Technical Explanation PDF

TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN
THE UNITED STATES OF AMERICA AND THE REPUBLIC OF ICELAND FOR THE
AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME AND CAPITAL,
SIGNED AT REYKJAVIK ON MAY 7, 1975

GENERAL EFFECTIVE DATE UNDER ARTICLE 31: 1 JANUARY 1976

TABLE OF ARTICLES

Article 1---------------------------------Taxes Covered
Article 2---------------------------------General Definitions
Article 3---------------------------------Fiscal Residence
Article 4---------------------------------General Rules of Taxation
Article 5---------------------------------Relief from Double Taxation
Article 6---------------------------------Source of Income
Article 7---------------------------------Nondiscrimination
Article 8---------------------------------Business Profits
Article 9---------------------------------Permanent Establishment
Article 10--------------------------------Shipping and Air Transport
Article 11--------------------------------Related Persons
Article 12--------------------------------Dividends
Article 13--------------------------------Interest
Article 14--------------------------------Royalties
Article 15--------------------------------Income from Real Property
Article 16--------------------------------Gains
Article 17--------------------------------Capital Taxes
Article 18--------------------------------Independent Personal Services
Article 19--------------------------------Dependent Personal Services
Article 20--------------------------------Amounts Received for Furnishing Personal Services
Article 21--------------------------------Teachers
Article 22--------------------------------Students and Trainees
Article 23--------------------------------Governmental Functions
Article 24--------------------------------Private Pensions and Annuities
Article 25--------------------------------Social Security Payments
Article 26--------------------------------Diplomatic and Consular Officers
Article 27--------------------------------Investment or Holding Companies
Article 28--------------------------------Mutual Agreement Procedure
Article 29--------------------------------Exchange of Information
Article 30--------------------------------Assistance in Collection
Article 31--------------------------------Entry into Force
Article 32--------------------------------Termination
Article 33--------------------------------Extensions to Territories

ARTICLE 1

Taxes Covered

Paragraph (1) designates the taxes of the Contracting States which are the subject of the
Convention. In the case of the United States, the subject taxes are the Federal income taxes
imposed by the Internal Revenue Code ("Code") (referred to as "United States tax"). However, in
certain situations described in paragraph (5) of Article 4 (General Rule's of Taxation), the United
States reserves its right to impose its accumulated earnings tax and personal holding company
tax.

In the case of Iceland, paragraph (1) provides that the subject taxes are the National
income tax, the National capital tax and the municipal income tax (referred to as "Icelandic tax").
Therefore, whenever the Convention refers to taxes imposed by Iceland or restricts its rate of tax,
the reference includes the municipal income tax.

Pursuant to paragraph (2), the Convention will also apply to taxes substantially similar to
those covered by paragraph (1) which are imposed in addition to, or in place of, existing taxes,
after the date of signature of the Convention (May 7, 1975).

Pursuant to paragraph (3), for the purpose of Article 7 (Nondiscrimination), the
Convention will apply to taxes of every kind imposed by the Contracting States or states,
political subdivisions or local authorities thereof. For the purpose of Article 29 (Exchange of
Information), the Convention will apply to taxes of every kind imposed by the Contracting
States.

ARTICLE 2
General Definitions

Paragraph (1) sets out definitions of certain basic terms used in the Convention. A
number of important terms, however, are defined elsewhere in the Convention.

The term "United States" means the United States of America. When used in a
geographical sense, the term means the states of the United States and the District of Columbia.
Thus, the Convention does not apply to possessions of the United States or the Commonwealth
of Puerto Rico. The term "Iceland" means the Republic of Iceland.

When used in a geographical sense, the terms "United States" and "Iceland" also include
their respective territorial seas and continental shelves, generally in accordance with the
principles of section 638 of the Code.

The term "one of the Contracting States" or "the other Contracting State" is defined to
mean the United States or Iceland as the context requires.

The term "person" is defined as including an individual, a partnership, a corporation, an
estate, a trust or any body of persons.

The term "United States corporation" or "corporation of the United States" is defined as a
corporation which is created or organized under the laws of the United States, any state thereof,
or the District of Columbia, or any unincorporated entity treated as a United States corporation
for United States tax purposes. An "Icelandic corporation" or "corporation of Iceland" is defined
as a corporation or any entity which is treated as a body corporate for tax purposes under the
laws of Iceland and is created or organized under the laws of Iceland.

With respect to the United States, the term "competent authority" means the Secretary of
the Treasury or his delegate. With respect to Iceland, it means the Minister of Finance or his
authorized representative. The term "State" means the United States, Iceland, or any other
National State.

The term "international traffic" is defined as any voyage of a ship or aircraft operated by
a resident of one of the Contracting States except where such voyage is confined solely to places
within a Contracting State. Thus, for example, coastal shipping along the Atlantic coast of the
United States is not a voyage in international traffic. However, if a ship operated by a resident of
Iceland transports goods from Canada to the United States, leaving some of the goods in New
York and the remainder in Norfolk, the portion of the voyage between New York and Norfolk is
international traffic.

Paragraph (2) provides that any term used in the Convention which is not defined therein
shall, unless the context otherwise requires, have the meaning which it has under the laws of the
Contracting State whose tax is being determined. However, where a term has a different meaning
under the laws of Iceland and the United States or where the meaning under the laws of one of
the Contracting States is not readily determinable, the competent authorities may for purposes of
the Convention establish a common meaning in order to prevent double taxation or to further any
other purpose of the Convention.

ARTICLE 3
Fiscal Residence

This Article sets forth rules for determining the residence of individuals, corporations,
and other persons for purposes of the Convention. Residence is important because, in general,
only a resident of one of the Contracting States may qualify for the benefits of the Convention.

In paragraph (1), the term "resident of Iceland" is defined as an Icelandic corporation (as
defined in Article 2 (General Definitions)) and any person (except a corporation or any entity
treated under Icelandic law as a corporation) resident in Iceland for purposes of its tax. Similarly,
"resident of the United States" means a United States corporation (as defined in Article 2
(General Definitions)) and any person (except a corporation or any unincorporated entity treated
as a corporation for United States tax purposes) resident in the United States for purposes of its
tax. Thus, a resident of the United States includes a resident alien individual and a resident
citizen but not a foreign corporation. A citizen of the United States or Iceland is not
automatically a resident of the United States or Iceland for purposes of this Convention.

The Convention provides that a partnership, estate, or trust is a resident of a Contracting
State only to the extent that the income derived by such person is subject to tax in such
Contracting State as the income of a resident. For example, under United States law, a
partnership is never, and an estate or trust is often not, taxed as such. Under the Convention,
Income received by a partnership, estate, or trust will not be treated for purposes of the
Convention as income received by a resident of the United States unless such income is subject
to tax in the United States as the income of a resident. Thus, the treatment of income received by
a partnership will be determined by the residence and taxation of its partners for United States
tax purposes with respect to that income. To the extent the partners are subject to United States
tax as residents of the United States, the partnership will be treated as a resident of the United
States. Similarly, the treatment of income received by a trust or estate will be determined by the
residence and taxation of the person subject to tax on such income, which may be the grantor, the
beneficiaries or the trust or estate itself, as the case may be.

Under paragraph (2), an individual who is a resident of both Contracting States under
paragraph (1) will, for purposes of the Convention, be deemed to be a resident of the Contracting
State in which he has his permanent home (where an individual dwells with his family), his
center of vital interests (closest economic and personal relations), a habitual abode, or his
citizenship, in the order listed. If the issue is not settled by these tests, the competent authorities
will decide by mutual agreement the one Contracting State of which he will be considered to be a
resident.

