Technical Explanation PDF

TREASURY
DEPARTMENT
TECHNICAL
EXPLANATION
OF
THE
CONVENTION
AND PROTOCOL
BETWEEN
THE
UNITED
STATES OF
AMERICA AND
THE SLOVAX
REPUBLIC
FOR THE
AVOIDANCE
OF
DOUBLE
TAXATION
AND THE
PREVENTION
OF FISCAL EVASION
WITH RESPECT TO
TAXES ON
INCOME AND
CAPITAL
SIGNED AT
BRATISLAVA
ON
OCTOBER
8, 1993

This is a technical
explanation of the Convention
between
the

United States and the
Slovak Republic signed
on October 8, 1993
("the Convention"). The Convention is based on the U.S. Treasury
Department's
draft Model Income Tax Convention, published on June
16, 1981 ("the U.S. Model"), the Model Tax Convention on Income and
Capital published
by the OECD in 1992 ("the
OECD Model"), and other
more recent U.S. income tax conventions. Although the U.S. Model
has been.withdrawn, and a new Model is being developed as this
Technical Explanation iz being prepared, the U.S. Model was the
relevant
Model
at the time the
Convention was negotiated.
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.
Article 1. GENERAL SCOPE

Paragraph .1 provides that the Convention is applicable to
residents of the United States or Slovakia, except where the terms
of the Convention provide otherwise. Under Article 4 (Resident),
a person is treated as a resident of a Contracting State if that
person is, under the
laws of that State, liable
to tax therein by
reason of his domicile
or other similar criteria,
subject to
certain limitations.
If a pcrson is, under
those criteria, a
resident
of both Contracting States,
a single state of residence
(or no state of residence)
is assigned under Article
4. These
rules govern for all
purposes of the Convention.
Certain
provisions of
the Convention
are also
applicable,
however, to
persons who
may not be residents
of either Contracting
State.
Examples include
Articles 20 (Government
Service), 25 (Non-
Discrimination)
and 27 (Exchange
of Information
and Administrative
Assistance).

Paragraph
2 is the
same as the
corresponding
provision
in the

U.S.
Model.
Under this
paragraph,
the Convention
may not
restrict

any
exclusion, exemption,
deduction,
credit
or other benefit
accorded
by the tax
laws of
the Contracting
States
or by any
other

agreement
between
the Contracting
States.
In effect,
paragraph 2

provides
that the
Convention
may not
increase
the tax
burden on
a

resident
of a Contracting
State
beyond
the burden
determined
under
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domestic law.
Thus, a right
to tax granted
by the
Convention to
a

Contracting
State cannot
be exercised
unless the domestic
law of

that State
also
provides
for such
a tax.

Under the principle of
paragraph
2, a taxpayer's
liability to
U.S. tax need not be determined
under the Convention
if the Code
would produce
a more favorable
result.
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,
suppose a Slovak resident
has three
separate businesses in the United States. One is a profitable
permanent establishment and the other two are trades or businesses
that earn taxable income under the Code but do not meet the
permanent establishment threshold tests of the Convention. One
trade or business
is profitable, and the other
incurs a loss.
Under
the Convention, the income
of the permanent establishment
is
taxable, and both the profit and lcss of the other two businesses
are ignored. Under
the Code, all three would
be taxable and the
loss would be offset against the profits of the two profitable
ventures. In this situation, 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,
however, 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.

Paragraph 3 contains the traditional "saving" clause found in
all U.S. treaties. Under this paragraph, each of the Contracting
States
may tax its own residents,
citizens and former citizens,
in
accordance with its domestic law, notwithstanding any Convention
provision to the contrary. If, for example, a Slovak resident
performs independent personal services in the United States and the
income
from the services is not
attributable to a fixed base
in the
United States, Article
14 (Independent Personal
Services) would
normally
prevent the United States
from taxing the income.
If,
however,
the Slovak resident
is also
a citizen
of the United
States,
the "saving" clause permits
the United States to include
the remuneration in the worldwide
income of the citizen and subject
it to tax
under normal Code rules
(i.e., without regard to Code
section
894(a)).
Special foreign
tax
credit
rules applicable
to
U.S.
taxation of certain
U.S. income
of U.S.
citizens resident
in

Slovakia are
provided in
paragraph 3
of Article 24
(Relief from
Double Taxation).

"Residence,"
for purposes of the "saving"
clause of paragraph
3, is determined
under Article 4 (Resident). 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
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resident
of Slovakia
under
Slovak
law, and
the tie-breaker
rules
of
Article
4 determine
that he is
a resident of
Slovakia, then
he will
be entitled
to U.S.
benefits under
the Convention.

Paragraph
3 also
reserves
the
right of
each Contracting
State
to tax
certain former
citizens. In
the case of
the United States,
citizens
whose loss
of citizenship
had as
one of its
principal
purposes
the avoidance
of U.S.
tax may
be taxed
for a period
of ten
years
following
the loss
of citizenship
in
accordance
with Code
section
877.
Paragraph
4 lists several
exceptions
to the "saving"
clause
under which
a Contracting
State's benefits
are extended
to its
citizens and residents.
Under subparagraph a),
U.S. residents and-
citizens
are entitled to certain
U.S. benefits provided under
the
Convention:
specifically, the correlative
adjustments authorized
by
paragraph
2 of Article 9 (Associated
Enterprises); the exemption
of
social security
benefits paid by Slovakia
that is provided in
paragraph
1(b) of Article 19
(Pensions, Annuities, Alimony,
and
Child Support)
; the exemption of nondeductible
alimony and child
support payments
paid by a Slovak resident
that is provided in
paragraph
4
of Article
19
(Pensions,
Annuities,
Alimony,
and
Child.
Support); the guarantee of a foreign tax credit provided in Article
24 (Relief from
Double Taxation); the nondiscrimination
protection
of Article 25 (Non-Discrimination) and the competent authority
procedures of Article
26 (Mutual Agreement
Procedure).
Under
subparagraph b), certain
additional benefits
are

available to U.S. residents who are neither U.S. citizens nor
"green card" holders (such as persons who are residents under the

substantial presence test of Code section 7701(b)). These are the
benefits extended
to employees of the
Slovak Government under
Article 20 (Government Service);
to visiting students,
trainees
teachers and researchers under Article 21 (Students, Trainees,
Teachers
and Researchers);
and
to members
of diplomatic
and
consular missions under Article 28 (Diplomatic Agents and Consular

officers).

Article
2.
TAXES COVERED

This Article
identifies
the U.S.
and Slovak taxes
to which
all
Articles
of
the Convention
apply.
Two articles
of
the Convention

are also applicable,
however,
with respect
to certain
taxes other

than those specified
in Article 2. Article 25 (Non-discrimination)
applies with
respect
to all taxes
imposed at
all levels of
government,
including state
and local governments.
Article
27
(Exchange
of Information
and Administrative
Assistance) applies
with respect
to all taxes
imposed by a
Contracting
State (i.e.,
imposed at the
national level).

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In the case of the United
States, the Convention
generally
applies
to the Federal
income taxes
imposed by
the Internal Revenue
Code.
Except in the
cases of Articles
25 (Non-discrimination)
and
27
(Exchange
of Information
and Administrative
Assistance),
however, the
accumulated earnings
tax and
personal holding
company
tax (which are
considered penalty
taxes)
are
excluded from
coverage, as are the social
security
taxes provided
in Code
sections 1401, 3101 and 3111. The Convention applies to the excise
taxes imposed with respect
to the investment income
of private
foundations under Code sections
4940 et seq., but does
n9t apply

(except in the case of Articles
25 and 27) with respect
to the
excise taxes imposed on insurance
premiums paid on policies
issued
by foreign insurers under Code section 4371.
In the case of Slovakia, the Convention generally applies to
the income taxes imposed by the Slovak income tax law and to the
Slovak tax on immovable property (the real property tax). As noted
above,
Article 25 (Non-Discrimination)
applies to all taxes
imposed
at all levels
of government in Slovakia and
Article 27 (Exchange of
Information and
Administrative Assistance)
applies to all national
level taxes
imposed
by Slovakia.

Under paragraph 2, the Convention will apply to any taxes that
are identical or substantially similar to those enumerated in
paragraph 1 and that are imposed in addition to, or in place of,
the existing taxes
after October 8, 1993
(the date of signature of
the Convention). Paragraph 2 also provides that the U.S. and
Slovak competent authorities
will notify each other of
significant
changes in their taxation laws. This refers to changes that are of
significance to the operation of the Convention. The competent
authorities will also notify
each other of official published
materials concerning the application of the Convention. This
refers to such materials as technical explanations, regulations,
rulings and judicial decisions relating to the Convention.

Article
3. GENERAL
DEFINITIONS
Paragraph 1 defines a
number of basic terms
used in the
Convention.
Certain other terms are
defined in other articles
of
the Convention. For
example, the term "resident
of a Contracting
State" is defined in
Article 4 (Resident). The
term
"permanent
establishment"
is defined
in Article
5
(Permanent
Establishment).
The terms
"dividends," "interest" and
"royalties" are defined
in
Articles 10 (Dividends),
11 (Interest) and 12
(Royalties),
respectively. The introductory
language makes clear
that the
definitions specified
in paragraph 1 apply
for purposes of the
Convention, and
apply unless the context
otherwise requires. The
latter condition allows flexibility in interpretation of the treaty
in order to avoid results
not intended by the treaty's
negotiators.
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Subparagraph
1(a)
defines the
term "Contracting
State" to
mean
the United
States
or Slovakia,
depending
on
the context
in which

the
term
is used.

Subparagraph
1(b)
defines the
term "United
States" 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 in
a geographical
sense,
the
"United
States"
includes
the
territorial
sea
and the seabed
and subsoil
of the adjacent
area
over
which
the United
States
may exercise
rights
in accordance
with
international
law
and
in
which U.S.
tax
law is
in force.

Currently,
under Code section
638, U.S. tax law applies
on the
continental
shelf only with respect
to the exploration
for and
exploitation of mineral resources.

Subparagraph
1(c) defines the term "Slovakia"
to mean the
Slovak Republic.

Subparagraph 1(d) defines
the term "person" to
include an
individual,
an estate, a trust, a partnership,
a company and any
other body
of persons. This definition
conforms to the definition
in the U.S.
Model. Any such person
may be a "resident" of
a
Contracting State for purposes of Article 4 (Resident) and thus
entitled
to the benefits
of the Convention.

Subparagraph 1(e) defines the term "company" as any body
corporate
or any entity
treated
as a body corporate
for
tax
purposes. For.
U.S. tax purposes, the
rules of Treas. Reg.
§301.7701-2 generally
will apply to determine
whether an entity is
a body corporate. Similarly,
for U.S. tax purposes,
a publicly

traded partnership, as
defined in Code section 7704,
will be
treated as a company for purposes of the Convention.

Subparagraph 1(f) defines the terms "enterprise of a

Contracting State" and "enterprise of the other Contracting State"
to
mean an enterprise carried
on by a resident of the appropriate

Contracting State. Thus an enterprise of a Contracting State need
not be carried on in that
State. It may be carried on
in the other
State or in a third state.

Subparagraph
1(g) defines the
term "international traffic"
to
mean 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 Slovak carrier
(if permitted)
would not
be treated as

international traffic, and the resulting income would not be exempt
from U.S.
tax under Article 8 (Shipping
and Air Transport). The

income
would, however,
be treated
as business profits
under Article
7 (Business
Profits) and
would therefore be
taxable in the United

States
only if attributable
to
a U.S. permanent
establishment
and

only
on a net
basis.
If, however,
goods
or passengers
are
carried

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by a Slovak airline from
Bratislava to New iork
and then to
Chicago,
the entire
trip would
be international
traffic.
This
would
be true even
if a Slovak
carrier transferred
goods
at the
U.S.
port of entry
from a ship
or plane to a
land vehicle,
or if
the overland
portion
of the trip
in the United
States
were handled

by an
independent
carrier
under
contract with
the Slovak carrier,

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

bill of lading.

