Technical Explanation PDF

TREASURY DEPARTMENT
TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN
THE UNITED
STATES OF
AMERICA
AND
THE
REPUBLIC OF AUSTRIA

FOR
THE AVOIDANCE
OF
DOUBLE
TAXATION
AND THE PREVENTION

OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

SIGNED AT VIENNA ON MAY
31, 1996

INTRODUCTION

This document
is a technical
explanation
of the
Convention
between
the
Uni.ted
States
and
Austria
signed
at
Vienna
on May
31,
1996
("the Convention").
References
are made
to the Convention

between the United States of America and the Republic of Austria

for the Avoidance of Double Taxation with Respect to Taxes on

Income, signed on October 25, 1956 ("the 1956 Convention"). The

Convention replaces the 1956 Convention. Negotiations took into

account the U.S. Treasury Department's current tax treaty policy,

the Model Double Taxation Convention on Income and Capital,

published by
the organization for Economic
Cooperation
and

Development ("the OECD Model"), and recent United States and

Austrian treaties concluded.with third countries.

The
Technical Explanation
is an official guide
to the

Convention.
It reflects the policies behind particular

Convention
provisions, as well as
understandings reached with

respect
to the application and interpretation of the Convention.

References in the technical explanation to "he" or "his" should

be read to mean "he or she" or "his or her."

The Convention is supplemented by a detailed Memorandum of

Understanding. Although not part of the Convention, and not

subject to ratification,
as made clear in diplomatic
notes

exchanged at the time of signature of the Convention, the

Memorandum of Understanding presents agreed understandings as to.

the proper interpretation of certain provisions of the

Convention. The explanations of each article include

explanations
of any Memorandum of Understanding (MOU) provisions

relating
to that article.

The first section of the Memorandum of Understanding relates

to a general matter of treaty interpretation. It states the

agreement of the Contracting States that, with the exceptions

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specified
below, whenever
a provision
of the
Convention

corresponds
to a provision
of
the OECD
Model, the
interpretations
of that
provision
in the
OECD
Commentary
should
apply
to the
comparable
provision
in the
Convention.
The
applicability
of
the
Commentary
to
the convention
is
consistent
with
the Vienna

Convention
on
the Law of
Treaties of
May 23,
1969.

The
general rule
stated above
does not
apply if either

Contracting
State has
entered a
reservation
to
the
OECD Model

or an observation
to its Commentary
with
respect to the
provision
in question.
It also
does not
apply if the
Memorandum
of
Understanding
to the
Convention
contains
a contrary
interpretation. Similarly, if a published interpretation by
either
Contracting
State (such
as this Technical
Explanation),
that
has been provided
to the
competent authority
of the
other
Contracting
State
prior to its
publication,
contains a contrary
interpretation,
or
if at any time
after the
entry into force
of
the
Convention,
the competent
authorities
agree
to
a contrary
interpretation,
the above
rule does
not
apply.
This technical
explanation has been provided
to the competent
authority of
Austria. This
technical
explanation applies
notwithstanding
a
different interpretation
in the Commentary
on the OECD Model,
even where the interpretation in the OECD Model Commentary is
adopted after
the issuance of this technical
explanation. The
use of the OECD
Commentary as provided
in the Memorandum of
Understanding
can neither result in an amendment
to the treaty as
approved by the Senate and ratified, nor can it result in an
interpretation contrary to the position of the United States.
Such Commentaries can be helpful,.as are interpretations by the
competent authorities of both states, in providing explanations
and interpretations of issues which arise during the life of the
treaty.
Article 1. PERSONAL SCOPE

Article 1 provides that the Convention is applicable to

residents of the United States or Austria, except where the

Convention otherwise provides. Under Article 4 (Residence) 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 the person's domicile, citizenship, place of management
or other similar criteria, subject to certain limitations, as

described in Article 4. If, however, a person is, under those

criteria, a resident of both Contracting States, Article 4

assigns a single state of residence.

This definition governs for all provisions of the

Convention. Certain provisions are applicable to persons who may
not be residents of either Contracting State. For example,
Article 19 (Government Service) may apply to a citizen of a

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Contracting State
who is resident
in neither State.
Paragraph 1

of Article
23 (Nondiscrimination)
applies
to nationals
(including

citizens) of the Contracting States.
Under Article 25 (Exchange

of Information and Administrative Assistance), information
may be

exchanged
with respect
to residents
of third
states. Residents

of a Contracting
State are
not automatically
entitled
to benefits

under the
Convention;
they must
also satisfy one of the

requirements
of Article 16 (Limitation
on Benefits) establishing

the right
to
obtain
treaty benefits.

Paragraph
2 makes explicit, on a reciprocal basis, the

generally accepted
principle that no provision in the Convention

may restrict any exclusion, exemption, deduction,
credit or other

allowance now or hereafter accorded by the laws of the Contract­
ing States or by any other agreement between the Contracting

States. Thus, for example,
subparagraph 2(a) provides
that if a

deduction would be allowed under the U.S. Internal Revenue Code

(the "Code") in computing the taxable income of a resident of

Austria, the deduction will remain available to that person in

computing taxable income under the treaty. In no event may the

treaty increase the tax burden on residents of the Contracting

States. Thus, a right to tax given by the treaty cannot be

exercised by the United States unless that right also exists

under the Code.

A taxpayer may always rely on the Code treatment. This does
not mean,
however, that a taxpayer may
pick and choose among Code
and treaty provisions in an inconsistent manner in order to
minimize tax. For example, assume a resident of Austria has
three separate businesses in the United States. One is a profit­
able
permanent establishment.
The
other twb are trades
or
businesses, which would earn taxable income under the Code, but
whidh
do not meet the permanent
establishment threshold
tests of
the Convention, one of which is profitable and the other which
incurs a loss. Under
the Convention, the income
of the permanent
establishment is taxable,
and both the profit
and loss of the
other two businesses
are ignored. Under the
Code, all three
would be taxable.
The loss would offset the
profits of the two
profitable ventures.
The taxpayer may not invoke
the
Convention
to exclude the profits
of the profitable trade
or business and
invoke
the Code to claim the
loss of the unprofitable trade
or
business against the profit of the permanent establishment. (See
Rev.
Rul. 84-17 1984-1 C.B.
308) However, if the taxpayer
invokes the Code for
the taxation of all three
ventures, he would
not be precluded from
invoking the Convention
with
respect, for
example,
to any dividend income
that is not effectively connected
with any
of his business
activities
in the
United States.
Subject to the
provisions of paragraph
3, subparagraph 2(b)

establishes that nothing in the Convention can be used to deny

any benefit granted by any other agreement between the United

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States
and Austria, regardless
of any provisions to the contrary,
or
silence, in this
convention.

Paragraph
3 modifies
the rule
of subparagraph
2(b)
with
respect to certain
obligations
undertaken by
the Contracting
States under other
agreements. Subparagraph 3(a) provides that,
notwithstanding any other
agreement to which the Contracting
States may
be parties, a dispute
concerning whether
a measure
falls within
the scope of this Convention
shall be considered
only by the competent
authorities of the
Contracting States as
defined under
subparagraph 1(e) of Article
3 (General Defini­
tions), and the procedures
under this Convention exclusively
shall
apply to the dispute.
Thus,
dispute resolution
procedures-
provided in trade, investment, or other agreements between the
Contracting
States
(including multilateral agreements to
which
both
Contracting States are
parties) shall not apply
for the

purpose of determining
the scope of this Convention.

Subparagraph 3(b) further provides that, unless the compe­
tent authorities agree that a taxation measure is not within the
scope of this Convention, the nondiscrimination obligations of
this Convention exclusively shall apply with respect to that
measure, except for such
national treatment or
most-favored

nation
("MFN") obligations as may apply to trade in.goods under
the General Agreement on
Tariffs and Trade ("GATT").
No national
treatment
or MFN obligation under any
other agreement shall apply
with respect
to
that measure. Thus,
any national treatment and
MFN obligations
undertaken by the
Contracting States under
agreements
other than the Convention,
shall not apply to a taxa­
tion measure,
with the exception of
GATT as applicable to trade
in goods.

*For
purposes
of
paragraph
3,
subparagraph
3(c)
defines
a
"measure" as a law, regulation,
rule, procedure,
decision,
administrative action,
or any other form
of measure.

Paragraph 4 contains the traditional saving clause while
paragraph 5 provides exceptions
to the saving clause.
Under
paragraph 4, each Contracting State reserves its right, except as
provided in paragraph 5,
to tax its residents (as
determined
under Article 4) and citizens
as if the Convention
had not come
into
effect and notwithstanding
any Convention
provisions
to the

contrary.
If, for
example, an
Austrian resident
performs
inde­
pendent 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 Austrian
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 the normal Code rules. (For special

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foreign
tax credit rules applicable
to the U.S. taxation
of
certain U.S. income of its citizens resident in Austria see
paragraph 2 of Article 22 (Relief from Double Taxation)).
"Residence" for the purpose
of the saving clause is deter­
mined under Article 4. Thus, for example, if an individual who
is not a U.S.
citizen is a resident of
the United States under

the Code and
is also a resident
of Austria
under Austrian
law,
and that individual has
a permanent home available
to him in
Austria and not in the United States, he would be treated as a

resident of Austria under
Article 4 and for purposes
of the
saving clause. The United
States would not. be permitted
to apply
its statutory
rules to that
person if they
are inconsistent
with
the treaty.

Under
paragraph
4 the Contracting
States
also reserve
their
right
to tax former
citizens whose
loss of citizenship
had
as one
of its principal
purposes
the avoidance
of tax, but
only for a

period of
10 years
after
the loss
of citizenship.
Such former
citizen of the
United
States
is taxable
in accordance
with
the

provisions of section 877 of the Code.

Paragraph
5 sets
forth exceptions
to the
saving clause
in

cases
where its application
would
contravene
policies reflected

in the Convention that are intended to benefit a Contracting

State's citizens and
residents. Subparagraph
a) lists certain
provisions
that
will apply to
all of the
citizens and
residents
of
a Contracting
State despite
the general
saving
clause
rule
of paragraph
4: (1)
Paragraph
2
of Article
9
(Associated

Enterprises)
grants
the right to
a correlative
adjustment,
and,
in particular,
permits
the
override
of the statute
of
limitations

for the purpose
of refunding
tax under
such
a correlative

adjustment.
(2)
Paragraph
4 of Article
13 (Capital
Gains)
seeks

to blend
the laws
of the two
Contracting
States
with
respect
to
the taxation
of gains
from the alienation
of assets
removed
from
a permanent
establishment
or fixed
base.
In doing
soit
modifies,
to some extent,
the tax
that the residence
country
may
impose
on such gains.
(3) Paragraphs
1(b) and
3 of Article
18
(Pensions)
deal with
social security
benefits and
alimony. Their.
inclusion
in the exceptions
to the
saving clause
means that
such

payments
will be
exempt from
tax in
the
country
of residence
of
the
recipient,
notwithstanding
a statutory
right of the
residence

country
to tax
the recipient
on the income.
(4) Article
22

(Relief
from Double
Taxation)
confers the
benefits of U.S.
double
taxation
relief
on U.S. citizens
and residents,
and
Austrian

benefits
on its
residents.
To
apply the
saving
clause to
this
Article
would
render
the Article
meaningless.
(5) Article
23
(Nondiscrimination)
prohibits discriminatory
taxation
by
one
Contracting
State of
the nationals
and residents
of the other
Contracting State.
These
prohibitions are
intended to
apply even
if the
national or resident
of the
other State is
also a national

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or resident of the
taxing State. (6) Article
24 (Mutual
Agreement Procedure)
may
confer U.S. benefits
on U.S. citizens

and residents and
Austrian benefits on its
residents. The
statute
of limitations
may be
waived
for refunds
and
the

competent
authorities are permitted
to use a definition of
a term
that
differs
from the statutory
definition
in one
or both
countries.
As
with the foreign
tax credit,
these benefits
are
intended to
be granted by a
Contracting State
to its citizens
and
residents.
Subparagraph
5(b) provides
a different
set of exceptions
to
the saving
clause. As
applied to the
United States,
these
exceptions are
available only
to individuals
who are
neither U.S.

citizens nor
lawful permanent residents
(i.e., "green card"
holders) but who remain in
the Unites States long enough to
become residents under the Code. As applied to Austria, these
exceptions are available to individuals who are not citizens of
Austria.
The benefits preserved by
this paragraph are the host
country
exemptions for the following
items of income: Government
service
salaries and pensions under
Article 19 (Government
Service);
certain income of visiting
students and trainees under
Article 20 (Students and Trainees); and the income of diplomatic
and
consular officers under Article
26 (Diplomatic Agents
and

Consular Officers).

Article 2. TAXES COVERED

This
Article identifies the U.S. and Austrian taxes to which

the Convention applies.
Paragraph 1 makes the general
statement
that the Convention applies
to taxes on income imposed
on behalf

of a Contracting State.
Thus, except, as noted
below, the
Convention does not apply to state and local taxes or to capital

taxes.

Paragraph 2 identifies the existing covered taxes. Subpara­
graph (a) identifies the
U.S. taxes covered as the Federal
income

taxes imposed
by the Code. The Convention
does not apply
to
social security
taxes (Code sections
1401, 3101 and 3111). U.S.
and Austrian social
security taxes are dealt with
in the bilater­
al Social Security Totalization Agreement, which entered into

force on November 1, 1991.

Subparagraph
2(b)
identifies
the Austrian
taxes covered
as
the Einkommensteuer
(income
tax), and
the Koerperschaftsteuer
(corporation
tax). The 1956
Convention
also covers
these taxes.
Paragraph 3 states that the Convention will apply to any

taxes that are
identical,
or substantially
similar,
to those
enumerated in
paragraph 2, and which are
imposed in addition to,

or
in place of, the existing taxes after the date of signature of

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the
Convention.
The paragraph
also
provides
that
the U.S.
and
Austrian competent
authorities
shall notify
each other
of any

changes
in their
taxation
laws
that are
significant
to
the

operation
of the Convention.
They are
also to notify
each other
of any
official
published
materials
concerning
the
application

of the
Convention.
Such materials
include
explanations,
regulations,
rulings
or
judicial
decisions.

.Paragraph
4 expands the
type of taxes
covered for
certain
specific purposes.
With respect to Article
23 (Non-Discrimi­
nation),
the Convention applies
in both Contracting States
to all
taxes
imposed
by a Contracting
State or
a political
subdivision
or
local authority thereof. Thus,
although state and local
taxes
in
the United States
are not,
for any other
purpose, covered
by

the Convention, they must be imposed in a non-discriminatory
manner, consistent with the rules of Article 23. The 1956
Convention applies the
same scope of taxes
covered for

nondiscrimination purposes. Paragraph 4 also provides that for
purposes of applying paragraphs 1 through 5 of Article 25
(Exchange
of Information and
Administrative Assistance),
the

Convention applies to all taxes imposed by the Contracting

States.
Thus, for example,
the United States can
request
information
from Austria for the
purpose of enforcing the
Federal

estate tax
or Federal excise taxes.
Information cannot
be
requested, however, for state and local tax purposes.
Article 3.
GENERAL DEPFINITIONS
Article 3 defines terms used in the Convention. Paragraph 1
defines a
number of basic
terms used
in the Convention.
Para­
graph 2
addresses terms that are not
defined in the Convention.

Other articles define certain other terms. 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, 11, and
12, respectively,
which deal with the taxation
of those items of

income.

Subparagraph
1(a) defines the term "person"
to include an
individual,
an estate, a
trust, a company
and any other
body or
persons.
Subparagraph
1(b)
defines
the term "company"
as a
body
corporate or an entity treated as a body corporate for tax
purposes.
Subparagraph
1(c) defines
the terms
"enterprise
of a
Contracting
State"
and "enterprise
of the
other Contracting
State"
as an enterprise
carried
on by a resident
of a Contracting
State and an enterprise
carried on by a resident
of the other

Contracting State, respectively.
Since the terms
"body corpo-
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rate" and "enterprise,
are not defined
in the Convention,
in
accordance
with paragraph
2 of this
Article,
they have
the
meaning that
they have under
the laws
of the Contracting
State
whose tax
is being
applied..

Subparagraph
1(d) defines
the
term
"international
traffic"
as any
transport
by a ship
or aircraft,
except
when such
trans­
port
is solely
between places
in the
other Contracting
State.

The meaning
of the term "other
Contracting
State" becomes
clear
in the context
of Article
8
(Shipping
and Air Transport),
which
refers
to the profits
of an
enterprise
of a Contracting
State

related
to activities
carried
on in
international
traffic.
The
reference
to the
"other Contracting
State,"
therefore,
refers
to
the State
other than
the one in which
the enterprise
is resident.

The exclusion
from international
traffic
of transport
solely

between
places
within
the other
Contracting
State
means,
for

example,
that a
carriage of
goods or passengers
solely
between
New York and Chicago
by an Austrian carrier (if
that were possi­
ble under U.S. law) would not be treated as international
traffic. The substantive
taxing rules of the Convention
relating
to the
taxation of income
from transport,
principally
Article
8,

therefore,
would
not apply to
income from
such carriage,
and the

United
States would not be required
to exempt the income
under
Article
8. 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 then only on a net basis. If,
however, goods or passengers are carried by an Austrian carrier
from Vienna to New York, with some of the. goods or passengers
carried only to New York, and the rest taken to Chicago, the

entire transport
would be international
traffic.

Subparagraphs
1(e)
(i) and
1(e)
(ii) define
the term
"compe­
tent authority" for the United States and Austria, respectively.
The U.S.
competent authority is the
Secretary of the Treasury
or
his delegate.
The Secretary of the
Treasury has delegated the
competent authority function to the Commissioner of Internal
Revenue, who has, in turn, re-delegated the authority to the

Assistant Commissioner (International). With respect to
interpretative issues, the Assistant Commissioner acts with the
concurrence of the Associate Chief Counsel (International) of the
Internal Revenue Service. In Austria the competent authority is
the Minister of Finance or his delegate. The routine relief from
source
taxation on dividends
in Austria is carried out
by the
Regional Directorate
for
Vienna.
The terms "United States" and "Austria" are defined in sub-
paragraphs 1(f) and 1(g),
respectively. The term "United
States"
is defined to mean the United
States of America. The
term does
not include Puerto Rico, the Virgin Islands, Guam or any other
U.S.
possession or
territory. When
used geographically,
the
term
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includes
the
states
of
the
United
States
and the
District
of
Columbia.
The
Convention
also explicitly
includes
the U.S.
continental
shelf
within
the definition
of the
United
States
to

the extent
that;
under international
law,
the United
States
has

sovereign
right
to
explore
for
and
exploit
the
natural
resources

of the
continental
shelf
and the
waters
above
it.
The
term

"Austria"
is defined
to
mean
the
Republic
of Austria.

Subparagraph
1(h)
defines the
term "nationals"
of
a

Contracting
State.
A
national
is an individual
possessing
the

nationality
of
a Contracting
State
(i..,
a
citizen),
and
any

legal
person, partnership
or association
deriving
its
status, as

such,
from the laws
in force
in a Contracting
State.

Paragraph
2 provides
that, in
applying
the Convention,
any

term used
but not defined
in the
Convention, unless
the context

otherwise
requires,
will have
the meaning
it has under
the laws

of
the Contracting State concerning
the taxes to which
the

convention applies.
Under the U.S. and Austrian
interpretation

of
this provision,
any meaning
under the
applicable tax
laws of

that State prevails
over a meaning given to the
term under other

laws
of that State.
If, however,
the
meaning
of a term
cannot be

readily determined
under
the laws of
a Contracting
State, or if

there is a
conflict in
meaning under
the laws of
the two States

that creates
problems in
the application
of the Convention,
the

competent
authorities may, pursuant
to the provisions
of

paragraph
3(e) of Article 24 (Mutual
Agreement Procedure),
establish a common meaning
in order to prevent
double taxation
or

to further
any other purpose of the
Convention. This common

meaning
need not conform to the meaning
of the term under the

laws
of either
Contracting
State.

It is understood that, when reference is made in paragraph 2

in the
internal
law of a Contracting
State
for purposes
of

defining
a term,
it means the
law
as in effect
at the time
the

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

treaty was signed. This use of "ambulatory definitions" is

generally
accepted within the OECD.
The use of an ambulatory

definition,
however, may lead to results
that
are at variance

with
the intentions of the negotiators and of the Contracting

States when
ratifying the treaty.
The reference in paragraph
2

to "unless the context otherwise requires" a definition different
from the internal law definition
of the Contracting
State whose

tax is being imposed refers to a circumstance where the result

intended by the
negotiators or by the
Contracting States is

different
from the result that
would
obtain under the statutory

definition.

The
first section of the
Memorandum of Understanding,

described in
the introductory section
of this Technical

Explanation,
is relevant
for the
application of
paragraph
2 of

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this article. It provides that, with certain
exceptions,
interpretations
found
in the
Commentary
to
the
OECD Model
will be
relevant
for
understanding
the meaning
of
terms
in this
Convention,
when
those
terms
are
also used
in
the
OECD
Model.
Article
4.
RESIDENT
Article
4 sets
forth rules
for determining
whether
a
person is
a resident of a Contracting
State for purposes of the
Convention.
The treaty definition
of residence is to be used
only for
purposes of the Convention.
The 1956 Convention does
not
contain a comprehensive
definition
of residence.
Determination
of residence
is important
because,
as noted in
the explanation
to Article 1 (General Scope),
as a general matter
only residents of the Contracting States may claim the benefits
of the
Convention. Any entitlement to benefits of a resident
of
a Contracting State is, however, subject to the requirements of
Article 16 (Limitation on Benefits).
The determination
of residence for treaty
purposes looks to a
person's liability to tax under the laws of the Contracting
States. A person who, under those laws, is a resident of one
Contracting State and not of the other need look no further.
Except
as specifically provided in the
Article (e.g., subpara­
graph 1(c)) for purposes of the Convention
that person will be
treated as a resident
of the State in which he
is resident under
internal law. If, however, a person is resident in both
Contracting States under their respective taxation laws, the
tie-breaker rules attempt to assign one State of residence to
such
a person.
Paragraph
1
defines
a
"resident
of
a Contracting
State."
In general, this definition incorporates the definitions of resi­
dence in U.S. and Austrian
law, by defining a resident
as a
person who, under the laws of a Contracting State, is subject to
tax there by reason of
his domicile, residence,
citizenship,
place
of management, place of incorporation, or any other similar
criterion. Thus, as a general
matter, residents
of the United
States include U.S. citizens as well as aliens who are considered
U.S. residents
under
U.S.
law.

Paragraph 1 provides
certain exceptions to this
general

rule. Under subparagraph 1(a), if a person is liable to tax only
in respect of income from sources within a State, the person will

not be treated
as a resident of
that Contracting State for

purposes
of the Convention. Thus,
for example, an Austrian
consular official
in the United States, who
may be subject to

U.S. tax on U.S. source investment income, but who is not taxable

in the United States on non-U.S. income, would not be considered
a resident of the United States for purposes of the Convention

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-11 ­
(See
Code section
7701(b)(5)(B)).
Similarly,
an
Austrian
enter­
prise with
a permanent establishment
in
the United States
is not,
by virtue
of
that permanent
establishment,
a resident
of
the
United
States. The enterprise
is subject to
U.S. tax only with
respect
to its
income that
is attributable
to the
U.S. permanent
establishment,
not
with respect
to its worldwide
income.
Subparagraph
1(b) provides that
the income of a partnership,
estate
or trust will
be treated as
the
income of
a resident
of a
Contracting
State
only to the
extent that
the income derived
or
paid by such
person is subject
to tax
in that State
as the income
of a resident,
either in the hands
of the person deriving the
income or in the hands of its partners, beneficiaries
or grantor.
The Memorandum
of
Understanding
describes the
treatment of
pass-
through entities, such
as limited liability companies,
not
explicitly referred to in the Article.
Under U.S. law, any organization classified as a partnership
for tax
purposes is taxable on a transparent
basis. (Certain
publicly-traded
partnerships, however,
will be classified for tax
purposes as corporations taxable at the entity level.) Thus,
under paragraph 1(b) of Article 4, Austrian source income
received by an entity classified as a partnership for U.S. tax
purposes will generally be treated as income of a U.S. resident
to the extent
the
income is included
in the distributive share
of
partners or members that are themselves U.S. residents (looking
through any partnerships that are themselves partners or members
and applying the provisions of Article 16 (Limitation on
Benefits).
Certain limited liability companies are classified as

partnerships for U.S. tax purposes. Under the Memorandum of
Understanding, the residence
of entities treated
as pass-throughs

for tax purposes is determined on the same basis as for a

partnership. Similarly, the treatment under the Convention of
income received by a 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 circumstances.

