Technical Explanation PDF

TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE
CONVENTION AND PROTOCOL BETWEEN THE
UNITED STATES OF AMERICA AND UKRAINE
FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
PREVENTION OF FISCAL EVASION WITH RESPECT TO
TAXES ON INCOME AND CAPITAL SIGNED AT WASHINGTON ON
MARCH 4, 1994
INTRODUCTION
This is a technical explanation of the Convention and
Protocol between the United States and Ukraine signed on March 4,
1994 ("the Convention"). The Convention replaces the Convention
Between the United States of America and the Union of Soviet
Socialist Republics for the Avoidance of Double Taxation of
Income, the Prevention of Fiscal Evasion with Respect to Taxes on
Income, and the Elimination of Obstacles to International Trade
and Investment, signed on June 20, 1973 ("the 1973 Convention"),
as it applied to the United States and Ukraine.
The Convention is based on the Model Double Taxation
Convention on Income and Capital, published by the OECD in 1992
("the OECD Model"), the 1973 Convention and other more recent US
income tax conventions.
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.
The explanations of each article include explanations of any
Protocol provision relating to that article.

Article 1. GENERAL SCOPE
Paragraph 1 provides that the Convention applies to
residents of the United States or Ukraine, and in some cases may
also apply to residents of third States. Article 4 defines
residents of the United States and Ukraine for the purposes of
the Convention. Examples of cases where the Convention may
affect residents of third States include the articles on non-
discrimination (Article 25) and the exchange of information
(Article 27).
Paragraph 2 provides that the Convention may not increase
the tax burden of residents of either State compared to what it
would be under the respective domestic law provisions. Thus, a
right to tax given by the Convention cannot be exercised unless
domestic law also provides for such a tax. This does not mean,
however, that a taxpayer may pick and choose among Code and
Convention provisions in an inconsistent manner in order to
minimize tax. For example, assume a resident of Ukraine 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 income taxable in the United States
under the Code but do not meet the permanent establishment
threshold tests of the Convention. One is profitable, and the
other incurs a loss. Under the Convention the income of the
permanent establishment is taxable, and both the profit and loss
of the other two businesses are ignored. Under the Code all
three would be taxable. 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
loss trade or business against the profit of the permanent
establishment. (See Rev. Rul. 84-17, 1984-1 C.B. 10.) If the
taxpayer invokes the Code for the taxation of all three ventures,
he would not be precluded from invoking the Convention with
respect, for example, to any dividend income he may receive from
the United States that is not effectively connected with any of
his business activities in the United States.
Under subparagraph 2 b), the Convention also may not
restrict a tax benefit conferred by any other agreement between
the Contracting States. Under notes exchanged between the
Contracting States on June 6, 1995 ("the Notes"), the Contracting
States have agreed to a provision that specifically addresses on
the relationship of the Convention to other agreements, including
the General Agreement on Trade in Services ("GATS").
The United States is a party to "GATS" but Ukraine is not.
Nevertheless, the Contracting States have considered the
relationship between the Convention and GATS in the event that
GATS should apply between them.

Article XXII(3) of GATS provides that a Member of the World
Trade Organization may not invoke the obligation of national
treatment under Article XVII of GATS with respect to a measure of
another Member that falls within the scope of an international
agreement between them relating to the avoidance of double
taxation. In the case of a dispute between Members as to whether
a measure falls within the scope of such an agreement between
them, Article XXII(3), footnote 11 of GATS provides that, with
respect to agreements on the avoidance of double taxation which
exist on the date of entry into force of the WTO Agreement, the
dispute may be brought before the Council for Trade in Services
only with the consent of both parties to such an agreement.
Paragraph 1 of the Notes provides that, notwithstanding
Article XXII(3) and footnote 11 of the GATS, in the event that
the GATS applies between the Contracting States, a dispute
concerning whether a measure is within the scope of the proposed
Convention shall be considered only pursuant to Article 26
(Mutual Agreement Procedure) of the proposed Convention by the
competent authorities as defined in subparagraph 1(j) of Article
3 (General Definitions) of the proposed Convention.
In addition, the Contracting States have considered the
relationship between the Convention and other agreements that
apply between them and that have provisions concerning national
treatment or most-favored-nation treatment. Paragraph 2 of the
Notes provides that, unless the competent authorities determine
that a taxation measure is not within the scope of the proposed
Convention, the national treatment or most-favored-nation ("MFN")
obligations under any other agreement (including GATS in the
event that it applies between the Contracting States) shall not
apply to a taxation measure, subject to certain exceptions.
These exceptions permit the application of such national
treatment or MFN obligations as may apply to trade in goods under
the Agreement on Trade Relations between the United States and
Ukraine, and the General Agreement on Tariffs and Trade ("GATT"),
if it applies between the United States and Ukraine.
Paragraph 3 contains the traditional "saving" clause, which
provides that each country may tax in accordance with its
domestic law, without regard to the Convention, its own
residents, and in the case of the United States, its citizens,
and former citizens. "Residence," for the purpose of the saving
clause, is determined under Article 4 (Residence). Thus, for
example, if an individual who is not a U.S. citizen is a resident
of the United States under the Code, e.g ., a "green card" holder,
and is also a resident of Ukraine under Ukrainian law, and the
tie-breaker rules of paragraph 2 of Article 4 determine that he
is a resident of Ukraine, he will be entitled to U.S. benefits
under the Convention. The paragraph also permits the taxation of
certain former citizens by the United States whose loss of
citizenship had as one of its principal purposes the avoidance of

U.S. tax, in accordance with section 877 of the Internal Revenue
Code. There is not a comparable provision in Ukrainian law
dealing with former citizens.
As a consequence of the saving clause, each article should
be read as not providing benefits with respect to the U.S.
taxation of U.S. citizens (wherever resident) or residents or
with respect to Ukrainian taxation of Ukrainian residents.
However, paragraph 4 provides certain exceptions to the saving
clause. Under subparagraph a), for example, U.S. residents and
citizens are entitled to certain U.S. benefits provided under the
Convention. Those benefits are: the correlative adjustments
authorized by paragraph 2 of Article 9, the exemption of social
security benefits paid by the other State that is provided in
paragraph 1 of Article 19, the guarantee of a foreign tax credit
provided in Article 24, the nondiscrimination protection of
Article 25 and the competent authority procedures of Article 26.
Under subparagraph b) certain additional benefits are available
to U.S. residents who are neither US citizens nor "green card"
holders; these are the benefits extended to employees of the
Ukrainian Government under Article 18, to visiting students,
trainees and researchers under Article 20, and to members of
diplomatic and consular missions under Article 28. This
paragraph also applies reciprocally.
Article 2. TAXES COVERED.
This Article identifies the U.S. and Ukrainian taxes to
which the Convention applies.
In the case of the United States, the Convention applies to
the Federal income taxes imposed by the Internal Revenue Code,
but not including the accumulated earnings tax or personal
holding company tax (which are considered penalty taxes) or
social security taxes. It also applies to the excise taxes
imposed with respect to the investment income of private
foundations. The non-discrimination provisions of Article 25
apply to all taxes imposed at all levels of government. - It is
the only article that applies to state and local taxes. The
exchange of information provisions of Article 27 apply to all
Federal level taxes, including estate and gift and excise taxes
to the extent that such information is relevant to enforcement of
the Convention or of any covered tax as long as such tax is
applied in a manner that is not inconsistent with the Convention.
In the case of Ukraine, the Convention applies to the taxes
on profits and income provided by the enumerated Ukrainian laws.
The non-discrimination provisions of Article 25 extend to all
taxes at all levels of government and the exchange of information
provisions of Article 27 extend to all national-level taxes.

Under paragraph 2, the Convention will apply to any taxes
that are substantially similar to those enumerated in paragraph
1, and that are imposed in addition to, or in place of, the
existing taxes after March 4, 1994 (the date of signature of the
Convention). In recognition of the fact that the Ukrainian tax
system is evolving, the paragraph adds that a subsequent tax
imposed by one State that is substantially similar to an existing
tax of the other State covered by paragraph 1 will also be
covered. For the same reason, paragraph 3 also includes in the
Convention's coverage any national level tax on property
subsequently imposed by either Contracting State.
Paragraph 2 also provides that the U.S. and Ukrainian
competent authorities will notify each other of significant
changes in their taxation laws that are of significance to the
operation of the Convention, including changes that deny or have
the effect of denying deductions for interest, wages and other
significant business expenses.
Article 3. GENERAL DEFINITIONS
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, which deal with the
taxation of those classes of income.
The term "Contracting State" means the United States or
Ukraine, depending on the context in which the term is used.
The terms "United States" and "Ukraine" are defined in
subparagraphs b) and c), respectively. The term "United States"
is defined to mean the United States of America. The term does
not include Puerto Rico, the Virgin Islands, Guam or any other
U.S. possession or territory. When used geographically, the
"United States" includes the territorial sea, and any area
outside the territorial sea that in accordance with international
law has been or may be designated an area in which the United
States may exercise rights with respect to the seabed and subsoil
and their natural resources.
When used geographically the term "Ukraine" includes the
territorial sea, and any area outside the territorial sea that in
accordance with international law has been or may be designated
an area in which the United States may exercise rights with
respect to the seabed and subsoil and their natural resources.
Subparagraph d) defines the term "national" to include any
individual possessing the nationality of a Contracting State, and

