Technical Explanation of Convention between US And Poland… Taxes on Income, Convention signed February 13, 2013

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE
CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC
OF POLAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION
OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME

This is a Technical Explanation of the Convention between the United States and the
Republic of Poland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income, signed at Warsaw on February 13, 2013 (the “Convention”).

Negotiations took into account the U.S. Treasury Department’s current tax treaty policy,
and the Treasury Department’s Model Income Tax Convention, published on November 15,
2006 (the "U.S. Model"). Negotiations also took into account the Model Tax Convention on
Income and on Capital, published by the Organisation for Economic Cooperation and
Development (the “OECD Model”), and recent tax treaties concluded by the United States and
Poland.

The Technical Explanation is an official guide to the Convention. It reflects the policies
behind particular Convention provisions, as well as understandings reached during the
negotiations 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,”
respectively. References to the “Code” are to the Internal Revenue Code of 1986, as amended.
References to a “Treas. Reg.” are to regulations issued under the Code by the Internal Revenue
Service and the Treasury Department.

ARTICLE 1 (GENERAL SCOPE)

Paragraph 1

Paragraph 1 of Article 1 provides that the Convention applies only to residents of one or
both Contracting States except where the terms of the Convention provide otherwise. Under
Article 4 (Resident) a person is generally treated as a resident of a Contracting State if that
person is, under the laws of that State, liable to tax therein by reason of domicile, citizenship,
residence, or any other criterion of a similar nature. However, if a person is considered a
resident of both Contracting States, Article 4 provides rules for determining a single Contracting
State of residence (or no Contracting State of residence). This determination governs for all
purposes of the Convention.

Certain provisions are applicable to persons who may not be residents of either
Contracting State. For example, paragraph 1 of Article 24 (Non-Discrimination) applies to
nationals of the Contracting States. In addition, under Article 26 (Exchange of Information),
information may be exchanged with respect to residents of third states.

Paragraph 2

Paragraph 2 states the generally accepted relationship both between the Convention and

domestic law and between the Convention and other agreements between the Contracting States.
That is, no provision in the Convention may restrict any exclusion, exemption, deduction, credit
or other benefit accorded by the laws of either Contracting State, or by any other agreement to
which both Contracting States are parties. The relationship between the non-discrimination
provisions of the Convention and the General Agreement on Trade in Services (the “GATS”) is
addressed in paragraph 3.

Under paragraph 2, for example, if a deduction would be allowed under the Code in
computing the U.S. taxable income of a resident of Poland, the deduction also is allowed to that
person in computing taxable income under the Convention. Paragraph 2 also means that the
Convention may not increase the tax burden on a resident of a Contracting State beyond the
burden determined under domestic law. Thus, a right to tax given by the Convention cannot be
exercised unless that right also exists under domestic law.

It follows that, under the principle of paragraph 2, a taxpayer’s U.S. tax liability need not
be determined under the Convention if the Code would produce a more favorable result. A
taxpayer may not, however, choose among the provisions of the Code and the Convention in an
inconsistent manner in order to minimize tax. Thus, a taxpayer may use the Convention to
reduce its taxable income, but may not combine both treaty and Code rules where doing so
would be inconsistent with the intent of either set of rules. For example, assume that a resident
of Poland has three separate businesses in the United States. One activity is a profitable
permanent establishment and the other two are trades or businesses that would earn taxable
income under the Code but do not meet the permanent establishment threshold tests of the
Convention. One is profitable and the other incurs a loss. Under the Convention, the income of
the permanent establishment is taxable in the United States, and both the profit and loss of the
other two businesses are ignored. Under the Code, all three would be subject to tax, but the loss
would 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 loss trade or business against the profit of the permanent establishment.
(See Rev. Rul. 84-17, 1984-1 C.B. 308.) If, however, the taxpayer invokes the Code for the
taxation of all three ventures, he would not be precluded from invoking the Convention with
respect, for example, to any dividend income he may receive from the United States that is not
effectively connected with any of his business activities in the United States.

Similarly, except as provided in paragraph 3, nothing in the Convention can be used to
deny any benefit granted by any other agreement to which both Contracting State are parties.
For example, if certain benefits are provided for military personnel or military contractors under
a Status of Forces Agreement between the United States and Poland, those benefits or
protections will be available to residents of the Contracting States regardless of any provisions to
the contrary (or silence) in the Convention.

Paragraph 3

Paragraph 3 relates to non-discrimination obligations of the Contracting States under the
GATS. The provisions of paragraph 3 are an exception to the rule provided in paragraph 2 of
this Article under which the Convention shall not restrict in any manner any benefit now or

hereafter accorded by any other agreement between the Contracting States.

Subparagraph 3(a) provides that, unless the competent authorities determine that a
taxation measure is not within the scope of the Convention, the national treatment obligations of
the GATS shall not apply with respect to that measure. Further, any question arising as to the
interpretation or application of the Convention, including in particular whether a measure is
within the scope of the Convention, shall be considered only by the competent authorities of the
Contracting States, and the procedures under the Convention exclusively shall apply to the
dispute. Thus, paragraph 3 of Article XXII (Consultation) of the GATS may not be used to bring
a dispute before the World Trade Organization unless the competent authorities of both
Contracting States have determined that the relevant taxation measure is not within the scope of
Article 24 (Non-Discrimination) of the Convention.

The term “measure” for these purposes is defined broadly in subparagraph 3(b). It would
include a law, regulation, rule, procedure, decision, administrative action or any other similar
provision or action.

Paragraph 4

Paragraph 4 contains the traditional saving clause found in all U.S. income tax treaties.
The Contracting States reserve their rights, except as provided in paragraph 5, to tax their
residents and citizens as provided under their domestic laws, notwithstanding any provisions of
the Convention to the contrary. For example, if a resident of Poland performs professional
services in the United States and the income from the services is not attributable to a permanent
establishment in the United States, Article 7 (Business Profits) would by its terms prevent the
United States from taxing the income. If, however, the resident of Poland is also a citizen of the
United States, the saving clause permits the United States to include the remuneration in the
worldwide income of the citizen and subject it to tax under the normal Code rules (i.e., without
regard to Code section 894(a)). Subparagraph 5(a) of Article 1 also preserves the benefits of
special foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its
citizens resident in the other Contracting State. See paragraph 4 of Article 23 (Relief from
Double Taxation).

For purposes of the saving clause, “residence” is determined under Article 4 (Resident).
Thus, an individual who is a resident of the United States under the Code (but not a U.S. citizen)
but who is determined to be a resident of the Poland under the tie-breaker rules of Article 4
would be subject to U.S. tax only to the extent permitted by the Convention. The United States
would not be permitted to apply its domestic law to that person to the extent that its law is
inconsistent with the Convention.

However, the person would still be treated as a U.S. resident for U.S. tax purposes other
than determining the individual’s U.S. tax liability. For example, in determining under Code
section 957 whether a foreign corporation is a controlled foreign corporation, shares in that
corporation held by the individual would be considered to be held by a U.S. resident. As a result,
other U.S. citizens or residents might be deemed to be United States shareholders of a controlled
foreign corporation subject to current inclusion of subpart F income recognized by the

corporation. See Treas. Reg. section 301.7701(b)-7(a)(3).

Under paragraph 4, each Contracting State also reserves its right to tax former citizens
and former long-term residents in accordance with domestic law for a period of ten years
following the loss of such status. Thus, paragraph 4 allows the United States to tax former U.S.
citizens and former U.S. long-term residents in accordance with Code section 877. Section 877
generally applies to a former citizen or long-term resident of the United States who relinquishes
citizenship or terminates long-term residency before June 17, 2008 if he fails to certify that he
has complied with U.S. tax laws during the 5 preceding years, or if either of the following
criteria exceed established thresholds: (a) the average annual net income tax of such individual
for the period of 5 taxable years ending before the date of the loss of status; or (b) the net worth
of such individual as of the date of the loss of status.

The United States defines “long-term resident” as an individual (other than a U.S. citizen)
who is a lawful permanent resident of the United States in at least 8 of the prior 15 taxable years.
An individual is not treated as a lawful permanent resident of the United States for any taxable
year in which the individual is treated as a resident of Poland under this Convention, or as a
resident of any country other than the United States under the provisions of any other U.S. tax
treaty, and the individual does not waive the benefits of the relevant tax treaty.

Paragraph 5

Paragraph 5 sets forth certain exceptions to the saving clause. The referenced provisions
are intended to provide benefits to citizens and residents even if such benefits do not exist under
domestic law.

Subparagraph 5(a) lists certain provisions of the Convention that are applicable to all
citizens and residents of a Contracting State, despite the general saving clause rule of paragraph
4:

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative
adjustment with respect to income tax due on profits reallocated under Article 9.

(2) Paragraphs 2, 3 and 5 of Article 18 (Pensions, Social Security, Annuities, Alimony
and Child Support) provide exemptions from source or residence State taxation for
certain pension distributions, social security payments, alimony and child support.

(3) Article 23 (Relief from Double Taxation) confirms to citizens and residents of one
Contracting State the benefit of a credit for income taxes paid to the other or an
exemption for income earned in the other State. In addition, paragraph 5 of Article
23 coordinates the tax systems of the Contracting States to avoid double taxation that
could result from the imposition of an exit tax or similar regime on an individual who
ceases to be treated as a resident (as determined under paragraph 1 of Article 4
(Resident)) of one Contracting State and becomes a resident of the other Contracting
State.

(4) Article 24 (Non-Discrimination) protects residents and nationals of one Contracting
State against the adoption of certain discriminatory taxation practices in the other
Contracting State.

(5) Article 25 (Mutual Agreement Procedure) confers certain benefits on citizens and
residents of the Contracting States in order to reach and implement solutions to
disputes between the two Contracting States.

Subparagraph 5(b) provides a different set of exceptions to the saving clause. The
benefits referred to are all intended to be granted to temporary residents of a Contracting State
(for example, in the case of the United States, holders of non-immigrant visas), but not to
citizens or to persons who have acquired permanent residence in that State. If beneficiaries of
these provisions travel from one Contracting State to the other, and remain in the other long
enough to become residents under its internal law, but do not acquire permanent residence status
(i.e., in the U.S. context, they do not become "green card" holders) and are not citizens of that
State, the host State will continue to grant these benefits even if they conflict with the statutory
rules. The benefits preserved by this paragraph are: the host country exemptions for 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
agents and consular officers and under Article 27 (Members of Diplomatic Missions and
Consular Posts).

Paragraph 6

Paragraph 6 addresses special issues presented by the payment of items of income, profit
or gain to entities that are fiscally transparent, such as partnerships, estates and trusts. Because
countries may take different views as to when an entity is fiscally transparent, the risk of both
double taxation and double non-taxation is relatively high. The provision, and the corresponding
requirements of the substantive rules of the other Articles of the Convention, should be read with
two goals in mind. First, the intention of paragraph 6 is to eliminate a number of technical
problems that could prevent investors using such entities from claiming treaty benefits, even
though such investors would be subject to tax on the income derived through such entities.
Second, the provision prevents a resident of a Contracting State from claiming treaty benefits in
circumstances where the resident investing in the entity does not take into account the item of
income paid to the entity because the entity is not fiscally transparent in its State of residence.

In general, the principles incorporated in this paragraph reflect the regulations under
Treas. Reg. section 1.894-1(d). Treas. Reg. 1.894-1(d)(3)(iii) provides that an entity will be
fiscally transparent under the laws of an interest holder’s jurisdiction with respect to an item of
income to the extent that the laws of that jurisdiction require the interest holder resident in that
jurisdiction to separately take into account on a current basis the interest holder’s respective
share of the item of income paid to the entity, whether or not distributed to the interest holder,
and the character and source of the item in the hands of the interest holder are determined as if
such item were realized directly by the interest holder. Entities falling under this description in
the United States include partnerships, corporations that have made a valid election to be taxed
under Subchapter S of Chapter 1 of the Code (“S corporations”), common investment trusts

under section 584, simple trusts and grantor trusts. This paragraph also applies to payments
made to other entities, such as U.S. limited liability companies (“LLCs”), that may be treated as
either partnerships or as disregarded as a separate entity for U.S. tax purposes.

Except as otherwise provided under subparagraph 6(b), under subparagraph 6(a), an item
of income, profit or gain derived by or through such a fiscally transparent entity will be
considered to be derived by a resident of a Contracting State if a resident is treated under the
taxation laws of that State as deriving the item of income. For example, if a company that is a
resident of Poland pays interest to an entity that is treated as fiscally transparent for U.S. tax
purposes, the interest will be considered derived by a resident of the United States, but only to
the extent that the taxation laws of the United States treats one or more U.S. residents (whose
status as U.S. residents is determined, for this purpose, under U.S. tax law) as deriving the
interest for U.S. tax purposes. Where the entity is a partnership, the persons who are, under U.S.
tax laws, treated as partners of the entity would normally be the persons whom the U.S. tax laws
would treat as deriving the interest income through the partnership. Also, it follows that persons
whom the United States treats as partners but who are not U.S. residents for U.S. tax purposes
may not claim a benefit under the Convention for the interest paid to the partnership, because
such third-country partners are not residents of the United States for purposes of claiming this
benefit. If, however, the country in which the third-country partners are treated as resident for
tax purposes, as determined under the laws of that country, has an income tax convention with
Poland, they may be entitled to claim a benefit under that convention (these results would also
follow in the case of an entity that is disregarded as a separate entity under the laws of one
jurisdiction but not the other, such as a single-owner entity that is viewed as a branch for U.S. tax
purposes and as a corporation for tax purposes under the laws of Poland). In contrast, where the
entity is organized under U.S. laws and is classified as a corporation for U.S. tax purposes,
interest paid by a company that is a resident of Poland to the U.S. corporation will be considered
derived by a resident of the United States since the U.S. corporation is treated under U.S.
taxation laws as a resident of the United States and as deriving the income.

Under subparagraph 6(a), the same result would be reached even if the tax laws of Poland
would treat the entity differently (e.g., if the entity were not treated as fiscally transparent in
Poland in the first example above where the entity is treated as a partnership for U.S. tax
purposes). Similarly, the characterization of the entity in a third country is also irrelevant, even
if the entity is organized in that third country, although subparagraph 6(b) imposes an additional
requirement in the case of entities organized in a third country.