Subparagraph 1(c) specifies additional conditions for

determining whether
a U.S. citizen or an alien
lawfully admitted

for permanent residence in the United States (i.., a "green
card" holder) will be treated as a U.S. resident for purposes of
the
Convention. If such an individual
is not also a resident
of
Austria under
paragraph 1, he will be treated
as a resident of
the United States
only if he has a substantial
presence, perma­
nent home or habitual abode in the United States. Substantial
presence for this
purpose is a similar
concept to "substantial
presence" under section 7701(b) of the U.S. Internal Revenue code
and the regulations thereunder (a minimum physical presence of
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-12­
more than 30 days in the calendar year for which the
determination
is relevant and a total of
at least 183 days in the
current
and previous
two
calendar
years). Thus,
for example,
an

individual
resident
of Mexico who
is a U.S. citizen
by birth, or

who
is a Mexican citizen and holds
a U.S. green card, but
who, in

either case, does not live in the United States, would not be

entitled to benefits under the treaty. On the other hand, a U.S.
citizen
who is transferred
to Mexico for two years
but who
maintains a permanent home or habitual abode in the United States

would be entitled to
treaty benefits. However,
the residence of
a U.S. citizen
or green card
holder who is also
a resident of

Austria under Austrian
law will be determined
by application of

the tie-breaker rules of paragraph 2.

Subparagraph
1(d) clarifies that
a Contracting State, and

its political
subdivisions
or local
authorities,
or agencies or

instrumentalities
of such
governments,
subdivisions,
etc.,
will
be
treated
as
residents
of
that State.
Thus, such
governmental
entities
are entitled
to treaty
benefits
as residents
of a
Contracting
State.

Although
the
Article does
not deal
explicitly
with
the

residence
of a
tax-exempt organization,
including
pension
funds,
it is understood that
such an organization that
is established

under
the laws
of
a Contracting
State,
and is, therefore,
a

resident
of that State
under its
law, is to
be treated as
a
resident
of that
State
for
purposes
of the
Convention
as well.

The
United
States
and
Austrian
negotiators
agreed
that
such
an
organization
is "liable
to
the tax
laws" of
its State
of resi­
dence,
under
which
it pays
zero
tax
if
it complies
with
certain

standards,
and
that
if it does
not
comply
with
these standards
it

will pay
tax
on its
income.
Thus,
the United
States
and Austria

agree
that the
fact that
a charitable
organization
or pension

fund
is
exempt
from tax
in
its resident
country
is not
to
be

construed
to deny
such
organization
or fund
resident
status
under

the
Convention.
Paragraph
1(g)
of
Article
16 also
affects
the
treatment
of such
entities
for purposes
of the Convention.
Paragraph
2 provides
a series
of
tie-breaker
rules
to
determine
a single
State
of
residence
for
an individual
who,
under
paragraph
1, would
be
a resident
of
both countries.
The
first
test
is
where
the
individual
has a
permanent
home.
If that
test
is
inconclusive
because
the
individual
has
a permanent
home
available
in
both
States
or in
neither
State,
his residence
is
in
the Contracting
State
where
his
personal
and economic
relations
are closest,
i.e., his
"center
of
vital
interests".
The
Memoran­
dum of
Understanding
clarifies
that
a period
of
time
beyond
a
year may
have
to be
examined
to
identify
the
center
of vital
interests.

If the center
of
vital interests
test is
also inconclusive,

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residence is in the
Contracting
State where
the individual main­
tains 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 nationality. If he is a national of
both States
or of neither of them,
the competent authorities

shall
endeavor to
assign a
single
State of
residence by
mutual

agreement.
Paragraph
3 resolves dual-residence
issues
for corporations.
Under
U.S.
law, a
corporation
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.
Under
Austrian
law a
corporation
is treated
as a resident
of Austria
if it is
regis­
tered
or managed
and
controlled
there.
Dual
residence,
there­
fore,
can
arise
if
a corporation
organized
in
the
U.S.
is managed

and
controlled
in Austria.
Under paragraph
3,
a
dual-resident
corporation
will
be treated
as a resident
of a Contracting
State

if it
is
created
under
the laws
of
that State,
or political

subdivision
thereof.
This
provision
conforms
to U.S.
law.

Paragraph
4 deals
with
persons
other
than
individuals
or

companies
that
are resident
in both
the
United
States
and Austria

under
paragraph
1. The
competent
authorities
are
instructed
to
determine
by
mutual agreement
a single
State of
residence
for

that
person
for
purposes
of the
Convention
and to
determine
the

mode
of
application
of the
Convention
to
such
person.

Article
S.
PERMANENT
ESTABLISHMENT
This
Article
defines
the term
"permanent
establishment,"
which
is
significant
for
several
articles
of
the Convention.
The
existence
of a permanent
establishment
in a
Contracting
State
is
necessary
under Article
7 (Business
Profits)
for taxation
by that
State of
the business
profits
of a
resident
of the
other Con­
tracting
State.
Since the
term
"fixed base"
in
Article
14
(Independent
Personal
Services)
is
understood
by
reference
to
the
definition
of "permanent
establishment,"
this
Article
is also
relevant
for purposes
of
Article 14.
Articles
10,
11, and
12
(dealing
with
dividends,
interest,
and
royalties,
respectively)

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

items
of
income
to a resident
of the
other
State
only
when the

income
is
not attributable
to
a permanent
establishment
or fixed
base
that the
recipient
has in
the source
State.
The concept
is
also
relevant
in determining
which
Contracting
State
may
tax
certain
gains
under
Article 13
(Capital
Gains)
and certain
"other
income"
under
Article
21
(Other
Income).

This
Article
follows
closely
recent
U.S.
treaties
and the
OECD
Model
provisions.
It
is similar
to
the
definition
of a
permanent
establishment
in the 1956
Convention except
that the
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-14­
exceptions
from the definition
of
"permanent establishment"
have
been broadened
to include not only certain
specified activities
but also any other activity
of a preparatory or auxiliary

character. Like other recent U.S. income tax conventions, it
adds a rule that
treats
drilling rigs or
ships in the same manner

as
construction
sites.

Paragraph 1 provides
the basic definition
of the term

"permanent establishment." The
term means a fixed place of
business through which the business of
an
enterprise is wholly or

partly carried on.

Paragraph
2 lists examples of fixed places of business
that

constitute
a permanent establishment.
The list is illustrative
and non-exclusive
and includes a place
of management, a branch,
an office, a factory, a workshop, and
a mine, an oil or gas well,

a quarry, or any other place of extraction of natural resources.

Paragraph
3 provides rules to determine
when a building site

a construction, assembly
or installation project,
or an installa­
tion
or drilling rig or ship used to explore or develop natural

resources
constitutes a permanent
establishment. The
site,

project,
etc., constitutes a
permanent establishment only
if it

lasts for
more than
12 months. The
twelve-month
test applies

separately to
each individual site or
project and the period

begins
when work (including
preparatory
work carried
on by
the

enterprise) physically
begins
in a Contracting
State. A series

of contracts
or projects
that
are interdependent,
both
commer­
cially
and geographically,
are to,
be treated as
a single project

for purposes
of applying
the
twelve-month
threshold
test. For

example, the
construction
of a housing
development
would be

considered as a single project
even if each house is
constructed

for a different
purchaser.
If the twelve-month
threshold
is

exceeded,
the site
or project constitutes
a
permanent establish­
ment from its
first day.
This interpretation
is based
on the

Commentaries
to paragraph
3 of Article
5 (Permanent
Establish­
ment) of the
OECD Model, which
contains
language almost
identical

to that
in this Convention
with
respect to construction
activi­
ties, and, therefore,
conforms
to the generally
accepted
interna­
tional interpretation
of the
language
in paragraph
3 of
Article
5

of the Convention
with respect to such activities.
Paragraph 3

applies
the
same
twelve-month
threshold
test
to
drilling
rigs,

both onshore
and
offshore.
Rigs must,
therefore,
be present
in
a

Contracting
State
for
twelve months
to constitute
a permanent

establishment.

Paragraph
4
contains
exceptions
to
the general
rule
of

paragraph
1 that a
fixed
place
of business
through
which
a

business
is carried
on constitutes
a permanent
establishment.

The paragraph
lists a
number of activities
that
may be carried
on

through a fixed place of business, but that, nevertheless, will

AUSTRIA
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-15­
not give
rise to a permanent
establishment.
The use of facili­
ties solely
to store,
display or deliver
merchandise
belonging
to

an enterprise will
not constitute a
permanent establishment
of
that
enterprise. The maintenance
of a stock of goods belonging
to
an enterprise solely for the
purpose of storage, display
or
delivery,
or solely
for the purpose
of processing
by
another
enterprise
will not give rise to a permanent
establishment of the
first-mentioned
enterprise.
The
maintenance of
a fixed place of
business solely for activities that have a preparatory or auxil­
iary character for the enterprise, such as advertising or the

supply of information (but not including the carrying on of
scientific research), will not constitute a permanent establish­
ment
of the enterprise. It is
understood that a combination
of *
these activities 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 acting
on behalf of an enterprise
will be deemed
to be a permanent establishment
of the enterprise,
if the agent
has and habitually exercises an authority to conclude contracts
in the name
of that enterprise. The
contracts referred to are
those relating to
the essential business operations
of the
enterprise; not those
relating to ancillary
activities. If,
however, the agent's
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 will not be
a permanent establish­
ment of the enterprise.
Paragraph 6
provides that
an enterprise
will not
be deemed
to have a permanent
establishment
in
a
Contracting State
merely
because it carries
on business in that State
through an indepen­
dent agent,
including a broker
or general
commission
agent, if
the agent is
acting in
the ordinary
course of his
business.
Paragraph 7 clarifies that
a company that is a resident
of a
Contracting
State
will not
be deemed
to
have
a permanent

establishment in the other
Contracting State merely
because it

controls, or is controlled
by, a company that is a
resident of
that other Contracting State,
or that carries on business
in that
other
Contracting
State. The determination
of whether or
not a
permanent
establishment exists will
be made solely on the basis
of the factors
described in paragraphs
1 through 6 of the Article
and not
on the ownership or control
relationship between the
companies.

Article
6.
INCOME
FROM REAL
PROPERTY

Paragraph
1 provides that income
of a resident of a Con­
tracting State derived from
real property situated
in the other
Contracting State may be
taxed in the Contracting State
in which

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(1998)

-16­
the property is situated. Like the OECD Model,
the paragraph
specifies
that
income
from
real
property
includes
income
from
agriculture
or
forestry.
This
Article
does
not grant
an exclu­
sive taxing
right to the
situs State, but
assigns it the primary
taxing
right.
The
Article
does
not
impose
any
limitation
in

terms
of rate
or form
of tax
on the
situs
State, although,
as

discussed
below
in
connection
with
paragraph
5, it
does
allow
the

taxpayer
the right
to elect
to
be taxed
on
a net
basis.

Paragraph
2 defines
the
term "real
property"
as
having the
meaning
that it
has under
the laws
of
the
situs country.
In
addition,
the paragraph
specifies certain classes
of property
which,
regardless
of internal
law definitions,
are
to be
included
within
the
meaning
of the
term
for purposes
of the
Convention.
The
definition conforms
to that in the OECD
Model.
Paragraph
3 elaborates
on the
general
rule of paragraph
1 by

specifying
that
the income
referred to
in paragraph
1 means

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

to,
income from direct use by
the owner and rental income
from

the
letting or sub-letting
of real property.

The Memorandum
of
Understanding
further
elaborates
on

paragraph 3.
It clarifies
that Article
6 applies
not only to

income earned
through
the
use of real
property owned
by the

income recipient,
but also
to income
from the exploitation
of

rights in real
property.
For example,
consider a piece
of real

property in Austria
owned by a resident
of Germany and leased by

the
German owner to a U.S. corporation,
which then sub-leases
the

property.
It is understood
that the rules of Article
6 will

apply
to the income earned by
the U.S. corporation from
its sub­
lease of the property,
even though the U.S. corporation
does not

own the Austrian real
property, and the property
that it does own

(i
e., the rights in the property)
is technically movable

property.

Paragraph 4 specifies that the basic rule of paragraph 1 (as

elaborated
in paragraph 3) applies
to.income from real property

of
an enterprise and to income
from real property used
for the

performance
of independent personal
services. This provision

clarifies that the
situs State may tax the real
property income

of a resident of the other Contracting State in the absence of a

permanent establishment or fixed base in the situs State, not­
withstanding the requirements of Articles 7 (Business Profits)

and 14 (Independent
Personal Services) that to
be taxable, income

must be attributable
to a permanent establishment
or fixed base,

respectively.

Paragraph 5 permits
a taxpayer to elect to
be taxed on real

property
income on a net basis,
that is, as if such income
were

attributable
to a permanent establishment.
The election is

AUSTRIA 336
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-17­
binding for the
taxable year of the
election and all subsequent

taxable
years
unless the
competent authorities,
upon
request of

the taxpayer,
agree to terminate
the election.
In the United

States, revocation
will be granted in accordance
with the provi­
sions
of
the relevant
regulations
under
section
897.

Article
7. BUSINESS
PROFITS

This Article
provides
rules for taxation
by a Contracting
State of the
business profits of an enterprise of the other

Contracting State.
It updates the corresponding
Article in the
1956
Convention to
conform more
closely to current
U.S. treaty

policy
and
to the OECD Model.

The general rule, found in paragraph 1, is that business
'profits of an enterprise of
one Contracting State may be taxed by
the other Contracting State only if the enterprise carries 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 only so much of

the income of the enterprise that is attributable to the perma­
nent establishment. This rule differs from the comparable rule
in the 1956 Convention, which contained a limited force of

attraction rule that
permitted the State in which
the permanent
establishment
is
located to tax
income of
the enterprise
even if

not attributable to
the permanent establishment,
but only to the
extent that the income is derived from sources
in that State.

Paragraph 2 provides rules for attributing business profits
to a permanent establishment.
The
Contracting
States will
attribute
to a permanent
establishment
the profits
that it would
have
been
expected to
earn had
it been
a
distinct
and independent
entity
engaged in the
same
or similar activities
under the same
or similar circumstances.
The computation
of the business
profits attributable
to a permanent establishment
under this

paragraph
is subject to the
rules of paragraph 3 regarding

deductions
for
expenses incurred
for the purposes
of earning
the

income.

The profits attributable
to a permanent
establishment may be

from sources within or without
a Contracting State.
Thus, for

example, items of foreign
source income described
in section
864(c)
(4) (B) of the
Code may be
attributed
to a U.S. permanent
establishment
of an Austrian
enterprise
and subject
to tax
in the

United
States. The
concept of
"attributable
to" in the Conven­
tion
is analogous
to but narrower
than the concept
of "effective­
ly connected
with" in
section 864(c)
of the Code.
Thus, the
limited "force
of attraction"
rule of Code
section 864(c)
(3) is
not applicable under the Convention.

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-18­
Paragraph
3 provides
that in determining
the business
profits
of a permanent
establishment,
deductions
shall be
allowed

for a reasonable
allocation of expenses incurred
for the purposes

of
the permanent
establishment,
regardless
of where the
expenses
are incurred.
This rule
ensures that
business profits
will be
taxed
on a net
basis. Among
the expenses
that may be
incurred
for the purposes of the permanent establishment are expenses for
research
and development,
interest and other
similar expenses,
as
well as executive
and
general administrative
expenses.
The
paragraph specifies
that the allocation
of the enumerated expens­
es made in determining the profits attributable to the permanent
establishment
must be "reasonable."
This language allows the
United
States to apply the types of expense
allocations found in
U.S. law, for example, in Treasury Regulations sections 1.861-8

and 1.882-5.

This
rule is not limited to expenses incurred exclusively for
the purposes of the permanent establishment, but includes
expenses incurred for the purposes of the enterprise as a whole,
or that part of the enterprise
that includes the
permanent
establishment. Deductions are to be allowed regardless of which
accounting unit of the enterprise books the expenses, so long as
they are incurred
for the purposes of the
permanent establish­
ment. Thus,
a portion of the interest
expense recorded on the
books of the home office in one State may be deducted by a
permanent establishment
in the other (or
vice versa) if properly
allocable thereto.
Paragraph 4 provides that no business profits will be

attributed
to a permanent establishment
merely because it pur­
chases goods or merchandise
for the enterprise of
which it is a
permanent establishment. This rule refers to a permanent estab­
lishment that performs more
than one function for the
enterprise,
including purchasing. For example, the permanent establishment
may purchase raw materials
for the enterprise's manufacturing
operation and sell the manufactured output. While business
profits may be attributable to the permanent establishment with
respect to its
sales activities, no profits
are attributable with
respect to its
purchasing activities. If
the sole activity were
the purchasing of goods or merchandise for the enterprise, the
issue of the
attribution of income would
not arise, because,

under subparagraph
4(d) of Article 5 (Permanent
Establishment),
there would
be no permanent
establishment.
Paragraph 5 states
that, to assure continuous
and consistent

tax treatment, the same
method for determining the
profits
of a

permanent
establishment is to be used
from year to year, unless

there is
good and sufficient
reason
to change.
In conformity
with
current U.S.
treaty policy
and the OECD
Model, the
paragraph
applies
"for the purposes
of the
preceding
paragraphs."
AUSTRIA 338
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-19­
Paragraph
6 explains
the
relationship
between
the
provisions
of
this Article
and
other provisions
of the
Convention.
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 this Arti­
cle.
Thus,
for example,
the
taxation
of interest
generally
will
be determined
by the rules of
Article 11 (Interest),
and
not by

Article 7.
However,
as provided
in paragraph
3 of Article
11, if
the
interest is attributable
to
a permanent
establishment,
the
provisions
of Article
7 apply instead.
Under this
paragraph, income derived
from shipping and air

transport
activities that are described
in Article 8 (Shipping
and Air Transport)
is taxable only
in the country of residence
of
the enterprise regardless of whether it is attributable to a
permanent establishment situated in the source State. For
example, an airline ticket office situated in the United States'
that constitutes a permanent
establishment of an
airline of
Austria will
not be subject to tax in
the United States with
respect
to the profits attributable
to that office, because
such

income is encompassed by Article 8.

Paragraph
7 specifies that
the term "business profits"
as

used in the Convention includes income from the rental of tangi­
ble personal property. some countries subject this class of
income to gross basis
taxation at source. The
inclusion of this
class of income in business profits means that such income earned

by a resident of a Contracting State can be taxed by the other

Contracting State only if the income is attributable to a perma­
nent establishment maintained by the resident in that other
State, and, if the income is taxable, it can be taxed only on a

net basis.

Paragraph 8 contains a special rule relating to a particular
type of
business entity, a sleeping
partnership (Stille
Gesellschaft) under Austrian law. A sleeping partnership is not
a commercial partnership
in the usual sense.
It is a contract
concluded under commercial law by which an investor (the sleeping

partner) contributes money or money's worth to the business of
his contracting partner in exchange for a share in the profits of

the
business and under the
entitlement to obtain specified

information about the development of the business. Commercial
law provides only one type of contract (with the possibility of

arranging
bilaterally various
details in different ways,
egg,
the exclusion
of participation in the
losses, as long as the
essential matters prescribed
by law are observed).
In relation

to third parties (eg.,
customers, suppliers
and other

contractors of the enterprise)
only the owner of the
business is
liable for the debts of the enterprise. Internally, it depends

on the terms of the contract with the sleeping partner as to

AUSTRIA
339
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6 (1998)

-20­
whether the
sleeping
partner
participates
only in
profits or has

also to bear
a portion
of the losses;
but, even
in the latter

case,
he is by
law not
obligated
to increase
his
investment.

Under Austrian
tax
law, there are
two kinds of sleeping
partnerships,
the
typical form
and the
non-typical
form.
In a
typical
sleeping
partnership,
a partner
whose
interest
is not
disclosed
(a "sleeping
partner")
participates
in (i) either
the
profits
and losses of the business, or (ii) only in its profits,
or (iii) in
its profits up to
a certain amount
(and not in the
losses). However,
in a typical sleeping partnership,
a sleeping
partner does not participate
in the capital and assets of
the
business, and his rights
upon withdrawal from the
partnership
are

limited to the return of his investment. Under Austrian tax law,
the profit
of the sleeping
partner
in a typical
sleeping

partnership is within the category of income from investment

activities.

In a non-typical sleeping partnership, a sleeping partner is

entitled to participate in the increase in net wealth of the

business property
(that is, a certain portion
of the business

value in case of termination
of the contract)
as well as in the
profits
and losses of the business.
The economic position
of a
sleeping
partner
in a non-typical
sleeping
partnership
is rather

close
to
that of a partner in
a partnership; thus, the
sleeping
partnership contract is subjected to the Austrian partnership
taxation regime
and the profit is considered
to be income from

commercial
activities.

The taxation of the income
of a sleeping partnership
(both
the
typical and the
non-typical
forms) under
Austrian
law is
illustrated
by the
following example.
The U.S.
corporation
(US)
invests 10,000 under a
sleeping partnership contract
in the
Austrian company
(A). US
is granted a
10% share in
the profits
of A. In year
1 A makes a profit (before
taxes and before
deduction
of the sleeping
partner's
share) of 20,000.
In year
2,
after
the finalization
of the financial
statements
for year
1, US

receives
a cash payment
of 2,000.

Under
Austrian
domestic
law, Austria's
taxation
of the

typical
sleeping
partnership
is as follows:
In year
2, A must
withhold
25% of
2,000
(which is
500). In
year
3,
US must
file a

corporation
tax return
in
Austria
for year
1. Assume
that the
net
income of
US from
its Austrian
investment
(e.g.
after

deduction
of refinancing
cost, travel
expenditure,
etc.)
is
1,000.
US will receive
an
assessment
notice
(probably
also
in
year 3) according
to which
the tax liability
for
year 2 is

determined to
be 340. The
500 previously
withheld
is credited
against that tax liability
so that, at the end, US
has a claim
for refund of
160 against the Austrian government.
The taxable
income of A is 18,000 (in year 1) because A's income is reduced

AUSTRIA
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-21 ­
by the
2,000
distributed
to US.

Under Austrian
domestic law, Austria's
taxation of the non-

typical
sleeping
partnership
is
as follows:
Under the

partnership
regime,
the joint income
of A and
US is determined

for year 1 to be 20,000. The portion of 2,000 which belongs to
US
is reduced (in the declaration
for the joint
profit
determination)
by special expenses
incurred by the partner.
So
again the taxable profit of US for year 1 is 1,000. The tax
liability
of US for year 1 is
340. US has to settle that
tax
liability by making a cash payment to the Austrian tax

administration
of 340. If,
in year 2, an amount of 2,000
is
transferred into the hands of US, then this is seen as a

withdrawal of property
and does not constitute
a taxable event.

No tax withholding
applies. The taxable income
of A is 18,000
(in year 1) because A's income is reduced by the 2,000 allocated
to US.

