contracting States the right to tax interest derived by a

resident of one State from sources in the other. Paragraphs 2 and 3 contain rules that limit

the source State's right to tax such interest payments. For interest derived by a resident of

a Contracting State from sources in any third state, Article 22 (Other Income) grants the

residence country exclusive taxing jurisdiction (other than for interest attributable to a

permanent establishment or fixed base in the other State)

urces in the other. Paragraphs 2 and 3 contain rules that limit

the source State's right to tax such interest payments. For interest derived by a resident of

a Contracting State from sources in any third state, Article 22 (Other Income) grants the

residence country exclusive taxing jurisdiction (other than for interest attributable to a

permanent establishment or fixed base in the other State).

Paragraph 2

Paragraph 2 grants to the source State the right to tax interest payments

beneficially owned by a resident of the other State. The general rate of source country tax

applicable to interest payments under paragraph 2 is limited to 10 percent. Under the

provisions of paragraph 3, the rate is modified for certain categories of interest, some of

which are exempt from source country tax.

The reduced rates of withholding tax, or exemption, of paragraphs 2 and 3 may be

granted at the time of payment by means of reduced withholding at source. It also is

consistent with the paragraphs for tax to be withheld at the time of payment at full

statutory rates, and the treaty benefit to be granted by means of a subsequent refund so

long as such procedures are applied in a reasonable manner.

The term “beneficial owner” is not defined in the Convention, and is, therefore,

defined as under the internal law of the country imposing tax (i.e., the source country).

The beneficial owner of the interest for purposes of Article 11 is the person to which the

interest income is attributable for tax purposes under the laws of the source State. Thus, if

interest arising in a Contracting State is received by a nominee or agent that is a resident

of the other State on behalf of a person that is not a resident of that other State, the

interest is not entitled to the benefits of this Article. However, interest received by a

nominee on behalf of a resident of that other State would be entitled to benefits. These

limitations are confirmed by paragraph 8 of the OECD Commentary to Article 11

received by a nominee or agent that is a resident

of the other State on behalf of a person that is not a resident of that other State, the

interest is not entitled to the benefits of this Article. However, interest received by a

nominee on behalf of a resident of that other State would be entitled to benefits. These

limitations are confirmed by paragraph 8 of the OECD Commentary to Article 11. See

also paragraph 24 of the OECD Commentary to Article 1 (Personal Scope).

Paragraph 3

Paragraph 3 specifies certain categories of interest that are either exempt from

source State taxation or are subject to tax at a rate lower than the 10 percent rate provided

for in paragraph 2. Subparagraph 3(a) exempts interest arising in one Contracting State

and paid to the Government of the other Contracting State or an instrumentality of that

Government. The term “instrumentality” includes the central banks of the Contracting

States (i.e., The Bangladesh Bank or any Federal Reserve Bank of the United States), and

the U.S. Export-Import Bank and the Overseas Private Investment Corporation. Other

institutions may be added to the category of “instrumentality” by mutual agreement of the

competent authorities of the Contracting States.

Paragraph 3(a) also provides a

source-state exemption for interest arising in a Contracting State on a debt obligation that

is guaranteed or insured by that Contracting State or an instrumentality of that State.

Subparagraph 3(b) provides for a maximum rate of tax at source of 5 percent on

interest derived from sources in one Contracting State that is beneficially owned by a

bank or other financial institution, including an insurance company, resident in the other

Contracting State

State on a debt obligation that

is guaranteed or insured by that Contracting State or an instrumentality of that State.

Subparagraph 3(b) provides for a maximum rate of tax at source of 5 percent on

interest derived from sources in one Contracting State that is beneficially owned by a

bank or other financial institution, including an insurance company, resident in the other

Contracting State.

Subparagraph 3(c) provides for a 5 percent rate of tax at source on interest derived

from sources in one Contracting State that is beneficially owned by a resident in the other

Contracting State in connection with a sale on credit to an enterprise of the first-

mentioned State of industrial, commercial or scientific equipment or of any other

merchandise.

Paragraph 4

Paragraph 4 provides an exception to the limited source country taxation rules of

paragraphs 2 and 3 in cases where the beneficial owner of the interest carries on business

through a permanent establishment in the State of source or performs independent

personal services from a fixed base situated in that State and the debt-claim in respect of

which the interest is paid is effectively connected with that permanent establishment or

fixed base. In such cases the provisions of Article 7 (Business Profits) or Article 15

(Independent Personal Services) will apply and the State of source will retain the right to

impose tax on such interest income.