any legal person, partnership or association deriving its status
as such from the laws in force in a Contracting State.
Subparagraph e) defines the term "person" to include an
individual, an estate, a trust, a partnership, a company and any
other body of persons. Any such person may be a "resident" of a
Contracting State for purposes of Article 4 and thus entitled to
the benefits of the Convention.
The term "company" is defined in subparagraph f) as any
entity treated as a body corporate for tax purposes. In Ukraine,
this includes a joint stock company, a limited liability company,
a joint venture, and any other legal entity or an organization
subject to the tax on profits in Ukraine. For U.S. tax purposes,
the rules of Treas. Reg. § 301.7701-2 generally will be applied
to determine whether an entity is a body corporate. However,
Ukrainian entities described in the second sentence Of
subparagraph f) are treated as companies for all purposes of the
treaty.
Subparagraph g) defines the term "international traffic."
The term means any transport by a ship or aircraft except when
such transport is solely between places within a Contracting
State. The exclusion from international traffic of transport
solely between places within a Contracting State means, for
example, that the transport of goods or passengers solely between
New York and Chicago by a Ukrainian carrier (if it were
permitted) would not be treated as international traffic, and the
resulting income would not be exempt from U.S. tax under Article
8. It would however, be treated as business profits under
Article 7 and would, therefore, be taxable in the United States
only if attributable to a U.S. permanent establishment, and then
only on a net basis. If, however, goods or passengers are
carried by a Ukrainian airplane from Kiev to New York and then to
Chicago, the trip would be international transport with respect
to the carriage for those who continued to Chicago as well as for
those who disembarked in New York.
Subparagraph h) defines the term "property." The definition
is relevant for possible future enactment of a tax on capital by
either Contracting State. (See Article 23 (Property).)
The terms "enterprise of a Contracting State" and
"enterprise of the other Contracting State" are defined in
subparagraph i) as an enterprise carried on by a resident of one
of the States and an enterprise carried on by a resident of the
other State, respectively. The term "enterprise" is not defined
in the Convention.
The "competent authority" is the Government official charged
with administering the provisions of the Convention and with
attempting to resolve any doubts or difficulties that may arise

in interpreting its provisions. The U.S. competent authority is
the Secretary of the Treasury or his authorized representative.
The Secretary of the Treasury has delegated the competent
authority function to the Commissioner of Internal Revenue, who
has, in turn, delegated the authority to the Assistant
Commissioner (International). With respect to interpretive
issues, the Assistant Commissioner acts with the concurrence of
the Associate Chief Counsel (International) of the Internal
Revenue Service. In Ukraine, the competent authority is the
Minister of Finance or his authorized representative.
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 a
different interpretation or the competent authorities agree to a
common meaning.
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. Determination of residence is important because, as
noted in the explanation to Article 1 (General Scope), as a
general matter only residents of the Contracting States may,
subject to Article 22 (Limitation on Benefits), claim the
benefits of the Convention. This definition of residence is to
be used only for purposes of the Convention.
The determination of residence for purposes of the
Convention looks first to a person's liability to tax as a
resident under the respective taxation laws of the Contracting
States. For this purpose, liability to tax is interpreted as
subject to the taxation laws; thus, a tax-exempt entity may be a
resident of a Contracting State. A person who, under those laws,
is a resident of one Contracting State and not of the other need
look no further. That person is a resident for purposes of the
Convention of the State in which he is resident under internal
law. Consistent with U.S. treaty policy, the Convention includes
citizenship as one of the criteria of residence. Thus, a U.S.
citizen resident in a third country is entitled to the benefits
of this Convention on the same basis as an individual residing in
the United States. If, however, a U.S. citizen or resident (e.q.,
a "green card" holder) is also a resident of Ukraine under its
taxation law, the individual must look to the tie-breaker rules
of paragraph 2, which attempt to assign one State of residence to
such a person for purposes of the Convention. A U.S. citizen
would continue to be subject to U.S. taxation under the saving
clause of paragraph 3 of Article 1 (General Scope), but a green
card holder's residence would be determined only under this
Article for purposes of Convention benefits.

It is understood that the two Contracting States and their
political subdivisions are to be treated as residents of those
States for purposes of the Convention.
A person that is liable to tax in a Contracting State only
in respect of income from sources within that State will not be
treated as a resident of that State for purposes of the
Convention. Thus, for example, a Ukrainian consular official in
the United States who is subject to U.S. tax on U.S. source
investment income, but not on non-U.S. income, would not be
considered a resident of the United States for purposes of the
Convention. (In most cases such an individual also would not be
a U.S. resident under the Code.)
Paragraph 1 of the Protocol provides that a partnership,
estate or trust will be treated as a resident of a Contracting
State in accordance with the residence of the person liable to
tax with respect to the income derived by the partnership,
estate, or trust, i.e., to the extent that the income is taxed as
the income of a resident, whether in the hands of the person
deriving the income or in the hands of its partners or
beneficiaries. This rule is applied to determine the extent to
which the partnership, estate or trust is entitled to benefits
with respect to income derived from the other Contracting State.
Under Ukrainian law a partnership is generally taxed as an
entity, and trusts and estates are not used. Under U.S. law, a
partnership is never (except for certain publicly traded limited
partnerships and partnerships that are reclassified as
associations under Treas. Reg. § 301.7701-2), and an estate or
trust is often not, a taxable entity. Thus for purposes of the
Convention, income received by a U.S. partnership need only be
treated as received by a U.S. resident to the extent included in
the distributive share of partners who are U.S. residents
(looking through any partnerships that are themselves partners).
Similarly, the treatment under the Convention of income received
by a U.S. trust or estate will be determined by the residence for
taxation purposes of the person subject to tax on such income,
which may be the grantor, the beneficiaries, or the estate or
trust itself, depending on the particular circumstances.
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 is
provided in paragraph 2 to determine a single State of residence
for that individual. These rules come from the OECD Model. The
first test applies if 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 his Contracting State of citizenship. If he is a
citizen of both States or of neither, the competent authorities
are instructed to resolve his residence by mutual agreement.
Paragraph 3 provides that if a person, other than an
individual, is a resident of both Contracting States under their
respective laws, the competent authorities will attempt to
establish a single country of residence and agree on how the
Convention is to apply to such a person.
Article 5. PERMANENT ESTABLISHMENT
This Article defines the term "permanent establishment,"
which is relevant to several articles of the Convention. The
current or former existence of a permanent establishment in a
Contracting State is necessary under Article 7 (Business Profits)
for that State to tax the business profits of a resident of the
other Contracting State. 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 which
the recipient has in the source State; if the income is or was
attributable to a permanent establishment, Article 7 (Business
Profits) applies (and if the income is or was attributable to a
fixed base, Article 14 (Independent Personal Services) applies).
This Article is similar in most respects to the
corresponding Article of the OECD Model.
Paragraph 1 provides the basic definition of the term
"permanent establishment." As used in the Convention, the term
means a fixed place of business through which a resident of one
Contracting State either wholly or in part carries on business
activities in the other Contracting State. It is not necessary
that the resident be a legal entity. In the case of an
individual, Article 14 (Independent Personal Services) uses the
concept of a "fixed base" rather than a "permanent
establishment," but the two concepts are considered to be
parallel.
Paragraph 2 contains a list of examples of fixed places of
business which constitute a permanent establishment: a place of
management, a branch, an office, a factory, a workshop, and a
mine, well, quarry or other place of extraction of natural
resources.
Paragraph 3 adds that a construction site, installation or
assembly project, or an installation or drilling rig or ship used
to explore for or exploit natural resources also constitutes a

permanent establishment, but only if it lasts more than 6 months.
Although shorter than the period provided in some recent
treaties, such as the treaty with the Russian Federation, this
period is longer than the period provided in some other treaties
with less-developed states, such as the 120 day period provided
in the tax treaty with India. This period therefore may be
considered to be consistent with recent U.S. treaty policy in
treaties with developing countries. Further, pursuant to Article
29 (Entry into Force), during the first taxable year in which the
Convention is in effect, a taxpayer may claim the benefit of the
longer period provided in the 1973 Convention (but only beyond
the end of that first taxable year to the extent consistent with
the six month period provided in the Convention).
The 6-month test applies separately to each individual site
or project. The period begins when work (including preparatory
work carried on by the resident) physically begins in a
Contracting State. A series of contracts or projects that are
interdependent both commercially and geographically is to be
treated as a single project. For example, the construction of a
housing development would be considered a single project even if
each house is constructed for a different purchaser. If the 6-
month threshold is exceeded, the site or project constitutes a
permanent establishment from its first day. This interpretation
of the Article is based on the Commentaries to paragraph 3 of
Article 5 of the OECD Model, which constitute the generally .
accepted international interpretation of the language in
paragraph 3 of Article 5 of the Convention. Drilling rigs, both
onshore and offshore, are covered by this rule, and must,
therefore, be present in a Contracting State for 6 months to
constitute a permanent establishment.
Paragraph 4 contains exceptions to the general rule of
paragraph 1 that a fixed place of business through which a
business is carried on constitutes a permanent establishment.
The paragraph lists a number of activities that may be carried on
through a fixed place of business, but that, nevertheless, will
not give rise to a permanent establishment. The use of
facilities solely to store, display or deliver merchandise
belonging to an enterprise will not constitute a permanent
establishment of that enterprise. The maintenance of a stock of
goods belonging to an enterprise solely for the purpose of
storage, display or delivery, or solely for the purpose of
processing by another enterprise will not give rise to a
permanent establishment of the first-mentioned enterprise. The
maintenance of a fixed place of business solely for purchasing
goods or collecting information for the resident, or for carrying
out any other activity of a preparatory or auxiliary character
for the resident, such as advertising, the supply of information,
or certain research activities, will not constitute a permanent
establishment of the resident. A combination of the activities
described in paragraph 4 will not give rise to a permanent

establishment.
Paragraphs 5 and 6 specify when the use of an agent will
constitute a permanent establishment where a permanent
establishment does not otherwise exist under paragraphs 1 through
4. Under paragraph 5, a dependent agent of an enterprise will be
deemed to be a permanent establishment of the enterprise, if the
agent has and habitually exercises an authority to conclude
contracts in the name of that enterprise. If, however, his
activities are limited to those activities specified in paragraph
4 that would not constitute a permanent establishment if carried
on directly by the enterprise through a fixed place of business,
the agent will not be a permanent establishment of the
enterprise.
Under paragraph 6, an enterprise will not be deemed to have
a permanent establishment in a Contracting State merely because
it carries on business in that State through an independent
agent, including a broker or general commission agent, if the
agent is acting in the ordinary course of his business.
Paragraph 7 clarifies that a company that is a resident of a
Contracting State will not be deemed to have a permanent
establishment in the other Contracting State merely because it
controls, or is controlled by, a company that is a resident of
that other Contracting State, or that carries on business in that
other Contracting State. The determination of whether a
permanent establishment exists will be made solely on the basis
of the factors described in paragraphs 1 through 6 of the
Article. Whether a company is a permanent establishment of a
related company, therefore, is based solely on those factors and
not on the ownership or control relationship between the
companies.
Article 6. INCOME FROM REAL PROPERTY
Paragraph 1 provides the standard income tax treaty rule
that income derived by a resident of Contracting State from real
property, including income from agriculture or forestry, located
in the other Contracting State may be taxed in that other State.
The income may also be taxed in the State of residence.
Paragraph 2 defines real property in accordance with the
laws of the Contracting States, but provides that it includes, in
any case, property accessory to real property, livestock and
equipment used in agriculture and forestry, rights to which the
provisions of general law respecting landed property apply,
usufruct of real property and rights to variable or fixed
payments as consideration for the working of, or the right to
work, mineral deposits, sources and other natural resources. The
term does not include ships, boats and aircraft.