In
specific cases,
it may be unclear as
to the whether a

sleeping partnership
should
be categorized
as the
typical or the

non-typical
form. In order to
avoid this classification
issue
under
the convention, paragraph
8 applies to income from
both

forms; thus, the
income
derived by a U.S.
sleeping partner with

respect to his
interest in a sleeping
partnership, whether
typical or non-typical,
is considered business profits
under the
Convention
and subject
to tax in
Austria to the
extent attribut­
able
to a permanent
establishment
in Austria.
Under paragraph
8,
if the
activities
carried
on
by the sleeping
partnership
constitute a permanent establishment in Austria, the permanent
establishment
of the
partnership
is attributed
to a U.S. sleeping
partner.
Paragraph 9 elaborates
on paragraphs 1 and 2 of
Article 7,

and
on the rules
in a
number of
other articles
of
the Convention

that relate
to permanent
establishment's
and
fixed
bases. These
are paragraph
4
of Article
10 (Dividends),
paragraph
3 of Article

11 (Interest),
paragraph
4 of Article
12 (Royalties),
paragraph
3
of Article
13 (Capital Gains), Article
14 (Independent Personal
Services)
and paragraph
2 of Article
21 (Other
Income).
Para­
graph
9 incorporates
the rule of
Code section.
864(c) (6) into
the
Convention.
It provides
that any income
or gain attributable
to
a permanent
establishment
(or, in the
context of the
other arti­
cles, a
fixed base as well) during
its existence is taxable
in
the Contracting
State where
the permanent
establishment
(or fixed

base) is or
was situated
even if the
payments are
deferred until
after
the permanent
establishment
(or
fixed base)
no
longer
exists.
The
effect of this rule can
be illustrated by the following
example.
Assume a company that
is a resident of Austria
and that
maintains a permanent
establishment in the United
States winds up
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341
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-22­
the permanent
establishment's
affairs
and sells
the
permanent
establishment's
inventory
and
assets to
a U.S.
buyer at
the end
of
year
1, in
exchange
for an
interest-bearing
installment
obligation
payable
in full
by
the end
of year
3.
Despite
the
fact
that Article
13's
threshold
requirement
for
U.S. taxation
is
not
met in years
2 or
3, because
the
company
has no permanent
establishment
in the
United
States,
the United
States
may tax
the
deferred
income
payment
received
by the
company
with
respect
to
the installment
obligation
in year
2 and
year 3
under Article
7
(pursuant
to the
application
of paragraph
3 of Article
11
(Interest)).
This Article is subject to the saving clause of paragraph 4

of Article
1 (Personal
Scope). Thus,
for example,
if a citizen

of the
United States
who is a resident
of Austria
derives busi­
ness
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
2 of
Article 22 (Relief from Double
Taxation), tax those
profits
as part of the worldwide income of the citizen, notwithstanding
the provisions of this Article under which such income derived by

a resident
of Austria is exempt
from
U.S. tax. The business

profits are also subject to the provisions of Article 16 (Limita­
tion on Benefits).
For example, assume an Austrian
company
is

doing
business
in the United
States and is
earning income
effec­
tively connected with
a trade or business in
the United States,

but does
not
have a permanent establishment
in the United States.

Under the provisions of Article 7, that company would not be

subject to U.S. tax on its business profits. If, however, the

company does not qualify for U.S. benefits under Article 16, its

income that is effectively connected with its U.S. trade or
business would be subject to U.S. tax.
Article
8. SHIPPING AND AIR
TRANSPORT

This Article provides rules governing the taxation of

profits
from the operation of ships and aircraft in international

traffic. The term "international traffic" is defined in subpara­
graph 1(d) of Article 3 (General
Definitions) as any
transport by

a ship or aircraft, except where such transport is solely between

places
in the other
Contracting State.

Paragraph 1 provides that profits of an enterprise of a

Contracting
State from operating
ships or aircraft in interna­
tional traffic
shall be taxable only in
that Contracting State.

This rule is the same as the rule under the 1956 Convention. By

virtue of paragraph
6 of Article 7 (Business
Profits), profits of

an enterprise of a Contracting State that are exempt in the other

Contracting State under this paragraph remain exempt even if the

enterprise has a permanent
establishment in that other
Contract-

AUSTRIA 342
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No. 6 (1998)

-23 ­
ing State.
Paragraph
2 extends
the definition
of profits
from
the
operation
of ships
or aircraft
in international
traffic
to
include
profits from
the rental
of
ships or
aircraft
on a full
(i~e.,
equipped
with
crew
and
supplies)
basis
or
on
a
bareboat
(i.e., without
crew and
supplies) basis
if the ships
or aircraft
are
operated
in international
traffic
by the
lessee,
or if the
rental
profits
are incidental
to profits
from
the operation
of
ships
or aircraft
in international
traffic
(as
described in
paragraph 1).
It is understood,
consistent
with
the Commentary
to Article
8 of the
OECD Model,
that income earned
by an enterprise
from
the
inland
transport of property
or passengers within either
con­
tracting State falls
within Article 8 if the transport
is under­
taken as part of the
international transport
of property or
passengers
by the enterprise. Thus,
if a U.S. shipping company
contracts
to carry property from Austria
to a U.S. city and,
as
part of that contract, it transports the property by truck from
its point of origin to an airport in Austria (or it contracts
with a trucking company to carry the property to the airport) the
income earned
by the U.S. shipping
company
from the overland leg
of the journey
would
be taxable
only in the United States.
In addition, certain non-transport activities that are an
integral part of the services performed by a transport company
are understood, consistent with the Commentary to Article 8 of
the OECD Model, to be covered in paragraph 1, though they are not
specified in paragraph 2. These include, for example, the
performance of some maintenance or catering services by one
airline
for another airline, if
these services are incidental
to
the -provision of those services by the airline for itself.
Income earned by concessionaires, however, is not covered by
Article 8.
Paragraph
3 provides that the profits
of an enterprise of
a
Contracting State from the use, rental, or maintenance of con­
tainers (including
equipment for their transport)
used to trans­
port goods in international traffic will be exempt from tax in
the other Contracting State. This rule applies regardless of
whether the recipient of the income is engaged in the operation
of ships or aircraft in international traffic, and regardless of
whether the enterprise has a permanent establishment in the other
Contracting State.
Paragraph 3 applies to an
enterprise of a
Contracting State regardless of the form of the enterprise.
Thus, it applies to a partnership or other pass-through entity to
the extent the entity is an enterprise of a Contracting State
under the Convention.
The shipping and air transport provisions of the 1956

AUSTRIA 343
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(1998)

-24­
Convention do not
deal with income
from the leasing
of ships or

aircraft,
except
when such
leasing
is an occasional
source
of

income
for
an enterprise
engaged
in
the international
operation

of ships
or
aircraft.
Also,
the
1956
Convention
does
not
deal

with
income
from
the use,
rental,
or
maintenance
of containers

except when such
container
income is supplementary
or
incidental

to
its
international
operation
of ships
or aircraft.

Paragraph 4 clarifies that the provisions of the
preceding

paragraphs
apply
equally
to profits
derived
by an
enterprise
of a

Contracting
State
from participation
in a
pool, joint
business,

or international
operating agency. Therefore,
the clarification
under
paragraph 4
extends to profits
from the
participation by
the
pool in the lease
of containers
which is supplementary
or

incidental
to its
international
operation
of ships or
aircraft.

The
taxation of gains
from the alienation
of ships, aircraft
or
containers is not dealt with
in this Article, but in paragraph
5
of Article
13
(Capital
Gains).
This
Article is subject to the saving clause of paragraph 4

of Article 1 (Personal
Scope). The United
States, therefore,

may, subject to the special foreign tax credit rules of paragraph

2 of Article 22 (Relief from Double Taxation), tax the shipping

or air transport profits of a resident of Austria if that

Austrian resident is a citizen of the United States. As with any

benefit of the Convention, the enterprise claiming the benefit

must
be entitled to the benefit
under
the provisions of
Article

16 (Limitation on Benefits).

Article 9. ASSOCIATED ENTERPRISES

This Article incorporates into the Convention the general

principles of section 482 of the Code. It provides that when

associated enterprises engage in transactions that are not at

arm's length, the Contracting States may make appropriate

adjustments to
the taxable income and
tax liability of such

enterprises
to reflect what the income
or tax of these

enterprises with respect to such transactions would have been had

an arm's-length relationship existed.

Paragraph 1 deals
with circumstances
where an enterprise of
a Contracting State is
related to an enterprise
of the other
Contracting State and those related enterprises make arrangements
or impose conditions between
themselves
in their
commercial
or
financial
relations that differ from
those that would be made
between
independent persons.
Under
those circumstances, the
Contracting States may adjust the income (or loss) of the enter­
prises to reflect the income that would have been taken into
account in the
absence
of such a relationship.
The paragraph
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344
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-25 ­
specifies the meaning of
the term "related enterprises"
in this
context. An
enterprise of
one Contracting
State is related
to an
enterprise of
the other Contracting State
if either enterprise
participates,
directly or indirectly, in
the management, control,
or capital of
the other enterprise. The
enterprises are also
related if the
same persons participate,
directly or indirectly,
in the management,
control,
or capital
of both enterprises.
The
term "control"
includes
any kind
of control,
whether or
not
legally enforceable and however exercised or exercisable.

Paragraph
1 contains additional
language
that clarifies
that
cost-sharing
or general services
agreements between associated
enterprises
are not necessarily
to be included among the
condi­
tions
"made or imposed between
two enterprises" referred
to in
the first sentence of paragraph 1. Thus, the mere presence of a
cost-sharing, or similar, agreement between two related parties
does not by itself indicate that the two parties have entered
into a non-arm's length transaction giving rise to an adjustment
under paragraph 1.
However, any such arrangement
may be examined
to determine whether,. in fact, it does constitute such a transac­
tion.
Paragraph 2 provides
that where a contracting
State
has made

an adjustment consistent
with the provisions
of paragraph 1 and
the other Contracting State agrees that the adjustment was

appropriate,
that
other Contracting State must
make
a corre­
sponding
adjustment
to
the tax liability of the
related person in

that other Contracting State. Where relevant, the Contracting
State
making such an adjustment
will take the other provisions
of

the Convention into account. For example, if the effect of a
corresponding adjustment is to treat an Austrian corporation as

having
made a distribution
of profits to its U.S.
parent
corporation the provisions
of Article 10 (Dividends)
will apply,
and
Austria may impose a 5
percent withholding tax
on the

dividend. The competent authorities are authorized to consult,
if
necessary, to resolve any
differences in the application
of
these provisions.

If
a corresponding adjustment
is made under paragraph
2, it
is to be implemented,
pursuant to paragraph
2 of Article 24
(Mutual Agreement
Procedure), notwithstanding
any time limits or
other procedural
limitations in the law
of the Contracting State
making the adjustment.
The saving clause
of paragraph 4 of
Article 1 (Personal Scope)
does
not apply to paragraph
2 of
Article 9 (see the exceptions
to the saving clause
in subpara­
graphs 5(a) of Article 1).
Thus, even if the statute
of limita­
tions has run, or there
is a closing agreement
between the
Internal
Revenue Service and the taxpayer,
a refund of tax can
be
made for
purposes of implementing
a corresponding adjustment.
Statutory or procedural
limitations, however, cannot
be overrid­
den to impose additional tax, because, under subparagraph 2(a) of
AUSTRIA 345
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-26­
Article
1 (General
Scope),
the Convention
cannot restrict
any
statutory
benefit.
Article 9 of the Convention
does not contain a counterpart
to
the
paragraph
3 found
in many
other
U.S.
income
tax treaties.
That
paragraph
is
intended
to clarify
that
the rights
of the
Contracting States to apply
internal law provisions relating
to
adjustments
between
related parties
are
fully
preserved.
Its
absence
does
not signal
any change
in
U.S. law
or in the
U.S.
treaty position.
Such
adjustments
--the
distribution,
apportionment,
or
allocation
of income,
deductions,
credits
or
allowances, or the
characterization
of income under thin
capital­
ization rules
--are permitted
even
if they differ
from,
or
go
beyond, those
authorized by
paragraph 1
of the Article,
as long
as they
accord with the
general principles
of paragraph
1, ie.,
that the adjustments
reflect what would
have transpired had the
related parties
been acting
at arm's length.
Thus,
the absence
of paragraph
3 does not limit
either State's
right to
implement
its own statutory
rules related to adjustments
intended to

reflect transactions between
unrelated parties. This
conclusion
derives from the fact that paragraph 1 is to be interpreted in a
permissive, rather than exclusive, manner. For example, while
paragraph 1 explicitly allows adjustments to deductions in
computing taxable
income, it does not preclude
adjustments
to tax
credits if such
adjustments
can be made
under internal law,

despite the lack of express authority in Article 9 to make such

adjustments.

It is also understood that Article 9 does not limit the
rights of the Contracting States to allocate income between
related persons in cases where the relationship differs from that

described in paragraph 1. This position conforms with the
Commentary to
the OECD Model, which explicitly
states that
further adjustments may be needed in circumstances outside of
paragraph 1. This rule would apply, for example, if a commercial
or contractual relationship allows one party to exercise a
controlling influence
over another. Any
adjustments made pursu­
ant to this provision must accord with the general principles of
paragraph 1 of Article
9. The paragraph in the Memorandum
of
Understanding relating to
Article 16 (Limitation on
Benefits) and
the anti-abuse concepts
of the treaty is also relevant
for
Article 9. The paragraph
makes clear that both
Contracting
States agree that the explicit
anti-abuse provisions
of the
Convention do not limit
the applicability of
statutory
anti-abuse provisions
of the Contracting
States.
Article 10.
DIVIDENDS

Article
10 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. Article
10
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-27­
also provides
rules
for the
imposition
by
the United
States
of a
tax
on
branch
profits.
Although
paragraph
1 establishes
that
dividends
"may
be taxed"
in the
residence
country,
as noted
in
the MOU,
this rule
does
not prevent
the source
State
from
also
taxing such
dividends.
Generally, the
article limits
the source
State's right
to tax dividends
and amounts
treated
as dividends
or dividend
equivalents.

Under paragraph
1, dividends paid
by a company that is
a
resident
of one Contracting
State to
a shareholder
resident in
the
other Contracting
State may
be taxed in
the State of
resi­
dence of the recipient.
Thus, paragraph 1 preserves
the right of
each Contracting
State to
tax dividends
derived by its
residents-
from companies resident in the other Contracting State. In the
case
of the United States, this
provision is consistent with
the
saving
clause of paragraph
5 of Article 1 (Personal
Scope).
Under Austrian law, Austria generally exempts certain direct

investment dividends. Dividends received by a resident company
from its nonresident subsidiary are exempt from corporate income
tax in the hands of
the former, subject to the
condition
that the
recipient company owned
25% or more of the share
capital of
the
distributing company directly and continuously for at least 12
months prior
to the end of the taxable
year in which the profit
distribution was received (KStG 1988. Sec. 10). Dividends which
do not qualify for
exemption
under this participation
exemption
are normally included in taxable income.
Paragraph 2 limits the right of the source State to tax

dividends
paid by a company resident
in that State if the
benefi­
cial owner of the dividends is a resident of the other Contract­
ing
State. Under subparagraph
2(a), the source State
tax is
generally
limited to 5 percent
of the gross amount of the
divi­
dends if the beneficial owner is a company (other than a partner­
ship) that holds directly at least 10 percent of the voting stock
of
the company paying the dividend.
Under subparagraph 2(b),
the
source
State tax is limited to
15 percent of the gross amount
of

the
dividends in all other cases.
Indirect ownership of
voting
shares (e g., through tiers of corporations) and direct ownership
of nonvoting shares are not included for purposes of determining

eligibility for the 5 percent direct dividend rate. Shares are
considered voting
shares if they provide
the
power to elect,

appoint or replace
the person, or a majority
of the board of

persons, exercising
the powers ordinarily
exercised by the board

of directors of a U.S.
corporation., The Convention
does not
require that the 10-percent voting interest be held for a minimum

period prior to the dividend payment date.

Under the 1956 Convention,
direct investment dividends
are

also taxable by
the source State at a maximum
rate of 5 percent

of the statutory rate of
tax otherwise imposed on such
dividends,

AUSTRIA
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-28­
but
the 1956
Convention
requires
an
ownership
threshold
of 95

percent
for
the 5
percent
rate
to apply.
Portfolio
dividends
are
subject
to source
State
tax under
the 1956
Convention
at
a rate
that
is one-half
of the
rate otherwise
applicable.
In the
base
of
the United
States,
this rule
results
in the
application
of
a
15 percent rate.
Paragraph
2 imposes
special
limits on
the rate of
source
State
taxation
for dividends
paid by U.S.
Regulated Investment
Companies and Real Estate Investment Trusts ("RICs" and "REITs").
Because
RICs and REITs are generally
not liable to corporate
tax
with
respect to distributed amounts,
the rate reduction
from 15
to
5 percent cannot be justified
as a means of
relieving multiple

levels of corporate tax when the dividend recipient holds a

substantial interest in the payer. Dividends paid by RICs are
denied the 5-percent direct dividend rate and are subject to the
15-percent portfolio
dividend rate (which generally
would be
applicable to a direct investment in the underlying corporate
stock), regardless of the percentage of voting shares held
directly by an Austrian
corporate recipient
of the dividend.
Dividends paid by a REIT are generally taxed at source at full
statutory rates (reflecting the source State taxation of real
property income under Article 6). The fact that notwithstanding
paragraphs 1 and 2, the United States may tax most REIT dividends
at its statutory 30-percent rate is made clear in the Memorandum
of
Understanding. However, dividends
paid by REITs are
taxed at
source at the 15-percent portfolio dividend rate if the benefi­
cial,owner of
the dividend is an Austrian
individual who owns
less than
a 10-percent
interest
in the
REIT.

The denial of
the 5-percent withholding
rate at source to

all RIC and REIT
shareholders, and the denial
of the 15 percent
ratd to
most shareholders
of REITs,
is intended
to prevent
the

use
of
these conduit entities
to gain unjustifiable benefits
for
certain
shareholders.
For example,
an Austrian
corporation
that
wishes
to hold a diversified
portfolio of U.S. corporate
shares
may hold the portfolio
directly
and pay a U.S.
withholding tax of

15 percent
on all of the
dividends
that it receives.
Alterna­
tively,
it
may place
the portfolio
of U.S. stocks
in
a RIC in

which the Austrian corporation owns more than 10 percent of the
shares,
but in
which the corporation
has
arranged to
have a

sufficient
number
of small
shareholders
to satisfy
the RIC

diversified
ownership
requirements.
Since the
RIC is a pure
conduit, there
are no U.S. tax costs to the
Austrian corporation

of interposing
the RIC as an intermediary
in the chain of owner­
ship.
In the
absence of the
special rules
in paragraph
2,

however, the
interposition would transform
portfolio dividends
into direct investment
dividends, which are
taxable at source by
the United States
at only 5 percent.

Similarly,
a resident of Austria
may hold U.S. real property

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-29­
directly
and pay
U.S.
tax either
at
a 30-percent
rate
on the

gross
income
or at the
ordinary
income
tax rates
specified
in

Code
sections
1 or 11
on net income.
As
in the preceding
exam­
ple,
by placing
the real
estate
holding
in a REIT,
the Austrian

investor could
transform real
estate income into
dividend income,

and
in the process,
absent the
special
rule,
transform,
at no tax

cost, high-taxed
income
into much
lower-taxed
income.
In the

absence
of the
special
rule,
if the REIT
shareholder
is an

Austrian
corporation that
owns at least a 10-percent
interest in

the REIT, the withholding rate would be 5 percent; in .all other

cases it would be 15 percent. In either event, with one excep­
tion, a tax of 30 percent
or more would be significantly
reduced.

The exception is the
relatively small individual
investor who

might be subject
to a U.S.
tax of 15 percent
of net income
even

if he earned the
real estate income directly. Under the special

rule
in
paragraph 2, such individuals,
defined
as
those holding

less than a 10-percent interest in the REIT, remain taxable at

source at a 15-percent rate.

The term
"beneficial owner," as
used in paragraph 2, is not

defined in the Convention, and is, therefore, defined as under

the internal
law of the country
imposing tax (._e,
the source

country). The beneficial
owner of a U.S. source
dividend
for

purposes of Article 10 is the person to which the dividend income

is attributable for tax purposes under the laws of the source

state. Thus, if a dividend paid by a U.S. corporation is re­
ceived by
a nominee or an agent that
is a resident of Austria
on

behalf of a person that
is not a resident of Austria
the dividend

is not entitled to the benefits of this Article. However, a

dividend received
by the nominee on behalf
of a resident of

Austria
would be entitled
to the
U.S. benefits.

Paragraph
2 does
not
affect
the
taxation
of the
profits
of

the corporation
out of which
the
dividends are paid.

Paragraph
3 defines the term dividends
as used in Article
10

to mean
income from shares or other
rights, not being debt

claims, participating
in profits, as
well as other income derived

from other rights that is subjected to the same taxation treat­
ment as income from shares by the laws of the Contracting State

of which the company making the distribution is a resident. The

definition of dividends also includes income from arrangements,

including debt obligations, that carry the right to participate

in profits, or that are determined by reference to profits, to

the extent that such income is characterized as a dividend under

the tax law of the source State. Thus, a constructive dividend

that results from a non-arm's-length transaction between a

corporation and a related party is a dividend. In the case of

the United States
the term dividend includes
amounts treated as a

dividend under
U.S. law upon the sale or
redemption of shares or

upon a transfer of shares in a reorganization. See, e.g., Rev.

AUSTRIA
349
Supp. No. 6 (1998)

-30­
Rul. 92-85,
1992-2
CB 69
(sale of
foreign
subsidiary
to U.S.
sister company
is a deemed
dividend to extent
of subsidiary's
and
sister's earnings
and profits).
Further,
a distribution
from a
U.S. publicly traded
limited partnership,
which is taxed as
a
corporation under U.S. law,
is a dividend for purposes
of Article
10. Under
Austrian law,
the income
from Austrian
bonds
participating
in profits
is not characterized
as a dividend
but
rather
as
interest.
A payment
denominated
as interest
that is made
by a thinly
capitalized corporation may be treated as a dividend to the
extent that the debt
is recharacterized as equity
under the laws
of the source State. Further, if a shareholder
lends shares to a
third party, the payments by the borrower to the lender in
substitution
for dividends
the lender
otherwise
would
have
received also
would be treated as dividends.
Paragraph
4 excludes
from the
rules of paragraphs
1
and 2
dividends effectively connected with a permanent establishment or
fixed base
of the recipient in the
source State. Such dividends
will be
included in the taxable
income of the permanent

establishment
and taxed on a net basis
under the rules of Article

7 (Business Profits)
or Article 14 (Independent
Personal

Services).
This rule conforms to
the OECD Model. The rule
in
paragraph
9 of Article
7 (Business
Profits)
applies to
this

paragraph
as well,
so that dividends
attributable to a permanent
establishment
or fixed base, but
received after the permanent
establishment
or fixed
base no longer
exists, will,
nevertheless,
be taxable in the
Contracting State in which
the permanent

establishment
or
fixed
base existed.

Paragraph
5 generally
bars
one Contracting
State from
impos­
ing any
tax on dividends
paid
by a
company resident
in the other
Contracting
State or
on the undistributed
profits
of such compa­
ny, even
if the dividends
or profits
consist wholly
or partly
of
profits
or income arising
in that
first State.
However, excep­
tions to
this rule apply
if such dividends
are paid
to a resident
of
the first-mentioned
Contracting
State,
or if the holding
in
respect
of which the
dividends are
paid is effectively
connected
with
a permanent
establishment
or fixed
base situated
in
the
first-mentioned State.
Paragraph 6 provides
for the imposition of
a branch profits

tax
by the
United
States.
The paragraph
permits
the
United
States
to
impose an
additional
tax (i
e., its
branch profits
tax

imposed
by section
884(a)
of the Code)
on a
company
that is
resident
in Austria
and that
has a permanent
establishment
in
the
United
States,
or that is subject
to net
basis taxation
in the
United
States under Article 6
(Income from Real Property)
because
the
Austrian corporation
has
elected under
Code section
882(d) to
treat
income from real property
not otherwise taxed on
a net
AUSTRIA
350
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-31 ­
basis as effectively connected
income, or because the
gain arises
from the disposition of a United States Real Property -Interest
other than an
interest in a United States
corporation. Such
additional tax
may be imposed only on the portion of the business
profits of the Austria company
that is attributable to the
permanent establishment and the portion of net income that is
subject to tax under Article
6 or paragraph 1 of Article
13 that
represents
the
dividend
equivalent
amount.
For
this
purpose,
"dividend equivalent amount"
has the same meaning
it has under
U.S. law, as amended from
time to time without
changing the
general principle thereof. It is understood that the concept of
dividend equivalent amount is intended to approximate the portion

of the
income referred
to above
that would
be distributed
as a

dividend
if such income were earned
by
a U.S. subsidiary of the

Austrian
company.
The United
States
may
not impose
its branch
tax on the business
profits of an Austrian corporation
that are
effectively connected
with a U.S. trade or business
but
that are
not attributable to
a permanent establishment
and are not other­
wise subject to U.S.
taxation under Article 6
or paragraph 1 of
Article 13.
Austria does
not impose
a branch
tax under
its law, and,
therefore, saw no need
to preserve an Austrian
right to impose

such a tax under the treaty.

