Technical Explanation PDF

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE
CONVENTION AND PROTOCOL BETWEEN THE GOVERNMENT OF THE
UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE
REPUBLIC OF VENEZUELA FOR THE AVOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME AND CAPITAL
GENERAL EFFECTIVE DATE UNDER ARTICLE 29: 1 JANUARY 2000
INTRODUCTION
This document is a technical explanation of the Convention and Protocol between the
United States and Venezuela that was signed at Caracas on January 25, 1999 (the “Convention”).
Negotiations took into account the U.S. Treasury Department’s current tax treaty policy, as
reflected in the U.S. Treasury Department’s Model Income Tax Convention of September 20,
1996 (the “U.S. Model”) and its recently negotiated tax treaties, the Model Income Tax
Convention on Income and on Capital, published by the OECD in 1992 and amended in 1994,
1995 and 1997 (the “OECD Model”), and recent tax treaties concluded by Venezuela.
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.”
TABLE OF ARTICLES
Article 1---------------------------------General Scope
Article 2---------------------------------Taxes Covered
Article 3---------------------------------General Definitions
Article 4---------------------------------Residence
Article 5---------------------------------Permanent Establishment
Article 6---------------------------------Income from Immovable Property Real Property
Article 7---------------------------------Business Profits
Article 8---------------------------------Shipping and Air Transport
Article 9---------------------------------Associated Enterprises
Article 10--------------------------------Dividends
Article 11--------------------------------Interest
Article 11A------------------------------Branch Tax
Article 12--------------------------------Royalties
Article 13--------------------------------Gains
Article 14--------------------------------Independent Personal Services
Article 15--------------------------------Dependent Personal Services
Article 16--------------------------------Directors' Fees
Article 17--------------------------------Limitation on Benefits
Article 18--------------------------------Artistes and Sportsmen

Article 19--------------------------------Pensions, Social Security, Annuities, and Child Support
Article 20--------------------------------Government Service
Article 21--------------------------------Students, Trainees, Teachers and Researchers
Article 22--------------------------------Other Income
Article 23--------------------------------Capital
Article 24--------------------------------Relief from Double Taxation
Article 25--------------------------------Non-discrimination
Article 26--------------------------------Mutual Agreement Procedure
Article 27--------------------------------Exchange of Information
Article 28--------------------------------Diplomatic Agents and Consular Officers
Article 29--------------------------------Entry into Force
Article 30--------------------------------Termination
ARTICLE 1
General Scope
Paragraph 1
Paragraph 1 of Article 1 provides that the Convention applies to residents of the United
States or Venezuela except where the terms of the Convention provide otherwise. Under Article
4 (Residence) 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, a period of physical
presence, or other similar criteria. If, however, a person is considered a resident of both
Contracting States, Article 4 provides rules for determining a single state of residence (or no
state of residence). This determination governs for all purposes of the Convention.
Certain provisions are applicable to persons who may not be residents of either
Contracting State. For example, Article 20 (Government Service) may apply to an employee of a
Contracting State who is resident in neither State. Likewise, under Article 27 (Exchange of
Information), information may be exchanged with respect to residents of third states. Also,
paragraph 1 of Article 25 (Non-Discrimination) applies to nationals of the Contracting States.
Paragraph 2
Paragraph 2 states the generally accepted relationship both between the Convention and
domestic law and between the Convention and other agreements between the Contracting States
(i.e., that no provision in the Convention may restrict any exclusion, exemption, deduction, credit
or other allowance or benefit accorded by the tax laws of the Contracting States, or by any other
agreement between the Contracting States). The list in paragraph 2 contains examples of benefits
not to be restricted and is not intended to be exhaustive.
For example, if a deduction would be allowed under the U.S. Internal Revenue Code (the
"Code") in computing the U.S. taxable income of a resident of Venezuela, the deduction also is
allowed to that person in computing taxable income under the Convention. Paragraph 2 also
means that the Convention may not increase the tax burden on a resident of a Contracting State

beyond the burden determined under domestic law. Thus, a right to tax given by the Convention
cannot be exercised unless that right also exists under internal law. The relationship between the
non-discrimination provisions of the Convention and other agreements is not addressed in
paragraph 2 but in paragraph 3.
It follows that under the principle of paragraph 2, a taxpayer's liability to U.S. tax need
not be determined under the Convention if the Code would produce a more favorable result. A
taxpayer may not, however, choose among the provisions of the Code and the Convention in an
inconsistent manner in order to minimize tax. For example, assume that a resident of Venezuela
has three separate businesses in the United States. One is a profitable permanent establishment
and the other two are trades or businesses that would earn taxable income under the Code but
that do not meet the permanent establishment threshold tests of the Convention. One is profitable
and the other incurs a loss. Under the Convention, the income of the permanent establishment is
taxable, and both the profit and loss of the other two businesses are ignored. Under the Code, all
three would be subject to tax, but the loss would be offset against the profits of the two profitable
ventures. The taxpayer may not invoke the Convention to exclude the profits of the profitable
trade or business and invoke the Code to claim the loss of the trade or business against the profit
of the permanent establishment. (See Rev. Rul. 84-17, 1984-1 C.B. 308.) If, however, the
taxpayer invokes the Code for the taxation of all three ventures, he would not be precluded from
invoking the Convention with respect, for example, to any dividend income he may receive from
the United States that is not effectively connected with any of his business activities in the
United States.
Similarly, nothing in the Convention can be used to deny any benefit granted by any
other agreement between the United States and Venezuela. For example, if certain benefits are
provided for diplomats under a Consular Convention between the United States and Venezuela,
those benefits or protections will be available to residents of the Contracting States regardless of
any provisions to the contrary (or silence) in the Convention.
Paragraph 3
Paragraph 3 specifically relates to non-discrimination obligations of the Contracting
States under other agreements. The provisions of paragraph 3 are an exception to the rule
provided in paragraph 2 of this Article under which the Convention shall not restrict in any
manner any benefit now or hereafter accorded by any other agreement between the Contracting
States.
Subparagraph (a) of paragraph 3 provides that, notwithstanding any other agreement to
which the Contracting States may be parties, a dispute concerning whether a measure is within
the scope of this Convention shall be considered only by the competent authorities of the
Contracting States, and the procedures under this Convention exclusively shall apply to the
dispute. Thus, procedures for dealing with disputes that may be incorporated into trade,
investment, or other agreements between the Contracting States shall not apply for the purpose
of determining the scope of the Convention.
Subparagraph (b) of paragraph 3 provides that, unless the competent authorities

determine that a taxation measure is not within the scope of this Convention, the non-
discrimination obligations of this Convention exclusively shall apply with respect to that
measure, except for such national treatment or most-favored-nation ("MFN") obligations as may
apply to trade in goods under the General Agreement on Tariffs and Trade ("GATT"). No
national treatment or MFN obligation under any other agreement shall apply with respect to that
measure. Thus, unless the competent authorities agree otherwise, any national treatment and
MFN obligations undertaken by the Contracting States under agreements other than the
Convention shall not apply to a taxation measure, with the exception of GATT as applicable to
trade in goods.
Subparagraph (c) of paragraph 3 defines a "measure" broadly. It would include, for
example, a law, regulation, rule, procedure, decision, administrative action or guidance, or any
other form of governmental action or guidance.
Paragraph 4
Paragraph 4 contains the traditional saving clause found in U.S. treaties. The Contracting
States reserve their rights, except as provided in paragraph 5, 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 Venezuela performs independent personal services in the United
States and the income from the services is not attributable to a fixed base in the United States,
Article 14 (Independent Personal Services) would by its terms prevent the United States from
taxing the income. If, however, the resident of Venezuela is also a citizen of the United States,
the saving clause permits the United States to include the remuneration in the worldwide income
of the citizen and subject it to tax under the normal Code rules (i.e., without regard to Code
section 894(a)).
For purposes of the saving clause, "residence" is determined under Article 4 (Residence).
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 Venezuela under its law, and that individual has a permanent home
available to him in Venezuela and not in the United States, he would be treated as a resident of
Venezuela 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 Internal Revenue Code but who is deemed to be a
resident of Venezuela under the tie-breaker rules of Article 4 (Residence) 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. section
301.7701(b)-7(a)(3).
Paragraph 1 of the Protocol clarifies that for purposes of the saving clause, the term
“citizens” in paragraph 4 includes former U.S. citizens whose loss of citizenship had, as one of

its principal purposes, the avoidance of tax. The United States treats an individual as having a
principal purpose to avoid tax if
(a) the average annual net income tax of such individual for the period of 5
taxable years ending before the date of the loss of status is greater than $100,000, or
(b) the net worth of such individual as of such date is $500,000 or more.
In the United States, such a former citizen is taxable in accordance with the provisions of section
877 of the Code.
Section 877 of the Code also provides that the United States may likewise tax its former
long-term residents whose loss of such long-term residence had as one of its principal purposes
the avoidance of tax. The United States’ right to tax those former long-term residents is
preserved in the saving clause of the U.S. Model. This Convention, however, achieves this result
with the inclusion of paragraph 3 of Article 17 (Limitation on Benefits), which denies these
individuals the benefits of the Convention. The United States defines “long-term resident” as an
individual (other than a U.S. citizen) who is a lawful permanent resident of the United States in
at least 8 of the prior 15 taxable years. An individual 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.
Paragraph 5
Some provisions are intended to provide benefits to citizens and residents even if such
benefits do not exist under internal law. Paragraph 5 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 4:
(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative
adjustment with respect to income tax due on profits reallocated under Article 9.
(2) Article 24 (Relief from Double Taxation) confirms the benefit of a credit, exemption
or other relief from double taxation to citizens and residents of one Contracting State for income
taxes paid to the other.
(3) Article 25 (Non-Discrimination) 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 Venezuela even if that person is a citizen of the United
States.
(4) Article 26 (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 5 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 the statutory rules. The benefits preserved by this paragraph are the host country
exemptions for the following items: tax treatment of government service salaries and pensions
under Article 20 (Government Service); certain income of visiting students and trainees under
Article 21 (Students, Trainees, Teachers and Researchers); and the income of diplomatic agents
and consular officers under Article 28 (Diplomatic Agents and Consular Officers).
ARTICLE 2
Taxes Covered
This Article specifies the U.S. taxes and the Venezuelan taxes to which the Convention
applies. Unlike Article 2 in the OECD Model, but consistent with the U.S. Model format, this
Article does not contain a general description of the types of taxes that are covered (i.e., income
taxes), but only a listing of the specific taxes covered for both of the Contracting States. With
three exceptions, the taxes specified in Article 2 are the covered taxes for all purposes of the
Convention. A broader coverage applies for purposes of Articles 25 (Non-Discrimination) and
27 (Exchange of Information). Article 25 applies with respect to all taxes, including those
imposed by state and local governments. Article 27 applies with respect to all taxes imposed at
the national level. Article 24 (Relief from Double Taxation) provides narrower coverage in that
while Venezuela’s business assets tax (BAT) is a covered tax, the United States is not required
by the Convention to grant a U.S. foreign tax credit for business assets taxes paid to Venezuela.
Paragraph 1
Subparagraph (a) provides that the Venezuelan covered taxes are Venezuela’s income tax
and its business assets tax (amplified as described above in the cases of Articles 25 (Non-
Discrimination) and (Exchange of Information)). Coverage of the business assets tax limits its
imposition to cases where a U.S. resident either
(i) has a permanent establishment in Venezuela under Article 5,
(ii) has real property in Venezuela, or
(iii) leases or otherwise permits a resident of Venezuela to use property for
which a “royalty” (as defined in Article 12) is paid.
The United States is not required, under Article 24 (Relief from Double Taxation) to grant a
foreign tax credit for assets taxes paid to Venezuela.
Subparagraph (b) provides that the United States covered taxes are the Federal income
taxes imposed by the Code. Although they may be regarded as income taxes, social security
taxes (Code sections 1401, 3101, 3111 and 3301) are specifically excluded from coverage. It is

expected that social security taxes will be dealt with in bilateral Social Security Totalization
Agreements, which are negotiated and administered by the Social Security Administration.
Except with respect to Article 25 (Non-Discrimination), state and local taxes in the United States
are not covered by the Convention.
In this Convention, unlike some U.S. treaties, the Accumulated Earnings Tax and the
Personal Holding Companies Tax are covered taxes because they are income taxes and they are
not otherwise excluded from coverage. Under the Code, these taxes will not apply to most
foreign corporations because of a statutory exclusion or the corporation's failure to meet a
statutory requirement.
Paragraph 2
Under paragraph 2, the Convention will apply to any taxes that are identical, or
substantially similar, to those enumerated in paragraph 1, 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
significant changes in their taxation laws that affect their obligations under the Convention. The
use of the term "significant" means that changes must be reported that are of significance to the
operation of the Convention. The competent authorities are also obligated to notify each other of
official published materials concerning the application of the Convention.
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 (Residence). 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
these definitions 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.
The term "Venezuela" is defined in subparagraph (a) to mean the Republic of Venezuela.
The term "United States" is defined in subparagraph (b) to mean the United States of
America, which includes the territorial seas of the United States, but not including Puerto Rico,
the Virgin Islands, Guam or any other United States possession or territory.
Paragraph 3 of the Protocol further provides that, only for purposes of this Convention
and when referred to in a geographical sense, “Venezuela” and “United States” include the areas
of the seabed and subsoil adjacent to their respective territorial seas in which they may exercise

rights in accordance with domestic legislation and with international law. This extension applies
to the extent that the United States or Venezuela exercises sovereignty in accordance with
domestic legislation and 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, for example, the extension 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.
Subparagraph 1(c) defines the terms “Contracting State” and “the other Contracting
State” as meaning Venezuela or the United States depending on the context in which the term is
used. That is, a provision using the terms “Contracting State” and “other Contracting State” is
bilateral, and “Contracting State” may be interpreted, as necessary, to be either Venezuela or the
United States.
Subparagraph 1(d) defines the term "person" to include an individual, a trust, a
partnership, a company and any other body of persons. The definition of “person” is significant
for a variety of reasons. For example, under Article 4, only a "person" can be a "resident" and
therefore eligible for most benefits under the treaty. Also, all "persons" are eligible to claim relief
under Article 26 (Mutual Agreement Procedure).
Although are not expressly listed in subparagraph 1(d), Venezuelan “entidades” and
“colectividades”, as defined under Article 22.3 of Venezuela’s Organic Tax Code (Código
Orgánico Tributario), shall, for the purposes of this Convention, be included within the term
“person”. These entities, while not legal persons under Venezuelan law, are nevertheless taxable
persons under the taxation laws of Venezuela. Therefore, it was agreed that they should be
included within the definitions of “person,” as well as “national,” and “resident” (the latter
subject to the Limitation on Benefits provisions of the Convention). In accordance with
paragraph 2 of Article 3, the meaning of the terms "partnership," "trust" and "estate" is to be
determined by reference to the law of the Contracting State whose tax is being applied.
The term "company" is defined in subparagraph (e) as a body corporate or an entity
treated as a body corporate for tax purposes. Although the Convention does not add “in the State
in which it is organized,” as does the U.S. Model, the result should be the same, as the
Commentaries to the OECD Model interpret the language identical to that of the Convention in a
manner consistent with the U.S. Model.
The terms "enterprise of a Contracting State" and "enterprise of the other Contracting
State" are defined in subparagraph (f) 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, nor is it defined in the OECD Model or its
Commentaries. Despite the absence of a clear, generally accepted meaning for the term
"enterprise," the term is understood to refer to any activity or set of activities that constitute a
trade or business.

Like the U.S. Model, subparagraph (f) provides that these terms also encompass an
enterprise conducted through an entity (such as a partnership) that is treated as fiscally
transparent in the Contracting State where the entity’s owner is resident. This phrase has been
included in the Convention in order to address more explicitly some of the problems presented
by fiscally transparent entities. In accordance with Article 4 (Residence), 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). Given the approach taken in
Article 4, an enterprise conducted by such an entity arguably could not qualify as an enterprise of
a Contracting State under the OECD Model because the OECD definition of enterprise requires
that the enterprise be conducted by a resident, although most countries would attribute the
enterprise to the owners of the entity in such circumstances. The definition in the Convention is
intended to make clear 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 Venezuela would still be a U.S. enterprise).
The term "national," as it relates to the United States and to Venezuela, is defined in
subparagraphs 1(g)(i) and (ii). This term is relevant for purposes of Articles 4 (Residence), 20
(Government Service) and 25 (Non-discrimination). A national of one of the Contracting States
is
(1) an individual possessing the nationality of that State, and
(2) any legal person, association or other entity (including an “entidad” or
“colectividad”) deriving its status as such from the law in force in the State where it is
established. This definition is closely analogous to that found in the OECD Model.
The inclusion of juridical persons in the definition may have significance in relation to
paragraph 1 of Article 25 (Non-discrimination), which provides that nationals of one Contracting
State may not be subject in the other to any taxes or connected requirements that are other or
more burdensome than those applicable to nationals of that other State who are in the same
circumstances.
Subparagraph 1(h) defines the term "international operation of ships or aircraft." The
term means any transport by a ship or aircraft except when the transport is solely between places
within a Contracting State. This definition is applicable principally in the context of Article 8
(Shipping and Air Transport), which refers to “operation of ships or aircraft in international
traffic”, which is to be understood to have the same meaning as “international operation of ships
or aircraft”. 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). This Convention does not include that limitation. The broader definition combines with
paragraphs 2 and 3 of Article 8 to exempt from tax by the source State income from the rental of

ships, aircraft or containers that is earned both by lessors that are operators of ships and aircraft
and by those lessors that are not (e.g., banks or container leasing companies).
The exclusion from the definition of “international operation of ships or aircraft” 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 the
international operation of ships or aircraft, whether carried by a U.S. or a foreign carrier. The
substantive taxing rules of the Convention relating to the taxation of income from transport,
principally Article 8 (Shipping and Air Transport), therefore, would not apply to income from
such carriage. Thus, if the carrier engaged in internal U.S. traffic were a resident of Venezuela
(assuming that were possible under U.S. law), the United States would not be required to exempt
the income from that transport under Article 8. The income would, however, be treated as
business profits under Article 7 (Business Profits), and therefore would be taxable in the United
States only if attributable to a U.S. permanent establishment of the foreign carrier, and then only
on a net basis. The gross basis U.S. tax imposed by section 887 would never apply under the
circumstances described. If, however, goods or passengers are carried by a carrier resident in
Venezuela from a non-U.S. port to, for example, New York, and some of the goods or
passengers continue on to Chicago, the entire transport would be international traffic. This would
be true if the international carrier transferred the goods at the U.S. port of entry from a ship to a
land vehicle, from a ship to a lighter, or even if the overland portion of the trip in the United
States was handled by an independent carrier under contract with the original international
carrier, so long as both parts of the trip were reflected in original bills of lading. For this reason,
the Convention refers, in the definition of "international operation of ships or aircraft," to "such
transport" being solely between places in the other Contracting State, while the OECD Model
refers to the ship or aircraft being operated solely between such places. The Convention’s
definition 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(i)(i) and (ii) define the term "competent authority" for the United States
and Venezuela, 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 Assistant
Commissioner (International). With respect to interpretative issues, the Assistant Commissioner
acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue
Service. The Venezuelan competent authority is the Integrated National Service of Tax
Administration (Servicio Nacional Integrado de Administración Tributaria -- SENIAT), its
authorized representative or the authority which is designated by the Ministry of Finance as
competent authority.
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. 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 26 (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.
It is understood that 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. Even before its explicit inclusion in the U.S. Model, this use of
"ambulatory definitions" was implicitly understood in previous U.S. and OECD Models.
The use of an ambulatory definition, however, may lead to results that are at variance
with the intentions of the negotiators and of the Contracting States when 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
Residence
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. 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. For purposes of the Convention, that person is a resident of the State in which he
is resident under internal law. If, however, a person is resident in both Contracting States under
their respective taxation laws, the Article proceeds, where possible, to use tie-breaker rules to

assign a single State of residence to such a person for purposes of the Convention.
Paragraph 1

The term "resident of a Contracting State" is defined in paragraph 1. Due to differences in
the structures of the United States and Venezuelan tax systems, paragraph 1 establishes particular
definitions of resident for each country. Subparagraph (a) provides the definition applicable to
the United States. It is based generally on the definitions of residence in U.S. law by referring to
a resident as a person who, under the laws of the United States, 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).
Subparagraph (a) also provides that a U.S. citizen or alien lawfully admitted for
permanent residence in the United States (i.e., a "green card" holder) who is not, under
subparagraph 1 (b), a resident of Venezuela, will be treated as a resident of the United States for
purposes of the Convention, and, thereby entitled to treaty benefits, only if he has a permanent
home or habitual abode in the United States. If, however, such an individual is a resident both of
the United States and Venezuela under the rules of paragraph 1, whether he is to be treated as a
resident of the United States or of Venezuela for purposes of the Convention is determined by
the tie-breaker rules of paragraph 4 of the Article, regardless of how close his nexus to the
United States may be. Thus, for example, an individual resident of Mexico who is a U.S. citizen
by birth, or who is a Mexican citizen and holds a U.S. green card, but who, in either case, has
never lived in the United States, would not be entitled to Venezuelan benefits under the
Convention. On the other hand, a U.S. citizen employed by a U.S. corporation who is transferred
to Mexico for two years but who maintains a permanent home or habitual abode in the United
States would be entitled to treaty benefits. However, the fact that a U.S. citizen who does not
have close ties to the United States may not be treated as a U.S. resident under the Convention
does not alter the application of the saving clause of paragraph 4 of Article 1 (General Scope) to
that citizen. For example, a U.S. citizen who pursuant to the "citizen/green card holder" rule is
not considered to be a resident of the United States still is taxable on his worldwide income
under the generally applicable rules of the Code.
Subparagraph (b) provides the definition of resident applicable to Venezuela and reflects
Venezuela’s domestic law definitions of taxable residents. The subparagraph provides that
residence for individuals is based on the concept of the “domiciliado.” An individual is
considered a domiciliado, and therefore a resident of Venezuela in a given tax year for purposes
of the Convention, if he is present in Venezuela for more than 180 days in that tax year or in the
preceding year. Subparagraph (b) also provides that any legal person that is created or organized
under the laws of Venezuela shall be considered a resident of Venezuela. This provision reflects
Venezuela’s domestic law definition of corporate residence, which is analogous to the place-of-
incorporation rule used in the United States. Any corporation registered under a commercial
registry in Venezuela (i.e., incorporated in Venezuela) is considered a taxable resident for
domestic law purposes and, under this subparagraph, for purposes of the Convention. The
subparagraph also provides explicit inclusion as residents of those Venezuelan entidades and
colectividades that are subject to the taxation applicable to corporations, which is necessary

because those entities are not legal bodies incorporated in Venezuela. Those entidades and
colectividades not taxed as corporations are fiscally transparent in Venezuela, and are therefore
subject to the provision of paragraph 2 of this Article.
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,
RICs, REITs and REMICs 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.
The Protocol’s paragraph 3 describes additional entities which are to be considered
residents for purposes of the Convention. Protocol paragraph 3 is analogous to subparagraphs 1
(b) and 1 (c) of the U.S. Model’s Article 4. Subparagraph 3 (a) makes clear 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, agencies and
other instrumentalities of that State.
Subparagraph 3(b) of the Protocol corresponds to the U.S. Model’s Article 4 paragraph
1(b) and 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 benefits to
employees.
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. 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
Paragraph 2 addresses special issues presented by fiscally transparent entities such as
partnerships and certain estates and trusts. This paragraph applies to any resident of a
Contracting State who is entitled to income derived through an entity that is treated as fiscally
transparent 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.