Paragraph 3 clarifies that the Article covers income from
any use of real property, without regard to the form of
exploitation, including leasing or sub-leasing.
Paragraph 4 is based on a corresponding provision in the
OECD Model, clarifying that paragraphs 1 and 3 of this Article
also apply to income from real property of an enterprise and to
income from real property used for the performance of independent
personal services.
Paragraph 5 provides for a binding election by the taxpayer
to be taxed on a net basis. The election reflects U.S. treaty
policy and U.S. law. Since this Article provides for net basis
taxation, it generally provides the same tax result as Article 7
(Business Profits).
Article 7. BUSINESS PROFITS
This Article provides the rules for the taxation by a
Contracting State of the business profits of a resident of the
other Contracting State. The general rule under paragraph 1 is
that business profits (as defined in paragraph 6) of a resident
of one Contracting State may not be taxed by the other
Contracting State unless the resident carries on or has carried
on business in that other Contracting State through a permanent
establishment (as defined in Article 5 (Permanent Establishment))
situated in the latter State. Where that condition is met, the
State in which the permanent establishment is situated may tax
the business profits attributable to the assets or activity of
that permanent establishment.
Subparagraph a) of paragraph 2 of the Protocol to the
Convention provides an example of the "attributable to" concept.
The example concerns a company that is engaged in oil production
through wells located in the other State. The company also
carries on exploration activities at another location in that
other State using assets and employees not connected with the
production activities; the activities last less than 6 months.
The company also occasionally leases drilling equipment to third
parties. The three activities are separate. The oil production
constitutes a permanent establishment and the resulting profits
are taxable in that other State. The other two activities do not
constitute permanent establishments, and any resulting profits
may not be taxed in that other State.
Paragraph 2 provides that the Contracting States will
attribute to a permanent establishment the profits that it would
be expected to make if it were an independent entity, engaged in
the same or similar activities under the same or similar
conditions, and dealing wholly independently with the enterprise
of which it is a permanent establishment and any other enterprise
that is an associated enterprise within the meaning of Article 9

(Associated Enterprises). Profits so attributable to a permanent
establishment are taxable in the State where the permanent
establishment is situated or was situated at the time the profits
were made. This rule incorporates the rule of section 864(c)(6)
of the Internal Revenue Code with respect to deferred payments,
which is also reflected in the provisions of Articles 11
(Interest), 12 (Royalties), 14 (Independent Personal Services)
and 21 (Other Income) dealing with amounts attributable to a
permanent establishment or fixed base. If the income was
attributable to a permanent establishment or fixed base when
earned, it is taxable by the State where the permanent
establishment or fixed base was located, even if receipt of the
income is deferred until the permanent establishment or fixed
base has ceased to exist.
The profits attributable to a permanent establishment may be
from sources within or without a Contracting State. Thus,
certain items of foreign source income described in section
864(c)(4)(B) or (C) of the Code may be attributed to a U.S.
permanent establishment of a Ukrainian resident and subject to
tax in the United States. The concept of "attributable to" in
the Convention is narrower than the concept of "effectively
connected" in section 864(c) of the Code. The limited "force of
attraction" rule in Code section 864(c)(3), therefore, is not
applicable under the Convention.
Paragraph 3 provides that the tax base must be reduced by
deductions for expenses incurred for the purposes of the
permanent establishment. These include expenses directly
incurred by the permanent establishment and a reasonable
allocation of expenses incurred by the home office, or by other
parts of the enterprise company, as long as the expenses were
incurred for the purposes of the permanent establishment.
Allocable expenses include executive and general administrative
expenses, research and development expenses, interest, and
charges for management, consultancy, or technical assistance,
wherever incurred and without regard to whether they are actually
reimbursed by the permanent establishment. As indicated in
paragraph 2(b) of the Protocol, the expenses may be incurred by
the home office of the permanent establishment, other permanent
establishments in third countries, or the permanent establishment
itself. The permanent establishment must be able to document
such expenses, if so requested by the tax authorities of the
State in which it is located. In no case, however, will
deductions be allowed for amounts paid by the permanent
establishment to the home office or other permanent
establishments in respect of deductible expenses such as
interest, royalties, and service fees. Rather, the permanent
establishment will be allowed deductions for such expenses only
to the extent they are reasonably allocable to the permanent
establishment, as described above.

Paragraph 4 provides that the business profits attributable
to a permanent establishment shall be determined by the same
method from year to year unless there is a good and sufficient
reason to the contrary.
Paragraph 5 provides that no business profits will be
attributed to a permanent establishment merely because it
purchases goods or merchandise for the resident of which it is a
permanent establishment. This rule refers to a permanent
establishment that performs more than one function for the
enterprise, including purchasing. For example, the permanent
establishment may purchase raw materials for the enterprise's
manufacturing operation and sell the manufactured output. While
business profits may be attributable to the permanent
establishment with respect to its sales activities, no profits
are attributable with respect to its purchasing activities. If
the sole activity were the purchasing of goods or merchandise for
the enterprise, the issue of the attribution of income would not
arise, because under subparagraph 4(d) of Article 5 (Permanent
Establishment) there would be no permanent establishment.
Paragraph 6 illustrates the meaning of the term "business
profits" as used in this Article. It includes income from the
active conduct of business, such as rental of tangible movable
(personal) property and income from furnishing the services of
others. It does not include compensation for personal services
of individuals, whether self-employed or as employees.
Paragraph 7 coordinates the provisions of this Article and
other provisions of the Convention. Under paragraph 7, where
business profits include items of income that are dealt with
separately under other articles of the Convention, the provisions
of those articles will, except where they specifically provide to
the contrary, take precedence over the provisions of Article 7
(Business Profits). Thus, for example, the taxation of interest
will be determined by the rules of Article ll (Interest) except
where, as provided in paragraph 3 of Article 11, the interest is
attributable to a permanent establishment, in which case, the
provisions of Article 7 apply.
Article 8. SHIPPING AND AIR TRANSPORT
This Article provides the rules that govern the taxation of
income from the operation of ships and aircraft in international
traffic. "International traffic" is defined in subparagraph 1 g)
of Article 3 (General Definitions). Such income, when derived by
a resident of either Contracting State, may be taxed only by that
State, the country of residence. If the other Contracting State
is the country where the income arises, it must exempt the income
from tax, even if it is attributable to a permanent establishment
in that State.

Income from the rental of ships or planes on a full basis
for use in international traffic is considered operating income
and is covered under paragraph 1. Income from the bareboat
leasing of ships or planes is also exempt from tax at source if
the ships or aircraft are used in international traffic by the
lessee. In such a case, it does not matter whether the lessor
carries on a business of operating ships or planes; the same rule
applies to a leasing company. However, if the lessor is an
operating company, and the income is incidental to income from
such operations, the exemption extends also to income from the
rental of ships or aircraft used in domestic traffic by the
lessee. Income from the leasing or use of containers in
international traffic is also exempt from tax at source under
this Article, whether derived by an operating company or by a
leasing company. Gain from the alienation of containers and
related equipment that are used in international traffic are
exempt if such gain is incidental to income from the use or
rental of such equipment. Further, gain from the alienation of
ships or aircraft operated in international traffic is exempt
from tax at source if such gain is incidental to income from the
operation by the resident of ships or aircraft in international
traffic.
Paragraph 3 clarifies that the provisions of paragraphs 1
and 2 apply to income from participation in a pool, joint
business, or international transportation agency. For example,
if a Ukrainian airline were to form a consortium with other
national airlines, the Ukrainian participant's share of the
income derived from U.S. sources would be covered by this
Article.
Article 9. ASSOCIATED ENTERPRISES
This Article provides that when two related persons that are
residents of the two Contracting States engage in transactions
that are not at arm's length, the Contracting States may make
appropriate adjustments to the taxable income and tax liability
of such persons to reflect the income or tax with respect to such
transactions that each would have had if the relationship between
them had been at arm's length.
Paragraph 1 deals with the circumstance where a resident of
a Contracting State participates, directly or indirectly, in the
management, control, or capital of a resident of the other
Contracting State, or when the same persons participate directly
or indirectly in the management, control, or capital of a
resident of one of the Contracting States and any other person.
The term "control" includes any kind of control, whether or not
legally enforceable and however exercised or exercisable. If in
either case transactions are entered into that are not at arm's
length, the competent authorities may adjust the income of their
residents to reflect what it would have been if they had been