Subparagraph 6(b) imposes an additional requirement in cases of payments through an
entity that is organized in a third country. In such cases, if the entity is not treated as fiscally
transparent under the laws of the State in which the income, profit or gains arises, and if the
entity is eligible in its own right for benefits under a convention for the avoidance of double
taxation between the third state and the State in which the income, profit or gain arises with
respect to the particular item of income, profit or gain that are more favorable than the benefits
provided under the Convention with respect to that item, subparagraph 6(a) shall not have
application. For example, assume that USCo, a corporation resident in the United States, is the
sole shareholder of FCo, an entity established in Country F. Under the laws of the United States,
FCo is treated as fiscally transparent, but under the laws of Poland, FCo is treated as a

corporation. FCo receives Poland-source interest which, under the provisions of Article 11
(Interest) of the Convention, would be subject to tax in Poland at a rate of 5 percent. Pursuant to
subparagraph 6(a), USCo would be considered as deriving the Poland-source interest. However,
subparagraph 6(b) provides that if the tax treaty between Poland and Country F provides a
limitation on the rate of interest withholding that is lower than 5 percent, and if FCo would be
eligible for such lower rate in its own right on the payment of interest, USCo shall not be deemed
as deriving the interest payment. Nevertheless, FCo may claim the more favorable treaty
benefits from Poland in its own right under the tax treaty between Poland and Country F.

The principles of paragraph 6 apply to trusts to the extent that they are fiscally
transparent in either Contracting State. For example, suppose that X, a resident of Poland,
creates a revocable trust in the United States and names persons resident in a third country as the
beneficiaries of the trust. If, under the laws of Poland, X is treated as taking the trust’s income
into account for tax purposes, the trust’s income would be regarded as being derived by a
resident of Poland. In contrast, since the determination of deriving an item of income, profit or
gain is made on an item by item basis, it is possible that, in the case of a U.S. non-grantor trust,
the trust itself may be able to claim benefits with respect to certain items of income, such as
capital gains, so long as it is a resident liable to tax on such gains, but not with respect to other
items of income that are treated as income of the trust’s interest holders.

As noted above, paragraph 6 is not an exception to the saving clause of paragraph 4.
Accordingly, paragraph 6 does not prevent a Contracting State from taxing an entity that is
treated as a resident of that State under its tax law. For example, if a U.S. LLC with members
who are residents of Poland elects to be taxed as a corporation for U.S. tax purposes, the United
States will tax that LLC on its worldwide income on a net basis, without regard to whether
Poland views the LLC as fiscally transparent.

ARTICLE 2 (TAXES COVERED)

This Article specifies the U.S. taxes and the taxes of Poland to which the Convention
applies. With two exceptions, the taxes specified in Article 2 are the covered taxes for all
purposes of the Convention. A broader coverage applies for purposes of Articles 24 (Non-
Discrimination) and 26 (Exchange of Information). Article 24 applies with respect to all taxes,
including those imposed by state and local governments. Article 26 applies with respect to all
taxes imposed at the national level.

Paragraph 1

Paragraph 1 identifies the category of taxes to which the Convention applies. Paragraph
1 is based on the OECD Model and defines the scope of application of the Convention. The
Convention applies to taxes on income, including gains, imposed on behalf of a Contracting
State, irrespective of the manner in which they are levied. Except with respect to Article 24
(Non-Discrimination), state and local taxes are not covered by the Convention.

Paragraph 2

Paragraph 2 also is based on the OECD Model and provides a definition of taxes on
income and on capital gains. The Convention covers taxes on total income or any part of income
and includes tax on gains derived from the alienation of property. The Convention does not
apply, however, to social security or unemployment taxes, or any other charges where there is a
direct connection between the levy and individual benefits. The Convention also does not apply
to property taxes, except with respect to Article 24 (Non-Discrimination) or to Article 26
(Exchange of Information) to the extent that such property taxes are imposed at the national
level.

Paragraph 3

Paragraph 3 lists the taxes in force at the time of signature of the Convention to which the
Convention applies.

The existing covered taxes of Poland are identified in subparagraph 3(a) as the personal
income tax and the corporate income tax, hereinafter referred to as “Polish tax”.

Subparagraph 3(b) provides that the existing U.S . taxes subject to the rules of the
Convention are the Federal income taxes imposed by the Code, together with the Federal taxes
imposed on the investment income of foreign private foundations (Code sections 4940 through
4948) hereinafter referred to as “United States tax”. Social security and unemployment taxes
(Code sections 1401, 3101, 3111 and 3301) are specifically excluded from coverage.

Paragraph 4

Under paragraph 4, the Convention will apply to any taxes that are identical, or
substantially similar, to those enumerated in paragraph 3, and which are imposed in addition to,
or in place of, the existing taxes after February 13, 2013, the date of signature of the Convention.
The paragraph also provides that the competent authorities of the Contracting States will notify
each other of any significant changes to their taxation laws.

ARTICLE 3 (GENERAL DEFINITIONS)

Article 3 provides general definitions and rules of interpretation applicable throughout
the Convention. Certain other terms are defined in other articles of the Convention. For
example, the term “resident of a Contracting State” is defined in Article 4 (Resident). The term
“permanent establishment” is defined in Article 5 (Permanent Establishment). These definitions
apply for all purposes of the Convention. Other terms, such as “ dividends,” “ interest” and
“royalties” are defined in specific Articles for purposes of those Articles.

Paragraph 1

Paragraph 1 defines a number of basic terms used in the Convention. The introduction to
paragraph 1 makes clear that these definitions apply for all purposes of the Convention, unless
the context requires otherwise. This latter condition allows flexibility in the interpretation of the
Convention in order to avoid results not intended by the Convention’s negotiators.

Subparagraph 1(a) defines the term "person" to include an individual, an estate, a trust, a
partnership, a company and any other body of persons. The definition is significant for a variety
of reasons. For example, under Article 4, only a "person" can be a "resident" and therefore
eligible for most benefits under the treaty. Also, all "persons" are eligible to claim relief under
Article 25 (Mutual Agreement Procedure).

The term “company” is defined in subparagraph 1(b) as a body corporate or an entity
treated as a body corporate for tax purposes in the state where it is organized. The definition
refers to the law of the state in which an entity is organized in order to ensure that an entity that
is treated as fiscally transparent in its country of residence will not get inappropriate benefits,
such as the reduced withholding rate provided by subparagraph 2(b) of Article 10 (Dividends). It
also ensures that the Limitation on Benefits provisions of Article 22 will be applied at the
appropriate level.

The terms “enterprise of a Contracting State” and "enterprise of the other Contracting
State" are defined in subparagraph 1(c) 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. An enterprise of a
Contracting State need not be carried on in that State. It may be carried on in the other
Contracting State or a third state (e.g., a U.S. corporation doing all of its business in Poland
would still be a U.S. enterprise).

Subparagraph 1(c) further provides that these terms also encompass an enterprise
conducted through an entity (such as a partnership) that is treated as fiscally transparent in the
Contracting State where the entity’s owner is resident. The definition makes this point explicitly
to ensure that the purpose of the Convention is not thwarted by an overly technical application of
the term “enterprise of a Contracting State” to activities carried on through partnerships and
similar entities. In accordance with Article 4 (Resident), an entity that is fiscally transparent in
the Contracting State in which it is organized is not considered to be a resident of that
Contracting State (although income derived through such an entity may be taxed as the income
of a resident of a Contracting State to the extent that it is taxed in the hands of resident partners
or other resident owners). The definition makes clear that as provided in Article 1 (General
Scope) paragraph 6, an enterprise conducted by such an entity will be treated as carried on by a
resident of a Contracting State to the extent its partners or other owners are residents. This
approach is consistent with Code section 875, which attributes a trade or business conducted by a
partnership to its partners and a trade or business conducted by an estate or trust to its
beneficiaries.

Subparagraph 1(d) defines the term “enterprise” as any activity or set of activities that
constitutes the carrying on of a business. The term “business” is not defined, but subparagraph
1(e) provides that it includes the performance of professional services and other activities of an
independent character. Both subparagraphs are identical to definitions added to the OECD
Model in connection with the deletion of Article 14 (Independent Personal Services) from the
OECD Model in 2000. The inclusion of the two definitions is intended to clarify that income
from the performance of professional services or other activities of an independent character is
dealt with under Article 7 (Business Profits) and not Article 21 (Other Income).

Subparagraph 1(f) defines the term "international traffic." The term means any transport
by a ship or aircraft except when such transport is solely between places within a Contracting
State. This definition is applicable principally in the context of Article 8 (Shipping and Air
Transport). The definition combines with paragraphs 2 and 3 of Article 8 to exempt from tax by
the source State: profits from the rental of ships or aircraft on a full (time or voyage) basis;
profits from the rental on a bareboat basis of ships or aircraft if the rental income is incidental to
profits from the operation of ships or aircraft in international traffic; profits from the rental on a
bareboat basis of ships or aircraft if such ships or aircraft are operated in international traffic by
the lessee; and profits of an enterprise of a Contracting State from the use, maintenance, or rental
of containers (including trailers, barges, and related equipment for the transport of containers),
where such use, maintenance or rental, as the case may be, is incidental to the operation of ships
or aircraft in international traffic.

The exclusion from international traffic of transport solely between places within a
Contracting State means, for example, that carriage of goods or passengers solely between New
York and Chicago would not be treated as international traffic, whether carried by a U.S. or a
foreign carrier. The substantive taxing rules of the Convention relating to the taxation of income
from transport, principally Article 8, therefore, would not apply to income from such carriage.
Thus, if the carrier engaged in internal U.S. traffic were a resident of Poland (assuming that were
possible under U.S. law), the United States would not be required to exempt the income from
that transport under Article 8. The income would, however, be treated as business profits under
Article 7 (Business Profits), and therefore would be taxable in the United States only if
attributable to a U.S. permanent establishment of the foreign carrier, and then only on a net basis.
The gross basis U.S. tax imposed by section 887 would not apply under the circumstances
described. If, however, goods or passengers are carried by a carrier resident in Poland from a
non-U.S. port to, for example, New York, and some of the goods or passengers continue on to
Chicago, the entire transport would be international traffic. This would be true if the
international carrier transferred the goods at the U.S. port of entry from a ship to a land vehicle,
from a ship to a lighter, or even if the overland portion of the trip in the United States was
handled by an independent carrier under contract with the original international carrier, so long
as both parts of the trip were reflected in original bills of lading. For this reason, the U.S. Model
refers, in the definition of "international traffic," to "such transport" being solely between places
in the other Contracting State, while the OECD Model refers to the ship or aircraft being
operated solely between such places. The U.S. Model language is intended to make clear that, as
in the above example, even if the goods are carried on a different aircraft for the internal portion
of the international voyage than is used for the overseas portion of the trip, the definition applies
to that internal portion as well as the external portion.

Finally, a "cruise to nowhere," i.e., a cruise beginning and ending in a port in the same
Contracting State with no stops in a foreign port, would not constitute international traffic.

Subparagraph 1(g) defines the term " competent authorities" for Poland and the United
States. The U.S. competent authority is the Secretary of the Treasury or his delegate. The
Secretary of the Treasury has delegated the competent authority function to the Commissioner of
Internal Revenue, who in turn has delegated the authority to the Deputy Commissioner

(International) LB&I. With respect to interpretative issues, the Deputy Commissioner
(International) LB&I acts with the concurrence of the Associate Chief Counsel (International) of
the Internal Revenue Service. The competent authority in the case of Poland is the Minister of
Finance or his authorized representative.

The geographical scope of the Convention with respect to Poland is set out in
subparagraph 1(h). The term “Poland” means the Republic of Poland, including the territorial
sea thereof and any area outside the territorial sea of the Republic of Poland designated under its
laws and in accordance with international law as an area within which the sovereign rights of the
Republic of Poland with respect to the sea bed and sub-soil and their natural resources may be
exercised.

The geographical scope of the Convention with respect to the United States is set out in
subparagraph 1(i). It encompasses the United States of America, including the states, the District
of Columbia, and the territorial sea of the United States. The term does not include Puerto Rico,
the United States Virgin Islands, Guam or any other U.S. possession or territory. For certain
purposes, the term “United States” includes the sea bed and subsoil of undersea areas adjacent to
the territorial sea of the United States. This extension applies to the extent that the United States
may exercise sovereignty in accordance with international law for the purpose of natural
resource exploration and exploitation of such areas. This extension of the definition applies,
however, only if the person, property or activity to which the Convention is being applied is
connected with such natural resource exploration or exploitation. Thus, it would not include any
activity involving the sea floor of an area over which the United States exercised sovereignty for
natural resource purposes if that activity was unrelated to the exploration and exploitation of
natural resources. This result is consistent with the result that would be obtained under Code
section 638, which treats the continental shelf as part of the United States for purposes of natural
resource exploration and exploitation.

The term “national,” as it relates to the United States and to Poland, is defined in
subparagraph 1(j). This term is relevant for purposes of Article 4 (Resident), Article 19
(Government Service) and Article 24 (Non-Discrimination). A national of one of the
Contracting States is either an individual who is a citizen or national of that State, or any legal
person, partnership or association deriving its status, as such, from the law in force in the State
where it is established.

Subparagraph 1(k) defines the term “pension fund”. The term means any person that is
established in a Contracting State and satisfies two criteria. First, as provided in clause 1(k)(i),
the person must be generally exempt from income taxation in the Contracting State in which it is
established. Second, as provided in clause 1(k)(ii), the person must be operated principally
either to administer or provide pension or retirement benefits, or to earn income for the benefit of
one or more persons established in the same Contracting State that are generally exempt from
income taxation in that Contracting State and are operated principally to administer or provide
pension or retirement benefits.

The definition recognizes that pension funds sometimes administer or provide benefits
other than pension or retirement benefits, such as death benefits. However, in order for the fund

to be considered a pension fund for purposes of the Convention, the provision of any other such
benefits must be merely incidental to the fund’s principal activity of administering or providing
pension or retirement benefits. The definition also ensures that if a fund is a collective fund that
earns income for the benefit of other funds, then substantially all of the funds that participate in
the collective fund must be residents of the same Contracting State as the collective fund and
must be entitled to benefits under the Convention in their own right.

In the case of the United States, the term “pension fund” includes the following: a trust
providing pension or retirement benefits under a Code section 401(a) qualified pension plan
(which includes a Code section 401(k) plan); a profit sharing or stock bonus plan; a Code section
403(a) qualified annuity plan; a Code section 403(b) plan; a trust that is an individual retirement
account under Code section 408; a Roth individual retirement account under Code section 408A
or a simple retirement account under Code section 408(p); a trust providing pension or retirement
benefits under a simplified employee pension plan under Code section 408(k); a trust described
in section 457(g) providing pension or retirement benefits under a Code section 457(b) plan; and
the Thrift Savings Fund (section 7701(j)). A group trust described in Rev. Rul. 81-100, as
amended by Rev. Rul. 2004-67 and Rev. Rul. 2011-1, qualifies as a pension fund only if
substantially all of its activity is to earn income for the benefit of pension funds that are
themselves entitled to benefits under the Convention as a resident of the United States.