In the case of a permanent establishment or fixed base that once existed in the

State but that no longer exists, the provisions of paragraph 4 also apply, by virtue of

paragraph 8 of Article 7 (Business Profits), to interest that would be attributable to such a

permanent establishment or fixed base if it did exist in the year of payment or accrual.

See the Technical Explanation of paragraph 8 of Article 7.

Paragraph 5

Although worded differently, paragraph 5 is the same in substance as paragraph 5

of the U.S. Model

s of paragraph 4 also apply, by virtue of

paragraph 8 of Article 7 (Business Profits), to interest that would be attributable to such a

permanent establishment or fixed base if it did exist in the year of payment or accrual.

See the Technical Explanation of paragraph 8 of Article 7.

Paragraph 5

Although worded differently, paragraph 5 is the same in substance as paragraph 5

of the U.S. Model. The paragraph provides that in cases involving special relationships

between persons, Article 11 applies only to that portion of the total interest payments

between such persons that would have been made absent such special relationships (i.e.,

an arm's-length interest payment). Any excess amount of interest paid remains taxable

according to the laws of the United States and Bangladesh, respectively, with due regard

to the other provisions of the Convention. Thus, if the excess amount would be treated

under the source country's law as a distribution of profits by a corporation, such amount

could be taxed as a dividend rather than as interest, but the tax would be subject, if

appropriate, to the rate limitations of paragraph 2 of Article 10 (Dividends).

The term “related person” is not defined in the Convention. In applying this

paragraph the United States considers the term to include the relationships described in

Article 9, which in turn corresponds to the definition of “control” for purposes of section

482 of the Code.

This paragraph does not address cases where, owing to a special relationship

between the payer and the beneficial owner or between both of them and some other

person, the amount of the interest is less than an arm's-length amount. In those cases a

transaction may be characterized to reflect its substance and interest may be imputed

consistent with the definition of interest in paragraph 6. The United States would apply

section 482 or 7872 of the Code to determine the amount of imputed interest in those

cases

r or between both of them and some other

person, the amount of the interest is less than an arm's-length amount. In those cases a

transaction may be characterized to reflect its substance and interest may be imputed

consistent with the definition of interest in paragraph 6. The United States would apply

section 482 or 7872 of the Code to determine the amount of imputed interest in those

cases.

Paragraph 6

The term “interest” as used in Article 11 is defined in paragraph 6, for purposes of

the Convention, to include, inter alia, income from debt claims of every kind, whether or

not secured by a mortgage. Interest that is paid or accrued subject to a contingency is

within the ambit of Article 11, although it is dealt with in paragraph 7, not paragraph 6.

The term includes income from a debt obligation carrying the right to participate in

profits. The term does not, however, include amounts that are treated as dividends under

Article 10 (Dividends).

The term interest also includes amounts subject to the same tax treatment as

income from money lent under the law of the State in which the income arises. Thus, for

purposes of the Convention, amounts that the United States will treat as interest include

(i) the difference between the issue price and the stated redemption price at maturity of a

debt instrument, i.e., original issue discount (OID), which may be wholly or partially

realized on the disposition of a debt instrument (section 1273), (ii) amounts that are

imputed interest on a deferred sales contract (section 483), (iii) amounts treated as OlD

under the stripped bond rules (section 1286), (iv) amounts treated as original issue

discount under the below market interest rate rules (section 7872), (v) a partner's

distributive share of a partnership's interest income (section 702), (vi) the interest portion

of periodic payments made under a “finance lease” or similar contractual arrangement

that in substance is a borrowing by the nominal lessee to finance the acquisition of

property, (vii)

nts treated as original issue

discount under the below market interest rate rules (section 7872), (v) a partner's

distributive share of a partnership's interest income (section 702), (vi) the interest portion

of periodic payments made under a “finance lease” or similar contractual arrangement

that in substance is a borrowing by the nominal lessee to finance the acquisition of

property, (vii) amounts included in the income of a holder of a residual interest in a

REMIC (section 860E), because these amounts generally are subject to the same taxation

treatment as interest under U.S. tax law, and (viii)interest with respect to notional

principal contracts that are recharacterized as loans because of a “substantial non-periodic

payment”.