independent of each other.
Paragraph 2 provides that, where a Contracting State has
made an adjustment that is consistent with the provisions of
paragraph 1, the other Contracting State will make a
corresponding adjustment to the tax liability of the related
person in that other State. Paragraph 2 of Article 26 (Mutual
Agreement Procedure) explains that the corresponding adjustment
will not be prevented by a domestic statute of limitations. It
is understood that the other Contracting State need adjust its
tax only if it agrees that the initial adjustment is appropriate.
The other provisions of the Convention, where relevant, are to be
taken into account. The competent authorities will consult, as
necessary, in applying these provisions.
Paragraph 3 simply confirms that this Article does not
restrict the provisions of either Contracting State's domestic
law relating to adjustments between related persons. The
reference in paragraph 1 to "income," for example, does not imply
that adjustments may not relate to deductions, exemptions,
credits, or other elements affecting the tax liability.
Article 10. DIVIDENDS
This Article provides rules for limiting the taxation at
source of dividends paid by a company that is a resident of one
Contracting State to a shareholder who is a resident of the other
Contracting State. It also provides rules for the imposition of
a tax at source on branch profits, analogous to the tax on
dividends paid by a subsidiary company.
Paragraph 1 preserves the residence State's general right to
tax its residents on dividends paid by a company that is a
resident of the other Contracting State. The same result is
achieved by the saving clause of paragraph 3 of Article 1
(General Scope).
Except as otherwise provided in paragraph 4, and in
paragraph 3 of the Protocol (discussed below), paragraph 2 limits
to 5 percent the tax imposed by the source State on direct
investment dividends. A non-reciprocal definition of direct
investment dividends has been adopted. In general, source state
tax is limited to 5 percent if the beneficial owner of the
dividend is a company resident in the other State that owns at
least 10 percent of the voting stock of the paying corporation
(or 10 percent of the authorized capital if the company does not
have voting stock). However, in the case of dividends paid by a
Ukrainian company, nonresidents of Ukraine must in total own at
least 20 percent of the voting stock of the paying company (or 20
percent of the authorized capital if the company does not have
voting stock) in order for the 5 percent limitation to apply.
The 20 percent foreign ownership requirement may be satisfied by

any non-Ukrainian shareholder (not only U.S. shareholders). This
requirement of 20 percent foreign ownership corresponds to
provisions in Ukrainian law relating to foreign-owned joint
ventures and eligibility for tax holidays. The United States did
not insist that this requirement apply also to dividends paid by
United States corporations because it is inconsistent with
general U.S. treaty policy of withholding 5 percent of dividends
paid to beneficial owners of 10 percent or more of the stock of
the paying corporation, and it would be inconsistent with U.S.
policy relating to limitation on benefits to confer an additional
benefit on a 10 percent Ukrainian shareholder in a U.S.
corporation only if an additional investor (potentially from a
third state that is not a U.S. treaty partner) also invested in
the paying corporation.
In other cases, the source State tax is limited to 15
percent of dividends beneficially owned by residents of the other
State.
Paragraph 3 defines the term "dividends" as used in this
Article. The term encompasses income from any shares or rights
that are not debt claims and that participate in profits, plus
income from other corporate rights treated for domestic law tax
purposes as dividends in the country of residence of the
distributing company, and income from other arrangements, even if
debt claims, if such arrangements carry the right to participate
in profits and the income is characterized as a dividend under
the domestic law of the country of residence of the distributing
company. The last case takes into account domestic law
distinctions between debt and equity. The definition also
confirms that distributions by a Ukrainian joint venture to the
foreign participants are dividends for purposes of this Article.
Thus, such distributions are eligible for the reduced tax rates
specified in paragraph 2.
Paragraph 4 explains that, where dividends are attributable
to a permanent establishment or fixed base that the beneficial
owner maintains in the other State, they are not subject to the
provisions of paragraphs 1 and 2 of this Article, but are covered
by Article 7 (Business Profits) or Article 14 (Independent
Personal Services), as appropriate. This is also the case if the
permanent establishment or fixed base has ceased to exist when
the dividends are received as long as the dividends were
attributable to the permanent establishment or fixed base in the
earlier year.
Paragraph 5 permits a Contracting State to impose a branch
profits tax on a corporation that is a resident of the other
State. The tax is in addition to the ordinary tax on business
profits. The additional tax is imposed on the "dividend
equivalent amount" of such profits at the 5 percent rate that
would apply to dividends paid by a wholly-owned subsidiary

corporation to its parent. At present Ukraine does not impose
such a tax. The U.S. tax will be imposed in accordance with
section 884 of the Internal Revenue Code, or a successor statute,
subject to the reduced rate provided for in this Article.
Paragraph 3 of the Protocol relaxes the limitations on
source country taxation for dividends paid by a U.S. Regulated
Investment Company (RIC) and a Real Estate Investment Trust
(REIT). A dividend paid by a RIC is subject to the 15-percent
portfolio dividend rate regardless of the percentage of voting
shares of the RIC held by the recipient of the dividend. The 5-
percent rate is intended to relieve multiple levels of corporate
taxation. Since RICs do not pay corporate tax with respect to
amounts distributed, the only tax imposed on their distributions
is the shareholder-level tax. Moreover, a foreign shareholder
could own a 10 percent interest in a RIC without owning a 10
percent interest in any company whose shares are held by the RIC.
In the case of a dividend paid by a REIT, the domestic law rate
applies, i.e., 30 percent.
Article 11. INTEREST
Paragraph 1 grants to each Contracting State the exclusive
right (subject to paragraph 3) to tax interest derived and
beneficially owned by its residents, without regard to source.
Each Contracting State agrees to exempt from tax interest derived
and beneficially owned by residents of the other State.
Paragraph 2 defines the term "interest" as used in the
Convention to include income from debt claims of every kind other
than those giving rise to dividends under paragraph 3 of Article
10 (Dividends), as well as income treated as interest by the
taxation law of the source State. In particular, income from
government securities, income from bonds or debentures, and any
premiums or prizes attaching to such securities, bonds or
debentures are considered interest. Interest on bank deposits
and on loans secured by mortgages is also covered. The
definition does not refer to penalties and fines for late
payment, which are frequently explicitly excluded from the treaty
definition of interest. Such amounts may be imposed in
accordance with domestic law.
Paragraph 3 provides an exception from the rule of paragraph
1 in cases where the beneficial owner of the interest, a resident
of one Contracting State, carries on business through a permanent
establishment in the other Contracting State or performs
independent personal services through a fixed based situated in
that other State and the interest is attributable to that
permanent establishment or fixed base. In such a case, the
income is taxable to the permanent establishment or fixed base in
accordance with the provisions of Article 7 (Business Profits) or
Article 14 (Independent Personal Services). This rule applies

even if the permanent establishment or fixed base no longer
exists when the interest is received or accrued, as long as the
interest would be attributable to the permanent establishment or
fixed base if it had been paid or accrued in the earlier year.
Paragraph 4 provides that, if as a result of a special
relationship between persons, the interest paid is excessive,
Article 11 applies only to the amount of interest payments that
would have been made absent such special relationship (i.e., an
arm's length interest payment). Any excess amount of interest
paid remains taxable according to the domestic law of the source
State, with due regard to the other provisions of the Convention.
Thus, for example, if the excess amount would be treated as a
distribution of profits, such amount could be taxed as a dividend
rather than as interest, but the tax would be subject, if
appropriate, to the rate limitations of paragraph 2 of Article 10
(Dividends).
Paragraph 4 of the Protocol reserves the right of the United
States to tax an excess inclusion of a residual holder of a Real
Estate Mortgage Investment Conduit (REMIC) in accordance with its
law; thus, the tax on such an excess inclusion of a resident of
Ukraine would be subject to the domestic rate of withholding tax,
now 30 percent.
Because Article 11 provides for exemption at source of
interest derived by a resident of the other Contracting State,
the United States will not impose its tax on excess interest of a
U.S. branch of a Ukrainian company (Code section 884(f)(1)(B)).
Article 12. ROYALTIES
Paragraph 1 grants to each Contracting State the right to
tax royalties derived and beneficially owned by its residents,
without regard to source. Paragraph 2 permits source taxation of
royalties beneficially owned by a resident of the other State at
a rate not to exceed 10 percent of the gross amount of the
royalties paid.
Paragraph 3 defines the term "royalties" as used in the
Convention to mean payments of any kind received as a
consideration for the use of, or the right to use, any copyright
of a literary, artistic, or scientific work, including computer
software programs, video cassettes, and films and tapes for radio
and television broadcasting. It also includes payments for the
use of, or right to use, 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. This definition does not refer to gain
from the alienation of any right or property that is contingent
on the productivity, use, or disposition of the property. Such
gain is taxable only in the State in which the alienator is

resident under Article 13 (Gains from the Alienation of
Property). Income from the leasing of tangible personal property
is taxed under Article 7 (Business Profits).
Paragraph 4 provides an exception to the rule of paragraph 1
in cases where the beneficial owner of the royalties, a resident
of one Contracting State, carries on business through a permanent
establishment in the other Contracting State or performs
independent personal services through a fixed base in that other
State and the royalties are attributable to that permanent
establishment or fixed base. In such a case, the royalties are
taxable to the permanent establishment or fixed base in
accordance with the provisions of Article 7 (Business Profits) or
Article 14 (Independent Personal Services). The same rule
applies if the permanent establishment or fixed base has ceased
to exist when the royalties are received, so long as the
royalties were attributable to it in the earlier year.
Paragraph 5 provides a rule for determining the source of
royalties. Royalties will be deemed to arise in a State if the
payor is a resident of that State (including the State itself or
a political subdivision thereof). However, if the payor has a
permanent establishment or fixed base in a Contracting State, the
liability to pay the royalties was incurred in connection with
such permanent establishment or fixed base, and the royalties are
borne by the permanent establishment or fixed base, the royalties
will be considered to arise in the State in which the permanent
establishment or fixed base is situated. Finally, if this rule
does not operate to deem royalties as arising in either State,
and the royalties relate to the use of intangible property (as
defined in paragraph 3), they shall be deemed to arise in the
State in which they are used. This source rule also applies for
purposes of Article 24 (Relief from Double Taxation).
Paragraph 6 provides that, if as a result of a special
relationship between persons, the royalty paid is excessive,
Article 12 applies only to the amount of royalty payments that
would have been made absent such special relationship (i.e., an
arm's length royalty payment). Any excess amount of royalties
paid remains taxable according to the laws of the United States
and Ukraine, respectively, with due regard to the other
provisions of the Convention. If, for example, the excess amount
is treated as a distribution of profits, such excess amount could
be taxed as a dividend rather than as a royalty payment, but the
tax imposed on the dividend payment will be subject, if
appropriate, to the rate limitations of paragraph 2 of Article 10
(Dividends).
Article 13. GAINS FROM THE ALIENATION OF PROPERTY
Article 13 provides rules for source and residence country
taxation of gains from the alienation of property.