Paragraph 2

Terms that are not defined in the Convention are dealt with in paragraph 2.

Paragraph 2 provides that in the application of the Convention, any term used but not
defined in the Convention will have the meaning that it has under the domestic law of the
Contracting State whose tax is being applied, unless the context requires otherwise. If the term is
defined under both the tax and non-tax laws of a Contracting State, the definition in the tax law
will take precedence over the definition in the non-tax laws. Finally, there also may be cases
where the tax laws of a State contain multiple definitions of the same term. In such a case, the
definition used for purposes of the particular provision at issue, if any, should be used.

The reference in paragraph 2 to the domestic law of a Contracting State means the law in
effect at the time the treaty is being applied, not the law as in effect at the time the treaty was
signed. The use of “ambulatory” definitions, however, may lead to results that are at variance
with the intentions of the negotiators and of the Contracting States when the treaty was
negotiated and ratified. The inclusion in both paragraphs 1 and 2 of an exception to the generally
applicable definitions where the “context otherwise requires” is intended to address this
circumstance. Where reflecting the intent of the Contracting States requires the use of a
definition that is different from a definition under paragraph 1 or the law of the Contracting State
applying the Convention, that definition will apply. Thus, flexibility in defining terms is
necessary and permitted.

ARTICLE 4 (RESIDENT)

This Article sets forth rules for determining whether a person is a resident of a

Contracting State for purposes of the Convention. As a general matter, only residents of the
Contracting States may claim the benefits of the Convention. The treaty definition of residence is
to be used only for purposes of the Convention. The fact that a person is determined to be a
resident of a Contracting State under Article 4 does not automatically entitle that person to the
benefits of the Convention. In order to obtain the benefits of the Convention, such person must
satisfy all applicable requirements specified in the Convention, including other applicable
requirements of Article 1 (General Scope), beneficial ownership and Article 22 (Limitation on
Benefits).

The determination of residence for treaty purposes looks first to a person’s liability to tax
as a resident under the respective taxation laws of the Contracting States. As a general matter, a
person is liable to tax as a resident under the domestic laws of one Contracting State and not of
the other need look no further. For purposes of the Convention, that person is a resident of the
State in which he is liable to tax as resident under domestic law. If, however, a person is liable
to tax as a resident under the domestic laws of both Contracting States, the Article uses tie-
breaker rules to assign a single State of residence (or no State of residence) to such a person for
purposes of the Convention.

Paragraph 1

The term “resident of a Contracting State” is defined in paragraph 1. In general, this
definition incorporates the definitions of residence in U.S. and Polish law by referring to a
resident as a person who, under the laws of a Contracting State, is liable to tax therein by reason
of his domicile, residence, citizenship, place of management, place of incorporation or any other
similar criterion. Thus, residents of the United States include aliens who are considered U.S.
residents under Code section 7701(b), entities organized in the United States and that have
elected under Treas. Reg. 301.7701-2 to be taxed by the United States as a corporation, and
companies that are treated as domestic corporations under Code section 7874(b). Paragraph 1
also specifically includes the two Contracting States, and political subdivisions and local
authorities of the two States, as residents for purposes of the Convention.

The fact that a particular entity does not pay tax in practice will not necessarily mean that
the entity is not a resident. An entity that is not fiscally transparent in its Contracting State of
residence for purposes of paragraph 6 of Article 1 (General Scope), and is not unconditionally
exempt from tax, will generally be treated as a resident for purposes of the Convention. This is
generally true even for an entity that, in practice, is not required to pay tax if it meets certain
requirements with respect to its activities, types of income, or distribution practices. For
example, a U.S. Regulated Investment Company (RIC) and a U.S. Real Estate Investment Trust
(REIT) are residents of the United States for purposes of the treaty. These entities are taxable to
the extent that they do not currently distribute their profits, and therefore may be regarded as
liable to tax, even though these entities do not generally have taxable income in practice. They
also must satisfy a number of requirements under the Code in order to be entitled to their
particular tax treatment.

A person who is liable to tax in a Contracting State only in respect of income from
sources within that State or of profits attributable to a permanent establishment in that State will

not be treated as a resident of that Contracting State for purposes of the Convention. Thus, a
consular official of the other Contracting State who is posted in the United States, who may be
subject to U.S. tax on U.S. source investment income, but is not taxable in the United States on
non-U.S. source income (see Code section 7701(b)(5)(B)), would not be considered a resident of
the United States for purposes of the Convention. Similarly, an enterprise of Poland with a
permanent establishment in the United States is not, by virtue of that permanent establishment, a
resident of the United States. The enterprise generally 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, as it would be if it were a U.S. resident.

Paragraph 2

Paragraph 2 provides that entities such as pension funds as defined in Article 3 (General
Definitions) and legal persons organized under the laws of a Contracting State and established
exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes are
residents of the Contracting State in which they are established or organized. Such persons are
liable to tax, notwithstanding that all or part of its income or gains may be exempt from tax
under the domestic laws of that State. Thus, a section 501(c) organization organized in the
United States (such as a U.S. charity) that is generally exempt from tax under U.S. law is
nevertheless a resident of the United States for all purposes of the Convention.

Paragraph 3

If, under the domestic law of both Contracting States, and, thus, under paragraph 1, an
individual is a resident of both Contracting States, a series of tie-breaker rules are provided in
paragraph 3 to determine a single State of residence for that individual. These tests are to be
applied in the order in which they are stated. The first test is based on where the individual has a
permanent home. If that test is inconclusive because the individual has a permanent home
available to him in both States, he will be considered to be a resident of the Contracting State
where his personal and economic relations are closest (i.e., the location of his "center of vital
interests"). If that test is also inconclusive, or if he does not have a permanent home available to
him in either State, he will be treated as a resident of the Contracting State where he maintains a
habitual abode. If he has a habitual abode in both States or in neither of them, he will be treated
as a resident of the Contracting State of which he is a national. If he is a national of both States
or of neither, the competent authorities shall endeavor to settle the question by mutual
agreement.

Paragraph 4

Paragraph 4 addresses dual residence issues for companies. A company is treated as
resident in the United States if it is created or organized under the laws of the United States or a
political subdivision. If, as is frequently the case, a company is treated as a resident of Poland if
it is either incorporated or managed and controlled there, dual residence can arise in the case of a
U.S. company that is managed and controlled in Poland. In other cases, a company may be a
dual resident because it was originally incorporated in one Contracting State but has "continued"
into the other Contracting State. Paragraph 4 thus attempts to deal with each of these situations.

Under paragraph 4, the residence of a dual resident company will be in the Contracting
State under the laws of which it is created or organized if it is created or organized under the
laws of only one of the other Contracting States. Thus, if a company is a resident of the United
States because it is incorporated under the laws of one of the states and is a resident of Poland
because its place of effective management is in Poland, then it will be a resident only of the
United States. However, if the incorporation test does not resolve the question because, for
example, the company was incorporated in one Contracting State and continued into the other
Contracting State, but the first-mentioned Contracting State does not recognize the migration and
continues to treat the company as a resident, the case would then be addressed by paragraph 5.

Paragraph 5

Paragraph 5 addresses situations when by reason of the provisions of paragraph 1, 2 or 4,
a person other than an individual is a resident of both Contracting States. In such cases, the
competent authorities of the Contracting States may, but are not required to, use the mutual
agreement procedure to endeavor to determine the mode of application to the dual resident
person. If the competent authorities do not reach a mutual agreement regarding a single State of
residence, such dual resident person cannot claim any benefit accorded to residents of a
Contracting State by the Convention. The person may, however, claim any benefits that are not
limited to residents, such as those provided by paragraph 1 of Article 24 (Non-Discrimination).
Thus, for example, a State cannot impose discriminatory taxation on a dual resident person.

Regardless of the outcome under this paragraph, dual resident companies may be treated
as a resident of a Contracting State for purposes other than that of obtaining benefits under the
Convention. For example, if a dual resident company pays a dividend to a resident of Poland,
the U.S. paying agent would withhold on that dividend at the appropriate treaty rate (assuming
the payee is entitled to treaty benefits), because reduced withholding is a benefit enjoyed by the
resident of Poland, not by the dual resident company. The dual resident company that paid the
dividend would, for this purpose, be treated as a resident of the United States under the
Convention. In addition, information relating to dual resident companies can be exchanged
under the Convention because, by its terms, Article 26 (Exchange of Information) is not limited
to residents of the Contracting States.

ARTICLE 5 (PERMANENT ESTABLISHMENT)

This Article defines the term "permanent establishment," a term that is significant for
several articles of the Convention. The existence of a permanent establishment in a Contracting
State is necessary under Article 7 (Business Profits) for the taxation by that State of the business
profits of a resident of the other Contracting State. Articles 10 (Dividends), 11 (Interest) and 13
(Royalties) provide for reduced rates of tax at source on payments of these items of income to a
resident of the other State only when the income is not attributable to a permanent establishment
that the recipient has in the source State. The concept is also relevant in determining which
Contracting State may tax certain gains under Article 14 (Capital Gains) and certain "other
income" under Article 21 (Other Income).

Paragraph 1

The basic definition of the term “permanent establishment” is contained in paragraph 1.
As used in the Convention, the term means a fixed place of business through which the business
of an enterprise is wholly or partly carried on. As indicated in the OECD Commentary to Article
5 (see paragraphs 4 through 8), a general principle to be observed in determining whether a
permanent establishment exists is that the place of business must be "fixed" in the sense that a
particular building or physical location is used by the enterprise for the conduct of its business,
and that it must be foreseeable that the enterprise’s use of this building or other physical location
will be more than temporary. If an enterprise carries on a business through a sub-contractor, a
permanent establishment may also exist for the enterprise if all the requirements of Article 5 are
met. For example, under paragraph 1, a permanent establishment may exist where an enterprise
carries on its business through sub-contractors at a fixed place of business of the enterprise.
Factors that indicate that a location is a fixed place of business of the enterprise, (i.e., a general
contractor) include legal possession of the site, controlling access to and use of the site, and
overall responsibility for what happens at the location.

Paragraph 2

Paragraph 2 lists a number of types of fixed places of business that constitute a
permanent establishment. This list is illustrative and non-exclusive. According to paragraph 2,
the term permanent establishment includes a place of management, a branch, an office, a factory,
a workshop, and a mine, oil or gas well, quarry or other place of extraction of natural resources.

Paragraph 3

This paragraph provides rules to determine whether a building site or a construction,
assembly or installation project, or a n installation or drilling rig or ship used for the exploration
of natural resources constitutes a permanent establishment for the contractor, driller, etc. Such a
site or activity does not create a permanent establishment unless the site, project, etc. lasts, or the
exploration activity continues, for more than twelve months. It is only necessary to refer to
"exploration" and not "exploitation" in this context because exploitation activities are defined to
constitute a permanent establishment under subparagraph (f) of paragraph 2. Thus, a drilling rig
does not constitute a permanent establishment if a well is drilled in twelve months or less.
However, the well becomes a permanent establishment as of the date that production begins.

The twelve-month test applies separately to each site or project. The twelve-month period
begins when work (including preparatory work carried on by the enterprise) physically begins in
a Contracting State. A series of contracts or projects by a contractor that are interdependent both
commercially and geographically are to be treated as a single project for purposes of applying
the twelve-month threshold test. For example, the construction of a housing development would
be considered as a single project even if each house were constructed for a different purchaser.

In applying this paragraph, time spent by a sub-contractor on a building site is counted as
time spent by the general contractor at the site for purposes of determining whether the general
contractor has a permanent establishment. However, for the sub-contractor itself to be treated as

having a permanent establishment, the sub-contractor's activities at the site must last for more
than twelve months. For purposes of applying the twelve-month rule, time is measured from the
first day the sub-contractor is on the site until the last day. Thus, if a sub-contractor is on a site
intermittently, intervening days that the sub-contractor is not on the site are counted.

These interpretations of the Article are based on the Commentary to paragraph 3 of
Article 5 of the OECD Model, which contains language that is substantially the same as that in
the Convention. These interpretations are consistent with the generally accepted international
interpretation of the relevant language in paragraph 3 of Article 5 of the Convention.

If the twelve-month threshold is exceeded, the site or project constitutes a permanent
establishment from the first day of activity.

Paragraph 4

This paragraph contains exceptions to the general rule of paragraph 1, listing a number of
activities that may be carried on through a fixed place of business but which nevertheless do not
create a permanent establishment. The use of facilities solely to store, display or deliver
merchandise belonging to an enterprise does not constitute a permanent establishment of that
enterprise. The maintenance of a stock of goods belonging to an enterprise solely for the
purpose of storage, display or delivery, or solely for the purpose of processing by another
enterprise does not give rise to a permanent establishment of the first-mentioned enterprise. The
maintenance of a fixed place of business solely for the purpose of purchasing goods or
merchandise, or for collecting information, for the enterprise, or for other activities that have a
preparatory or auxiliary character for the enterprise, such as advertising, or the supply of
information, do not constitute a permanent establishment of the enterprise. Moreover,
subparagraph 4(f) provides that a combination of the activities described in the other
subparagraphs of paragraph 4 will not give rise to a permanent establishment if the combination
results in an overall activity that is of a preparatory or auxiliary character.

Paragraph 5

Paragraphs 5 and 6 specify when activities carried on by an agent or other person acting
on behalf of an enterprise create a permanent establishment of that enterprise. Under paragraph
5, a person is deemed to create a permanent establishment of the enterprise if that person has and
habitually exercises an authority to conclude contracts on behalf of the enterprise. If, however,
his activities are limited to those activities specified in paragraph 4 which would not constitute a
permanent establishment if carried on by the enterprise through a fixed place of business, the
person does not create a permanent establishment of the enterprise.

The reference to the ability to habitually exercising an authority to conclude contracts “on
behalf of” an enterprise should be interpreted consistently with the analogous terms found in the
OECD Model “in the name of that enterprise” and the U.S. Model “binding on the enterprise.”
As indicated in paragraph 32 to the OECD Commentaries on Article 5, paragraph 5 of the Article
is intended to encompass persons who have “sufficient authority to bind the enterprise’s
participation in the business activity in the State concerned.”

Paragraph 6

Under paragraph 6, an enterprise is not deemed to have a permanent establishment in a
Contracting State merely because it carries on business in that State through an independent
agent, including a broker or general commission agent, if the agent is acting in the ordinary
course of his business. Thus, there are two conditions that must be satisfied: the agent must be
both legally and economically independent of the enterprise; and the agent must be acting in the
ordinary course of its business in carrying out activities on behalf of the enterprise.