Since the definitions of residence in this Article apply for purposes of the entire
Convention, an individual who is deemed to be a resident of one Contracting State and not a
resident of the other Contracting State by reason of paragraph (2) will be deemed to be a resident
only of the first-mentioned Contracting State for all purposes of the Convention, including
Article 4 (General Rules of Taxation). For example, if an individual is determined to be a
resident of Iceland under paragraph (2) and is also considered to be a resident of the United
States under the laws of the United States, such individual would continue to receive the
exemptions and special benefits granted by the Convention to residents of Iceland, unless the
individual is a citizen of the United States (see the saving clause of paragraph (3) of Article 6
(General Rules of Taxation)).

ARTICLE 4
General Rules of Taxation

Under paragraph (1), a resident of one Contracting State may be taxed by the other
Contracting State on any income from sources within that other Contracting State and only on
such income, subject to any limitations set forth in the Convention. For this purpose, the source
rules contained in Article 6 (Source of Income) are to be applied. However, if the resident is a
citizen of the other Contracting State, that Contracting State may tax the resident without regard
to this paragraph because of the saving clause of paragraph (3) of this Article.

Paragraph (2) contains the customary rule that the Convention will not restrict in any
manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter

accorded by the laws of a Contracting State in the determination of a tax imposed by it, or by any
other agreement between the Contracting States. This rule reflects the principle that a convention
should not increase the tax burden on residents of the Contracting States.

Paragraph (3) contains the traditional saving clause under which the United States
reserves the right to tax its citizens and residents (as determined under Article 3 (Fiscal
Residence)) as if the Convention had not come into effect. However, the saving clause does riot
apply in several cases in which its application would contravene policies reflected in the
Convention. Thus, the saving clause does not affect the provisions with respect to relief from
double taxation, nondiscrimination, social security payments, diplomatic and consular officers or
the mutual agreement procedure. Moreover, the saving clause does not affect the benefits of the
Convention to teachers, students and trainees, and individuals performing governmental
functions, who are neither citizens of, nor have immigrant status in, the Contracting State
imposing the tax. In the case of the United States, “immigrant status” means the individual has
been admitted to the United States for permanent residence. The saving clause is reciprocal.

Paragraph (5) reserves the right of the United States to impose its personal holding
company tax under section 541 of the Code and its accumulated earnings tax under section 531
of the Code notwithstanding any provision of the Convention. However, paragraph (5) also
provides that an Icelandic corporation will be exempt from the personal holding company tax in
any taxable year if all of its stock is owned, directly or indirectly, by one or more individuals
who are residents of Iceland (and not citizens of the United States) for that entire year. In
addition, an Icelandic corporation will be exempt from the accumulated earnings tax in any
taxable year unless it is engaged in trade or business in the United States through a permanent
establishment at any time during such year.

Paragraph (6) authorizes the competent authorities of the Contracting States to prescribe
regulations necessary to carry out the provisions of the Convention. On the United States side,
this authority is also provided by section 7805 of the Code.

ARTICLE 5
Relief from Double Taxation

Under paragraph (1), the United States agrees to allow a United States citizen or resident
as a credit against the United States tax the appropriate amount of Icelandic tax in accordance
with the provisions and subject to the limitations of the law of the United States (as it may be
amended from time to time without changing the principles of paragraph (1)). In addition, in the
case of a United States corporation owning at least ten percent of the voting power (i.e., voting
stock) of an Icelandic corporation from which it receives dividends in any taxable year, the
United States will allow credit for the appropriate amount of Icelandic tax paid by the Icelandic
corporation paying such dividends with respect to the profits out of which such dividends are
paid. The appropriate amount will be based upon the amount of tax paid to Iceland, but the credit
shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on
income from sources within Iceland or on income from sources outside of the United States)
provided by United States law for the taxable year. This provision does not require the United

States to maintain a per-country or overall limitation in the future so long as the general principle
of a foreign tax credit remains in effect. For the purpose of applying the United States credit in
relation to taxes paid to Iceland, the rules set forth in Article 6 (Source of Income) will be
applied to determine the source of income, and the taxes referred to in paragraph (1)(b) of Article
1 (Taxes Covered) other than the national capital tax will be considered to be income taxes.

Under paragraph (2)(a), where a resident of Iceland derives income or owns property
which, in accordance with the Convention may be taxed in the United States or may be taxed in
both Contracting States according to Articles 16 (Capital Gains), 18 (Indepen4ent Personal
Services), or 19 (Dependent Personal Services), or is exempt from United States tax under
Articles 21 (Teachers) or 22 (Students and Trainees), Iceland will, subject to paragraph (2)(b),
exempt such income or property from tax but may, in calculating tax on the remaining income or
property of that resident, apply the rate of tax which would have been applicable if the exempted
income or property had not been so exempted.

Under paragraph (2)(b), except as provided in subparagraph (a), where a resident of
Iceland derives income which, in accordance with the Convention may be taxed in both
Contracting States, Iceland will allow as a credit against the tax on the income of that resident an
amount equal to the tax paid in the United States. Such credit will not, however, exceed that part
of the Icelandic tax, as computed before the credit is given, which is attributable to the income
derived from sources in the United States as determined under the rules set forth in Article 6
(Source of Income).

ARTICLE 6
Source of Income

This Article contains the source rules which are to be used in applying the provisions of
the Convention, such as Article 5 (Relief of Double Taxation). Under Article 4 (General Rules of
Taxation), one Contracting State may tax a resident of the other Contracting State only on
income from sources within the first-mentioned Contracting State (provided the resident is not a
citizen of the first-mentioned Contracting State).

Paragraph (1) provides that dividends will he treated as income from sources within a
Contracting State only if paid by a corporation of that Contracting State.

Under paragraph (2), with two exceptions, interest will be treated as income from sources
within a Contracting State only if paid by that Contracting State, a political subdivision or a local
authority thereof, or by a resident of that Contracting State. Under the first exception, if the
person paying the interest (whether or not such person is a resident of a Contracting State) has a
permanent establishment in a Contracting State in connection with which the indebtedness on
which the interest is paid was incurred and such interest is borne by the permanent establishment,
the interest will be deemed from sources within the Contracting State in which the permanent
establishment is situated. For example, if a resident of France has a permanent establishment in
Iceland which borrows money from a resident of the United States and bears the interest, the
interest will be deemed to be from Icelandic sources. Thus, if paragraph (1) of Article 13

(Interest) is applicable, this interest will be exempt from Icelandic tax. As provided in paragraph
(7) of Article 9 (Permanent Establishment), the principles of Article 9 will be applied to
determine whether the resident of France has a permanent establishment in Iceland.

Under the second exception, paragraph (2) also provides that if the person paying the
interest is a resident of a Contracting State and has a permanent establishment in a State other
than a Contracting State in connection with which the indebtedness on which the interest is paid
was incurred and such interest is paid to a resident of the other Contracting State, and such
interest is borne by the permanent establishment, the interest will be deemed from sources within
the State in which the permanent establishment is situated. This interest will be exempt from tax
in the Contracting State where the payor is a resident if paid to a resident of the other Contracting
State because, under Article 4 (General Rules of Taxation), a resident of one Contracting State
not a citizen of the other Contracting State may be taxed by that other Contracting State only on
income from sources within that other Contracting State. For example, if a resident of the United
States has a permanent establishment in France which borrows money from a resident of Iceland
and bears the interest, the interest will be deemed to be from French sources. If the recipient-
resident of Iceland is not a citizen of the United States, the United States may not tax the income
because of the rule in Article 4 which was mentioned above. As provided in paragraph (7) of
Article 9 (Permanent Establishment), the principles of Article 9 will be applied to determine
whether the resident of the United States has a permanent establishment in France.

Paragraph (3) provides that royalties described in paragraph (2) of Article 14 (Royalties)
for the use of, or the right to use, property or rights described in such paragraph will be treated as
income from sources within a Contracting State only to the extent that such royalties are for the
use of, or the right to use, such property or rights within that Contracting State.