Paragraph 2 provides that an item of income derived by such a fiscally transparent entity
will be considered to be derived by a resident of a Contracting State if 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 Venezuela 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 United States 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 Venezuela, 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
Venezuela 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 Venezuela (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, Venezuela, or in a
third country. For example, income from sources in Venezuela received by an entity organized
under the laws of Venezuela, 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 Venezuela, the entity
is treated as fiscally transparent. Rather, for purposes of the treaty, the income is treated as
derived by an entity resident in Venezuela. 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 the other Contracting State.
The taxation laws of a Contracting State may treat an item of income, profit or gain as
income, profit or gain of a resident of that State even if, under the taxation laws of that State, the
resident is not subject to tax on that particular item of income, profit or gain. For example, U.S.-
source dividends would be regarded as income or gain of a resident of Venezuela who otherwise
derived the income or gain, despite the fact that the resident could be exempt from tax in
Venezuela on the dividend because of Venezuela’s territorial system of taxation.
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 Venezuela, 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 the Code's rules. If
Venezuela has no rules comparable to those in sections 671 through 679 then it is possible that
under that State's law neither X nor the trust would be taxed on the income derived from the
United States. In these cases paragraph 2 provides that the trust's income would be regarded as
being derived by a resident of Venezuela only to the extent that the laws of Venezuela treat
residents of Venezuela as deriving the income for tax purposes.
Paragraph 3
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 3 to determine a single State of residence for that individual. These tests
are to be applied in the order in which they are stated. The first test is based on where the
individual has a permanent home. If that test is inconclusive because the individual has a
permanent home available to him in both States, he will be considered to be a resident of the
Contracting State where his personal and economic relations are closest (i.e., the location of his
"center of vital interests"). If that test is also inconclusive, or if he does not have a permanent
home available to him in either State, he will be treated as a resident of the Contracting State
where he maintains 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 attempt to agree to assign a single State of residence.
Paragraph 4
Dual residents other than individuals (such as companies, 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 reach a mutual agreement in determining a single
State of residence for that person for purposes of the Convention. If the competent authorities are
unable to reach such an agreement, the dual-resident person shall not be considered a resident of
either Contracting State, and shall therefore not be granted the benefits of the Convention. Since
it is only for the purposes of deriving treaty benefits that such dual residents are excluded from
the Convention, they may be treated as resident for other purposes. For example, if a dual
resident corporation pays a dividend to a resident of Venezuela, the U.S. withholding agent
would be permitted to withhold on that dividend at the appropriate treaty rate, since reduced
withholding is a benefit enjoyed by the resident of Venezuela receiving the dividend, not by the
dual resident. The dual resident corporation that pays the dividend would, for this purpose, be
treated as a resident of the United States under 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 14
(Independent Personal Services) is understood by reference to the definition of "permanent
establishment," this Article is also relevant for purposes of Article 14. Articles 10, 11 and 12
(dealing with dividends, interest, and royalties, respectively) provide for reduced rates of tax at
source on payments of these items of income to a resident of the other State only when the
income is not attributable to a permanent establishment or fixed base that the recipient has in the
source State. The concept is also relevant in determining which Contracting State may tax certain
gains under Article 13 (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 Commentaries (see
paragraphs 4 through 8), a general principle to be observed in determining whether a permanent
establishment exists is that the place of business must be “fixed” in the sense that a particular
building or physical location is used by the enterprise for the conduct of its business, and that it
must be foreseeable that the enterprise’s use of this building or other physical location will be
more than temporary.
Paragraph 2
Paragraph 2 lists a number of types of fixed places of business that constitute a
permanent establishment. This list is illustrative and non-exclusive. According to paragraph 2,
the term permanent establishment includes a place of management, a branch, an office, a factory,
a workshop, and a mine, oil or gas well, quarry or other place of extraction of natural resources.
Paragraph 3
Paragraph 3 describes several additional activities of business sites that will constitute a
permanent establishment. Paragraph 3 (a) provides rules to determine whether a building site or a
construction, assembly or installation project, or an installation or drilling rig or ship used for the
exploration of natural resources constitutes a permanent establishment for the contractor, driller,
etc. An activity does not create a permanent establishment unless the site, project, etc. lasts or
continues for more than 183 days within any twelve month period commencing or ending in the
taxable year concerned. It is only necessary to refer to "exploration" and not "exploitation" in
this context because exploitation activities are defined to constitute a permanent establishment
under subparagraph (f) of paragraph 2. Thus, a drilling rig does not constitute a permanent
establishment if a well is drilled in only three months. However, if production begins in the

following month, the well becomes a permanent establishment as of that date. As explained in
subparagraph (b) of paragraph 4 of the Protocol, unlike the OECD Model, the time period
calculation under the Convention shall not take into account time spent solely on preparatory
activities, such as obtaining permits.
The 183 day test applies separately to each site or project. The 183 day period begins
when work 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. Subparagraph (a) of paragraph 4 of the Protocol
clarifies that in applying paragraph 3, time spent by a sub-contractor on a building site shall be
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 within any twelve month period commencing or ending in the taxable
year concerned. If a sub-contractor is on a site intermittently, then, for purposes of applying the
183-day rule, time is measured from the first day the sub-contractor is on the site until the last
day (i.e., intervening days that the sub-contractor is not on the site are counted).
These interpretations of the Article are based on the Commentary to paragraph 3 of
Article 5 of the OECD Model and are consistent with the generally accepted international
interpretation of the relevant language in paragraph 3 of Article 5 of the Convention.
The paragraph also specifies, in subparagraph (b), that the furnishing of services in a
Contracting State by an enterprise either through employees or others engaged for that purpose
will constitute a permanent establishment, so long as the activities continue physically in that
State for a period or periods aggregating more than 183 days within any twelve month period
commencing or ending in the taxable year concerned.
Paragraph 4
This paragraph contains exceptions to the general rule of paragraph 1, listing a number of
activities that may be carried on through a fixed place of business, but which nevertheless do not
create a permanent establishment. The use of facilities solely to store, display or deliver
merchandise belonging to an enterprise, does not constitute a permanent establishment of that
enterprise. The maintenance of a stock of goods belonging to an enterprise solely for the purpose
of storage, display or delivery, or solely for the purpose of processing by another enterprise does
not give rise to a permanent establishment of the first-mentioned enterprise. The maintenance of
a fixed place of business solely for the purpose of purchasing goods or merchandise, or for
collecting information, for the enterprise, or for other activities that have a preparatory or
auxiliary character for the enterprise, such as advertising, or the supply of information, do not

constitute a permanent establishment of the enterprise. Thus, as explained in paragraph 22 of the
OECD Commentaries, a news bureau of a newspaper would not constitute a permanent
establishment of the newspaper.
Subparagraph (f) provides that the maintenance of a fixed place of business for a
combination of the activities listed in subparagraphs (a) through (e) of the paragraph does not
give rise to a permanent establishment. The Convention contains the OECD Model’s
qualification that the overall combination of activities must be of a preparatory or auxiliary
character. As further clarified in paragraph 5 of the Protocol, the maintaining of sales personnel
in a Contracting State would not be an activity excepted under paragraph 4 and, if the
requirements of paragraphs 1,5 and 6 of Article 5 are met, would constitute a permanent
establishment.
Paragraph 5
Paragraphs 5 and 6 specify when activities carried on by an agent on behalf of an
enterprise create a permanent establishment of that enterprise. Under paragraph 5, a dependent
agent of an enterprise is deemed to be a permanent establishment of the enterprise if the agent
has and habitually exercises an authority to conclude contracts that are binding on the enterprise.
If, however, the agent’s activities are limited to those activities specified in paragraph 4 which
would not constitute a permanent establishment if carried on by the enterprise through a fixed
place of business, the agent is not a permanent establishment of the enterprise.
The Convention uses the OECD Model term “in the name of that enterprise” rather than
the U.S. Model term “binding on the enterprise”. There is no substantive difference. As indicated
in paragraph 32 to the OECD Commentaries on Article 5, the application of the provision is not
limited to “an agent who enters into contracts literally in the name of the enterprise; the
paragraph applies equally to an agent who concludes contracts which are binding on the
enterprise, even if those contracts are not actually in the name of the enterprise.”
The contracts referred to in paragraph 5 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 in the name of the enterprise with its customers for, say, the sale
of the goods produced by the enterprise, but it can enter into service contracts in the name 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 6
Under paragraph 6, an enterprise is not deemed to have a permanent establishment in a
Contracting State merely because it carries on business in that State through an independent
agent, including a broker or general commission agent, if the agent is acting in the ordinary
course of his business. Thus, there are two conditions that must be satisfied: the agent must be
both legally and economically independent of the enterprise, and the agent must be acting in the
ordinary course of its business in carrying out activities on behalf of the enterprise.

Whether the agent and the enterprise are independent is a factual determination. Among
the questions to be considered 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 the
activities it performs is not economically independent and therefore is not described in paragraph
6.
Another relevant factor in determining whether an agent is economically independent is
whether the agent 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. The paragraph provides that an agent will be considered
a permanent establishment of an enterprise (under Paragraph 5) when the activities of that agent
are devoted wholly or almost wholly on behalf of that enterprise, and the conditions between the
agent and the enterprise differ from those which would be made between independent persons
(i.e., the agent and the enterprise are not operating at arms length).
It should be borne in mind, however, that in the absence of transactions between the
agent and the enterprise under non-arm’s length conditions, exclusivity is not in itself a
conclusive test: an agent may be economically independent notwithstanding an exclusive
relationship with the principal if it has the capacity to diversify and acquire other clients without
substantial modifications to its current business and without substantial harm to its business
profits. Thus, exclusivity should be viewed merely as a pointer to further investigation of the
relationship between the principal and the agent. Each case must be addressed on the basis of its
own facts and circumstances.
Paragraph 7
This paragraph clarifies that a company that is a resident of a Contracting State is not
deemed to have a permanent establishment in the other Contracting State merely because it
controls, or is controlled by, a company that is a resident of that other Contracting State, or that
carries on business in that other Contracting State. The determination whether a permanent
establishment exists is made solely on the basis of the factors described in paragraphs 1 through
6 of the Article. Whether a company is a permanent establishment of a related company,
therefore, is based solely on those factors and not on the ownership or control relationship
between the companies.

ARTICLE 6
Income from Immovable Property (Real Property)
Paragraph 1
This paragraph 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. Paragraph 1 specifies that income from
immovable property (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).
Given the availability of the net election in paragraph 5 for those taxpayers who, under the
domestic law of the situs State, are not otherwise allowed to compute their tax on income from
real property on a net basis, 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. 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.
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, except that, as provided in paragraph 5, the situs State must
allow the taxpayer an election to be taxed on a net basis if such treatment is not otherwise
available under domestic law.
Paragraph 2
The term "immovable property (real property)" is defined in paragraph 2 mainly 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. 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 (real property)" for purposes of Article 6 is more limited than the
expansive definition of "immovable property (real property)" situated in the other Contracting
State" in paragraphs 1 and 2 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 the domestic law of the Contracting State levying the tax does not tax
this income on a net basis, and if in that case, a net taxation election has not been made as
provided in paragraph 5, 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 is not considered "derived"
from real property and is not dealt with in Article 6. The taxation of that income is addressed in
Article 13 (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 would fall
under Articles 10 (Dividends), 11 (Interest) or 13 (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(Gains).
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 14
(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.
Paragraph 5
This paragraph provides that a resident of one Contracting State who is liable to tax on
real property income situated in the other Contracting State and who is not otherwise allowed to
compute the tax on such income on a net basis may elect, for any taxable year, to be subject to
tax in that other State on a net basis, as though the income were attributable to a permanent
establishment in that other State. The election may be terminated with the consent of the
competent authority of the situs State. In the United States, revocation will be granted in
accordance with the provisions of Treas. Reg. section 1.871-10(d)(2).
ARTICLE 7
Business Profits
This Article provides rules for the taxation by a Contracting State of the business profits
of an enterprise of the other Contracting State.
Paragraph 1
Paragraph 1 states the general rule that business profits of an enterprise of one
Contracting State may not be taxed by the other Contracting State unless the enterprise carries on
business in that other Contracting State through a permanent establishment (as defined in Article
5 (Permanent Establishment)) situated there. When that condition is met, the State in which the
permanent establishment is situated may tax the enterprise, but only on a net basis and only on
the income that is attributable to the permanent establishment. This paragraph is identical to
paragraph 1 of Article 7 of the OECD Model.

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 4 and paragraph 6 of the Protocol for the allowance of allocation
of expenses incurred for the purposes of earning the profits.
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.
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. Any such approach, however, must be designed to
approximate an arm’s length result. This paragraph has not been included in the Convention
because it is unnecessary. The U.S. view is that paragraphs 2 and 3 of Article 7 authorize the use
of such approaches independently of paragraph 4 of Article 7 of the OECD Model because total
profits methods are acceptable methods for determining the arm’s length profits of associated
enterprises under Article 9 (Associated Enterprises). Accordingly, it is understood that, under
paragraph 2 of the Convention, it is permissible to use methods other than separate accounting to
determine the arm’s length profits of a permanent establishment where it is necessary to do so for
practical reasons, such as when the affairs of the permanent establishment are so closely bound
up with those of the head office that it would be impossible to disentangle them on any strict
basis of accounts.
Paragraph 3
Paragraph 3 provides that nothing in this Article shall affect the application of any law of
a Contracting State relating to the determination of the tax liability of any person in cases where
the information available to the competent authority of that State is inadequate to determine the
profits to be attributed to a permanent establishment. The Internal Revenue Service would have
this power even in the absence of such a specific provision. In any such case, however,
determination of the profits of the permanent establishment must be consistent with the
principles stated in this Article (i.e., it must seek to reflect arm’s length pricing and appropriate
deductions of expenses.
Paragraph 4
This paragraph is in substance the same as paragraph 3 of Article 7 of the OECD Model,
although it is more detailed. Paragraph 4 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, as clarified in paragraph 6 of the Protocol, 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.
Paragraph 4 clarifies, as does the UN Model and the commentary to the OECD Model,
that a permanent establishment may not take any deduction for royalties, fees, commissions, or
service fees paid to its home office or other office of the enterprise other than amounts which
represent reimbursement of actual expenses incurred by such office. Since the permanent
establishment and the home and other offices of the enterprise are parts of a single entity, there
should be no profit element in such intra-company transfers. 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.
The last sentence of paragraph 4, which is neither in the U.S. Model nor in the OECD
Model, allows each Contracting State, consistent with its law, to impose limitations on the
deductions taken by the permanent establishment as long as the limitations are consistent with
the concept of net income. This sentence is intended to be only a clarification, and does not alter
the definition of allowable deductions in the U.S. and OECD Models. It would not permit the
Contracting States to deny a deduction for wages or interest expenses since such expenses are so
fundamental that denial of deductions would be inconsistent with the concept of net income.
Paragraph 6 of the Protocol 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 paragraph also explains that these deductions shall be
allowed, regardless of where they are incurred, but only to the extent that they have not been
deducted by the enterprise, and have not been reflected in other deductions allowed to the
permanent establishment, such as deductions for the cost of goods sold or of the purchases. The
allocation of expenses must be accomplished in a manner that reflects to a reasonably close
extent the factual relationship between the deduction and the permanent establishment and the
enterprise. Some examples of bases and factors that can be used in allocating expenses according
to this factual relationship are provided in paragraph 6 of the Protocol, and are taken from the
bases and factors described in Temporary Treas. Reg. § 1.861-8T(c)(1). Accordingly, 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. §§ 1.861-8 and 1.882-5).
Paragraph 5

Paragraph 5 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 (Permanent Establishment). A common situation in
which paragraph 5 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 6
Paragraph 6 provides 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).
The OECD Model does not expressly provide such a limitation, although it generally is
understood to be implicit in paragraph 1 of Article 7 of the OECD Model. This provision was
included in the Convention to make it clear that the limited force of attraction rule of Code
section 864(c)(3) is not incorporated into paragraph 2.
This paragraph also tracks paragraph 6 of Article 7 of the OECD Model, providing 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 method.
Paragraph 7
Paragraph 7 coordinates the provisions of Article 7 and other provisions of the
Convention. Under this paragraph, when business profits include items of income that are dealt
with separately under other articles of the Convention, the provisions of those articles will,
except when they specifically provide to the contrary, take precedence over the provisions of
Article 7. For example, the taxation of dividends will be determined by the rules of Article 10
(Dividends), and not by Article 7, except where, as provided in paragraph 6 of Article 10, the
dividend is attributable to a permanent establishment or fixed base. In the latter case the
provisions of Articles 7 or 14 (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 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. This rule
applies with respect to paragraphs 1 and 2 of Article 7 (Business Profits), paragraph 6 of Article
10 (Dividends), paragraph 6 of Article 11 (Interest), paragraph 4 of Article 12 (Royalties),
paragraph 3 of Article 13 (Gains), Article 14 (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 Venezuela 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 3.
Relation to Other Articles
This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope).
Thus, if a citizen of the United States who is a resident of Venezuela 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 tax those profits, notwithstanding the provision of
paragraph 1 of this Article which would exempt the income from U.S. tax.
The benefits of this Article are also subject to Article 17 (Limitation on Benefits). Thus,
an enterprise of the other Contracting State that derives income effectively connected with a U.S.
trade or business may not claim the benefits of Article 7 unless the resident carrying on the
enterprise qualifies for such benefits under Article 17.
ARTICLE 8
Shipping and Air Transport
This Article governs the taxation of profits from the international operation of ships and
aircraft. Paragraph 7 of the Protocol makes clear that the provisions of this Article shall not

affect the continued validity of the Agreement Between the Government of the United States and
the Government of the Republic of Venezuela For The Avoidance of Double Taxation With
Respect to Shipping and Air Transport, signed December 29, 1987, in Caracas, Venezuela. 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 (Gains).
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 7 of Article 7 (Business Profits) defers to Article 8 with respect to shipping
income, such income derived by a resident of one of the Contracting States may not be taxed in
the other State even if the enterprise has a permanent establishment in that other State. Thus, if a
U.S. airline has a ticket office in Venezuela, Venezuela 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 (Business Profits).
Paragraph 2
The income from the operation of ships or aircraft in international traffic that is exempt
from tax under paragraph 1 is defined in paragraph 2.
In addition to income derived directly from the operation of ships and aircraft in
international traffic, this definition also includes certain items of rental income that are closely
related to those activities. First, income of an enterprise of a Contracting State from the rental of
ships or aircraft on a full basis (i.e., with crew) when such ships or aircraft are used in
international traffic is income of the lessor from the operation of ships and aircraft in
international traffic and, therefore, is exempt from tax in the other Contracting State under
paragraph 1. Also, paragraph 2 encompasses income from the lease of ships or aircraft on a
bareboat basis (i.e., without crew), either when the 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. As discussed above, of these classes of
rental income, only non-incidental, bareboat lease income is not covered by Article 8 of the
OECD Model. The scope of Article 8 is thus the same as the U.S. Model, but broader than that of
the OECD Model as it covers rentals from bareboat leasing that are not incidental to the
operation of ships or aircraft by the resident itself.
Paragraph 2 also clarifies, consistent with the Commentary to Article 8 of the OECD
Model, that income earned by an enterprise from the inland transport of property or passengers
within either Contracting State falls within Article 8 if the transport is undertaken as part of the
international transport of property or passengers by the enterprise. Thus, if a U.S. shipping
company contracts to carry property from Venezuela to a U.S. city and, as part of that contract, it
transports the property by truck from its point of origin to an airport in Venezuela (or it contracts
with a trucking company to carry the property to the airport) the income earned by the U.S.