Paragraph 7

Paragraph 7 provides anti-abuse exceptions to the rules provided in paragraphs 2

and 3 for two classes of interest payments. The first exception, subparagraph (a) of

paragraph 7, is consistent with the policy of Code sections 860E(e) and 860G(b) that

excess inclusions with respect to a REMIC should bear full source country tax in all

cases. Without a full tax at source on such income arising in the United States, 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 United States fisc

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 type

that does not qualify as portfolio interest under U.S. law and to analogous types of

interest under Bangladesh law

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 type

that does not qualify as portfolio interest under U.S. law and to analogous types of

interest under Bangladesh 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 or 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).

Paragraph 8

Paragraph 8 provides the rule for determining the source of interest. Interest is

considered to arise in a Contracting State if paid by a resident of that State, which, as

defined in Article 4 (Fiscal Domicile), includes that State itself and its political

subdivisions or local authorities. If, however, interest is borne by a permanent

establishment or fixed base in one of the States, that interest is considered to arise in that

State. For this purpose, interest is considered to be borne by a permanent establishment or

fixed base if it is allocable to taxable income of that permanent establishment or fixed

base

at State itself and its political

subdivisions or local authorities. If, however, interest is borne by a permanent

establishment or fixed base in one of the States, that interest is considered to arise in that

State. For this purpose, interest is considered to be borne by a permanent establishment or

fixed base if it is allocable to taxable income of that permanent establishment or fixed

base.

Relation to Other Articles

Notwithstanding the foregoing limitations on source country taxation of interest,

the saving clause of paragraph 2 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

3 of Article 23 (Relief from Double Taxation), as if the Convention had not come into

force.

As with other benefits of the Convention, the benefits of reduced source State

taxation of interest under Article 11 are available to a resident of the other State only if

that resident is entitled to those benefits under the provisions of Article 17 (Limitation on

Benefits).

ARTICLE 12 (ROYALTIES)

Article 12 provides rules for the taxation of royalties arising in one Contracting

State and paid to a beneficial owner that is a resident of that other Contracting State.

Paragraph 1

Paragraph 1 grants to both Contracting States the right to tax royalties derived by

a resident of one State from sources in the other. Paragraph 2 contains rules that limit the

source State's right to tax such royalty payments. For interest derived by a resident of a

Contracting State from sources in any third state, Article 22 (Other Income) grants the

residence country exclusive taxing jurisdiction (other than for royalty attributable to a

permanent establishment or fixed base in the other State).

Paragraph 2

Paragraph 2 allows the State where the royalty arises, as defined in paragraph 5,

to tax the royalty

nts. For interest derived by a resident of a

Contracting State from sources in any third state, Article 22 (Other Income) grants the

residence country exclusive taxing jurisdiction (other than for royalty attributable to a

permanent establishment or fixed base in the other State).

Paragraph 2

Paragraph 2 allows the State where the royalty arises, as defined in paragraph 5,

to tax the royalty. If, however, the beneficial owner of the royalty is a resident of the

other Contracting State, the tax may not exceed 10 percent of the gross amount of the

royalties.

The term “beneficial owner” is not defined in the Convention, and is, therefore,

defined as under the internal law of the country imposing tax (i.e., the source country).

The beneficial owner of a royalty payment for purposes of Article 13 refers to the person

to which the royalty income is attributable for tax purposes under the laws of the source

State. Thus, if a royalty arising in a Contracting State is received by a nominee or agent

that is a resident of the other State on behalf of a person that is not a resident of that other

State, the royalty is not entitled to the benefits of this Article. However, a royalty

received by a nominee on behalf of a resident of that other State would be entitled to

benefits. These limitations are confirmed by paragraph 4 of the OECD Commentary to

Article 12. See also paragraph 24 of the OECD Commentary to Article 1 (Personal

Scope).

Paragraph 3

The term “royalties” as used in Article 12 is defined in paragraph 3 to include

payments of any kind received as a consideration for the use of, or the right to use, any

tapes used for radio or television broadcasting, and any patent, trademark, design or

model, plan, secret formula or process, or other like right or property, or for information

concerning industrial, commercial or scientific experience

d received as a consideration for the use of, or the right to use, any

tapes used for radio or television broadcasting, and any patent, trademark, design or

model, plan, secret formula or process, or other like right or property, or for information

concerning industrial, commercial or scientific experience. It does not include income

from leasing personal property, nor does it include payments in consideration for the

working of, or the right to work, mineral deposits, sources or other natural resources. The

term “royalties” also includes gain derived from the alienation of any right or property

that would give rise to royalties, to the extent the gain is contingent on the productivity,

use, or further alienation thereof. Gains that are not so contingent are dealt with under

Article 13 (Capital Gains).