Paragraph (4) provides that income from real property and royalties from the operation of
mines, quarries, or other natural resources (including gains derived from the sale of such
property or the right giving rise to such royalties) will be treated as income from sources within a
Contracting State only if such property is situated in that Contracting State.

Paragraph (5) provides that income from the rental of tangible personal (movable)
property will be treated as income from sources within a Contracting State only if such property
is situated in that Contracting State.

Under paragraph (6), income received by an individual for his performance of labor or
personal services, whether as an employee or in an independent capacity, will be treated as
income from sources within a Contracting State only to the extent that such services are
performed in that Contracting State Income from personal services performed aboard ships or
aircraft operated by a resident of a Contracting State in international traffic, or in fishing on the
high seas, will be treated as income from sources within that Contracting State if rendered by a
member of the regular complement of the ship or aircraft. However, not-withstanding this rule,
remuneration described in Article 23 (Governmental Functions) and payments described in
Article 25 (Social Security Payments) will be treated as income from sources within the
Contracting State which has the right to tax such income.

Paragraph (7) provides that income from the purchase and sale of intangible or tangible
personal (including movable) property (other than gains described as royalties by paragraph
(2)(b) of Article 14 (Royalties)) will be treated as income from sources within a Contracting
State only if such property is sold in that Contracting State.

Paragraph (8) contains a general qualification to the preceding source rules. It provides
that industrial or commercial profits attributable to a permanent establishment which the
recipient, a resident of one Contracting State, has in the other Contracting State, including
income derived from real property and natural resources and dividends, interest, royalties, (as
defined in paragraph (2) of Article 14 (Royalties)), and capital gains, but only if the property or
rights giving rise to such income, dividends, interest, royalties or capital gains are effectively
connected with such permanent establishment, will be treated as income from sources within that
other Contracting State. See the discussion of paragraph (6) of Article 8 (Business Profits) for a
discussion of the term "effectively connected."

Under paragraph (9) the source of any item of income to which paragraphs (1) through
(8) are not applicable will be determined by each Contracting State in accordance with its own
law. However, if the source of any item of income under the laws of one Contracting State is
different from its source under the laws of the other Contracting State or if its source is not
readily determinable under the laws of one of the Contracting States, the competent authorities of
the Contracting States may, in order to prevent double taxation or further any other purpose of
the Convention, establish a common source of the item of income for purposes of the
Convention.

Several of the source rules set out in this Article differ to some degree from those existing
in the Code. Since Article 4 (General Rules of Taxation) provides that the Convention will not
increase a person's United States tax, a taxpayer is entitled to use the more beneficial of the Code
rules or the Convention rules in calculating his income for United States tax purposes, or in the
case of a citizen or resident of the United States, his foreign tax credit. Thus, for example, if
income is effectively connected with a permanent establishment of an Icelandic corporation in
the United States under the Convention but is not effectively connected under section 864(c) of
the Code, and a lesser tax is due under the Code if the income is not effectively connected, the
taxpayer is subject only to the lesser tax.

ARTICLE 7
Nondiscrimination

Paragraph (1) provides that a citizen of one Contracting State who is a resident of the
other Contracting State will not he subjected in that other Contracting State to more burdensome
taxes than a citizen of that other Contracting State who is a resident thereof. The determination
whether there is more burdensome taxation is to be made by comparing the treatment of
individuals who are in comparable positions. Thus, for example, a citizen of Iceland who is a
resident of the United States and who otherwise meets the requirements specified in section 911
of the Code would under this Article be eligible for the benefits of section 911 even though not a
citizen of the United States. On the other hand, just as a United States citizen who becomes a

nonresident alien at any time during a taxable year or whose spouse is a nonresident alien at any
time during a taxable year cannot file a joint return for that year, an Icelandic citizen would not
be entitled to file a joint return with his spouse if either is a nonresident alien at any time during
the taxable year.

Paragraph (2) provides that a permanent establishment which a resident of one
Contracting State has in the other Contracting State will not be subject in that other Contracting
State to more burdensome taxes than a resident of that other Contracting State carrying on the
same activities. However, this does not obligate a Contracting State to grant to individual
residents of the other Contracting State any personal allowances, reliefs, or deductions for
taxation purposes on account of civil status or family responsibilities which it grants to its own
individual residents.

Paragraph (3) prohibits one Contracting State from subjecting a corporation of such
Contracting State, the capital of which is wholly or partly owned or controlled, directly or
indirectly, by one or more residents of the other Contracting State to any taxation or any
requirement connected with taxation which is other or more burdensome than those applicable to
corporations of the first-mentioned Contracting State carrying on the same activities, the capital
of which is wholly or partly owned or controlled by one or more residents of the first-mentioned
Contracting State.

Under paragraph (4), the provisions of paragraph (2) will not prevent Iceland from taxing
the total profits attributable to a permanent establishment which is maintained in Iceland by a
United States corporation. However, the amount of such tax shall not exceed the tax that would
be imposed on an Icelandic corporation earning such profits that distributed to its shareholders
the same percentage of its profits as such United States corporation maintaining such permanent
establishment distributed to its shareholders from its total profits. Under Icelandic law, an
Icelandic corporation may receive a deduction for dividends paid, for corporate tax purposes, up
to ten percent of the nominal value of the stock of the corporation. An Icelandic permanent
establishment of a foreign corporation does not normally receive this benefit. This paragraph
extends the benefit of the deduction to permanent establishments of United States corporations
and establishes a rule for determining the amount of the deduction.

Under paragraph (3) of Article 1 (Taxes Covered), the provisions of this Article extend to
all taxes of every kind imposed by the Contracting States or states, political subdivisions or local
authorities thereof.

ARTICLE 8
Business Profits

Paragraph (1) sets forth the general rule that industrial or commercial profits of a resident
of one Contracting State are exempt from tax by the other Contracting State unless the resident is
engaged in industrial or commercial activity in that other Contracting State through a permanent
establishment situated therein. Where the resident is so engaged, only the industrial or
commercial profits attributable to the permanent establishment can be taxed by that other

Contracting State, unless the resident is a citizen of the other Contracting State. (See the saving
clause in paragraph (3) of Article 4 (General Rules of Taxation).) Under paragraph (8) of Article
6 (Source of Income), industrial or commercial profits whether fr6m sources within or without a
Contracting State attributable to a permanent establishment which a resident of one Contracting
State has in the other Contracting State will be considered to he from sources within that other
Contracting State. Thus, items of income described in section 864(c)(4)(B) of the Code
attributable to a permanent establishment situated in the United States will be subject to tax by
the United States.

In determining the proper attribution of industrial or commercial profits under the
Convention, paragraph (2) provides that both Contracting States will attribute to the permanent
establishment such profits which would be attributable to it if it were an independent entity
engaged in the same or similar activities under the same or similar conditions and dealing wholly
independently with the resident of which it is a permanent establishment. Under paragraph (3),
expenses which are reasonably connected with profits attributable to the permanent
establishment, including executive and general administrative expenses, whether incurred in the
Contracting State in which the permanent establishment is situated or elsewhere, will be allowed
as deductions in determining the industrial or commercial profits of the permanent establishment.
However, in determining the amount of the deduction under paragraph (3) for expenses incurred
by the head office, the deduction may be limited to the expense incurred without including a
profit element for the head office.

Paragraph (4) provides that no profits shall be attributed to a permanent establishment
merely because of the purchase of goods or merchandise by that permanent establishment, or by
the resident of which it is a permanent establishment, for the account of such resident. Paragraph
(2) of the Article does not override paragraph (4). Thus, where a permanent establishment
purchases goods for its head office, the industrial or commercial profits attributed under
paragraph (2) to the permanent establishment with respect to its other activities will not be
increased by adding a notion figure for profits from purchasing.