Whether the agent and the enterprise are independent is a factual determination. Among
the questions to be considered is the extent to which the agent operates on the basis of
instructions from the enterprise. An agent that is subject to detailed instructions regarding the
conduct of its operations or to comprehensive control by the enterprise is not legally
independent.

In determining whether the agent is economically independent, a relevant factor is the
extent to which the agent bears business risk. Business risk refers primarily to risk of loss. An
independent agent typically bears risk of loss from its own activities. In the absence of other
factors that would establish dependence, an agent that shares business risk with the enterprise, or
has its own business risk, is economically independent because its business activities are not
integrated with those of the principal. Conversely, an agent that bears little or no risk from the
activities it performs is not economically independent and therefore is not described in paragraph
6.

Another relevant factor in determining whether an agent is economically independent is
whether the agent acts exclusively or nearly exclusively for the principal. Such a relationship
may indicate that the principal has economic control over the agent. A number of principals
acting in concert also may have economic control over an agent. The limited scope of the agent's
activities and the agent's dependence on a single source of income may indicate that the agent
lacks economic independence. It should be borne in mind, however, that exclusivity is not in
itself a conclusive test; an agent may be economically independent notwithstanding an exclusive
relationship with the principal if it has the capacity to diversify and acquire other clients without
substantial modifications to its current business and without substantial harm to its business
profits. Thus, exclusivity should be viewed merely as a pointer to further investigation of the
relationship between the principal and the agent. Each case must be addressed on the basis of its
own facts and circumstances.

Paragraph 7

This paragraph clarifies that a company that is a resident of a Contracting State is not
deemed to have a permanent establishment in the other Contracting State merely because it con-
trols, or is controlled by, a company that is a resident of that other Contracting State, or that
carries on business in that other Contracting State. The determination of whether a permanent
establishment exists is made solely on the basis of the factors described in paragraphs 1 through
6 of the Article. Whether a company is a permanent establishment of a related company,

therefore, is based solely on those factors and not on the ownership or control relationship
between the companies.

ARTICLE 6 (INCOME FROM REAL PROPERTY)

Paragraph 1

The first paragraph of Article 6 states the general rule that income of a resident of a
Contracting State derived from real property situated in the other Contracting State may be taxed
in the Contracting State in which the property is situated. The paragraph specifies that income
from real property includes income from agriculture and forestry.

This Article does not grant an exclusive taxing right to the situs State; the situs State is
merely given the primary right to tax. The Article does not impose any limitation in terms of
rate or form of tax on the situs State.

Paragraph 2

The term “real property” is defined in paragraph 2 by reference to the domestic law
definition in the situs State. In the case of the United States, the term has the meaning given to it
by Treas. Reg. 1.897-1(b). In addition to the statutory definitions in the two Contracting States,
the paragraph specifies certain additional classes of property that, regardless of domestic law
definitions are within the scope of the term for purposes of the Convention. This expanded
definition conforms to that in the OECD Model. With respect to the United States, the definition
of “real property” for purposes of Article 6 is more limited than the reference to a “United States
real property interest” in paragraph 2 of Article 14 (Capital Gains). The Article 14 term includes
not only real property as defined in Article 6 but certain other interests in real property.

Paragraph 3

Paragraph 3 makes clear that all forms of income derived from the exploitation of real
property are taxable in the Contracting State in which the property is situated. This includes
income from any use of real property, including, but not limited to, income from direct use by
the owner (in which case income may be imputed to the owner for tax purposes) and rental
income from the letting of real property. In the case of a net lease of real property, if a net
election has not been made, the gross rental payment (before deductible expenses incurred by the
lessee) is treated as income from the property.

Other income closely associated with real property is covered by other Articles of the
Convention, however, and not Article 6. For example, income from the disposition of an interest
in real property is not considered "derived" from real property; taxation of that income is
addressed in Article 14. Interest paid on a mortgage on real property would be covered by
Article 11 (Interest). Distributions by a U.S. REITor certain regulated investment companies
would fall under Article 14 in the case of distributions of U.S. real property gain or Article 10
(Dividends) in the case of distributions treated as dividends. Finally, distributions from a United
States Real Property Holding Corporation as defined under Code section 897(c)(2) are not

considered to be income from the exploitation of real property; such payments would fall under
Article 10 or Article 14.

Paragraph 4

This paragraph specifies that the basic rule of paragraph 1 (as elaborated in paragraph 3)
applies to income from real property of an enterprise. This clarifies that the situs country may
tax the real property income (including rental income) of a resident of the other Contracting State
in the absence of attribution to a permanent establishment in the situs State. This provision
represents an exception to the general rule under Articles 7 (Business Profits) that income must
be attributable to a permanent establishment in order to be taxable in the situs state.

ARTICLE 7 (BUSINESS PROFITS)

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

Paragraph 1

Paragraph 1 states the general rule that business profits of an enterprise of one
Contracting State may not be taxed by the other Contracting State unless the enterprise carries on
business in that other Contracting State through a permanent establishment (as defined in Article
5 (Permanent Establishment)) situated there. When that condition is met, the State in which the
permanent establishment is situated may tax the enterprise on the income that is attributable to
the permanent establishment.

Although the Convention does not include a definition of “business profits,” the term is
intended to cover income derived from any trade or business. In accordance with this broad
definition, the term “business profits” includes income attributable to notional principal contracts
and other financial instruments to the extent that the income is attributable to a trade or business
of dealing in such instruments or is otherwise related to a trade or business (as in the case of a
notional principal contract entered into for the purpose of hedging currency risk arising from an
active trade or business). Any other income derived from such instruments is, unless specifically
covered in another article, dealt with under Article 21 (Other Income).

In addition, as a result of the definitions of "enterprise" and "business" in Article 3
(General Definitions), the term includes income derived from the furnishing of personal services.
Thus, a consulting firm resident in one State whose employees or partners perform services in
the other State through a permanent establishment may be taxed in that other State on a net basis
under Article 7, and not under Article 15 (Income from Employment), which applies only to
income of employees. With respect to the enterprise’s employees themselves, however, their
salary remains subject to Article 15.

Because this Article applies to income earned by an enterprise from the furnishing of
personal services, the Article also applies to income derived by a partner resident in a

Contracting State that is attributable to personal services performed in the other Contracting
State through a partnership with a permanent establishment in that other State. Income which
may be taxed under this Article includes all income attributable to the permanent establishment
in respect of the performance of the personal services carried on by the partnership (whether by
the partner himself, other partners in the partnership, or by employees assisting the partners) and
any income from activities ancillary to the performance of those services (e.g., charges for
facsimile services).

The application of Article 7 to a service partnership may be illustrated by the following
example: a partnership formed in Poland has five partners (who agree to split profits equally),
four of whom are resident and perform personal services only in Poland at Office A, and one of
whom is a resident and performs personal services at Office B, a permanent establishment in the
United States. In this case, the four partners of the partnership resident in Poland may be taxed
in the United States in respect of their share of the income attributable to the permanent
establishment, Office B. The services giving rise to income which may be attributed to the
permanent establishment would include not only the services performed by the one resident
partner, but also, for example, if one of the four other partners came to the United States and
worked on an Office B matter there, the income in respect of those services. Income from the
services performed by the visiting partner would be subject to tax in the United States regardless
of whether the visiting partner actually visited or made use of Office B while performing
services in the United States.

Paragraph 2

Paragraph 2 provides rules for the attribution of business profits to a permanent
establishment under which the attributed business profits are determined as if the permanent
establishment were a separate enterprise that is independent from the rest of the enterprise of
which it is a part, as well as from any other person. The Contracting States will attribute to a
permanent establishment the profits that it would have earned had it been a distinct and separate
enterprise engaged in the same or similar activities under the same or similar conditions and
dealing wholly independently with the enterprise of which it is a permanent establishment.
However, the business profits attributable to a permanent establishment are limited to those
profits derived from the functions performed, assets used and risks assumed by the permanent
establishment.

Whereas paragraph 2 of Article 7 of the OECD Model provides that the paragraph applies
“[F]or the purposes of this Article and Article [23A][23B],” paragraph 2 Article 7 applies only
for purposes of attributing business profits, and does not have relevance for purposes of relief
from double taxation, other than the narrow circumstances as provided in paragraph 3 of this
Article (described below).

The “attributable to” concept of paragraph 2 employs the arm’s length principle reflected
in the report of the OECD “2010 Report on the Attribution of Profits to Permanent
Establishments” (the “2010 Report”) for determining the amount of business profits that shall be
taxable to a permanent establishment, in place of the analogous principles in Code section
864(c). In effect, paragraph 2 allows the United States to tax only the lesser of two amounts of

income: the amount determined by applying U.S. rules regarding the calculation of effectively
connected income and the amount determined under Article 7 of the Convention. That is, a
taxpayer may choose the set of rules that results in the lowest amount of taxable income, but may
not combine both treaty and Code rules in a way that would be inconsistent with the intent of
either set of rules.

Because the purpose of paragraph 2 is to determine the profits that are attributable to a
permanent establishment, paragraph 2 applies in place only of Code section 864(c), which has an
analogous function. The amount of income “attributable to” a permanent establishment under
Article 7 may be greater or lesser than the amount of income that would be treated as
“effectively connected” to a U.S. trade or business under section 864. Moreover, the profits
attributable to a permanent establishment may be from sources within or without a Contracting
State. However, as stated in paragraph 2, the business profits attributable to a permanent
establishment include only those profits derived from the functions performed, assets used and
risks assumed by the permanent establishment. For example, a foreign corporation that has a
significant amount of third party foreign source royalty income attributable to a U.S. permanent
establishment may find that it will pay less tax in the United States by applying section 864(c) of
the Code, rather than Article 7, if the royalty income is not derived in the active conduct of a
trade or business in the United States under Code section 864(c)(4)(B)(i). But, as described in
the Technical Explanation to paragraph 2 of Article 1 (General Scope), if the foreign corporation
chooses to apply Code Section 864(c) to determine its effectively connected income, it may not
also use Article 7 principles to reduce its third party royalty income by interbranch royalty
expense, since doing so would be inconsistent with either the principles of the Code or the
Convention. (See Rev. Rul. 84-17, 1984-1 C.B. 308.). Conversely, if the taxpayer opts to use
Article 7 to calculate the amount of business profits attributable to its U.S. permanent
establishment, it must include all foreign-source income, from third parties and interbranch
income in its business profits whether or not such income would be effectively connected income
under the Code, if attributable to functions performed, assets used or risks assumed by the
permanent establishment. Then, as stated above, the foreign corporation may elect to be taxed
on the lower of the two amounts. Article 7 can only be used to reduce the amount of tax that
would have otherwise been calculated using Code section 864(c) principles.

Paragraph 2 refers specifically to the dealings between the permanent establishment and
other parts of the enterprise of which the permanent establishment is a part in order to emphasize
that the separate and independent enterprise fiction of the paragraph requires that these dealings
be treated the same way as similar transactions taking place between independent enterprises.
That specific reference to dealings between the permanent establishment and other parts of the
enterprise does not, however, restrict the scope of the paragraph. Where a transaction that takes
place between the enterprise and an associated enterprise affects directly the determination of the
profits attributable to the permanent establishment (e.g. the acquisition by the permanent
establishment from an associated enterprise of goods that will be sold through the permanent
establishment), paragraph 2 also requires that, for the purpose of computing the profits
attributable to the permanent establishment, the conditions of the transaction be adjusted, if
necessary, to reflect the conditions of a similar transaction between independent enterprises.
Assume, for instance, that the permanent establishment situated in State S of an enterprise of
State R acquires property from an associated enterprise of State T. If the price provided for in

the contract between the two associated enterprises exceeds what would have been agreed to
between independent enterprises, paragraph 2 of Article 7 of the treaty between State R and State
S will authorize State S to adjust the profits attributable to the permanent establishment to reflect
what a separate and independent enterprise would have paid for the property. In such case, Sate
R will also be able to adjust the profits of the enterprise of State R under paragraph 1 of Article 9
of the treaty between State R and State T, which will trigger the application of the corresponding
adjustment mechanism of paragraph 2 of Article 9 of that treaty.

Computation of the profits attributable to a permanent establishment under paragraph 2
takes into account the profits from all its activities, transactions with both associated and
independent enterprises, and dealings with other parts of the enterprise. This analysis involves
two steps. The first step requires a functional factual analysis to determine:

• the attribution to the permanent establishment of the rights and obligations arising
out of transactions between the enterprise of which the permanent establishment is a
part and separate enterprises;

• the identification of significant people functions relevant to the attribution of
economic ownership of assets, and the attribution of economic ownership of assets
to the permanent establishment;

• the identification of significant people functions relevant to the assumption of risks,
and the attribution of risks to the permanent establishment;

• the identification of other functions of the permanent establishment;

• the recognition of dealings between the permanent establishment and other parts of
the enterprise; and

• the attribution of capital based on the assets and risks attributed to the permanent
establishment.

The second step is to price any such dealings that are attributed to the permanent establishment
in accordance with the 2010 Report. Thus, any of the methods permitted in the 2010 Report,
including profits methods, may be used as appropriate and in accordance with the principles of
the OECD’s Transfer Pricing Guidelines. However, the attribution methods apply only for
purposes of attributing profits within the legal entity. It does not create legal obligations or other
tax consequences that would result from transactions having independent legal significance. In
order to facilitate the administration of the two step process, taxpayers are encouraged to provide
documentation supporting the conclusions reached in the first step, and demonstrating the
appropriateness of the dealings and the associated prices.

An entity that operates through branches rather than separate subsidiaries will typically
have lower capital requirements because the capital of the entity is available to support all of the
entity’s liabilities (with some exceptions attributable to local regulatory restrictions). This is the
reason most commercial banks and some insurance companies operate through branches rather

than through subsidiaries. The benefit that comes from such lower capital costs must be
allocated among the branches in an appropriate manner. This issue does not arise in the case of
an enterprise that operates through separate entities, since each entity will have to be separately
capitalized or will have to compensate another entity for providing capital (usually through a
guarantee).

Under U.S. domestic regulations, internal “transactions” generally are not recognized
because they do not have legal significance. In contrast, paragraph 2 provides that such internal
dealings may be used to allocate income in cases where the dealings accurately reflect the
allocation of risk within the enterprise. One example is global trading in securities. In many
cases, banks use internal swap transactions to transfer risk from one branch to a central location
where traders have the expertise to manage that particular type of risk. Under the Convention,
such a bank may also use such swap transactions as a means of allocating income between the
branches, if use of that method is the “best method” within the meaning of regulation section
1.482-1(c). The books of a branch will not be respected, however, when the results are
inconsistent with a functional analysis. So, for example, income from a transaction that is
booked in a particular branch (or home office) will not be treated as attributable to that location
if the sales and risk management functions that generate the income are performed in another
location.