shipping company from the overland leg of the journey would be taxable only in the United
States. Similarly, Article 8 also would apply to income from lighterage undertaken as part of the
international transport of goods.
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. These interpretations of paragraph 1 also are consistent with the
Commentary to Article 8 of the OECD Model.
Paragraph 3
Under this paragraph, profits of an enterprise of a Contracting State from the use,
maintenance or rental of containers (including equipment for their transport) 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 and 3 also apply to profits
derived by an enterprise of a Contracting State from participation in a pool, joint business or
international operating agency. This refers to various arrangements for international cooperation
by carriers in shipping and air transport. For example, airlines from two countries may agree to
share the transport of passengers between the two countries. They each will fly the same number
of flights per week and share the revenues from that route equally, regardless of the number of
passengers that each airline actually transports. Paragraph 4 makes clear that with respect to each
carrier the income dealt with in the Article 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
As with other benefits of the Convention, the benefit of exclusive residence country
taxation under Article 8 is available to an enterprise only if it is entitled to benefits under Article
22 (Limitation on Benefits).
This Article also is subject to the saving clause of paragraph 4 of Article 1 (General
Scope) of the Model. Thus, if a citizen of the United States who is a resident of Venezuela
derives profits from the operation of ships or aircraft in international traffic, notwithstanding the
exclusive residence country taxation in paragraph 1 of Article 8, the United States may 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. 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 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. For this purpose, all types of control are
included, i.e., whether or not legally enforceable and however exercised or exercisable.
The fact that a transaction is entered into between such related enterprises does not, in
and of itself, mean that a Contracting State may adjust the income (or loss) of one or both of the
enterprises under the provisions of this Article. If the conditions of the transaction are consistent
with those that would be made between independent persons, the income arising from that
transaction should not be subject to adjustment under this Article.
Similarly, the fact that associated enterprises may have concluded arrangements, such as
cost sharing arrangements or general services agreements, is not in itself an indication that the
two enterprises have entered into a non-arm’s length transaction that should give rise to an
adjustment under paragraph 1. Both related and unrelated parties enter into such arrangements
(e.g., joint venturers may share some development costs). As with any other kind of transaction,
when related parties enter into an arrangement, the specific arrangement must be examined to see
whether or not it meets the arm’s length standard. In the event that it does not, an appropriate
adjustment may be made, which may include modifying the terms of the agreement or

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
Commentaries to Article 9 of the OECD Model, together with the U.S. observation set forth in
paragraph 15 thereof, sets forth a similar understanding of the scope of Article 9 in the context of
thin capitalization.
Paragraph 2
When a Contracting State has made an adjustment that is consistent with the provisions
of paragraph 1, and the other Contracting State agrees that the adjustment was appropriate to
reflect arm's-length conditions, that other Contracting State is obligated to make a correlative
adjustment (sometimes referred to as a “corresponding adjustment”) to the tax liability of the
related person in that other Contracting State. Although the OECD Model does not specify that
the other Contracting State must agree with the initial adjustment before it is obligated to make
the correlative adjustment, the Commentary makes clear that the paragraph is to be read that
way.
As explained in the OECD Commentaries, 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, 1993-34 I.R.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 Venezuela, the provisions of Article 10 (Dividends) will apply, and the United
States may impose a 5 percent withholding tax on the dividend. Also, if under Article 23
Venezuela generally exempts such dividends from Venezuelan income tax, 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. 96-13,
1996-13 I.R.B. 31, Section 7.05.
Paragraph 3
Paragraph 3 preserves the rights of the 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. 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 Commentaries to Article
9.
Relation to Other Articles
The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to
paragraph 2 of Article 9 by virtue of the exceptions to the saving clause in paragraph 5(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 1 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. The
article provides for full residence country taxation of such dividends and a limited source State
right to tax. Rules for the imposition of a tax on branch profits by the State of source are found in
Article 11A (Branch Tax). Finally, the article prohibits a State from imposing a tax on dividends

paid by companies resident in the other Contracting State except if such dividends are paid to a
resident of the first-mentioned State or are attributable to a permanent establishment or fixed
based situated in the first-mentioned 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, except when the dividends arise in the other State or are attributable to a permanent
establishment or fixed base in that other State. In those cases, that other State may also tax the
dividend.
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 holds at least 10 percent of the voting
shares of the company paying the dividend, then the source State's tax is limited to 5 percent of
the gross amount of the dividend. Indirect ownership of voting shares (through tiers of
corporations) and direct ownership of non-voting shares are not taken into account for purposes
of determining eligibility for the 5 percent direct dividend rate. Shares are considered voting
shares if they provide the power to elect, appoint or replace 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.
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 5 of Article 25 (Non-
Discrimination).
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 (Residence)) is
received by a nominee or agent that is a resident of the other State on behalf of a person that is
not a resident of that other State, the dividend is not entitled to the benefits of this Article.
However, a dividend received by a nominee on behalf of a resident of that other State would be
entitled to benefits. These limitations are confirmed by paragraph 12 of the OECD

Commentaries to Article 10. See also, paragraph 24 of the OECD Commentaries to Article 1
(General 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 U.S. Regulated Investment
Company (RIC) or a U.S. Real Estate Investment Trust (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. 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
purposes of this rule, foreclosure property and mortgages will not be considered an interest in
real property unless, in the case of a mortgage, it has substantial equity components. With respect
to partnership interests held by a REIT, the REIT will be treated as owning directly the interests
in real property held by the partnership.
The denial of the 5 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 unjustified source
taxation benefits for certain shareholders resident in Venezuela. For example, a corporation
resident in the other Contracting State 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 5 percent.
Similarly, a resident of Venezuela 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
Exemption from tax in the State of source is provided for dividends paid to a beneficial
owner that is the other Contracting State, one of its political subdivisions or local authorities. In
addition, exemption from tax in the State of source is provided for dividends paid to a beneficial
owner that is a governmental entity resident in that other Contracting State constituted and
operated exclusively to administer or provide pension benefits. This would include, in the case of
the United States, state pension funds organized to provide benefits to retired state employees. In
both cases, the exemption shall not apply if the dividends are derived directly or indirectly from
the carrying on of a trade or business or from an associated enterprise.
Paragraph 8 of the Protocol provides that the reference in paragraph 4 of Article 10 of the
Convention to a “governmental entity constituted and operated exclusively to administer or
provide pension benefits” shall include certain public or mixed public and private entities that
provide pension benefits. In the case of Venezuela, in order to qualify, such entity must operate
under or pursuant to the Ley del Subsistema de Pensiones (Law of the Pension System) enacted
under the Ley Orgánica del Sistema de Seguridad Social Integral (Organic Law of the Integrated
Social Security System). The details of that law are described more fully below.
Venezuela is currently considering ways of reforming its government-run social security
system. The Ley del Subsistema de Pensiones, under or pursuant to which a Venezuelan entity
must operate in order to qualify under paragraph 8 of the Protocol, currently is proposed
legislation that would replace Venezuela’s existing regime with a system of privatized funds,
known under the proposed legislation as “individual capitalization funds” which would be
permitted to invest in equities. Individuals would open “individual capitalization accounts” that
could invest in the individual capitalization fund of the individual’s choice. Participation in these
accounts would cover all workers. Under the proposed legislation, both the worker and the
worker’s employer would be required to make contributions to the individual’s account. Upon
retirement, the worker would receive distributions from his account in amounts based on the
account’s investment performance. Further, the proposed legislation would establish
“intergenerational solidarity funds,” for the purpose of providing a guaranteed minimum level of
benefits in event of inadequate investment performance of a worker’s individual capitalization

fund of choice.
The stated objectives of the proposed legislation are to replace the current social security
system with a system that retains the fundamental principles of the current system, grant benefits
to citizens in general, and avoid inequities that exist between beneficiaries. The proposed
legislation contemplates only the “individual capitalization funds” and “intergenerational
solidarity funds.” Because the system under the proposed legislation is similar, both in its
purpose and scope of application to all working Venezuelans and their dependents, to a
government-run social security system, the inclusion of the proposed funds within the exemption
for dividend payments to certain governmental entities providing pension benefits was judged
warranted.
The exemption and the explicit inclusion of the proposed Venezuelan funds is consistent
with the policy underlying section 892 of the Code, which provides a general tax exemption for
the investment income of foreign governments. Also consistent with that policy, paragraph 4
states that the exemption will not apply if the dividend is derived from the carrying on of
commercial activity or if the dividend is paid by an associated enterprise.
Any equivalent U.S. entities would also be eligible to receive the withholding exemption
given to such governmental entities. Although the United States currently does not have any such
funds, the provision was made reciprocal to ensure that, if the United States were ever to adopt a
similar regime, the constituent entities would qualify for benefits.
There is no provision in the OECD Model analogous to paragraph 4 of the Convention.
Because the Ley del Subsistema de Pensiones has not been enacted, additional general
requirements are listed in paragraph 8 of the Protocol to ensure that the exemption for dividend
payments to certain governmental entities providing pension benefits will apply only to entities
that operate under or pursuant to a final version of the law that includes the significant features
of the proposed law. To satisfy these requirements, the final Venezuelan law must:
(1) provide universal coverage;
(2) require mandatory contributions by both employers and employees;
(3) limit the discretion of the employers and employees to direct investment;
(4) restrict distributions or borrowing, directly or indirectly, except upon or until death,
retirement or disability; and
(5) require that accounts be maintained at only one such qualifying entity at a time.
In addition, the entity must be operated, and its investment parameters established, pursuant to
governmental oversight and regulation.
Paragraph 5
Paragraph 5 defines the term dividends broadly and flexibly. The definition is intended to
cover all arrangements that yield a return on an equity investment in a corporation as determined
under the tax law of the state of source, as well as arrangements that might be developed in the
future.

The term dividends includes income from shares, or other corporate rights that participate
in the profits of the company and are treated as dividends under the laws of the source State. The
term also includes income that is subjected to the same tax treatment as income from shares by
the law of the State of source. Thus, a constructive dividend that results from a non-arm's length
transaction between a corporation and a related party is a dividend. In the case of the United
States the term dividend includes amounts treated as a dividend under U.S. law upon the sale or
redemption of shares or upon a transfer of shares in a reorganization. See, e.g., Rev. Rul. 92-85,
1992-2 C.B. 69 (sale of foreign subsidiary’s stock to U.S. sister company is a deemed dividend
to extent of 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 is not
characterized by the United States as a dividend and, therefore, is not a dividend for purposes of
Article 10, provided the limited liability company is not characterized as an association taxable
as a corporation under U.S. law. Finally, a payment denominated as interest that is made by a
thinly capitalized corporation may be treated as a dividend to the extent that the debt is
recharacterized as equity under the laws of the source State.
Paragraph 6
Paragraph 6 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 located, 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 paragraph 6 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 of accrual. See the Technical Explanation of
paragraph 8 of Article 7.
Paragraph 7
A State's right to tax dividends paid by a company that is a resident of the other State is
restricted by paragraph 7 to cases in which the dividends are paid to a resident of that State or are
attributable to a permanent establishment or fixed base in that State. Thus, a State may not
impose a "secondary" withholding tax on dividends paid by a nonresident company out of
earnings and profits from that State. In the case of the United States, paragraph 7, therefore,
overrides the ability to impose taxes under sections 871 and 882(a) on dividends paid by foreign
corporations that have a U.S. source under section 861(a)(2)(B).
Relation to Other Articles

Notwithstanding the foregoing limitations on source country taxation of dividends, the
saving clause of paragraph 4 of Article 1 permits the United States to tax dividends received by
its residents and citizens 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 the other Contracting State 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.
ARTICLE 11
Interest
Article 11 specifies the taxing jurisdiction over interest income of the States of source
and residence and defines the terms necessary to apply the article. The Article provides for full
residence country taxation of such interest and a limited source country right to tax.
Paragraph 1
Paragraph 1 preserves the residence country’s general right to tax its residents on interest
arising in the other State. For interest from any other source paid to a resident, 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 allows the State where the interest arises, as defined in paragraph 7, to tax
the interest, except as provided in paragraph 3. If, however, the beneficial owner of the interest is
a resident of the other Contracting State, the tax may not exceed the maximum rates specified in
subparagraphs (a) and (b). 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, 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 8 of
the OECD Commentaries to Article 11. See also paragraph 24 of the OECD Commentaries to
Article 1 (General Scope).
Subparagraph (a) applies to interest beneficially owned by any financial institution
(including an insurance company). The rate of tax at source on such interest may not exceed 4.95
percent of the gross amount of the interest. This rate is based on Venezuela’s statutory rate of
interest withholding when the payment is made to financial institutions.

Subparagraph (b) applies to all other categories of interest that are not dealt with in
subparagraph (a) or paragraph 3. That subparagraph imposes a ceiling of 10 percent of the gross
amount of such interest.
Paragraph 3
Paragraph 3 specifies three categories of interest that are exempt from source State
taxation. The first category, described in subparagraph 3(a), is interest paid by that State or one
of its political subdivisions or local authorities. The second category, described in subparagraph
3 (b), is interest beneficially owned by the other State or one of its political subdivisions, local
authorities or by an instrumentality wholly owned by that State. Paragraph 9 of the Protocol
defines these instrumentalities to include the U.S. Export-Import Bank, the Federal Reserve
Banks, the Overseas Private Investment Corporation, the Venezuelan Banco de Comercio
Exterior, the Banco Central de Venezuela and the Fondo de Inversiones de Venezuela. The
Protocol also allows the competent authorities to agree on the inclusion of other such
instrumentalities. The function of the Banco de Comercio Exterior, according to the legislation
creating it, is the “promotion of exports and investments.” The legislation creating the Fondo de
Inversiones de Venezuela states that the objectives of that entity are “to implement the
privatization and restructuring of public entities, to assist in the financing of the development of
the economic structure of the country, and the promotion of approved international investment
projects.” The Banco Central de Venezuela is the Central Bank of Venezuela.
Finally, subparagraph 3 (c) describes the third category of interest which shall be exempt
from source State taxation, interest beneficially owned by a resident of the other State with
respect to debt obligations that have been made, guaranteed or insured, directly or indirectly, by
that other State or one of its wholly owned instrumentalities described in the preceding two
sentences.
Paragraph 4
Paragraph 4 provides anti-abuse exceptions to the source State reductions in tax provided
in paragraphs 2 and 3 for two classes of interest payments.
The first exception, in subparagraph (a) of paragraph 4, deals with so-called "contingent
interest." Under this provision interest arising in one of the Contracting States that is determined
by reference to the receipts, sales, income, profits or other cash flow of the debtor or a related
person, to any change in the value of any property of the debtor or a related person or to any
dividend, partnership distribution or similar payment made by the debtor to a related person, also
may be taxed in the Contracting State in which it arises, and according to the laws of that State,
but if the beneficial owner is a resident of the other Contracting State, the gross amount of the
interest may be taxed at a rate not exceeding the rate prescribed in subparagraph b) of paragraph
2 of Article 10 (Dividends).
The second exception, in subparagraph (b) of paragraph 4, is consistent with the policy of
Code sections 860E(e) and 860G(b) that excess inclusions with respect to a real estate mortgage
investment conduit (REMIC) should bear full U.S. tax in all cases. Without a full tax at source

foreign purchasers of residual interests would have a competitive advantage over U.S. purchasers
at the time these interests are initially offered. Also, absent this rule the U.S. 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.
Paragraph 5
The term "interest" as used in Article 11 is defined in paragraph 2 to include, inter alia,
income from debt claims of every kind, whether or not secured by a mortgage. Penalty charges
for late payment are excluded from the definition of interest. Interest that is paid or accrued
subject to a contingency is within the ambit of Article 11. This includes income from a debt
obligation carrying the right to participate in profits, unless such income is characterized as a
dividend under the laws of the source State. The term does not, however, include amounts that
are treated as dividends under Article 10 (Dividends).
The term interest also includes income that is treated as interest by the taxation law of the
Contracting 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 interest or OID under the stripped bond rules
(section 1286),
(iv) amounts treated as original issue discount under the below-market
interest rate rules (section 7872),
(v) a partner's distributive share of a partnership's interest income (section
702),
(vi) the interest portion of periodic payments made under a "finance lease"
or similar contractual arrangement that in substance is a borrowing by the nominal
lessee to finance the acquisition of property,
(vii) amounts included in the income of a holder of a residual interest in a
REMIC (section 860E), because these amounts generally are subject to the same
taxation treatment as interest under U.S. tax law, and
(viii) embedded interest with respect to notional principal contracts.
Paragraph 6
Paragraph 6 provides an exception to the taxing 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 interest is attributable to that permanent establishment or fixed base. In such cases
the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services) will
apply and the State of source will retain the right to impose tax on such interest income on a net

basis.
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 6 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 7
Paragraph 7 provides a general source rule with two exceptions. Interest is considered to
arise in a Contracting State if paid by a resident of that State (including that State itself or one of
its political subdivisions or local authorities). As a first exception, interest that is borne by a
permanent establishment or fixed base in one of the States 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. Likewise, if the
person paying the interest, whether or not he is a resident of a Contracting State, derives profits
that are taxable in one of the Contracting States on a net basis under paragraphs of Article 5
(Income from Immovable Property (Real Property)) or paragraph 1 of Article 13 (Gains), and the
interest is allocable to those profits, it shall be deemed to arise in that State.
Paragraph 8
Paragraph 8 provides that in cases involving special relationships between persons,
Article 11 applies only to that portion of the total interest payments that would have been made
absent such special relationships (i.e., an arm’s length interest payment). Any excess amount of
interest paid remains taxable according to the laws of the United States and Venezuela,
respectively, with due regard to the other provisions of the Convention. Thus, if the excess
amount would be treated under the source country's law as a distribution of profits by a
corporation, such amount could be taxed as a dividend rather than as interest, but the tax would
be subject, if appropriate, to the rate limitations of paragraph 2 of Article 10 (Dividends).
The term "special relationship" is not defined in the Convention. In applying this
paragraph the United States considers the term to include the relationships described in Article 9,
which in turn correspond 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 2. Consistent with Article 9 (Associated Enterprises) the United States would apply
section 482 or 7872 of the Code to determine the amount of imputed interest in those cases.
Relation to Other Articles
Notwithstanding the foregoing limitations on source country taxation of interest, the

saving clause of paragraph 4 of Article 1 permits the United States to tax its residents and
citizens as if the Convention had not come into force.
As with other benefits of the Convention, the benefits of limited source State taxation
under paragraphs 2, 3 and 4(a), 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 11A
Branch Tax
Article 11A permits the United States to impose its branch taxes on the “dividend
equivalent amount” and the “excess interest” of a Venezuelan company that derives business
profits attributable to a U.S. permanent establishment or which derives income subject to tax on
a net basis in the United States under Articles 6 (Income from Immovable Property (Real
Property) or 13 (Gains). These branch taxes are imposed under Code section 884.The tax on the
dividend equivalent amount is limited to 5 percent, the same rate that applies to direct investment
dividends. The tax on excess interest is limited to 10 percent, except in the case of persons
referred to in subparagraph (a) of paragraph 11 (Interest), in which case the tax is limited to 4.95
percent.
More specifically, with respect to profit, Article 11A permits the United States generally
to impose its branch profits tax on a corporation resident Venezuela to the extent of the
corporation'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 not 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 corporation
resident in Venezuela that are effectively connected with a U.S. trade or business but that are not
attributable to a permanent establishment and are not otherwise subject to U.S. taxation under
Article 6 or paragraph 1 of Article 13.
Paragraph 10(a) of the Protocol specifies that the term "dividend equivalent amount" used
in subparagraph (a) shall have the meaning it has under section 884 of the Code, as amended
from time to time, provided the amendments are consistent with the purpose of the branch profits
tax. Generally, the dividend equivalent amount for a particular year is the income described
above that is included in the corporation's effectively connected earnings and profits for that
year, after payment of the corporate tax under Articles 6, 7 or 13, reduced for any increase in the
branch's U.S. net equity during the year or increased for any reduction in its U.S. net equity
during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg. section 1.884-
1. The dividend equivalent amount for any year approximates the dividend that a U.S. branch

office would have paid during the year if the branch had been operated as a separate U.S.
subsidiary company.
With respect to interest, Article 11A permits the United States generally to impose its
branch profits tax on a corporation resident Venezuela to the extent of the corporation's “excess
interest,” which is defined in paragraph 10(b) of the Protocol. In general, excess interest is the
portion of the entire enterprise’s interest expense that is allocated to the branch over the amount
of interest paid by the U.S. branch, and a tax is applied to the amount of that deemed payment.
Such excess interest is deemed to arise in Contracting State in which that branch is located. The
rate of tax on the deemed payment is limited to 10 percent, the rate generally applicable to
interest payments to residents of the other Contracting State. However, in the case of interest
deemed paid by the branch of a financial institution, the rate of tax is limited to 4.95 percent, the
rate generally applicable to interest beneficially owned by financial institutions. The formula for
calculating excess interest does not require that interest be fully deductible in one year. Rather,
interest may be “excess interest” even though not deductible in a particular year if it is allocable
to the U.S. income under U.S. domestic law rules.
Just as under Venezuela’s current system there is no shareholder level tax on dividends,
there is also no Venezuelan tax on the dividend equivalent amount of branch profits or on excess
interest. Nevertheless, this Article is drafted reciprocally, and thus, if in the future Venezuela
should adopt branch taxes, it may apply them to U.S. companies, subject to the limitations of this
Article.
ARTICLE 12
Royalties
Article 12 specifies the taxing jurisdiction over royalties of the States of residence and
source, and defines the terms necessary to apply the article.
Paragraph 1
Paragraph 1 provides that a royalty derived by a resident of a Contracting State that arises
in the other Contracting State may be taxed in the first-mentioned Contracting States. For
royalties from any other source paid to a resident, Article 22 (Other Income) grants the residence
country exclusive taxing jurisdiction (other than for royalties attributable to a permanent
establishment or fixed base in the other State).
Paragraphs 2 and 3
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 the maximum rates specified in subparagraphs 2(a) and 2(b) for the
corresponding classes of royalties described in paragraph 3. 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 royalty for purposes of