Paragraph 1 preserves the situs country right to tax gains
derived from the alienation of real property situated in the
situs State (the "source State"). Thus, paragraph 1 permits
gains derived by a resident of one State from the alienation of
real property located in the other State to be taxed by such
other State.
Paragraph 2 provides that the rule of paragraph 1 applies to
shares of the stock of any company that consists principally of
real property situated in a Contracting State, and a
participation in any partnership, trust or estate to the extent
attributable to real property situated in a Contracting State.
In all events the term "real property situated in the other
State" includes a United States real property interest in the
United States, as that term is defined in section 897 of the
Internal Revenue Code (or any successor statute). Thus, the
United State preserves its right to collect the tax imposed by
section 897 on gains derived by foreign persons from the
disposition of United States real property interests, including
gains arising from indirect dispositions described in section
897(h). For this purpose, the source rules under section
861(a)(5) shall determine whether a real property interest is
situated in the United States.
Paragraph 3 provides that gains from the alienation of
personal property that are attributable to a permanent
establishment that an enterprise of one of the States maintains
in the other State may be taxed in the other State. The same
rule applies to a fixed base used for the purpose of performing
independent personal services, and to gain from the alienation of
a permanent establishment or fixed base described in this
paragraph. This provision permits gains from the alienation by a
resident of a State of an interest in a partnership, trust or
estate that has a permanent establishment in the other State to
be taxed as gains attributable to such permanent establishment.
Thus, for example, the United States may tax gains derived from
the disposition of an interest in a partnership that has a
permanent establishment in the United States, regardless of
whether the assets of such partnership consist of personal
property as defined in Article 13.
Paragraph 4 provides that gains from the alienation of
property other than that described in this Article shall be
taxable only in the State of which the alienator is a resident.
The rule in this paragraph is subject to the provisions of
Article 8 (Shipping and Air Transport). Gains described in
Article 8 are taxable in accordance with the provisions of that
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
employment (dependent personal services). Articles 16 through 20
provide exceptions and additions to these general rules for
directors' fees (Article 16); income of artistes and sportsmen
(Article 17); government service salaries (Article 18); pensions
in respect of personal service income and social security
benefits (Article 19); and certain income of students, trainees
and researchers (Article 20) .
Income derived by an individual who is a resident of one
Contracting State from the performance of personal services in an
independent capacity in the other Contracting State is exempt
from tax in that other State unless two conditions are satisfied.
The income may be taxed in that other State if the services are
or were performed there (see Code section 864(c)(6)); and the
income is attributable to a fixed base that is or was regularly
available to the individual in that other State for the purpose
of performing his services. If those two conditions are met, the
income attributable to the fixed base also may be taxed by the
State where the fixed base is located. The income attributed to
the fixed base must be taxed on a net basis, after allowance of
deductions for business expenses, in accordance with principles
similar to those provided in Article 7 (Business Profits) for the
taxation of business enterprises. However, in this case, only
income from services performed in a Contracting State may be
attributed to a fixed base in that State.
Paragraph 2 notes that the term "independent personal
services" includes independent scientific, literary, artistic,
educational or teaching activities, as well as the independent
activities of physicians, lawyers, engineers, architects,
dentists, and accountants. This list, which is derived from the
OECD Model, is not exhaustive. The term includes all personal
services performed by an individual for his own account, where he
receives the income and bears the risk of loss arising from the
services.
As indicated in paragraph 4 of Article 6 (Income from Real
Property), the provisions of Article 6 rather then of Article 14
will apply to income from real property that is used for the
performance of independent personal services.
Paragraph 5 of the Protocol acknowledges that the State of
source may require a preliminary withholding of tax from income
derived by residents of the other State, including but not
limited to income referred to in this Article. Where there is a
tentative withholding of tax, each State agrees to make timely
refunds on application of the taxpayer if the Convention provides
for a reduced rate or an exemption.

This Article deals with the taxation of remuneration derived
by a resident of a Contracting State for the performance of
personal services in the other Contracting State as an employee.
Under paragraph 1, remuneration derived by an employee who
is a resident of a Contracting State may be taxed by his State of
residence. This is the same result as achieved by paragraph 3 of
Article 1 (General Scope). However, to the extent that the
remuneration is derived from an employment exercised (the
performance of services) in the other Contracting State, the
remuneration also may be taxed by the other Contracting State if
the conditions specified in paragraph 2 are satisfied.
Paragraph 1 also provides that the more specific rules of
Articles 18 (Government Service), and 19 (Pensions) 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 employ­
ment income generally under Article 15, it may not have the right
to tax a particular type of income under the Convention if that
right is proscribed by one of the aforementioned articles.
Under paragraph 2, the Contracting State in which the
services are performed may also tax the remuneration unless three
conditions are satisfied: (1) the individual is present in that
State for a period or periods not exceeding 183 days in the
calendar year; (2) the remuneration is paid by, or on behalf of
an employer who is not a resident of that Contracting State; and
(3) the remuneration is not borne as a deductible (or
capitalizable) expense by a permanent establishment or fixed base
that the employer has in that State. If a foreign employer pays
the salary of an employee, but a host country corporation or
permanent establishment reimburses the foreign employer through a
deductible payment that can be identified as a reimbursement,
neither condition (2) nor (3), as the case may be, will be
considered to have been fulfilled. Conditions (2) and (3) are
intended to ensure that a Contracting State will not be required
both to allow a deduction to the payor for the amount paid and to
exempt the employee on the amount received. In order for the
remuneration to be exempt from tax in the source State, all three
conditions must be satisfied.
Paragraph 3 contains a special rule that provides for
exemption from tax at source for remuneration for services
performed as an employee aboard a ship or aircraft operated in
international traffic. Such income is taxable only in the State
of the employee's residence.
Article 16. DIRECTORS' FEES
This Article provides that a Contracting State may tax the
Article 15. DEPENDENT PERSONAL SERVICES

director's fees and similar payments paid by a company that is a
resident of that State for services performed by a resident of
the other Contracting State in his capacity as a director of the
company. For this purpose, "similar payments" includes fixed
salaries (or the portion thereof) paid for services performed as
a director. Only the State of residence of the director,
however, may tax any portion of the remuneration that is derived
in respect of services performed in that State.
This article is subject to the provisions of the saving
clause of paragraph 3 of Article 1 (General Scope).
Article 17. ARTISTES AND SPORTSMEN
This Article deals with the taxation by one State of
artistes (i.e ., performing artists and entertainers) and
sportsmen resident in the other 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 his 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
over those of Articles 14 (Independent Personal Services) and 15
(Dependent Personal Services). This Article applies, however,
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.
Paragraph 1 provides that income derived by a resident of
one State from his personal activities as an entertainer or
sportsmen exercised in the other State may be taxed in that other
State. This provision corresponds to the OECD Model, but departs
from most recent U.S. treaties in that the latter have introduced
a dollar threshold test to distinguish between individuals who
earn very high compensation in a short period of time, and
modestly compensated individuals who are not clearly
distinguishable from those who earn other types of personal
service income. The potential inconsistency in treatment of
modestly compensated artistes and sportsmen on the one hand and
other categories of modestly compensated employees on the other
is addressed in part, however, by paragraph 3 of this Article,
which is discussed below.
Income derived from one State by an entertainer or sportsman
who is a resident of the other in connection with his activities
as such, but 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 this Convention, such as Article 12 (Royalties).
Paragraph 2 is intended to eliminate the potential for abuse

when income from a performance by an entertainer or sportsman
does not accrue to the performer himself, but to another person.
Foreign entertainers commonly 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, a nominal employer may be a company established and
owned by the performer, and merely act as the nominal recipient
of the remuneration for the employee's performance. The
entertainer may be acting as a nominal employee for a nominal
salary, and arrange to receive the remainder of the income from
the performance at a later time or in another form. In such
case, absent the provisions of paragraph 2, the company providing
the entertainer's services could attempt to escape host country
tax because it earns business profits but has no permanent
establishment in that country.
Paragraph 2 prevents this type of abuse while protecting the
taxpayer's rights to the benefits of the Convention when there is
a legitimate employer-employee 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 persons related to him) participates, directly or
indirectly, in the 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 imposed on the person
providing the services of the entertainer or sportsman. This
paragraph does not affect the rules of paragraph 1, which apply
to the entertainer or sportsman himself. To the extent of salary
payments to the performer, which are treated under paragraph 1,
the income taxable by virtue of paragraph 2 to the person
providing his services is reduced.
For purposes of paragraph 2, income is deemed to accrue to
another person (i.e., the person providing the services of the
entertainer or sportsman) if that person has control over, or the
right to receive, gross income in respect of the services of the
entertainer or sportsman. 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 entertainer or sportsman, nor any persons related to him,
participate directly or indirectly in the profits of the person
providing the services of the entertainer or athlete.