In the case of financial institutions, the use of internal dealings to allocate income within
an enterprise may produce results under Article 7 that are significantly different than the results
under the effectively connected income rules of Code section 864(c). For example, income from
interbranch notional principal contracts may be taken into account under Article 7,
notwithstanding that such transactions may be ignored for purposes of U.S. domestic law. Under
the consistency rule described above, a financial institution that conducts different lines of
business through its U.S. permanent establishment may not choose to apply the rules of the Code
with respect to some lines of business and Article 7 of the Convention with respect to others. If
it chooses to use the rules of Article 7 to allocate its income from its trading book, it may not
then use U.S. domestic rules to allocate income from its loan portfolio.

Paragraph 2 provides that deductions shall be allowed for expenses incurred for purposes
of a permanent establishment, ensuring that business profits will be taxed on a net basis. These
deductions may include compensation to other parts of the enterprise for functions performed for
the branch’s benefit, if they are functions that would be compensated at arm’s length. Thus,
deductions against business profits may be allowed when an accounting unit of the enterprise
books third-party expenses for purposes of the permanent establishment. However, the amount
deducted to determine net business profits is not the actual amount of third-party expense
booked, but rather the amount of compensation that would be paid at arm’s length by the branch
for the function performed.

For example, when the home office of an enterprise books interest expense that is used in
part to fund the permanent establishment, the permanent establishment may deduct an arm’s
length amount of interest paid to the home office to compensate it for an appropriate amount of
debt-funding. The permanent establishment may also take into account arm’s length fees to an
enterprise’s treasury center for functions performed for its benefit. In each case, the amount of

expense allowed as a deduction is determined by applying the arm's length principle. Similarly,
where the branch and other parts of the enterprise share benefits of centralized functions, such as
research and development or headquarters services, the deduction allowed to the permanent
establishment would be its appropriate share of the arm’s length compensation for such shared
functions. The method to be used in calculating that compensation, and the permanent
establishment’s appropriate share thereof, will depend on the facts and circumstances, including
the terms of the arrangements between the branches and head office. The amount of deduction
could be computed as a share of either the total costs, or other value indicator, of the centralized
function, depending on which provides the most reliable measure of the arm’s length charge for
sharing in the centralized functions in the facts and circumstances. The permanent
establishment’s appropriate share of such compensation for these functions will depend on the
benefits it reasonably expects to receive from the arrangement as a proportion of the total
reasonably expected benefits of all parts of the enterprise.

A permanent establishment cannot be funded entirely with debt, and must have sufficient
capital to carry on its activities as if it were a distinct and separate enterprise. To the extent that
the permanent establishment has not booked adequate capital, a Contracting State may attribute
such capital to the permanent establishment and deny an interest deduction to the extent
necessary to reflect that capital attribution. The method prescribed by U.S. domestic law for
making this attribution is found in Treas. Reg. 1.882-5. Both Treas. Reg. 1.882-5 and the
method prescribed in this paragraph start from the premise that all of the capital of the enterprise
supports all of the assets and risks of the enterprise, and therefore the entire capital of the
enterprise must be allocated to its various businesses and offices.

However, Treas. Reg. 1.882-5 does not take into account the fact that there is more risk
associated with some assets than others. For instance, an independent enterprise would need less
capital to support a floating rate U.S. Treasury security than it would need to support an equity
security or other asset with significant market and/or credit risk. Accordingly, in some cases
Treas. Reg. 1.882-5 would require a taxpayer to allocate more capital to the United States, and
therefore would reduce the taxpayer’s interest deduction more, than is appropriate. To address
these cases, the Convention allows a taxpayer to apply a more flexible approach that takes into
account the relative risk of its assets in the various jurisdictions in which it does business. In
particular, in the case of financial institutions other than insurance companies, the amount of
capital attributable to a permanent establishment is determined by allocating the institution’s
total capital between its offices on the basis of the proportion of the financial institution’s risk-
weighted assets attributable to each office. This recognizes the fact that financial institutions are
in many cases required to risk-weight their assets for regulatory purposes and, in other cases, will
do so for business reasons even if not required to do so by regulators. However, risk-weighting
is more complicated than the method prescribed by Treas. Reg. 1.882-5. Accordingly, to ease
this administrative burden, taxpayers may choose to apply the principles of Treas. Reg. 1.882-
5(c) to determine the amount of capital allocable to its U.S. permanent establishment, in lieu of
determining its allocable capital under the risk-weighted capital allocation method provided by
the Convention, even if it has otherwise chosen to apply the principles of Article 7 rather than the
effectively connected income rules of U.S. domestic law.

Paragraph 3

Paragraph 3 provides that where, in accordance with paragraph 2, a Contracting State
adjusts the profits that are attributable to a permanent establishment of an enterprise of one of the
Contracting States and taxes accordingly profits of the enterprise that have been charged to tax in
the other State, the other Contracting State shall, to the extent necessary to eliminate double
taxation, make an appropriate adjustment if it agrees with the adjustment made by the first-
mentioned State. If the other Contracting state does not so agree, the Contracting States shall
eliminate any double taxation resulting therefrom by mutual agreement.

Paragraph 4

Paragraph 4 coordinates the provisions of Article 7 and other provisions of the
Convention. Under this paragraph, when business profits include items of income that are dealt
with separately under other articles of the Convention, the provisions of those articles will,
except when they specifically provide to the contrary, take precedence over the provisions of
Article 7. For example, the taxation of dividends will be determined by the rules of Article 10
(Dividends), and not by Article 7, except where, as provided in paragraph 6 of Article 10, the
dividend is attributable to a permanent establishment. In the latter case the provisions of Article 7
apply. Thus, an enterprise of one State deriving dividends from the other State may not rely on
Article 7 to exempt those dividends from tax at source if they are not attributable to a permanent
establishment of the enterprise in the other State. By the same token, if the dividends are
attributable to a permanent establishment in the other State, the dividends may be taxed on a net
income basis at the source State full corporate tax rate, rather than on a gross basis under Article
10.

As provided in Article 8 (Shipping and Air Transport), income derived from shipping and
air transport activities in international traffic described in that Article is taxable only in the
country of residence of the enterprise regardless of whether it is attributable to a permanent
establishment situated in the source State.

Paragraph 5

Paragraph 5 incorporates into the Convention the principles of Code section 864(c)(6),
but not section 864(c)(7). Like the Code section on which it is based, paragraph 5 provides that
any income or gain attributable to a permanent establishment during its existence, following the
rules of paragraph 2 and 3, is taxable in the Contracting State where the permanent establishment
is situated, even if the payment of that income or gain is deferred until after the permanent
establishment ceases to exist. This rule applies with respect to paragraphs 1 and 2 of Article 7
(Business Profits), paragraph 6 of Article 10 (Dividends), paragraph 6 of Article 11 (Interest),
paragraph 4 of Articles 13 (Royalties) and 14 (Gains) and paragraph 2 of Article 21 (Other
Income).

The effect of this rule can be illustrated by the following example. Assume a company
that is a resident of the other Contracting State and that maintains a permanent establishment in
the United States winds up the permanent establishment's business and sells the permanent
establishment's inventory to a U.S. buyer prior to winding up in exchange for an interest-bearing

installment obligation payable in full at the end of year 3. Despite the fact that Article 14's
threshold requirement for U.S. taxation is not met in year 3 because the company has no
permanent establishment in the United States, the United States may tax the deferred income
recognized by the company in year 3.

Relationship to Other Articles

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope) of
the Model. Thus, if a citizen of the United States who is a resident of the other Contracting State
under the treaty derives business profits from the United States that are not attributable to a
permanent establishment in the United States, the United States may, subject to the special
foreign tax credit rules of paragraph 4 of Article 23 (Relief from Double Taxation), tax those
profits, notwithstanding the provision of paragraph 1 of this Article which would exempt the
income from U.S. tax.

The benefits of this Article are also subject to Article 22 (Limitation on Benefits). Thus,
an enterprise of the other Contracting State and that derives income effectively connected with a
U.S. trade or business may not claim the benefits of Article 7 unless the resident carrying on the
enterprise qualifies for such benefits under Article 22.

ARTICLE 8 (SHIPPING AND AIR TRANSPORT)

This Article governs the taxation of profits from the operation of ships and aircraft in
international traffic. The term "international traffic" is defined in subparagraph 1(f) of Article 3
(General Definitions).

Paragraph 1

Paragraph 1 provides that profits derived by an enterprise of a Contracting State from the
operation in international traffic of ships or aircraft are taxable only in that Contracting State.
Because paragraph 4 of Article 7 (Business Profits) defers to Article 8 with respect to taxation of
shipping income, such income derived by a resident of one of the Contracting States may not be
taxed in the other State even if the enterprise has a permanent establishment in that other State.
Thus, if a U.S. airline has a ticket office in Poland, Poland may not tax the airline's profits
attributable to that office under Article 7. Since entities engaged in international transportation
activities normally will have many permanent establishments in a number of countries, the rule
avoids difficulties that would be encountered in attributing income to multiple permanent
establishments if the income were covered by Article 7.

Paragraph 2

The income from the operation of ships or aircraft in international traffic that is exempt
from tax under paragraph 1 is defined in paragraph 2.

In addition to income derived directly from the operation of ships and aircraft in

international traffic, this definition also includes certain items of rental income. First, income of
an enterprise of a Contracting State from the rental of ships or aircraft on a full basis (i.e.
, with
crew) is income of the lessor from the operation of ships and aircraft in international traffic and,
therefore, is exempt from tax in the other Contracting State under paragraph 1. Also, paragraph
2 encompasses income from the lease of ships or aircraft on a bareboat basis (i.e., without crew),
either when the income is incidental to other income of the lessor from the operation of ships or
aircraft in international traffic, or when the ships or aircraft are operated in international traffic
by the lessee. If neither of those two conditions apply, income from the bareboat rentals would
constitute business profits. The coverage of Article 8 is therefore broader than that of Article 8
of the OECD Model, which covers bareboat leasing only when it is incidental to other income of
the lessor from the operation of ships of aircraft in international traffic.

Paragraph 2 also clarifies, consistent with the Commentary to Article 8 of the OECD
Model, that income earned by an enterprise from the inland transport of property or passengers
within either Contracting State falls within Article 8 if the transport is undertaken as part of the
international transport of property or passengers by the enterprise. Thus, if a U.S. shipping
company contracts to carry property from Poland 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 Poland (or it contracts
with a trucking company to carry the property to the airport) the income earned by the U.S.
shipping company from the overland leg of the journey would be taxable only in the United
States. Similarly, Article 8 also would apply to all of the income derived from a contract for the
international transport of goods, even if the goods were transported to the port by a lighter, not
by the vessel that carried the goods in international waters.

Finally, certain non-transport activities that are an integral part of the services performed
by a transport company, or are ancillary to the enterprise’s operation of ships or aircraft in
international traffic, are understood to be covered in paragraph 1, though they are not specified in
paragraph 2. These include, for example, the provision of goods and services by engineers,
ground and equipment maintenance and staff, cargo handlers, catering staff and customer
services personnel. Where the enterprise provides such goods to, or performs services for, other
enterprises and such activities are directly connected with or ancillary to the enterprise’s
operation of ships or aircraft in international traffic, the profits from the provision of such goods
and services to other enterprises will fall under this paragraph.

For example, enterprises engaged in the operation of ships or aircraft in international
traffic may enter into pooling arrangements for the purposes of reducing the costs of maintaining
facilities needed for the operation of their ships or aircraft in other countries. For instance, where
an airline enterprise agrees (for example, under an International Airlines Technical Pool
agreement) to provide spare parts or maintenance services to other airlines landing at a particular
location (which allows it to benefit from these services at other locations), activities carried on
pursuant to that agreement will be ancillary to the operation of aircraft in international traffic by
the enterprise.

Also, advertising that the enterprise may do for other enterprises in magazines offered
aboard ships or aircraft that it operates in international traffic or at its business locations, such as
ticket offices, is ancillary to its operation of these ships or aircraft. Profits generated by such

advertising fall within this paragraph. Income earned by concessionaires, however, is not
covered by Article 8. These interpretations of paragraph 1 also are consistent with the Commen-
tary to Article 8 of the OECD Model.

Paragraph 3

Under this paragraph, profits of an enterprise of a Contracting State from the use,
maintenance or rental of containers (including equipment for their transport) are exempt from tax
in the other Contracting State if such use, maintenance or rental, as the case may be, is incidental
to the operation of ships or aircraft in international traffic. This treatment is consistent with the
Commentary to Article 8 of the OECD Model, although it is narrower than the treatment under
the U.S. Model, which provides for exclusive residence tax of such profits 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 4

This paragraph clarifies that the provisions of paragraphs 1 and 3 also apply to profits
derived by an enterprise of a Contracting State from participation in a pool, joint business or
international operating agency. This refers to various arrangements for international cooperation
by carriers in shipping and air transport. For example, airlines from two countries may agree to
share the transport of passengers between the two countries. They each will fly the same number
of flights per week and share the revenues from that route equally, regardless of the number of
passengers that each airline actually transports. Paragraph 4 makes clear that with respect to
each carrier the income dealt with in the Article corresponds to that carrier's share of the total
transport, not the income derived from the passengers actually carried by the airline. This
paragraph corresponds to paragraph 4 of Article 8 of the OECD Model.

Relationship to Other Articles

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 14 (Capital Gains).

As with other benefits of the Convention, the benefit of exclusive residence country
taxation under Article 8 is available to an enterprise only if it is entitled to benefits under Article
22 (Limitation on Benefits).

This Article also is subject to the saving clause of paragraph 4 of Article 1 (General
Scope) of the Model. Thus, if a citizen of the United States who is a resident of Poland derives
profits from the operation of ships or aircraft in international traffic, notwithstanding the
exclusive residence country taxation in paragraph 1 of Article 8, the United States may, subject
to the special foreign tax credit rules of paragraph 4 of Article 23 (Relief from Double Taxation),
tax those profits as part of the worldwide income of the citizen. (This is an unlikely situation,
however, because non-tax considerations (e.g., insurance) generally result in shipping activities
being carried on in corporate form.)