Subparagraph
1(h)
defines the
term "competent
authority."
The
competent
authorities
are 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
delegate.
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 Slovakia,
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 tax law of the
Contracting

State whose tax is being applied. If, however, the meaning of a

term cannot
be readily determined under
the law of a Contracting
State, or
if there is a conflict in
meaning under the laws of the

two States that creates difficulties in the application of the
Convention,
the
competent authorities
may,
pursuant to paragraph
3

of Article 26 (Mutual
Agreement
Procedure),
agree
to a common
meaning in order to
prevent double taxation or
further any other
purpose of the Convention. Likewise, if the definition of a term
under either paragraph
1 of Article 3 or
the tax law of a
Contracting State would result in a circumstance unintended by the
treaty negotiators or by the Contracting States (e.g., due to a
change in
the statutory definition
of the term since the signing

*date
of the
Convention),
the
competent
authorities
may
agree
to a

common meaning of the term. This common meaning need not conform

to the meaning of the term
under the laws of either
Contracting
State.

Article 4. RESIDENT

This Article sets forth rules for determining whether a person
is
a resident of a Contracting
State for purposes
of the
Convention. As a general
matter, only residents
of the Contracting
States may claim
the benefits of
the Convention.
The Convention

definition
of residence
is to
be used only
for purposes
of the
Convention.
The
fact that a
person is determined
to be a
resident
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of a Contracting State under
Article 4 does not necessarily
entitle
a person to the benefits
of the Convention. In addition
to being
a resident, a person must qualify for benefits under Article 17
(Limitation
on Benefits).

Under paragraph
1, the determination
of residence for
Convention
purposes looks first to a
person's liability to tax
as
a resident under the
respective taxation laws
of the Contracting
States. Thus a person who is liable to tax under the laws of a
Contracting
State by reason of
his domicile, residence,
place of
management, place of incorporation or any other similar criterion
is treated as
a resident of that State. A
person who, under those
laws, is a resident
of one Contracting State
and not of the other

generally
need look
no further.

Paragraph 2 provides several exceptions to the general rule of
paragraph 1. Under subparagraph 2(a), a person who is liable to

tax in a Contracting State only in respect of income from sources

within that State, or capital situated therein, will not be treated
as a resident of that
Contracting State for purposes
of the
Convention. Thus, for example,
a Slovak consular official
who is
posted in the United States, and who is subject to U.S. tax on U.S.­
source investment income but not on non-U.S. source 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.)

Under
subparagraph
2(b), a partnership,
estate
or trust
will

be treated as a resident of a Contracting State to the extent that

the income derived by the partnership, estate, or trust is subject
to tax in that State as the income of a resident, whether in the

hands of the partnership, estate or trust deriving the income or in
the hands of its partners, beneficiaries or grantors. This rule is
applied to determine the
extent to which a partnership,
estate or

trust is entitled to Convencion
benefits with respect
to income
that it receives
from the other
Contracting
State. Under
U.S. law,
a partnership
(other
than certain
publicly
traded
limited

partnerships
and
partnerships
that are reclassified
as associations
under
Treas. Reg.
§ 301.7701-2)
is never,
and an estate
or trust

often
is not, a
taxable entity.
Thus, for
Convention
purposes,
income
received
by a U.S. partnership
need
only be treated
as
received
by a U.S.
resident
to the extent
that
it is 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.
A joint venture
that
is
taxed
in Slovakia
as a resident
enterprise will
be a resident
of

Slovakia
for
Convention
purposes,
even
if it is characterized
as a

partnership
under
U.S. law.

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Under subparagraph
2(c),
a U.S.
citizen or
a nonresident
alien
lawfully
admitted
for permanent
residence
(a
"green
card"
holder)

will be
treated
as a U.S.
resident
by Slovakia
for purposes
of
the
Convention
only
if
such
individual
has
a
substantial
presence,
permanent
home
or habitual
abode
in
the United
States.
Therefore,
a U.S.
citizen or
"green card
holder whose
permanent home
or
habitual
abode is
not in
the U.S.
and not in
Slovakia
and who
does
not stay
in the
U.S. long
enough to
be a U.S.
5
resident
under
code
7701
will not
be
entitled
to
benefits
under
this
treaty.
Under subparagraph
3(a),
the two
Contracting
States, their
political
subdivisions
and local authorities,
and
agencies and
instrumentalities thereof,
are to be treated as
residents of those
States
for purposes
of Convention
benefits.
Under subparagraph
3(b),
a pension trust or any other
organization that is constituted
and operated exclusively to provide pension benefits or for
religious,
charitable,
scientific,
artistic,
cultural
or

educational purposes
and that, in any such
case, is a resident of

a Contracting
State under
the laws of that
State
is zo be treated

as a resident
of that State
for purposes
of the Convention.
This

rule applies notwithstanding
the fact that all or
part of the
organization's income may
be exempt from income tax
under the'
internal laws
of that
State.

Paragraph 4 provides
a series of tie-breaker
rules to

determine a single State of residence for an individual who, under

the laws
of the two Contracting States,
and thus under paragraph
1,
is deemed to be a resident of both Contracting States. These rules
come from the OECD Model. The first rule establishes residence
where the
individual has a permanent
home. If that test
is
inconclusive because the individual has a permanent home available
to him in both States, he will be considered to be a resident of

the Contracting State with which 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

determine his residence by mutual agreement.

Paragraph
5 seeks to settle
dual-residence issues for

companies
(defined in Article 3 (General
Definitions) as entities

treated
as a body corporate for tax
purposes).
A company
is
treated
as resident in the United
States if it is created
or
organized
under the laws of the United
States or a political
subdivision
thereof. A company is
treated as a resident
of
Slovakia if its
place of registration is in Slovakia. In most
cases it is expected
that the place of
incorporation and
registration will
be the same. However, in
the event that a
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company
is a resident
of both
countries under
their respective
domestic laws,
this paragraph
provides
that the company
will be
deemed to
be
a resident only of the
State under whose laws it was

created.

Paragraph 6 provides
that where a person, other
than an
individual
or a company, is a resident
of both Contracting States
under their
respective laws, the
competent authorities will
establish a single
country of residence by mutual
agreement and
determine how the
Convention is to apply
to such person.
Article 5. PERMANENT ESTABLISHMENT

This Article defines the term "permanent establishment," whici
is relevant to several articles of the Convention. The 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 (Dividends), 11 (Interest) and 12 (Royalties) provide

for reduced rates of tax at source on payments of these items of

income to a resident of the other State only when the income is not
attributable to a permanent establishment or fixed base that the
recipient has in the source State. If the income is attributable
to a permanent establishment, Article 7 (Business Profits) applies,
and if the income is attributable to a fixed base, Article 14
(:Independent Personal Services) applies.

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 the business of an
enterprise is wholly or partly carried on. 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
that constitute a permanent
establishment: a place
of
management,
a branch, an office,
a factory, a workshop, and
a mine,
oil
or gas well, quarry or other
place of extraction of
natural
resources.
The use of singular
nouns
in this illustrative
list is
not meant
to imply
that each such
place of business
constitutes
a

separate permanent
establishment.
In the
case of mines
or wells,

for
example,
several
such places
of business
could
constitute
a
single permanent
establishment
if
the project
is a
whole
commercially and geographically.

Subparagraph
3(a) adds
that a building
site or construction
or
installation
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
12
months.
This
12-month
threshold
is the
same as that
provided
in

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the
U.S. and
OECD models
and
applies separately
to each
individual

site
or project.
The
testing
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
are 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.
Likewise,
the
drilling of
several wells
within the same
geographic
area or by the
same
resident will
be considered
a single permanent
estabjishment.

If
the 12-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.

Subparagraph
3(b) provides that the furnishing
of services,

including consultancy services,
by
an enterprise through
employees

or other personnel will constitute a permanent establishment, but

only if activities of that
nature continue (whether for
the same or
a connected project) within
the
country for a period
or periods
aggregating more than nine
months within any 12-month
period. A

permanent establishment is not considered to exist, however, under

either subparagraph 3(a) or 3(b) in any taxable year in which the

activity described in such subparagraph continues for a period or

periods aggregating less than 30 days in that taxable year.

Paragraph 4 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. Under subparagraph
4(a), the use of facilities solely to store, display or deliver
merchandise belonging
to an enterprise will
not constitute a
permanent establishment
of that enterprise. Under
subparagraphs

4(b)
and (c), 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. Under subparagraphs 4(d) and (e), the maintenance of

a fixed place of business solely for purchasing goods or collecting
information for the enterprise,
or for carrying out
any other
activity of a preparatory
or auxiliary character for the
enterprise
(e.g., advertising, the supply
of information or certain
research

activities), will not constitute
a permanent establishment
of the

enterprise. Finally,
under subparagraph 4(f),
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.
Under paragraph
5, a
dependent
agent of an enterprise
is deemed to be a permanent
establishment
of the enterprise
if the agent has and habitually
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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 by the
enterprise
through
a

fixed
place
of
business,
the
agent is
not a
permanent
establishment
of
the enterprise.

Under
paragraph
6, an enterprise
is not
deemed to
have a
permanent
establishment
in a Contracting
State
merely because
it

carries on business
in that State through an
independent agent,

including a broker
or general commission
agent, if the agent is
acting in the
ordinary
course of his business
as an independent
agent.

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 (IMMOVABLE PROPERTY)

Paragraph 1 provides the general rule that income derived by

a resident of a Contracting State from real property located in the
other Contracting
State (including income from agriculture
or
forestry) may
be taxed in that other State.
The income may also be
taxed in the State of residence. Thus the Article does not grant

an exclusive taxing right to the situs State, but merely grants it

the
primary right to tax.
The Article does not impose
any
limitation in terms
of rate or form of tax on
the situs State,
except that, as provided
in paragraph 5, the situs
State must allow

the taxpayer an election to be taxed on a net basis.

Paragraph
2 defines the term "real
property" by reference
to
the
internal law of
the situs State.
In addition,
the paragraph
specifies certain classes
of property that, regardless
of internal
law definitions,
are
to be included
within the
meaning of the
term
for purposes
of the
Convention.
The term "real
property"
in no
event includes
ships, boats or aircraft.
Paragraph
3 clarifies
that
all forms
of income
from the
exploitation of real
property are taxable in
the situs State,
including
but
not limited
to income from
direct use
of real
property by
the owner and
rental income
from
the letting
of real

property.
Income
from the
disposition
of real
property,
however,

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is not considered
to be
"derived" from
real property
and is not
covered by
this Article.
The taxation
of such income
is addressed
in
Article 13
(Gains).
Similarly,
interest
paid
on a mortgage
on

real property
and
distributions
by
a U.S.
Real Estate
Investment

Trust are not
considered to
be "derived"
from real property.
The

taxation
of
these items
is addressed
in
Articles
10 (Interest)
and
11 (Dividends),
respectively.

Paragraph
4 clarifies
that income
from real property
of an
enterprise is covered by this Article, and not by Aerticle 7
(Business
Profits). Similarly,
income
from
real property
used for

the performance
of independent
personal
services is
covered by this
Article,
and
not by
Article
14 (Independent
Personal
Services).
Thus
the situs
State
may tax
the real property
income
of
a resident
of the
other State in
the absence
of attribution
to a permanent
establishment
or fixed
base.

Paragraph 5 provides
that a resident of
one Contracting State

that derives real
property income from the
other Contracting State

may be taxed in
that other State on a net
basis, as if the income

were attributable to a permanent establishment in that other State.
For purposes of taxation
by the United States, an election
to be

taxed on a net basis will
be binding for the taxable
year
of the

election and for all subsequent taxable years, unless the U.S.
competent authority agrees to terminate the election. The election
is based on the U.S. Model provision, which reflects U.S. law (Code
section
871(d)).