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.

Consideration for the use or right to use cinematographic films, or works on film,

tape, or other means of reproduction in radio or television broadcasting is specifically

included in the definition of royalties. It is intended that subsequent technological

advances in the field of radio and television broadcasting will not affect the inclusion of

payments relating to the use of such means of reproduction in the definition of royalties

inematographic films, or works on film,

tape, or other means of reproduction in radio or television broadcasting is specifically

included in the definition of royalties. It is intended that subsequent technological

advances in the field of radio and television broadcasting will not affect the inclusion of

payments relating to the use of such means of reproduction in the definition of royalties.

If an artist who is resident in one Contracting State records a performance in the

other Contracting State, retains a copyrighted interest in a recording, and receives

payments for the right to use the recording based on the sale or public playing of the

recording, then the right of such other Contracting State to tax those payments is

governed by Article 12. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810 F.2d

20(D.C. Cir. 1986). By contrast, if the artist earns in the other Contracting State income

covered by Article 18 (Entertainers and Althletes), for example, endorsement income

from the artist’s attendance at a film screening, and if such income also is attributable to

one of the rights described in Article 12 (e.g., the use of the artist’s photograph in

promoting the screening), Article 18 and not Article 12 is applicable to such income.

Computer software generally is protected by copyright laws around the world.

Under the Convention consideration received for the use or the right to use computer

software is treated either as royalties or as business profits, depending on the facts and

circumstances of the transaction giving rise to the payment.

The term “industrial, commercial, or scientific experience” (sometimes referred to

as “know-how”) has the meaning ascribed to it in 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

ving rise to the payment.

The term “industrial, commercial, or scientific experience” (sometimes referred to

as “know-how”) has the meaning ascribed to it in 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.

Know-how also may include, in limited cases, technical information that is

conveyed through technical or consultancy services. It does not include general

educational training of the user's employees, nor does it include information developed

especially for the user, for example, a technical plan or design developed according to the

user's specifications. Thus, as provided in paragraph 11 of the Commentary to Article 12

of the OECD Model, the term “royalties” does not include payments received as

consideration for after-sales service, for services rendered by a seller to a purchaser under

a guarantee, or for pure technical assistance.

The term “royalties” also does not include payments for professional services

(such as architectural, engineering, legal, managerial, medical, software development

services). For example, income from the design of a refinery by an engineer (even if the

engineer employed know-how in the process of rendering the design) or the production of

a legal brief by a lawyer is not income from the transfer of know-how taxable under

Article 12, but is income from services taxable under either Article 15 (Independent

Personal Services) or Article 16

(Dependent Personal Services). Professional services may be embodied in property that

gives rise to royalties, however.

Thus, if a professional contracts to develop patentable property and retains rights in the

resulting property under the development contract, subsequent license payments made for

those rights would be royalties

either Article 15 (Independent

Personal Services) or Article 16

(Dependent Personal Services). Professional services may be embodied in property that

gives rise to royalties, however.

Thus, if a professional contracts to develop patentable property and retains rights in the

resulting property under the development contract, subsequent license payments made for

those rights would be royalties.

Paragraph 4

This paragraph provides an exception to the rule of paragraph 2 that gives the

state of source limited taxing jurisdiction. That exception applies in cases where the

beneficial owner of the royalties carries business through a permanent establishment in

the state of source or performs independent personal services from a fixed base situated

in that state and the right or property in respect of which the royalties are paid are

effectively connected with that permanent establishment or fixed base. In such cases the

provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services)

will apply.

In the case of a permanent establishment or fixed base that once existed in the

State but that no longer exists, the provisions of paragraph 4 also apply, by virtue of

paragraph 8 of Article 7 (Business Profits), to interest that would be attributable to such a

permanent establishment or fixed base if it did exist in the year of payment or accrual.

See the Technical Explanation of paragraph 8 of Article 7.

Paragraph 5

Paragraph 5 provides that in cases involving special relationships between the

payor and beneficial owner of royalties, Article 12 applies only to the extent the royalties

would have been paid absent such special relationships (i.e., an arm's-length royalty).

Any excess amount of royalties paid remains taxable according to the laws of the two

Contracting States with due regard to the other provisions of the Convention

in cases involving special relationships between the

payor and beneficial owner of royalties, Article 12 applies only to the extent the royalties

would have been paid absent such special relationships (i.e., an arm's-length royalty).