Under paragraph (5), the term "industrial or commercial activity" includes the conduct of
manufacturing, mercantile, insurance, agricultural, fishing or mining activities, the operation of
ships or aircraft, the furnishing of services, and the rental of tangible personal property and the
rental or licensing of motion picture films or films or tapes used for radio and television
broadcasting. The term does no include the performance of personal services by an individual
either as an employee or in an independent capacity.

Paragraph (6)(a) defines the term "industrial or commercial profits" to include income
derived from industrial or commercial activity, and income derived from real property and
natural resources and dividends, interest, royalties (as defined in paragraph (2) of Article 14
(Royalties)), and capital gains but only if the property or rights giving rise to such income,
dividends, interest, royalties, or capital gains is effectively connected with a permanent
establishment which the recipient, being a resident of one Contracting State, has in the other
Contracting State, whether or not such income is derived from industrial or commercial activity.
See paragraph (3) of Article 12 (Dividends), paragraph (2) of Article 13 (Interest), paragraph (3)
of Article 14 (Royalties), and paragraph (1)(b) of Article 16 (Capital Gains).

Paragraph (6)(b) contains criteria for determining whether property or rights are
effectively connected with a permanent establishment. Factors to be taken into account include
whether the rights or property are used in or held for use in carrying on industrial or commercial
activity through a permanent establishment and whether the activities carried on through such
permanent establishment were a material factor in the realization of the income derived from
such property or rights. For this purpose, due regard shall be given to whether or not such
property or rights or such income were accounted for through such permanent establishment. The
effectively connected test in this paragraph is substantially similar to the effectively connected
test in section 864(c)(2) of the Code.

Under paragraph (7), where industrial or commercial profits include items of income
which are dealt with separately in other articles of the Convention, the provisions of those
articles will, except as otherwise provided therein, supersede the provisions of this Article. Thus,
for example, taxation of interest income will be controlled by Article 13 (Interest) and not by this
Article unless, as provided by paragraph (2) thereof, the interest is effectively connected with a
permanent establishment.

ARTICLE 9
Permanent Establishment

This Article defines the term "permanent establishment." The existence of a permanent
establishment is relevant under Article 8 (Business Profits) to the taxation of industrial or
commercial profits and in determining the applicability of other provisions of the Convention,
such as Articles 12 (Dividends), 13 (Interest), 14 (Royalties), and 16 (Capital Gains).

Under paragraph (1), the term permanent establishment" means a fixed place of business
through which industrial or commercial activity is carried on. Illustrations in paragraph (2) of a
fixed place of business include a branch; an office; a factory; a workshop; a warehouse; a mine,
quarry or other place of extraction of natural resources; and a building site or construction or
installation project which exists for more than twelve months. As a general rule, any fixed
facility or premises through which a resident conducts industrial or commercial activity for an
indefinite or substantial period of time will be treated as a fixed place of business unless it is
used only for one or more of the activities described in paragraph (3).

Under the construction or installation project rule the twelve-month period begins only
when work physically commences in the other Contracting State. A series of contracts or
projects which are inter-dependent both commercially and geographically is to be treated as a
single project for the purpose of applying the twelve-month test.

Paragraph (3) specifically provides that a permanent establishment does not include a
fixed place of business used only for one or more of the following:
“(a) The use of facilities for the purpose of storage, display, or delivery of goods
or merchandise belonging to the resident
“(b) The maintenance of a stock of goods or merchandise belonging to the

resident for the purpose of storage, display, or delivery;
“(c) The maintenance of a stock of goods or merchandise belonging to the
resident for the purpose of processing by another person;
“(d) The maintenance of a fixed place of business for the purpose of purchasing
goods or merchandise, or for collecting information, for the resident;
"(e) The maintenance of a fixed place of business for the purpose of advertising,
for the supply of information, for scientific research, or for similar activities which have a
preparatory or auxiliary character, for the resident; or
"(f) The maintenance of a building site or construction or installation project
which does not exist for more than 12 months."

As noted, these exceptions are cumulative and a fixed place of business used only for one or
more of these purposes will not be considered a permanent establishment under the Convention.

Under paragraph (4) a person acting in one Contracting State on behalf of a resident of
the other Contracting State, other than an agent of an independent Status to whom paragraph (5)
applies, will be deemed to he a permanent establishment in the first-mentioned Contracting State
if such person has, and habitually exercises in that first-mentioned Contracting State, an
authority to conclude contracts in the name of the resident, unless the exercise of the authority is
limited to the purchase of goods or merchandise for the resident.

On the other hand, paragraph (5) provides that a resident of one Contracting State will not
be deemed to have a permanent establishment in the other Contracting State merely because such
resident engages in industrial or commercial activity in such other Contracting State through a
broker, general commission agent, or any other agent of an independent status, where such
broker or agent is acting in the ordinary course of his business.

Under paragraph (6), the fact that a resident of one Contracting State is a related person
with respect to a resident of the other Contracting State or with respect to a person who engages
in industrial or commercial activity in that other Contracting State (whether through a permanent
establishment or otherwise) shall not be taken into account in determining whether the resident
of the first-mentioned Contracting State has a permanent establishment in that other Contracting
State. As defined in Article 11 (Related Persons), a person is related to another person if either
person owns or controls directly or indirectly the other, or if any third person owns or controls
directly or indirectly both such persons.

Paragraph (7) provides that the principles set forth in this Article are to be applied in
determining whether there is a permanent establishment in a State other than one of the
Contracting States or whether a person other than a resident of one of the Contracting States has
a permanent establishment in one of the Contracting States. This is necessary for the proper
application of paragraph (2) of Article 6 (Source of Income) and paragraph (4) of Article 12
(Dividends). This paragraph is not intended to extend the benefits of the Convention to persons
other than residents of the two Contracting States.

ARTICLE 10

Shipping and Air Transport

Paragraph (1) provides that, notwithstanding Article 8 (Business Profits), income derived
by a resident of the United States from the operation in international traffic of ships or aircraft
registered in the United States will be exempt from tax by Iceland. Under paragraph (2), such
income derived by a resident of Iceland will be exempt from tax by the United States, regardless
of where the ship or aircraft is registered.

Paragraph (3) makes clear that this Article applies to income derived by a domestic or
international carrier from the rental of such ships or aircraft under a bareboat or full charter if the
lease is incidental to its business as a carrier. For example, if an airline which is a resident of one
Contracting State has excess equipment in the winter months and leases several of its aircraft
which are not required by it during that period to an airline which is a resident of the other
Contracting State, that rental income of the lessor is not subject to tax by that other Contracting
State, whether or not the lessee uses the aircraft in international traffic. (See paragraph (3) of
Article 16 (Capital Gains) for the treatment of gains from the sale, exchange or other disposition
of ships or aircraft operated in international traffic.)

Paragraph (3) also makes clear that the Article applies to income derived from the use
and lease of containers, trailers for the inland transport of containers and other related equipment
if such income is incidental to other income described in paragraph (1). It Is intended that, in the
case of a resident of Iceland, the income should be incidental to other income described in
paragraph (2).

This Article is subject to the saving clause of paragraph (3) of Article 4 (General Rules of
Taxation). Therefore, a Contracting State may tax the income from international traffic derived
by a resident of the other Contracting State without regard to this Article if such resident is a
citizen of the first-mentioned Contracting State.

ARTICLE 11
Related Persons

This Article complements section 482 of the Code and confirms the authority of the
United States under that section. Where a resident of a Contracting State and any other related
person make arrangements or impose conditions between themselves which are different from
those which would be made between independent persons, under paragraph (1) any income,
deductions, credits or allowances which would, but for those arrangements or conditions, have
been taken into account in computing the income or loss of, or the tax payable by, one of such
persons, may be taken into account in computing the amount of the income subject to tax and the
taxes payable by such person.