ARTICLE 9 (ASSOCIATED ENTERPRISES)

This Article incorporates into the Convention the arm's-length principle reflected in the
U.S. domestic transfer pricing provisions, particularly Code section 482. It provides that when
related enterprises engage in a transaction on terms that are not arm's-length, the Contracting
States may make appropriate adjustments to the taxable income and tax liability of such related
enterprises to reflect what the income and tax of these enterprises with respect to the transaction
would have been had there been an arm's-length relationship between them.

Paragraph 1

This paragraph is essentially the same as its counterpart in the OECD Model. It
addresses the situation where an enterprise of a Contracting State is related to an enterprise of the
other Contracting State, and there are arrangements or conditions imposed between the
enterprises in their commercial or financial relations that are different from those that would
have existed in the absence of the relationship. Under these circumstances, the Contracting
States may adjust the income (or loss) of the enterprise to reflect what it would have been in the
absence of such a relationship.

The paragraph identifies the relationships between enterprises that serve as a prerequisite
to application of the Article. As the Commentary to the OECD Model makes clear, the
necessary element in these relationships is effective control, which is also the standard for
purposes of Code section 482. Thus, the Article applies if an enterprise of one State participates
directly or indirectly in the management, control, or capital of the enterprise of the other State.
Also, the Article applies if any third person or persons participate directly or indirectly in the
management, control or capital of enterprises of different States. For this purpose, all types of
control are included, i.e., whether or not legally enforceable and however exercised or
exercisable.

The fact that a transaction is entered into between such related enterprises does not, in
and of itself, mean that a Contracting State may adjust the income (or loss) of one or both of the
enterprises under the provisions of this Article. If the conditions of the transaction are consistent
with those that would be made between independent persons, the income arising from that trans-
action should not be subject to adjustment under this Article.

Similarly, the fact that associated enterprises may have concluded arrangements, such as
cost sharing arrangements or general services agreements, is not in itself an indication that the
two enterprises have entered into a non-arm's-length transaction that should give rise to an
adjustment under paragraph 1. Both related and unrelated parties enter into such arrangements
(e.g., joint venturers may share some development costs). As with any other kind of transaction,
when related parties enter into an arrangement, the specific arrangement must be examined to see
whether or not it meets the arm's-length standard. In the event that it does not, an appropriate
adjustment may be made, which may include modifying the terms of the agreement or re-
characterizing the transaction to reflect its substance.

It is understood that the Code section 482 "commensurate with income" standard for
determining appropriate transfer prices for intangibles operates consistently with the arm's-length
standard. The implementation of this standard in the regulations under Code section 482 is in
accordance with the general principles of paragraph 1 of Article 9 of the Convention, as
interpreted by the OECD Transfer Pricing Guidelines.

This Article also permits tax authorities to deal with thin capitalization issues. They may,
in the context of Article 9, scrutinize more than the rate of interest charged on a loan between
related persons. They also may examine the capital structure of an enterprise, whether a
payment in respect of that loan should be treated as interest, and, if it is treated as interest, under
what circumstances interest deductions should be allowed to the payor. Paragraph 2 of the
Commentary to Article 9 of the OECD Model, together with the U.S. observation set forth in
paragraph 15, sets forth a similar understanding of the scope of Article 9 in the context of thin
capitalization.

Paragraph 2

When a Contracting State has made an adjustment that is consistent with the provisions
of paragraph 1, and the other Contracting State agrees that the adjustment was appropriate to
reflect arm's-length conditions, that other Contracting State is obligated to make a correlative
adjustment (sometimes referred to as a “corresponding adjustment”) to the tax liability of the
related person in that other Contracting State. Although the OECD Model does not specify that
the other Contracting State must agree with the initial adjustment before it is obligated to make
the correlative adjustment, the Commentary makes clear that the paragraph is to be read as such.

As explained in the Commentary to Article 9 of the OECD Model, Article 9 leaves the
treatment of "secondary adjustments" to the laws of the Contracting States. When an adjustment
under Article 9 has been made, one of the parties will have in its possession funds that it would
not have had at arm's length. The question arises as to how to treat these funds. In the United
States the general practice is to treat such funds as a dividend or contribution to capital,
depending on the relationship between the parties. Under certain circumstances, the parties may
be permitted to restore the funds to the party that would have the funds had the transactions been
entered into on arm's length terms, and to establish an account payable pending restoration of the
funds. See Rev. Proc. 99-32, 1999-2 C.B. 296.

The Contracting State making a secondary adjustment will take the other provisions of
the Convention, where relevant, into account. For example, if the effect of a secondary
adjustment is to treat a U.S. corporation as having made a distribution of profits to its parent
corporation in the other Contracting State, the provisions of Article 10 (Dividends) will apply,
and the United States may impose a 5 percent withholding tax on the dividend. Also, if under
Article 23 (Elimination of Double Taxation), Poland generally gives a credit for taxes paid with
respect to such dividends, it would also be required to do so in this case.

The competent authorities are authorized by paragraph 3 of Article 25 (Mutual
Agreement Procedure) to consult, if necessary, to resolve any differences in the application of
these provisions. For example, there may be a disagreement over whether an adjustment made by

a Contracting State under paragraph 1 was appropriate.

If a correlative adjustment is made under paragraph 2, it is to be implemented, pursuant
to paragraph 2 of Article 25 (Mutual Agreement Procedure), notwithstanding any time limits or
other procedural limitations in the law of the Contracting State making the adjustment. Thus,
even if a statute of limitations has expired, a refund of tax can be made in order to implement a
correlative adjustment (s tatutory or procedural limitations, however, cannot be overridden to
impose additional tax, pursuant to paragraph 2 of Article 1 (General Scope)). If a taxpayer has
entered a closing agreement (or other written settlement) with the United States prior to bringing
a case to the competent authorities, the U.S. competent authority will endeavor only to obtain a
correlative adjustment from the other Contracting State. See Rev Proc. 2006-54, 2006-2 C.B.
1035, § 7.05 (or any applicable successor procedures).

Relationship to Other Articles

The saving clause of paragraph 4 of Article 1 does not apply to paragraph 2 of Article 9
by virtue of an exception to the saving clause in subparagraph 5(a) of Article 1. This permits the
competent authorities of the Contracting States to make any adjustments necessary to relieve
double taxation pursuant to the mutual agreement procedure.

ARTICLE 10 (DIVIDENDS)

Article 10 provides rules for the taxation of dividends paid by a company that is a
resident of one Contracting State to a beneficial owner that is a resident of the other Contracting
State. The Article provides for full residence-State taxation of such dividends and a limited
source-State right to tax. Article 10 also provides rules for the imposition of a tax on branch
profits by the State of source. Finally, the Article prohibits a State from imposing taxes on a
company resident in the other Contracting State, other than a branch profits tax as provided in
Article 12 (Branch Profits), on undistributed earnings.

Paragraph 1

Paragraph 1 permits a Contracting State to tax its residents on dividends paid to them by
a company that is a resident of the other Contracting State. For dividends from any other source
paid to a resident, Article 21 (Other Income) grants the residence country exclusive taxing
jurisdiction (other than for dividends attributable to a permanent establishment in the other
State).

Paragraph 2

The State of source also may tax dividends beneficially owned by a resident of the other
State, subject to the limitations of paragraphs 2 and 3. Paragraph 2 generally limits the rate of
withholding tax in the State of source on dividends paid by a company resident in that State to 15
percent of the gross amount of the dividend. If, however, the beneficial owner of the dividend is
a company resident in the other State and owns directly shares representing at least 10 percent of
the voting power of the company paying the dividend, then the rate of withholding tax in the

State of source is limited to 5 percent of the gross amount of the dividend. For application of this
paragraph by the United States, shares are considered voting stock if they provide the power to
elect, appoint or replace any person vested with the powers ordinarily exercised by the board of
directors of a U.S. corporation.

The determination of whether the ownership threshold for subparagraph 2(a) is met for
purposes of the 5 percent maximum rate of withholding tax is made on the date on which
entitlement to the dividend is determined. Thus, in the case of a dividend from a U.S. company,
the determination of whether the ownership threshold is met generally would be made on the
dividend record date.

Paragraph 2 does not affect the taxation of the profits out of which the dividends are paid.
The taxation by a Contracting State of the income of its resident companies is governed by the
domestic law of the Contracting State, subject to the provisions of paragraph 4 of Article 24
(Non-Discrimination).

The term "beneficial owner" is not defined in the Convention, and is, therefore, generally
defined under the domestic law of the country imposing tax (i.e., the source country). The
beneficial owner of the dividend for purposes of Article 10 is the person to which the income is
attributable under the laws of the source State. Thus, if a dividend paid by a corporation that is a
resident of one of the States (as determined under Article 4 (Residence)) is received by a
nominee or agent that is a resident of the other State on behalf of a person that is not a resident of
that other State, the dividend is not entitled to the benefits of this Article. However, a dividend
received by a nominee on behalf of a resident of that other State would be entitled to benefits.
These limitations are confirmed by paragraphs 12-12.2 of the Commentary to Article 10 of the
OECD Model.

Special rules apply to shares held through fiscally transparent entities both for purposes
of determining whether the ownership threshold has been met and for purposes of determining
the beneficial owner of the dividend.
A company that is a resident of a Contracting State shall be considered to own directly
the voting stock owned by an entity that is considered fiscally transparent under the laws of that
State and that is not a resident of the other Contracting State of which the company paying the
dividends is a resident, in proportion to the company’s ownership interest in that entity. This is
consistent with the rules of paragraph 6 of Article 1 (General Scope), which provides that
residence State principles shall be used to determine who derives the dividends, to assure that
the dividends for which the source State grants benefits of the Convention will be taken into
account for tax purposes by a resident of the residence State.
For example, assume that FCo, a company that is a resident of Poland, owns a 50
percent interest in FP, a partnership that is organized in Poland. FP owns 100 percent of the
sole class of stock of USCo, a company resident in the United States. Poland views FP as
fiscally transparent under its domestic law, and taxes FCo currently on its distributive share of
the income of FP and determines the character and source of the income received through FP in
the hands of FCo as if such income were realized directly by FCo. In this case, FCo is treated

as deriving 50 percent of the dividends paid by USCo under paragraph 6 of Article 1.
Moreover, FCo is treated as owning 50 percent of the stock of USCo directly. The same result
would be reached even if the tax laws of the United States would treat FP differently (e.g., if FP
were not treated as fiscally transparent in the United States). If FP were organized in a third
state, is not viewed as fiscally transparent under U.S. law, and would be eligible for benefits
with respect to the dividend under a tax treaty between the United States and the third state,
paragraph 6 of Article 1 provides that FCo is treated as deriving 50 percent of the dividends
paid by USCo only if the applicable dividend withholding rate provided under the Convention
(5 percent) is more favorable than the applicable dividend withholding rate that FP could claim
with respect to the dividend in its own right under the tax treaty between the United States and
the third country.
While residence State principles control who is treated as owning voting stock of the
company paying dividends through a fiscally transparent entity and, consequently, who derives
the dividends, source State principles of beneficial ownership apply to determine whether the
person who derives the dividends, or another resident of the other Contracting State, is the
beneficial owner of the dividends. If the person who derives the dividends under paragraph 6 of
Article 1 would not be treated as a nominee, agent, custodian, conduit, etc. under the source
State’s principles for determining beneficial ownership, that person will be treated as the
beneficial owner of the dividends for purposes of the Convention. In the example above, FCo is
required to satisfy the beneficial ownership principles of the United States with respect to the
dividends it derives. If under the beneficial ownership principles of the United States, FCo is
found not to be the beneficial owner of the dividends, FCo will not be entitled to the benefits of
Article 10 with respect to such dividends. If FCo is found to be a nominee, agent, custodian, or
conduit for a person who is a resident of Poland, that person may be entitled to benefits with
respect to the dividends.
Paragraph 3

Paragraph 3 provides that dividends beneficially owned by a pension fund may not be
taxed in the Contracting State of which the company paying the tax is a resident, unless such
dividends are derived from the carrying on of a business, directly or indirectly, by the pension
fund or through an associated enterprise. For purposes of application of this paragraph by the
United States, the term “trade or business” shall be defined in accordance with Code section
513(c). The term "pension fund" is defined in subparagraph 1(k) of Article 3 (General
Definitions).
Paragraph 4
Paragraph 4 imposes limitations on the rate reductions provided by paragraphs 2 and 3
in the case of dividends paid by a RIC or a REIT.
The first sentence of subparagraph 4(a) provides that dividends paid by a RIC or REIT
are not eligible for the 5 percent rate of withholding tax of subparagraph 2(a).
The second sentence of subparagraph 4(a) provides that the 15 percent maximum rate of
withholding tax of subparagraph 2(b) applies to dividends paid by RICs and that the elimination

of source-country withholding tax of paragraph 3 applies to dividends paid by RICs and
beneficially owned by a pension fund.
The third sentence of subparagraph 4(a) provides that the 15 percent rate of withholding
tax also applies to dividends paid by a REIT and that the elimination of source-country
withholding tax of paragraph 3 applies to dividends paid by REITs and beneficially owned by a
pension fund, provided that one of the three following conditions is met. First, the beneficial
owner of the dividend is an individual or a pension fund, in either case holding an interest of not
more than 10 percent in the REIT. Second, the dividend is paid with respect to a class of stock
that is publicly traded and the beneficial owner of the dividend is a person holding an interest of
not more than 5 percent of any class of the REIT’s shares. Third, the beneficial owner of the
dividend holds an interest in the REIT of not more than 10 percent and the REIT is “diversified.”
Subparagraph 4(b) provides a definition of the term “diversified.” A REIT is diversified
if the gross value of no single interest in real property held by the REIT exceeds 10 percent of
the gross value of the REIT’s total interest in real property. Section 856(e) foreclosure property
is not considered an interest in real property, and a REIT holding a partnership interest is treated
as owning its proportionate share of any interest in real property held by the partnership.
Subparagraph 4(c) provides that the rules of paragraph 4 shall apply to dividends paid by
companies resident in Poland that the competent authorities have determined by mutual
agreement are similar to a RIC or a REIT.
Paragraph 5

Paragraph 5 defines the term dividends broadly and flexibly. The definition is intended
to cover all arrangements that yield a return on an equity investment in a corporation as
determined under the tax law of the state of source, as well as arrangements that might be
developed in the future.