Article 12 is 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 Commentaries to Article 12. See also
paragraph 24 of the OECD Commentaries to Article 1.
Subparagraph (a) of paragraph 2 limits the tax at source to 5 percent of the gross amount
of royalties described in subparagraph (a) of paragraph 3. These are royalties for the use of, or
the right to use, industrial, commercial or scientific equipment. The U.S. Model and most U.S.
treaties treat such income as business profits, and not as royalties. The Convention includes this
income within the scope of Article 12, but applies a rate lower than that applied to industrial
royalties. Rental payments for ships, aircraft and containers used in international traffic are,
however, taxed under Article 8 (Shipping and Air Transport), not Article 12.
Subparagraph (b) of paragraph 2 limits the tax at source to 10 percent of the gross amount
of royalties described in subparagraph (b) of paragraph 3. The royalties that fall into this
category are payments for the use of, or the right to use, any copyright or literary, dramatic,
musical, artistic, or scientific work, including cinematographic films, tapes, and other means of
image or sound reproduction, 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. Gains derived from the alienation of such right or property, to the extent
that such gains are contingent on their productivity, use, or disposition, are also included within
this class of royalties. Subparagraph (b) of paragraph 2 limits the tax at source on such royalties
to 10 percent of the gross amount of the royalty.
The term “royalties” is defined in the Convention and therefore is generally independent
of domestic law. Thus, the United States would impose a 5 percent tax on payments for the rental
of drilling rigs, even though such payments would not be characterized as royalties under
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 image or sound 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 209 (D.C. Cir. 1986).
Computer software generally is protected by copyright laws around the world. Under the
Convention, consideration received for the use, or the right to use, computer software is treated
either as royalties or as business profits, depending on the facts and circumstances of the
transaction giving rise to the payment.
The primary factor in determining whether consideration received for the use, or the right
to use, computer software is treated as royalties or as business profits, is the nature of the rights
transferred. See Treas. Reg. section 1.861-18. The fact that the transaction is characterized as a
license for copyright law purposes is not dispositive. For example, as was discussed and
understood among the negotiators, a typical retail sale of "shrink wrap" software generally will
not be considered to give rise to royalty income, even though for copyright law purposes it may
be characterized as a license.
The means by which the computer software is transferred are not relevant for purposes of
the analysis. Consequently, if software is electronically transferred but the rights obtained by the
transferee are substantially equivalent to rights in a program copy, the payment will be
considered business profits.
The term "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
(Gains).
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, such as a
technical plan or design developed according to the user's specifications. Thus, as provided in
paragraph 11 of the Commentaries 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. As provided in paragraph 11
of the Protocol, payments received as consideration for technical services or assistance
(including studies or surveys of a scientific, geological or technical nature), for engineering
works (including the plans related thereto), or for consultancy or supervisory services or

assistance shall be considered payments to which the provisions of Article 7 (Business Profits) or
Article 14 (Independent Personal Services) apply. 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 gross-basis taxing jurisdiction in cases where the beneficial owner of the royalties
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 royalties are
attributable to that permanent establishment or fixed base. In such cases the provisions of Article
7 (Business Profits) or Article 14 (Independent Personal Services) will apply.
The provisions of paragraph 8 of Article 7 (Business Profits) apply to this paragraph. For
example, royalty income that is attributable to a permanent establishment or a fixed base and that
accrues during the existence of the permanent establishment or fixed base, but is received after
the permanent establishment or fixed base no longer exists, remains taxable under the provisions
of Articles 7 (Business Profits) or 14 (Independent Personal Services), respectively, and not
under this Article.
Paragraph 5
Paragraph 5 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.
Paragraph 6
Paragraph 6 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. 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).
Relation to Other Articles
Notwithstanding the foregoing limitations on source country taxation of royalties, the
saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its
residents and citizens as if the Convention had not come into force.

As with other benefits of the Convention, the benefits of exclusive residence State
taxation of royalties under paragraph 1 of Article 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
Gains
Article 13 assigns either primary or exclusive taxing jurisdiction over gains or income
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
Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source to tax
gains from the alienation of real 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 paragraph 2). 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
paragraph 2.
Paragraph 2
This paragraph defines the term "real property situated in the other Contracting State."
The term includes real property referred to in Article 6 (i.e., an interest in the real property itself)
an interest in a partnership, trust or estate to the extent that its assets consist of real property
situated in that other State, a "United States real property interest" (when the United States is the
other Contracting State under paragraph 1), and an equivalent interest in real property situated in
Venezuela. The OECD Model does not refer to real property interests other than the real property
itself, and the United States has entered a reservation on this point with respect to the OECD
Model, reserving the right to apply its tax under FIRPTA to all real estate gains encompassed by
that provision.
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 U.S. corporations for this purpose. Section 897(i). In applying paragraph
1 the United States will look through distributions made by a REIT. Accordingly, distributions
made by a REIT 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.
Paragraph 3
Paragraph 3 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. Such gains may be taxed in the State in which the permanent establishment or fixed
base is located.
A resident of the other Contracting State 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
3, 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 8 of Article 7 (Business Profits) refers to paragraph 3 of Article 13. That rule
clarifies that income that is attributable to a permanent establishment or a fixed base, but that is
deferred and received after the permanent establishment or fixed base no longer exists, may
nevertheless be taxed by the State in which the permanent establishment or fixed base was
located. Thus, under Article 13, gains derived by a resident of a Contracting State from the sale
of movable property forming part of the business property of a permanent establishment in the
other Contracting State may be taxed by that other State even if the income is deferred and
received after the permanent establishment no longer exists.
Paragraph 4
This paragraph limits the taxing jurisdiction of the state of source with respect to gains
from the alienation of ships, aircraft, or containers operated in international traffic or movable
property pertaining to the operation of such ships, aircraft, or containers. Under paragraph 4
when such income is derived by an enterprise of a Contracting State it is taxable only in that
Contracting State. Notwithstanding paragraph 3, the rules of this paragraph apply even if the
income is attributable to a permanent establishment maintained by the enterprise in the other
Contracting State. This result is consistent with the general rule under Article 8 (Shipping and
Air Transport) that confers exclusive taxing rights over international shipping and air transport
income on the state of residence of the enterprise deriving such income.
Paragraph 5
Paragraph 5 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 4.
For example, gain derived from shares, other than shares described in paragraphs 2 or 3, debt
instruments and various financial instruments, may be taxed only in the State of residence, to the
extent such income is not otherwise characterized as income taxable under another article (e.g.,
Article 10 (Dividends) or Article 11 (Interest)). Similarly, gain derived from the alienation of
tangible personal property, other than tangible personal property described in paragraph 3, may
be taxed only in the State of residence of the alienator. Gain derived from the alienation of any

property, such as a patent or copyright, that produces income taxable under Article 12
(Royalties) is taxable under Article 12 and not under this article, provided that such gain is of the
type described in paragraph 2(b) of Article 12 (i.e., it is contingent on the productivity, use, or
disposition of the property). 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 4 of Article 1 (General Scope) permits the United States
to tax its citizens and residents as if the Convention had not come into effect. Thus, any
limitation in this Article on the right of the United States to tax gains does not apply to gains of a
U.S. 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
Independent Personal Services
The Convention deals in separate articles with different classes of income from personal
services. Article 14 deals with the general class of income from independent personal services
and Article 15 deals with the general class of income from dependent personal services. Articles
16 and 18 through 21 provide exceptions and additions to these general rules for directors' fees
(Article 16); performance income of artistes and sportsmen (Article 18); pensions in respect of
personal service income, social security benefits, annuities, alimony, and child support payments
(Article 19); government service salaries and pensions (Article 20); and certain income of
students, trainees, teachers and researchers (Article 21).
Paragraph 1
Paragraph 1 of Article 14 provides the general rule that an individual who is a resident of
a Contracting State and who derives income from performing professional services in an
independent capacity will be exempt from tax in respect of that income by the other Contracting
State. The income may be taxed in the other Contracting State only if the income is attributable
to a fixed base that is regularly available to the individual in that other State for the purpose of
performing his services.
Paragraph 1 is subject to the provisions of Article 7 (Business Profits) to ensure that in
cases when the source state is allowed to tax income from independent personal services, it will
do so only on a net basis. Paragraph 12 of the Protocol states that this Article shall be interpreted
along the lines of the 1992 OECD Model Convention (which, at the time this Protocol paragraph
was drafted, was the most recent version of the OECD Model). This reference to the OECD
Model was inserted to make clear that source tax shall be imposed on net income, as if the
income were attributable to a permanent establishment and taxable under Article 7. The U.S.

Model achieves the same result in its paragraph 2, which specifies that for purposes of paragraph
1, the income that is taxable in the source State shall be determined under the principles of
paragraph 3 of Article 7.
Income derived by persons other than individuals or groups of individuals from the
performance of independent personal services is not covered by Article 14. Such income
generally would be business profits taxable in accordance with Articles 5 (Permanent
Establishment) and 7 (Business Profits). Income derived by employees of such persons generally
would be taxable in accordance with Article 15 (Dependent Personal Services).
The term "fixed base" is not defined in the Convention, but its meaning is understood to
be similar, but not identical, to that of the term "permanent establishment," as defined in Article
5 (Permanent Establishment). The term "regularly available" also is not defined in the
Convention. Whether a fixed base is regularly available to a person will be determined based on
all the facts and circumstances. In general, the term encompasses situations where a fixed base is
at the disposal of the individual whenever he performs services in that State. It is not necessary
that the individual regularly use the fixed base, only that the fixed base be regularly available to
him. For example, a U.S. resident partner in a law firm that has offices in the other Contracting
State would be considered to have a fixed base regularly available to him in the other State if
work space in those offices (whether or not the same space) were made available to him
whenever he wished to conduct business in the other State, regardless of how frequently he
conducted business in the other State. On the other hand, an individual who had no office in the
other State and occasionally rented a hotel room to serve as a temporary office would not be
considered to have a fixed base regularly available to him.
It is not necessary that the individual actually use the fixed base. It is only necessary that
the fixed base be regularly available to him. For example, if an individual has an office in the
other State that he can use if he chooses when he is present in the other State, that fixed base will
be considered to be regularly available to him regardless of whether he conducts his activities
there.
This Article applies to income derived by a partner resident in the Contracting State that
is attributable to personal services of an independent character performed in the other State
through a partnership that has a fixed base in that other Contracting State. Income which may be
taxed under this Article includes all income attributable to the fixed base in respect of the
performance of the personal services carried on by the partnership (whether by the partner
himself, other partners in the partnership, or by employees assisting the partners) and any income
from activities ancillary to the performance of those services (for example, charges for facsimile
services). Income that is not derived from the performance of personal services and that is not
ancillary thereto (for example, rental income from subletting office space), will be governed by
other Articles of the Convention.
The application of Article 14 to a service partnership may be illustrated by the following
example: a partnership formed in the Contracting State has five partners (who agree to split
profits equally), four of whom are resident and perform personal services only in the Contracting
State at Office A, and one of whom performs personal services from Office B, a fixed base in the

other State. In this case, the four partners of the partnership resident in the Contracting State may
be taxed in the other State in respect of their share of the income attributable to the fixed base,
Office B. The services giving rise to income which may be attributed to the fixed base would
include not only the services performed by the one resident partner, but also, for example, if one
of the four other partners came to the other State and worked on an Office B matter there, the
income in respect of those services also. As noted above, this would be the case regardless of
whether the partner from the Contracting State actually visited or used Office B when
performing services in the other State.
Paragraph 8 of Article 7 (Business Profits) refers to Article 14. That rule clarifies that
income that is attributable to a permanent establishment or a fixed base, but that is deferred and
received after the permanent establishment or fixed base no longer exists, may nevertheless be
taxed by the State in which the permanent establishment or fixed base was located. Thus, under
Article 14, income derived by an individual resident of a Contracting State from services
performed in the other Contracting State and attributable to a fixed base there may be taxed by
that other State even if the income is deferred and received after there is no longer a fixed base
available to the resident in that other State.
Paragraph 2
Paragraph 2 provides a non-exhaustive list of examples of the types of services that are
included within the term "professional services of an independent character." It clearly includes
those activities listed in paragraph 2 of Article 14 of the OECD Model, such as independent
scientific, literary, artistic, educational or teaching activities, as well as the independent activities
of physicians, lawyers, engineers, architects, dentists, and accountants. Beyond these examples,
the term includes all personal services performed by an individual for his own account, whether
as a sole proprietor or a partner, where he receives the income and bears the risk of loss arising
from the services. The taxation of income of an individual from those types of independent
services which are covered by Articles 16 and 18 through 21 is governed by the provisions of
those articles. For example, taxation of the income of a corporate director would be governed by
Article 16 (Directors’ Fees) rather than Article 14.
Relation to Other Articles
If an individual resident of Venezuela who is also a U.S. citizen performs independent
personal services in the United States, the United States may, by virtue of the saving clause of
paragraph 4 of Article 1 (General Scope) tax his income without regard to the restrictions of this
Article
ARTICLE 15
Dependent Personal Services
Article 15 apportions taxing jurisdiction over remuneration derived by a resident of a
Contracting State as an employee between the States of source and residence.

Paragraph 1
The general rule of Article 15 is contained in paragraph 1. Remuneration derived by a
resident of a Contracting State as an employee may be taxed by the State of residence, and the
remuneration also may be taxed by that other Contracting State to the extent derived from
employment exercised (i.e., services performed) in the other Contracting State. Paragraph 1 also
provides that the more specific rules of Articles 16 (Directors' Fees), 19 (Pensions, Social
Security, Annuities, Alimony and Child Support), 20 (Government Service) and 21 (Students,
Trainees, Teachers and Researchers) apply in the case of employment income described in one
of these articles. Thus, even though the State of source has a right to tax employment income
under Article 15, it may not have the right to tax that income under the Convention if the income
is not taxable in the State of source under the provisions of another of the Convention.
Consistent with the corresponding provision of the OECD Model, paragraph 1 applies to
"salaries, wages and other similar remuneration," whereas the U.S. Model omits the word
"similar." The U.S. Model’s deletion of "similar" is intended to make it clear that Article 15
applies to any form of compensation for employment, including payments in kind, regardless of
whether the remuneration is "similar" to salaries and wages. Accordingly, the Convention’s
Protocol paragraph 13 clarifies that "similar remuneration" in the context of this paragraph is to
be given a broad interpretation, and is to be understood to encompass benefits in kind received in
respect of an employment and any other benefits, whether or not considered as salary in the
domestic legislation of both Contracting States. Protocol paragraph 13 also provides a non-
exhaustive list of examples of compensation that would be considered “similar remuneration”.
The list includes, but is not limited to, the use of a residence or automobile, health of life
insurance coverage and club memberships, provision of meals, food and groceries, child care,
reimbursement of medical, pharmaceutical and dental care expenses, provision of work clothing,
toys and school supplies, scholarships, reimbursement of training course expenses, mortuary and
burial expenses.
Consistently with section 864(c)(6) of the Code, Article 15 also applies regardless of the
timing of actual payment for services. Thus, a bonus paid to a resident of a Contracting State
with respect to services performed in the other Contracting State with respect to a particular
taxable year would be subject to Article 15 for that year even if it was paid after the close of the
year. Similarly, an annuity received for services performed in a taxable year would be subject to
Article 15 despite the fact that it was paid in subsequent years. In either case, whether such
payments were taxable in the State where the employment was exercised would depend on
whether the tests of paragraph 2 were satisfied. Consequently, a person who receives the right to
a future payment in consideration for services rendered in a Contracting State would be taxable
in that State even if the payment is received at a time when the recipient is a resident of the other
Contracting State.
Paragraph 2
Paragraph 2 sets forth an exception to the general rule that employment income may be
taxed in the State where the employment is exercised. Under paragraph 2, the State where the
employment is exercised may not tax the income from the employment if three conditions are

satisfied:
(a) the individual is present in the other Contracting State for a period or periods
not exceeding 183 days in any 12-month period that begins or ends during the taxable
year concerned (i.e., the taxable year in which the services are performed);
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident
of that other Contracting State; and
(c) the remuneration is not borne by a permanent establishment or fixed base that
the employer has in that other State.
In order for the remuneration to be exempt from tax in the source State, all three conditions must
be satisfied. This exception is identical to that set forth in the U.S. and OECD Models.
The 183-day period in condition (a) is to be measured using the "days of physical
presence" method. Under this method, the days that are counted include any day in which a part
of the day is spent in the host country. (Rev. Rul. 56-24, 1956-1 C.B. 851.) Thus, days that are
counted include the days of arrival and departure; weekends and holidays on which the employee
does not work but is present within the country; vacation days spent in the country before, during
or after the employment period, unless the individual's presence before or after the employment
can be shown to be independent of his presence there for employment purposes; and time during
periods of sickness, training periods, strikes, etc., when the individual is present but not working.
If illness prevented the individual from leaving the country in sufficient time to qualify for the
benefit, those days will not count. Also, any part of a day spent in the host country while in
transit between two points outside the host country is not counted. These rules are consistent
with the description of the 183-day period in paragraph 5 of the Commentary to Article 15 in the
OECD Model.
Conditions (b) and (c) are intended to ensure that a Contracting State will not be required
to allow a deduction to the payor for compensation paid and at the same time to exempt the
employee on the amount received. Accordingly, if a foreign person pays the salary of an
employee who is employed in the host State, but a host State corporation or permanent
establishment reimburses the payor with a payment that can be identified as a reimbursement,
neither condition (b) nor (c), as the case may be, will be considered to have been fulfilled.
The reference to remuneration "borne by" a permanent establishment or fixed base is
understood to encompass all expenses that economically are incurred and not merely expenses
that are currently deductible for tax purposes. Accordingly, the expenses referred to include
expenses that are capitalizable as well as those that are currently deductible. Further, salaries
paid by residents that are exempt from income taxation may be considered to be borne by a
permanent establishment or fixed base notwithstanding the fact that the expenses will be neither
deductible nor capitalizable since the payor is exempt from tax.
Paragraph 3
Paragraph 3 contains a special rule applicable to remuneration for services performed by
a resident of a Contracting State in respect of employment as a member of the crew of a ship or
aircraft, or as other personnel regularly employed to serve aboard a ship or aircraft, in each case

if the ship or aircraft is operated in international traffic. Such remuneration may be taxed only in
the State of residence of the employee. In addition to the crew, this provision may cover, for
example, in the case of a cruise ship, entertainers, lecturers, etc., employed by the shipping
company to serve on the ship throughout its voyage. The Convention’s term “member of a crew
of a ship or aircraft, or as other personnel regularly employed to serve aboard a ship or aircraft”
is meant to clarify that a person who exercises his employment as, for example, an insurance
salesman while aboard a ship or aircraft is not covered by this paragraph. This paragraph is
inapplicable to persons dealt with in Article 14 (Independent Personal Services). The rule of this
paragraph is not meant to differ substantively from the U.S. Model rule in Article 15, paragraph
3, regarding employment as a member of the “regular complement” of a ship or aircraft operated
in international traffic.
Relation to Other Articles
If a U.S. citizen who is resident in Venezuela performs services as an employee in the
United States and meets the conditions of paragraph 2 for source country exemption, he
nevertheless is taxable in the United States by virtue of the saving clause of paragraph 4 of
Article 1 (General Scope).
ARTICLE 16
Directors' Fees
This Article provides that a Contracting State may tax the fees and other similar
compensation paid by a company that is a resident of that State for services performed in that
State by a resident of the other Contracting State in his capacity as a director of the company.
This rule is an exception to the more general rules of Article 14 (Independent Personal Services)
and Article 15 (Dependent Personal Services), and applies notwithstanding those articles. Thus,
for example, in determining whether a director's fee paid to a non-employee director is subject to
tax in the country of residence of the corporation, it is not relevant to establish whether the fee is
attributable to a fixed base in that State.
Consistent with the corresponding provision of the OECD Model, Article 16 applies to
"directors fees and other similar payments," whereas the U.S. Model omits the word "similar."
The U.S. Model’s deletion of "similar" is intended to make it clear that Article 16 applies to any
form of payment for director services, including payments in kind, regardless of whether the
compensation is "similar" to a fee. Accordingly, the Convention’s Protocol paragraph 13 clarifies
that "similar payments" in the context of this Article is to be given a broad interpretation, and is
to be understood to encompass benefits in kind received in respect of an employment and any
other benefits, whether or not considered as salary in the domestic legislation of both Contracting
States. Protocol paragraph 13 also provides a non-exhaustive list of examples of compensation
that would be considered “similar payments”. The list includes, but is not limited to, the use of a
residence or automobile, health of life insurance coverage and club memberships, provision of
meals, food and groceries, child care, reimbursement of medical, pharmaceutical and dental care
expenses, provision of work clothing, toys and school supplies, scholarships, reimbursement of
training course expenses, mortuary and burial expenses.