It is anticipated that if an adjustment is made in accordance with paragraph (1) by a
Contracting State to the income of one of its residents, the other Contracting State will, if it
agrees with such redetermination and if necessary to prevent double taxation, make a
corresponding adjustment to the income of a person in such other Contracting State related to

such resident. If the other Contracting State disagrees with the redetermination, it is intended that
the two Contracting States will endeavor to reach agreement in accordance with the mutual
agreement procedure in Article 28 (Mutual Agreement Procedure).

Paragraph (2) provides that for purposes of the Convention a person is related to another
person if either person owns or controls directly or indirectly the other, or if a third person or
persons own or control directly or indirectly both. “Control” includes any kind of control,
whether or not legally enforceable, and however exercised or exercisable.

ARTICLE 12
Dividends

Paragraph (1) provides that dividends derived from sources within one Contracting State
by a resident of the other Contracting State may be taxed by both Contracting States. However,
paragraph (2) limits the rate of tax imposed by the Contracting State of source to a rate not in
excess of fifteen percent of the gross amount actually distributed. If the dividend recipient is a
corporation, the rate of tax imposed by the Contracting State of source may not exceed five
percent of the gross amount actually distributed if during the part of the paying corporation's
taxable year which precedes the date of payment of the dividend and during the whole of its prior
taxable year (if any), at least ten percent of the outstanding voting stock of the corporation was
owned by the recipient corporation, and not more than twenty-five percent of the gross income of
the paying corporation for such prior taxable year (if any) consists of interest or dividends (other
than interest derived from the conduct of a banking, insurance, or financing business and
dividends or interest received from subsidiary corporations, fifty percent or more of the
outstanding voting stock of which is owned by the paying corporation at the time such dividends
or interest is received). These rate limitations do not affect the taxation of profits of the
corporation which pays the dividends.

Paragraph (3) provides that the limitations of paragraph (2) will not apply if the dividend
recipient, being a resident of one Contracting State, has a permanent establishment in the other
Contracting State and the shares with respect to which the dividends are paid are effectively
connected with the permanent establishment. In such a case, the dividends will be treated as
industrial or commercial profits subject to Article 8 (Business Profits). If the dividend recipient
is a citizen of the source Contracting State, that Contracting State may tax the recipient without
regard to this Article because of the saving clause of paragraph (3) of Article 4 (General Rules of
Taxation).

Paragraph (4) provides that dividends paid by a corporation of one Contracting State to a
person other than a resident of the other Contracting State (and in the case of dividends paid by
an Icelandic corporation, to a person other than a citizen of the United States) will be exempt
from tax by the other Contracting State. However, this rule is inapplicable if the dividend
recipient has a permanent establishment in that other Contracting State and the shares with
respect to which the dividends are paid are effectively connected with the permanent
establishment.

ARTICLE 13
Interest

Paragraph (1) provides that interest derived from sources within one Contracting State by
a resident of the other Contracting State will be exempt from tax by the first-mentioned
Contracting State.

Paragraph (2) provides that paragraph (1) will not apply if the interest recipient, being a
resident of one Contracting State, has a permanent establishment in the other Contracting State
and the indebtedness giving rise to the interest is effectively connected with the permanent
establishment. In such a case, the interest will be treated as an industrial or commercial profit
subject to Article 8 (Business Profits).

If excessive interest is paid to a related person, paragraph (3) provides that the provisions
of the Article do not apply to the excessive portion of the payment. The excessive portion may be
taxed by each Contracting State according to its own law, including the Convention where
applicable. In the case of the United States, the excessive portion may be taxed as a dividend, in
which case the provisions of Article 12 (Dividends) may apply.

Paragraph (4) defines the term "interest" for purposes of the Convention as income from
bonds, debentures, Government securities, notes, or other evidences of indebtedness, whether or
not secured and whether or not carrying a right to participate in profits, and debt-claims of every
kind, as well as all other income which, under the taxation law of the Contracting State in which
the income has its source, is assimilated to income from money lent:

Under paragraph (5), interest paid by a resident of one Contracting State to a person other
than a resident of the other Contracting State (and in the case of interest paid by an Icelandic
corporation, to a person other than a citizen of the United States) will be exempt from tax by the
other Contracting State. However, this rule is inapplicable if such interest is treated as income
from sources within the other Contracting State under paragraph (2) of Article 6 (Source of
Income), or if the recipient of the interest has a permanent establishment in the other Contracting
State and the indebtedness giving rise to the interest is effectively connected with such
permanent establishment.

This Article is subject to the saving clause of paragraph (3) of Article 4 (General Rules of
Taxation). Therefore, interest derived by a citizen of the source Contracting State may be taxed
by that Contracting State without regard to this Article.

ARTICLE 14
Royalties

Paragraph (1) provides that royalties derived from sources within one Contracting State
by a resident of the other Contracting State will be exempt from tax by the first-mentioned
Contracting State.

Paragraph (2) defines the term "royalties" as payment of any kind made as consideration
for the use of, or the right to use, copyrights of literary, artistic, or scientific works (but not
including copyrights of motion picture films or films or tapes used for radio or television
broadcasting (see Paragraph (5) of Article 8 (Business Profits)), patents, designs, models, plans,
secret processes or formulae, trademarks, or other like property or rights, or knowledge,
experience, or skill (know-how). The term also includes gains derived from the sale, exchange,
or other disposition of any such property or rights to the extent the amounts realized on such sale,
exchange or other disposition for consideration are contingent on the productivity, use, or
disposition of the property or rights. If the amounts realized are not so contingent, the provisions
of Article 16 (Capital Gains) may apply.

Paragraph (3) provides that paragraph (1) will not apply if the royalty recipient, being a
resident of one Contracting State, has in the other Contracting State a permanent establishment
and the property or rights giving rise to the royalty is effectively connected with such permanent
establishment. In such a case, the royalty will be treated as an industrial or commercial profit
subject to Article 8 (Business Profits).

If excessive royalties are paid to a related person, paragraph (4) provides that the
provisions of the Article do not apply to the excessive portion of the royalty. The excessive
portion may be taxed by each Contracting State according to its own law, including the
Convention where applicable. Thus, the excessive portion may be treated as a dividend or
interest, or in whatever other manner is appropriate.

As noted under paragraph (3) of Article 6 (Source of Income), royalties described in
paragraph (2), including contingent gains, will be treated as income from sources within a
Contracting State only to the extent they are payments for the use of, or the right to use, property
or rights described in paragraph (2) within that Contracting State.

This Article is subject to the saving clause of paragraph (3) of Article 4 (General Rules of
Taxation). Therefore, royalties derived by a citizen of the source Contracting State may be taxed
by that Contracting State without regard to this Article.

ARTICLE 15
Income from Real Property

Under paragraph (1), income from real property, including royalties in respect of the
operation of mines, quarries, or other natural resources (e.g., oil wells) and gains derived from
the sale, exchange or other disposition of such property or of the right giving rise to such
royalties, may be taxed by the Contracting State in which the real property, mines, quarries or
other natural resources are situated. However, income from real property does not include
income and gains from ships and aircraft and interest on indebtedness secured by real property
(e.g., mortgages) or by a right giving rise to royalties in respect of the operation of mines,
quarries or other natural resources. Such income and gains are covered by Articles 10 (Shipping
and Air Transport) and 16 (Capital Gains) and such interest is covered by Article 13 (Interest).

Paragraph (1) applies to income derived from the usufruct, direct use, letting, or use in
any other form of real property.

ARTICLE 16
Capital Gains

Under paragraph (1), a resident of one Contracting State will be exempt from tax by the
other Contracting State on gains from the sale, exchange, or other disposition of capital assets,
e.g., stock or securities. However, the exemption does not apply if
(1) the gain is from the sale, exchange or other disposition of property described in
Article 15 (Income from Real Property) situated within the other Contracting State;
(2) the recipient of the gain has a permanent establishment in the other Contracting State
and the property giving rise to the gain is effectively connected with the permanent
establishment; or
(3) the individual recipient of the gain maintains a fixed base in the other Contracting
State for a period or periods aggregating 183 days or more during the taxable year and the
property giving rise to the gain is effectively connected with the fixed base, or the individual
recipient of the gain is present in the other Contracting State for a period or periods aggregating
183 days or more during the taxable year.