Article 7. BUSINESS PROFITS

This
Article provides the
rules for the taxation
by a
Contracting State of the business profits of an enterprise of the
other Contracting
.State. Paragraph
1 provides the general rule
that business
profits (as defined
in paragraph
7) of an
enterprise
of one Contracting
State may
not be taxed
by the other
Contracting
State unless
the enterprise
carries on or
has carried
on business
in
that other
Contracting
State
through
a permanent
establishment
(as defined
in Article
5 (Permanent
Establishment))
situated
there.
Where
that condition
is
met, the
State in
which
the permanent
establishment
is
situated
may tax the
business
profits
of the
enterprise,
but
only so
much as is
attributable
to
the assets
or

activity
of that permanent
establishment.

Paragraph
2
provides
that the Contracting
States
will

attribute
to
a permanent
establishment
the
profits
that it
might be
expected
to
make if it
were a
distinct
and independent
enterprise

engaged
in the
same or
similar
activities
under the
same or
similar
conditions.
The
computation
of
business
profits
attributable
to
a
permanent
establishment
under
this
paragraph
is subject
to
the
rules of
paragraph
3 for the
allowance
of expenses
incurred
for
purposes
of earning
the income.

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Profits 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 derived. This rule
incorporates the rule of Code section 864(c) (6) with respect to
deferred payments,
which is also reflected
in the provisions of
Articles 11 (Interest), 12 (Royalties), 14 (Independent Personal
Services) and 22 (Other Income) dealing with amounts attributable
to a permanent establishment or fixed base. If 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 concept of "attributable to" in paragraph 2 is analogous

to, but narrower than,
the
concept of "effectively
connected" in
Code section 864(c).
For example, the profits
attributable to a

permanent establishment
may be from sources within
or without a
Contracting State. Thus, Code section 864(c) (B) is consistent with
paragraph 2, i.e., certain
items of foreign source
income described
in Code section 864(c) (4) (B) may be attributed to a U.S. permanent
establishment of a Slovak
resident and subject to
tax in the United
States. The "asset use" and "business activities" tests of Code
section 864(c)(2) are also consistent with the "attributable to"
concept. As discussed in connection with paragraph 5, however, the
limited "force of attraction" rule in Code section 864(c) (3) is not
applicable under the Convention.

Paragraph 3 provides that, in determining the business profits
of a permanent establishment, deductions shall be allowed for
expenses
that are 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 permanent establishments

of
the home office, as long as
the expenses were incurred on
behalf
of the company as a whole or a part of it that includes the
permanent
establishment. Allocable
expenses include executive
and
general
administrative expenses,
research and development expenses,
interest
and other similar expenses,
wherever incurred and
without
regard
to whether
they are actually
reimbursed
by the permanent
establishment.
Paragraph 4 provides
that no business
profits will be
attributed to a permanent
establishment merely because
it purchases
goods or merchandise
for the enterprise 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
establish­
ment
with respect
to
its sales
activities,
no
profits
are
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attributable
to it
with respect
to its
purchasing
activities.
If

the sole
activity
of the
office were
the
purchasing
of goods
or
merchandise
for
the
enterprise,
however,
the
issue
of
the

attribution
of income
would not
arise.
Under subparagraph
4(d) of
Article
5 (Permanent
Establishment),
the office
would not
be a
permanent
establishment
to which
profits could
be attributed.
Under paragraph 5, the
business
profits attributed
to a
permanent establishment
are only those profits derived
from its
assets or activities.
This paragraph clarifies
that
the,"limited

force of attraction"
concept of Code section
864(c)(3) is not
incorporated into the Convention. The paragraph is also intended

to assure consistent tax
treatment over time for
permanent

establishments by providing that profits shall be determined by the
same method of accounting each year, unless there is good reason to
change the method used. This provision restricts both the
Contracting State in changing accounting methods to be applied to
permanent establishments
and permanent establishments
seeking to
change accounting methods. This provision, however, does not
restrict a Contracting State from imposing additional requirements

on a permanent establishment, as provided in its law, in the event

of a change in accounting method, to prevent amounts from being
duplicated or omitted (see Code section 481).

Paragraph 6 provides that nothing in this Article shall affect
the application of any law of a Contracting State relating to the
determination of the tax liability of any person in cases where the
information available
to the competent authority
of that State is
inadequate to determine the profits to be attributed to a permanent
establishment. In any such case, however, the determination of the
profits of
the permanent establishment
must be consistent with the
principles
stated
in this Article (to
the
extent possible based
on
the available
information).
Paragraph 7 defines
the term "business
profits" to mean
generally any income
derived from any trade or
business. Business
profits include, specifically,
income from the
furnishing of the
personal services of
other persons, but do not include
compensation
received by an
individual for the
performance of personal
service,
whether as
an employee
or in an independent
capacity.
Thus
a
consulting
firm resident
in one State
whose employees
perform
services
in the
other State
through
a permanent
establishment
may
be taxed in
that other
State on a net
basis
under Article
7. The
salaries
of
the employees,
however,
will be
subject
to
the rules
of
Article 15
(Dependent Personal
Services).
Paragraph
8 coordinates
the provisions
of this
Article
and
other
provisions of the Convention.
Under paragraph 8,
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.
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Thus, for example, the taxation of interest will be determined by

the rules of Article 11 (Interest), and not by Article 7, except

where (as provided in paragraph 4 of Article 11) the interest is

attributable to a permanent establishment.

This Article is subject
to the "saving" clause
of paragraph 3
of Article
1 (General Scope) of the
Model.
Thus, if a citizen
of

the United States who is a resident of Slovakia under the
Convention derives business profits from the United States that are
not attributable to a permanent
establishment in the United
States,
the United States may, subject
to the special foreign
tax
credit

rules of paragraph 3 of Article 24 (Relief from Double Taxation),

tax those profits, notwithstanding the provisions of this Article.
Article
8. SHIPPING AND
AIR TRANSPORT
This Article
governs
the taxation
of profits
from the
operation of ships and aircraft in international traffic. Under
paragraph 1, profits derived by an enterprise of a Contracting
State from the operation of ships or aircraft in international
traffic
are taxable only in that
State. By virtue of paragraph
8,
of
Article 7 (Business
Profits),
profits
of an enterprise
of a
Contracting
State that are exempt
in the other Contracting
State

under this paragraph
are
exempt in that other
State even if the
enterprise
has a permanent
establishment there.

Paragraph 2 defines the term "profits from the operation of

ships or aircraft in international
traffic" to include
profits
derived from
the rental of ships or planes
on a full (time or
voyage) basis (i.e., with crew) for use in international traffic.
The term also
includes profits derived from
the leasing of ships or
aircraft on a
bareboat basis (i.e., without
crew) for use in
international
traffic,
provided that
the lessor
is an enterprise

engaged
in the operation of
ships or aircraft in international
traffic and the profits are incidental to such activities.

Paragraph
3 provides that profits
derived by an enterprise
of
a
Contracting State from the
use, maintenance or rental
of
containers
(including
trailers, barges
and related
equipment
for
the transport
of containers)
used
in international
traffic
are
exempt
from tax in
the other Contracting
State.
This result
obtains
whether
the enterprise
is
engaged
in the operation
of
ships
or aircraft
in
international
traffic
or is
a leasing
company,
and
whether
or not
the enterprise
has
a permanent
establishment
in
that
other
Contracting
State.
Paragraph
4 clarifies
that the
provisions
of paragraph
1 apply
to
income
from participation
in a pool,
joint
business,
or
international
operating
agency.
This
refers
to
various
arrangements
for international
cooperation
by carriers
in
shipping
and
air
transport.
For
example,
if
the Slovak
airline
were
to form
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a consortium
with other
national airlines,
the Slovak
participant's
share of
the total
income derived
by the consortium
from
U.S.
sources
would
be covered
by this
Article.

Article
9.
ASSOCIATED
ENTERPRISES

This Article incorporates
into
the Convention
the general
principles of Code section 482. It provides generally that when a
resident
of one Contracting State engages
in transactionswith
a

related person
resident in the other
Contracting
State, and such

transactions
are not conducted on
an arm's length basis, the
Contracting States may make appropriate adjustments to the taxable
income and tax liability of such persons to reflect the income or

tax liability with respect to such transactions that each person

would
have had if the relationship
between
them had been
at arm's

length.

Paragraph 1 deals with the circumstances where an enterprise
of a Contracting
State participates
directly
or indirectly in the
management, control
or capital of an enterprise
of the other
Contracting State, or when the same persons participate directly or
indirectly in the management,
control, or capital of
an enterprise
of one
Contracting State and of
an enterprise of the other
Contracting State. The term "control" includes any kind of
control, whether or not legally
enforceable and however
exercised
or exercisable. If, in
either circumstance, the two
enterprises
make or impose conditions in their commercial or financial
relations that
differ from the conditions
that would exist in
relations
between independent
enterprises,
the competent

authorities
may adjust the income
of the related enterprises
to
reflect
the profits
that would
have accrued
to either enterprise
if
the two enterprises 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 enterprise
in that
other State.
It is understood
that the
other Contracting
State need
adjust its

tax only if
it
agrees that
the initial
adjustment under
paragraph

1 is appropriate.
The Contracting
State making
an adjustment
under
this paragraph
will
take the other
provisions
of the Convention
into account.
For example,
if the
effect of
a correlative
adjustment
is to treat
a Slovak corporation
as
having made
a
distribution
of profits
to its
U.S. parent
corporation,
the
provisions
of Article
10 (Dividends)
will apply
to that
distribution.
The competent
authorities
are authorized
to consult,
if
necessary, to
resolve any differences
in
the application
of this
paragraph.
Paragraph
2
of Article
26
(Mutual
Agreement
Procedure)

explains
that
any correlative
adjustment
made
under
this paragraph

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will
be implemented,
notwithstanding
any time
limits
or procedural
limitations
in
the
law of
the
Contracting
State
making
the
adjustment.
The "saving"
clause
of paragraph
3
of Article
1
(General
Scope)
does
not
apply
to paragraph
2 of Article
9.
Thus
even
if the
statute
of limitations
has
run,
or there
is a
closing
agreement
between
the
Internal
Revenue
Service
and
the
taxpayer,
a
refund
of
tax
can
be made
in order
to
implement
a
correlative
adjustment.
Statutory
or procedural
limitations,
however,
cannot
be overridden
to impose
additional
tax, because,
under
paragraph
2
of
Article
1 (General
Scope),
the Convention
cannot
restrict
any
statutory
benefit.
Under
paragraph
3,
the provisions
of paragraph
2
are not
applicable
in the
case
of fraud,
gross
negligence
or
willful
default.
Article
10.
DIVIDENDS

This
Article
provides
rules for
the taxation
of
dividends
and
similar
amounts paid
by a company resident
in one
Contracting State
to a resident
of the
other
Contracting
State.
The article
permits
full residence
State
taxation
of such
dividends
and limited
source
State taxation.
Article
10
also provides
rules
for the
imposition
of a tax on
branch profits
by
the State of
source.

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).
Paragraph
2 grants
the source
State the right
to tax dividends
paid by a
company that is
a resident of
that State to
a resident of
the other
Contracting State. If
the beneficial owner of the
dividend is a company
that owns at least 10 percent
of the voting
shares
of the
company paying
the dividend,
the tax that
may be
imposed
by the source State is
limited to 5 percent of the
gross

amount
of the dividend. In all
other cases, the source State
tax

is limited to
15 percent of the gross
amount of the dividend.
Indirect ownership of voting
shares (e.g., through
tiers of
corporations)
and direct or indirect
ownership of nonvoting
shares
are not considered for purposes of determining eligibility for the

5 percent direct
investment dividend
rate.