Any excess amount of royalties paid remains taxable according to the laws of the two

Contracting States with due regard to the other provisions of the Convention. If, for

example, the excess amount is treated as a distribution of corporate profits under

domestic law, such excess amount will be taxed as a dividend rather than as royalties, but

the tax

imposed on the dividend payment will be subject to the rate limitations of paragraph 2 of

Article 10 (Dividends)

Paragraph 6

Paragraph 6 provides a source rule for royalties. Under this provision, royalties

shall be deemed to arise in a Contracting State when they are in consideration for the use

of, or the right to use, property, information or experience in that State. This source rule

is in general accord with the “place-of-use” test of section 861(a)(4) of the Code.

Relation to Other Articles

Notwithstanding the foregoing limitations on source country taxation of royalties,

the saving clause of paragraph 2 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

3 of Article 23 (Relief from Double Taxation), as if the Convention had not come into

force.

As with other benefits of the Convention, the benefits of limited source State

taxation of royalties under paragraph 2 of Article 12 are available to a resident of the

other State only if that resident is entitled to those benefits under Article 17 (Limitation

on Benefits).

ARTICLE 13 (CAPITAL GAINS)

Article 13 assigns either primary or exclusive taxing jurisdiction over gains from

the alienation of property to the State of residence or the State of source and defines the

terms necessary to apply the Article

of Article 12 are available to a resident of the

other State only if that resident is entitled to those benefits under Article 17 (Limitation

on Benefits).

ARTICLE 13 (CAPITAL GAINS)

Article 13 assigns either primary or exclusive taxing jurisdiction over gains from

the alienation of property to the State of residence or the State of source and defines the

terms necessary to apply the Article.

Paragraph 1

Subparagraph 1(a) of Article 13 preserves the non-exclusive right of the State of

source to tax gains attributable to the alienation of immovable property situated in that

State. The paragraph therefore permits the United States to apply section 897 of the Code

to tax gains derived by a resident of the other Contracting State that are attributable to the

alienation of real property situated in the United States (as defined in subparagraph 1(b)).

Gains attributable to the alienation of real property include gain from any other property

that is treated as a real property interest within the meaning of subparagraph 1(b). As in

Article 6 (Income from Immovable Property), the use of the term “immovable property”

in this paragraph is intended to have the same meaning as the term “real property.”

Subparagraph 1(b) defines the term “immovable property” for purposes of this

paragraph. The term includes real property referred to in Article 6 (Income from

Immovable Property) (i.e., an interest in the real property itself). It also includes a

“United States real property interest,” when the United States is the other Contracting

State under subparagraph (a). When Bangladesh is the other Contracting State, the term

also includes shares of stock of a company the property of which consists principally of

immovable property situated in Bangladesh.

ovable Property) (i.e., an interest in the real property itself). It also includes a

“United States real property interest,” when the United States is the other Contracting

State under subparagraph (a). When Bangladesh is the other Contracting State, the term

also includes shares of stock of a company the property of which consists principally of

immovable property situated in Bangladesh.

Under section 897(c) of the Code the term “United States real property interest”

includes shares in a U.S. corporation that owns sufficient U.S. real property interests to

satisfy an asset-ratio test on certain testing dates. The term also includes certain foreign

corporations that have elected to be treated as US corporations for this purpose. Section

897(i).

In applying paragraph 1, the United States will look through certain distributions

made by a REIT or RIC. Accordingly, distributions made by a REIT or RIC are taxable

under paragraph 1 of Article 13 (not under Article 10 (Dividends)) when they are

attributable to gains derived from the alienation of real property. However, a distribution

made by a REIT with respect to a class of stock publicly traded on an established

securities market located in the United States is not treated as gain from the sale or

exchange of a U.S. real property interest if the shareholder did not own more than 5

percent of the class of stock during the taxable year.

Paragraph 2

Paragraph 2 of Article 13 deals with the taxation of certain gains from the

alienation of movable property forming part of the business property of a permanent

establishment that an enterprise of a Contracting State has in the other Contracting State

or of movable property pertaining to a fixed base available to a resident of a Contracting

State in the other Contracting State for the purpose of performing independent personal

services. This also includes gains from the alienation of such a permanent establishment

(alone or with the whole enterprise) or of such fixed base

enterprise of a Contracting State has in the other Contracting State

or of movable property pertaining to a fixed base available to a resident of a Contracting

State in the other Contracting State for the purpose of performing independent personal

services. This also includes gains from the alienation of such a permanent establishment

(alone or with the whole enterprise) or of such fixed base. Such gains may be taxed in the

State in which the permanent establishment or fixed base is located.