The term "day" for purposes of this Article and the other physical presence tests contained in the
Convention with respect to an individual means a calendar day during any portion of which the
individual is physically present in the relevant Contracting State.

Under paragraph (2), the provisions of Article 15 (Income from Real Property) will apply
to real property gains, and the provisions of Article 8 (Business Profits) will apply to gains
effectively connected with a permanent establishment.

Under paragraph (3), gains which a resident of a Contracting State derives from the sale,
exchange or other disposition of ships or aircraft which are operated in international traffic will
be exempt from tax by the other Contracting State, notwithstanding Article 8 (Business Profits)
and paragraphs (1) and (2) of this Article.

If the recipient of the gain is a citizen of the other Contracting State, that Contracting
State may tax the recipient without regard to this Article because of the saving clause of
paragraph (3) of Article 4 (General Rules of Taxation).

ARTICLE 17
Capital Taxes

Under paragraph (1), capital represented by property referred to in Article 15 (Income
from Real Property) may be taxed in the Contracting State in which such property is situated.

Under paragraph (2), capital represented by assets, other than property referred to in
paragraphs (1) or (3), which are effectively connected with a permanent establishment or fixed
base of a resident of a Contracting State may be taxed in the Contracting State in which the
permanent establishment or fixed base is situated

Under paragraph (3), ships and aircraft of a resident of a Contracting State and assets,
other than property referred to in paragraph (1), pertaining to the operation of such ships or
aircraft will be exempt from tax by the other Contracting State.

Under paragraph (4), all other elements of capital of a resident of a Contracting State not
dealt with in this Article shall be exempt from tax by the other Contracting State.

At the present time, the United States does not impose a separate capital (net wealth) tax.

ARTICLE 18
Independent Personal Services

In dealing with the taxation of income from personal services the Convention
distinguishes between "independent" and "dependent" personal services. The Convention also
provides special treatment for individuals who are "public entertainers" and for amounts received
in certain circumstances for furnishing personal services.

Personal services performed in an independent capacity, or independent personal
services, are services performed by an individual for his own account where he receives the
income and bears the losses arising from such services. If an individual is an independent
contractor he is considered as rendering independent personal services. Generally, services
rendered by physicians, lawyers, engineers, architects, dentists and accountants performing
personal services as sole proprietors or partners are independent personal services.

Under paragraph (1), income derived by an individual resident of one Contracting State
from the performance of personal services in an independent capacity may be taxed by that
Contracting State. Except as permitted by paragraph (2), such income will be exempt from tax by
the other Contracting State.

Under paragraph (2) such income derived in the other Contracting State may be taxed by
that other Contracting State if
(1) the individual is present therein for a period or periods aggregating 183 days or more
in the taxable year;
(2) the individual maintains a fixed base therein for a period or periods aggregating 183
days or more in the taxable year (but only on such income attributable to the fixed base) ; or
(3) the individual is a public entertainer, such as a theater, motion picture, or television
artist, a musician, or an athlete, and the income is derived from his personal services as a public
entertainer provided he is present therein for more than a total of 90 days during the taxable year
or such income exceeds $100 or its equivalent in Icelandic kronur for each day such person is
present therein for the purpose of performing.

Under paragraph (3) of Article 4 (General Rules of Taxation), the other Contracting State may
also tax any individual who is a citizen of that Contracting State without regard to this Article.

ARTICLE 19
Dependent Personal Services

Under paragraph (1), subject to Articles 21 (Teachers), 22 (Students and Trainees), 23
(Government Functions) and 24 (Private Pensions and Annuities), wages, salaries, and similar
remuneration derived by an individual who is a resident of one Contracting State from labor or
personal services performed as an employee may be taxed by that Contracting State. Except as
provided by paragraph (2), such remuneration derived from sources within the other Contracting
State may also be taxed by that other Contracting State. It is intended that for purposes of the
Convention the term "wages, salaries and similar remuneration" includes income from services
performed as an officer of a corporation.

Under paragraph (2) such remuneration derived by an individual resident of one
Contracting State will be exempt from tax by the other Contracting State if:
(a) the individual is present in that other Contracting State for a period or periods
aggregating less than 183 days in the taxable year;
(b) the individual is an employee of a resident of the first-mentioned Contracting
State or of a permanent establishment maintained in that Contracting State by a resident
of a State other than that Contracting State; and
(c) the remuneration is not borne as such by a permanent establishment which the
employer has in that other Contracting State.

Such income may nevertheless be taxed by that other Contracting State if the individual, is a
citizen of that Contracting State, because of paragraph (3) of Article 4 (General Rules of
Taxation).

Under paragraph (3), notwithstanding paragraph (2), remuneration derived by an
individual from the performance of labor or personal services as an employee aboard ships or
aircraft operated by a resident of a Contracting State in international traffic or in fishing on the
high seas will be exempt from tax by the other Contracting State if such individual (even if a
resident of a State other than a Contracting State) is a member of the regular complement of the
ship or aircraft. However, this paragraph is also subject to the saving clause of paragraph (3) of
Article 6 (General Rules of Taxation) so that the other Contracting State may tax a citizen or
resident of that other Contracting State without regard to this paragraph.

ARTICLE 20
Amounts Received for Furnishing Personal Services

Paragraph (1) provides that amounts received by a resident of one Contracting State in

consideration of furnishing in the other Contracting State the personal services of one or more
other persons will not constitute industrial or commercial profits under Article 8 (Business
Profits) to the extent that
(a) the person for whom the services were rendered designated the person or
persons who would render the services, whether or not he had the legal right to do so and
whether or not the designation was made formally; or the person for whom the services
were rendered had the right to designate the person or persons who would render the
services; or by reason of the facts and circumstances the arrangement for personal
services had the effect of designating the person or persons who would render the
services; and
(b) the resident of the first-mentioned Contracting State directly or indirectly pays
compensation for such services to any person, other than another resident of the first-
mentioned Contracting State or of the other Contracting State who is subject to tax on
such compensation.

If this paragraph applies, the amounts received for providing personal services of other persons
in the other Contracting State may be taxed by that other Contracting State even though not
attributable to a permanent establishment.

Paragraph (2) provides an exception to paragraph (1) if it is established to the satisfaction
of the competent authority of that other Contracting State with respect to any amount received
that neither the creation nor organization of the resident of the first-mentioned Contracting State
(where such resident is a corporation or other entity) nor the furnishing of the services through
such person has the effect of a substantial reduction in income, war profits, excess profits, or
similar taxes.

ARTICLE 21
Teachers

Paragraph (1) provides that where a resident of one Contracting State is invited by the
other Contracting State or by a university or other recognized educational institution in that other
Contracting State to come to that other Contracting State for a period not expected to exceed two
years for the purpose of teaching or engaging in research, or both, at a university or other
recognized educational institution, and such resident comes to that other Contracting State
primarily for such purpose) his income from personal services for teaching or research at the
university or educational institution will be exempt from tax by that other Contracting State for a
period not exceeding two years from the date of his arrival in that other Contracting State.

Since a temporary visit may be of such a duration that an individual may lose his status as
a resident of the Contracting State of which he was a resident at the time he became eligible for
the benefits of this Article, the individual need only be a resident of such Contracting State at the
beginning of his visit. However, if the individual becomes a citizen of, or acquires immigrant
status in, the other Contracting State, that other Contracting State may tax the individual without
regard to this Article. See paragraphs (3) and (4)(b) of Article 4 (General Rules of Taxation). If
the individual's visit exceeds a period of two years from the date of his arrival, the exemption

applies only to the income received by the individual before the expiration of such two-year
period.