Paragraph 3 relaxes the limitations on source country taxation
for dividends paid by a U.S.
Regulated Investment Company (RIC)
or
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 directly by
the
recipient of the dividend. Generally, the reduction of the direct
investment dividend rate
to 5 percent is intended
to relieve
multiple levels of corporate
taxation in cases where
the recipient

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of
the dividend
holds
a
substantial
interest
in
the payor.
This
rationale
does
not justify
a reduction
of the rate
in the
case of
dividends
paid
by RICs,
because
RICs do
not pay corporate
tax with
respect
to amounts
distributed
to
their shareholders.
Further,
although
amounts
received
by
a RIC may have
been subject
to U.S.
corporate
tax (e.g.,
dividends paid
by a publicly
traded
U.S.
company
to a RIC),
it is unlikely
that a 10
percent shareholding
in
a RIC
by a
Slovak resident
will
correspond
to
a 10 percent
shareholding
in the
entity
that has
paid U.S.
corporate
tax (e.g.,

the publicly
traded
U.S.
company).
Thus, in
the case
of .dividends
received
by a RIC
and paid
out to its
shareholders,
the
requirement
of a substantial
shareholding
in the
entity paying
the corporate

tax
is generally
lacking.

In the
case of
a dividend
paid
by a U.S.
REIT
to a Slovak
resident,
the U.S.
statutory
rate i.e., 30
percent, generally
applies
(except
in the
case of
amounts
subject
to tax
as
effectively
connected income
under Code
section 897 (h)).
Dividends
beneficially
owned by an
individual holding
a less
than 10 percent
interest in the REIT
are eligible, however,
for the 15 percent
portfolio
dividend
rate provided
in paragraph
3. The denial
of the
15 percent
portfolio rate
to corporate
shareholders
and 10 percent*
or
greater individual
shareholders
is intended
to prevent
indirect
investment in
U.S. real property through a
REIT from receiving more
favorable treatment
than direct investment
in such real property.
Paragraph 4 defines the
term "dividends," as used
in this
Article, to include income
from any
shares, "jouissance"
rights,
mining shares, founders'
shares or other rights that
are not debt
claims and that participate
in profits; income from other
corporate
rights that is
subjected to the same taxation
treatment
as income
from shares by the laws of thh Contracting State of which the
company
making a distribution
is
a resident;
and income
from
arrangements,
including debt
obligations, if such arrangements
carry the right to participate in profits and the income is
characterized
as a dividend under the
domestic law of the

Contracting State
in which the income
arises.

Paragraph
5 provides that, where
dividends are attributable
to
a permanent establishment or fixed base that the beneficial owner

maintains in the country
of source, they are
not subject to the
provisions of paragraph 2 of this Article, but instead are taxable
under Article 7 (Business Profits) or Article 14 (Independent
Personal Services), as appropriate. Such dividends will be taxed
on a net basis using the rates and rules of taxation generally
applicable
to residents of the
Contracting State in which
the
permanent establishment or fixed base is located, as modified by
the Convention.
Paragraph 6 permits a Contracting State to impose a "branch
profits, tax"
on a corporation that is a
resident of the other
State. Under paragraph
6, a Contracting State may impose
a tax, in
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addition to
other taxes
permitted by
the Convention,
on a
corporation that
is a resident
of the other
Contracting
State and

that maintains
a permanent
establishment
in the first
mentioned
State or that
is subject to
net basis taxation
in that
State under

Article 6 (Income
from Real Property (Immovable
Property)) or
Article 13 (Gains).
The additional
tax may
not exceed
5 percent of
the income of
the corporation that is attributable
to a permanent

establishment in the taxing
State or subject to tax on
a net basis

in that State, after deducting
the taxes on profits imposed
thereon
in that other
State and after adjustment
for increases or decreases
in the assets, net of liabilities, of the corporation connected
with the permanent
establishment
or the trade
or business. Such

tax may only be imposed
if, under the domestic
law of the taxing

State,
it applies to the permanent
establishment of any nonresident
corporation. The U.S. tax will be imposed in accordance with Code
section
884, subject to the
limitation provided for
in this
Article. For U.S. tax purposes, the limitation is understood to

correspond to
5 percent of the "dividend
equivalent amount," as
defined in Code section 884.

Under paragraph 7, where
a company that is a resident
of a
Contracting State derives profits or income from the other-
Contracting State, that other State may not impose tax on the
dividends paid by the
company, except insofar as
such dividends are
paid
to a resident of that other State or insofar.as the holding in
respect of which the dividends are paid forms part of the business
property of a permanent establishment or a fixed base situated in

that other State. This result obtains even if the dividends paid

consist wholly or partly of profits or income arising in such other
State.

Article
11. INTEREST

Paragraph 1 grants
to each Contracting
State the exclusive
right (subject
to paragraphs 2 and 4) to tax
interest beneficially

owned
by a resident of that Contracting
State and arising
in the

other Contracting State.

Paragraph
2 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 Slovak
resident would
be
subject
to the U.S. statutory rate
of withholding tax, i.e.,
30
percent.

Paragraph 3
defines the
term "interest,"
as used
in the
Convention, to
include income from debt
claims of every kind,
whether or
not secured
by
a mortgage,
and, subject
to
paragraph
4

of Article 10
(Dividends), whether or not
carrying a right to
participate in
profits. The
term "interest"
includes,
in

particular,
income
from government
securities,
income from
bonds
or
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debentures,
and
any premiums
or
prizes
attaching
to
such

securities,
bonds or
debentures, and
all other
income treated
as

interest
by the
taxation
law of
the source
State.
The definition

does not
refer
to penalties
and fines
for
late
payment,
which
are

frequently
excluded
from the
treaty
definition
of
interest.
However,
such
amounts would
also
be exempt
from tax
at source
under
Article
22 (Other
Income).

Paragraph
4 provides
an exception
from the
rule of
paragraph

I
in cases
where
the
beneficial
owner
of
the interest,
-who is
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 have
been
attributable
to the permanent
establishment
or fixed base
if

it had
been received
or accrued
in the earlier
year, i.e., because

the debt
claim on
which the interest
is paid
was attributable
to

the permanent establishment
in such earlier
year.

Paragraph 5 provides a
source
rule for interest.
Under this

paragraph, interest is deemed to arise in a Contracting State when

the payer is a resident of that State. Where, however, the payer

(whether
or not a resident of
a Contracting State) has
in a
Contracting State a permanent establishment or fixed base, and such
interest is borne by such permanent establishment or fixed base,
then such interest
shall be deemed to arise
in the State in which

the
permanent establishment
or fixed base is situated.

Paragraph
6 provides that
if, as a result of a
special
relationship
between the payer
and the beneficial owner
of the
interest, or between
both of them and some
other person, 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 laws
of

the United
States and Slovakia, respectively,
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,
subject to
the provisions of Article
10 (Dividends).

Because the rule of paragraph 2 provides for exemption at
source of interest derived
by a resident of the other
Contracting
State, the United States will not impose tax under Code section 884
on excess interest of a U.S. branch of a Slovak company.
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Article
12.
ROYALTIES

Paragraph
1 grants to each Contracting
State the right
(subject
to
paragraph
2,
discussed
below)
to tax
royalties

beneficially
owned
by its
residents and
arising in
the other
Contracting State.

Paragraph 3 defines
the term "royalties"
as used in the
Convention.
Under
subparagraph
3(a), the term
"royalties"
includes
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 cinematographic
films or films
or tapes
and
other means of image or sound
reproduction.
The reference
to
"other
means" of reproduction
makes clear that subsequent
technological
advances
will not affect
the exclusion
of payments
relating to the
use of such means of image
or sound reproduction
from
the definition
of royalties.
Under subparagraph
3(b),
the
term 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 industrial,
commercial, or scientific equipment.or for information concerning
industrial, commercial,
or scientific experience.
In addition, the
term "royalties" includes
gains from the alienation
of any right or
property
described in paragraph
3 that is contingent
on the
productivity, use,
or
further disposition of the property.
Under paragraph 2, royalties described in subparagraph 3(a)

("copyright royalties")
that are paid by a resident
of one
Contracting State and beneficially owned by a resident of the other
Contracting State are
taxable only in that other
Contracting State,
i.e., the residence
State of the beneficial owner.
The scope of

the term "copyright" as used in the paragraph is determined under

domestic law. Royalties described in subparagraph 3(b)

("industrial royalties") may be taxed both by the source State and
by
the residence State of the
beneficial owner, but the
tax that

may be imposed by the source State is limited to 10 percent of the

gross amount of the
royalties. Taxation of any
royalties arising

in one Contracting State and derived and beneficially owned by a

resident of the other
Contracting State is a
departure from the
U.S. model. Inclusion
of equipment rentals under
the definition of
royalties is
a further departure
from the U.S.
model. However,
like a number of countries,
Slovakia feels strongly
about this
point and the maximum
treaty rate of 10%
does represent a
significant
reduction of the
Slovak nontreaty rate
of 25%.

Paragraph
4 provides an exception
to the rules of paragraphs

1 and
2 in cases
where a beneficial
owner of
royalties who
is a
resident of one
Contracting State
carries on or has
carried 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,
i.e., the
right or property
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in respect
of which
the
royalties
are paid
forms
part of
the
business
property
of such
permanent
establishment
or
fixed base.
In
such a
case, the
royalties
are taxable
in accordance
with the
provisions
of Article
7
(Business
Profits)
or
Article
14
(Independent
Personal
Services),
and
the
source State
will
generally
retain the right of taxation.
This rule applies
even if
the
permanent establishment or
fixed base no longer exists
when the
royalties
are paid or
accrued,
as long
as the royalties
would
have

been attributable
to
the permanent
establishment
or fixed base
if

they had been
paid or accrued in the earlier
year, e.g.,, because
the license
in respect of which the
royalties are paid was
attributable
to the permanent establishment
in such earlier year.
Paragraph
5 provides that if,
as a result of a special
relationship between the payer and the beneficial owner of a
royalty, or between both of them and some other person, the toyalty
paid is excessive, Article 12 applies only to the amount of the
royalty payment that would have been made absent such special
relationship (i.e.,
an arm's length royalty
payment). Any excess
amount
of royalty paid remains
taxable according to the laws
of the
United States and Slovakia, respectively,
with due regard to the
other
provisions
of the Convention.
If, for
example, the
excess
amount is
treated as a distribution
of profits by a company under
the internal
law
of the source State,
such excess amount will
be
taxed
as a dividend,
rather than
as a royalty
payment, subject
to
the provisions of Article 10 (Dividends).
Paragraph 6 provides source
rules for royalty payments.
Under
subparagraph 6(a), royalties
are treated as arising
in a
Contracting State when the
payer is that State itself,
a political

subdivision or
local
authority of that State
or a person who is a

resident of that
State for purposes of its
tax. Where, however,

the person paying
the royalties
(whether
or not a resident
of one

of the Contracting
States)
has in a Contracting
State a
permanent

establishment
or fixed base in
connection with which the liability

to
pay royalties was incurred,
and the royalties are borne
by
the

permanent
establishment
or
fixed base, then
the royalties
are
deemed to arise in
the State in which the permanent
establishment

or
fixed base is situated. Where
subparagraph 6(a) does not
apply
to
treat royalties
as arising in a
Contracting State,
subparagraph
6(b)
treats royalties
paid for
the use of, or
the right to
use, any
property
or right
described
in paragraph
3 in a Contracting
State

as arising
in that
State.

Article 13. GAINS

This Article
provides rules
for source
and residence
State
taxation of
gains from the alienation
of property.

Paragraph
1 provides
that gains
derived
by a
resident of
one

Contracting
State
from
the alienation
of real
property
situated
in

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the
other Contracting State
may be taxed in the other
(situs)
State.
This paragraph
is intended
to preserve
the right
of the
United States
to tax the full range of gains
taxable
under section

897 of the Code.