Paragraph
7
provides that the
branch profits tax permitted

by
paragraph 6 shall not be
imposed at a rate exceeding
the

direct
dividend withholding
rate specified
in subparagraph
2(a),
which is five percent.

Notwithstanding
the
foregoing
limitations
on source
State

taxation
of dividends,
the
saving
clause
of paragraph
4
of

Article
1 (Personal
Scope) permits
the United
States to
tax

dividends
received
by its
residents
and
citizens,
subject
to
the
special
foreign
tax
credit
rules
of
paragraph
2
of Article
22

(Relief from
Double
Taxation),
as if
the Convention
had
not come

into effect.
The benefits
of this Article
are available
to a
resident
of a Contracting
State
only
if that
resident
qualifies
for benefits
under the provisions
of Article
16 (Limitation
on

Benefits).

Article
11.
INTEREST

Article 11 provides rules
for source and residence
State

taxation
of
interest.

Paragraph
1 grants
to
the residence
State
the exclusive

right to
tax interest
derived and
beneficially
owned by its

residents.
Thus, this
Convention
generally
preserves
the exemp­
tion at
source for
interest
provided
in the
1956 Convention.
As
in the
case of
Article 10
(Dividends),
the
source
State shall
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351
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-32­
treat as
the beneficial owner of such
income the person to which

the
income is attributable for
tax purposes under the laws
of the
source
State.
Interest arising
in a
Contracting
State and paid
to a nominee
or agent that is a resident of the other Contracting
State
therefore may be taxed
in the State of source
if the
beneficial
owners
are not
residents
of the other
Contracting
State (subject
to the
provisions
of
any applicable
treaty between
the State of source
and
the State of residence
of the beneficial

owner).
Paragraph 2
defines the term "interest"
as used in the
Convention to include,
inter Alia, income from debt
claims of
every kind, whether
or not secured by a mortgage,
and whether
or
not carrying a right to participate
in the debtor's
profits. The
term
includes, in
particular,
income
from government
securities
and
income from bonds
or debentures,
including
premiums or
prizes
attaching
to
these instruments.
Penalty
charges
for late
payment
are not
defined as
interest, but
an excess inclusion
with respect
to a
residual interest
in a real
estate
mortgage
investment
conduit is defined as interest
(see paragraph 5).
Any income
dealt
with in Article
10 is also
excluded
from
the definition
of
interest. Thus,
for example,
if under domestic
law of
the source
State, income
from a debt
obligation
carrying the
right to
participate
in profits is
treated as
a dividend,
it is also
treated
as a dividend
under paragraph
3 of Article
10 and
is not
covered
by
Article
11. Such
income
that is not
treated
as a
dividend
under
the
law
of the
source
State, however,
remains
within
the
definition
of interest
Under
Article
11.
Paragraph
3
provides
an
exception
from
the
source-State
exemption
rule
of
paragraph
1 in
cases
where
the beneficial
owner
of
the interest
carries on
business through
a permanent
estab­
lishment
in
the source
State
or performs
independent
personal
services
from
a fixed
base
situated
in the source
State
and the
debt
claim in
respect of which
the interest
is effectively
connected
with the
permanent
establishment
or
fixed
base. In
such
cases, the
provisions
of Article 7
(Business Profits)
or
Article
14
(Independent
Personal
Services)
will
apply
and the
source.State
will generally
retain the
right
to
impose
tax on
a

net
basis
on
such
interest
income.
This
rule
conforms
to
the

OECD
Model.
The
rule
in paragraph
9 of
Article
7 (Business

Profits)
applies
to
this
paragraph
as
well,
so that
interest

attributable
to
a permanent
establishment
or fixed
base, but

received
after
the
permanent
establishment
or fixed
base
no

longer
exists,
will, nevertheless,
be taxable
in
the Contracting

State
in which
the permanent
establishment
or fixed
base
existed.

Paragraph
4 limits
the
benefits
of
this
Article
to interest
amounts
that
reflect
arm's
length
transactions.
If
the
interest
paid
exceeds
an
arm's
length
amount
due to
a special
relationship
between
the
debtor and
creditor,
then
any excess
amount
of
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352
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-33­
interest
paid remains taxable
according to the
laws of the source
State with due
regard to the
other provisions
of the
Convention.
Thus,
for example,
if the
excess
amount
would
be treated
as a
distribution
of profits, such
amount could
be taxed as
a dividend

rather
than
as interest,
but the
tax would
be subject
to
the rate

limitations of paragraph 2 of Article
10 (Dividends).

Paragraph
.5provides exceptions
to the general
exemption from
source-State
taxation of interest.
Paragraph 5(a) permits
the
United
States to impose its statutory
rate of tax (currently
30
percent) on an excess
inclusion with respect
to a residual
interest of an Austrian
resident in a U.S. real
estate mortgage
investment conduit
(REMIC), notwithstanding
the provisions of
paragraphs
1 and 2 that
generally exempt
interest
from taxation
at source. The legislation that created REMICs in 1986 provided

that such excess inclusions
were to be taxed
at the full 30­
percent statutory rate, regardless of any then-existing treaty

provisions to the contrary. Providing for the 30-percent rate in

the Convention, therefore,
conforms to Congressional
intent the

treatment of excess
inclusions with respect
to residents of

Austria.
It is consistent
with
the policy of Code sections

860E(e) and 860G(b) that excess inclusions with respect to a real

estate mortgage investment conduit (REMIC) should bear full U.S.

tax in all cases. Without a full tax at source, foreign

purchasers of residual interests would have a competitive

advantage
over U.S. purchasers
at the time these interests.are

initially
offered. Also, absent
this rule, the U.S. would
suffer

a revenue
loss with respect to
mortgages held in a REMIC
because

of opportunities
for tax avoidance created
by differences in the

timing of taxable
and
economic income
produced
by these

interests.

The second exception,
in subparagraph
5(b), deals with

contingent interest
of the type that
does not qualify as

portfolio interest
under U.S. law and
to analogous types of

interest under
Austrian law. Under this
provision, interest

arising in one
of the Contracting States
that is determined by

reference to the
receipts, sales, income,
profits or other cash

flow
of the debtor
or
a related
person,
to any
change in
the

value of any property
of the debtor or a
related person or to any

dividend, partnership
distribution or similar
payment made by the

debtor to a related
person, and paid to
a
resident of the other

State may also
be taxed in the Contracting
State
in which it

arises, and according
to the laws of
that State, but if the

beneficial owner
is a resident of the other
Contracting State,

the gross amount of the
interest may be taxed at
a rate not

exceeding the
rate prescribed
in subparagraph
(b) of
paragraph 2

of Article 10 (Dividends).

The Article
does not refer to the excess
of the amount of

interest deductible
by a permanent establishment
of an Austrian

AUSTRIA 353
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-34­
company in the United
States over
the interest actually
paid by

such permanent
establishment
(i..,
the excess
interest
portion
of the branch level interest taxes
imposed by section 884(f) of
the
Code).
Since
this
amount
is treated
as
.interest
derived
and
beneficially
owned
by the
resident
of Austria,
the
Article
11
exemption
from
source country
taxation
will
generally
prevent
the

collection
of
this excess
interest
tax.

Notwithstanding
the
foregoing
limitations
on
source
State
taxation
of
interest,
the saving
clause
of paragraph
4
of Article
1 (Personal
Scope)
permits
the United
States
to tax its
residents
and citizens,
subject
to the special
foreign tax
credit rules
of

paragraph
2 of Article
22 (Relief
from
Double
Taxation,
as if the
Convention
had
not come
into force.
As
with all
benefits
under
this
Convention,
the granting
of benefits
under this Article
is

subject
to the
requirement
that the beneficial
owner
of the

interest income
qualify
for benefits under the provisions of

Article
16 (Limitation
on Benefits).

Article
12. ROYALTIES

Article 12 provides
rules for
source and residence
country

taxation
of royalties.

Paragraph 1 provides the general rule that royalties derived
and beneficially owned by a resident of a Contracting State shall
be taxable only in that State. Except for motion picture royal­
ties, which
are dealt with in paragraph
2, the residence state
has the exclusive right to tax royalties derived and beneficially
owned by its residents. The source State shall treat the recipi­
ent of royalties as the beneficial owner of such royalties for
purposes of Article 12 if the recipient is the person to which
the income is attributable for tax purposes under the laws of the
source
State.
Paragraph 2 contains an exception to the exemption at source

provided in paragraph
1. The source State may
tax royalties that
constitute consideration for the use of, or the right to use,

motion picture films, or films, tapes or other means of reproduc­
tion used for radio
or television broadcasting,
but at a rate not

above 10 percent of the gross amount of the royalty. The refer­
ence to "other means of reproduction" clarifies that the 10­
percent tax at source will apply to payments resulting from the

use
of means of reproduction
that reflect future technological
advances
in the field
of radio
and television
broadcasting.

The source treatment
for royalties in
the 1956 Convention

(ije., exemption at source for most royalties and source taxation

at a rate of 10 percent for motion picture royalties) is carried
forward
to the Convention.

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-35­
Paragraph 3 defines the term "royalties" as used in the
convention as
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; for the
use of, or the
right to
use, any patent, trademark, design or model,
plan, secret formula
or process,
or
other like
right
or property;.or
for
the use
of,
or the right to use,
information concerning industrial,
commer­
cial, or scientific experience. Royalties
also include gains
derived from the
alienation
of any such
right or property
that

are
contingent on the productivity,
use, or further alienation

thereof.

The
term royalties
is defined in the Convention
and therefore

is generally independent
of domestic law.
Certain terms used in
the definition
are not
defined in
the Convention,
but these
may

be defined
under domestic
tax law.
For example,
the term "secret
process
or formulas" is found
in the Code, and its meaning
has
been elaborated
in the
context of sections
351 and
367. See
Rev.
Rul.
55-17, 1955-1 C.B. 388;
Rev.
Rul. 64-56, 1964-1 C.B.
133;
Rev. Proc. 69-19, 1969-2 C.B. 301.

The
term "industrial,
commercial,
or scientific
experience"
(sometimes
referred to
as "know-how")
has the meaning
ascribed
to
it in the paragraph
11 of
the Commentary
to Article
12 of the
OECD Model Convention.
Consistent
with
that meaning,
the term
may include
information that
is ancillary
to a right
otherwise
giving rise
to royalties,
such as a patent
or secret
process.
Computer
software
generally
is protected
by
copyright
laws

around
the world.
Under
the Convention,
whether
payments
for the
use or the
right to use
computer software
are
treated as

royalties
or as business
profits will
depend
on the
facts and
circumstances
of
the transaction.
Payments
received
in

connection
with the
transfer
of so-called
"shrink-wrap"
computer
software are treated
as business
profits.

Paragraph 4
excludes from
the scope
of this Article
royal­
ties
effectively
connected
with
a permanent
establishment
or
fixed
base of
the beneficial
owner
in the
source
State.
In such
cases
the provisions
of Article
7 (Business
Profits) or Article
14 (Independent
Personal
Services)
will apply
and the
source
State will generally
retain
the right to
tax
such royalties.
The
rule
in paragraph
9
of Article
7 (Business
Profits)
applies
to
this
paragraph
as well,
so that
royalties
attributable
to a

permanent
establishment
or fixed
base,
but received
after
the
permanent
establishment
or fixed
base no longer
exists,
will,

nevertheless,
be
taxable
in the Contracting
State
in which
the
permanent
establishment
or
fixed base
existed.
Paragraph
5 limits
the benefits
of
this Article
to
royalty
amounts
that reflect
arm's-length
transactions.
It provides
that

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in
cases involving
special
relationships
between
the
payor and

beneficial
owner
of
a
royalty,
Article
12 applies
only
to the

extent
of royalty
payments
that
would
have
been
made
absent
such
special relationships.
Any excess
amount of
royalties
paid
remains
taxable
according
to the
laws
of the
source
State
with
due regard to the
other provisions
of the Convention.
If, for
example,
the
excess
amount
is
treated
as
a distribution
of
profits
under
the national
law
of the source
State,
such
excess
amount
will be taxed
as a dividend
rather than
as a royalty
payment,
and the
tax imposed
on
the dividend
will
be
subject
to
the rate
provided in
subparagraph
2(a) of Article
10 (Dividends).
Paragraph
6 contains
the
source rule
for
royalty payments.
Under this
rule, a royalty
arises in
a Contracting
State to the
extent
it is a payment
for the
use of, or
the right to
use,
rights
or property
within that
State.
This
source rule
is

relevant
for
the implementation
of paragraph
2. If, for example,
a U.S. resident
is the beneficial
owner
of a royalty
paid by a
resident
of Austria
for the exhibition
of a motion
picture in

Austria,
that royalty is
sourced in Austria
and is subject
to a
10 percent
withholding
tax in Austria.
If, however, the payment,

even if made by an
Austrian resident, is for the
exhibition of a
motion picture in Germany,
or in the United States,
the royalty

would not be Austria
source
income, and would
not be subject to

Austrian tax.
Notwithstanding the foregoing limitations on source State

taxation of royalties, the saving clause of paragraph 4 of

Article 1 (Personal Scope) permits the United States to tax its

citizens, subject
to the special foreign
tax credit rules of
paragraph 2 of
Article 22 (Relief from Double
Taxation), and its

residents as if
the Convention had not come
into effect. As with
all
*benefits under this Convention,
the granting of benefits
under this Article is subject to the requirements that the
beneficial owner of the royalty income qualify for benefits under

the
provisions of Article
16 (Limitation on Benefits).
Article
13.
GAINS

Article 13 provides rules for source and residence country
taxation
of gains from
the alienation of property.
Paragraph 1 preserves the source country right to tax gains

derived
from the alienation
of real .property situated
in the
source (ie.,
situs) state. Thus, paragraph
1 permits gains
derived
by a resident
of one Contracting
State
from the alien­
ation of
real property,
referred
to in Article
6 (Income from
Real Property) and situated in the other Contracting State to be

taxed
by such other
Contracting State.

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For purposes of
paragraph 1, paragraph
2 defines "real
property
situated
in the other
Contracting
State" to include
real
property referred
to in Article 6 (i._, interests
in the real
property itself) and certain indirect
interests
in real property.
The term is defined separately for the United States and Austria,
to allow
use of the U.S.
statutory
term "United
States real
property
interest."
Indirect
interests
include shares
or
comparable interests in a company the assets of which consist or
consisted wholly or principally of real property situated in the
source state. In addition,
for
United States,
but not Austrian,
purposes, interests in a partnership, trust, or estate, to the
extent that the assets of such entity consist of real property
situated in the source state, are included in this definition of
real property situated in the other Contracting State. It is
clear that in all events the term "real property situated in the
other Contracting State" includes a United States real property
interest, and the specified partnership, trust or estate inter­
ests, when the United States
is the other Contracting
State.
Thus, the United States
preserves its right to collect
the tax
imposed under the ForeignInvestment
in Real Property
Tax Act
(section 897 of the Code) on gains derived by foreign persons

from the disposition of United States real property interests.

For this
purpose, the source rules
of section 861(a)(5) of the

Code shall
determine whether a United
States real property.

interest is situated in the United States.

Because the definition
of "real property
situated
in the

other Contracting State"
contained in paragraph
2 is specifically

limited to
the interpretation of.paragraph
1, such definition has

no effect
on the right to tax income
covered
in other articles.

For example,
the inclusion of interests
in certain corporations

in the definition
of real property
situated
in the other Con­
tracting
state for purposes of permitting
source country taxation

of gains
derived from dispositions
of such interests under this

Article
does not affect the treatment
of dividends paid by such

corporations.
Such dividends
remain
subject to the limitations

on source
country taxation contained
in Article 10 (Dividends)

and are
not
governed by the unlimited
source country taxation

right contained
in Article 6 with respect
to immovable property.

Paragraph 3 preserves
the source country's
right
to tax

gains from the alienation
of personal property
in certain circum­
stances.
It provides
that
the other Contracting
State
(the

source
state) may tax gains
from the alienation of personal

property
forming part
of the business
property
of a permanent

establishment
that an enterprise of a Contracting
State has in

the other State
or
of personal property
pertaining
to a fixed

base available to a resident
of a Contracting State
in the other

State for the purpose of performing independent personal servic­
es, including such gains
from the alienation of such
a permanent

establishment
(alone
or with the whole
enterprise) or of such

AUSTRIA
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-38­
fixed base. The rule
in paragraph 9 of Article
7 (Business
Profits) applies
to
paragraph
3 as well, so that
the Contracting
State in which the permanent
establishment existed
may tax gains

from the alienation of personal property forming part of the
business property
of a permanent
establishment
or pertaining
to a
fixed base that are received after the permanent establishment or
fixed base
no longer exists.

This provision
permits
gains
from
the
alienation.by
a

resident
of a
Contracting
State of an
interest
in a partnership,

trust, or
estate that has a permanent
establishment situated
in

the other
Contracting State to be taxed
as gains attributable
to
such permanent
establishment
under paragraph
3. Thus, for
example,
the
United States
may
tax gains
derived
from the
dispo­
sition of
an interest in
a partnership
that
has a permanent

establishment
in the
United States,
whether
or not the assets
of
the partnership
consist
of real property
as defined
in Article
13.
Paragraph
4 contains
a rule
to coordinate
the
interaction
of
Code
section
864(c)
(7) with
the analogous
provision
of
Austrian
law.
Under
the Code
rule, if
an asset
which had
been part
of the
business
property
of a U.S.
trade or
business
(or, in
a treaty
context,
of a permanent
establishment
or fixed
base in the
United

States)
is alienated
within
ten
years of
its removal
from
the

U.S. trade
or business
(or permanent
establishment/fixed
base),

the gain realized
on such
alienation
is subject to
U.S. tax.

Austria's
income
tax
act
(Section
6, subparagraph
6)

provides
that
a transfer
of
property
used
in a permanent

establishment
in Austria
to a
permanent
establishment
outside
of

Austria
is
a
taxable
event.

Paragraph
4 provides
that
gain
that accrued
during
the
time
an asset
formed
part
of the business
property
of a permanent
establishment
or
fixed
base
that
a
resident
of
a Contracting
State
has
or had
in the
other
Contracting
State
may
be taxed
in
the other
State,
but only
to the
extent of
the gain
that accrued
during
the
time the
asset
formed
part
of the
business
property
of
a permanent
establishment
or fixed
base that
the
resident
has or
had in
that other
State.
Thus, for
example,
with
regard
to
the
transfer
of appreciated
assets
from a U.S.
company's
permanent

establishment
in Austria
to
a permanent
establishment
in a third
country,
paragraph
4
would
coordinate
and
modify
the
application

of U.S. and
Austrian
law.

With
regard
to
the
sale
of
appreciated
assets
by
an
Austrian

company,
the U.S.
may
tax the
gain
to the
extent
accrued
during

the
time
the asset
formed
part
of
the business
property
of
a

permanent
establishment
that
the Austrian
company
has or
had
in

the
United
States.
This is
a limitation
on the
amount
of the

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6(1998)

-39­
gain
that is
taxable
under
section
864(c)(7)
of the
Code.

Further,
although
this
rule does
not
impose
a
time
limitation
to

the U.S. right to
tax the gain, under
section 864(c)(7), the

United
States
may not
tax
a gain
that is
realized
after
the
ten-

year period has lapsed.

The provision
also
restricts
the application
of
U.S. laws
to

U.S. citizens
and residents
that had
property in
an Austrian

permanent
establishment
or fixed base
to the extent
that Austria

taxed the
gain in accordance
with
this paragraph.
Under the

provision,
the residence
State of the
taxpayer must
exclude
from

the income
that it subjects
to tax any amount
of gain
that
has

been taxed,
in accordance
with paragraph
4, by the
State in which

the permanent establishment or fixed base is, or was, located.

Thus, for example,
if a U.S. person alienates
an asset that at

one time formed
part of the business
property of a permanent

establishment
of that person in Austria,
and if the total gain
is

$100, and $25 of that gain accrued during the time that the asset

was part of the Austrian permanent establishment, Austria will

have taxed $25 of the gain at the time the asset was removed from

Austria,
and the United States
may tax the remaining $75
of
gain

at the time of alienation.

Paragraph 5 provides that gains derived by an enterprise of
a Contracting
State from the alienation
of ships, aircraft or
containers used
in international traffic
shall be taxable only in
that Contracting State. Consistent with the definition of
containers provided in
paragraph 3 of Article 8,
containers
include trailers,
barges, and related
equipment for the transport
of containers.
Thus, such gains are
taxable on the same basis
as
income from
the operation of ships
or aircraft under Article
8
(Shipping and Air Transport).

Paragraph 5 also provides that those gains that are included

within the definition
of royalties in paragraph
3 of Article 12

(Royalties) will be
subject to the rules of that
Article, and not
Article 13.
The gains
referred to
are those derived
from the
alienation of any right
or property that gives
rise to royalties

that are contingent
on the productivity, use,
or further alien­
ation thereof.
The source country
will either exempt such gains

or tax
them at not
more than
10 percent,
in accordance
with

Article 12.

Paragraph 6 provides
that gains from the alienation
of

property other than property referred to in paragraphs 1 through

5 are taxable only
in the Contracting State of
which the alien­
ator
is a resident. Thus,
gain
from the sale of corporate

securities
or other tangible
personal property not covered
in

paragraphs
3 and 4 is
exempt from tax at source.

Under
the Austrian tax law
for the reorganization
of

AUSTRIA 359
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-40­
enterprises,
if
a
foreign
corporation
has
a permanent
establishment
in Austria
and transfers
permanent
establishment
assets
into
a subsidiary,
Austria
will
tax the
appreciation
in
the
assets on
incorporation
unless
the
shares remain
subject
to
Austrian
tax.
This is
consistent
with
paragraph
3, which
permits
the Contracting
State in
which
the permanent
establishment
is

located to tax gains on the alienation of personal property

forming
part
of the
business
property
of
the permanent

establishment.

In the
reverse
case,
with regard
to
the transfer
of

appreciated
assets of an
Austrian company's permanent

establishment
in the
United States
to a U.S.
subsidiary,

paragraph
3 also
would permit
the United
States
to
tax such

gains.
However,
the transaction
may not
be taxable under
the
.corporate
reorganization
provisions
of
the
Internal
Revenue
Code
(section
351 and
related provisions).

Paragraph
7 provides
that
where property
was transferred
by

a resident of
the United States to an
Austrian company as a

capital
contribution and,
in application of the Austrian

Reorganization Tax
Act (Umgruendungssteuergesetz),
no capital

gains
taxation
took place, a subsequent
alienation of the

respective shares
in the Austrian company
that takes place

through
the year 2010 shall remain taxable
in
Austria. This rule
applies to the disposition of stock that was received on the
incorporation of a permanent establishment in Austria if the

capital gains were
not taxed on the incorporation
of
the

subsidiary.

The operation of paragraph 7 is illustrated by the following
example.
A U.S. corporation (A) has
a permanent establishment
in
Austria, with assets having a tax basis of 1,000 and a net market
value of 5,000.. Thus, the permanent establishment represents a

business
with untaxed (hidden)
reserves of 4,000. Assume
that,
in 1996 (or in any
year thereafter before 2011),
the Austrian
permanent establishment is transformed into an Austrian company

(B).
This can be arranged under
the current Austrian tax
regime
tax free, which means that the assets of the permanent

establishment will be incorporated into the financial accounts of
the new company
at 1,000. Correspondingly,
the shares held by A
in the newly
created
Austrian company B
will be valued for tax

purposes at 1,000.
If the shares were sold
in 1999 (assume for

5,500), then
this transaction would
be
taxable in Austria
(capital gain:
4,500). In
case the sales
price is
only 4,000,
the capital
gain would
be 3,000.