The analogous OECD and U.S. provisions reach different results in certain cases. Under
the OECD Model provision, a resident of one Contracting State who is a director of a
corporation that is resident in the other Contracting State is subject to tax in that other State in
respect of his directors' fees regardless of where the services are performed. The United States
has entered a reservation with respect to the OECD provision. Under Article 16 of the
Convention, the State of residence of the corporation may tax nonresident directors with no time
or dollar threshold, but only with respect to remuneration for services performed in that State.
This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope).
Thus, if a U.S. citizen who is a resident of the other Contracting State is a director of a U.S.
corporation, the United States may tax his full remuneration regardless of where he performs his
services.
ARTICLE 17
Limitation on Benefits
Purpose of Limitation on Benefits Provisions
The United States views an income tax treaty as a vehicle for providing treaty benefits to
residents of the two Contracting States. This statement begs the question of who is to be treated
as a resident of a Contracting State for the purpose of being granted treaty benefits. The
Commentaries to the OECD Model authorize a tax authority to deny benefits, under substance-
over-form principles, to a nominee in one State deriving income from the other on behalf of a
third-country resident. In addition, although the text of the OECD Model does not contain
express anti-abuse provisions, the Commentaries to Article 1 contain an extensive discussion
approving the use of such provisions in tax treaties in order to limit the ability of third-country
residents to obtain treaty benefits. The United States holds strongly to the view that tax treaties
should include provisions that specifically prevent misuse of treaties by residents of third
countries. Consequently, all recent U.S. income tax treaties contain comprehensive Limitation on
Benefits provisions.
A treaty that provides benefits to any resident of a Contracting State creates possibilities
for "treaty shopping": the use, by residents of third countries, of legal entities established in a
Contracting State with a principal purpose of obtaining the benefits of a tax treaty between the
United States and the other Contracting State. It is important to note that this definition of treaty
shopping does not encompass every case in which a third-country resident establishes an entity
in a U.S. treaty partner, and that entity enjoys treaty benefits to which the third-country resident
would not itself be entitled. If the third-country resident had substantial reasons for establishing
the structure that were unrelated to obtaining treaty benefits, the structure would not fall within
the definition of treaty shopping set forth above.
Of course, the fundamental problem presented by this approach is that it is based on the
taxpayer's intent, which a tax administrator is normally ill-equipped to identify. In order to avoid
the necessity of making this subjective determination, Article 17 sets forth a series of objective

tests. The assumption underlying each of these tests is that a taxpayer that satisfies the
requirements of any of the tests probably has a real business purpose for the structure it has
adopted, or has a sufficiently strong nexus to the other Contracting State (e.g., a resident
individual) to warrant benefits even in the absence of a business connection, and that this
business purpose or connection is sufficient to justify the conclusion that obtaining the benefits
of the treaty is not a principal purpose of establishing or maintaining residence.
For instance, the assumption underlying the active trade or business test under paragraph
1 (d) is that a third-country resident that establishes a "substantial" operation in Venezuela and
that derives income from a related activity in the United States would not do so primarily to avail
itself of the benefits of the treaty; it is presumed in such a case that the investor had a valid
business purpose for investing in Venezuela, and that the link between that trade or business and
the U.S. activity that generates the treaty-benefited income manifests a business purpose for
placing the U.S. investments in the entity in Venezuela. It is considered unlikely that the investor
would incur the expense of establishing a substantial trade or business in Venezuela simply to
obtain the benefits of the Convention. A similar rationale underlies other tests in Article 17.
While these tests provide useful surrogates for identifying actual intent, these mechanical
tests cannot account for every case in which the taxpayer was not treaty shopping. Accordingly,
Article 17 also includes a provision (paragraph 4) authorizing the competent authority of a
Contracting State to grant benefits. While an analysis under paragraph 4 may well differ from
that under one of the other tests of Article 17, its objective is the same: to identify investors
whose residence in the other State can be justified by factors other than a purpose to derive treaty
benefits.
Article 17 and the anti-abuse provisions of domestic law complement each other, as
Article 17 effectively determines whether an entity has a sufficient nexus to the Contracting State
to be treated as a resident for treaty purposes, while domestic anti-abuse provisions (e.g.,
business purpose, substance-over-form, step transaction or conduit principles) determine whether
a particular transaction should be recast in accordance with its substance. Thus, internal law
principles of the source State may be applied to identify the beneficial owner of an item of
income, and Article 17 then will be applied to the beneficial owner to determine if that person is
entitled to the benefits of the Convention with respect to such income.
Structure of the Article
The structure of the Article is as follows: Paragraph 1 states that a person that is a
resident of a Contracting State and derives income from the other Contracting State is entitled to
the benefits of the Convention only if that person possesses one of a series of listed attributes.
Paragraph 2 provides further limitations on entidades and colectividades otherwise entitled to
benefits under paragraph 1. Paragraph 3 provides an exception to paragraph 1 with respect to
former-long-term-residents of the United States. Paragraph 4 provides that benefits also may be
granted if the competent authority of the State from which benefits are claimed determines that it
is appropriate to provide benefits in that case. Paragraph 5 defines the term "recognized
securities exchange" as used in paragraph 1(e).

Paragraph 1
Paragraph 1 states that a person that is a resident of a Contracting State and derives
income from the other Contracting State is entitled to the benefits of the Convention only if that
person possesses one of a series of listed attributes of a resident of a Contracting State. The
benefits otherwise accorded to residents under the Convention include all limitations on source-
based taxation under Articles 6 through 16 and 18 through 23, the treaty-based relief from double
taxation provided by Article 24 (Relief from Double Taxation), and the protection afforded to
residents of a Contracting State under Article 25 (Non-Discrimination). Some provisions do not
require that a person be a resident in order to enjoy the benefits of those provisions. These
include paragraph 1 of Article 25 (Non-Discrimination), Article 26 (Mutual Agreement
Procedure), and Article 28 (Diplomatic Agents and Consular Officers). Article 17 accordingly
does not limit the availability of the benefits of these provisions.
Paragraph 1 has seven subparagraphs, each of which describes a category of residents
that are entitled to all benefits of the Convention.
It is intended that the provisions of paragraph 1 will be self executing. Unlike the
provisions of paragraph 4, discussed below, claiming benefits under paragraph 2 does not require
advance competent authority ruling or approval. The tax authorities may, of course, on review,
determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the
benefits claimed.
Individuals -- Subparagraph 1(a)
Subparagraph (a) provides that an individual resident of a Contracting State will be
entitled to all treaty benefits provided that the individual would not be considered a resident of
another country under the principles of subparagraphs 3(a) and 3(b) of Article 4 (Residence).
(This provision, modified from the corresponding provision in the U.S. Model, is intended to
prevent a third-country resident individual from using Venezuela’s broad residency concept
(“domiciliado”) to treaty-shop into the United States.) If such an individual receives income as a
nominee on behalf of a third-country resident, benefits may be denied under the respective
articles of the Convention by the requirement that the beneficial owner of the income be a
resident of a Contracting State.
Governmental Entities -- Subparagraph 1(b)
Subparagraph (b) provides that the Contracting States, their political subdivisions and
local authorities, and instrumentalities and companies wholly-owned by the Contracting States or
one of their political subdivisions and local authorities, will be entitled to all benefits of the
Convention.
Tax Exempt Organizations and Pension Funds -- Subparagraph 1(c)
Subparagraph 1(c) provides that not-for-profit organizations, including pension funds or
private foundations, that because of such status generally are exempt from tax in their State of

residence, will be entitled to all the benefits of the Convention if more than half of the
beneficiaries, members or participants, if any, in such an organization are themselves entitled to
the benefits of the Convention.
Active Trade or Business -- Subparagraph 1(d)
Subparagraph 1(d) sets forth a test under which a resident of a Contracting State may
receive treaty benefits with respect to certain items of income that are connected to an active
trade or business conducted in its State of residence.
This subparagraph sets forth a three-pronged test that must be satisfied in order for a
resident of a Contracting State to be entitled to the benefits of the Convention with respect to a
particular item of income. First, the resident must be engaged in the active conduct of a trade or
business in its State of residence. Second, the income derived from the other State must be
derived in connection with, or be incidental to, that trade or business. Third, if there is common
ownership of the activities in both States, the trade or business must be substantial in relation to
the activity in the other State that generated the item of income. These determinations are made
separately for each item of income derived from the other State. It therefore is possible that a
person would be entitled to the benefits of the Convention with respect to one item of income but
not with respect to another. If a resident of a Contracting State is entitled to treaty benefits with
respect to a particular item of income under paragraph 3, the resident is entitled to all benefits of
the Convention insofar as they affect the taxation of that item of income in the other State. Set
forth below is a discussion of each of the three prongs of the test under paragraph 3.
Active Conduct of Trade or Business Requirement
The term "trade or business" is not defined in the Convention. Pursuant to paragraph 2 of
Article 3 (General Definitions), when determining whether a resident of the other State is entitled
to the benefits of the Convention under subparagraph 1(d) with respect to income derived from
U.S. sources, the United States will ascribe to this term the meaning that it has under the law of
the United States. Accordingly, the United States competent authority will refer to the
regulations issued under section 367(a) for the definition of the term "trade or business." In
general, therefore, a trade or business will be considered to be a specific unified group of
activities that constitute or could constitute an independent economic enterprise carried on for
profit. Furthermore, a corporation generally will be considered to carry on a trade or business
only if the officers and employees of the corporation conduct substantial managerial and
operational activities. See Code section 367(a)(3) and the regulations thereunder.
Notwithstanding this general definition of trade or business, subparagraph 1(d) provides
that the business of making or managing investments will be considered to be a trade or business
only when part of banking, insurance or securities activities conducted by a bank, insurance
company, or registered securities dealer. Conversely, such activities conducted by a person other
than a bank, insurance company or registered securities dealer will not be considered to be the
conduct of an active trade or business, nor would they be considered to be the conduct of an
active trade or business if conducted by a banking or insurance company or registered securities
dealer, but not as part of the company's banking, insurance or dealer business.

Because a headquarters operation is in the business of managing investments, a company
that functions solely as a headquarters company will not be considered to be engaged in an active
trade or business for purposes of paragraph 1(d).
Derived in Connection With Requirement
Under the second prong of the test of subparagraph 1(d) income is derived in connection
with a trade or business if the income-producing activity in the other State is a line of business
that forms a part of or is complementary to the trade or business conducted in the State of
residence by the income recipient. Although no definition of the terms "forms a part of" or
"complementary" is set forth in the Convention, it is intended that a business activity generally
will be considered to "form a part of" a business activity conducted in the other State if the two
activities involve the design, manufacture or sale of the same products or type of products, or the
provision of similar services. In order for two activities to be considered to be "complementary,"
the activities need not relate to the same types of products or services, but they should be part of
the same overall industry and be related in the sense that the success or failure of one activity
will tend to result in success or failure for the other. In cases in which more than one trade or
business is conducted in the other State and only one of the trades or businesses forms a part of
or is complementary to a trade or business conducted in the State of residence, it is necessary to
identify the trade or business to which an item of income is attributable. Royalties generally will
be considered to be derived in connection with the trade or business to which the underlying
intangible property is attributable. Dividends will be deemed to be derived first out of earnings
and profits of the treaty-benefited trade or business, and then out of other earnings and profits.
Interest income may be allocated under any reasonable method consistently applied. A method
that conforms to U.S. principles for expense allocation will be considered a reasonable method.
The following examples illustrate the application of this provision of subparagraph 1(d).
Example 1.USCo is a corporation resident in the United States. USCo is engaged in an active
manufacturing business in the United States. USCo owns 100 percent of the
shares of FCo, a corporation resident in Venezuela. FCo distributes USCo
products in Venezuela. Since the business activities conducted by the two
corporations involve the same products, FCo's distribution business is considered
to form a part of USCo's manufacturing business within the meaning of
subparagraph 1(d).
Example 2.The facts are the same as in Example 1, except that USCo does not manufacture.
Rather, USCo operates a large research and development facility in the United
States that licenses intellectual property to affiliates worldwide, including FCo.
FCo and other USCo affiliates then manufacture and market the USCo-designed
products in their respective markets. Since the activities conducted by FCo and
USCo involve the same product lines, these activities are considered to form a
part of the same trade or business.
Example 3.Americair is a corporation resident in the United States that operates an
international airline. FSub is a wholly-owned subsidiary of Americair resident in

Venezuela. FSub operates a chain of hotels in Venezuela that are located near
airports served by Americair flights. Americair frequently sells tour packages that
include air travel to Venezuela and lodging at FSub hotels. Although both
companies are engaged in the active conduct of a trade or business, the businesses
of operating a chain of hotels and operating an airline are distinct trades or
businesses. Therefore FSub's business does not form a part of Americair's
business. However, FSub's business is considered to be complementary to
Americair's business because they are part of the same overall industry (travel)
and the links between their operations tend to make them interdependent.
Example 4.The facts are the same as in Example 3, except that FSub owns an office building
in Venezuela instead of a hotel chain. No part of Americair's business is
conducted through the office building. FSub's business is not considered to form a
part of or to be complementary to Americair's business. They are engaged in
distinct trades or businesses in separate industries, and there is no economic
dependence between the two operations.
Example 5.USFlower is a corporation resident in the United States. USFlower produces and
sells flowers in the United States and other countries. USFlower owns all the
shares of ForHolding, a corporation resident in Venezuela. ForHolding is a
holding company that is not engaged in a trade or business. ForHolding owns all
the shares of three corporations that are resident in Venezuela: ForFlower,
ForLawn, and ForFish. ForFlower distributes USFlower flowers under the
USFlower trademark in Venezuela. ForLawn markets a line of lawn care products
in the other State under the USFlower trademark. In addition to being sold under
the same trademark, ForLawn and ForFlower products are sold in the same stores
and sales of each company's products tend to generate increased sales of the
other's products. ForFish imports fish from the United States and distributes it to
fish wholesalers in Venezuela. For purposes of paragraph 1(d), the business of
ForFlower forms a part of the business of USFlower, the business of ForLawn is
complementary to the business of USFlower, and the business of ForFish is
neither part of nor complementary to that of USFlower.
Finally, a resident in one of the States also will be entitled to the benefits of the
Convention with respect to income derived from the other State if the income is "incidental" to
the trade or business conducted in the recipient's State of residence. Subparagraph 1(d) provides
that income derived from a State will be incidental to a trade or business conducted in the other
State if the production of such income facilitates the conduct of the trade or business in the other
State. An example of incidental income is the temporary investment of working capital derived
from a trade or business.
Substantiality
As indicated above, subparagraph 1(d) provides that income that a resident of a State
derives from the other State will be entitled to the benefits of the Convention under paragraph 1
only if the income is derived in connection with a trade or business conducted in the recipient's

State of residence and that trade or business is "substantial" in relation to the income-producing
activity in the other State. Subparagraph 1(d) provides that whether the trade or business of the
income recipient is substantial will be determined based on all the facts and circumstances.
These circumstances generally would include the relative scale of the activities conducted in the
two States and the relative contributions made to the conduct of the trade or businesses in the
two States.
Publicly-Traded Corporations -- Subparagraph 1(e)
Subparagraph (e) applies to publicly-traded corporations, and provides that a company
will be entitled to all the benefits of the Convention if in the principal class of shares of the
company there is substantial and regular trading on a “recognized securities exchange” located in
either Contracting State. The term "recognized securities exchange" is defined in paragraph 5.
The term "principal class of shares" is not defined in the Convention, but will be
interpreted by the United States, consistently with other recent U.S. tax treaties and the U.S.
Model, to mean that class of shares that represents the majority of the voting power and value of
the company. In most cases, this class will be the ordinary or common shares of the company. If
the company has more than one class of shares, it is necessary as an initial matter to determine
whether one of the classes accounts for more than half of the voting power and value of the
company. If so, then only those shares are considered for purposes of the regular trading
requirement. If no single class of shares accounts for more than half of the company's voting
power and value, it is necessary to identify a group of two or more classes of the company's
voting power and value, and then to determine whether each class of shares in this group satisfy
the regular trading requirement. Although in a particular case involving a company with several
classes of shares it is conceivable that more than one group of classes could be identified that
account for more than 50% of the shares, it is only necessary for one such group to satisfy the
requirements of this subparagraph in order for the company to be entitled to benefits. Benefits
would not be denied to the company even if a second, non-qualifying, group of shares with more
than half of the company's voting power and value could be identified.
The term "substantial and regular trading" is not defined in the Convention. In
accordance with paragraph 2 of Article 3 (General Definitions), this term will be defined by
reference to the domestic tax laws of the State from which treaty benefits are sought, generally
the source State. In the case of the United States, this term is understood to have the meaning it
has under Treas. Reg. § 1.884-5(d)(4)(i)(B), relating to the branch tax provisions of the Code.
Under these regulations, a class of shares is considered to be "regularly traded" if two
requirements are met: trades in the class of shares are made in more than de minimis quantities
on at least 60 days during the taxable year, and the aggregate number of shares in the class traded
during the year is at least 10 percent of the average number of shares outstanding during the year.
Sections 1.884-5(d)(4)(i)(A), (ii) and (iii) will not be taken into account for purposes of defining
the term "regularly traded" under the Convention. Authorized but unissued shares are not
considered for purposes of this test.
As described more fully below, the regular trading requirement can be met by trading on
any recognized exchange or exchanges located in either State. Trading on one or more

recognized securities exchanges may be aggregated for purposes of this requirement. Thus, a
U.S. company could satisfy the regularly traded requirement through trading, in whole or in part,
on a recognized securities exchange located in the other Contracting State.
Subsidiaries of Publicly-Traded Corporations -- Subparagraph 1(f)
Subparagraph 1(f) applies to subsidiaries of publicly-traded corporations, and provides a
test under which certain companies that are directly or indirectly controlled by companies
satisfying the publicly-traded test of subparagraph 1(e) may be entitled to the benefits of the
Convention. Under this test, a company will be entitled to the benefits of the Convention if 50
percent or more of each class of shares in the company is directly or indirectly owned by five or
fewer companies that are described in subparagraph 1(f).
This test differs from that under subparagraph 1(e) in that 50 percent of each class of the
company's shares, not merely the class or classes accounting for more than 50 percent of the
company's votes and value, must be held by publicly-traded companies described in
subparagraph 1(e). Thus, the test under subparagraph 1(f) considers the ownership of every class
of shares outstanding, while the test under subparagraph 1(e) only considers those classes that
account for a majority of the company's voting power and value.
Subparagraph 1(f) permits indirect ownership. Consequently, the ownership by publicly-
traded companies described in subparagraph 1(e) need not be direct. However, any intermediate
owners in the chain of ownership must themselves be entitled to benefits under paragraph 1.
Ownership/Base Erosion -- Subparagraph 1(g)
Subparagraph 1(g) provides a two part test, the so-called ownership and base erosion test.
This test applies to any form of legal entity that is a resident of a Contracting State. Both prongs
of the test must be satisfied for the resident to be entitled to benefits under this subparagraph.
The ownership prong of the test, under clause i), requires that 50 percent or more of each
class of beneficial interests in the person (in the case of a corporation, 50 percent or more of each
class of its shares) be owned by persons who are themselves entitled to benefits under other tests
of paragraph 1 (i.e., subparagraphs (a), (b), (c), (e), or (f)). The ownership may be indirect
through other persons themselves entitled to benefits under paragraph 1.
Trusts may be entitled to benefits under this provision if they are treated as residents
under Article 4 (Residence) and they otherwise satisfy the requirements of this subparagraph. For
purposes of this subparagraph, the beneficial interests in a trust will be considered to be owned
by its beneficiaries in proportion to each beneficiary's actuarial interest in the trust. The interest
of a remainder beneficiary will be equal to 100 percent less the aggregate percentages held by
income beneficiaries. A beneficiary's interest in a trust will not be considered to be owned by a
person entitled to benefits under the other provisions of paragraph 1 if it is not possible to
determine the beneficiary's actuarial interest. Consequently, if it is not possible to determine the
actuarial interest of any beneficiaries in a trust, the ownership test under clause i) cannot be
satisfied, unless all beneficiaries are persons entitled to benefits under the other subparagraphs of

paragraph 1.
The base erosion prong of the test under subparagraph 1(g) requires that less than 50
percent of the person's gross income for the taxable year be paid or accrued, directly or
indirectly, to non-residents of either State, in the form of payments that are deductible for tax
purposes in the entity's State of residence. To the extent they are deductible from the taxable
base, trust distributions would be considered deductible payments. Depreciation and amortization
deductions, which are not "payments," are disregarded for this purpose. The purposed of this
provision is to determine whether the income derived from the source State is in fact subject to
the tax regime of either State. Consequently, payments to any resident of either State, are not
considered base eroding payments for this purpose (to the extent that these recipients do not
themselves base erode to non-residents).
The term "gross income" defined in paragraph 6.
Paragraph 2
Paragraph 2 provides that an entidad or colectividad formed under the laws of Venezuela
otherwise entitled to benefits under paragraph 1 will not be entitled to the benefits of this
Convention if 50 percent or more of the vote or value of a "disproportionate" class of interests is
owned by persons other than citizens of the United States or residents of the United States or
Venezuela that meet the requirements of subparagraphs (a), (b), (c), (e), or (f) of paragraph 1. In
general, a class of interests is "disproportionate" for these purposes if the interests entitle the
owner to a disproportionately higher participation in the earnings that the company generates in
the other State through particular assets or activities of the company. Such participation may take
any form, including dividends or redemption payment. Such a class of interests would include
so-called alphabet stock or tracking stock that entitles the holder to earnings produced by a
particular division or subsidiary of the company in the source State. This provision applies if the
disproportionate class of interests is issued by the company claiming benefits, or by a company
that controls the company claiming benefits. In this context, control does not require majority
ownership.
Paragraph 3
Paragraph 3 provides that notwithstanding paragraph 1, a former long-term resident of
the United States shall not be entitled to the benefits of the Convention for the 10-year period
following the loss of long-term-resident status if such loss had for one of its principal purposes
the avoidance of U.S. tax. Under section 877 of the Code, under which certain former U.S.
citizens and long-term residents are subject to U.S. tax, an individual shall be presumed as
having a principal purpose to avoid U.S. tax if
(1) the average annual net income tax of such individual for the period of 5 taxable years
ending before the date of the loss of status is greater than $100,000 (indexed for inflation after
1994); or
(2) the net worth of such individual as of the date of the loss of status is $500,000 or more
(indexed for inflation after 1994).