For purposes of Article
13, paragraph 2 defines
the term "real
property situated in
the other Contracting State"
to include real

property
referred to in Article
6 (Income from Real
Property
(Immovable
Property)) (i.e., interests
in the immovable
property
itself) and certain
indirect interests
in real property. Such
indirect interests include shares of stock in a company at least 50
percent of the assets of which consist of real property situated in
the source State. Thus,
a Slovak resident would be subject
to U.S.
tax on gain from the alienation
of shares in a United
States Real

Property Holding Corporation.
Similarly, such a resident
would be
subject to tax on a liquidating distribution by such a U.S.
corporation
and on
a distribution
by a REIT
attributable.to
gain

from the alienation of U.S.-situs
real property. This
provision

also.preserves
the U.S. right to tax
gain from the alienation of
an
interest
in a partnership, trust or
estate, to the extent that the

gain
is attributable to
U.S.-situs real property.

Paragraph 3 preserves
the right of the
source State to tax
gains from the
alienation of
personal (movable)
property
in certain
circumstances.
Under paragraph
3, gains
from the alienation
of
movable property forming
part of the business property
of a
permanent establishment that
an enterprise of a Contracting
State

has in the other Contracting
State, or of movable
property
pertaining to a fixed base
available to a resident of
a Contracting
State in
the other Contracting State
for the purpose of performing

independent personal services, including such gains from the
alienation of such
a permanent establishment
(alone or with the
whole enterprise) or
of such fixed base, may be
taxed in that other
State.

Paragraph
4 provides that gains
derived by an enterprise
of a

Contracting State from the alienation of ships, aircraft or
containers used in international traffic are taxable only in that

State.

Paragraph 5 clarifies
that payments described
in paragraph 3

of Article 12
(Royalties), including gains
from the alienation of

any right or property
described in paragraph
3 of Article 12 that

is contingent
on the productivity, use, or
further disposition of

the property, are taxable only in accordance with the provisions of
Article 12.

Paragraph 6 grants to the residence State the exclusive right

to tax
gains from the
alienation of
property other
than property

referred
to
in paragraphs
1
through
5.

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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).
Exceptions
and additions
to these
general
rules
are
provided
for directors'
fees
in Article
16;
for
performance
income
of artistes
and
sportsmen
in Article
18;
for
pensions
in respect
of personal
service
income
and social
security

benefits
in Article 19;
for government
service
salaries and
pensions
in Article
20; and
for certain
income of
students,
trainees, teachers
and researchers
in Article 21.
Under paragraph 1,
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 the services are or
were
performed in that other
State (see Code section
864(c) (6)) and
either
(a) the income is attributable
to a fixed base regularly
available
to the individual in
that other State for the purpose
of

performing
his services,
in which case the income
attributable to

that
fixed base
may be taxed
in that other
State, or
(b) the
individual
remained in
that other State
for more
than
an aggregate
of 183 days in
any twelve month period. The
State of residence may
tax in either
case under paragraph
3 of
Article.1 (General
Scope).
In addition, under paragraph
3 of Article 1 (General Scope),
if the
individual is a Slovak resident
who
performs independent
personal

services
in the United
States,
and the individual
is also
a U.S.
citizen,
the United States may tax his
income without regard to the
restrictions
of this Article, subject
to the special foreign tax
credit rules
of paragraph
3 of Article
24 (Relief
from Double
Taxation).
The term "fixed base" is not defined in the Convention, but
its meaning is understood
to be analogous to that
of the term
"permanent establishment." Therefore, it is understood that the
income
attributed to a fixed base will be taxed 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 "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. The taxation of income from the

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types
of independent
services
that
are
covered
by Articles
16 and

18 through
21 is governed
by the
provisions
of those
articles.

Article
15.
DEPENDENT
PERSONAL
SERVICES

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 that other
Contracting
State
unless
the conditions
specified in paragraph
2 are satisfied.

Paragraph
1 also
provides that
the more
specific rules
of
Articles
16 (Directors'
Fees),
19 (Pensions,
Annuities, Alimony,
and
Child Support),
20 (Government
Service),
and 21 (Students,
Trainees,
Teachers,
and Researchers)
apply
in the case
of

employment
income described
in one of
these articles.
Thus, even

though the
State of source has a general
right to tax employment

income 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. Similarly,
though
a State of source
may have
no general
right of taxation
under Article
15 with respect
to a particular
item of
income, the

State may have the right
to tax that income under
one of the
aforementioned
Articles.

Under paragraph 2, remuneration
of an individual
resident of

a Contracting State that
is derived from the performance
of
services as an employee within
the other Contracting
State may not

be taxed
by that other Contracting
State if three conditions are

satisfied:
(a) the individual is present
in that State for a period
or periods not exceeding
in the aggregate 183
days in any twelve

month period; (b) the remuneration is paid by, or on behalf of, an

employer who is not a resident of that other Contracting State, and
(c) the remuneration is not borne by a permanent establishment or

fixed base that the employer
has
in that other State.
If a foreign
employer pays the salary
of an employee, but a
host country
corporation or permanent establishment reimburses the
foreign
employer in a
deductible payment that
can be identified as a
reimbursement,
neither condition (b) nor
(c) will be considered to
have been
fulfilled. Conditions
(b) and (c) 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
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be exempt
from
tax in the
source
State, all
three
conditions
must

be
satisfied.

Paragraph
3 contains
a special
rule applicable
to remuneration
for services
performed by an individual
who is a resident of
a
Contracting
State
as an employee
aboard
a ship
or aircraft
operated
in international
traffic.
Such
remuneration
may
be taxed
only
in

the Contracting
State
of
residence of
the employee
if the services

are performed
as
a member of the regular
complement of the ship
or
aircraft.
This rule is
similar to the
corresponding
provision in
the
U.S. Model.
The
"regular
complement"
of
a ship or
aircraft
includes
the
crew. In
the case
of
a cruise
ship,
it may
also
include
others,
such as entertainers,
lecturers,
etc., employed
by
the shipping
company
to serve on
the ship. The
use
of the
term
"regular complement"
is intended to clarify
that a person who
exercises his
employment
as, for example,
an insurance
salesman
while aboard
a ship or aircraft
is not covered
by this
paragraph.

If a U.S.
citizen who
is resident
in Slovakia
performs
dependent services in the
United States and meets the
conditions of
paragraph 2, or is a crew
member
on a Slovak ship or
airline, and
would therefore be exempt from U.S. tax if he were not a U.S.
citizen, he is nevertheless taxable in the United States on his
remuneration by virtue of the saving clause of paragraph 3 of
Article
1 (General Scope), subject
to the special foreign tax
credit rules
of paragraph 3 of Article
24 (Relief from Double
Taxation).
Article 16.
DIRECTORS'
FEES

This Article provides that a Contracting State may tax the
fees 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, provided that the
services are performed in the first-mentioned State. This rule is
an exception to the more
general rules of Article 14
(Independent
Personal Services) and Article 15 (Dependent Personal Services).
Thus, for example, in determining whether a non-employee
director's
fee is subject to tax in the State of residence of the company,
whether the company constitutes
a fixed base of the
director in
that State is not relevant.

The rule provided in this Article represents a departure from

the U.S. Model, which treats
a corporate director
in the same
manner as any other individual performing personal services -­
outside directors
would be subject to the
provisions of Article 14
(Independent Personal
Services)
and inside
directors would be
subject to the
provisions of Article
15 (Dependent Personal
Services). The
preferred Slovak position
is reflected in the OECD
Model, in which
a resident of one Contracting
State who is a
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-27­
director
of
a company
that is
resident
in the
other Contracting
State
is
subject
to tax
in
that other
State
in
respect
of his
directors'
fees
regardless
of where
the
services
are
performed.
The
provision
in Article
16
of the
Convention
represents
a
compromise
between
these
two
positions.
The
State
of residence
of
the
company
may
tax nonresident
directors
with no
threshold,
but

only
with
respect
to remuneration
for
services
performed
in that
State.

This Article
is subject
to
the "saving"
clause
of paragraph
of
Article
1 (General
Scope).
Thus,
if
a U.S.
citizen
who is
a
Slovak
resident
is
a director
of a U.S.
corporation,
the
United
States
may
tax his
full remuneration
regardless
of the
place of
performance
of
his
services.
Article
17.
LIMITATION
ON
BENEFITS

Article
17 ensures
that source
basis tax benefits
granted
by
a Contracting
State
pursuant to
the Convention
are limited
to the
intended
beneficiaries --residents
of the other Contracting State
--
and are not
extended to residents
of third
States not
having a,
substantial
business
in, or
business nexus
with, 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. Absent Article
17, the entity
would generally be entitled
to benefits as a
resident of a Contracting
State, subject to
such limitations, e.g.,
business purpose,
substance-over-form, step
transaction or conduit
principles, as
may be applicable
to the
transaction or
arrangement
under the
domestic
law of
the source
State.
Article 17 is more detailed than the corresponding article in

the U.S. Model and follows
the form of the article
used in more
recent treaties. See, e.g., Convention Between the United States

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, 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 "recognized
securities exchange"
as
used in subparagraph
1(c). Paragraph 4 defines
the term "gross
income"
as used in subparagraph
l(e)(ii).

The
first
two
categories
of
persons
eligible
for
benefits
from

the
other
Contracting
State
under the
Convention
are
individual

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residents
of a Contracting
State
(subparagraph
1(a)) and
the two
Contracting
States
and their
political
subdivisions
or local
authorities
(subparagraph
1(b)).
It is considered
unlikely
that

persons
falling
into these
two
categories
can be used
improperly
to
derive
treaty
benefits
on behalf
of a third-country
resident.
If

an individual
is receiving
income as
a nominee on
behalf of
a
third-country
resident,
benefits
will
be denied
with respect
to
those
items of
income
under the
articles
of the
Convention
that
grant
the benefit,
because of
the requirements
in those
articles

that
the beneficial
owner (and
not merely
the recipient)
of the
income
be a
resident
of a Contracting
State,

The third category, described in subparagraph 1(c), consists

of
persons that
are
residents
of one Contracting
State and
derive

income
from the
other Contracting
State that
is connected
with, or

incidental to, an
active trade or business
conducted in the
residence
State.
Income
that is
derived in
connection
with,
or is
incidental
to, the
business of
making or managing
investments
will

not
qualify for
benefits under
this provision,
unless the
business

is
a bank or insurance
company
engaged in
banking or
insurance
activities.
The
first
six
examples
in the
Memorandum
of

Understanding
Regarding the Scope of the
Limitation
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
1(c).

The fourth category, described
in subparagraph 1(d),
consists

of companies
in
whose principal
class
of
shares there
is

substantial and regular
trading on a recognized
securities exchange
(as defined in paragraph
3) and companies that are wholly owned,

directly or indirectly, by a company that is a resident of the same
Contracting
State and whose
principal class of shares
are so
traded.

The fifth category,
described in subparagraph
1(e), includes

not-for-profit organizations
(including a pension
fund or private

foundation) that satisfy two conditions: (a) the organization is

generally exempt from tax in its State of residence by virtue of

its not-for-profit status and (b) more than half of the

beneficiaries, members,
or participants,
if any, in the

organization are persons who are entitled under this Article to
benefits of the Convention.

The sixth
category, described
in subparagraph 1(f)
of
paragraph
1, includes persons who satisfy
two tests: the so-called
"ownership" and "base
erosion" tests. The "ownership"
test
requires
that more than 50 percent
of the beneficial interest
in
the person
(or, in the case of a company,
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
c)). The "base
erosion"
test requires
that not
more than 50
percent of
the
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person's
gross income
(as
defined in
paragraph
4) be used,
directly
or indirectly,
to
meet
liabilities
(including
liabilities
for
interest
or royalties)
to
persons
not entitled
to benefits
under

the other
tests
of paragraph
1
(other than
subparagraph
c)).