Under these same
facts, except that another
form
of

alienation is chosen,
such as a contribution
of the shares into

the U.S. or Austrian company (X) before the year 2011, the result
would be the same; the capital gain would be taxable in Austria

AUSTRIA
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-41­
because, if X subsequently
sells its stock to company
Z, this
transaction could not be taxed any more under the new treaty
even
within the
interim period
ending in 2010.
Under
these same facts, except
that the stock of B
is sold
or otherwise alienated after year 2010, the transaction would not
be taxable
in Austria.
In the event that a transfer of stock is treated as an

"alienation" for Austrian tax purposes and double taxation
results,
it is expected that any such
double taxation would
be
addressed under competent authority procedures.
Notwithstanding
the foregoing limitations on source State

taxation of certain gains, the saving clause of paragraph 4 of
Article 1 (Personal Scope) permits the Contracting States to tax

their citizens and residents as if the Convention had not come

into
effect. The
rules of paragraph
4 of
this Article,
however,
continue
to apply to the citizens
and residents of a Contracting
State by virtue
of the exceptions to the
saving clause of para­
graph 5 of Article
1. As with all
benefits under this
Convention the
granting of benefits under
this
Article is subject
to the requirement
that the beneficial
owner of the income
qualify
for benefits
under the
provisions
of Article
16
(Limitation
on Benefits).

Article
14. INDEPENDENT
PERSONAL
SERVICES

The Convention
provides separate
articles dealing with
different
classes of income from personal
services. Article
14
deals with
the general class of income
from independent personal
services,
and Article
15 deals
with the general
class
of
income
from dependent personal services.
Modifications to
these general
rules are
provided for the performance
income of artistes and
athletes
(Article 17); pensions in
respect of personal service
income,
social security benefits, annuities,
alimony,
and child

support payments
(Article
18); government
service
salaries
(Article 19); and
income
of students and business
trainees
(Article
20).

Article 14
provides the
general rule
that income
derived by
an individual
who is a
resident of a
Contracting
State from the
performance
of personal
services in an
independent
capacity shall
generally be taxable
only in that State. However,
such income
may
be taxed in
the other Contracting
State
if the services
are
performed
there
and the income
is attributable
to
a fixed
base
that is
regularly available
to the
individual in
that other State
for the
purpose
of performing
his
activities.
The
Convention does not define
the term "fixed base,"
but its
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-42­
meaning
is understood to be
analogous to that of the
term
"permanent
establishment," as
defined in Article 5 (Permanent
Establishment) similarly,
the rules of Article
7 (Business

Profits)
for attributing
income
and expenses
to a permanent
establishment
are generally
relevant
for attributing
income to
a

fixed base. However,
the taxing right conferred
by this Article
with respect
to income from independent
personal services
is
somewhat
more limited than that provided
in Article 7 for the

taxation
of business profits. In both
articles the income of
a
resident of one Contracting State must be attributable to a

permanent establishment or fixed base in the other for that other
State to have a taxing right. In Article 14, in addition,
the

income must be attributable to services performed in that other

State, while Article 7 does not require that all of the income

generating activities
be performed in the State
where
the

permanent establishment is located.

The Article does not define the term "personal services in an

independent capacity." The term, however, is understood to
include all personal
services
performed by
an
individual for his

own account,
whether as a
sole proprietor
or a partner,
where he
receives the income
and bears the risk of
loss arising from the

services. Income
from services in which
capital is a material
income producing
factor will, however, generally
be governed by

the provisions of Article
7 (Business Profits). The
taxation
of

income of an individual from
those types of independent
services

that
are covered
by Articles 17
through 20
is governed
by the
provisions
of those
articles.
There
is no
Article
in the
Convention
that deals
specifically
with directors'
fees.
Such
fees
paid to
"outside-directors"
are
covered
by this
Article.
The rule in
paragraph
9 of Article
7 (Business
Profits)

applies to Article
14 as
well. That
rule clarifies,
in the
context
of Article
14, that income
which is
attributable
to, a

fixed
base
but is
deferred and
received after
the fixed base
no

longer
exists, may
nevertheless
be taxed by
the State in
which

the
fixed base was
located. Thus,
the tax cannot
be avoided
by
deferring the payment.

The taxing
rule
in
paragraph
1 of the
Article
differs

significantly
from
that in
the 1956
Convention.
Under
Article
X
of that
Convention,
the host
State
exempted
from tax
income
from
independent
personal services
performed
by a resident
of the

other State
if the
person
performing
the services
was
present
in

the host
State for
a period
or periods
aggregating
not more
than

183 days
in the
taxable
year, and
either
the individual
was
performing
his
services
under
contract
with a
resident
of the

individual's
State of
residence,
and the
compensation
was
borne

by
that person,
or
the compensation
did
not
exceed
$3,000.
The
new Convention
does
not
examine the
length
of time
or compensa­
tion
received
but,
instead,
considers
whether
the income
received.

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-43­
from
independent
personal
services
performed
is
attributable
to
a

fixed
base.

If the
individual
is
an Austrian
resident
who performs

independent
personal
services
in the United
States,
and the

individual
is also
a U.S. citizen, the
United States
may,
by

virtue
of the saving clause of
paragraph 4 of Article 1 (Personal

Scope)
tax the individual's income
without regard to the
restric­
tions of this Article,
subject to the special
foreign tax credit

rules of paragraph
2 of Article 22 (Relief from Double Taxation).

Article
15. DEPENDENT
PERSONAL
SERVICES
This Article deals with the taxation of remuneration derived
by a resident
of a Contracting State
as an employee.
Under paragraph 1, employment income derived by an individual

who is a resident of a contracting State may be taxed in the

State of residence. To the extent the remuneration is derived

from an employment exercised in the other Contracting State (the

"host country"),
the
remuneration may also
be taxed by the host

country, subject to the conditions specified in paragraph 2.

The provisions of this paragraphs apply, subject to the

provisions of Articles 18
(Pensions) and 19 (Government
Service).

Thus, if a person is exempt from tax in the host country under

the provisions
of Articles 18 or 19 (eg.L,
the person is perform­
ing Government
service
on behalf of one
State
in the other) he

cannot be subject to host
country tax under paragraph
1 of this

Article even though his
employment is exercised
in the host

country. Article 17 (Artistes
and Athletes) specifies
that
its

provisions apply notwithstanding
the provisions of
this Article.

Thus, for example, a resident of one Contracting State, who is a

member of a football team
that plays in the other
Contracting

State, and
who earns over S20,000
in a taxable year from his

performances
in the other State will
be subject to host country

tax on his
employment income even if
he would otherwise be exempt

under Article 15.

Paragraph
2 specifies the conditions
under
which, even where
the remuneration
of a resident of a
Contracting State (described
in paragraph
1) is derived from sources
within the other Con­
tracting
state
(ie., the services
are performed
there),
that
other
State may
not tax the
remuneration.
The host country
may
not
tax if three conditions are
satisfied:
(1) the individual
is
present
there for a period
or periods not exceeding,
in the
aggregate,
183
days in any 12-month
period
beginning
or
ending in
the fiscal year concerned; (2) the remuneration is paid by, or on
behalf of, an employer
who is not a resident of
the host country;
and (3)
the remuneration is not borne
as a deductible expense
by
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-44­
a permanent
establishment
or fixed base
that the employer
has
in

the host
country.

The first
condition
is taken
from
the
1992
OECD
Model.
In

previous
OECD
Models,
the
183-day
period
covered
only
the
fiscal

year concerned. This permitted an abuse under which an employee

could
remain
in a country
for the
last
5 1/2 months
of
one
fiscal

year
and the
first 5
1/2 months
of the
next and
fail to meet
the

test
for taxability
in the host
country. The
language
of
sub­
paragraph
2(a)
prevents
that
abuse.

The 183-day
period
in condition
(a) is to
be measured
using

the "days of physical presence" method. Under this method, the

days
that are
counted include any day in which a part of the day

is spent in the host country.
(Rev. Rul. 56-24,
1956-1 C.B.

851.) Thus, days that are counted include the days of arrival

and departure;
weekends
and holidays on
which the employee does

not
work but is present within the country;
vacation days spent

in the country before, during or after the employment period,

unless the individual's presence before or after the employment

can be shown to be independent of his presence there for employ­
ment
purposes; and time
during periods of sickness,
training

periods, strikes etc., when the individual is present but not

working. If
illness prevented the individual
from leaving the

country in sufficient
time to qualify for
the benefit, those days

will not count. Also, any part of a day spent in the host

country while in transit between two points outside the host

country is not counted. These rules are consistent with the

description
of the 183-day period
in paragraph 5 of the Commen­
tary to Article 15 in the OECD Model.

Conditions (2) and
(3) are intended to assure
that
a Con­
tracting State will not be required both to allow a deduction to

the
employer
for the salary paid and
to exempt the employee
on

the amount received. If
a foreign employer pays the
salary of an

employee, but a host country
corporation or permanent
establish­
ment reimburses the foreign
employer in a deductible
payment that

can be identified as a reimbursement,
neither condition
(2) nor

(3),
as the case
may
be, will
be considered
to have been
ful­
filled. For the remuneration to be exempt from tax in the source

State,
all three
conditions
must be
satisfied.

Paragraph 3 contains
a special rule applicable
to
remunera­
tion 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 comple­
ment
of the ship
or aircraft.
The "regular
complement"
includes

the
crew. In
the case, for
example, of
a cruise ship,
it may

also
include
others,
such as entertainers,
lecturers,
etc.,

AUSTRIA
364
Supp. No. 6(1998)

-45­
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.
A U.S.
citizen resident in
Austria who performs dependent

services
in the United
States and meets
the conditions for
U.S.
exemption
under paragraph 2, or
a U.S. citizen or resident
who
is

a crew member on an
Austrian ship or airline,
and would, there­
fore, be exempt from
U.S. tax under paragraph
3 were he not a

U.S. citizen
or resident, is, nevertheless,
taxable in the United

States on his remuneration by virtue of the saving clause of

paragraph 4 of Article 1 (Personal Scope), subject to the special

foreign tax
credit rule of paragraph
2 of Article 22 (Relief from
Double Taxation).

Article
16. LIMITATION
ON BENEFITS

Article 16 addresses the problem of "treaty shopping." The
Article ensures that only those persons intended to benefit from
the Convention --residents of the other Contracting State --do
so, by not granting benefits that will ultimately enure to the
benefit of residents of third States that do not have a substantial
business in, or business nexus with, that other Contracting State.
In a typical case of treaty shopping, a resident of a third

State wants to derive
treaty-favored
income from
one of the

Contracting States, but
has no treaty, or has an
unfavorable
treaty,
with. that
State. The
third-country
resident
would
establish an
entity resident
in the
other Contracting
State
principally
for the purpose
of deriving
income from
the first-
mentioned Contracting
State
and claiming
treaty benefits
with
respect to that
income. Article 16 seeks
to deny benefits to
such persons by limiting
the benefits of the Convention
to those

persons whose
residence
in a Contracting
State
is
unlikely to

have
been motivated
by the
existence of
the Convention.

Absent
Article 16, the entity described
in the preceding
paragraph
generally would
be entitled
to benefits
as a resident
of a Contracting
State, subject,
however, to anti-abuse
provisions
(eg_, business
purpose,
substance-over-form,
step
transaction
or conduit
principles)
that may
apply
to the
transaction
or arrangement under the
domestic law of the source
State.
As
noted in
the Memorandum
of
Understanding,
Article
16
and the anti-abuse
provisions
of domestic law
complement each

other,
as Article
16 generally
determines
whether an entity
has

sufficient
nexus
to the Contracting
State
to be treated
as a

resident
for treaty purposes,
while domestic anti-abuse

provisions
determine whether
a particular transaction should
be

AUSTRIA 365
Supp.
No.
6 (1998)

-46­
recast
in
accordance
with
the
substance
of
the transaction.
The
structure
of the Article
is as
follows:
Paragraph
1
lists
a
series
of
attributes,
any
one
of which
will
entitle
a
person
who is
a resident
of a Contracting
State to
some or
all of
the benefits
of the
Convention
in
the other
Contracting
State.

These tests are
essentially objective tests. Paragraph 2 pro­
vides
that benefits
may
be granted,
even
to a person
not
entitled

to benefits
under
the tests
of paragraph
1, if the
competent

authority of
the State in
which the relevant
income
arises
so

determines.
Paragraph 3
defines the
term "recognized
stock
exchange."
Paragraph
4
addresses "triangular
cases."
Paragraph
5
authorizes the
competent authorities
to
develop agreed
applica­
tions
and to exchange
information
necessary
for
carrying
out the
provisions
of the Article.
The negotiators
developed
a Memorandum
of Understanding

indicating how the provisions of the Article are to be understood

both by the competent
authorities and by
taxpayers in the Con­
tracting States.
It is anticipated that
as the competent author­
ities
and taxpayers gain more
experience with the concepts
in

this
Article further
guidance
will be developed
and made
public.
The
Memorandum of Understanding
discusses the anti-abuse
concept of the treaty,
making the point that
the treaty
provi­
sions designed to curb
abusive international transactions
and to

exclude income from
those transactions from treaty
benefits do

not prevent a Contracting
State from applying
a "substance over
form" evaluation of the facts in cases not specifically covered
by an anti-abuse clause in the treaty. The phrase "substance
over form"
is understood to refer to
the process of looking
at
the economic substance of a transaction or event rather than
solely at
its legal form. This process
also encompasses the
notion of taking into account
the economic consideration
that
underlies
the
transactions
or
event.
Under subparagraphs
(a) and
(b) of paragraph 1, two
categories of persons
eligible for benefits
from the other
Contracting State are
(1) individual residents
of a Contracting

State and (2) the Contracting
States, political
subdivisions or
local authorities
thereof. It is unlikely
that a person falling

into one
of these categories can
be used to derive treaty­
benefitted
income as the beneficial
owner of the income on behalf

of a third-country
person. If an individual
receives 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 those articles

require
that the beneficial owner
of the income be a resident
of

a
Contracting
State.

Subparagraph
1(c)
describes the
"active trade or business"
AUSTRIA
366
Supp.
No. 6(1998)

-47­
and the
"substantiality"
test
for
eligibility
for
benefits.
This
subparagraph
looks
not at
objective
characteristics
of the
person

deriving
the
income,
but at
the
nature
of
the
activity
engaged
in

by
that person
and
the connection
between
the
income
and that

activity.
Under
this
test,
a resident
of
a Contracting
State
deriving
an item
of income
from the
other Contracting
State is
entitled
to
benefits
with
respect
to that
item
of income
if the
person
is engaged
in an active
trade or business
in the State
of
residence
and
the item
of income
in
question
is derived
in
connection
with,
or
is
incidental
to, that
trade
or business.
If
the income is derived in
connection with the trade
or business,

rather
than being
incidental
to it,
the trade
or business
must be

substantial
in relation
to
the income
generating
activity
in the

other State.
The
substantiality
test
is needed
to support
the
connection
between the
income and the active
trade or business.

The test
for incidental
activity
does
not require
substantiality.

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.

In general,
it is expected that if a
person qualifies for
benefits under
the other subparagraphs
of
paragraph 1,
no inquiry
will be made
into qualification for benefits
under subparagraph
1(c).
Upon satisfaction
of any of
the other tests
of paragraph

1, any income derived
by the beneficial owner
from the other Con­
tracting
State is entitled to treaty
benefits. Under subpara­
graph 1(c),
however, the test is applied
separately for each item
of
income.

The Memorandum of Understanding
describes the understandings
reached by the negotiators
on the intended scope of
subparagraph
1(cy and illustrates some
of these understandings
by means of

examples. The examples
are not intended to be exhaustive,
but
merely to illustrate the kinds of considerations relevant in

determining whether a particular case falls within the scope of

subparagraph
1(c).

The Memorandum
of Understanding
also describes how the

negotiators agreed to interpret certain terms used in subpara­
graph 1(c). A person resident in one of the States will be
considered to be engaged in an active trade or business not only

if such person is directly so engaged, but also if the person:
(i) is a partner
in a partnership;

(ii) is under
the beneficial
control
of a single
person

engaged in an active
trade or business in
that State;
(iii) is under the beneficial control of a group of five or

AUSTRIA 367
Supp. No. 6 (1998)

-48­
fewer
persons
each member
of which
is engaged
in activity
in
that
State
that
is a component
part
of or
directly
related
to the
trade
or business
in
that State;
(iv)
is a
company
that is
a member
of a group
of companies
that forms, or could form, a consolidated group for tax purposes
under domestic
law (as applied without
regard
to the residence
of
such companies)
and the group is engaged
in an active trade
or
business
in that
State;

(v) owns, either
alone or as a member
of a group of five or
fewer persons
that are qualified persons
or residents of an

"identified state," a controlling beneficial interest
in a person
engaged if an active trade or business in the owner's State of
residence; or
(vi) is together with another person that is so engaged,
under the common
control of a person
or a group of five
or fewer
persons. that (or, in the
case of a group, each member
of which)
is a qualified person or a resident of an "identified state."
The Memorandum of Understanding defines an "identified
state" as any third country that the competent authorities agree
has effective
exchange
of
information provisions
with
the State

being requested to give treaty benefits. It defines "income
derived
in connection with or incidental
to" a trade or business
as income
that comes from a line of
business (or assets that are
part of that business)
in Austria that forms
part of a business

conducted in the United States, or vice versa.

The Memorandum
of Understanding
clarifies, principally
through
the use of a number of examples,
what is meant by the
term "substantial."
In
the case of an
Austrian resident
deriving
income from
an active
trade or business
in the
United States
carried
on by
a related
person,
for that
Austrian
trade
or
business
to be
considered substantial
in relation
to the
income-
generating
activity
in
the United
States,
it is
not necessary

that the trade
or business be as large
as the U.S. income-
generating
activity.
The Austrian
trade or
business cannot,
however,
in terms of
gross income,
assets, or
similar measures,
be only
a very small
percentage
of the
U.S. activity.
The
substantiality
requirement
is intended
to prevent
an
abuse of
the active
trade or business
test.
For example,
a
third-country
resident
may want to
acquire a U.S.
motion picture
company.
If its
country of residence
has
no tax treaty
with the
United
States, any
dividends
generated by the
investment
would be
subject
to a 30-percent
U.S.
withholding tax.
Absent a
substan­
tiality
test,
the
investor could
set up an
Austrian corporation
that would
operate a small
video-rental
outlet in Austria
to rent
a
few videos
of the
movies produced
by the U.S.
company.
That
AUSTRIA 368
Supp. No. 6 (1998)

-49­
Austrian
corporation
would
then acquire
the
U.S. production

company
with capital
provided
by the
third-country
resident.
It
might be
argued
that the
U.S.-source
income
is generated
from
business
activities
in the United
States related
to the
video-

rental activity
of the Austrian
parent
and that the
dividend

income should
be subject to U.S.
tax at the 5-percent rate

provided in Article 10 (Dividends).
However, the substantiality
test would not be met in this
example, so the dividends would

remain subject to the 30-percent withholding tax in
the United

States.

In addition to this subjective facts and circumstances

approach to interpreting substantiality, the Memorandum of

Understanding provides a safe-harbor
standard.
Under the safe
harbor,
in general, an activity in
a State will be deemed sub­
stantial
in relation to the income-producing
activity in the

other State
if the ratios of the
assets used in the first-

mentioned
State, gross income derived
from the active business
in

that State, and payroll
expense for services performed
in that

State to the assets,
gross income, and payroll
expense,

respectively, for services
performed in the other
Contracting

State
each exceed
7.5 percent and
the average
of the three
ratios

exceeds
10 percent. If ratio for
any factor fails the 7.5­
percent test,
the average ratio for
the preceding three years may
be substituted for that factor. A similar test applies in the
recent U.S.-France income
tax treaty,
the U.S.-Netherlands
income

tax treaty, and the
proposed U.S.-Luxembourg
income tax treaty.
Since the term "gross
income" is not defined
in the conven­
tion,
in determining whether
a person deriving income from
U.S.
sources
is entitled
to the. benefits
of the
Convention,
in
accordance
with paragraph
2 of Article
3 (General
Definitions),
the United States
will ascribe the meaning
to the term that it
has under U.S.
law. Thus,
in general,
the term should
be under­
stood to mean
gross receipts (net of returns
and allowances) less
the cost of goods
sold. The cost of sales
and operations,
or
cost of
goods sold,
includes the
sum
of the direct
materials,
direct
labor, and overhead
costs
related
to producing,
acquiring,
storing,
and handling the inventories
sold during a
period.
Overhead
costs allocable to
inventory include depreciation,
property
taxes paid, amortization,
employee retirement
plan
expenses,
or other
supervisory,
general, and
administrative
(SG&A) expenses,
to the extent
these costs
directly
benefit or
are incurred by reason
of inventory operations.
The
cost of

goods sold does not include
expenses associated with
advertising,

promotion, sales and marketing,
or operating costs not
related to

inventory operations.

Subparagraph
1(d) provides a two-part
test, ownership and

base erosion,
both
of which must
be met for
benefits to
be

granted
under this subparagraph.
Under these tests, benefits
AUSTRIA 369
Supp. No. 6 (1998)

-50­
vill be
granted
to a resident
of
a Contracting
State
if both
(1)
more than 50
percent of
the beneficial
interest in
the
person

(or,
in the case
of a corporation,
more than
50 percent of
each

class of its shares) is owned,
directly or indirectly,
by persons

who are themselves entitled
to benefits under the other
tests of

paragraph
1 (other
than
subparagraph
(c)),
or by
U.S. citizens,
and (2) not more than 50 percent of the person's gross income is
used, directly
or indirectly,
to
make deductible
payments
to

persons
who are not themselves
eligible for benefits under
the
other
tests of paragraph 1 (other
than subparagraph (c)),
or who
are not
U.S. citizens.
The rationale for
this two-part test is that
since 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, merely requiring substantial ownership of

the entity by treaty country residents or U.S. citizens is not

sufficient
to prevent such benefits
from flowing substantially
to

third-country residents. It is also necessary to require that
the
entity's deductible payments
be made to such treaty
country
residents
or their equivalents.
For example, a third-country
resident
could lend funds
to an Austrian-owned Austrian

corporation
to
be on-lent to
the United States.
The U.S.-source
interest
income
of the Austrian
corporation
would be
exempt
from
U.S. withholding
tax under
Article
11 (Interest).
While
the
Austrian
corporation
would
be subject
to
Austrian
corporation

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
Austria
and the third
country,
that

interest
income is
exempt from Austrian
tax,
the
U.S. treaty
benefit
with respect
to
the U.S.-source
interest
income
will
have

flowed to
the third-country
resident
inappropriately,
with
no
reciprocal
benefit to
the United
States from the
third country.

Under
subparagraph
1(e) a
company that
is a resident
of a

Contracting
State
is entitled
to
treaty
benefits
from the
other

Contracting
State
if there
is
substantial
and
regular
trading
in

the company's
principal
class
of shares
on a recognized
stock
exchange.
Paragraph
3 defines
the
term "recognized
stock ex­
change"
as the
NASDAQ
System
and
any stock
exchange
registered
as
a national securities
exchange
with the
U.S. Securities
and Ex­
change Commission,
and the
Vienna stock
exchange.
Paragraph 3
also
provides that
the competent
authorities
may, by
mutual
agreement,
recognize
additional
exchanges
for purposes
of sub­
paragraph
1(e). The
contracting
States intend
that the term
"principal
class
of shares"
is
to be interpreted
as the class
of
shares that
represents
the
majority
of the voting
power
and value

of
the company.
When
no single
class
of
shares
represents
the
majority
of
the voting
power
and value
of
the
company,
the
"principal
class
of shares"
is
generally
those classes
that
in
AUSTRIA
370
Supp. No. 6 (1998)

-51 ­
the aggregate
possess
more
than 50 percent
of the voting
power

and value
of the company. The term
"shares'! shall include
depository
receipts thereof
or trust
certificates
thereof. In
determining
voting
power, any shares
or class
of shares that
are

authorized but not issued
shall not be counted; and,
in mutual

agreement between
the competent authorities, appropriate
weight

shall be given
to any restrictions or limitations on voting

rights
of, or entitlement to disproportionately higher

participation
in, issued
shares.