Pursuant to paragraph (2), this Article does not apply to income from research undertaken
primarily for the private benefit of a specific person or persons.

ARTICLE 22
Students and Trainees

Paragraph (1) provides that an individual who is a resident of one Contracting State at the
time he becomes temporarily present in the other Contracting State and who is temporarily
present therein for the primary purpose of studying at a university or other recognized
educational institution in that other Contracting State, securing training required to qualify him to
practice a profession or professional specialty, or studying or doing research as a recipient of a
grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or
educational organization, will be exempt from tax by that other Contracting State for a period not
exceeding five taxable years from the date of his arrival in that other Contracting State on:
(1) Gifts from abroad for the purpose of his maintenance, education, study, research or
training;
(2) The grant, allowance, or award; and
(3) Income from personal services performed in the other Contracting State not in excess
of $2,000 or its equivalent in Icelandic kronur for any taxable year.

Under paragraph (2), an individual who is a resident of one Contracting State at the time
he becomes temporarily present in the other Contracting State and who is temporarily present
therein as an employee of, or under contract with, a resident of the first-mentioned Contracting
State, for the primary purpose of acquiring technical, professional, or business experience from a
person other than that resident of the first-mentioned Contracting State or other than a person
related to such resident, or studying at a university or other recognized educational institution in
that other Contracting State, will be exempt from tax by that other Contracting State for a period
of twelve consecutive months on income from personal services not in excess of $5,000 or its
equivalent in Icelandic kronur.

Under paragraph (3), an individual who is a resident of one Contracting State at the time
he becomes temporarily present in the other Contracting State and who is temporarily present
therein for a period not exceeding one year, as a participant in a program sponsored by the other
Contracting State, for the primary purpose of training, research, or study, will be exempt from
tax by the other Contracting State with respect to his income from personal services in respect of
such training, research, or study performed in that other Contracting State in an aggregate
amount not in excess of $10,000 or its equivalent in Icelandic kronur.

Under the first and second sentences of paragraph (4), the benefits provided in paragraph
(1) and the benefits provided under Article 21 (Teachers) may extend only for such period of
time, not to exceed five years from the date of the individual's arrival, as may reasonably or
customarily be required to effectuate the purpose of the visit. The third sentence of paragraph (4)

makes clear that the benefits provided by Article 21 (Teachers) will not be available to an
individual for any period immediately following a period for which the benefits of paragraph (1)
of this Article are available to that individual.

If an individual qualifies for the benefits of more than one of the provisions of Articles 21
(Teachers) and 22 (Students and Trainees), such individual may choose the most favorable
provision but may not claim the benefits of more than one provision in any taxable year as a
means of avoiding the limitations provided. Thus, for example, an individual who comes to the
other Contracting State for the primary purpose of studying may be able to qualify under either
paragraph (2) or (3) of this Article. However, he cannot combine the maximum exclusion limits
in those two paragraphs to exclude $15,000 during the taxable year. The exclusions permitted by
the Convention are in addition to any exclusions, exemptions, deductions, credits or other
allowances to which the individual is entitled under the laws of the Contracting States. If the
individual becomes a citizen of, or acquires immigrant status in, the other Contracting State, that
other Contracting State may tax the individual without regard to this Article. See paragraphs (3)
and (4)(b) of Article 4 (General Rules of Taxation).

ARTICLE 23
Governmental Functions

Under this Article, wages, salaries, and similar remuneration, including pensions or
similar benefits, paid by or from public funds of one Contracting State, or a political subdivision
or local authority thereof, to a citizen of that Contracting State, for labor or personal services
performed for the Contracting State, or for any of its political subdivisions or local authorities, in
the discharge of governmental functions will be exempt from tax by the other Contracting State.

If the citizen becomes a citizen of, or acquires immigrant status in, the other Contracting
State, that other Contracting State may tax the individual without regard to this Article. See
paragraphs (3) and (4)(b) of Article 4 (General Rules of Taxation).

ARTICLE 24
Private Pensions and Annuities

Except as provided in Article 23 (Governmental Functions) pensions and other similar
remuneration paid to an individual who is a resident of a Contracting State in consideration of
past employment will be taxable under paragraph (1) only in that Contracting State. Thus, private
pensions and similar remuneration derived from sources within one Contracting State by an
individual resident of the other Contracting State in consideration of past employment are
exempt from tax in the first-mentioned Contracting State. The term "pensions and other similar
remuneration is defined in paragraph (3) as periodic payments made after retirement or death in
consideration for services rendered, or by way of compensation for injuries received in
connection with past employment. The term does not include social security payments covered in
Article 25 (Social Security Payments).

Paragraph (2) provides that alimony and annuities paid to an individual resident of a
Contracting State will be taxable only in that Contracting State. The term "annuities" is defined
in paragraph (4) as a stated sum paid periodically at stated times during life or during a specified
number of years, under an obligation to make the payments in return for adequate and full
consideration (other than for services rendered). The term "alimony" is defined in paragraph (5)
as periodic payments made pursuant to a decree of divorce, separate maintenance agreement, or
support or separation agreement which is taxable to the recipient under the internal laws of the
Contracting State of which he is a resident. Thus, the term "alimony" would not include a
payment which would not be taxable to the recipient under the laws of the Contracting State in
which he is a resident even though such payment is made pursuant to a decree of divorce or of
separate maintenance agreement.

This Article is subject to the savings clause of paragraph (3) of Article 4 (General Rules
of Taxation). Therefore, individuals who are citizens of a Contracting State may be taxed by that
Contracting State without regard to this Article.

ARTICLE 25
Social Security Payments

This Article provides that social security payments and other public pensions, e.g.,
railroad retirement benefits, paid by one Contracting State to an individual who is a resident of
the other Contracting State (or in the case of such payments by Iceland, to an individual who is a
citizen of the United States, i.e., such payments by Iceland to United States citizens or residents
will be exempt from tax by the United States) will be taxable only in the first-mentioned
Contracting State. Payments described in Article 23 (Governmental Functions) are not covered
by this Article.

Under paragraph (2) of Article 32 (Termination), this Article may be terminated by either
Contracting State at any time after the Convention enters into force.

ARTICLE 26
Diplomatic and Consular Officers

This Article provides that nothing in the Convention will affect the fiscal privileges of
diplomatic and consular officials under the general rules of international law or under the
provisions of special agreements. This is merely a special case of the general rule provided in
paragraph (2) of Article 4 (General Rules of Taxation).

ARTICLE 27
Investment or Holding Companies

This Article provides that a corporation of one Contracting State deriving dividends,
interest, royalties or capital gains from sources within the other Contracting State not be entitled

to the benefits of Articles 12 (Dividends), 13 (Interest), 14 (Royalties) or 16 (Capital Gains) if by
reason of special measures the tax imposed on such corporation by the first-mentioned
Contracting State with respect to such dividends, interest, royalties or capital gains is
substantially less than the tax generally imposed by such Contracting State on corporate profits,
and twenty-five percent or more of the capital of such corporation is held of record or is
otherwise determined, after consultation between the competent authorities of the Contracting
States, to be owned, directly or indirectly, by one or more persons who are not individual
residents of the first-mentioned Contracting State (or, in the case of an Icelandic corporation,
who are citizens of the United States).

The purpose of this Article is to deal with potential abuse which could occur if one of the
Contracting States provided preferential rates of tax for investment or holding companies. In
such a case, residents of third countries could organize a corporation in the Contracting State
extending the preferential rates for the purpose of making investments in the other Contracting
State. The combination of low tax rates in the first Contracting State and the reduced rates or
exemptions in the other Contracting State would enable the third country residents to realize
unintended benefits.