Paragraph 3 provides an exception to the rules of paragraphs
1 and 2. It exempts income of a resident of one of the
Contracting States from tax in the State in which the artiste or
sportsman performs his activities if the visit to that State is
substantially supported by public funds of the State in which the
artiste or sportsman resides, or the visit is made pursuant to an
arrangement agreed to by the Contracting States (such as a
cultural exchange). Thus, for example, if an orchestra or ballet
troupe that is substantially supported by public funds in one of
the States were to visit the other Contracting State, its members
would not be subject to tax in the other Contracting State on
their income from performing in the other Contracting State.
This article is subject to the provisions of the saving
clause of paragraph 3 of Article 1 (General Scope).
Article 18. GOVERNMENT SERVICE
This Article follows the corresponding provisions of the
OECD Model.
Paragraph 1 provides that payments from the public funds of
a Contracting State or political subdivision or local authority
to compensate an individual for performing governmental services
generally may be taxed only by that State. However, if the
individual is either a citizen of the other State, or did not
become a resident of the other State solely for the purpose of
taking the job, the compensation may be taxed only by that other
State. It is understood that a governmental worker's spouse who
takes a governmental job subsequent to becoming a resident of the
host state, nevertheless will be considered to have become a
resident of the host State solely for the purpose of taking a
governmental job.
Paragraph 2 provides rules for the taxation of pensions paid
from public funds in respect of governmental services. Such
pensions may be taxed only by the paying State unless the
individual is a resident and citizen of the other State, in which
case the other (residence) State also may tax the pension (and
must grant a foreign tax credit for any taxes paid to the paying
State).
This rule does not apply to social security benefits and
other public pensions that are not in respect of services
rendered to the paying government or a political subdivision or
local authority thereof; such amounts are taxed under Article 19
(Pensions). However, this rule does apply to social security
payments to U.S. Government employees for whom the social
security system is the retirement plan related to their
government service; i.e., in the unusual case where a Ukrainian
citizen and resident derives a pension for U.S. Government
employment that is paid under the social security system, Ukraine

may tax that pension. This could happen, for example, if a
locally hired driver for the U.S. Embassy in Kiev were to retire
and receive a U.S. pension under social security.
The rules of paragraphs 1 and 2 are an exception to the
saving clause of paragraph 3 of Article 1 (General Scope) for
individuals who are neither citizens nor permanent residents of
the State where the services are performed. Thus, for example,
payments by Ukraine to its employees at the Ukrainian Embassy in
Washington are exempt from U.S. tax if the employees are not U.S.
citizens or green card holders and were not residents of the
United States at the time they became employed by Ukraine, even
if they would otherwise be considered U.S. residents for tax
purposes. (Under the 1984 modification to the definition of a
U.S. resident in Code section 7701, this exception to the saving
clause is of less relevance, since time spent in the United
States as a foreign government employee does not count in
applying the physical presence test of residence.)
This article applies only to remuneration and pensions paid
in respect of services of a governmental nature. Paragraph 3
provides that remuneration and pensions paid in respect of
services for a government-conducted business (for example, a
government-operated airline) are covered by Articles 14
(Independent Personal Services) , 15 (Dependent Personal Services)
or 19 (Pensions), as appropriate.
Article 19. PENSIONS
Except as provided in Article 18 (Government Service),
pensions and similar remuneration in consideration of past
employment may be taxed only by the Contracting State of which
the beneficial owner is a resident. It is understood that the
services need not have been performed by the beneficial owner of
the pension; for example, a pension paid to a surviving spouse
who is a resident of Ukraine would be exempt from tax by the
United States on the same basis as if the right to the pension
had been earned directly by the surviving spouse. A pension may
be paid in installments or in a lump sum.
Social security benefits and other public pensions paid by a
Contracting State, other than in consideration of past
employment, may be taxed only by that State. This rule is also
an exception to the saving clause of paragraph 3 of Article 1
(General Scope). Thus, a Ukrainian social security benefit will
be exempt from U.S. tax even if the beneficiary is a U.S.
resident or a U.S. citizen (whether resident in the United
States, Ukraine, or a third country).
Since annuities, alimony and child support are not dealt
with in this article or elsewhere in the Convention, they are
taxable under Article 21 (Other Income). Under that Article

these items of income are taxable exclusively in the State of
residence.
Article 20. STUDENTS, TRAINEES AND RESEARCHERS
This Article deals with visiting students, trainees, and,
researchers. An individual who is a resident of one of the
Contracting States and who visits the other Contracting State for
the primary purpose of studying at an accredited educational
institution, such as a university, or of studying or doing
research as the recipient of a grant or similar payment from a
charitable organization, or of acquiring training for a
profession, will not be taxed by that other State on amounts
received from abroad to cover his expenses and on any grant or
similar payment regardless of its source.
The reference to "primary purpose" is meant to describe
individuals participating in a full-time program of study,
training, or research. It was substituted for the reference in
the OECD Model to "exclusive purpose" to prevent too narrow an
interpretation; it is not the intention to exclude full-time
students who, in accordance with their visas, may hold part-time
employment jobs. For U.S. purposes, a religious, charitable etc.
organization as described in paragraph 1(c) means an organization
that qualifies as tax-exempt under section 501(c)(3).
The exemptions provided in paragraph 1 are available for the
period of time ordinarily necessary to complete the study,
training, or research but not for more than five years in the
case of training or research. It is expected that in most cases
study programs would also be completed within five years;
however, an individual who completes both undergraduate and
graduate degrees could require a longer period.
For the exemption to apply to a researcher, the research
must be undertaken in the public interest, and not primarily for
the private benefit of a specific person or persons. For
example, the exemption would not apply to a grant from a tax-
exempt research organization to search for the cure to a disease
if the results of the research become the property of a for-
profit company. The exemption would not be denied, however, if
the tax-exempt organization licensed the results of the research
to a for-profit enterprise in consideration of an arm's-length
royalty consistent with its tax-exempt status.
This Article is an exception to the saving clause of
paragraph 3 of Article 1 (General Scope). Thus, a Ukrainian
student, trainee, or researcher is entitled to the benefits of
this Article even if such individual becomes a resident of the
United States under the substantial presence test of Code section
7701(b). However, the benefits of this Article are not available
to a U.S. citizen or green card holder.

Unlike the 1973 Convention, the Convention does not provide
any special benefits for teachers. Pursuant to Article 29 (Entry
into Force), the benefits provided by the 1973 Convention may be
claimed for the first taxable year after the entry into force of
the Convention, but in that case none of the benefits of the new
Convention may be claimed during that year.
Article 21. OTHER INCOME
This Article provides the rules for the taxation of items of
income not dealt with in the other articles of the Convention,
such as alimony, child support payments, lottery winnings,
punitive damages, and cancellation of indebtedness income.
Paragraph 1 contains the general rule that items of income
derived by a resident of a Contracting State and not dealt with
elsewhere in the Convention may be taxed only in the State of
residence. This exclusive right of taxation applies irrespective
of the source of the income.
Paragraph 2 contains an exception to the general rule of
paragraph 1 for income that is attributable to a permanent
establishment or fixed base that is or was 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) or 14 (Independent Personal
Services). For example, other income, wherever arising, that is
attributable to a permanent establishment that is or was
maintained in the United States by a resident of Ukraine would be
taxable by the United States.
Article 22. LIMITATION ON BENEFITS
Article 22 addresses the problem of "treaty shopping" by
limiting source basis tax benefits granted by a Contracting State
pursuant to the Convention to those residents of the other
Contracting State that have a substantial business nexus with, or
otherwise have a significant business purpose for residing in,
the other Contracting State. For example, a resident of a third
State might establish an entity resident in a Contracting State
for the purpose of deriving income from the other Contracting
State and claiming source State benefits with respect to that
income. Article 22 limits the abuse of the Convention by
limiting the benefits of the Convention to those persons whose
residence in a Contracting State has not been motivated by the
existence of the Convention. Absent Article 22, the entity would
generally be entitled to benefits as a resident of a Contracting
State, although the entity might be denied those benefits as a
result of limitations imposed by the domestic law of the source
State, (e.q., business purpose, substance-over-form, step
transaction or conduit principles). Article 22 and the anti-
abuse provisions of domestic law complement each other, as

Article 22 generally 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 determine whether a particular transaction should be
recast in accordance with its substance.
Article 22 follows the form used in other recent U.S. income
tax treaties. See, e.q., the Convention between the United State
of America and the Federal Republic of Germany for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income and Capital and to Certain Other
Taxes. The structure of the Article is as follows: Paragraph 1
lists a series of attributes of a resident of a Contracting
State, the presence of any one of which will entitle that person
to benefits of the Convention in the other Contracting State.
Paragraph 2 provides that benefits also may be granted to a
person not entitled to benefits under the tests of paragraph 1,
if the competent authority of the source State determines that it
is appropriate to provide benefits in that case. Paragraph 3
defines the term "gross income" as used in paragraph 1(e)(ii).
Point 6 of the Protocol defines the term "officially recognized
securities exchange" as used in paragraph 1(c) as that term
applies to the United States. At the time the Convention was
signed there was not yet a corresponding definition for the
Ukrainian securities exchange, which was then being developed.
The first category of persons eligible for benefits from the
other Contracting State under paragraph 1 consists of individual
residents of a Contracting State. It is unlikely that
individuals can be used to derive treaty-benefitted income on
behalf of a third-country resident. If such an individual is
receiving income as a nominee on behalf of a third country
resident, benefits will be denied under the respective articles
of the Convention by the reguirement that the beneficial owner of
the income be a resident of a Contracting State.
The second category consists of active businesses that are
residents of one of the Contracting States and derive income from
the other Contracting State that is connected with, or incidental
to, that business. For this purpose, the business of making or
managing investments is not considered an active business unless
carried on by a bank or insurance company. The first six
examples in the Memorandum of Understanding regarding the scope
of the Limitations on Benefits Article in the Convention Between
the Federal Republic of Germany and the United States of America
(German Convention) illustrate the situations covered by
subparagraph (b).
The third category consists of companies whose shares are
regularly traded in substantial volume on an officially
recognized securities exchange, or a company wholly owned,
directly or indirectly, by a company that is a resident of the