Subparagraph 1(f) grants benefits to a company of which no
more than five publicly-traded companies,
as defined in subpara­
graph 1(e), own, directly or indirectly, at least 90 percent of
their shares. Such ownership
must
be at least 90%
by vote and
value.
Each person in the ownership
chain must be a resident
of
a Contracting State and the owner of any remaining portion of the
company
must be an individual resident
of a Contracting State.
This would
allow a corporation to
qualify for benefits if, for
example,
it is a wholly-owned subsidiary
of a publicly-traded

company that
satisfies the tests of
subparagraph 1(e) and would,

therefore,
itself qualify
for benefits
if it received
any income

from the
other Contracting State.
If
the ownership of any

remaining
portion of the company
belongs to more than one

individual,
each such
individual
must be a
resident of
a

Contracting
State.
Therefore,
up to 10%
of shares are
permitted

to be held by individual
residents
of a Contracting
State.

Subparagraph
1(g) provides
that
a not-for-profit
organization
that
is a resident
of
a Contracting
State is
entitled
to benefits
from
the other Contracting
State
if it
satisfies
two conditions:
(1)
It must be
generally exempt
from
tax
in its State
of residence
by virtue
of its not-for-profit
status,
and
(2) more
than half
of the
beneficiaries,
members,
or
participants, if
any, in the organization
must be persons
entitled,
under
this Article,
to the benefits
of the Convention.
Subparagraph
1(h) grants
benefits
to a resident
of
a
Contracting
State
if that
person
is a .recognized
headquarters
company
for a multinational
corporate
group.
A person is
consid­
ered
a headquarters
company
for
this purpose
only
if several
conditions,
specified
in the Memorandum
of Understanding,
are
satisfied:
The person
seeking
such
treatment
must
perform
in
its
residence State
a substantial
portion
of
the overall
supervision
and administration
of the
group, which
may include, but
cannot be
principally,
group financing;
the person
must have, and
exercise,
independent
discretionary
authority
to
carry
out
these functions;

and it
must be
subject
to
the same
income
taxation
rules
in
its

residence
State
as are persons
engaged
in the
active
conduct
of a

trade
or business,
as described
above
in
connection with
the

active
business test under
subparagraph 1(c).

AUSTRIA
371
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-52­
In
addition, the
headquarters
company
must
meet the
follow­
ing conditions:
Either for
the taxable
year
concerned,
or as
an
average for
the preceding four years, the activities
and gross

income of the corporate group
that the headquarters company
supervises and
administers must
be spread sufficiently
among
several
countries.
The group must
consist
of corporations
resident
in, and
engaged
in an active
business
in,
at least
five
countries
or groups
of countries,
and the
income derived
in the

Contracting
State
of which
the headquarters
company
is not a

resident
must
be
derived in
connection with,
or to be incidental

to, that active business.
The business activities
carried on in
each of the
five countries
or
groupings of
countries must

generate
at least
10 percent
of the
gross
income
of the group.

The
business activities
carried on
in any one country
other than
the Contracting State
where the headquarters company
resides may

not generate
50 percent
or more of the
gross income
of the group.

Moreover, no more than
25 percent of the headquarters
company's

gross income may be derived from the other Contracting State.

These
tests also appear in the U.S.-France treaty.

The provisions of paragraph 1 are intended to be self

executing. Unlike claiming benefits under paragraph 2, discussed
below, claiming benefits
under this paragraph
does
not require
advance competent authority ruling or approval. The tax authori­
ties may, on review, determine that the taxpayer has improperly

interpreted the paragraph and is not. entitled to the benefits

claimed.

Paragraph
2 provides that a
resident of a Contracting
State

that does not qualify for benefits of the Convention under the

provisions of paragraphs 1 and 4, nevertheless, may be granted

benefits
at the discretion of
the competent authority of
the Con­
tradting
State in which the income
arises. The competent
author­
ity
of the State requested to
give
benefits will consult
with the

competent
authority
of the other
State before
denying
benefits
under this paragraph.

The
Memorandum of Understanding
provides some discussion
and
guidance as to how the discretionary authority is to be exer­
cised.
Relevant portions
are reproduced
below.

It is assumed that, for purposes of implementing paragraph

2,
a taxpayer
will be permitted
to present
his case
to his
competent
authority for an advance
determination based
on the
facts,
and will not be required
to wait until the tax authorities

of one
of the Contracting
States
have determined
that benefits

are denied before
making a request under
this paragraph. In
these circumstances,
it is
also expected
that
if the
competent

authority determines that
benefits are to be allowed,
they will

be allowed retroactively to the time of entry into force of the

relevant treaty
provision or the establishment
of the structure
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-53­
in question, whichever is later.

In making determinations
under paragraph
2, it is
understood
that the competent
authorities
will take
into account
all rele­
vant facts
and circumstances.
The
factual
criteria
the competent
authorities
are expected
to take
into
account
include
the
exis­
tence
of a clear business
purpose
for the structure
and location

of the
income
earning entity
in
question;
the
conduct
of
an

active
trade or business
(as opposed
to a mere
investment
activi­
ty) by such entity; a valid business
nexus between that entity
and the activity
giving rise to the income
and the extent to

which the entity,
if it is a corporation,
would be entitled
to

treaty
benefits comparable to
those afforded by the.Convention
if

it had been incorporated in the country of residence of the

majority
shareholders.

The following example
illustrates
the application
of these

principles:

Facts: Austrian, German and Belgian companies, each of
which is engaged directly or through its
affiliates in substantial
active business
operations
in its country
of residence,
decide
to
cooperate in the development, production and
marketing of an advanced passenger aircraft
through a corporate joint venture with its
statutory seat in Austria. The development,
production
and marketing aspects
of the project

are carried out by
the individual joint
venturers.

The joint venture
company, which
is staffed with a
significant
number
of managerial
and financial

personnel
seconded
by the
joint venturers, acts
as

the general
headquarters for
the joint venture,
responsible
for
the overall management
of the
project
including coordination
of the functions
separately
performed
by the individual
joint

venturers
on behalf
of the
joint venture
company,

the investment
of working
capital
contributed
by

the joint venturers
and the financing
of the

project's
additional
capital
requirements
through

public
and private
borrowings.
The
joint venture
company derives portfolio
investment income
from

U.S. sources.
Is this
income eligible for

benefits
under the U.S.-Austrian
treaty?

Analysis:
If the
joint venture
corporations's
activities
constitute an
active business and
the income is
connected
to
that business,
benefits
would
be
allowed
under
subparagraph
1(c).
If not,
it is
expected
that the U.S.
competent authority
would

determine that
treaty benefits should
be allowed

AUSTRIA 373
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-54­
in
accordance
with
paragraph
2 under
the
facts

presented,
particularly
in
view
of
(i)
the
clear
business
purpose
for
the
formation
and
location
of
the joint
venture
company;
and (ii) the
significant
headquarters
functions
performed
by

that
company
in
addition
to financial
functions.

The
fact
that
all
of
the
joint
venturers
are
corporations
resident
in European
Union
member
States
having
tax
treaties
in
force
with the
United States
and that
they are
engaged directly
or through
their
affiliates
in
substantial
active
business
operations
in such
EU member
states
is an element
in
determining

eligibility
for
benefits
under
paragraph
2.

The discretionary
authority
granted
to the
competent
author­
ities
in paragraph
2 is particularly
important
in
view of
the

developments
in, and
objectives
of,
international
economic.

integration,
such
as that among
the
member states
of
the European

Union and
the members
of the
North
American
Free Trade
Agreement.
It is expected
that
the
authority
will be
exercised
with
particu­
lar
cognizance
of those factors.

The
Memorandum
of
Understanding
notes
that the
United
States

and
Austria
will
discuss
whether
Article
16 should
be
amended
to

reflect
Austria's
relationship
with
its
EU partners.
If such an

amendment
proves
to be desirable,
a
Protocol
to
the Convention

will
be promptly
negotiated
to reflect
this understanding.

Paragraph
4 addresses
the so-called
"triangular
case," in

which an
Austrian
enterprise
derives
interest
or royalty
income

from
the United
States,
and
that income
is
attributable
to
a

permanent
establishment
located
in a
third
jurisdiction,
and that

third
jurisdiction
imposes
little or
no income
tax liability
on

those
profits.
This
provision
is necessary
in
this Convention
to

prevent triangular
case abuse since Austria
exempts from tax

profits
attributable
to a permanent
establishment
of
its
resi­
dents located in certain
countries, although
it would tax the

income
(subject
to a foreign
tax credit)
if the income
were

earned
directly by the Austrian
resident and were not attribut­
able
to the permanent
establishment
in
the third
jurisdiction.

The
Contracting
States
agreed
that it
would be
inappropriate
to

grant
treaty benefits
with
respect to such
income. Therefore,

paragraph
4 generally
denies any
treaty benefit
with respect
to

interest
or royalty income beneficially
owned
by an Austrian

resident
and
attributable
to a permanent
establishment
in a third

jurisdiction
if the combined
tax in
Austria and the
third juris­
diction
is less than 60 percent of
the tax that would be imposed

in Austria if the
income were subject to tax
there. The para­
graph is
drafted for Austria only
since it has no application

with respect
to the United
States, because
the United
States does

not exempt
the profits of a U.S.
company attributable to its

AUSTRIA
374
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(1998)

-55­
foreign
permanent
establishments.
For
example,
assume
that an
Austrian
Company
has a
permanent
establishment
in a
third
country
and
that
the permanent
establishment
earns
royalty
income
derived
in
the United
States.
The royalty
income
is attributable
to the
permanent
establishment
of the Austrian company in the third country.
Also assume that,
under
the tax
treaty
in
force
between
Austria
and
the
third
country,
Austria
will
not impose
its
income
tax on
the
profits
of
the Austrian
company
from
its permanent
establishment
in
the
third
country.
Assume
further
that
the royalty
income
received
by the
Austrian
company
will be
subject
to income
tax in
the
third country
at an effective
rate
of 22% (using
a tax base
comparable
to that used
in Austria).
Inasmuch
as 22% taxation
in
the
third country
exceeds
60%
of the tax
that Austria
would
have

imposed
(34%), the
special disqualification
provision
of
paragraph 4 does
not apply to that
income.

The paragraph
provides
three exceptions
to the
general

restrictions.
First,
the provisions
of paragraph
4 do not apply
to
interest derived in connection
with
or incidental to an
active
trade or
business carried
on by the
permanent
establishment
in
the third
jurisdiction.
The business
of making
or managing
investments is not an active trade or business for this purpose
unless
the activities are banking
or insurance activities
carried
on by a bank or insurance
company. Second, they
do not apply to
royalties received
as compensation for the use
of, or the right
to use,
intangible property produced
or developed by the perma­
nent establishment
itself. Third,
in the case of an Austrian
resident with a permanent
establishment in a third
jurisdiction,
the provisions of paragraph
4 do not apply if the profits
of the
permanent establishment are taxed in the United States, ie.,
under the subpart F provisions of Part III of Subchapter N of
chapter 1 of subtitle
A of the Internal Revenue
Code.
Paragraph
5 provides additional
authority to the
competent
authorities
(in addition to that of
Article 25 (Mutual Agreement
Procedure)) to consult together to develop a common application
of the provisions of
this Article. This provision
is intended to
expedite matters relating to the factors relevant in making a
determination
regarding qualification
for treaty benefits.
Article
17.
ARTISTES
AND
ATHLETES
This Article deals with
the taxation by a Contracting
State
of artistes
(i~e., performing artists
and entertainers) and
athletes resident in the other Contracting State from the perfor­
mance of their services as such. The term is considered to
include participants in certain activities, such as chess and
bridge tournaments, who might
not be considered "athletes"
in the
AUSTRIA
375
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-56­
traditional
sense.
The
Article
applies
both to
the
income
of
an

entertainer
or
athlete
who
performs
services
on
his
own behalf

and one
who
performs
services
on
behalf
of
another
person,
either

as an
employee
of that person,
or pursuant
to
any other arrange­
ment.
Paragraph
1 of
the
Article
applies
only
with
respect
to

the
income
of performing
artists
and
athletes,
themselves.

Paragraph
2 applies
in
certain
circumstances
to
income
received

by
persons
providing
the services
of
the 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
(Independent

Personal Services)
and 15 (Dependent
Personal Services).

Paragraph
1
describes
the
circumstances
in
which
a Contract­
ing
State
may tax
the performance
income
of an entertainer
or

athlete
who is
a resident
of the
other
Contracting
State.
Under

the paragraph,
the other
Contracting
State
may tax
the income

derived
by a
resident
of a
Contracting
State
from
personal

activities
as an entertainer
or athlete
exercised
in
the other

Contracting
State
if the
amount of
the gross
receipts
derived
by

the
individual
exceeds
$20,000
(or
its
equivalent
in
Austrian

shillings)
for
the taxable
year.
The $20,000
includes
expenses

reimbursed
to or
borne
on behalf
of, the
individual.
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
or athletes
with

no
dollar or time
threshold.
The United States
imposes
a dollar-

threshold
test
in its treaties
to distinguish
between two
groups
of
entertainers
and
athletes
--those
who
are
paid very
large
sums
of money for
very short
periods of service,
and who
would,
therefore,
normally
be exempt
from host
country tax
under the
standard
personal services
income
rules, and those
who earn
only
modest
amounts
and
are, therefore,
not clearly
distinguishable
from those
who earn
other types
of personal
service income.
Paragraph
I applies
notwithstanding
the provisions
of
Articles
7 (Business
Profits),
14
(Independent
Personal
Services)
and 15 (Dependent
Personal
Services).
Thus, an
individual who
would otherwise
be exempt
from tax under
those Articles,
but is
subject
to tax
under this Article,
may
be
taxed. An entertainer
or
athlete who receives less
than the $20,000 threshold
amount,
and who is, therefore,
not subject to host-country
tax under this
Article may,
nevertheless, be subject
to tax in that country
under Article 7, 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

taxable year, but the income is attributable to a fixed base

regularly
available
to the entertainer
in
the State of
perfor­
mance,
that State
may tax
that income
under Article
14.

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-57­
Since it is frequently
not possible to know until
the
end of
the year
whether
the
income
an
entertainer
or athlete
derived
from performance
in a Contracting
State exceeds
$20,000,
nothing
in the
Convention
precludes
that
Contracting
State from withhold­
ing tax during
the
year and refunding
after
the close of the year
if the taxability
threshold
is then shown
to have not
been met.
(See discussion of
paragraph 3, below,
regarding withholding
of

tax on payments
to a person
other than the performer.)
Article
17 applies to all income
directly connected
with a
performance
by the entertainer,
such as appearance fees,
award or
prize money, and a share of the gate receipts. Income derived
from a
Contracting State
from other
than actual
performance,
such
as
royalties.from record sales
and payments for product
endorse­
ments, is not covered
by this Article, but by
other articles of
the Convention,
such
as Article 12
(Royalties) or Article
14
(Independent Personal Services). For example, if an entertainer

receives
royalty income from the sale
of live recordings, the

royalty income
would be
exempt from
source country
tax under

Article 12, even if
the performance was conducted
in the source

country, although he could be taxed in the source country with

respect to income from
the performance itself
under this Article

if the dollar
threshold is
exceeded.

In determining whether income falls under Article 17 or

another article, the controlling factor will be whether the

income
in question is predominantly
attributable
to the
perfor­
mance itself or other activities or property rights. For in­
stance, a fee
paid to a performer for endorsement
of a perfor­
mance in which
the performer will participate
would be considered

to be so closely associated with the performance itself that it

normally would
fall within Article 17.
Similarly, a sponsorship

fee paid by a
business in return for the
right to attach its name

to the performance
would be so closely
associated with the

performance
that it
would fall
under
Article
17 as well.
A

cancellation fee
would not be considered
to fall within Article

17 but would
be other income
within the
meaning of
Article 21

(Other Income).
Each
case
must be evaluated
based on
its indi­
vidual facts and circumstances.

As indicated
in paragraph
4 of the Commentaries
to
Article 17

of the OECD Model,
where an individual
fulfills a dual role as

performer and
non-performer (such as
a player-coach or an

actor-director),
but his role in one
of the two capacities

is negligible
the predominant
character
of the individual's

activities should control
the characterization
of those

activities.
In other cases
there should
be an apportionment

between the
performance-related
compensation
and other

compensation.

Paragraph 2 is
intended to deal with the
potential for abuse

AUSTRIA 377
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-58­
when
income
from
a performance
by an
entertainer
or athlete
does
not
accrue
to the
performer
but, instead,
accrues
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,
for example,
be
a
company established
and owned by
the performer,.which
is merely
acting
as the
nominal income
recipient
in
respect
of the remuner­
ation
for the entertainer's
performance.
The entertainer
may
be
acting
as an "employee"
receiving
a modest
salary
and arranging
to receive
the
remainder
of the
income from
the performance
in
another
form or
at a later
time.
In such
case,
absent
the
provisions
of paragraph
2,
the company
providing
the
entertainer's
services
can
escape
host
State
tax
because
it earns
business
profits
but has no permanent
establishment
in
that
State.
The
income
could later
be paid
out to
the
entertainer
at
a time
when
the entertainer
is
not subject
to
host
country
tax,
perhaps
as salary
payments, dividends
or liquidating
distribu­
tions.
Paragraph
2 seeks
to prevent
this
type of
abuse
while at
the

same
time
allowing
the benefits
of the Convention
when a legiti­
mate employee-employer
relationship
exists between
the performer

and the
person
providing
services.
Under
paragraph
2, when
the
income accrues
to a person other than
the performer, resident
in

the same
Contracting State as the
performer, and the performer

(or persons related to
him
or her) 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. If the "employer"
is resident in a
third State,

this
Convention
does not apply
to its income.
It is,
therefore,

subject to the
host country's
internal
law, or to the
provisions

of a treaty if
one exists, between the
host country and the

country
of residence of
the "employer."

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 the per­
former, 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

AUSTRIA
378
Supp. No. 6 (1998)

-59­
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,
participates directly or indirectly in the profits of the person

providing the services of the entertainer or athlete. Consider
for example,
a circus owned by a U.S.
corporation that performs

in Vienna and the Austrian promoters of the performance pay the

circus,
which, in turn, pays salaries
to the clowns. The circus
has no permanent establishment
in Austria. Since
the clowns do
not participate
in the profits of the
circus, but merely receive
their salaries
from the circus' gross
receipts, the circus
is
protected
by Article 7 and its income
is not subject to Austrian
tax.
Whether the
salaries of the
clowns are
subject to Austrian
tax depends
on whether
the salaries
exceed the
$20,000 threshold.
This
exception
for
non-abusive
cases
is
not
in
the
OECD
Model,
but reflects the U.S. position
that the purpose of
the paragraph
is to prevent
abuse of the provisions
of Articles 7 and 14
in
this context.
Paragraph
3 authorizes the Contracting
State where
a
performer's
activities
are exercised
to withhold
tax on payments

made to a
person other
than the entertainer
or
athlete for

activities
exercised by
the entertainer
or athlete
in cases where

paragraph
2 does not apply.
Whereas
paragraph 2
covers abusive
cases, this
paragraph
is needed where
there is
no abuse, but
payment
is made to
an agent of
the entertainer
or athlete.
This
language
conforms
to U.S. policy.
Upon request
of the person
to
whom the
payment
is made,
the amount
withheld
in excess
of
the
tax liability
of the entertainer
or
athlete shall
be refunded.
Refund claims
must be accompanied
by
the necessary
documentation.
For example, the
Austrian organizer of a
domestic public
performance
enters
into a contract
with a
U.S. artiste
promotion
agency.
Under
that contract
the U.S. agency
agrees to
send a
U.S.
entertainer
(who
has no contractual
arrangements
with
the
Austrian
organizer
but
only with
the promotion
agency)
to perform
in Austria.
The Austrian
organizer
has to pay
1,000,000 to
the
agency
which in turn
has
to pay a
contractual
fee of 600,000
to

the artiste.
Under
paragraph
3, Austria
is
entitled
to
withhold
20% of the
1,000,000
paid
to the agency
and the
agency
in turn
is

entitled
to claim
a refund
of 20%
of 400,000
(provided
it can
prove
that only
600,000
was paid
to the
artiste).
However,
if
paragraph
2 applies, no
tax refund would take
place.
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-60­
The Memorandum of Understanding provides the following

clarification
of the
treatment
of
orchestras
and their
members:
Paragraph
1 of Article 17 relates
only to individuals.
Legal
entities
operating
an orchestra
(like associations,

municipalities,
and states)
are, according to
paragraph 1,
not taxable
in the country
where such orchestra
performs,
although
such entities
may be subject
to
tax in
the country
of performance
under paragraph
2 of this Article
or under

Article 7 (Business
Profits). The individual
musicians would
be taxable
there,
but only
if their annual
remuneration

received
for the
performance
in the host
state exceeded
the

threshold
of 20,000 U.S. dollars.
In the case of a monthly
paid salary
only that portion of
the monthly pay may become
taxable
which is allocable to the
days physically spent
in
the host country. If,
however, a performance-related
global
payment is made, then the
whole amount shall be
taken into

consideration
without
any
deduction for
periods of

preparation
spent outside
the host
State.

The reference in the
Memorandum of Understanding
to a

performance-related global payment refers to a payment consisting

of compensation for performance
and preparation where
each such
activity is not separately compensated under the artiste's or

athlete's contract. Therefore,
where a payment
is for a
performance in a host State, including preparation done outside

the host State, the whole amount may be taken into account by the
host State with no deduction for periods of preparation spent

outside
the host
State.

The 1956 Convention contains no special rules for the

taxation of the
income of entertainers and
athletes. Such income
was subject to
the general rules for the
taxation of personal
service
income, which
imposed, among
others, a
$3,000 threshold

for taxation of personal services income.

This
Article is subject to
the provisions of the
saving

clause
of paragraph 4 of Article
1 (Personal Scope). Thus,
if an
entertainer
or athlete who is
resident in Austria is
also a

citizen
of the United States,
the United States may tax
all of

his or her income from
performances in the United
States without
regard
to the provisions of this
Article, subject, however,
to

the
special
foreign
tax credit provisions
for U.S.
citizens
who

are residents
of Austria
found
in paragraph
2 of Article
22

(Relief from Double
Taxation). In addition,
benefits of this

Article
are subject
to
the provisions
of Article
16 (Limitation
on Benefits).

Article 18. PENSIONS

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This
Article
deals
with
the
taxation
of private
pensions
and

annuities,
social
security
benefits,
alimony
payments
and
child
support
payments,
and
with
the
tax
treatment
of cross-border
contributions
to
pension
plans.
Subparagraph
1(a)
provides
that, except
where
the provisions
of Article
19
(Government
Service)
apply
(i.e.,
where a
pension
is
paid
in respect
of
Government
service),
pensions
and other
similar
remuneration
derived
and
beneficially
owned
by
a resident

of
a Contracting
State
in consideration
of past
employment
are

taxable
only in
the State
of residence
of
the recipient.
This
rule
applies
to both
periodic
and
lump-sum
payments.
The
term
"pensions
and other
similar
remuneration"
includes
amounts
paid
by
all private
retirement
plans
and arrangements
in consideration

of
past employment,
regardless
of whether
they
are
qualified

plans
under U.S.
law, including
plans
and
arrangements
described
in section 457 or
414(d) of the Internal
Revenue Code.
It also
includes an
Individual
Retirement Account.
Treatment
of such
pensions under
the 1956
Convention
is essentially
the same as
under this Convention.
Subparagraph 1(b) provides
that social security
payments and
other public pensions paid
by one of the Contracting
States to a
resident of the other Contracting
State or to a United
States

citizen are taxable only in the paying State. The reference to
U.S. citizens
is to ensure that a social
security payment by
Austria to a U.S. citizen not resident in the United States will
not be taxable by the United States. The fact that these provi­
sions are also subject to the provisions of Article 19 places the
treatment of social security
benefits paid in respect
of past
government service under the rules of that article rather than
this one.