ARTICLE 28
Mutual Agreement Procedure

Under paragraph (1), when a resident of one Contracting State considers that the action of
one or both Contracting States results or will result for him in taxation not in accordance with the
Convention, he may, notwithstanding the remedies provided by the national laws of the
Contracting States, present his case to the competent authority of the Contracting State of which
he is a resident. A resident of a Contracting State need not, although it is anticipated that in the
normal situation he will, exhaust his other administrative or judicial remedies prior to resorting
to the use of the mutual agreement procedure. If the claim is considered to have merit by the
competent authority, that competent authority must endeavor to come to an agreement with the
competent authority of the other Contracting State with a view to the avoidance of taxation
contrary to the Convention.

Paragraph (2) requires the competent authorities of the two Contracting States to
endeavor to resolve by mutual agreement any difficulties or doubts arising as to the application
of the Convention. In particular, the competent authorities may agree to the same attribution of
industrial or commercial profits to a resident of one Contracting State and its permanent
establishment situated in the other Contracting State; the same allocation of income, deductions,
credits, or allowances between a resident of one Contracting State and any related person; the
same determination of the source of particular items of income; and uniform accounting for
income and deductions.

Under paragraph (3), the competent authorities may communicate with each other
directly and, when advisable, meet together for an oral exchange of opinions, for the purpose of
reaching an agreement.

Under paragraph (4), in cases in which the competent authorities reach an agreement,
taxes will be imposed on such income, and refund or credit of taxes allowed, by the Contracting
States in accordance with such agreement. This permits the issuance of a refund or credit
notwithstanding procedural barriers otherwise existing under Contracting State's law, such as the
statute of limitations.

ARTICLE 29
Exchange of Information

Paragraph (1) provides for a system of administrative cooperation between the competent
authorities of the two Contracting States by requiring an exchange of information pertinent to the
carrying out of the Convention and of the domestic laws of the Contracting States concerning
taxes covered by the Convention. As provided by paragraph (3) of Article 1, for this purpose
taxes covered by the Convention means taxes of every kind imposed by the Contracting States.
This language permits the competent authorities to exchange information in connection with tax
compliance generally, not merely illegal acts or crimes. Information exchanged must be treated
as secret and cannot be disclosed to any persons other than those (including a court or
administrative body) concerned with the assessment, collection, enforcement or prosecution in
respect of such taxes. Thus, disclosure is not prohibited as a part of a public proceeding before a
court or administrative body.

Paragraph (2) makes clear that a Contracting State is not obligated to carry out
administrative measures at variance with the laws or the administrative practice of either
Contracting State; to supply particulars which are not obtainable under the laws, or in the normal
course of the administration, of either Contracting State; or to supply information which would
disclose any trade, business, industrial, commercial or professional secret or trade process, or
information, the disclosure of which would be contrary to public policy.

In making the determinations necessary under paragraph (2) a Contracting State
requested to furnish information will use the standard it uses in the enforcement of its own laws
by its administrative and judicial authorities, treating the tax of the Contracting State with respect
to which a request relates as if it were a tax of the Contracting State requested to furnish the
information and were being imposed by such Contracting State. Depositions of witnesses and
copies of unedited original documents (including books, papers, statements, records, accounts, or
writings) may be provided by the competent authority of a Contracting State if specifically
requested by the competent authority of the other Contracting State. In addition, any information
which may be furnished in accordance with this Article shall not be withheld by reason of any
doctrine of law under which international judicial assistance is not accorded in tax matters.

Under paragraph (3), the exchange of information may be on either a routine basis or on
request with reference to particular cases. The competent authorities may agree on the list of
information to be furnished on a routine basis.

Paragraphs (4) and (5) provide for notification and text transmittal at least once a year of
amendments of the tax laws referred to in paragraph (1) of Article 1 (Taxes Covered), of adopted

taxes referred to in paragraph (2) of that Article, or of published material concerning application
of the Convention, whether in the form of regulations, rulings or judicial decisions.

ARTICLE 30
Assistance in Collection

This Article provides for mutual assistance in the collection of taxes where required to
ensure that the benefits of the Convention will only be extended to persons entitled to such
benefits. It does not in any way affect rights of residents of the Contracting States under the
Convention.

Paragraph (1) provides that each Contracting State will endeavor to collect on behalf of
the other Contracting State such taxes imposed by that other Contracting State as will ensure that
any exemption or reduced rate of tax granted under the Convention by that other Contracting
State will not be enjoyed by persons not entitled to such benefits. The competent authorities of
the Contracting States may consult together for the purpose of giving effect to this Article.

Paragraph (2) makes clear, however, that in no case shall this Article be construed to
impose upon a Contracting State the obligation to carry out administrative measures at variance
with the regulations and practices of either Contracting State or which would be contrary to the
first-mentioned Contracting State's sovereignty, security, or public policy.

ARTICLE 31
Entry into Force

This Article provides that the Convention is subject to ratification and for the exchange of
instruments of ratification. The Convention will enter into force one month after the date of
exchange of such instruments of ratification. The Convention shall first have effect with respect
to income and capital of calendar years or taxable years beginning (or in the case of taxes
payable at source, payments made) on or after January 1 of the year following the year in which
the instruments of ratification were exchanged. It is intended for purposes of this Article and
Article 32 (Termination) that the reference to calendar years applies only to cases where the
taxable year is the calendar year.

ARTICLE 32
Termination

Paragraph (1) provides that the Convention will remain in force indefinitely, but that it
may be terminated by either Contracting State at any time after five years from the date it enters
into force. A Contracting State seeking to terminate the Convention must give at least six
months' notice through diplomatic channels. If the Convention is terminated, such termination
will be effective with respect to income and capital of calendar years or taxable years beginning
(or, in the case of taxes payable at source, payments made) on or after January 1 next following

the expiration of the six month period.

Under paragraph (2), the provisions of Article 25 (Social Security Payments) may,
notwithstanding paragraph (1), be terminated by either Contracting State at any time after the
Convention enters into force by prior notice given through diplomatic channels.

ARTICLE 33
Extensions to Territories

Under paragraph (1), either Contracting State may, at any time while the Convention
continues in force, by a written notification given to the other Contracting State through
diplomatic channels, declare its desire that the Convention, either in whole or in part or with such
modifications as may be found necessary for special application in a particular case, shall extend
to all or any of the area (to which the Convention is not otherwise applicable) for whose
international relations it is responsible and which impose taxes substantially similar in character
to those which are the subject of the Convention. When the other Contracting State has, by a
written communication through diplomatic channels, signified to the first-mentioned Contracting
State that such notification is accepted in respect of such area or areas, and the notification and
communication have been ratified and instruments of ratification exchanged, the Convention, in
whole or in part, or with such modifications as may be found necessary for special application in
a particular case, as specified in the notification, will apply to the area or areas named in the
notification and will enter into force and effect on and after the date or dates specified therein.
None of the provisions of the Convention will apply to any such area in the absence of such
acceptance and exchange of instruments of ratification in respect of that area.

Under paragraph (2), at any time after the date of entry into force of an extension under
paragraph (1), either Contracting State may, by six months' prior notice of termination given to
the other Contracting State through diplomatic channels, terminate the application of the
Convention to any area to which it has been extended under paragraph (1). In such event the
Convention will cease to apply and have force and effect, beginning on or after the first day of
January next following the expiration of the six-month period, to the area or areas named therein,
but without affecting its continued application to the United States, Iceland, or to any other area
to which it has been extended under paragraph (1).

Pursuant to paragraph (3), in the application of the Convention in relation to any area to
which it is extended by notification by Iceland or the United States, reference to “Iceland” or the
“United States”, as the case may be, shall be construed as referring to that area.

Under paragraph (4), termination in respect of the United States or Iceland of the
Convention under Article 32 (Termination) will unless otherwise expressly agreed by both
Contracting States, terminate the application of the Convention to any area to which the
Convention has been extended under this Article by the United States or Iceland.