The rationale for the
two-part test of subparagraph
1(f)
derives
from the
fact
that treaty
benefits
can
be indirectly
enjoyed
not only
by equity
holders
of an entity,
but
also by
that
entity's
various
classes
of
obligees,
such as
lenders,
licensors,
service
providers,
insurers and
reinsurers,
and others.
In order
to
prevent such
benefits
from inuring
substantially
to
third-country
residents, it is
not sufficient merely to
require
substantial ownership
of the entity by treaty
country residents or
their equivalent.
It is also necessary
to require that the
entity's deductible
payments
be made in
substantial part
to such
treaty country residents
or their equivalents. For
example, a
third-country resident could lend funds to a Slovak-owned Slovak
corporation
to be reloaned to the United
States. The U.S. source
interest income of the Slovak corporation would be exempt from U.S.
withholding tax under
Article 11 (Interest)
of the Convention.
While the Slovak corporation would be subject to Slovak income tax,
its taxable income could be reduced to near zero by the deductible
interest paid to the third-country resident. If, under a
Convention between Slovakia and the third country, that interest is
exempt from Slovak tax, the U.S. treaty benefit with respect to the
U.S. source interest income
will have flowed to the
third-country

resident.

It is intended that the provisions of paragraph 1 will be
self-executing. Unlike the provisions of paragraph 2, discussed

below, a claim of benefits under paragraph 1 does not require
advance competent authority ruling or approval. The tax

authorities may, of course, determine on review that the taxpayer

has improperly interpreted the paragraph and is not entitled to the
benefits claimed.

Paragraph
2 of Article 17 permits
the
competent authority
of

the State in which income
arises to grant Convention
benefits in

additional cases, even
if they do not meet the
standards of
paragraph 1 (or sufficient
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.

Paragraph
3 defines the term "recognized
securities
exchange"
as used
in subparagraph
1(d).
In the case
of the
United States,

this
term means
the
NASDAQ
System
owned
by the
National
Association
of Securities
Dealers,
Inc.
and
any stock
exchange
registered
with

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the Securities
and
Exchange
Commission
as a
national
securities
exchange
for
purposes
of
the Securities
Exchange
Act
of 1934.
In

the case
of
Slovakia,
the
term
means
the Slovak
stock
exchange
(Burza
Cennych
Papierov
Bratislava
A.S.)
and
any other
stock
exchange
approved
by
the Slovak
State
authorities.
The
term
"recognized
securities
exchange"
also includes
any other
stock
exchange
located
in
a Contracting
State
and agreed
upon
by the
competent
authorities.

Paragraph 4 defines the term "gross income," as used in
subparagraph l(e)(ii), generally to mean gross receipts. In the

case of an enterprise engaged in a manufacturing or production
business, the term "gross income" means gross receipts reduced by

the direct costs of labor and materials attributable to such
manufacture or production and paid or payable out of such receipts.
Article
18.
ARTISTES
AND
SPORTSMEN

Article 18 addresses the taxation in a Contracting State of

artistes (i.e., performing artists and entertainers) and athletes

resident in the other Contracting State from the performance of
their services as such. The Article applies both to the income of
an entertainer
or athlete 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 Article 14 (Independent Personal Services) and 15 (Dependent
Personal Services). This Article applies, however, only with
respect to the income of performing artists and athletes. 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
describes the
circumstances
in which a
Contracting
State
may tax the
performance income
of an entertainer
or athlete

who
is a resident
of the
other Contracting
State.
Under the
paragraph, income
derived by
a
resident of
a Contracting
State from
his personal
activities
as
an entertainer
or
athlete exercised
in

the other
Contracting
State may be
taxed in that
other State if
the
amount
of the gross
receipts derived
by the individual
exceeds
$20,000
(or its equivalent
in Slovak crowns)
for
the taxable
year
concerned.
The $20,000
includes
expenses reimbursed
to
the
individual
or
borne on
his behalf.
If the
gross
receipts
exceed
$20,000,
the
full amount,
not just
the excess,
may
be taxed
in the
State
of performance.

The
OECD Model
provides for
taxation by
the country
of
performance of
the remuneration
of entertainers
with
no dollar or

time threshold.
The United
States introduces
the dollar
threshold
test
to distinguish
between
two
groups of
entertainers
and
athletes
--
those who
are paid
very large
sums
of money
for very
short
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periods of service,
and who would, therefore,
normally be exempt
from host country tax
under the standard personal
services income

rules,
and those who earn only
modest amounts and are, therefore,

not
clearly distinguishable from
those who earn other types
of
personal service income.

Paragraph 1 applies
notwithstanding the
provisions of Articles
7 (Business Profits), 14
(Independent Personal Services)
or 15
(Dependent
Personal
Services).
Thus, if
an individual
would
otherwise
be exempt from tax under
those Articles, but is subject
to tax under
this Article, he may
be taxed. An entertainer
or
athlete who
receives less than the
$20,000 threshold amount, and
who is, therefore,
not affected by this Article,
may nevertheless

be subject to tax in the host country under Article 14 or 15 if the
tests for taxability under those Articles are met. For example, if
an entertainer who is an independent contractor earns only $19,000

of
income for the calendar year,
but the income is attributable
to

a fixed base regularly available to him in the State of

performance, that State may tax his income under Article 14. It is
frequently not
possible to know until year
end whether the income

and entertainer or athlete derived from performance in a

Contracting State
will exceed $20,000. Nothing
in the Convention

precludes that Contracting State, however, from withholding tax
during the year and refunding after the close of the year if the

taxability threshold has not been met.

Paragraph
2 is intended to deal with the potential for abuse

when income from a performance by an. entertainer or athlete 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, the "employer" may be, for example, a company established and
owned by the performer that is merely acting as the nominal income
recipient in respect of the remuneration for the performer's
performance.
The performer
may
be acting as
an "employee,"
receiving
a modest salary and arranging
to receive the remainder
of
the
income from
his performance
in another
form or at a later
time.
In such
a case,
absent
the provisions
of
paragraph
2, the company

providing
the
entertainer's
services
can
escape host
country
tax
because
it earns
business profits
but has
no permanent
establishment
in
that country.
The performer
may largely
or
entirely escape
host country
tax by receiving
only
a small salary

in
the year the
services are
performed, perhaps
small
enough to
place him
below the dollar
threshold
in paragraph
1. He would
arrange
to receive
further
payments
in a later
year, when
he is
not
subject
to host
country
tax, perhaps
as
salary
payments,
dividends,
or liquidating distributions.

Paragraph
2 seeks
to prevent
this type
of
abuse while
at
the

same
time protecting
the
taxpayers'
rights
to
the benefits
of the

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Convention
when there
is
a legitimate
employee-employer
relationship
between
the performer
and the
person providing
his
services.
Under
paragraph
2,
when the
income
accrues
to
a person
other
than the
performer,
and the
performer
(or persons
related
to
him)
participate,
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 on the

person
providing the
services of
the entertainer
or athlete. This
paragraph
does not affect the rules
of paragraph 1, which
apply
to

the entertainer or athlete himself. To the extent of salary
payments to 'he 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 athlete) if
that other person has control
over, or
the right to receive, gross
income in respect of the
services of
the entertainer or athlete.
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.
The paragraph
2 override of the
protection of Articles
7
(Business Profits) and 14 (Independent Personal Services) does not

apply if it is established that neither the entertainer or athlete,
nor any persons related to the entertainer or athlete, participate

directly or indirectly in the profits of the person providing the

services of the entertainer or athlete. Thus, for example, if a

circus owned by a U.S. corporation performs in Bratislava, the
Slovak promoters
of the performance
pay the circus, which in turn
pays salaries
to the clowns. The
circus has no permanent
establishment
in Slovakia. Since the clowns do
not participate in
the profits
of the circus, but merely
receive their salaries out
of

the
circus'
gross
receipts,
the
circus
is
protected
by
Article
7.
and its income
is not subject to Slovak
tax. Whether the salaries
of the clowns are subject to Slovak tax depends on whether they
exceed the
$20,000 threshold in paragraph
1. This exception for

non-abusive cases to the paragraph
2 override of the Articles
7 and
14 protection of persons providing
the
services of entertainers
and
athletes is not found in
the OECD Model. The policy
reflected in

this exception is, however, consistent with the stated intent of

Article 17 of that Model, as indicated in its Commentaries. The

Commentaries to Article
17 state that paragraph 2 is
intended to

counteract certain tax avoidance devices in which income is
diverted from the performer to another person in order to minimize
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-33­
the total
tax
on the
remuneration.
It is therefore
consistent
not

to apply
these
rules
in
non-abusive
cases.

Paragraph
3 is not
found in the
U.S. or OECD
Models.
It
provides an exception to the rules in paragraphs 1 and 2 in the
case
of a visit to
a Contracting
State by an entertainer
or
athlete
who is a
resident of the other Contracting
State, if the visit
is
substantially
supported,
directly
or indirectly,
by the
public
funds of
his State of residence or
of a political subdivision
or
local authority
of that State. In
the circumstances described,
only the Contracting State of residence of the entertainer or
athlete may tax his income from the performances so supported in
the other State.
This Article is subject to the provisions of the saving clause
of paragraph
3 of Article 1 (General
Scope). Thus, if
an
entertainer
or athlete who is a resident
in Slovakia is a citizen
of the United States, the United States may tax all of his income
from performances in the United States without regard to the
provisions of this Article,
subject, however, to
the special
foreign tax credit provisions of paragraph 3 of Article 24 (Relief

from Double Taxation).

Article 19. PENSIONS,
ANNUITIES, ALIMONY,
AND CHILD SUPPORT

This
Article deals
with the
taxation of
private and
public
pensions
and annuities, alimony
and child support payments.

Paragraph 1 provides in subparagraph a) that pensions and
other
similar remuneration
derived
and beneficially
owned
by
a
resident of a Contracting
State in consideration of past
employment
may be taxed only by the State of residence of the beneficial
owner. The past employment
need not have been exercised
by the
beneficial
owner
of the
pension.
For example,
a pension
paid
to a
surviving
spouse
who is a resident
of Slovakia
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.

Subparagraph
1(b)
provides
that
social security
benefits
and

other public
pensions
paid
by a Contracting
State to
a resident
of

the
other Contracting
State
or a citizen
of the
United States
may

be
taxed only
by the
paying State.
This
rule
applies
to
benefits

paid under
the social
security
legislation
of both
Contracting
States
and certain
U.S.
Railroad
Retirement
benefits.

The rule
of subparagraph
1(b)
is an
exception
to the
"saving"
clause
of
paragraph
3 of Article
1
(General
Scope).
Thus, a Slovak
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,
Slovakia,
or a third
country).
The
rules of
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paragraph
1 do
not apply
to pensions
for
governmental
service,
which are
dealt with
in Article
20 (Government
Service).

Under paragraph 2, annuities
that are derived and
beneficially
owned by a resident
of a Contracting State
are taxable only in that
State. An annuity, as the term is used in this paragraph, means a
stated sum paid periodically
at stated times during
a specified
number of years, under an obligation to make the payment in return
for adequate and
full consideration (other
than for services
rendered).