The term includes income from shares, or other corporate rights that are not treated as
debt under the law of the source State, that participate in the profits of the company. The term
also includes income that is subjected to the same tax treatment as income from shares by the
law of the State of source. Thus, a constructive dividend that results from a non-arm's length
transaction between a corporation and a related party is a dividend. In the case of the United
States the term dividend includes amounts treated as a dividend under U.S. law upon the sale or
redemption of shares or upon a transfer of shares in a reorganization. See Rev. Rul. 92-85, 1992-
2 C.B. 69 (sale of foreign subsidiary’s stock to U.S. sister company is a deemed dividend to
extent of the subsidiary's and sister company's earnings and profits). Further, a distribution from
a U.S. publicly traded limited partnership, which is taxed as a corporation under U.S. law, is a
dividend for purposes of Article 10. However, a distribution by a limited liability company is
not taxable by the United States under Article 10, provided the limited liability company is not
characterized as an association taxable as a corporation under U.S. law.

Finally, a payment denominated as interest that is made by a thinly capitalized
corporation may be treated as a dividend to the extent that the debt is recharacterized as equity
under the laws of the source State.

Paragraph 6

Paragraph 6 provides a rule for taxing dividends paid with respect to holdings that form
part of the business property of a permanent establishment. In such case, the rules of Article 7
(Business Profits) shall apply. Accordingly, the dividends will be taxed on a net basis using the
rates and rules of taxation generally applicable to residents of the State in which the permanent
establishment is located, as such rules may be modified by the Convention. An example of
dividends paid with respect to the business property of a permanent establishment would be
dividends derived by a dealer in stock or securities from stock or securities that the dealer held
for sale to customers.

Paragraph 7

The right of a Contracting State to tax dividends paid by a company that is a resident of
the other Contracting State is restricted by paragraph 7 to cases in which the dividends are paid
to a resident of that Contracting State or are attributable to a permanent establishment in that
Contracting State. Thus, a Contracting State may not impose a “secondary” withholding tax on
dividends paid by a nonresident company out of earnings and profits from that Contracting
State.
The paragraph also restricts the right of a Contracting State to impose corporate level
taxes on undistributed profits, other than a branch profits tax. The paragraph does not restrict a
State’s right to tax its resident shareholders on undistributed earnings of a corporation resident in
the other State. Thus, the authority of the United States to impose taxes on subpart F income and
on earnings deemed invested in U.S. property, and its tax on income of a passive foreign
investment company that is a qualified electing fund is in no way restricted by this provision.

Relationship to Other Articles

Notwithstanding the foregoing limitations on source country taxation of dividends, the
saving clause of paragraph 4 of Article 1 permits the United States to tax its residents and
citizens, subject to the special foreign tax credit rules of paragraph 4 of Article 23 (Elimination
of Double Taxation), as if the Convention had not come into effect.

Rules regarding the application of branch profits taxes are found in Article 12 (Branch
Profits).

The benefits of this Article are also subject to the provisions of Article 22 (Limitation on
Benefits). Thus, if a resident of Poland is the beneficial owner of dividends paid by a U.S.
corporation, that shareholder must qualify for treaty benefits under at least one of the tests of
Article 22 in order to receive the benefits of this Article.

ARTICLE 11 (INTEREST)

Article 11 specifies the taxing jurisdictions over interest income of the States of source

and residence and defines the terms necessary to apply the Article.

Paragraph 1

Paragraph 1 grants the Contracting State of residence the non-exclusive right to tax
interest beneficially owned by its residence and arising in the other Contracting State.

Paragraph 2

Paragraph 2 provides that the State of source may also tax interest beneficially owned by
a resident of the other Contracting State, but limits the rate of tax to 5 percent of the gross
amount of the interest.

The term “beneficial owner” is not defined in the Convention, and is, therefore, defined
under the domestic law of the State of source. The beneficial owner of the interest for purposes
of Article 11 is the person to which the income is attributable under the laws of the source State.
Thus, if interest arising in a Contracting State is received by a nominee or agent that is a resident
of the other State on behalf of a person that is not a resident of that other State, the interest is not
entitled to the benefits of Article 11. However, interest received by a nominee on behalf of a
resident of that other State would be entitled to benefits. These limitations are confirmed by
paragraph 9 of the OECD Commentary to Article 11.

Special rules apply to interest derived through fiscally transparent entities for purposes
of determining the beneficial owner of the interest. In such cases, residence State principles
shall be used to determine who derives the interest, to assure that the interest for which the
source State grants benefits of the Convention will be taken into account for tax purposes by a
resident of the residence State.
For example, assume that FCo, a company that is a resident of Poland, owns a 50
percent interest in FP, a partnership that is organized in Poland. FP receives interest arising in
the United States. Poland views FP as fiscally transparent under its domestic law, and taxes
FCo currently on its distributive share of the income of FP and determines the character and
source of the income received through FP in the hands of FCo as if such income were realized
directly by FCo. In this case, FCo is treated as deriving 50 percent of the interest received by
FP that arises in the United States under paragraph 6 of Article 1. The same result would be
reached even if the tax laws of the United States would treat FP differently (e.g., if FP were not
treated as fiscally transparent in the United States). If FP were organized in a third state, were
not viewed as fiscally transparent under U.S. law, and would be eligible for benefits with
respect to the interest under a tax treaty between the United States and the third state, paragraph
6 of Article 1 provides that FCo is treated as deriving 50 percent of the interest paid by USCo
only if the applicable interest withholding rate provided under the Convention is more favorable
than the applicable interest withholding rate that FP could claim with respect to the interest in
its own right under the tax treaty between the United States and the third country.
While residence State principles control who is treated as deriving the interest, source
State principles of beneficial ownership apply to determine whether the person who derives the

interest, or another resident of the other Contracting State, is the beneficial owner of the interest.
If the person who derives the interest under paragraph 6 of Article 1 would not be treated as a
nominee, agent, custodian, conduit, etc. under the source State’s principles for determining
beneficial ownership, that person will be treated as the beneficial owner of the interest for
purposes of the Convention. In the example above, FCo is required to satisfy the beneficial
ownership principles of the United States with respect to the interest it derives. If under the
beneficial ownership principles of the United States, FCo is found not to be the beneficial owner
of the interest, FCo will not be entitled to the benefits of Article 11 with respect to such interest.
If FCo is found to be a nominee, agent, custodian, or conduit for a person who is a resident of
Poland, that person may be entitled to benefits with respect to the interest.

Paragraph 3

Paragraph 3 provides that notwithstanding the provisions of paragraph 2, interest
described in paragraph 1 shall be taxable only in the Contracting State in which the recipient is a
resident if the beneficial owner of the interest is a resident of that State and either: (1) is that
Contracting State or the central bank, a political subdivision, local authority or statutory body
thereof; (2) the interest is paid by the Contracting State in which the interest arises or by the
central bank, a political subdivision, local authority or statutory body thereof; (3) the interest is
paid in respect of a loan, debt-claim or credit that is owed to, or made, provided, guaranteed or
insured by that Contracting State or a political subdivision, local authority, statutory body or
export financing agency thereof; (4) is a pension fund, but only if the pension fund does not
derive the interest from the carrying on of a business, directly or indirectly, or is (5) either: (a) a
bank; (b) an insurance company; (c) an enterprise (other than a bank) that is unrelated to the
payer of the interest and that substantially derives its gross income from the active and regular
conduct of a lending or finance business. Clause (iii) of subparagraph 3(e) provides the
following non-exhaustive list of activities that for purposes of subparagraph 3(e) are considered a
lending or finance business: (1) making loans; (2) purchasing or discounting accounts receivable,
notes or installment obligations; (3) engaging in finance leasing (including purchasing, servicing,
and disposing of finance leases and related leased assets); (4) issuing letters of credit or
providing guarantees; or (5) providing charge and credit card services.

Paragraph 4

Paragraph 4 provides anti-abuse exceptions to paragraphs 2 and 3 for two classes of
interest payments.

The first class of interest, dealt with in subparagraph 4(a), is so-called contingent interest.
Under this provision, interest arising in one of the Contracting States that is determined with
reference to receipts, sales, income, profits or other cash flows 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 or a related person also may be
taxed in the State in which it arises, and according to the laws of that State. If the beneficial
owner is a resident of the other Contracting State, however, the gross amount of the interest may
be taxed at a rate not exceeding 15 percent of the gross amount of the payment. With respect to
such interest arising in the United States, subparagraph 4(a) refers to contingent interest of a type

described in Code section 871(h)(4)(C), including the exceptions of that section where
applicable.
The second class of interest that is dealt with in subparagraph 4(b), in the case of the
United States, is excess inclusions from U.S. real estate mortgage investment conduits
(“REMICs”). Subparagraph 4(b) serves as a backstop to Code section 860G(b). That section
generally requires that a foreign person holding a residual interest in a REMIC take into account
for U.S. tax purposes “any excess inclusion” and “amounts includible ... [under the REMIC
provisions] when paid or distributed (or when the interest is disposed of)....”
Without a full tax at source, non-U.S. transferees of residual interests would have a
competitive advantage over U.S. transferees at the time these interests are initially offered.
Absent this rule, the United States 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 such interests. In many cases, the transfer to the
foreign person is simply disregarded under Treas. Reg. 1.860G-3. Subparagraph 4(b) also
provides that excess inclusions from REMICs are not considered “other income” subject to
Article 21 (Other Income) of the Convention.

Paragraph 5

The term "interest" as used in Article 11 is defined in paragraph 5 to include, inter alia,
income from debt claims of every kind, whether or not secured by a mortgage. Penalty charges
for late payment are excluded from the definition of interest. Interest that is paid or accrued
subject to a contingency is within the ambit of Article 11. This definition includes income from a
debt obligation carrying the right to participate in profits. The term does not, however, include
amounts treated as dividends under Article 10 (Dividends).

The term interest also includes amounts which under the taxation law of the Contracting
State in which the income arises are assimilated to income from money lent. This wording is to
be interpreted consistently with the U.S. Model reference to “amounts subject to the same tax
treatment as income from money lent under the law of the State in which the income arises.”
Thus, for purposes of the Convention, amounts that the United States will treat as interest include
(i) the difference between the issue price and the stated redemption price at maturity of a debt
instrument (i.e., original issue discount ("OID")), which may be wholly or partially realized on
the disposition of a debt instrument (section 1273), (ii) amounts that are imputed interest on a
deferred sales contract (section 483), (iii) amounts treated as interest or OID under the stripped
bond rules (section 1286), (iv) amounts treated as original issue discount under the below-market
interest rate rules (section 7872), (v) a partner's distributive share of a partnership's interest
income (section 702), (vi) the interest portion of periodic payments made under a "finance lease"
or similar contractual arrangement that in substance is a borrowing by the nominal lessee to
finance the acquisition of property, (vii) amounts included in the income of a holder of a residual
interest in a REMIC (section 860E), because these amounts generally are subject to the same
taxation treatment as interest under U.S. tax law, and (viii) interest with respect to notional
principal contracts that are recharacterized as loans because of a “substantial non-periodic
payment.”

Paragraph 6

Paragraph 6 provides an exception to paragraphs 1, 2 and 3 in cases where the beneficial
owner of the interest carries on business through a permanent establishment situated in that State
and the debt-claim in respect of which the interest is paid is effectively connected with such
permanent establishment. In such cases the provisions of Article 7 (Business Profits) will apply
and the State of source will retain the right to impose tax on such interest income.

In the case of a permanent establishment that once existed in a Contracting State but no
longer exists, the provisions of this paragraph apply, by virtue of paragraph 5 of Article 7
(Business Profits), to interest paid with respect to a debt-claim that would be effectively
connected to such a permanent establishment if it did exist in the year of payment or accrual.
See the Technical Explanation of paragraph 5 of Article 7. Accordingly, such interest would
remain taxable under the provisions of Article 7, and not under this Article.

Paragraph 7

Paragraph 7 provides a general source rule for interest. Interest is considered to arise in a
Contracting State if paid by a resident of that State (including that State itself or one of its
political subdivisions or local authorities). Interest that is borne by a permanent establishment in
one of the Contracting States is considered to arise in that State. For this purpose, interest is
considered to be borne by a permanent establishment if it is allocable to taxable income of that
permanent establishment or fixed base. If the actual amount of interest on the books of a U.S.
branch of a resident of Poland exceeds the amount of interest allocated to the branch under
Treas. Reg. 1.882-5, the amount of such excess will not be considered U.S. source interest for
purposes of this Article.

Paragraph 8

Paragraph 8 provides that in cases involving special relationships between the payer and
the beneficial owner of interest income, Article 11 applies only to that portion of the total interest
payments that would have been made absent such special relationships (i.e., an arm's-length
interest payment). Any excess amount of interest paid remains taxable according to the laws of
the United States and the other Contracting State, respectively, with due regard to the other
provisions of the Convention. Thus, if the excess amount would be treated under the source
country's law as a distribution of profits by a corporation, such amount could be taxed as a divi-
dend rather than as interest, but the tax would be subject, if appropriate, to the rate limitations of
paragraph 2 of Article 10 (Dividends).

The term "special relationship" is not defined in the Convention. In applying this
paragraph the United States considers the term to include the relationships described in Article 9,
which in turn corresponds to the definition of "control" for purposes of Code section 482.

This paragraph does not address cases where, owing to a special relationship between the
payer and the beneficial owner or between both of them and some other person, the amount of

the interest is less than an arm's-length amount. In those cases a transaction may be
characterized to reflect its substance and interest may be imputed consistent with the definition
of “interest” in paragraph 3. The United States would apply Code section 482 or 7872 to
determine the amount of imputed interest in those cases.

Relationship to Other Articles

Notwithstanding the foregoing limitations on source country taxation of interest, the
saving clause of paragraph 4 of Article 1 permits the United States to tax its residents and
citizens, subject to the special foreign tax credit rules of paragraph 4 of Article 23 (Relief from
Double Taxation), as if the Convention had not come into force.

Rules regarding the application of branch-level interest taxes are found in Article 12
(Branch Profits).

As with other benefits of the Convention, the benefits of Article 11 are available to a
resident of the other State only if that resident is entitled to those benefits under the provisions of
Article 22 (Limitation on Benefits).

ARTICLE 12 (BRANCH PROFITS)

Paragraph 1

Paragraph 1 permits a Contracting State to impose a branch profits tax on a company
resident in the other Contracting State. The tax is in addition to other taxes permitted by the
Convention. The term “company” is defined in subparagraph 1(b) of Article 3 (General
Definitions).
A Contracting State may impose a branch profits tax on a company if the company has
income attributable to a permanent establishment in that Contracting State, derives income from
real property in that Contracting State that is taxed on a net basis under Article 6 (Income from
Real Property), or realizes gains taxable in that State under paragraph 1 of Article 14 (Capital
Gains). In the case of the United States, the imposition of such tax is limited, however, to the
portion of the aforementioned items of income that represents the amount of such income that is
the “dividend equivalent amount.” This is consistent with the relevant rules under the U.S.
branch profits tax, and the term dividend equivalent amount is defined under U.S. law. Section
884 defines the dividend equivalent amount as an amount for a particular year that is equivalent
to the income described above that is included in the corporation's effectively connected earnings
and profits for that year, after payment of the corporate tax under Articles 6, 7 (Business Profits)
or 14, reduced for any increase in the branch's U.S. net equity during the year or increased for
any reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets less U.S.
liabilities. See Treas. Reg. 1.884-1.
The dividend equivalent amount for any year approximates the dividend that a U.S.
branch office would have paid during the year if the branch had been operated as a separate U.S.
subsidiary company. In the case that Poland also imposes a branch profits tax, the base of its tax

must be limited to an amount that is analogous to the dividend equivalent amount, and the
applicable rate would be subject to the limitations of clause (ii) of subparagraph 1(b).