same State and whose shares are so traded.
The fourth category covers tax exempt organizations, if more
than half of the beneficiaries, members, or participants, if any,
are individual residents of either Contracting State or persons
who meet the criteria of subparagraphs (a), (b), (c), or (e) of
this Article.
The fifth category provides a two part test, the so-called
ownership and base erosion tests. Both must be satisfied for the
resident to be entitled to benefits under subparagraph (e). The
ownership test requires that more than 50 percent of the
beneficial interest in the person (or, in the case of a
corporation, more than 50 percent of each class of its shares) be
owned, directly or indirectly, by persons who are themselves
entitled to benefits under the other tests of paragraph 1 (other
than subparagraph (b)). The base erosion test requires that not
more than 50 percent of the person's gross income be used,
directly or indirectly, to meet liabilities to persons other than
persons eligible for benefits under the other tests of paragraph
1 (other than subparagraph (b)). For this purpose "gross income"
means gross receipts or, in the case of a manufacturing or
producing activity, gross receipts less the direct costs of labor
and materials.
The rationale for this two-part test is that, to prevent
such benefits from inuring substantially to third-country
residents, it is not sufficient to require substantial ownership
of the equity of the entity by treaty country residents. It is
also necessary to ensure that the entity's tax base not be eroded
by deductible payments to third country residents.
It is intended that the provisions of paragraph 1 will be
self executing. Unlike the provisions of paragraph 2, discussed
below, claiming benefits under paragraph 1 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.
It is understood that, just as the two Contracting States
and their political subdivisions are to be treated as residents
of those States for purposes of Convention benefits, they also
are entitled to benefits under Article 22.
Paragraph 2 permits the competent authority of the State in
which income arises to grant Convention benefits in additional
cases, even if the beneficial owner of the income does not meet
the safe harbor standards of paragraph 1 (or the information is
not available to make such a determination). This discretionary
provision is included in recognition 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 and does not indicate a motive of
attempting to derive unintended Convention benefits.
Article 23. PROPERTY
This Article specifies the circumstances in which a
Contracting State may impose tax on property owned by a resident
of the other Contracting State. Since neither the United States
nor Ukraine imposes a national-level tax on capital, the purpose
of this article is to provide rules to deal with any such tax
subsequently enacted.
Paragraph 1 provides that real property (as defined in
Article 6 (Income from Real Property)) that is owned by a
resident of one Contracting State but located in the other
Contracting State may be taxed by that other State.
Paragraph 2 provides the same rule for movable property that
is part of the business property of a permanent establishment or
fixed base that a resident of one Contracting State maintains in
the other Contracting State. Such capital may be taxed in that
other State.
In both cases, paragraphs 1 and 2, the State of residence
may also tax; the taxing right given to the State where the
capital is located is not an exclusive right.
Paragraph 3 provides that ships, aircraft or containers
owned by a resident of one Contracting State and operated in
international traffic may be taxed only in the residence State.
This is consistent with the rule of Article 8 (Shipping and Air
Transport), that addresses the income from international
transportation activities.
Paragraph 4 provides the same rule as paragraph 3, taxation
only in the country of residence of the owner, for all other
items of property.
Article 24. RELIEF FROM DOUBLE TAXATION
Each Contracting State uses the foreign tax credit method to
avoid double taxation of income arising in the other State. The
credit is subject to the limitations of domestic law, such as
Code sections 56(a) and 904.
Paragraph 7 of the Protocol explains and modifies this
Article. Subparagraph (a) of paragraph 7 of the Protocol
modifies the Ukrainian taxes described in Article 2 (Taxes
Covered), i.e.. the tax on income (profits) of enterprises, the
income tax on individuals, and any substantially similar tax that

is subsequently introduced. The modified taxes constitute
separate levies (i.e., are considered to be distinct from the
Ukrainian statutory taxes) for purposes of determining their
eligibility for the credit allowed under section 901. The
Protocol's modifications (described below) are intended to make
such levies conform to taxes on net income that would satisfy the
U.S. standards of a creditable foreign income tax.
At the time the Convention was signed, the base on which the
Ukrainian taxes covered in Article 2 were imposed was determined
without a full deduction for labor costs and interest expense in
the case of companies with Ukrainian participation (either wholly
owned by Ukrainian residents or joint ventures with Ukrainian
participation). The Protocol's modifications remove this
obstacle to creditability of the Ukrainian tax for the persons
described in the Protocol. Based on these modifications, the
Protocol provides that the Ukrainian taxes described in Article
2, as modified by this Convention and in effect on the date of
signature of the Convention (March 4, 1994), are income taxes for
purposes of Article 24 (Relief from Double Taxation), and
therefore are fully creditable for U.S. income tax purposes.
This provision has no effect on the creditability of Ukrainian
taxes imposed on persons other than those described in the
Protocol; the creditability of taxes imposed on such persons
would be determined under the general principles of U.S. law.
Subparagraph (a) of paragraph 7 of the Protocol permits full
deductions for wages and interest expense of a joint venture that
is a resident of Ukraine when U.S. residents own at least 20
percent of the beneficial interest in the venture and the
venture's total corporate capital (i.e., equity capital owned by
all participants determined without regard to country of
residence) amounts to at least $100,000 (an "eligible U.S.
venture"). An eligible U.S. venture may deduct its expenses for
remuneration for personal services in determining its Ukrainian
tax base. Subparagraph (a) also applies to a permanent
establishment in Ukraine of a United States resident, and to an
individual who is a U.S. citizen or resident and who carries on
activities in Ukraine as an entrepreneur (i.e., a sole
proprietorship or self-employed service provider). This
provision does not alter the general rule under Article 7
(Business Profits) that deductions will not be allowed for
interest paid by a permanent establishment to the home office.
Consequently, in accordance with Article 7 (Business Profits), a
permanent establishment will be allowed deductions for interest
expenses only to the extent they are reasonably allocable to the
permanent establishment.
Subparagraph (b) of paragraph 7 of the Protocol provides
that the 20 percent beneficial U.S. ownership requirement of
subparagraph 7(a) of the Protocol for eligible U.S. ventures may
be satisfied by indirect ownership through residents of the

United States or Ukraine. Thus, for example, a Ukrainian company
that is wholly-owned by another Ukrainian company would be an
eligible U.S. venture if at least 20 percent of the second
Ukrainian company were owned by a U.S. resident. If, however,
the second Ukrainian company were a resident of a third state,
the U.S. ownership of that second company would not be considered
for purposes of subparagraph 7(a).
Subparagraph (c) ensures that the U.S. recipient of
Ukrainian source dividends and royalties can claim a U.S. foreign
tax credit with respect to the Ukrainian withholding taxes
imposed on such income. Under Ukrainian law, the payor of
dividends and royalties is considered to be liable for the
withholding tax, rather than the recipient as under U.S. law.
Subparagraph (c) provides that for U.S. tax purposes the
recipient will be deemed to be liable for the tax, if the
recipient elects to include the tax in gross income, thereby
ensuring that the Ukrainian tax may be claimed as a credit
against U.S. liability.
Finally, subparagraph (d) provides that no tax sparing
credits will be provided. If the United States permits such a
credit in the future, whether through an amendment of its
internal law or through a treaty with a third State, it is agreed
that the Convention will be amended to authorize the provision of
such credits. Such an amendment to the Convention would be
subject to constitutionally required ratification procedures in
each State. The United States has undertaken a similar
obligation with respect to the income tax convention with India.
25. MON-DISCRIMINATION
This Article ensures that citizens of a Contracting State,
in the case of paragraph 1, and residents of a Contracting State,
in the case of paragraphs 2 through 4, will not be subject to
discriminatory taxation in the other Contracting State.
Paragraph 1 provides that a citizen of one Contracting State
may not be subject to taxation or connected requirements in the
other Contracting State that are different from or more
burdensome than the taxes and connected requirements imposed upon
a citizen of that other State or of a third State in the same
circumstances. A citizen of a Contracting State is afforded
protection under this paragraph even if the citizen 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 tax treatment in Ukraine as a citizen of any other
country who is a resident of that third country and in the same
circumstances.
It is understood, however, that for U.S. tax purposes, a
U.S. citizen who is resident outside the United States, whether

in Ukraine or a third country, is not in the same circumstances
as a citizen of Ukraine who is a resident outside the United
States, because the U.S. citizen is subject to U.S. tax on his
worldwide income and the Ukrainian citizen is subject to U.S. tax
on only his U.S. income. Thus, a citizen of Ukraine resident in
a third state is not entitled under this Article to net-basis
taxation at source of dividends paid by U.S. companies because a
U.S. citizen resident in a third country is taxed on a net basis
by the United States. Similarly, it is understood that neither
Contracting State is required to grant to residents of the other
Contracting State the same personal exemptions and deductions
that it provides to its own residents to take account of marital
status or family responsibilities.
Paragraph 2 of the Article provides that a permanent
establishment in a Contracting State of a resident of the other
Contracting State may not be less favorably taxed in the first-
mentioned State than an enterprise of that first-mentioned State
or of a third State which is carrying on the same activities.
Section 1446 of the Code imposes on any partnership, whether
domestic or foreign, the obligation to withhold tax from a
foreign partner's distributive share of income effectively
connected with a U.S. trade or business. If tax has been over-
withheld, the partner can, as in other cases of over-withholding,
file for a refund. In the context of the Convention, this
obligation applies with respect to a Ukrainian resident partner's
share of the partnership income 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 that this withholding provision is not a
form of discrimination within the meaning of paragraph 2 of the
Article, but merely a reasonable adaptation of the mode of
taxation to the particular circumstances of nonresident partners.
Like other withholding provisions applicable to nonresident
aliens, this is a reasonable method for the collection of tax
from persons who are not continually present in the United
States, and as to whom it may otherwise be difficult for the
United States to enforce its tax jurisdiction.
Paragraphs 3 and 4 prevent discrimination against residents
of a Contracting State who engage in business transactions with
residents of the other Contracting State. Paragraph 3 prohibits
discrimination in the allowance of deductions. When a resident
of a Contracting State pays interest or royalties or makes 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
under the same conditions as if the payment had been made to a
resident of the first-mentioned State. An exception to this rule
is provided for cases where the provisions of paragraph 1 of