Paragraph 14 of the Protocol provides that “long-term resident” shall mean any individual who is
a lawful permanent resident of the United States in 8 or more taxable years during the preceding
15 taxable years. The paragraph further provides that in determining whether the threshold in the
preceding sentence is met, there shall not count any year in which the individual is treated as a
resident of Venezuela under this Convention, or as a resident of any country other than the
United States under the provisions of any other tax treaty of the United States, and, in either case,
the individual does not waive the benefits of such treaty applicable to residents of the other
country.
Paragraph 4
Paragraph 4 provides that a resident of one of the States that is not otherwise entitled to
the benefits of the Convention may be granted benefits under the Convention if the competent
authority of the State from which benefits are claimed so determines. This discretionary
provision is included in recognition of the fact that, with the increasing scope and diversity of
international economic relations, there may be cases where significant participation by third-
country residents in an enterprise of a Contracting State is warranted by sound business practice
or long-standing business structures and does not necessarily indicate a motive of attempting to
derive unintended Convention benefits.
The competent authority of a State will base a determination under this paragraph on
whether the establishment, acquisition, or maintenance of the person seeking benefits under the
Convention, or the conduct of such person's operations, has or had as one of its principal
purposes the obtaining of benefits under the Convention. Thus, persons that establish operations
in one of the States with the principal purpose of obtaining the benefits of the Convention
ordinarily will not be granted relief under paragraph 4.
The competent authority may determine to grant all benefits of the Convention, or it may
determine to grant only certain benefits. For instance, it may determine to grant benefits only
with respect to a particular item of income in a manner similar to subparagraph 1(d). Further, the
competent authority may set time limits on the duration of any relief granted.
It is assumed that, for purposes of implementing paragraph 4, a taxpayer will not be
required to wait until the tax authorities of one of the States have determined that benefits are
denied before he will be permitted to seek a determination under this paragraph. In these
circumstances, it is also expected that if the competent authority determines that benefits are to
be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty
provision or the establishment of the structure in question, whichever is later.
Finally, there may be cases in which a resident of a Contracting State may apply for
discretionary relief to the competent authority of his State of residence. For instance, a resident
of a State could apply to the competent authority of his State of residence in a case in which he
had been denied a treaty-based credit under Article 24 on the grounds that he was not entitled to
benefits of the article under Article 17.
Paragraph 5

Paragraph 5 provides that the term "recognized securities exchange" means, in
subparagraph (a), the Caracas and Maracaibo Stock Exchanges, the Bolsa Electrónica, and any
stock exchanges registered with the Comisión Nacional De Valores, in accordance with the Ley
de Mercado de Capitales, and in subparagraph (b) the NASDAQ System owned by the National
Association of Securities Dealers, and any stock exchange registered with the Securities and
Exchange Commission as a national securities exchange for purposes of the Securities Exchange
Act of 1934. Subparagraph (c) provides that the competent authorities may also agree to
recognize additional exchanges for the purposes of this Article.
Paragraph 6
Paragraph 6 provides a definition of the term “gross income” as used in the base erosion
test of paragraph 1 (g)(ii). For the purposes of that subparagraph, “gross income” means gross
receipts. However, for enterprises engaged in manufacturing, or the production of goods, “gross
income” means gross receipts less direct costs of labor and materials attributable to such
manufacture or production and paid or payable our of such receipts.
ARTICLE 18
Artistes and Sportsmen
This Article deals with the taxation in a Contracting State of artistes (i.e., performing
artists and entertainers) and sportsmen resident in the other Contracting State from the
performance of their services as such. The Article applies both to the income of an entertainer or
sportsman who performs services on his own behalf and one who performs services on behalf of
another person, either as an employee of that person, or pursuant to any other arrangement. The
rules of this Article take precedence, in some circumstances, over those of Articles 14
(Independent Personal Services) and 15 (Dependent Personal Services).
This Article applies only with respect to the income of performing artists and sportsmen.
Others involved in a performance or athletic event, such as producers, directors, technicians,
managers, coaches, etc., remain subject to the provisions of Articles 14 and 15. In addition,
except as provided in paragraph 2, income earned by juridical persons is not covered by Article
18.
Paragraph 1
Paragraph 1 describes the circumstances in which a Contracting State may tax the
performance income of an entertainer or sportsman who is a resident of the other Contracting
State. Under the paragraph, income derived by an individual resident of a Contracting State from
activities as an entertainer or sportsman exercised in the other Contracting State may be taxed in
that other State if the amount of the gross receipts derived by the performer exceeds $6,000 (or
its equivalent in Venezuela bolivares) for the taxable year. The $6,000 includes expenses
reimbursed to the individual or borne on his behalf. If the gross receipts exceed $6,000, the full
amount, not just the excess, may be taxed in the State of performance.

The OECD Model provides for taxation by the country of performance of the
remuneration of entertainers or sportsmen with no dollar or time threshold. The United States
introduces the dollar threshold test in its treaties to distinguish between two groups of
entertainers and athletes -- those who are paid relatively large sums of money for very short
periods of service, and who would, therefore, normally be exempt from host country tax under
the standard personal services income rules, and those who earn relatively modest amounts and
are, therefore, not easily distinguishable from those who earn other types of personal service
income. The United States has entered a reservation to the OECD Model on this point.
Tax may be imposed under paragraph 1 even if the performer would have been exempt
from tax under Articles 14 (Independent Personal Services) or 15 (Dependent Personal Services).
On the other hand, if the performer would be exempt from host-country tax under Article 18, but
would be taxable under either Article 14 or 15, tax may be imposed under either of those
Articles. Thus, for example, if a performer derives remuneration from his activities in an
independent capacity, and the remuneration is not attributable to a fixed base, he may be taxed
by the host State in accordance with Article 18 if his remuneration exceeds $6,000 annually,
despite the fact that he generally would be exempt from host State taxation under Article 14.
However, a performer who receives less than the $6,000 threshold amount and therefore is not
taxable under Article 18, nevertheless may be subject to tax in the host country under Articles 14
or 15 if the tests for host-country taxability under those Articles are met. For example, if an
entertainer who is an independent contractor earns $5,000 of income in a State for the calendar
year, but the income is attributable to a fixed base regularly available to him in the State of
performance, that State may tax his income under Article 14.
Since it frequently is not possible to know until year-end whether the income an
entertainer or sportsman derived from performances in a Contracting State will exceed $6,000,
nothing in the Convention precludes that Contracting State from withholding tax during the year
and refunding after the close of the year if the taxability threshold has not been met.
As explained in paragraph 9 of the OECD Commentaries to Article 17, Article 18 applies
to all income connected with a performance by the entertainer, such as appearance fees, award or
prize money, and a share of the gate receipts. Income derived from a Contracting State by a
performer who is a resident of the other Contracting State from other than actual performance,
such as royalties from record sales and payments for product endorsements, is not covered by
this Article, but by other articles of the Convention, such as Article 12 (Royalties) or Article 14
(Independent Personal Services). For example, if an entertainer receives royalty income from the
sale of live recordings, the royalty income would be subject to limited source country tax under
Article 12, even if the performance was conducted in the source country, although he could be
fully taxed in the source country with respect to income from the performance itself under this
Article if the dollar threshold is exceeded.
In determining whether income falls under Article 17 or another article, the controlling
factor will be whether the income in question is predominantly attributable to the performance
itself or other activities or property rights. For instance, a fee paid to a performer for
endorsement of a performance in which the performer will participate would be considered to be

so closely associated with the performance itself that it normally would fall within Article 18.
Similarly, a sponsorship fee paid by a business in return for the right to attach its name to the
performance would be so closely associated with the performance that it would fall under Article
18 as well. As indicated in paragraph 9 of the Commentaries to Article 17 of the OECD Model, a
cancellation fee would not be considered to fall within Article 18 but would be dealt with under
Article 7, 14 or 15.
As indicated in paragraph 4 of the Commentaries to Article 17 of the OECD Model,
where an individual fulfills a dual role as performer and non-performer (such as a player-coach
or an actor-director), but his role in one of the two capacities is negligible, the predominant
character of the individual's activities should control the characterization of those activities. In
other cases there should be an apportionment between the performance-related compensation and
other compensation.
Consistently with Article 15 (Dependent Personal Services), Article 17 also applies
regardless of the timing of actual payment for services. Thus, a bonus paid to a resident of a
Contracting State with respect to a performance in the other Contracting State with respect to a
particular taxable year would be subject to Article 18 for that year even if it was paid after the
close of the year.
Paragraph 2
Paragraph 2 is intended to deal with the potential for abuse when a performer's income
does not accrue directly to the performer himself, but to another person. Foreign performers
frequently perform in the United States as employees of, or under contract with, a company or
other person.
The relationship may truly be one of employee and employer, with no abuse of the tax
system either intended or realized. On the other hand, the "employer" may, for example, be a
company established and owned by the performer, which is merely acting as the nominal income
recipient in respect of the remuneration for the performance (a “star company”). The performer
may act as an "employee," receive a modest salary, and arrange to receive the remainder of the
income from his performance in another form or at a later time. In such case, absent the
provisions of paragraph 2, the income arguably could escape host-country tax because the
company earns business profits but has no permanent establishment in that country. The
performer may largely or entirely escape host-country tax by receiving only a small salary in the
year the services are performed, perhaps small enough to place him below the dollar threshold in
paragraph 1. The performer might arrange to receive further payments in a later year, when he is
not subject to host-country tax, perhaps as deferred salary payments, dividends or liquidating
distributions.
Paragraph 2 seeks to prevent this type of abuse while at the same time protecting the
taxpayers' rights to the benefits of the Convention when there is a legitimate employee-employer
relationship between the performer and the person providing his services. Under paragraph 2,
when the income accrues to a person other than the performer, and the performer or related
persons participate, directly or indirectly, in the receipts or profits of that other person, the

income may be taxed in the Contracting State where the performer's services are exercised,
without regard to the provisions of the Convention concerning business profits (Article 7) or
independent personal services (Article 14). Thus, even if the "employer" has no permanent
establishment or fixed base in the host country, its income may be subject to tax there under the
provisions of paragraph 2. Taxation under paragraph 2 is on the person providing the services of
the performer. This paragraph does not affect the rules of paragraph 1, which apply to the
performer himself. The income taxable by virtue of paragraph 2 is reduced to the extent of salary
payments to the performer, which fall under paragraph 1.
For purposes of paragraph 2, income is deemed to accrue to another person (i.e., the
person providing the services of the performer) if that other person has control over, or the right
to receive, gross income in respect of the services of the performer. Direct or indirect
participation in the profits of a person may include, but is not limited to, the accrual or receipt of
deferred remuneration, bonuses, fees, dividends, partnership income or other income or
distributions.
Paragraph 2 does not apply if it is established that neither the performer nor any persons
related to the performer participate directly or indirectly in the receipts or profits of the person
providing the services of the performer. Assume, for example, that a circus owned by a U.S.
corporation performs in the other Contracting State, and promoters of the performance in the
other State pay the circus, which, in turn, pays salaries to the circus performers. The circus is
determined to have no permanent establishment in that State. Since the circus performers do not
participate in the profits of the circus, but merely receive their salaries out of the circus' gross
receipts, the circus is protected by Article 7 and its income is not subject to host-country tax.
Whether the salaries of the circus performers are subject to host-country tax under this Article
depends on whether they exceed the $6,000 threshold in paragraph 1.
Since pursuant to Article 1 (General Scope) the Convention only applies to persons who
are residents of one of the Contracting States, if the star company is not a resident of one of the
Contracting States then taxation of the income is not affected by Article 17 or any other
provision of the Convention.
This exception from paragraph 2 for non-abusive cases is not found in the OECD Model.
The United States has entered a reservation to the OECD Model on this point.
Paragraph 3
Paragraph 3 provides a special exemption at source of the remuneration of entertainers or
athletes whose visit is wholly or mainly supported by the public funds of one or both of the
Contracting States, or one of their political subdivisions or local authorities. In such a case, the
income shall be taxed only in the Contracting State of which the artiste or sportsman is resident.
Some other recent U.S. treaties, including the treaties with Germany and France, provide a
similar exception.
Relation to Other Articles

This Article is subject to the provisions of the saving clause of paragraph 4 of Article 1
(General Scope). Thus, if an entertainer or a sportsman who is resident in the other Contracting
State is a citizen of the United States, the United States may tax all of his income from
performances in the United States without regard to the provisions of this Article. In addition,
benefits of this Article are subject to the provisions of Article 17 (Limitation on Benefits).
ARTICLE 19
Pensions, Social Security, Annuities, and Child Support
This Article deals with the taxation of private (i.e., non-government service) pensions and
annuities, social security benefits, and child support payments and with the tax treatment of
contributions to pension plans.
Unlike most U.S. tax treaties, the Convention contains no rules for alimony. As a result,
alimony payments fall under the rules of Article 22 (Other Income), which, in general, allow
items of income of a resident of a Contracting State to be taxed in that State and the State in
which the income arises.
Paragraph 1
Paragraph 1 provides that distributions from pensions and other similar remuneration
beneficially owned by a resident of a Contracting State in consideration of past employment are
taxable only in the State of residence of the beneficiary. It is understood that the term “pension
distributions and other similar remuneration,” includes both periodic and lump sum payments.
The phrase “pension distributions and other similar remuneration” is intended to
encompass payments made by private retirement plans and arrangements in consideration of past
employment. In the United States, the plans encompassed by paragraph 1 include: qualified plans
under section 401(a), individual retirement plans (including individual retirement plans that are
part of a simplified employee pension plan that satisfies section 408(k), individual retirement
accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section
408A), non-discriminatory section 457 plans, section 403(a) qualified annuity plans, and section
403(b) plans. The competent authorities may agree that distributions from other plans that
generally meet similar criteria to those applicable to other plans established under their
respective laws also qualify for the benefits of Paragraph 1. In the United States, these criteria
are as follows:
a) The plan must be written;
b) In the case of an employer-maintained plan, the plan must be
nondiscriminatory insofar as it (alone or in combination with other comparable plans)
must cover a wide range of employees. including rank and file employees, and actually
provide significant benefits for the entire range of covered employees;
c) In the case of an employer-maintained plan the plan must contain provisions
that severely limit the employees’ ability to use plan assets for purposes other than
retirement, and in all cases be subject to tax provisions that discourage participants from
using the assets for purposes other than retirement; and

d) The plan must provide for payment of a reasonable level of benefits at death, a
stated age, or an event related to work status, and otherwise require minimum
distributions under rules designed to ensure that any death benefits provided to the
participants’ survivors are merely incidental to the retirement benefits provided to the
participants.
In addition, certain distribution requirements must be met before distributions from these
plans would fall under paragraph 1. To qualify as a pension distribution or similar remuneration
from a U.S. plan the employee must have been either employed by the same employer for five
years or be at least 62 years old at the time of the distribution. In addition, the distribution must
be made either
(A) on account of death or disability,
(B) as part of a series of substantially equal payments over the
employee’s life expectancy (or over the joint life expectancy of the
employee and a beneficiary), or
(C) after the employee attained the age of 55.
Finally, the distribution must be made either after separation from service or on or after
attainment of age 65. A distribution from a pension plan solely due to termination of the pension
plan is not a distribution falling under paragraph 1.
Pensions in respect of government service are not covered by this paragraph, but are
covered either by paragraph 2 of this Article, if they are in the form of social security benefits, or
by paragraph 2 of Article 20 (Government Service). Thus, Article 19 covers section 457, 401(a)
and 403(b) plans established for government employees. If a pension in respect of government
service is not covered by Article 20 solely because the service is not “in the discharge of
functions of a governmental nature,” the pension is covered by this Article 19. In the case of
Venezuela, in general, pensions in respect of government service will be covered by this article
and not by paragraph 2 of Article 20, because, in general, such pensions are not paid by, or out of
the funds created by, Venezuela.
Paragraph 2
The treatment of social security benefits is dealt with in paragraph 2. This paragraph
provides that payments made by one of the Contracting States under the provisions of its social
security or similar legislation to a resident of the other Contracting State or to a citizen of the
United States will be taxable in the Contracting State making the payment. This paragraph
applies to social security beneficiaries whether they have contributed to the system as private
sector or Government employees.
The phrase "similar legislation" is intended to refer to United States tier 1 Railroad
Retirement benefits, as is clarified in paragraph 15 of the Protocol.
Paragraph 3
Under paragraph 3, annuities, other than those covered in paragraph 1, that are derived

from a Contracting State and that are beneficially owned by an individual resident of the other
Contracting State are taxable only in the State from which they are derived. An annuity, as the
term is used in this paragraph, means a stated sum paid periodically at stated times during a
specific time period, under an obligation to make the payment in return for adequate and full
consideration (other than services rendered). An annuity otherwise covered in this paragraph
received in consideration for services rendered would be treated as deferred compensation and
generally taxable in accordance with Articles 14 (Independent Personal Services) and 15
(Dependent Personal Services).
Paragraph 4
Paragraph 4 deals with child support payments, defined as periodic payments for the
support of a minor child made pursuant to a written separation agreement or a decree of divorce,
separate maintenance, or compulsory support. Under paragraph 4, such payments made by a
resident of a Contracting State to a resident of the other Contracting State are taxable only in that
other State.
Relation to Other Articles
Article 19 is subject to the saving clause of paragraph 4 of Article 1 (General Scope).
Thus, for example, a U.S. citizen who is resident of Venezuela and receives a pension payment
from the United States may be subject to U.S. tax on the payment, notwithstanding the rules in
Article 19 that give Venezuela the exclusive taxing right. Because paragraph 2 does not restrict
either State’s right to tax social security payments, the saving clause is irrelevant.
ARTICLE 20
Government Service
Paragraph 1
Subparagraphs (a) and (b) of paragraph 1 deal with the taxation of government
compensation (other than a pension addressed in paragraph 2). Subparagraph (a) provides that
remuneration paid by a Contracting State or its political subdivisions or local authorities to any
individual who is rendering services to that State, political subdivision or local authority, is
exempt from tax by the other State. Under subparagraph (b), such payments are, however,
taxable exclusively in the other State (i.e., the host State) if the services are rendered in that other
State and the individual is a resident of that State who is either a national of that State or a person
who did not become resident of that State solely for purposes of rendering the services. Unlike
the OECD Model, the paragraph applies both to government employees and to independent
contractors engaged by governments to perform services for them.
Paragraph 2
Paragraph 2 provides rules for the taxation of pensions paid from public funds in respect
of governmental services. The paragraph provides that such pensions may be taxed only by the

paying State unless the individual recipient is a resident and national of the other State, in which
case only the other (residence) State may tax the pension. This rule is subject to the provisions of
paragraph 2 of Article 19 (Pensions, Social Security, Annuities, and Child Support), which
provides that social security benefits paid by a Contracting State to a resident of the other
Contracting State or a citizen of the United States may be taxed by the paying State.
Paragraph 3
The exemptions provided in this Article are limited to remuneration and pensions in
respect of services of a governmental nature. Paragraph 3 provides that remuneration and
pensions for services to a government-owned business are taxable under the provisions of
Articles 14 (Independent Personal Services), 15 (Dependent Personal Services), 16 (Directors'
Fees), 18 (Artistes and Athletes), or 19 (Pensions, Social Security, Annuities, and Child
Support), as the case may be. Thus, if a local government runs a business, even though the
employees who are working for the business are employees of the local government, the
compensation of those employees is covered by Article 15 and not Article 20, because the
employees are not engaging in a governmental function when they perform their employment
duties. Further, the remuneration of artistes or sportsmen who are performing in one Contracting
State and are sponsored by the government of the other Contracting State is taxable under
paragraph 3 of Article 18 (Artistes and Sportsmen) only in the State sponsoring the performance.
Such remuneration is not taxable under this Article because such performers are not employees
of the government nor are they discharging functions of a governmental nature. Whether
functions are of a governmental nature is determined by reference to the concept of a
governmental function in the State in which the income arises.
Relation to Other Articles
Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of
Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the
recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for
permanent residence there (i.e., in the United States, a "green card" holder). Thus, a resident of a
Contracting State who in the course of performing functions of a governmental nature becomes a
resident of the other State (but not a permanent resident), would be entitled to the benefits of this
Article.
ARTICLE 21
Students, Trainees, Teachers and Researchers
Paragraph 1
Paragraph 1 of Article 21 provides that a resident of a Contracting State who visits the
other Contracting State for the primary purpose of studying at a university or other recognized
educational institution, securing training in a professional speciality, or engaging in research of
an educational nature shall be exempt from taxation in that Contracting State with respect to
certain items of income during such period of study, research, or training. Paragraph 1(b) defines

those exempt items of income as
(1) payments from abroad, other than compensation for personal services, for
maintenance, education, study, research, or training;
(2) grants, allowances, or awards from a governmental, religious, charitable, scientific,
literary, or educational institution funding the research or studies; and
(3) income from personal services performed in that other Contracting State not in excess
of $5,000 (or the equivalent in Venezuelan bolivares) per taxable year.
The exemptions provided in paragraph 1 are available to the visiting student or trainee for a
period not exceeding five years from the beginning of the visit and for such additional period of
time as is necessary to complete, as a full-time student, the educational requirements as a
candidate for a post-graduate or professional degree from a recognized educational institution.
Paragraph 2
The second paragraph of the Article provides an exemption for residents of a Contracting
State who are employed by, or under contract with, a resident of the same Contracting State and
who temporarily visit the other Contracting State for the purpose of studying at a university or
other recognized educational institution or acquiring technical, professional, or business training
or experience in that other Contracting State, provided such training is from a person other than
the employer or contractor. Such student or trainee is exempt from taxation in the other
Contracting State for a period of twelve months on personal services income not in excess of
$8,000 (or the equivalent in Venezuelan bolivares) during that period.
The monetary limits provided in paragraphs 1 and 2 are in addition to, and not in lieu of,
other exemptions provided by the Code. Thus, an unmarried resident of Venezuela who is
temporarily present in the United States for the primary purpose of studying at a university
would be entitled to exclude $5,000 of income from the performance of personal services and, in
addition, would be entitled to the personal exemption allowed by section 151 of the Code, as
provided by section 873 (b) of the Code.
Paragraph 3
Paragraph 3 provides a limited exemption from tax in a Contracting State for income
from personal services of individuals resident in the other Contracting State, who are temporarily
present in the first-mentioned State for the purpose of teaching or carrying on research at a
recognized educational or research institution in that first State. Unlike the exemptions in
paragraphs 1 and 2, no dollar limit to these benefits for teachers and researchers is specified.
However, paragraph 3 establishes that the host country exemption provided shall only last for
two years from the date of entry of that individual in the host State, and in no case shall the
benefits of the paragraph be granted for more than five taxable years to any individual.
Paragraph 4
Paragraph 4 establishes that the exemptions provided in this Article do not apply to
income from research if such research is undertaken primarily for the private benefit of a specific

person or persons. For example, personal service income arising from research at a corporate
research facility would, in general, not qualify as exempt income.
Relation to Other Articles
The benefits conferred by the other Contracting State under Article 20 are subject to the
provisions of the saving clause in paragraph 4 of Article 1 (General Scope) as modified by
paragraph 5(b) of Article 1. With respect to the United States, the modified saving clause applies
to U.S. citizens and persons having immigrant status in the United States ("green card" holders).
Thus, the provisions of paragraph 1 which would exempt a Venezuelan resident from taxation as
a student in the United States are overridden by the saving clause if that student is a U.S. citizen
or green card holder. On the other hand, if a student (who is not a citizen or a green card holder)
acquires residence in the United States for tax purposes during that period of study or training, he
will be exempt from tax in the United States on those certain items of income.
ARTICLE 22
Other Income
Article 22 general1y assigns taxing jurisdiction over income not dealt with in the other
articles (Articles 6 through 16 and 18 through 21) of the Convention to the State of residence of
the beneficial owner of the income and defines the terms necessary to apply the article. However,
the other State may also tax such income if it arises in the other State. An item of income is
"dealt with" in another article if it is the type of income described in the article and it has its
source in a Contracting State. For example, all royalty income that arises in a Contracting State
and that is beneficially owned by a resident of the other Contracting State is "dealt with" in
Article 12 (Royalties).
Examples of items of income commonly covered by Article 22 include income from
gambling, punitive (but not compensatory) damages, covenants not to compete, and income from
certain financial instruments to the extent derived by persons not engaged in the trade or business
of dealing in such instruments (unless the transaction giving rise to the income is related to a
trade or business, in which case it is dealt with under Article 7 (Business Profits)). In this
Convention, alimony payments are also covered in Article 22. The article also applies to items of
income that are not dealt with in the other articles because of their source or some other
characteristic. For example, Article 11 (Interest) addresses only the taxation of interest arising in
a Contracting State. Interest arising in a third State that is not attributable to a permanent
establishment, therefore, is subject to Article 22.
Distributions from partnerships and distributions from trusts are not generally dealt with
under Article 22 because partnership and trust distributions generally do not constitute income.
Under the Code, partners include in income their distributive share of partnership income
annually, and partnership distributions themselves generally do not give rise to income. Also,
under the Code, trust income and distributions have the character of the associated distributable
net income and therefore would generally be covered by another article of the Convention. See
Code section 641 et seq.