Paragraphs
3 and 4 deal with
alimony and child support
payments. The provisions of the two paragraphs differ, in some
respects, from the comparable provisions in the U.S. Model so that
they may
better coordinate the provisions
of U.S. and Slovak law
regarding
the treatment of such payments.
Paragraph 3 deals only
with those
alimony payments that
are deductible to the payor.
Under the
paragraph, alimony paid by
a resident of a Contracting
State, to the extent that it is deductible by that resident, to a
resident
of the other Contracting
State is taxable only in the
State of residence of the recipient. Paragraph 4 deals with
nondeductible alimony and
periodic payments for the
support of a
minor child.
These types of payments
by a resident of a
Contracting State
to a resident of the other
Contracting State are
taxable only in the State of residence of the payor.
Both alimony,
under
paragraph 3, and nondeductible alimony
and
child
support payments,
under paragraph
4, are defined as
periodic
payments
made
pursuant to a written
separation agreement or
decree
of
divorce, separate maintenance,
or compulsory support.
In
addition,
for a payment to be treated
as "alimony" for purposes
of
this Article,
it must
be taxable to
the recipient
under the laws
of
his State of residence.
Under
U.S. law, alimony is generally
deductible to the
payer

and taxable in the hands of the recipient. Such payments made by

U.S. residents,
therefore,
fall within
the
terms of
paragraph 3 and
are
taxable only
in Slovakia.
Under Slovak
law, to the
extent
alimony
is deducted
by the payer,
it is taxable
to the recipient.

In such
cases, alimony
paid. by
Slovak residents
also falls
under
paragraph 3.

The "saving"
clause of
paragraph
3 of Article
1 does not
apply
to paragraph
4.
The benefits
of this
paragraph,
therefore,
are
not
overridden by any
contrary provisions
of the Code.

Article 20. GOVERNMENT SERVICE
This
Article
follows
the corresponding
provisions
of the
OECD

Model. The
Article
provides
generally
that payments
(including
a

pension)
from
the public
funds of
a Contracting
State
or political

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subdivision
or local
authority
thereof
to compensate
a citizen
of

that
State
for the
performance
of services
rendered
in
the
discharge
of functions
of a
governmental
nature
may be
taxed only
by that
State.
Payments
in respect
of services
rendered
in
connection
with
a business
carried
on by
that State,
political
subdivision
or local
authority
(for
example,
a
government-operated
airline) are governed by
the provisions of Article 14
(Independent
Personal
Services),
15 (Dependent
Personal
Services)
or 18

(Artistes
and Sportsmen),
as the case
may be, and
not
by Article

20.

The
provisions
of this Article
do not apply
to social
security
benefits
and other
public pensions
that are
not paid in raspect
of

services
rendered to the paying
government
or a political

subdivision
or local
authority thereof.
Such amounts
are governed
by the provisions
of Article 19 (Pensions,
Annuities,
Alimony and

Child Support).

The rules of this Article
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
Slovakia
to its employees at the Slovak
Embassy in Washington are

exempt from U.S. tax
if the employees are not "green
card" holders
or citizens of both countries.

Article 21. STUDENTS,
TRAINEES, TEACHERS AND
RESEARCHERS

This Article deals with visiting students, trainees, and,
unlike the
U.S. Model, teachers
and researchers.

Paragraph 1 deals with certain payments received by a student

who is temporarily present in the host State for the primary
purpose of study
at an accredited educational
institution, securing
professional
training,
or study
or
research as the
recipient
of a

grant
from a governmental,
religious, charitable, scientific,
literary or educational
organization. If such
a student was a
resident of the other
Contracting State at the
beginning of his
visit,
he will be exempt from tax
in the host State on (i)
payments
(other than compensation
for personal services)
arising from
sources, or remitted
from, outside the host State,
that are for the
purpose
of the
student's
or trainee's
maintenance,
education
or
training,
(ii) the study
or research
grant, and (iii)
income from

personal
services
performed in
the host State
in an aggregate
amount not exceeding
$5,000
or its equivalent
in Slovak
crowns for

any taxable
year.
These exemptions
are available
for
a period
of

time not
exceeding
five years
from the
date of the
student's
arrival in
the host State. It
is expected that, in most
cases,

study,
training
or research
programs
would
be completed
within
five
years.

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The
reference in paragraph 1
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 subparagraph
1(c) is
an organization
that
qualifies
as tax-exempt
under Code
section
501(c)(3).
Paragraph 2 deals
with
a resident of a Contracting
State
who

is an employee of an enterprise of that State and who is
temporarily present in the other Contracting State for the primary

purpose of studying at an accredited educational institution in the
host State or acquiring
technical, professional
or business
experience
from a person other than
his employer. Such resident

will be
exempt from tax by the host
State for a period of
12
consecutive months on compensation for personal services, wherever
performed,
in
an aggregate amount
not exceeding. $8,000 or its
equivalent
in Slovak
crowns.
Paragraph 3 of the Article deals with a resident of a
Contracting State who is temporarily present in the other
Contracting
State for a period not
exceeding one year, as
a
participant in a program sponsored by the Government of the host

State, for the primary purpose of training, research or study.
Such
an
individual will be exempt
from tax by the host State
on
compensation for personal services in respect of such training,
research or study
performed in the host
State in an aggregate
amount not exceeding $10,000 or its equivalent
in Slovak crowns.

Paragraph 4 permits the
competent authorities
to agree to
adjust the dollar
amounts
specified in paragraphs
1 through 3 to
reflect significant
changes in price levels
over time. The
exemption for income from
personal services in paragraphs
1 through
3 applies only if the services are performed solely for the
purposes of supplementing
the funds otherwise available
for
the
person's maintenance, education
or
training. The $5,000
exemption
applies in addition
to, and
not
in lieu
of, any allowances
(e.g.,

personal exemptions
and deductions)
available
to the
person under

the internal
laws of
the Contracting
States. If
the amount earned
exceeds $5,000 per annum, only the excess is taxable.

Paragraph
5
of the Article deals
with
visiting professors
and
teachers.
Although there is
no provision in the U.S.
or OECD
Models
dealing
with professors
or teachers,
and
it is not standard
U.S. treaty policy
to provide benefits
to visiting teachers by
treaty,
the
United States
will frequently
agree
to include such
a

provision when requested by the treaty partner. Paragraph 5

provides that
if a professor or teacher
who is a resident of one

Contracting State
visits
the other Contracting
State for a period

not exceeding
two
years for
the
purpose
of teaching
or
conducting

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research
at an accredited
educational
or research
institution,
he

will
be
exempt
from tax
in the
host
State
on his
compensation
for

such
teaching
or
research.
A person
is
not entitled
to the
benefits
of this
paragraph
if
he has,
during the
immediately
preceding
period,
enjoyed the
benefits of
paragraph 1,
2 or 3 of

Article
21 as
a student, apprentice
or
trainee. If,
however,
following
the period in which
a person claimed benefits
under
paragraph
1, 2 or 3, that person
resumes residence and
physical
presence in his original home State before returning to the host

State as a teacher or researcher,
he may claim the
benefits of
paragraph 5. The benefits of paragraph 5 may be claimed only once

by a particular individual.

Paragraph 6
clarifies
that, for the exemption
of paragraph 5

to apply
to income from research, the
research rust 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 Slovak 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.

Article
22. OTHER
INCOME
This Article
provides the rules for
the taxation of items
of

income not
dealt with in the other articles
of the Convention. This
Article
deals with
classes
of income
that
are not
dealt
with
elsewhere,
such as lottery winnings,
punitive damages, and

cancellation
of indebtedness
income.
The
article
also
applies
to

items of income
that are excluded
from the
other
articles
because

of their
source or
some other
characteristic.
For example,
Article
11 (Interest)
addresses
only the
taxation of
interest
arising in
a

Contracting
State.
Interest
arising
in a third
state therefore
is
subject to the
rules of Article 22.

Paragraph
1
contains
the
general
rule
that
such
items
of
income
derived
by a resident
of a
Contracting
State
will be taxable
only
in
the State
of
residence.
This
exclusive
right of
taxation

applies
irrespective
of whether
the residence
State exercises
its

right
to tax
the
income.

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157
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Paragraph 2
contains an
exception
to the general
rule of
paragraph
1 for income
(other
than
income from
real
property)
that

is attributable
to a permanent
establishment
or fixed
base 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).
Thus, in general,
third-country
income
that is
attributable
to
a permanent
establishment
maintained
in the United

States
by
a resident
of Slovakia
would
be taxable
by the
United
States.

There
is
an exception
to the
rule
of paragraph
2 for
income

from
real property,
as defined
in paragraph
2 of
Article
6 (Income
from Real Property
(Immovable
Property)). If
a Slovak resident

derives income
from real
property located
outside the
United States
that is attributable
to
the resident's
permanent
establishment
or
fixed base in the United
States, only Slovakia
and not the United
States
may tax
that income.
This special
rule for foreign
situs
real property
is consistent
with the
general rule,
also reflected
in Articles
6 and 23 (Capital), that only the situs and residence
states may tax
real property and real property
income. Even if
such property is part of
the property of a permanent
establishment
or fixed base
in a Contracting
State, that
State may
not tax if
neither the situs of the property
nor the residence of
the owner is
in that State.

This Article is subject
to the "saving" clause of
paragraph 3
of Article 1 (General Scope). Thus the United States may tax the
income of a Slovak resident not dealt with elsewhere in the
Convention if that Slovak resident is a citizen of the United
States.
Article
23.
CAPITAL

This Article
specifies the circumstances
in which
a
Contracting State may impose tax on capital owned by a resident of

the other Contracting State. Since the United States does not
impose a national-level tax on capital, the only capital taxes
covered by the Convention are those imposed by
Slovakia. Thus,
although the Article is drafted in a reciprocal manner, its
provisions
are relevant only for the imposition
of Slovak tax.

Paragraph 1 provides
that capital represented
by real property
(as defined
in Article 6 (Income
from Real
Property) (Immovable
Property)) that is
owned by a resident of a Contracting
State and

situated in the other Contracting State may be taxed in the situs

state. Thus, real property owned by a U.S. resident and located in
Slovakia
may be
taxed
by Slovakia.

Paragraph 2 provides the same rule for movable property that

is part of
the business property of
a permanent establishment
or

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-39­
fixed
base
that an
enterprise
or resident
of a
Contracting
State
has
in the
other Contracting
State.
Thus,
movable
property
that is
part
of the
business
property
of
a permanent
establishment
or
fixed
base
that
a U.S.
enterprise
or resident
maintains
in Slovakia
may

be taxed
in Slovakia.

The taxing
right
granted
to the situs
State
under
paragraphs

1 and
2 is
not an exclusive
right;
in
both
cases,
the
State of
residence
may also
tax.
As
noted above,
the
United States
does
not
impose
a
capital
tax.
The
Article
does
not preclude
Slovakia,
however,
from
imposing
its
capital
tax
with
regard
to real
or
immovable
property
owned
by
a Slovak
resident
and
located
in
the

United
States.

Paragraph
3 provides
that capital
represented
by 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
rule
is consistent
with the
rule of Article

8
(Shipping
and Air
Transport)
that
addresses
the income
from
international
transportation
activities.

Paragraph 4
provides that
all other
items of capital
of a
resident
of a Contracting
State
shall be taxable
only
in the
residence
State.

Article
24. RELIEF
FROM
DOUBLE
TAXATION

In this Article,
each Contracting
State undertakes
to relieve
double
taxation by granting a foreign
tax credit against its
income
tax for
the income tax
paid to the
other country.
Under paragraph
1, the credit granted
by the United States
is allowed in accordance
with the provisions
and subject to the limitations
of U.S. law, as

that law may be amended over
timc, so long as the general
principle
of this Article (the allowance of a credit) is retained. Thus,
although the Convention
provides for a foreign tax credit,
the
terms of the credit
are determined by the
provisions of the U.S.

statutory credit,
at the time the
credit
is given.

The U.S. foreign tax credit is generally limited under the
Code to the amount of U.S.
tax due with respect to
net foreign
source
income within the relevant
foreign tax credit limitation
category
(see Code section 904(a)).
Nothing in the Convention
prevents
the limitation
of the U.S. credit from
being applied on a

per-country
or overall basis
or some variation thereof.
In
general,
where source rules are
provided in the Convention
for
purposes of determining the taxing rights of the Contracting
States, these are consistent with the Code source rules for foreign
tax credit
and other purposes.
Where,
however, there
is an
inconsistency
between Convention and
Code source rules, the Code
source rules (e.g.,
Code section 904(g)) will be
used to determine
the limits
for the allowance
of a credit
under the
Convention.
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(Paragraph
3
of
the Article
provides
an exception
to this general

rule
with
respect
to certain
U.S.
source
income
of
U.S.
citizens

resident
in Slovakia.)