The Memorandum of Understanding clarifies that the term

"social security payments" is not restricted to old age pensions
but refers to all sorts of social security benefits, e.g., to
benefits granted in kind
and to payments made in compensation
for
work-related
diseases or accidents. The
term "other public

pensions" as
used in subparagraph 1(b)
is intended to refer to
tier 1 Railroad Retirement benefits.

Paragraph
2 provides
that
annuities
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). Annuities
are similarly treated
under
the 1956
Convention.
Paragraphs 3 and 4 deal with alimony and child support
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payments.
Under paragraph 3,
alimony paid by a resident
of a
Contracting
State is
taxable only
in that State.
The payment
need not be taxable
to the recipient under
internal law of the

recipient's
State of residence
to qualify
as an alimony
payment.

Paragraph 4 deals with periodic payments that are not dealt with

in paragraph 3. Under this paragraph, such payments for the
support
of a minor child
by a resident of a Contracting
State to

a resident of the other Contracting State are exempt from tax in

both
Contracting States.

Alimony and child support payments are defined as periodic

payments made
pursuant to
a written separation agreement or
a

decree of divorce, separate maintenance, or compulsory support.

Under U.S. law, alimony
generally is deductible
to
the payor

and taxable
in the hands of the recipient,
and child support

payments
are neither deductible
nor
included as
income to the

recipient.
Under
Austrian law,
both alimony
and child support
payments
are treated as non-deductible
and non-includible pay­
ments.
Paragraph
5 deals with the taxation
of contributions, borne
by an
individual
who
renders dependent
personal
services
in a
Contracting
State
(the "host State"),
to a pension
scheme
estab­
lished in,
and recognized
for tax purposes
in,
the other Con­
tracting
State.
In general,
when
determining
the
individual's

taxable
income,
the host
State shall
treat
such
contributions
in

the
same way
and subject
them
to the
same conditions
and
limita­
tions
as contributions
made
to a pension
scheme
in
that host

State.
However,
such
treatment
is provided
only
if (i)
the
individual
was
not a resident
of
the host
State and
was contrib­
uting to
the
pension
scheme
immediately
before
beginning
to
work

in that
State
and (ii)
the competent
authority
of
the host
State
agrees
that
the
pension
scheme
in
the other
State
generally

corresponds
to a
pension
scheme
recognized
as
such for
tax

purposes
by the
host
State.
A pension
scheme
means
an
arrange­
ment
in which
the
individual
participates
to
receive
retirement

benefits
in respect
of dependent
personal
services rendered.
A
pension scheme
is recognized
for
tax
purposes
in a State if
contributions
to
the
scheme
would
qualify
for tax
relief
in that

State.
Paragraph
5 permits
a deduction
from the
individual's
income
for qualifying
amounts
borne
by the
individual,
whether
the
payment
is made
by
the
individual
or
by another
person
on

behalf
of
the
individual.

Subparagraph
1(b) and
paragraph
3 of
this Article
are
among

the exceptions
to
the saving
clause
of
paragraph
4
of Article
1

(Personal
Scope)
found
in subparagraph
5(a) of that
Article.
Thus,
Austrian
social
security
benefits
paid
to a U.S.
resident
or
citizen
are
exempt
from U.S.
taxation.
Similarly,
an alimony
payment
by
an Austrian
resident
to a
resident
or citizen
of the
AUSTRIA 382
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-63­
United States
is taxable only
in Austria.
The provisions
of this
Article dealing
with pensions,
annuities and child
support

payments are,
however, subject to the saving clause of paragraph

4 of
Article
1. Such
payments
received
by a resident
or
citizen
of the United States may, therefore, be subject to U.S. tax, if
they are so
subject under the Code, even if they would be exempt

under
the
provisions
of
this
Article.

Article
19. GOVERNMENT
SERVICE

This
Article deals with the taxation
of compensation paid by

a government in respect
of government service
performed in the
discharge of governmental functions and paid from public funds.
Paragraph
1 provides that,
as a general rule, wages,
sala­
ries and similar remuneration
including pensions,
annuities or

similar benefits, paid
from public funds of a
Contracting State,

or one of its political
subdivisions or local
authorities, to a

citizen
of that State who is an
employee of the paying entity
for
services rendered in the discharge of governmental functions to
that State, subdivision, or local authority shall be taxable only

in that State.
The Memorandum of Understanding
clarifies that if
a governmental
entity, such as an Embassy
or Consulate, is
performing governmental
functions,
all
of its employees,
includ­
ing persons such as cooks or drivers, are to be considered as

employed in the discharge
of governmental functions.
Social
security benefits paid
in
respect of government
services are

dealt
with in this
Article, not
Article 18 (Pensions).

Paragraph 2 specifies that
remuneration and pensions
paid in

respect
of services
performed
in connection
with
a business

carried
on by a Contracting
State
or a political
subdivision
or

local authority
thereof are not subject
to the provisions
of

paragraph
1, but are taxable under
the provisions of Articles
14
(Independent
Personal Services), 15
(Dependent Personal Servic­
es), 17
(Artistes and Athletes), and
18 (Pensions). Thus, if
a
local government
sponsors
a basketball.team
in an
international

tournament,
and pays the athletes from
public funds, the compen­
sation of the players is
covered by Article 17 and
not Article

19, because the athletes
are not engaging in a
governmental

function when they play basketball.
Paragraph
3 provides
that paragraph
1 shall
also apply,

generally,
to remuneration
paid to
the Austrian
Foreign Trade

Representatives
of the Austrian
Federal Economic
Chamber
and to

the staff
members of the
Austrian Foreign
Trade
Offices. The

provision
applies
only
to the extent
that they are
discharging

governmental
functions
in the United
States and that
the recipi­
ents of
such remuneration
are
Austrian
citizens.

AUSTRIA 383
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-64­
Pursuant to paragraph 5(b) of
Article 1 (Personal Scope),

the
benefits
of
this
Article
are
not
subject
to
the saving
clause

of paragraph
4 of Article
1, with
respect
to
individuals
who
are

neither citizens of, nor lawful
permanent residents in, that

State.
Thus,
for example,
an
individual
who
is
a U.S. citizen
or

a lawful
permanent
resident of
the United
States and
who is

employed
by the Government of Austria
in the United States,

would,
notwithstanding
this Article,
be fully
subject to
U.S.

tax.

Article
20. STUDENTS
AND TRAINEES

This Article provides
that a resident of
one of the Con­
tracting
States who goes to the
other
Contracting State
for the
purpose
of full-time education at a
recognized educational

institution
or for full-time
training
shall be exempt from
tax by

that
other Contracting state with
respect to payments that
arise

outside that
State and that are for
the purpose of the

individual's
maintenance, education,
or training.
The tax

exemption,
however,
applies to an
apprentice or
business trainee
for a maximum of three years from the day the apprentice or

trainee
first arrives in the State
for the purpose of the
appren­
ticeship
or business
training.

If the visitor comes principally to work in the host State
but also is a part-time student, he would not be entitled to the
benefits of this
Article, even with respect
to any payments he
may receive from
abroad for his maintenance
or education, and
regardless of whether or not he is in a degree program. Whether
a student is to be considered
full-time will be determined
by the
rules of the
educational institution at
which he is studying.
Similarly, a person
who visits the host
State for the purpose of
obtaining business
training and who also
receives a salary from
his
employer for providing services
would not be considered
a
trainee
and
would
not be
entitled
to the
benefits
of this
Article.
An educational
institution is understood
to be an institution

that
normally maintains
a regular faculty and normally
has a

regular body of students
in attendance at the place
where the

educational
activities are
carried on.
An educational
institu­
tion will be considered
to be accredited if it is
accredited by

an authority
that generally
is responsible
for accreditation
of

institutions
in the particular
field
of
study.

A payment will be
considered to
arise outside
the host State

if the payor
is located outside the host
State. Thus, if an

employer
from
one of the Contracting
States sends an employee
to

the other Contracting
State for training,
the payments the

trainee receives
from abroad from his employer
for his mainte-

AUSTRIA
384
Supp. No. 6 (1998)

-65­
nance or
training while
he is present
in the host
state will
be
exempt from host-country tax.
The
1956 Convention
provides a similar
exemption for
stu­
dents, but does not
require full-time attendance
at a recognized
educational institution.
As under this Convention, the 1956
Convention does not impose a time limit on the length of stay for
purposes of the tax exemption. For apprentices, the 1956 Conven­
tion provides
a broad exemption from host
country tax for persons
temporarily present, without a specific time limitation, for
purposes of acquiring business
or technical experience.
The 1956
Convention also provides
an exemption from host country
tax for
the compensation for services
of certain trainees
whose annual
compensation
for services performed does not exceed $10,000.
By virtue of the exceptions to the saving clause in subpara­
graph
5(b) of Article
1 (Personal
Scope), the
benefits
conferred
by the host State are not
subject to the saving clause
of para­
graph
4 of Article
I with respect
to individuals
who are neither
citizens of nor lawful permanent
residents in that
State. Thus,
a citizen
of the
United States
who is a resident
of Austria
and
is in the United States
to study at an American university
does
not benefit from the U.S.
tax exemption accorded by
this Article.
However, if the individual
is not a citizen of the
United States
and
does not acquire
immigrant
status in the
United States,
the
fact
that the individual
may
become a U.S.
resident for
tax

purposes
will not
lead to a
denial of the
benefits of
this

Article.

Article
21. OTHER
INCOME

This Article
provides
the rules for
the
taxation
of items of
income
that
are not
dealt
with
in
the other
articles
of the
Convention.
The Article
assigns
taxing
jurisdiction
over such
items of
income generally
to the
State of .residence
of
the
beneficial
owner
of the income.
Items
of
income covered
by this
Article
include
classes
of income
not dealt
with elsewhere
in the
Convention,
such as,
for example,
gambling winnings.
It also
includes
items
of income that
are
not dealt
with in the
other
articles
because
the income
in question
does not meet
certain
characteristics
of the income
covered
by the
other articles.
For
example,
Article
10
(Dividends)
deals
with dividends
paid by a
company that
is a resident
of a Contracting
State.
A dividend
paid
by a third-country
corporation
would
not be covered
by
Article
10, and
would,
therefore,
come within
the
scope
of
this
Article.
The
general rule
of paragraph
1 that the
"other income"
of a
resident
of a
Contracting
State
will be taxable
only
in the
State
of
residence applies
irrespective
of whether
the residence
State
AUSTRIA 385
Supp. No. 6(1998)

-66­
exercises
its
right
to tax
the
income
covered
by
the Article.
Paragraph
2 contains
an
exception
to the
general
rule
of
paragraph
1
for income,
other than
income
from real
property,
that
is
effectively
connected
with
a permanent
establishment
or
fixed
base
maintained
in a Contracting
State
by a
resident
of
the
other
Contracting
State.
The
taxation
of
such income
is
governed
by the
provisions
of Articles
7 (Business
Profits) and
14
(Independent
Personal
services).
Thus,
in general,
third-country
income
that is attributable
to a permanent
establishment
maintained
in
the United
States
by a resident
of
Austria
would be
taxable
by the
United
States.
An
exception
to
this rule
in paragraph
2 is
provided
for
income from
real property,
as defined
in paragraph
2 of
Article
6

(Income
from Real
Property).
Even
if such
property
is part
of

the property
of
a permanent
establishment
or
fixed
base in
a Con­
tracting
State, that
State
may not
tax income
from
the
property

if neither the
situs of the
property nor
the residence
of the

owner is
in that State.
For example,
if an Austrian
resident

derives income
from real property located
outside the United

States
that is effectively
connected
with the resident's
perma­
nent establishment
or fixed base
in the United
States, only
Austria may tax
that
income. This special
rule for foreign-situs
real property is consistent with the general rule, also reflected
in Article 6, that only the situs and residence States may tax
real property
and real property
income. .
This Article is subject to the saving clause of paragraph 4
of Article 1 (Personal Scope). Thus, the United States may tax
the income of an Austrian resident not dealt with elsewhere in
the Convention,
if that Austrian resident
is a citizen of the
United
States. The benefits of
this Article are also subject
to
the provisions of Article
16 (Limitation on Benefits),
which
require that the
beneficial owner of the
income is qualified to
receive treaty benefits
under at least one of the
tests of
Article
16.
Article 22. RELIEF
FROM. DOUBLE
TAXATION
Article 22 describes the manner in which each Contracting
State undertakes to relieve double taxation. The United States
uses the foreign tax credit method. Austria uses a foreign tax
credit method as laid
down in Article 23 B
of the OECD Model
Convention.
In paragraph
1, the United States
agrees to allow its

citizens and residents to credit against their U.S. income tax
the income taxes paid to Austria. Paragraph 1 also provides for
a deemed-paid
credit, consistent with section
902 of the Code, to

AUSTRIA
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-67­
a U.S. corporation
in
respect of dividends
received
from an

Austrian
corporation
in which
the U.S. corporation
owns at least

10 percent
of the voting shares. This
credit is for the tax paid
by the Austrian corporation.on
the earnings out
of which the
dividends
are
considered
paid.

The credit
under the
Convention
is allowed
in accordance

with
the provisions and subject to the
limitations of U.S. law,
as that law may be amended overtime, so long as the general
principle of this Article,
i.e., the allowance of a credit,
is
retained. Thus, although the Convention
provides for a foreign
tax credit, the terms of the credit are determined by the Provi­
sions, at the time
a credit is given, of the
U.S. statutory
credit, U.S. law generally limits the credit against U.S. tax 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 on
some variation
thereof.
Paragraph
4 specifies the rules
for determining the source
of income for

credit purposes under the Convention.
Paragraph
I also provides
that the
Austrian
income taxes
specified
in paragraphs
2(b) and 3 of
Article 2
(Taxes Covered)
are
to be treated
as income
taxes for purposes
of allowing
a

credit
under the
Convention.
It is not
U.S. policy
to allow
credit by
treaty for taxes
that
are
not creditable
under
the

Code, and
it was the understanding
of
the negotiators
that the
Austrian income taxes
specified in Article 2 for
which credit is

allowed
under
Article
22 are
creditable
taxes
under
the Code.

The
Memorandum
of Understanding
clarifies
that
the relevant

laws
for purposes of the U.S.
foreign tax credit granted
in
paragraph
1 are the
laws as of the
date of entry
into force
of
the treaty,
as they may
be subsequently
amended.
Under U.S.
law,
when
the Alternative
Minimum
Tax (AMT)
is due,
foreign
tax
credits
may reduce
the
AMT, but
not to zero,
as such
credits
can

offset
only 90
percent of the
AMT. The Memorandum
of Understand­
ing notes
that
this limitation
is consistent
with
the general

U.S.
commitment
to
provide
a foreign
tax credit.
The
Memorandum
of
Understanding
also illustrates
how to

calculate
the dividend
gross-up
and the
deemed-paid
credit.
The
deemed-paid
credit is
calculated
as the
ratio
of dividends

received
to after-tax
foreign
earnings
multiplied
by
creditable

foreign taxes.
The
U.S.
parent
must
include
in income
the actual
dividend
received
plus the
"gross
up" for foreign
taxes
deemed
paid. The
total
foreign
tax credit
allowed,
subject
to the

foreign
tax credit
limitation,
equals
the sum
of actual

withholding
taxes
paid
plus
the deemed-paid
credit.

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No. 6 (1998)

-68­
Paragraph
2 sets
out
the
rules
for
taxing
U.S.
citizens
who

are
residents
of
Austria.
Since
U.S.
citizens
are
subject
to

U.S. tax
at ordinary
progressive
rates
on their
worldwide
income,

the
U.S.
tax
on
the
U.S.
source
income
of a
U.S.
citizen
resident

in
Austria
will
often
exceed
the
U.S.
tax
allowable
under
the

Convention
on
an
item
of
U.S.
source
income
derived
by a
resident

of
Austria
who
is
not
a U.S.
citizen.

Subparagraph
2(a)
provides
special
Austrian
credit
rules
for
certain
items
of
income
received
by
Austrian
residents
who
are
U.S.
citizens.
For income
that
is either
exempt
from
U.S. tax
or

subject
to
a reduced
rate
of
tax under
the
Convention
when

derived
by Austrian
residents
who
are not
U.S. citizens,
Austria

shall
allow
a
foreign
tax credit
to its
residents
who
are U.S.

citizens
only
for
the tax
that the
United States
may
impose under

the
provisions
of the
Convention,
other
than the
taxes
that
it

may
impose only by
reason
of U.S.
citizenship
of the taxpayer

under
the saving
clause
of paragraph
4 of
Article
1 (Personal

Scope).
Thus,
if
a U.S.
citizen
resident
in
Austria
receives

U.S.
source
portfolio
dividends,
the foreign
tax credit
granted
by
Austria would
be limited
to 15
percent
of the dividend
--the
U.S.
tax that may
be imposed under
subparagraph
2(b) of Article

10
(Dividends)
--
even
if the
shareholder
is subject
to U.S.
net
income
tax
because
of his
U.S.
citizenship.
With
respect
to
royalty (other
than motion
picture
royalties)
or interest
income,
Austria
would
allow
no foreign
tax
credit,
because
its residents
are exempt
from
U.S. tax
on these
classes
of income
under
the
provisions
of Articles
11
(Interest)
and
12 (Royalties).
Subparagraph
2(b)
deals with
the potential
for
double
taxa­
tion
which can arise
as a result
of the absence,
because
of

subparagraph 2(a), of a full
Austrian foreign tax credit
for the

U.S. tax
imposed on its citizens
resident in Austria. The

subparagraph provides
that the United States
will credit the

Austrian income
tax
paid
after allowance
of the credit
provided

for
in subparagraph
2(a). It
further provides
that in
allowing

the credit,
the United
States will not
reduce its
tax below the

amount
allowed as a
creditable tax in Austria
under subparagraph

2(a). Since the income
dealt with in this
paragraph is U.S.

source income,
it is necessary
to resource
some of
the
income in

respect of
which the United States
is required to allow a credit

under
subparagraph
2(b) as Austrian source
in order for the

United States
to be able to credit
the Austrian tax effectively.

Subparagraph
2(c) provides for this
resourcing.
It deems the

items of income referred to in subparagraph 2(a) to be from

Austrian sources
to
the
extent necessary
to avoid
double taxation

under subparagraph
2(b).
This resourcing
is for
the
exclusive

purpose of
relieving double
taxation
in the United
States with

respect
to
certain U.S.
source income
of its citizens
who are

resident in Austria. This provision is not affected by the

general foreign tax credit source rules in paragraph 4.

AUSTRIA
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-69­
Paragraph
3 describes
how Austria
will
avoid double
taxation

under
the Convention.
Subparagraph
3(a)
provides
that Austria
will allow a resident
of Austria who derives
income that may be

taxed in
the United States
(unless
the U.S..right
to tax is

solely
by
virtue
of citizenship
under
the
saving
clause
of
paragraph
4 of Article
1
(Personal
Scope)),
to deduct
from
Austrian
tax (i._.,
to credit)
an
amount equal
to the tax
paid on
that income in the United States. The credit, however, may not
exceed
that part of
the Austrian
income tax
(computed
before
the

credit)
that
is attributable
to
the income
that
the United
States
may
tax. The branch
tax levied
under
paragraph
6 of Article
10
(Dividends)
shall
be attributable
to the
income of
the permanent

establishment in the
year in which the tax
is levied.

Subparagraph 3(b) allows
Austria to take into
account any
income that is exempt from tax under
this Convention when comput­
ing the amount of Austrian
tax due on the remaining income
of the
resident (i.e.,
Austria may apply exemption
with progression).
Paragraph 4 sets
forth the rules for
determining the source
of income and
profits for purposes of double
tax
relief under the

Convention. For determining the source of income for U.S.
foreign
tax credit
purposes,
the rules of
this paragraph
apply

only
for crediting the taxes referred
to in paragraphs 2(b)
and 3
of Article 2 (Taxes
Covered). As a general rule,
where under the
treaty (other than
by application of the saving
clause of para­
graph 4 of
Article 1 (Personal
Scope))
a Contracting
State may

tax
a resident of the other
Contracting State on an
item of

income,
that income is deemed
to be sourced in the
first-
mentioned
State.
Where income
of a resident
of a Contracting
State may
not be taxed in the other
State, the income is deemed

to be sourced
in the State of residence
of the income recipient.

In general, such source rules provided in the Convention for

purposes of determining the taxing rights of the Contracting
States, are consistent with the Code source rules for foreign tax
credit
and other purposes. Where,
however, the Convention
and

Code
source
rules
are
inconsistent,
the
Code
source
rules
(eg.,

Code
section 904(g)) will be used
to determine the limits
for the
allowance of a credit under the Convention. (Paragraph 2 of the

Article provides an
exception to this general
rule with respect
to certain U.S. source
income of U.S. citizens
resident in

Austria,
as
discussed
above.)

This Article
is not subject
to the
saving clause
of paragraph
4 of Article 1 (Personal Scope). Thus, the United States will
allow a credit to its citizens
and residents in accordance
with the
Article, even if such credit were to provide a benefit not
available under U.S. law.

Article 23. NONDISCRIMINATION

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This
Article assures
that
nationals and
residents
of a
Contracting
State will
not be
subject to
discriminatory
taxation
in the
other Contracting
State.
It also provides
for nondiscrim­
inatory
taxation of
residents of
the taxing. State
with respect
to
deductions
for amounts
paid to
residents of the
other State.
It
also prohibits a State from imposing discriminatory taxation upon
its resident
companies that are owned, partly
or wholly, by

residents
of the
other State.
Non-discrimination,
in the
context
of this Article, means
providing national
treatment.

Paragraph 1
provides that
a national
of one Contracting
State may not
be subject to taxation or connected
requirements in
the other contracting
State which are other
or
more burdensome

than the taxes
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
Austria as an Austrian national who is in similar circumstances
(i.e., who is also resident in the third country). The term
"national" is defined in subparagraph 1(h) of Article 3 (General
Definitions).

The United States is not
obligated, by virtue of
paragraph 1,
to apply
the same
taxing regime
to an Austrian
national
who is
not resident in the United States and a U.S. national who is not
resident
in the United States since
that paragraph applies only
when the nationals
of the
two Contracting
States are
in the same
circumstances. United
States citizens who are
not residents of
the United States
but who are, nevertheless,
subject to United
States tax on their
worldwide income are not in
the same circum­
stances
with respect
to United
States
taxation
as citizens
of

Austria who are not
United States residents.
Thus, for example,
Article 23 would not
entitle an Austrian national
not resident in
the United
States to
the net basisrtaxation
of
U.S. source
dividends
or other investment income
that applies to a U.S.
citizen
not
resident
in the
United
States.

Paragraph
2 provides
that a permanent
establishment
in
a
Contracting
State
of an enterprise
of the other
Contracting
State
may
not be
less favorably
taxed
in the
first-mentioned
than an
enterprise of that first-mentioned
State
which is carrying
on the
same activities.
This provision,
however,
does not
obligate a
Contracting State to grant
to a resident of the other
Contracting
State any tax
allowances,
reliefs, etc.,
which it grants
to
its
own residents
on account
of their
civil status
or family
responsibilities.
Thus, if an
individual resident
in Austria
owns an
Austrian
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.
AUSTRIA 390
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-71­
not obligated
to allow
to the
Austrian
resident
the personal

allowances
for himself
and
his family
that he
would
be
permitted

to take
if the
permanent
establishment
were
a sole
proprietorship

owned
and operated
by a U.S. resident.

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 an Austrian
resident
partner's share
of

the partnership
income attributable
to a
U.S. permanent
estab­
lishment. There is no
similar obligation with respect
to the
distributive shares of U.S.
resident partners. The
Memorandum of
Understanding makes clear,
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 Austrian
partnerships,
since the law
requires that
partnerships
of both
domiciles withhold tax in respect of the partnership shares of
non-U.S partners. In distinguishing between U.S. and Austrian
partners, the
requirement to withhold on
the Austrian but not the
U.S. partner's
share is not discriminatory
taxation; rather, like

other withholding on nonresident aliens, is merely a reasonable

method for the
collection of tax from persons
who
are not contin­
ually 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 overwithholding, file a U.S. tax return

claiming a refund.

The Memorandum of Understanding also notes that paragraph 2

requires
Austria to grant to an
Austrian permanent establishment

of
a U.S. corporation the same
carry-forward of losses that
would

be
dllowed to a permanent establishment
of an Austrian corpora­
tion.