Paragraph 1
Paragraph 1 provides that items of income not dealt with in other articles that are earned
by a resident of a Contracting State generally will be taxable in the State of residence. This right
of taxation applies whether or not the residence State exercises its right to tax the income
covered by the Article. The residence taxation provided by paragraph 1 applies only when a
resident of a Contracting State is the beneficial owner of the income. This is understood from the
phrase "income of a resident of a Contracting State." Thus, source taxation of income not dealt
with in other articles of the Convention is not limited by paragraph 1 if it is nominally paid to a
resident of the other Contracting State, but is beneficially owned by a resident of a third State.
Paragraph 2
Paragraph 2 provides an exception to the general rule of paragraph 1 for income, other
than income from real property, that is attributable to a permanent establishment or fixed base
maintained in a Contracting State by a resident of the other Contracting State. The taxation of
such income is governed by the provisions of Articles 7 (Business Profits) and 14 (Independent
Personal Services). Therefore, income arising outside the United States that is attributable to a
permanent establishment maintained in the United States by a resident of Venezuela generally
would be taxable by the United States under the provisions of Article 7. This would be true even
if the income is sourced in a third State.
There is an exception to this general rule with respect to income a resident of a
Contracting State derives from real property located outside the other Contracting State (whether
in the first-mentioned Contracting State or in a third State) that is attributable to the resident's
permanent establishment or fixed base in the other Contracting State. In such a case, only the
first-mentioned Contracting State (i.e., the State of residence of the person deriving the income)
and not the host State of the permanent establishment or fixed base may tax that income. This
special rule for foreign-situs property is consistent with the general rule, also reflected in Article
6 (Income from Immovable Property (Real Property)), that only the situs and residence States
may tax real property and real property income. Even if such property is part of the property of a
permanent establishment or fixed base in a Contracting State, that State may not tax it if neither
the situs of the property nor the residence of the owner is in that State.
The provisions of paragraph 8 of Article 7 (Business Profits) apply to this paragraph. For
example, other income that is attributable to a permanent establishment or a fixed base and that
accrues during the existence of the permanent establishment or fixed base, but is received after
the permanent establishment or fixed base no longer exists, remains taxable under the provisions
of Articles 7 (Business Profits) or 14 (Independent Personal Services), respectively, and not
under this Article.
Paragraph 3
Paragraph 3 is not found in the U.S. or OECD Models. It is taken from the U.N. Model. It
modifies the general rule of paragraph 1. It provides that, notwithstanding paragraphs 1 and 2,

items of income of a resident of a Contracting State not dealt with in the other articles of the
Convention and arising in the other Contracting State, may also be taxed in that other
Contracting State. Thus, gambling income of a resident of the United States that arises in
Venezuela may be taxed both in the United States and in Venezuela. Paragraph 1, therefore,
provides exclusive residence-based taxation only to income of a resident of a Contracting State
that does not arise in the other Contracting State.
Relation to Other Articles
This Article is subject to the saving clause of paragraph 4 of Article 1 (Personal Scope).
Thus, the United States may tax the income of a resident of Venezuela that is not dealt with
elsewhere in the Convention, if that resident is a citizen of the United States. The Article is also
subject to the provisions of Article 17 (Limitation on Benefits). Thus, if a resident of Venezuela
earns income that falls within the scope of paragraph 1 of Article 21, but that is taxable by the
United States under U.S. law, the income would be exempt from U.S. tax under the provisions of
Article 21 only if the resident satisfies one of the tests of Article 18 for entitlement to benefits.
ARTICLE 23
Capital
This Article specifies the circumstances in which a Contracting State may impose tax on
capital owned by a resident of the other Contracting State. While absent from the U.S. Model,
the inclusion of a Capital Article is appropriate because of Venezuela’s Business Assets Tax
(BAT), which serves as a type of alternative minimum tax. The BAT is a covered tax for
Venezuela under subparagraph 1(a) of Article 2 (Taxes Covered). However, it should be noted
that in accordance with subparagraph 3(a) of Article 24 (Relief from Double Taxation) the
Convention does not require the United States to allow foreign tax credits for Venezuelan BAT
paid. Since the United States does not impose taxes on capital, the only capital taxes covered by
the Convention is the BAT of Venezuela. Thus, although the Article is drafted in a reciprocal
manner, its provisions are relevant only for the imposition of the BAT of Venezuela. The
explanation which follows will be from the perspective of Venezuela as the taxing State.
The Article provides the general rule in paragraph 4 that, except as provided elsewhere in
the Article, capital owned by a resident of a Contracting State may be taxed only by that
Contracting State. Thus, in general, Venezuela cannot tax a resident of the United States on
capital owned by that resident. Exceptions to this general rule are provided in paragraphs 1, 2
and 3.
Paragraph 1 provides that capital represented by real property (as defined in Article 6
(Income from Real Property (Immovable Property)) which is owned by a U.S. resident and
located in Venezuela may be taxed by Venezuela. Under paragraph 2, capital which is
represented by personal property which is part of the business property of a permanent
establishment maintained by a U.S. resident in Venezuela or pertains to a fixed base maintained
in Venezuela by a U.S. resident may be taxed by Venezuela. Paragraph 3 deals with capital
represented by ships, aircraft or containers that are owned by a U.S. resident, and are operated in

international traffic and with other personal property pertaining to the operation of such ships,
aircraft or containers. Under the paragraph, such capital is taxable only in the United States.
Thus, the capital to which each of paragraphs 1, 2 and 3 of the Article relate is subject to
taxation in the same manner as is income from such capital under Articles 6 (Income from Real
Property (Immovable Property)), 7 (Business Profits), 8 (Shipping and Air Transport) and 13
(Gains) of the Convention.
ARTICLE 24
Relief from Double Taxation
Paragraph 1
Paragraph 1 confirms the understanding that the Contracting States shall avoid double
taxation in accordance with the paragraphs of this Article. Paragraphs 2 and 3 describe the
manner in which each Contracting State undertakes to relieve double taxation. The United States
uses the foreign tax credit method under its internal law, and by treaty. Venezuela employs a
broad exemption method under its internal law and may use either the exemption or foreign tax
credit methods under this Convention.
Paragraph 2
Venezuela agrees in paragraph 2 to allow to its residents relief from double taxation of
income derived by that resident which, in accordance with the provisions of the Convention, may
be taxed in the United States. This relief is granted in accordance with, and subject to the
limitations of the law of Venezuela, as they may be amended over time, so long as the general
principle of the Article, i.e., the allowance of relief, is retained. The primary method of avoiding
double taxation used by Venezuela, under its territorial-based system of taxation, is a broad
exemption of foreign source income from Venezuelan tax. This is the method provided in
paragraph 2(a). Subparagraph 2(b) would apply in the case that Venezuela adopts a worldwide
system of taxation, under which it would avoid double taxation by granting foreign tax credits.
Paragraph 3
The United States agrees, in paragraph 3, to allow to its citizens and residents a credit
against U.S. tax for income taxes paid or accrued to Venezuela.
The credit under the Convention is allowed in accordance with the provisions and subject
to the limitations of U.S. law, as that law may be amended over time, so long as the general
principle of this Article, i.e., the allowance of a credit, is retained. Thus, although the Convention
provides for a foreign tax credit, the terms of the credit are determined by the provisions, at the
time a credit is given, of the U.S. statutory credit.
As indicated, the U.S. credit under the Convention is subject to the various limitations of
U.S. law (see Code sections 901 - 908). For example, the credit against U.S. tax generally is

limited to the amount of U.S. tax due with respect to net foreign source income within the
relevant foreign tax credit limitation category (See Code section 904(a) and (d)), and the dollar
amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g.,
Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits
and other inter-year adjustments. When the alternative minimum tax is due, the alternative
minimum tax foreign tax credit generally is limited in accordance with U.S. law to 90 percent of
alternative minimum tax liability. Furthermore, nothing in the Convention prevents the limitation
of the U.S. credit from being applied on a per-country basis (should internal law be changed), an
overall basis, or to particular categories of income (see, e.g., Code section 865(h)).
Subparagraph (b) provides for a deemed-paid credit, consistent with section 902 of the
Code, to a U.S. corporation in respect of dividends received from a corporation resident in
Venezuela of which the U.S. corporation owns at least 10 percent of the voting stock. This credit
is for the tax paid by the corporation of Venezuela on the profits out of which the dividends are
considered paid.
Relation to Other Articles
By virtue of the exceptions in subparagraph 5(a) of Article 1 this Article is not subject to
the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States will allow
a credit to its citizens and residents in accordance with the Article, even if such credit were to
provide a benefit not available under the Code.
ARTICLE 25
Non-discrimination
This Article assures that nationals of a Contracting State, in the case of paragraph 1, and
residents of a Contracting State, in the case of paragraphs 2, 4 and 5, will not be subject, directly
or indirectly, to discriminatory taxation in the other Contracting State. For this purpose, non-
discrimination means providing national treatment. Not all differences in tax treatment, either as
between nationals of the two States, or between residents of the two States, are violations of this
national treatment standard. Rather, the national treatment obligation of this Article applies only
if the nationals or residents of the two States are comparably situated.
Each of the relevant paragraphs of the Article provides that two persons that are
comparably situated must be treated similarly. Although the actual words differ from paragraph
to paragraph (e.g., the Protocol’s paragraph 17, which clarifies paragraph 1, refers to two
nationals "in the same circumstances," paragraph 2 refers to two enterprises "carrying on the
same activities" and paragraph 5 refers to two enterprises which are "similarly situated"), the
common underlying premise is that if the difference in treatment is directly related to a tax-
relevant difference in the situations of the domestic and foreign persons being compared, that
difference is not to be treated as discriminatory (e.g., if one person is taxable in a Contracting
State on worldwide income and the other is not, or tax may be collectible from one person at a
later stage, but not from the other, distinctions in treatment would be justified under paragraph
1). Other examples of such factors that can lead to non-discriminatory differences in treatment

will be noted in the discussions of each paragraph.
The operative paragraphs of the Article also use different language to identify the kinds
of differences in taxation treatment that will be considered discriminatory. For example,
paragraphs 1 and 5 speak of "any taxation or any requirement connected therewith that is other
or more burdensome," while paragraph 2 specifies that a tax "shall not be less favorably levied."
Regardless of these differences in language, only differences in tax treatment that materially
disadvantage the foreign person relative to the domestic person are properly the subject of the
Article.
Paragraph 1
Paragraph 1 provides that a national of one Contracting State may not be subject to
taxation or connected requirements in the other Contracting State that are other or more
burdensome than the taxes and connected requirements imposed upon a national of that other
State in the same circumstances. This is consistent with the OECD Model, while differing
slightly from the U.S. Model, which refers only to taxes and other requirements that are more
burdensome than the taxes and connected requirements imposed upon a national of that other
State in the same circumstances.
As noted above, whether or not the two persons are both taxable on worldwide income is
a significant circumstance for this purpose. The 1992 revision of the OECD Model added after
the words "in the same circumstances,” the phrase "in particular with respect to residence,"
reflecting the fact that under most countries' laws residents are taxable on worldwide income and
nonresidents are not. Since in the United States nonresident citizens are also taxable on
worldwide income, the Convention’s Protocol paragraph 17 expands the phrase to refer, not to
residence, but to taxation on worldwide income. The underlying concept, however, is essentially
the same as in the OECD Model.
A national of a Contracting State is afforded protection under this paragraph even if the
national is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a
third country is entitled, under this paragraph, to the same treatment in Venezuela as a national of
Venezuela who is in similar circumstances (i.e., presumably one who is resident in a third State).
The term "national" in relation to a Contracting State is defined in subparagraph 1(g) of Article 3
(General Definitions).
Because the relevant circumstances referred to in the paragraph relate, among other
things, to taxation on worldwide income, paragraph 1 does not obligate the United States to
apply the same taxing regime to a national of Venezuela who is not resident in the United States
and a U.S. national who is not resident in the United States. United States citizens who are not
residents of the United States but who are, nevertheless, subject to United States tax on their
worldwide income are not in the same circumstances with respect to United States taxation as
citizens of Venezuela who are not United States residents. Thus, for example, Article 25 and the
understanding stated in Protocol paragraph 17 would not entitle a national of Venezuela resident
in a third country to taxation at graduated rates of U.S. source dividends or other investment
income that applies to a U.S. citizen resident in the same third country.

The scope of paragraph 1 in this Convention and the U.S. Model is broader than that in
the 1981 Model, because of the expanded definition of the term "national" in Article 3 (General
Definitions). In order to conform the Convention’s definition to that in the OECD Model, the
definition of "national" extends beyond individuals possessing the nationality of a Contracting
State to also cover juridical persons and other entities such as Venezuelan “entidades” and
“colectividades” that are nationals of a Contracting State as well.
Paragraph 2
Paragraph 2 of the Article, like the comparable paragraph in the OECD Model, provides
that a Contracting State may not tax a permanent establishment of an enterprise of the other
Contracting State less favorably than an enterprise of that first-mentioned State that is carrying
on the same activities. This provision, however, does not obligate a Contracting State to grant to
a resident of the other Contracting State any tax allowances, reliefs, etc., that it grants to its own
residents on account of their civil status or family responsibilities. Thus, if a sole proprietor who
is a resident of Venezuela has a permanent establishment in the United States, in assessing
income tax on the profits attributable to the permanent establishment, the United States is not
obligated to allow to the resident of Venezuela the personal allowances for himself and his
family that he would be permitted to take if the permanent establishment were a sole
proprietorship owned and operated by a U.S. resident, despite the fact that the individual income
tax rates would apply.
The fact that a U.S. permanent establishment of an enterprise of Venezuela is subject to
U.S. tax only on income that is attributable to the permanent establishment, while a U.S.
corporation engaged in the same activities is taxable on its worldwide income is not, in itself, a
sufficient difference to deny national treatment to the permanent establishment. There are cases,
however, where the two enterprises would not be similarly situated and differences in treatment
may be warranted. For instance, it would not be a violation of the non-discrimination protection
of paragraph 2 to require the foreign enterprise to provide information in a reasonable manner
that may be different from the information requirements imposed on a resident enterprise,
because information may not be as readily available to the Internal Revenue Service from a
foreign as from a domestic enterprise. Similarly, it would not be a violation of paragraph 2 to
impose penalties on persons who fail to comply with such a requirement (see, e.g., sections
874(a) and 882(c)(2)). Further, a determination that income and expenses have been attributed or
allocated to a permanent establishment in conformity with the principles of Article 7 (Business
Profits) implies that the attribution or allocation was not discriminatory.
Section 1446 of the Code imposes on any partnership with income that is effectively
connected with a U.S. trade or business the obligation to withhold tax on amounts allocable to a
foreign partner. In the context of the Convention, this obligation applies with respect to a share
of the partnership income of a partner resident in the other Contracting State, and attributable to
a U.S. permanent establishment. There is no similar obligation with respect to the distributive
shares of U.S. resident partners. It is understood, however, that this distinction is not a form of
discrimination within the meaning of paragraph 2 of the Article. No distinction is made between
U.S. and non-U.S. partnerships, since the law requires that partnerships of both U.S. and non-

U.S. domicile withhold tax in respect of the partnership shares of non-U.S. partners.
Furthermore, in distinguishing between U.S. and non-U.S. partners, the requirement to withhold
on the non-U.S. but not the U.S. partner's share is not discriminatory taxation, but, like other
withholding on nonresident aliens, is merely a reasonable method for the collection of tax from
persons who are not continually present in the United States, and as to whom it otherwise may be
difficult for the United States to enforce its tax jurisdiction. If tax has been over-withheld, the
partner can, as in other cases of over- withholding, file for a refund. (The relationship between
paragraph 2 and the imposition of the branch tax is dealt with below in the discussion of
paragraph 3.)
Paragraph 3
Paragraph 3 of the Article confirms that no provision of the Article will prevent either
Contracting State from imposing the branch taxes described in Article 11A (Branch Tax). Since
imposition of the branch taxes under the Convention is specifically sanctioned by Article 11A,
its imposition could not be precluded by Article 25, even without paragraph 3. Under the
generally accepted rule of construction that the specific takes precedence over the more general,
the specific branch tax provisions of Article 11A would take precedence over the more general
national treatment provision of Article 25.
Paragraph 4
Paragraph 4 prohibits discrimination in the allowance of deductions. When an enterprise
of a Contracting State pays interest, royalties or other disbursements to a resident of the other
Contracting State, the first-mentioned Contracting State must allow a deduction for those
payments in computing the taxable profits of the enterprise as if the payment had been made
under the same conditions to a resident of the first-mentioned Contracting State. An exception to
this rule is provided for cases where the provisions of paragraph 1 of Article 9 (Associated
Enterprises), paragraph 8 of Article 11 (Interest) or paragraph 6 of Article 12 (Royalties) apply,
because in these situations, the related parties have entered into transactions on a non-arm’s
length basis. This exception would include the denial or deferral of certain interest deductions
under Code section 163(j).
The term "other disbursements" is understood to include a reasonable allocation of
executive and general administrative expenses, research and development expenses and other
expenses incurred for the benefit of a group of related persons that includes the person incurring
the expense.
Paragraph 4 also provides that any debts of an enterprise of a Contracting State to a
resident of the other Contracting State are deductible in the first-mentioned Contracting State for
computing the capital tax of the enterprise under the same conditions as if the debt had been
contracted to a resident of the first-mentioned Contracting State. Even though, for general
purposes, the only capital tax covered by the Convention is Venezuela’s business assets tax,
under paragraph 6 of this Article, the non-discrimination provisions apply to all taxes levied in
both Contracting States, at all levels of government. Thus, this provision may be relevant for
both States, as many local governments in the United States impose capital taxes.

Paragraph 5
Paragraph 5 requires that a Contracting State not impose other or more burdensome
taxation or connected requirements on an enterprise of that State that is wholly or partly owned
or controlled, directly or indirectly, by one or more residents of the other Contracting State, than
the taxation or connected requirements that it imposes on other similar enterprises of that
first-mentioned Contracting State. For this purpose it is understood that “similar” refers to
similar activities or ownership of the enterprise.
This rule, like all non-discrimination provisions, does not prohibit differing treatment of
entities that are in differing circumstances. Rather, a protected enterprise is only required to be
treated in the same manner as other enterprises that, from the point of view of the application of
the tax law, are in substantially similar circumstances both in law and in fact. The taxation of a
distributing corporation under section 367(e) on an applicable distribution to foreign
shareholders does not violate paragraph 4 of the Article because a foreign-owned corporation is
not similar to a domestically-owned corporation that is accorded non-recognition treatment under
sections 337 and 355.
For the reasons given above in connection with the discussion of paragraph 2 of the
Article, it is also understood that the provision in section 1446 of the Code for withholding of tax
on non-U.S. partners does not violate paragraph 4 of the Article.
It is further understood that the ineligibility of a U.S. corporation with nonresident alien
shareholders to make an election to be an "S" corporation does not violate paragraph 4 of the
Article. If a corporation elects to be an S corporation (requiring 75 or fewer shareholders), it is
generally not subject to income tax and the shareholders take into account their pro rata shares of
the corporation's items of income, loss, deduction or credit. (The purpose of the provision is to
allow an individual or small group of individuals to conduct business in corporate form while
paying taxes at individual rates as if the business were conducted directly.) A nonresident alien
does not pay U.S. tax on a net basis, and, thus, does not generally take into account items of loss,
deduction or credit. Thus, the S corporation provisions do not exclude corporations with
nonresident alien shareholders because such shareholders are foreign, but only because they are
not net-basis taxpayers. Similarly, the provisions exclude corporations with other types of
shareholders where the purpose of the provisions cannot be fulfilled or their mechanics
implemented. For example, corporations with corporate shareholders are excluded because the
purpose of the provisions to permit individuals to conduct a business in corporate form at
individual tax rates would not be furthered by their inclusion.
Paragraph 6
As noted above, notwithstanding the specification in Article 2 (Taxes Covered) of taxes
covered by the Convention for general purposes, for purposes of providing non-discrimination
protection this Article applies to taxes of every kind and description imposed by a Contracting
State or a political subdivision or local authority thereof. Customs duties are not considered to be
taxes for this purpose.