Paragraph
2 provides
that Slovakia
may
include
in the
income

tax
base of
its residents
items
of
income that,
under
the
Convention,
are also
taxable
by the
United States.
Slovakia
will

credit
the U.S. tax paid
on such income
to the extent
that such
tax
does not exceed
the amount
of Slovak tax
that is appropriate
to the
income.

Paragraph 3
provides a special
rule for
the tax treatment
of

U.S. citizens
resident in Slovakia.
Under this paragraph, income

that may
be taxed by
the United States
solely
by reason of
citizenship
in accordance
with
the "saving" clause
of paragraph
3
of Article
1 (General
Scope) shall
be treated
as having its
source
in Slovakia
to the extent necessary to
avoid double taxation. This
provision overrides U.S. law source
rules only in those cases where
U.S. law would operate to deny a foreign tax credit for taxes
imposed by Slovakia under the provisions of the Convention on U.S.

citizens resident in Slovakia. In no case, however, is this.
provision to reduce the taxes paid to the United States below the

amount that would be paid if the individual were not a citizen of

the United States,
i.e., the U.S. tax imposed
on a nonresident,
non-citizen
with respect to income
arising in the United
States.

As an example of the application of paragraph 3, consider a

U.S. citizen resident in Slovakia who receives $200 of portfolio
dividend income
from
United States sources
and is subject to U.S.
tax at 28 percent
($56) on that income.
Under the provisions of
Article 10 (Dividends), the United States tax on portfolio
dividends paid to residents of Slovakia who are not U.S. citizens
is limited to 15 percent ($30 in this case). Suppose Slovakia
taxes that income of its resident at 40 percent, or $80, and
grants, in accordance with the provisions of paragraph 2 of this
Article, a credit for the $30 of U.S. tax imposed on the basis of
source only. The net Slovak tax will be $50 and the total tax
$106. Thus,
the total tax is higher
than either of the two
countries'
taxes, indicating
some double taxation. The
United
States
agrees
to
resource enough
of that dividend
income
to avoid

double
taxation,
but in no case,
to reduce
the U.S. tax paid
below

the
$30 it is entitled
to tax at source.
In this example,
the U.S.
will
resource enough of the dividend
to permit a credit
of $26,
thus
reducing its net tax from
$56 to $30. The total tax
becomes

$80
($50
+ 30), the higher of the
two taxes, and double taxation
is
eliminated. (The
need for such a resourcing
provision arises
only

if the Slovak tax
exceeds the applicable
U.S. tax and
the Slovak

credit permitted under its
law and the treaty is limited
to
the
U.S. tax imposed
under the treaty on residents
of Slovakia who are

not U.S. citizens.)

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By reason of paragraph 4(a) of Article 1 (General Scope),
Article 24 is not subject
to the provisions of
the
"saving" clause
of paragraph
3 of Article
1. Thus,
the "saving"
clause cannot
be
used
to deny a Slovak resident
the benefit of the credits
provided
for
in paragraph 1 or to deny
a U.S. citizen or resident
the
benefit
of the credits provided
for in paragraphs 2
and 3.

Article
25. NON-DISCRIMINATION
This Article ensures that nationals, enterprises and residents
of a Contracting State will not be subject to discriminatory
taxation in the other
Contracting State. For
this purpose, non­
discrimination
means providing
national treatment.
Paragraph
1 provides
that a
national
of
one Contracting
State

may
not be subject to taxation
or any connected requirement
in the
other Contracting
State
that is different
from or
more burdensome

than the taxation and connected requirements imposed upon a
national of that other State in the same circumstances. A national
of a Contracting State is afforded protection under this paragraph-

even if the
national is not a resident
of either Contracting State.
Thus, a U.S. citizen who
is resident in a third
country is
entitled, under this paragraph, to the same treatment in Slovakia
as a Slovak national who is in similar circumstances. It is
understood,
however, that for U.S.
tax purposes, a U.S. citizen
who
is resident outside
the United States, whether
in Slovakia or a
third country, is not
in the same circumstances
as a national of
Slovakia
who is a resident outside the
United States, because the
U.S. citizen
is subject to U.S. tax
on his worldwide income while

the Slovak national is subject to U.S. tax only on his U.S. source

income.

Paragraph 2 defines
the term "nationals" to
mean all

individuals possessing the
nationality of a Contracting
State
and

all legal persons,
partnerships
and associations
deriving
their
status as such
from the laws in force in a
Contracting State. The
term includes
citizens
of a Contracting
State.

Paragraph
3
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
that is carrying
on the same activities.
This provision, however,
does not
oblige
a Contracting
State
to grant
to a resident
of
the

other Contracting
State any
tax allowances,
reliefs,
etc., that
it

grants
to its own
residents
on account
of
their civil
status
or
family
responsibilities.
Thus,
if an individual
resident
in
Slovakia
owns
a Slovak
enterprise
that
has
a permanent
establishment
in the
United
States,
in assessing
income
tax
on the

profits
attributable
to
the permanent
establishment,
the
United
States
is not
obligated
to allow
to the
Slovak
resident
the
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personal
allowances
for himself and
his family
that he would
be
permitted
to take if
the permanent
establishment
were a
sole
proprietorship
owned
and operated
by a U.S.
resident.
Section
1446
of the
Code
imposes
on any
partnership
with
income
effectively
connected
with
a U.S.
trade or
business
the
obligation
to withhold
tax on
amounts
allocable
to a
foreign
partner.
In the
context
of the Convention,
this obligation
applies
with
respect
to a Slovak
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,
however,
that
this distinction
is not a form
of discrimination
within
the meaning
of paragraph
2 of the Article.
No distinction
is made
between U.S.
and Slovak
partnerships.
The requirement
to withhold
on the
Slovak
but not
the U.S.
partner's
share
is not discriminatory
taxation,
but, like
other withholding on nonresident
aliens, 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.
If tax has
been over-withheld,
the partner
can, as.

in
other cases
of over-withholding,
file for a
refund.

Paragraph
4 of
the Article
specifies
that
no provision
of the

Article
will
prevent
either Contracting
State
from imposing
the
branch
tax described in paragraph
6 of Article 10 (Dividends).

Paragraph
5 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
6 of Article 11 (Interest)
or paragraph 5 of Article 12

(Royalties) apply, because all of these provisions permit the
denial of deductions in certain circumstances in respect to
excessive (not at arm's length) payments between related persons..
The
term "other disbursements"
is understood
to include a
reasonable
allocation of executive and
general administrative
expenses,
research and development expenses and other expenses
incurred
for the benefit of
a group of related persons
that
includes the person incurring the expense.

Paragraph 5 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. At present,
only
Slovakia imposes a capital
tax. However, this Article
also
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applies to taxes
imposed by political subdivisions
and local
authorities
of Slovakia
and to state
and local taxes
in the United

States.
(See discussion
of paragraph
7.)
Thus, if such
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.

Paragraph 6 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, and 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.
It is
understood
that the rules of Code
section 367(e) (2) regarding
liquidating
distributions of appreciated
property by a U.S.
subsidiary
to a foreign
parent corporation,
the provision
in Code

section 1446 for withholding
of tax on distributions
to non-U.S.

partners (discussed
above), and the rule of Code
section 1361 under
which
nonresident alien individuals
are ineligible to
become
shareholders
of subchapter S
corporations, do not violate
the.
provisions
of this
Article.

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 or local
authority
thereof.
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 Slovakia 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. The
competent authorities of

the two Contracting
States are identified in subparagraph 1(g) of

Article
3 (General
Definitions).

Paragraph
1 provides
that, where
a person
considers that
the

actions
of one
or both
Contracting
States
result or
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.
The case
must
be presented
within
three
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years from
the first notification
of the action resulting
in
taxation not in accordance with the Convention. 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.

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 satisfactory solution
unilaterally, it will seek agreement with the competent authority
of the other Contracting State to avoid taxation not in accordance
with the Convention. Any agreement reached under this provision 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, time or other
procedural limitations can be overridden only for the purpose of
making refunds and 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. It is intended
that the
competent authorities may
agree, for example,
to the same
attribution of
income, deductions, credits
or allowances between a
resident of one
Contracting State and its
permanent establishment

in the
other;
to the
allocation of
income, deductions,
credits
or

allowances
between
persons; or
to settle a variety of conflicting

applications
of the Convention,
including those regarding
the
characterization of
items of income or of persons,
the application
of source rules to particular items of income, differences in
meanings
of a term, and differences
in applying penalties,
fines
and
interest. Agreements rea-
ied by the competent authorities
under
this paragraph need not
conform to the internal
law
provisions of either Contracting State.

Paragraph
3 also authorizes the
competent authorities
to
address
double
taxation in cases
not provided for in the
Convention,
but with
respect to
taxes covered
by the Convention.
An example
might be double taxation arising
from a transfer pricing
adjustment
between
two permanent
establishments
of a third-country
resident,
one in
the United States
and the
other in Slovakia.
Since
no resident
of a Contracting
State is involved
in the
case,

the
Convention does
not, by its
terms, apply.
The competent
authorities
may, nevertheless,
use
the authority
of the Convention

to
seek to prevent
double taxation.

Paragraph
4 authorizes
the
competent
authorities
to
communicate
with each
other directly
for these
purposes. It
is not
necessary to communicate
through diplomatic
channels.
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The benefits
of this
Article are
also available
to residents

or citizens
of either
Contracting
State under
paragraph
4(a)
of
Article
1 (General
Scope).
Thus,
rules,
definitions,
procedures,

etc., that are
agreed upon
by the competent
authorities
under this

Article may be
applied by the United States
with respect to its
citizens
and residents,
even
if those
rules
etc. differ
from the
comparable Code
provisions. Similarly, U.S.
law may be overridden
to provide refunds of tax
to a U.S. citizen or resident
under this

Article.

Article
27. EXCHANGE OF
INFORMATION AND ADMINISTRATIVE

ASSISTANCE

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 Slovakia concerning the taxes covered by the Convention.
For 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 Slovakia
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
disclosure constraints 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
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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 national
taxes of every kind,
notwithstanding the provisions
of 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
to

the contrary.
This provision
also applies
to residents of either

Contracting State, provided that they are not citizens of that
State and,
in
the case of the United
States, are not "green card"

holders. (See subparagraph 4(b) of Article 1 (General Scope.)

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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.

Paragraph
2 provides
that the
Convention
will
enter into
force
on
the date
on which
instruments
of
ratification
are
exchanged.
Under
subparagraph
2(a),
the
Convention
will
have
effect
with
respect
to taxes
withheld at source
for amounts
paid or credited
on
or after
the
first
day of
the second
month
next
following
the
date
of
entry into
force.
For example,
if
the Convention
were
to enter
into
force on
December
10,
1993, the
withholding
rates
on
dividends,
interest
and
royalties
would be
reduced
(or eliminated)
for amounts
paid
on or after
February
1, 1994.
For
all other
taxes, the
Convention
will
have effect
for
any taxable
period
beginning on
or after January
1 of the year
in which the
Convention
enters
into force,
i.e., 1993
in the preceding
example.
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. The Convention
may be terminated at
any time
after five
years from the
date of its
entry into force,
provided that
written notice
has been
given through
diplomatic
channels
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 day of the January
next following the expiration
of the six-
month period. The
Convention will cease to apply
with respect to

other taxes
for taxable
periods beginning
on or after
the first day
of the January
next following
expiration
of 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.

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