Article 9 (Associated Enterprises), paragraph 4 of Article 11
(Interest) or paragraph 6 of Article 12 (Royalties) apply,
because all of these provisions permit the denial of deductions
in certain circumstances in respect to excess (not at arm's
length) payments between related persons. Accordingly, paragraph
3 permits the denial or deferral of a deduction for interest in
accordance with domestic thin capitalization rules such as
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 which includes the person incurring the expense.
Paragraph 3 also provides that any debts of a resident of a
Contracting State to a resident of the other Contracting State
are deductible in the first-mentioned Contracting State in
computing taxable capital under the same conditions as if the
debt had been contracted to a resident of the first-mentioned
State. Thus, for example, if a tax is imposed on the value of
real property net of debt, the same deduction must be allowed
with respect to debt of creditors who are residents of either
Contracting State. In this case, the Article would also apply to
a real property tax imposed by a local government.
Paragraph 4 requires that a Contracting State not impose
other or more burdensome taxation or connected requirements on a
company that is a resident 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 similar resident
companies owned by residents of the first-mentioned State or of a
third State. It is understood that the U.S. rules that impose
tax on a liquidating distribution of a U.S. subsidiary of a
Ukrainian company and the rule restricting the use of small
business corporations to U.S. citizens and resident alien
shareholders do not violate the provisions of this Article.
Paragraph 5 of the Article specifies that no provision of
the Article will prevent either Contracting State from imposing
the branch profits tax described in paragraph 5 of Article 10
(Dividends). At present Ukraine does not impose such a tax, but
if it were to introduce one consistent with paragraph 5 of
Article 10 it could do so under this Article.
Paragraph 6 provides that the provisions of this Article do
not extend to benefits granted to citizens or residents of a
third State in accordance with a special agreement with that
third State, such as an income tax Convention.
Paragraph 7 provides that, notwithstanding the specification
of taxes covered by the Convention in Article 2 (Taxes Covered),
for purposes of providing nondiscrimination protection this

Article applies to taxes of every kind and description imposed by
a Contracting State or a political subdivision. Customs duties
are not considered to be taxes for this purpose.
The saving clause of paragraph 3 of Article 1 (General
Scope) does not apply to this Article, by virtue of the
exceptions in paragraph 4(a) of Article 1. Thus, for example, a
U.S. citizen who is resident in Ukraine may claim benefits in the
United States under this Article.
Article 26. MUTUAL AGREEMENT PROCEDURE
This Article provides for cooperation between the competent
authorities of the Contracting States to resolve disputes that
may arise under the Convention and to resolve cases of double
taxation not provided for in the Convention.
Paragraph 1 provides that, where a person considers that the
actions of one or both Contracting States will result for him in
taxation that is not in accordance with the Convention, he may
present his case to the competent authority of his State of
residence or citizenship. It is not necessary for a person first
to have exhausted the remedies provided under the national laws
of the Contracting States before presenting a case to the
competent authorities. The Convention does not limit the time
during which a case may be brought.
Paragraph 2 provides that, if the competent authority of the
Contracting State to which the case is presented considers the
case to have merit, and if it cannot reach a unilateral solution,
it will seek agreement with the competent authority of the other
Contracting State to avoid taxation not in accordance with the
Convention. If agreement is reached under this provision, it is
to be implemented even if implementation would be otherwise
barred by the statute of limitations or by some other procedural
limitation, such as a closing agreement. Because, as specified
in paragraph 2 of Article 1 (General Scope), the Convention
cannot operate to increase a taxpayer's liability, the Convention
overrides time or other procedural limitations of domestic law
only for the purpose of making refunds (not to impose additional
tax) .
Paragraph 3 authorizes the competent authorities to seek 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. They may agree to the same attribution of income,
deductions, credits or allowances between a resident of one
Contracting State and its permanent establishment in the other,
and to the allocation of income, deductions, credits or
allowances between persons. These allocations are to be made in

accordance with the arm's length principles of Article 7
(Business Profits) and Article 9 (Associated Enterprises). The
competent authorities may also agree to settle a variety of
conflicting applications of the Convention, including those
regarding the characterization of items of income, the
application of source rules to particular items of income, and
differences in meanings of a term. Agreements reached by the
competent authorities under this paragraph need not conform to
the internal law provisions of either Contracting State. The
competent authorities also may address cases of double taxation
not foreseen by the Convention and attempt to reach an agreement
that would prevent that result.
Paragraph 4 authorizes the competent authorities to
communicate with each other directly for these purposes. It is
not necessary to communicate through diplomatic channels.
The benefits of this Article are also available to residents
of either Contracting State. (See paragraph 4(a) of Article 1
(General Scope).)
Article 27. EXCHANGE OF INFORMATION
This Article provides for the exchange of information
between the competent authorities of the Contracting States. The
information to be exchanged is that necessary for carrying out
the provisions of the Convention or the domestic laws of the
United States or Ukraine concerning the taxes covered by the
Convention. For the purposes of this Article, the taxes covered
by the Convention include all taxes imposed at the national
level. 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 any national level tax, even if
the transaction to which the information relates is a purely
domestic transaction in the requesting State.
Paragraph 1 states that information exchange is not
restricted by Article 1 (General Scope). This means that
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 Ukraine that engages in transactions with a U.S.
resident, the United States could request information with
respect to that permanent establishment, even though it is not a
resident of either Contracting State. Such information would not
be routinely exchanged, but may be requested in specific cases.
Paragraph 1 also provides assurances that any information
received in accordance with this Article will be treated as
secret, subject to the same restrictions on disclosure that apply
to information obtained under the laws of the requesting State.

Information received may be disclosed only to persons, including
courts and administrative bodies, concerned with the assessment,
collection, enforcement or prosecution in respect of the taxes to
which the information relates, or to persons concerned with the
administration of these taxes. The information must be used by
such persons in connection with these designated functions.
Persons concerned with the administration of taxes, in the United
States, include the tax-writing committees of Congress and the
General Accounting Office. Information received by these bodies
is for use in the performance of their role in overseeing the
administration of U.S. tax laws. Information received under this
Article may be disclosed in public court proceedings or in
judicial decisions.
Paragraph 2 explains 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
either State obligated to supply information not obtainable under
the laws or administrative practice of either State. Thus, there
is no obligation to furnish information to the other Contracting
State if either the requested State or the requesting State could
not obtain such information for itself in a domestic case. There
is also no obligation to disclose trade secrets or other
information, the disclosure of which would be contrary to public
policy. Either Contracting State may, however, at its
discretion, subject to the limitations of the paragraph and its
internal law, provide information that it is not obligated to
provide under the provisions of this paragraph.
Paragraph 3 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 paragraph 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 can be used in the judicial proceedings of the
requesting State. The requested State should 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 provides that this Article applies to taxes of
every kind and description, irrespective of whether they are
described in Article 2 (Taxes Covered).
Article 28. DIPLOMATIC AGENTS AND CONSULAR OFFICERS
This Article confirms that any fiscal privileges to which

members of diplomatic or consular missions are entitled under the
general provisions of international law or under special
agreements will apply, notwithstanding any provisions of this
Convention. This Article protects the fiscal privileges of
technical staff and other employees of such missions as well as
those with diplomatic status.
Article 29. ENTRY INTO FORCE
This Article provides the rules for bringing the Convention
into force and giving effect to its provisions. Paragraph 1
provides for the ratification of the Convention by both
Contracting States and the prompt exchange of instruments of
ratification at Kiev.
Paragraph 2 provides that the Convention will enter into
force on the date on which instruments of ratification are
exchanged. The Convention will have effect with respect to taxes
withheld at source on dividends, interest and royalties for
amounts paid or credited on or after the first day of the second
month following the month in which the Convention enters into
force. For example, if the Convention were to enter into force
on July 10, 1994, the withholding rates on dividends, interest
and royalties would be reduced (or eliminated) for amounts paid
on or after August 1, 1995. For all other income taxes, the
Convention will have effect for any taxable period beginning on
or after January 1 of the year following entry into force.
The 1973 Convention will cease to have effect when the
provisions of this Convention take effect in accordance with
paragraph 2.
Paragraph 4 provides that a person entitled to the benefits
of the 1973 Convention may elect to continue to apply that
Convention for the first taxable year in which this Convention
would otherwise have effect. This is a taxpayer-by-taxpayer
election, i.e., a taxpayer may not elect the 1973 Convention for
one purpose and the Convention for another purpose.
Article 30. TERMINATION
The Convention is to remain in effect indefinitely, unless
terminated by one of the Contracting States in accordance with
the provisions of this Article. A Contracting State may
terminate the Convention at any time after 5 years from the date
of its entry into force by giving written notice through
diplomatic channels to the other Contracting State at least six
months in advance. If such notice is given, the Convention will
cease to apply in respect of taxes withheld on dividends,
interest and royalties paid or credited on or after the first of
January following the six month period and with respect to other
taxes for taxable periods beginning on or after the first of

January following the six month period. Thus, for example, if
notice of termination is given in July or later of a calendar
year, the termination will not be effective as of the following
January 1 but as of the second January 1, since the notice period
must continue for at least six months.
Article 30 relates to unilateral termination by a
Contracting State of the Convention. The Article does not
prevent the Contracting States from entering into a new bilateral
agreement that supersedes, amends or terminates provisions of the
Convention either prior to the expiration of the five year period
or without the six month notification period.