The term “movable property” has the same meaning as the term “personal

property.”

A resident of Bangladesh that is a partner in a partnership doing business in the

United States generally will have a permanent establishment in the United States as a

result of the activities of the partnership, assuming that the activities of the partnership

rise to the level of a permanent establishment. Rev. Rul. 91-32, 1991-1 C.B. 107. Further,

under paragraph 2, the United States generally may tax a partner's distributive share of

income realized by a partnership on the disposition of movable property forming part of

the business property of the partnership in the United States.

Paragraph 3

Paragraph provides that gains derived by an enterprise of a Contracting State from

the alienation of ships, aircraft or containers operated 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.

Paragraph provides that gains derived by an enterprise of a Contracting State from

the alienation of ships, aircraft or containers operated 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.

Paragraph 3 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 alienation thereof. The source country may tax such gains at a rate not

exceeding 10 percent, in accordance with Article 12.

Paragraph 4

Paragraph 4 grants to the State of residence of the alienator the exclusive right to

tax gains from the alienation of property other than property referred to in paragraphs 1

through 3. For example, gain derived from shares, other than shares described in

paragraphs 1 or 2, debt instruments and various financial instruments, may be taxed only

in the State of residence of the alienator, to the extent such income is not otherwise

characterized as income taxable under another article (e.g., Article 10 (Dividends) or

Article 11 (Interest)). Similarly gain derived from the alienation of tangible personal

property, other than tangible personal property described in paragraph 3, may be taxed

only in the State of residence of the alienator. Sales by a resident of a Contracting State of

real property located in a third state are not taxable in the other Contracting State, even if

the sale is attributable to a permanent establishment located in the other Contracting

State

tion of tangible personal

property, other than tangible personal property described in paragraph 3, may be taxed

only in the State of residence of the alienator. Sales by a resident of a Contracting State of

real property located in a third state are not taxable in the other Contracting State, even if

the sale is attributable to a permanent establishment located in the other Contracting

State.

Relation to Other Articles

Notwithstanding the foregoing limitations on taxation of certain gains by the State

of source, the saving clause of paragraph 2 of Article 1 (Personal Scope) permits the

United States to tax its citizens and residents as if the Convention had not come into

effect. Thus, any limitation in this Article on the right of the United States to tax gains

does not apply to gains of a U.S. citizens or resident. The benefits of this Article are also

subject to the provisions of Article 17 (Limitation on Benefits). Thus, only a resident of a

Contracting State that satisfies one of the conditions in Article 17 is entitled to the

benefits of this Article.

ARTICLE 14 (BRANCH TAX)

Article 14 permits the United States to impose its branch profits tax and its branch

level interest tax on a Bangladesh corporation. Bangladesh may impose a branch profits

tax on a U.S. corporation.

Paragraph 1

Paragraph 1 provides that each Contracting State may impose tax on a company

resident in the other State in addition to other taxes permitted by the Convention. The

taxes referred to in this paragraph are specified in paragraph 2.

ranch profits tax and its branch

level interest tax on a Bangladesh corporation. Bangladesh may impose a branch profits

tax on a U.S. corporation.

Paragraph 1

Paragraph 1 provides that each Contracting State may impose tax on a company

resident in the other State in addition to other taxes permitted by the Convention. The

taxes referred to in this paragraph are specified in paragraph 2.

Paragraph 2

Subparagraph (a) of paragraph 2 identifies the taxes referred to in paragraph 1 that

may be imposed by the United States and describes the base on which these taxes may be

imposed. The rates of these taxes are specified in paragraph 3. Paragraph 2(a) permits the

United States to impose its branch profits tax on the “dividend equivalent amount” of a

company resident in Bangladesh. The base of the tax is limited to the company's (i)

business profits that are attributable to a permanent establishment in the United States (ii)

income that is subject to taxation on a net basis because the corporation has elected under

section 882(d) of the Code to treat income from real property that is otherwise taxed on a

net basis as effectively connected income and (iii) gain from the disposition of a United

States Real Property Interest, other than an interest in a United States Real Property

Holding Corporation. The United States may not impose its branch profits tax on the

business profits of a Bangladesh corporation that are effectively connected with a U.S.

trade or bu

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