Relation to Other Articles
The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this
Article, by virtue of the exceptions in paragraph 5(a) of Article 1. Thus, for example, a U.S.
citizen who is a resident of Venezuela may claim benefits in the United States under this Article.
Nationals of a Contracting State may claim the benefits of paragraph 1 regardless of
whether they are entitled to benefits under Article 17 (Limitation on Benefits), because that
paragraph applies to nationals and not residents. They may not claim the benefits of the other
paragraphs of this Article with respect to an item of income unless they are generally entitled to
treaty benefits with respect to that income under a provision of Article 17.
ARTICLE 26
Mutual Agreement Procedure
This Article provides the mechanism for taxpayers to bring to the attention of the
Contracting States’ competent authorities issues and problems that may arise under the
Convention. It also provides a mechanism for cooperation between the competent authorities of
the Contracting States to resolve disputes and clarify issues that may arise under the Convention
and to resolve cases of double taxation not provided for in the Convention. The competent
authorities of the two Contracting States are identified in paragraph 1(i) of Article 3 (General
Definitions).
Paragraph 1
This paragraph provides that where a resident of a Contracting State considers that the
actions of one or both Contracting States will result in taxation that is not in accordance with the
Convention he may present his case to the competent authority of either Contracting State. This
is consistent with paragraph 16 of the OECD Commentary to Article 25, which suggests that
countries may agree to allow a case to be brought to either competent authority. Because there
seems to be no apparent reason why a resident of a Contracting State must take its case to the
competent authority of its State of residence and not to that of the partner, the Convention adopts
the approach suggested in the OECD Commentary. Under this approach, a U.S. permanent
establishment of a corporation resident in Venezuela that faces inconsistent treatment in the two
countries would be able to bring its complaint to the competent authority in either Contracting
State.
Although the typical cases brought under this paragraph will involve economic double
taxation arising from transfer pricing adjustments, the scope of this paragraph is not limited to
such cases. For example, if a Contracting State treats income derived by a company resident in
the other Contracting State as attributable to a permanent establishment in the first-mentioned
Contracting State, and the resident believes that the income is not attributable to a permanent
establishment, or that no permanent establishment exists, the resident may bring a complaint
under paragraph 1 to the competent authority of either Contracting State.

It is not necessary for a person bringing a complaint first to have exhausted the remedies
provided under the national laws of the Contracting States before presenting a case to the
competent authorities, nor does the fact that the statute of limitations may have passed for
seeking a refund preclude bringing a case to the competent authority. Like the U.S. Model, but
unlike the OECD Model, no time limit is provided within which a case must be brought.
Paragraph 2
This paragraph instructs the competent authorities in dealing with cases brought by
taxpayers under paragraph 1. It provides that if the competent authority of the Contracting State
to which the case is presented judges the case to have merit, and cannot reach a unilateral
solution, it shall seek an agreement with the competent authority of the other Contracting State
pursuant to which taxation not in accordance with the Convention will be avoided. In a deviation
from the U.S. Model, paragraph 2 states that, provided that the statute of limitations has been
interrupted in accordance with the steps designated under domestic law, any agreement is to be
implemented even if such implementation otherwise would be barred by the statute of limitations
or by some other procedural limitation, such as a closing agreement. In a case where the 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. 96-13, 1996-3
I.R.B. 31, section 7.05. Because, as specified in paragraph 2 of Article 1 (General Scope), the
Convention cannot operate to increase a taxpayer's liability, time or other procedural limitations
can be overridden only for the purpose of making refunds and not to impose additional tax.
Paragraph 3
Paragraph 3 authorizes the competent authorities to resolve difficulties or doubts that may
arise as to the application or interpretation of the Convention. The paragraph includes a
non-exhaustive list of examples of the kinds of matters about which the competent authorities
may reach agreement. This list is purely illustrative; it does not grant any authority that is not
implicitly present as a result of the introductory sentence of paragraph 3. The competent
authorities may, for example, agree to the same allocation of income, deductions, credits or
allowances between an enterprise in one Contracting State and its permanent establishment in the
other (subparagraph (a)) or between persons (subparagraph (b)). These allocations are to be made
in accordance with the arm's length principle underlying Article 7 (Business Profits) and Article
9 (Associated Enterprises). Agreements reached under these subparagraphs may include
agreement on a methodology for determining an appropriate transfer price, common treatment of
a taxpayer's cost sharing arrangement, or upon an acceptable range of results under that
methodology.
As indicated in subparagraphs (c), (d), (e) and (f), the competent authorities also may
agree to settle a variety of conflicting applications of the Convention. They may agree to
characterize particular items of income in the same way (subparagraph (c)), to apply the same
source rules to particular items of income(subparagraph (d)), to adopt a common meaning of a
term (subparagraph (e)).

Subparagraph (f) authorizes the competent authorities to increase any dollar amounts
referred to in the Convention to reflect economic and monetary developments. Under the
Convention, this refers to Articles 18 (Artistes and Sportsmen) and 21 (Students, Trainees,
Teachers and Researchers). The rule under subparagraph (f) is intended to operate as follows: if,
for example, after the Convention has been in force for some time, inflation rates have been such
as to make the $6,000 exemption threshold for entertainers in Article 18 unrealistically low in
terms of the original objectives intended in setting the threshold, the competent authorities may
agree to a higher threshold without the need for formal amendment to the treaty and ratification
by the Contracting States. This authority can be exercised, however, only to the extent necessary
to restore those original objectives. This provision can be applied only to the benefit of
taxpayers, i.e., only to increase thresholds, not to reduce them.
Subparagraph (g) makes clear that the competent authorities can agree to the common
application, consistent with the objective of avoiding double taxation, of procedural provisions of
the internal laws of the Contracting States, including those regarding penalties, fines and interest.
Since the list under paragraph 3 is not exhaustive, the competent authorities may reach
agreement on issues not enumerated in paragraph 3 if necessary to avoid double taxation. For
example, the competent authorities may seek agreement on a uniform set of standards for the use
of exchange rates, or agree on consistent timing of gain recognition with respect to a transaction
to the extent necessary to avoid double taxation. Agreements reached by the competent
authorities under paragraph 3 need not conform to the internal law provisions of either
Contracting State.
Finally, paragraph 3 authorizes the competent authorities to consult for the purpose of
eliminating double taxation in cases not provided for in the Convention and to resolve any
difficulties or doubts arising as to the interpretation or application of the Convention. This
provision is intended to permit the competent authorities to implement the treaty in particular
cases in a manner that is consistent with its expressed general purposes. It permits the competent
authorities to deal with cases that are within the spirit of the provisions but that are not
specifically covered. An example of such a case might be double taxation arising from a transfer
pricing adjustment between two permanent establishments of a third-country resident, one in the
United States and one in Venezuela. Since no resident of a Contracting State is involved in the
case, the Convention does not apply, but the competent authorities nevertheless may use the
authority of the Convention to prevent the double taxation.
Paragraph 4
Paragraph 4 provides that the competent authorities may communicate with each other
for the purpose of reaching an agreement. This makes clear that the competent authorities of the
two Contracting States may communicate without going through diplomatic channels. Such
communication may be in various forms, including, where appropriate, through face-to-face
meetings of the competent authorities or their representatives.
Other Issues

Treaty effective dates and termination in relation to competent authority dispute
resolution
A case may be raised by a taxpayer under a treaty with respect to a year for which a
treaty was in force after the treaty has been terminated. In such a case the ability of the
competent authorities to act is limited. They may not exchange confidential information, nor may
they reach a solution that varies from that specified in its law.
A case also may be brought to a competent authority under a treaty that is in force, but
with respect to a year prior to the entry into force of the treaty. The scope of the competent
authorities to address such a case is not constrained by the fact that the treaty was not in force
when the transactions at issue occurred, and the competent authorities have available to them the
full range of remedies afforded under this Article.
Triangular Competent Authority Solutions
International tax cases may involve more than two taxing jurisdictions (e.g., transactions
among a parent corporation resident in country A and its subsidiaries resident in countries B and
C). As long as there is a complete network of treaties among the three countries, it should be
possible, under the full combination of bilateral authorities, for the competent authorities of the
three States to work together on a three-sided solution. Although country A may not be able to
give information received under Article 27 (Exchange of Information) from country B to the
authorities of country C, if the competent authorities of the three countries are working together,
it should not be a problem for them to arrange for the authorities of country B to give the
necessary information directly to the tax authorities of country C, as well as to those of country
A. Each bilateral part of the trilateral solution must, of course, not exceed the scope of the
authority of the competent authorities under the relevant bilateral treaty.
Relation to Other Articles
This Article is not subject to the saving clause of paragraph 4 of Article 1 (General
Scope) by virtue of the exceptions in paragraph 5(a) of that Article. Thus, rules, definitions,
procedures, etc. that are agreed upon by the competent authorities under this Article may be
applied by the United States with respect to its citizens and residents even if they differ from the
comparable Code provisions. Similarly, as indicated above, U.S. law may be overridden to
provide refunds of tax to a U.S. citizen or resident under this Article. A person may seek relief
under Article 26 regardless of whether he is generally entitled to benefits under Article 17
(Limitation on Benefits). As in all other cases, the competent authority is vested with the
discretion to decide whether the claim for relief is justified.
ARTICLE 27
Exchange of Information
Paragraph 1

This Article provides for the exchange of information between the competent authorities
of the Contracting States. The information to be exchanged is that which is necessary for
carrying out the provisions of the Convention or the domestic laws of the United States or of
Venezuela concerning the taxes covered by the Convention. The reference to information that is
“necessary” is consistent with the OECD Model, and while the U.S. Model refers to information
that is “relevant,” the terms consistently have been interpreted as being equivalent, and as not
requiring a requesting State to demonstrate that it would be unable to enforce its tax laws unless
it obtained a particular item of information. Therefore, it should not be interpreted that
“necessary” creates a higher threshold than “relevant.”
The taxes covered by the Convention for purposes of this Article constitute a broader
category of taxes than those referred to in Article 2 (Taxes Covered). As provided in paragraph
4, for purposes of exchange of information, covered taxes include all taxes imposed by the
Contracting States. Exchange of information with respect to domestic law is authorized insofar
as the taxation under those domestic laws is not contrary to the Convention. Thus, for example,
information may be exchanged with respect to a covered tax, even if the transaction to which the
information relates is a purely domestic transaction in the requesting State and, therefore, the
exchange is not made for the purpose of carrying out the Convention.
An example of such a case is provided in the OECD Commentary: A company resident in
the United States and a company resident in Venezuela transact business between themselves
through a third-country resident company. Neither Contracting State has a treaty with the third
State. In order to enforce their internal laws with respect to transactions of their residents with
the third-country company (since there is no relevant treaty in force), the Contracting State may
exchange information regarding the prices that their residents paid in their transactions with the
third-country resident.
Paragraph 1 states that information exchange is not restricted by Article 1 (General
Scope). Accordingly, information may be requested and provided under this Article with respect
to persons who are not residents of either Contracting State. For example, if a third-country
resident has a permanent establishment in Venezuela which engages in transactions with a U.S.
enterprise, the United States could request information with respect to that permanent
establishment, even though it is not a resident of either Contracting State. Similarly, if a
third-country resident maintains a bank account in Venezuela, and the Internal Revenue Service
has reason to believe that funds in that account should have been reported for U.S. tax purposes
but have not been so reported, information can be requested from Venezuela with respect to that
person's account.
Paragraph 1 also provides assurances that any information exchanged will be treated as
secret, subject to the same disclosure constraints as information obtained under the laws of the
requesting State. Information received may be disclosed only to persons, including courts and
administrative bodies, involved with the assessment, collection, enforcement or prosecution in
respect of the taxes to which the information relates, or to persons involved with the
administration of these taxes or with the oversight of such activities. The information must be
used by these persons in connection with these designated functions. Persons in the United States

involved with the oversight of the administration of taxes include legislative bodies, such as the
tax-writing committees of Congress and the General Accounting Office. Information received by
these bodies must be for use in the performance of their role in overseeing the administration of
U.S. tax laws. Information received may be disclosed in public court proceedings or in judicial
decisions.
The Article authorizes the competent authorities to exchange information on a routine
basis, on request in relation to a specific case, or spontaneously. It is contemplated that the
Contracting States will utilize this authority to engage in all of these forms of information
exchange, as appropriate.
Paragraph 2
Paragraph 2 is identical to paragraph 2 of Article 26 of the OECD Model. It provides that
the obligations undertaken in paragraph 1 to exchange information do not require a Contracting
State to carry out administrative measures that are at variance with the laws or administrative
practice of either State. Nor is a Contracting State required to supply information not obtainable
under the laws or administrative practice of either State, or to disclose trade secrets or other
information, the disclosure of which would be contrary to public policy. Thus, a requesting State
may be denied information from the other State if the information would be obtained pursuant to
procedures or measures that are broader than those available in the requesting State.
While paragraph 2 states conditions under which a Contracting State is not obligated to
comply with a request from the other Contracting State for information, the requested State is not
precluded from providing such information, and may, at its discretion, do so subject to the
limitations of its internal law.
Paragraph 3
Paragraph 3 does not have an analog in the OECD Model. It provides that when
information is requested by a Contracting State in accordance with this Article, the other
Contracting State is obligated to obtain the requested information as if the tax in question were
the tax of the requested State, even if that State has no direct tax interest in the case to which the
request relates. The OECD Model does not state explicitly in the Article that the requested State
is obligated to respond to a request even if it does not have a direct tax interest in the
information. The OECD Commentary, however, makes clear that this is to be understood as
implicit in the OECD Model. (See paragraph 16 of the OECD Commentary to Article 26.)
The Convention does not include the first sentence of paragraph 3 of the U.S. Model
dealing with bank secrecy rules. Paragraph 19 of the Protocol clarifies that the competent
authorities of both Contracting States have the necessary authority under their domestic laws to
comply with the provisions of this Article, and specifically to obtain information held by persons
other than taxpayers, including information held by financial institutions, agents and trustees, so
such sentence was not necessary.
Paragraph 3 further provides that the requesting State may specify the form in which

information is to be provided (e.g., depositions of witnesses and authenticated copies of original
documents) so that the information is usable in the judicial proceedings of the requesting State.
The requested State should, if possible, provide the information in the form requested to the
same extent that it can obtain information in that form under its own laws and administrative
practices with respect to its own taxes.
Paragraph 4
As noted above in the discussion of paragraph 1, the exchange of information provisions
of the Convention apply to all taxes imposed by a Contracting State, not just to those taxes
designated as covered taxes under Article 2 (Taxes Covered). The U.S. competent authority may,
therefore, request information for purposes of, for example, estate and gift taxes or federal excise
taxes.
Treaty Effective Dates and Termination in Relation to Exchange of Information
A tax administration may seek information with respect to a year for which a treaty was
in force after the treaty has been terminated. In such a case the ability of the other tax
administration to act is limited. The treaty no longer provides authority for the tax
administrations to exchange confidential information. They may only exchange information
pursuant to domestic law.
ARTICLE 28
Diplomatic Agents and Consular Officers
This Article confirms that any fiscal privileges to which diplomatic or consular officials
are entitled under general provisions of international law or under special agreements will apply
notwithstanding any provisions to the contrary in the Convention. The agreements referred to
include any bilateral agreements, such as consular conventions, that affect the taxation of
diplomats and consular officials and any multilateral agreements dealing with these issues, such
as the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular
Relations. The U.S. generally adheres to the latter because its terms are consistent with
customary international law.
The Article does not independently provide any benefits to diplomatic agents and
consular officers. Article 20 (Government Service) does so, as do Code section 893 and a
number of bilateral and multilateral agreements. In the event that there is a conflict between the
tax treaty and international law or such other treaties, under which the diplomatic agent or
consular official is entitled to greater benefits under the latter, the latter laws or agreements shall
have precedence. Conversely, if the tax treaty confers a greater benefit than another agreement,
the affected person could claim the benefit of the tax treaty.
Pursuant to subparagraph 5(b) of Article 1, the saving clause of paragraph 4 of Article 1
(General Scope) does not apply to override any benefits of this Article available to an individual
who is neither a citizen of the United States nor has immigrant status in the United States.

ARTICLE 29
Entry into Force
This Article contains the rules for bringing the Convention into force and giving effect to
its provisions.
Paragraph 1
Paragraph 1 provides for the ratification of the Convention by both Contracting States
according to their constitutional and statutory requirements. Each State must notify the other
through the diplomatic channel as soon as its requirements for ratification have been complied
with. Paragraph 1 also requires that instruments of ratification accompany the notifications.
In the United States, the process leading to ratification and entry into force is as follows:
Once a treaty has been signed by authorized representatives of the two Contracting States, the
Department of State sends the treaty to the President who formally transmits it to the Senate for
its advice and consent to ratification, which requires approval by two-thirds of the Senators
present and voting. Prior to this vote, however, it generally has been the practice for the Senate
Committee on Foreign Relations to hold hearings on the treaty and make a recommendation
regarding its approval to the full Senate. Both Government and private sector witnesses may
testify at these hearings. After receiving the Senate’s advice and consent to ratification, the treaty
is returned to the President for his signature on the ratification document. The President's
signature on the document completes the process in the United States.
Paragraph 2
Paragraph 2 provides that the Convention will enter into force on the date on which the
second of the two notifications of the completion of ratification requirements and accompanying
instrument of ratification has been received. The date on which a treaty enters into force is not
necessarily the date on which its provisions take effect. Paragraph 2, therefore, also contains
rules that determine when the provisions of the treaty will have effect. Under paragraph 2(a), the
Convention will have effect with respect to taxes withheld at source (principally dividends,
interest and royalties) for amounts paid or credited on or after January 1 of the year following the
date on which the Convention enters into force. For example, if instruments of ratification are
exchanged on April 25 of a given year, the withholding rates specified in paragraph 2 of Article
10 (Dividends) would be applicable to any dividends paid or credited on or after January 1 of the
following year. If for some reason a withholding agent withholds at a higher rate than that
provided by the Convention (perhaps because it was not able to re-program its computers before
the payment is made), the beneficial owner of the income may make a claim for refund pursuant
to section 1464 of the Code.
Likewise, for all other taxes, paragraph 2(b) specifies that the Convention will have effect
for any taxable year or assessment period beginning on or after January 1 of the year following
entry into force.

ARTICLE 30
Termination
This Article contains the rules for terminating the Convention.
Paragraph 1
Paragraph 1 states that the Convention is to remain in effect indefinitely, unless
terminated by one of the Contracting States in accordance with the provisions of Article 30. The
Convention may be terminated at any time after the year in which the Convention enters into
force, provided that at least six months prior notice of the termination has been given through the
diplomatic channel. If such notice of termination is given, subparagraph (a) provides that the
provisions of the Convention with respect to withholding at source will cease to have effect on or
after January 1 of the year following the date on which the notice is given. Likewise, for other
taxes, the Convention will cease to have effect as of taxable periods beginning on or after
January 1 of the year following the date on which the notice is given.
Paragraph 2
Paragraph 2 is intended to deal with changes in law of either of the Contracting States
that have the effect of changing the application of the Convention in a significant manner or that
alter the relationship between the Contracting States. Paragraph 2 provides, first, that, in
response to a change in the law of either State, the appropriate authority of either State may
request consultations with its counterpart in the other State to determine whether a change in the
Convention is appropriate. The “appropriate authorities” may be the Contracting States
themselves, communicating through diplomatic channels, or they may be the competent
authorities under the Convention, communicating directly. The request for consultations may
come either from the authority of the Contracting State making the change in law, or it may
come from the authority of the other State. If the authorities determine, on the basis of
consultations, that a change in domestic legislation has significantly altered the balance provided
by the Convention, they will consult with a view to amending the Convention to restore an
appropriate balance. Any such amendment would, of course, require a protocol or new treaty
which would be subject to Senate advice and consent to ratification.
Other Aspects of Article
A treaty performs certain specific and necessary functions regarding information
exchange and mutual agreement. In the case of information exchange the treaty's function is to
override confidentiality rules relating to taxpayer information. In the case of mutual agreement
its function is to allow competent authorities to modify internal law in order to prevent double
taxation and tax avoidance. With respect to the effective termination dates for these aspects of
the treaty, therefore, if a treaty is terminated as of January 1 of a given year, no otherwise
confidential information can be exchanged after that date, regardless of whether the treaty was in
force for the taxable year to which the request relates. Similarly, no mutual agreement departing

from internal law can be implemented after that date, regardless of the taxable year to which the
agreement relates. Therefore, for the competent authorities to be allowed to exchange otherwise
confidential information or to reach a mutual agreement that departs from internal law, a treaty
must be in force at the time those actions are taken and any existing competent authority
agreement ceases to apply.
Article 30 relates only to unilateral termination of the Convention by a Contracting State.
Nothing in that Article should be construed as preventing the Contracting States from concluding
a new bilateral agreement, subject to ratification, that supersedes, amends or terminates
provisions of the Convention without the six-month notification period.
Customary international law observed by the United States and other countries, as
reflected in the Vienna Convention on Treaties, allows termination by one Contracting State at
any time in the event of a "material breach" of the agreement by the other Contracting State.