Paragraph
3 prohibits discrimination
in the allowance
of
deductions. When an enterprise of a Contracting State pays
interest, royalties or other disbursements to a resident of the
other Contracting State, the first 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 Contracting
State. An
exception to this rule is provided for cases where the provisions
of
paragraph 1 of Article 9 (Associated
Enterprises), paragraph
4
of Article 11 (Interest) or paragraph 5 of Article 12 (Royalties)
apply, because all of these provisions permit deductions to be
denied in certain
circumstances in respect
of transactions
between related
persons.
This
exception
would include
the denial
or deferral of certain interest deductions under Code section
163(j). The term
"other disbursements"
is understood to include
a reasonable allocation of executive and general administrative
AUSTRIA
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-72­
expenses,
research
and
development
expenses
and
other
expenses
incurred
for
the
benefit
of a
group
of related
persons
which
includes
the
person
incurring
the
expense.
Paragraph
3
also
provides
that
any debts
of
an
enterprise
of
a Contracting
State
to a
resident
of
the other
Contracting
State
are deductible in
the first Contracting State in computing the
capital
tax
of the
enterprise
under
the
same conditions
as
if the
debt
had
been contracted
to
a resident
of
the first-mentioned
Contracting
State.
Even though
a
Contracting
State may
not
now
impose
a
national
tax
on capital,
because
the
nondiscrimination

provisions
apply
to all taxes
levied
at all
levels of
government
in
the U.S.
and Austria,
this
provision
may be relevant
for U.S.
as well
as Austrian.
tax purposes,
because of
taxes
on capital,
such as
real property
taxes,
levied
by sub-national
governments.

Paragraph 4 prohibits
a Contracting State
from subjecting an
enterprise
of that State
that is wholly
or partly
owned or
controlled,
directly
or indirectly,
by one or more
residents
of

the other
Contracting State
to taxation or connected
requirements
that are other
or more burdensome
than the taxation or
connected
requirements
imposed on other similar enterprises
in
the first
State.
As in the case
of its other treaties,
the United States

takes the position, confirmed in the Memorandum of Understanding,
that
the provisions of Code
section 367(e) (2) regarding
the
taxation of corporations
on certain distributions
in liquidation
to foreign parent -corporations are not contrary to paragraph 4 of
the Article. It takes the same position with respect to its
rules providing
that -a corporation
with nonresident alien share­
holders
is not eligible to make an election to be an "S" corpora­
tion. In both cases, this position is based on the fact that
corporations
eligible for these
benefits are not similarly

situated.
In the first case,
a foreign parent corporation
will
not be subject to U.S. tax on a subsequent alienation, as would a

U.S. corporation.
In the second case,
a foreign shareholder
is
not subject to U.S. tax on worldwide income, as are U.S. resident
shareholders.

For the reasons given above in connection with the discus­
sion of paragraph 2, it is also understood that the provision in
section 1446 of the Code for withholding tax on non-U.S. partners

does
not violate paragraph
4 of the Article.
Paragraph 5 specifies that no provision of the Article will
prevent
either Contracting State
from imposing the branch
tax
described in paragraphs
6 and 7 of Article 10
(Dividends). Thus,
even if the
branch tax
were judged to
violate the
provisions of
paragraphs 2 or 4 of this Article, neither Contracting State
would be constrained from imposing the tax.
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(1998)

-73­
As noted above, 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 4 of Article 1 (Personal

Scope) does not apply to this Article, by virtue of the excep­
tions in subparagraph
5(a) of that Article.
Thus, for example, a

U.S. citizen who is resident in Austria may claim benefits in the

United States under this
Article. As
with all benefits
under

this Convention,
the
granting of benefits
under this Article
is

subject to the requirement that the beneficial owner of the

income
qualify for
benefits under
the provisions
of Article
16

(Limitation
on
Benefits).

Article
24. MUTUAL
AGREEMENT
PROCEDURE

This Article provides for cooperation between the competent
authorities
of the Contracting
States to
resolve disputes
which
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(e)
of Article
3
(General
Definitions).
Paragraph
1 provides
that
where a person
considers
that the
actions
of one or both
Contracting
States will
result for him
in
taxation
which
is not
in accordance
with
the
Convention
he may
present
his case to
the competent
authority
of his State
of
residence
or nationality.
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
compe­
tent
authorities.
Paragraph
2 provides that if
the competent authority
of the
Contracting
State
to which
the case
is presented
judges the
case
to have
merit
but cannot
reach
a unilateral
solution,
it
shall
seek agreement
with
the competent
authority of
the other Con­
tracting
State so
as to
avoid
taxation
not in
accordance
with the
Convention.
If agreement
is reached
under
this
provision,
it
is
to be
implemented
even
if
implementation
is otherwise
barred
by
the statute
of limitations
or by some
other
procedural
limita­
tion,
such as
a closing
agreement.
Because,
under
paragraph
2 of
Article 1 (Personal
Scope),
the Convention
cannot
operate to
increase
a taxpayer's
liability,
time
or other
procedural
limita­
tions
can be
overridden
only
for
the purpose
of making
refunds
and not
to impose additional
tax.
AUSTRIA
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-74 ­
Paragraph
3
authorizes
the competent
authorities
to
seek to
resolve
difficulties
or doubts
that may arise
on the application
or interpretation
of the
Convention.
The paragraph
includes
a
non-exhaustive
list of examples
of the matters
about which
the
competent
authorities may
reach agreement.
They may
agree to the
same attribution of
income, deductions, credits
or allowances
between an
enterprise in
one Contracting
State and
its permanent

establishment
in the other State or
between related persons. The

competent authorities may also agree to settle a variety of

conflicting
applications
of the
Convention,
including
those

regarding the characterization
of items of income,
the applica­
tion of source rules to particular items of income, and to a

common meaning of a term.

The paragraph also authorizes the competent authorities to

consult for purposes of eliminating double taxation in cases not

provided for in the Convention. This provision is intended to

permit the competent authorities to implement the Convention in

particular cases in a manner that is consistent with its

expressed
general
purposes,
even
though
the
cases
are
not,

specifically
covered by the Convention. An example of such a

case might be double taxation
arising from a transfer
pricing

adjustment between two
permanent establishments
of a third-

country resident, one in
the United States and one
in Austria.

Since no resident of a Contracting
State
is involved
in the case

(both permanent
establishments being residents
of the third

State), the Convention does
not, by its terms, apply,
but the

competent authorities
may, nevertheless,
use the authority of the

Convention
to seek
to prevent
the.double
taxation.

Paragraph
4 provides
that the competent authorities
may

communicate
with each
other directly
for the
purpose of reaching

agreement under
this Article.

Paragraph 5 directs the
competent authorities
to
consult

with
each other to
develop an
agreed application
of the
provi­
sions
of the Convention,
including
Article
16 (Limitation
on

Benefits).
It also allows the competent
authorities
to prescribe

regulations
and carry out the purposes
of the Convention.

The
Memorandum
of Understanding
explains that
the mutual

agreement
procedure is
fully governed
by the provisions
of the

treaty and of internal
legislation and is not
intended to create

new treaty
law.
However,
one
of the main
purposes
of
this

provision
is to find
a coordinated
understanding
of treaty

provisions
that
leaves
room for
divergent
interpretations.

This Article
is not subject
to the
saving clause
of para­
graph
4 Article 1
(Personal Scope),
by virtue
of the exceptions

to the saving clause
in subparagraph 5(a) of that
Article.
Thus,

rules,
definitions,
procedures,
etc., which
are agreed upon
by

AUSTRIA 394
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-75 ­
the competent authorities under this Article, may be applied by
the United States
with respect
to its citizens
and residents
even
if they differ from the comparable Code provisions.
Similarly,
as indicated above,
U.S. law may be overridden
to provide refunds
of tax to
a
U.S. citizen
or resident.
Article 25. EXCHANGE OF INFORMATION AND ADMINISTRATIVE
ASSISTANCE
This Article provides
for the exchange of information

between the competent authorities of the Contracting States and

for the provision of certain assistance in the collection of

taxes.

* Paragraphs 1 through 6 provide for the exchange of
information. Paragraph 1 provides that 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

Austria concerning the taxes covered by this Article insofar as
the
taxation thereunder
is not
contrary to
the Convention.
Under
paragraph
6 of this Article and
paragraph 4 of Article
2, for

purposes
of the exchange of
information provisions,
the

Convention applies
to taxes of every
kind imposed by a
Contracting State.
In applying the exchange
of information

provisions
to all taxes
imposed
by a Contracting
State, this

provision conforms
to Article 12 of the
Estate
and Gift Tax

Treaty between
the
United States
and
Austria.

Paragraph 1 also clarifies that the carrying out of provi­
sions of the domestic
laws of the Contracting
States concerning
taxes includes penal investigations
regarding fiscal
offenses

relating
to taxes
covered by
this Article.
This provision
makes
clear that information
may be exchanged concerning
penal, as well

as non-penal tax investigations. A provision in the Memorandum
of Understanding
clarifies
the meaning
of the term "penal
inves­
tigations" by applying the
term to proceedings carried
out by
either judicial or administrative
bodies
and by
providing an

example of a penal investigation
carried out by an administrative

body.
This example
states that
the commencement
of a criminal

investigation
by the Criminal Investigation
Division
of the

Internal
Revenue
Service constitutes
a penal
investigation.
Therefore,
the term
"penal investigation"
forms a basis
for
disclosure
under
Austrian bank
secrecy laws
and
practices.

Another provision
in the
Memorandum
of Understanding
makes

clear that information may
be exchanged at any stage
in a tax

case,
stating that
a request for
information
cannot be rejected
by the requested
State merely because
the request was made for

the purposes
of pending judicial
proceedings in tax matters.

AUSTRIA 395
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-76­
Paragraph 1 also
provides that
information may be
exchanged
spontaneously
or on
request
and
that
the competent
authorities
may
agree on
information
which
shall be furnished
on a regular
basis.
The
purpose
of
these
references
to specific
forms
of
exchange
is
to clarify,
in
addition
to
exchanging
information

upon
specific
request,
that the
exchange
of
information
spontane­
ously
by a
Contracting
State
of,
as mutually
agreed,
routinely

between
Contracting
States
is
contemplated
under
the provisions

of
the Convention.
No inference
should
be drawn
that
these

references
impose
any
restriction
on the
means
that
competent

authorities
may use
to exchange
information.
Thus,
for example,
the
exchange of
information
in connection
with
simultaneous

examinations
is contemplated.
Also,
on
the basis
of
this Arti­
cle,
the presence
of tax inspectors
of a Contracting
State
on the

territory
of another
Contracting
State is allowed
by both
States,

including,
with
the
consent
of the
taxpayer,
interviews
with

taxpayers.
However,
such direct
contacts
would have
to be agreed
upon
by
mutual
agreement
of
the competent
authorities
and
carried

out
by
duly authorized
representatives.

Paragraph
1 states that
information
exchange
is not re­
stricted
by Article
1 (Personal
Scope). This
means that
informa­
tion 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 Austria
which engages in transactions
with
a

U.S. enterprise, the
United States could request
information with
respect
to
that permanent establishment,
even though it is not
a

resident
of either Contracting
State. Similarly, if a
third-

country resident maintains a bank account in Austria, the United

States could request information
with respect to
that
person's

account to
the same extent that it
could request the information
regarding a resident
of Austria or the
United States.
Paragraph 1 also provides assurances that any information
exchanged will be treated
as secret, subject to
the same disclo­
sure constraints as information obtained under the laws of the
requesting
State. Information received
may be disclosed only
to
persons,
including courts and administrative
bodies, involved
in

the assessment
or collection of, the
enforcement or prosecution

in respect
of, or the determination
of appeals in relation to,
or
the
oversight of the administration
of the taxes covered
by this
Article. The information may be used by these persons only in
connection with these designated functions.
Under the Memorandum of Understanding, it is understood that

persons involved in the oversight of the administration of taxes

in the United
States are the appropriate
committees of the U.S.

Congress
as well as the U.S.
General Accounting Office,
where

such access is necessary to carry out their oversight

responsibilities. Information received by these bodies is for
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-77­
use in the
performance
of their
role in overseeing
the

administration
of
U.S. tax
laws.
It
is
also
understood
that

persons
involved
in
the oversight
of the
administration
of
taxes

in Austria
are
the Accounting
Court (Rechnungshof)
and
the

committees
of Parliament
as is
necessary
to
carry
out
their

oversight
responsibilities.

Paragraph
1 permits persons
entitled
to disclosure
of
information
received
to disclose
it in
public court
proceedings
or in
judicial
decisions.
It
is contemplated
that the
Contracting
States
will
utilize

Article
25 to exchange information
on a routine basis, on
request
in
relation to a specific
case, or spontaneously.

Paragraph
2 explains
that the obligations
undertaken
in

paragraph 1 to exchange
information do not require
a contracting

State to
carry out administrative measures
which are at variance
with the
laws or administrative practice
of either State. Nor

does that
paragraph require a Contracting
State to supply infor­
mation not
obtainable
under the laws
or administrative practice
of either State, or to disclose any trade, business, industrial,
commercial or professional secret or trade process, or other

information, the disclosure of which would be contrary to public
policy.

Regarding subparagraph (b), due to the limitations under the
internal
law of Austria concerning
bank secrecy, Austria will
be

able to obtain bank information only in connection with a penal

investigation in the United States, as interpreted and agreed in
the Memorandum of Understanding. Either Contracting State may,

however, at its
discretion, subject to
the limitations of the

paragraph and its internal
law, provide information
which it is

not obligated
to provide under the
provisions of this paragraph.

Regarding subparagraph (c), the Memorandum of Understanding
contains the agreement of the Contracting States that, on the

basis of paragraph 19 of the OECD Commentary on Article 26 of the
OECD Model Convention, the provisions on bankers discretion (bank

secrecy rules) do not constitute a professional, trade, business,
industrial, or commercial secret. In Austria, this opinion is

supported by German and Austrian jurisprudence. (The German

language has one term referring
to both "trade" and
"business;"
thus, the German
language version of the
Convention uses the same

word
to refer
to both.)

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 informa­
tion as if the tax in question were the tax of the requested

State, even if
that State has no tax interest
of its own in the
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­
case to which the
request
relates.
The paragraph further
pro­
vides
that the
requesting
State
may specify
the form
in which
information
is to be
provided
(e.l.,.
depositions
of witnesses
and
authenticated
copies
of
original
documents)
so that
the
informa­
tion can be usable in the judicial proceedings of the requesting
State.
The requested
State
should,
if possible,
provide
the
information
in the
form requested
to the
same
extent
that
it can
obtain
information
in that
form under
its
own laws
and adminis­
trative practices
with respect to its own taxes. Providing
information
in
the
form
requested
is a continuation
of
present
practice.
Paragraph
4
clarifies that
the tax
authorities
of a
Contracting
State may deliver documents
to persons in the other
Contracting State by using postal
services. Each Contracting
State shall,
for purposes of
its taxes, determine
in accordance

with its domestic law the
legal efficacy or sufficiency
of the

documents so delivered.

Paragraph
5
clarifies that
the information
exchange
provi­
sions of this
Article apply
to assistance
carried out under
penal, as well as non-penal,
investigation procedures.
Paragraph
5 also provides
that
requests
for arrest
of persons
are not
covered
by the Convention.
As
discussed above, paragraph
6 provides that the informa­
tion
exchange provisions of this
Article.shall apply to
taxes of
every
kind imposed
by a Contracting State.

Paragraph 7 provides for assistance in collection of the
taxes specified under Article 2 to the extent necessary to ensure
that treaty benefits are enjoyed only by persons entitled to
those benefits under the
terms of the Convention.
Under this
paragraph, a Contracting State will endeavor to collect on behalf

of the other State only those amounts necessary to ensure that

any exemption or reduced rate of tax at source granted under the

Convention by that other State is not enjoyed by persons not

entitled to those benefits.

Subparagraphs a), b), c) and d) of paragraph 7 impose
conditions
on collection assistance.
Under subparagraph
a),
the
requesting State
must produce a copy of
a document certified by

its competent authority specifying that the sums referred for
collection assistance are
finally due and enforceable.
The tax
of a requesting State
shall be considered "finally
due and
enforceable"
when
the requesting
state has
the right under
its
internal law to collect
the tax and all administrative
and

judicial
rights of
the taxpayer
to retrain
collection
in the
requesting
State have lapsed or
been exhausted. Thus, the
concept of "finally due and enforceable" is equivalent to "final­
ly determined"
in
the U.S. income
tax treaties with Canada and
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the Netherlands.

Under subparagraph b), a document described in subparagraph

a) shall be rendered enforceable in accordance with the laws of

the requested State. Under Austrian law, such documents must be

rendered enforceable by the Regional Finance Directorates

(Finanzlandesdirektionen).
Where the U.S.
Competent Authority

accepts a request for collection
assistance, the
Austrian tax

claim shall be treated by the United States as an assessment

under United States
laws against the taxpayer
as of the time the

request is received.

Under subparagraph c), the requested State shall effect
recovery in accordance
with the rules governing
the recovery of
similar tax debts of its own; however, tax debts to be recovered
shall not be regarded
as privileged debts in the
requested State.
This provision
establishes
the rule
that a tax for
which collec­
tion assistance
is provided
shall not
have in the requested
State
any priority specially
accorded to
the taxes
of the requested
State.
Thus, the priority
enjoyed
by the requested
State
for
collection
of its own
taxes in relation
to conflicting
creditor
claims
(eg_, in bankruptcy)
are
not automatically
extended
to
the tax claims
of the requesting
state.
Also under subparagraph
c), in the
Republic of Austria,

judicial execution
shall
be requested
by the Finanzrokuratur
or

by the
finance office
delegated
to
act on his
behalf. Where
the

U.S. competent
authority
accepts
a request
for collection
assis­
tance, and
judicial
enforcement
is
required to
effect such

assistance,
judicial
enforcement
will
be iequested
and the matter

will
be referred
to the Department
of Justice
as if the
Austrian

tax
claim were a
U.S. tax assessment.

Under
subparagraph
d), appeals
concerning
the existence
or

amount
of the debt
shall lie
only to the
competent tribunal
of

the requesting State.

Finally, paragraph
7 provides that the Contracting
State

asked
to
collect
the
tax
is
not obligated,
in
the process,
to

carry out
administrative
measures that
are different
from those

used
in the
collection
of its
own taxes,
or
that would
be con­
trary to
its sovereignty,
security,
public
policy
or essential

interests.
Under the
Memorandum
of Understanding,
the

Contracting
States
agree that
the "essential
interest"
clause

above
can be invoked
by
a Contracting
State
if
requested
to

recover
a
tax on behalf
of
the other
Contracting
State
and
the

requested
State
denies
that
the tax
in question
is
levied in

accordance
with
the provisions
of
the Convention.

Regarding all provisions
of Article 25, the
Memorandum of

Understanding
provides two
clarifications.
First,
it is

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understood
that
the requested
State
shall
be
obligated
to
obtain
the
requested
information
according
to
its
procedures
at
the time
of
the request.
Therefore,
if
either
State undertakes
new and
more
comprehensive
procedures
to
obtain
information
for its
own
purposes,
those
procedures
shall
be
used
to obtain
information
under
those procedures
for the other
Contracting State.
Second,
it is
understood
that this
Article
is
not
confined
to
taxes

levied,
or
information
coming
into
existence,
after
the

Convention
becomes
effective.
Therefore,
it is
clear that
the
date on
which the
information
is exchanged
is the relevant
date
for purposes
of
determining
whether
Article
25
applies.
Thus,
an
exchange
of information
is
within
the scope
of the
Convention
whether
or not
the information
is
in existence
before,
or the

taxable
year
is before,
the effective
date
of the
Convention.

Article 26. DIPLOMATIC AGENTS AND CONSULAR OFFICERS
This Article
confirms
that
any
fiscal privileges
to which

diplomatic
or consular
officials
are entitled
under
general

provisions
of international
law or
under special
agreements
will
apply,
notwithstanding
any provisions
to the
contrary in
the

Convention.
The agreements
referred to
include any
bilateral
agreements,
such as
consular conventions,
that
affect the taxa­
tion
of diplomats and consular
officials and any multilateral
agreements,
to which both Contracting
States are parties,
dealing
with
these issues, such as the
Vienna Convention on Diplomatic
Relations and the Vienna Convention on Consular Relations.
The saving clause of paragraph 4 of Article 1 (Personal
Scope) does not apply,
by virtue of the exceptions
in subpara­
graph 5(b) of that
Article, to override any
benefits of this
Article available to an individual who is neither a citizen of

the
United States nor has
immigrant
status
there.

Article
27. APPLICATION
OF
THE CONVENTION

This Article provides that nothing in this Agreement shall
be construed
so as to preclude either
Contracting State from
applying any withholding tax systems according to its domestic
laws. However,
if the Convention provides
for an exemption from
or a reduction
of tax and the amount withheld
exceeds the limits

imposed
by the Convention, the
excess shall be refunded
upon the

taxpayer's
request.
Article
28.
ENTRY
INTO
FORCE

This Article provides the rules for bringing the Convention

into force and the
general rules for the effective
dates of its
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-81­
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 first day
of the second month following
the exchange

of instruments
of ratification.
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 on which the
Convention enters into
force.
For all
other income
taxes, the Convention
will
have effect
for
fiscal periods
beginning on
or after the first
day of January
next
following
the date
on which the Convention
enters into
force. Thus, if instruments
are exchanged on
October 15 of a
year, the treaty will enter into force on December 1 of that
year. It will have
effect for withholding
tax purposes for
payments
made or credited on
or after February 1 of the
next
year. For other purposes, it will have effect for taxable years
beginning on or after January 1 of that next year.
Paragraph
3 provides a general exception
to the effective

date rules of paragraph 2. Under this paragraph, if the 1956
Convention would have afforded greater relief from tax to a

person entitled to
its benefits than would be the
case under this

convention,
that person may elect
to remain subject to all
of the
provisions of the 1956 Convention for the first assessment period

or taxable year with respect to which this Convention would have
had effect under the provisions of paragraph 2 of this Article.

With regard to the interpretation of paragraph 3, the intent

is to allow the
taxpayer to elect to extend
the benefits of the
old Convention for one year from the date on which the relevant
provision of
the new Convention would first
take effect. For
example, suppose
the instruments of ratification
are exchanged on
February 1 of
year 1 and the Convention thus
enters into force on
April 1 of year 1. The new Convention would take effect with
respect to interest withholding for interest paid or credited on
or after June
1
of the first year. If the
election is made, the

provisions of
the old Convention regarding
interest withholding

would continue
to have effect for interest
paid or credited at

any time prior to June 1 of the second year. With regard to

assessed taxes,
the new convention is applicable
as of January 1

of year 2. Therefore,
with respect to the
branch tax, which is
imposed on an
assessment basis, an election
would allow the old

Convention to continue,
thus preventing the imposition
of the
branch tax for the first taxable year beginning on or after

January 1 of year 3.

Paragraph 4 provides
that the 1956 Convention
will
cease to

AUSTRIA 401
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-82­
have
effect
at the
time
this
Convention
takes
effect
under
the

provisions
of
paragraphs
2
and
3
of
this
Article.

Article
29. TERMINATION
The Convention
is to
remain
in effect
indefinitely,
unless
terminated
by
a Contracting
State.
The
Convention
may
be termi­
nated by
either
Contracting
State
at any
time
after 5
years from

the date
of its
entry into
force,
provided
that at
least six
months'
prior notice
has
been
given,
in writing,
through
diplo­
matic
channels.
The termination
will
have
effect
in respect
of
tax withheld
at source,
for
amounts
paid or
credited
on or after,

and in
respect of other
taxes, to
fiscal periods
beginning
on
or

after, the
first
day of January
next
following
the expiration
of
the six-month
period.
Thus,
if
notice
is given
prior
to July
1

of
any calendar
year after the
five-year period
has elapsed,
the

provisions
of the Convention
will cease to have effect
for

withholding
purposes with respect
to any payment made or
credited

on
or after January 1 of the
following year, and for
other
purposes
for taxable years beginning
on or after January
1 of the
following year.

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