As discussed in the Technical Explanations to Articles 1(2) and 7(2), consistency
principles prohibit a taxpayer from applying provisions of the Code and this Convention in an
inconsistent manner in order to minimize tax. In the context of the branch profits tax, this
consistency requirement means that if a company resident in Poland uses the principles of Article
7 to determine its U.S. taxable income, it must then also use those principles to determine its
dividend equivalent amount. Similarly, if the company instead uses the Code to determine its
U.S. taxable income it must also use the Code to determine its dividend equivalent amount. As
in the case of Article 7, if a company of Poland, for example, does not from year to year
consistently apply the Code or the Convention to determine its dividend equivalent amount, then
the company must make appropriate adjustments or recapture amounts that would otherwise be
subject to U.S. branch profits tax if it had consistently applied the Code or the Convention to
determine its dividend equivalent amount from year to year.

Clause (ii) of subparagraph 1(b) provides that the branch profits tax shall not be imposed
at a rate exceeding five percent, as provided in subparagraph 2(a) of Article 10 (Dividends).
Subparagraph 1(b) applies equally if a taxpayer determines its taxable income under the laws of
a Contracting State or under the provisions of Article 7. For example, as discussed above,
consistency principles require a company resident in Poland that determines its U.S. taxable
income under the Code to also determine its dividend equivalent amount under the Code. In that
case, the withholding rate reduction provided in subparagraph 2(a) of Article 10 would apply
even though the company did not determine its dividend equivalent amount using the principles
of Article 7.

Paragraph 2

Paragraph 2 permits a Contracting State to impose its branch level interest tax on a
company resident in the other Contracting State. The base of this tax is the excess, if any, of the
interest allocable to the profits of the company that are either attributable to a permanent
establishment in the first-mentioned State (including gains under paragraph 4 of Article 14
(Capital Gains)) or subject to tax in the first-mentioned State under Article 6 (Income from Real
Property) or paragraph 1 of Article 14, over the interest paid on indebtedness related to that
permanent establishment, or in the case of profits subject to tax under Article 6 or paragraph 1 of
Article 14, over the interest paid by that trade or business in the first-mentioned State. Such
excess interest may be taxed as if it were interest arising in the first-mentioned State and
beneficially owned by the resident of the other State. Thus, such excess interest may be taxed by
the first-mentioned State at a rate not to exceed the applicable rates provided in paragraph 2 of
Article 11 (Interest).

Relationship to Other Articles

Notwithstanding the foregoing limitations on source country taxation, the saving clause
of paragraph 4 of Article 1 permits the United States to tax its residents and citizens, subject to

the special foreign tax credit rules of paragraph 4 of Article 23 (Relief from Double Taxation), as
if the Convention had not come into effect.

The benefits of this Article are also subject to the provisions of Article 22 (Limitation on
Benefits).

ARTICLE 13 (ROYALTIES)

Article 13 provides rules for the taxation of royalties arising in one Contracting State and
paid to a beneficial owner that is a resident of the other Contracting State.

Paragraph 1

Paragraph 1 grants to the State of residence the non-exclusive right to tax royalties
beneficially owned by its residents and arising in the other Contracting State.

Paragraph 2

Paragraph 2 provides that the State of source may also tax royalties, but if the beneficial
owner of the royalties is a resident of the other Contracting State, the rate of tax shall be limited
to 5 percent of the gross amount of the royalties.

The term “beneficial owner” is not defined in the Convention, and is, therefore, defined
under the domestic law of the State of source. The beneficial owner of the royalties for purposes
of Article 13 is the person to which the income is attributable under the laws of the source State.
Thus, if royalties arising in a Contracting State are received by a nominee or agent that is a
resident of the other State on behalf of a person that is not a resident of that other State, the
royalties are not entitled to the benefits of Article 13. However, the royalties received by a
nominee on behalf of a resident of that other State would be entitled to benefits. These
limitations are confirmed by paragraph 4 of the OECD Commentary to Article 12 of the OECD
Model.

Special rules apply to royalties derived through fiscally transparent entities for purposes
of determining the beneficial owner of the royalties. In such cases, residence State principles
shall be used to determine who derives the royalties, to assure that the royalties for which the
source State grants benefits of the Convention will be taken into account for tax purposes by a
resident of the residence State.
For example, assume that FCo, a company that is a resident of Poland, owns a 50
percent interest in FP, a partnership that is organized in Poland. FP receives royalties arising in
the United States. Poland views FP as fiscally transparent under its domestic law, and taxes
FCo currently on its distributive share of the income of FP and determines the character and
source of the income received through FP in the hands of FCo as if such income were realized
directly by FCo. In this case, FCo is treated as deriving 50 percent of the royalties received by
FP that arise in the United States under paragraph 6 of Article 1. The same result would be
reached even if the tax laws of the United States would treat FP differently (e.g., if FP were not

treated as fiscally transparent in the United States). If FP were organized in a third state, were
not viewed as fiscally transparent under U.S. law, and would be eligible for benefits with
respect to the royalty under a tax treaty between the United States and the third state, paragraph
6 of Article 1 provides that FCo is treated as deriving 50 percent of the U.S.-source royalty only
if the applicable royalty withholding rate provided under the Convention is more favorable than
the applicable royalty withholding rate that FP could claim with respect to the royalty in its own
right under the tax treaty between the United States and the third country.
While residence State principles control who is treated as deriving the royalties, source
State principles of beneficial ownership apply to determine whether the person who derives the
royalties, or another resident of the other Contracting State, is the beneficial owner of the
royalties. If the person who derives the royalties under paragraph 6 of Article 1 would not be
treated as a nominee, agent, custodian, conduit, etc. under the source State’s principles for
determining beneficial ownership, that person will be treated as the beneficial owner of the
royalties for purposes of the Convention. In the example above, FCo is required to satisfy the
beneficial ownership principles of the United States with respect to the royalties it derives. If
under the beneficial ownership principles of the United States, FCo is found not to be the
beneficial owner of the royalties, FCo will not be entitled to the benefits of Article 13 with
respect to such royalties. If FCo is found to be a nominee, agent, custodian, or conduit for a
person who is a resident of Poland, that person may be entitled to benefits with respect to the
royalties.
Paragraph 3

Paragraph 3 defines the term “royalties,” as used in Article 13 with an exhaustive list of
examples. Subparagraph 3(a) first defines royalties to mean payments of any kind received as a
consideration for the use of, or the right to use, any copyright of literary, artistic scientific or
other work (including cinematographic films or radio or television broadcasting tapes), any
patent, trademark, design or model, plan, secret formula or process, or for information
concerning industrial, commercial, or scientific experience. Subparagraph 3(b) also provides
that “royalties” also include gain derived from the alienation of any right or property that would
give rise to royalties, to the extent the gain is contingent on the productivity, use, or further
alienation thereof. Gains that are not so contingent are dealt with under Article 14 (Capital
Gains). Lastly, subparagraph 3(c) provides that “royalties” also include payments of any kind
received as a consideration for the use of, or the right to use any industrial, commercial, or
scientific equipment.

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 formula" is
found in the Code, and its meaning has been elaborated in the context of sections 351 and 367.
See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 64-56, 1964-1 C.B. 133; Rev. Proc. 69-19,
1969-2 C.B. 301.

Consideration for the use or right to use cinematographic films, or works on film, tape, or
other means of reproduction in radio or television broadcasting is specifically included in the

definition of royalties. It is intended that, with respect to any subsequent technological advances
in the field of radio or television broadcasting, consideration received for the use of such
technology will also be included in the definition of royalties.

If an artist who is resident in one Contracting State records a performance in the other
Contracting State, retains a copyrighted interest in a recording, and receives payments for the
right to use the recording based on the sale or public playing of the recording, then the right of
such other Contracting State to tax those payments is governed by Article 13. See Boulez v.
Commissioner, 83 T.C. 584 (1984), aff'd, 810 F.2d 209 (D.C. Cir. 1986). By contrast, if the artist
earns in the other Contracting State income covered by Article 17 (Entertainers and Sportsmen),
for example, endorsement income from the artist’s attendance at a film screening, and if such
income also is attributable to one of the rights described in Article 13 (e.g., the use of the artist’s
photograph in promoting the screening), Article 17 and not Article 13 is applicable to such
income.

Computer software generally is protected by copyright laws around the world. Under the
Convention, consideration received for the use, or the right to use, computer software is treated
either as royalties or as business profits, depending on the facts and circumstances of the
transaction giving rise to the payment.

The primary factor in determining whether consideration received for the use, or the right
to use, computer software is treated as royalties or as business profits is the nature of the rights
transferred. See Treas. Reg. 1.861-18. The fact that the transaction is characterized as a license
for copyright law purposes is not dispositive. For example, a typical retail sale of "shrink wrap"
software generally will not be considered to give rise to royalty income, even though for
copyright law purposes it may be characterized as a license.

The means by which the computer software is transferred are not relevant for purposes of
the analysis. Consequently, if software is electronically transferred but the rights obtained by the
transferee are substantially equivalent to rights in a program copy, the payment will be
considered business profits.

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

Know-how also may include, in limited cases, technical information that is conveyed
through technical or consultancy services. It does not include general educational training of the
user's employees, nor does it include information developed especially for the user, such as a
technical plan or design developed according to the user's specifications. Thus, as provided in
paragraph 11.3 of the Commentary to Article 12 of the OECD Model, the term "royalties" does
not include payments received as consideration for after-sales service, for services rendered by a
seller to a purchaser under a warranty, or for pure technical assistance.

The term "royalties" also does not include payments for professional services (such as

architectural, engineering, legal, managerial, medical or software development services). For
example, income from the design of a refinery by an engineer (even if the engineer employed
know-how in the process of rendering the design) or the production of a legal brief by a lawyer is
not income from the transfer of know-how taxable under Article 13, but is income from services
taxable under either Article 7 (Business Profits) or Article 15 (Income from Employment) as
applicable. Professional services may be embodied in property that gives rise to royalties,
however. Thus, if a professional contracts to develop patentable property and retains rights in the
resulting property under the development contract, subsequent license payments made for those
rights would be royalties.

Paragraph 4

This paragraph provides an exception to paragraphs 1 and 2 in cases where the beneficial
owner of the royalties carries on business through a permanent establishment in the state of
source and the right or property in respect of which the royalties are paid is effectively connected
with such permanent establishment. In such cases the provisions of Article 7 (Business Profits)
will apply.

In the case of a permanent establishment that once existed in a Contracting State but that
no longer exists, the provisions of this paragraph also apply, by virtue of paragraph 5 of Article 7
(Business Profits) to royalties paid with respect to rights or property that would be effectively
connected to such permanent establishment if it did exist in the year of payment or accrual.
Accordingly, such royalties would remain taxable under the provisions of Article 7, and not
under this Article.

Paragraph 5

Paragraph 5 contains the source rule for royalties. Under paragraph 5, royalties are
treated as arising in a Contracting State only to the extent that they are in consideration for the
use of, or the right to use, property, information or experience in that State. This source rule
parallels the source rule in Code section 861(a)(4).

Paragraph 6

Paragraph 6 provides that in cases involving special relationships between the payer and
beneficial owner of royalties, Article 13 applies only to the extent the royalties would have been
paid absent such special relationships (i.e., an arm's-length royalty). Any excess amount of
royalties paid remains taxable according to the laws of the two Contracting States, with due
regard to the other provisions of the Convention. If, for example, the excess amount is treated as
a distribution of corporate profits under domestic law, such excess amount will be taxed as a
dividend rather than as royalties, but the tax imposed on the dividend payment will be subject to
the rate limitations of paragraph 2 of Article 10 (Dividends).

Relationship to Other Articles

Notwithstanding the foregoing limitations on source country taxation of royalties, the

saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its
residents and citizens, subject to the special foreign tax credit rules of paragraph 4 of Article 23
(Relief from Double Taxation), as if the Convention had not come into force.

As with other benefits of the Convention, the benefits of exclusive residence State
taxation of royalties under paragraph 1 of Article 13 are available to a resident of the other State
only if that resident is entitled to those benefits under Article 22 (Limitation on Benefits).

ARTICLE 14 (CAPITAL GAINS)

Article 14 assigns either primary or exclusive taxing jurisdiction over gains from the
alienation of property to the State of residence or the State of source.

Paragraph 1

Paragraph 1 of Article 14 preserves the non-exclusive right of the State of source to tax
gains from the alienation of real property situated in that State.

Paragraph 2

Paragraph 2 allows the United States to tax in accordance with Code section 897 gains
derived by a resident of Poland that are attributable to the alienation of a United States real
property interest. Under Code section 897(c) the term “United States real property interest”
includes shares in a U.S. corporation that owns sufficient U.S. real property interests to satisfy an
asset-ratio test on certain testing dates. The term also includes certain foreign corporations that
have elected to be treated as U.S . corporations for this purpose. See Code section 897(i). In
addition, any distribution made by a REIT or certain RICs is taxable under paragraph 1 of Article
14 (rather than under Article 10 (Dividends)) to the extent that it is attributable to gains derived
from the alienation of U.S. real property interests. See Code section 897(h).

Paragraph 3

Paragraph 3 permits Poland to tax gains derived by a resident of the United States from
the alienation of two categories of property. The first category is described in subparagraph 3(a)
as shares, including rights to acquire shares, deriving more than 50 percent of their value directly
or indirectly from real property situated in Poland. The second category is described in
subparagraph 3(b) as an interest in a partnership or trust to the extent that the assets of the
partnership or trust consist in aggregate more than 50 percent of real property situated in Poland
or of shares referred to in subparagraph 3(a).

Paragraph 4

Paragraph 4 deals with the taxation of certain gains from the alienation of movable
property forming part of the business property of a permanent establishment that an enterprise of
a Contracting State has in the other Contracting State. This also includes gains from the alien-
ation of such a permanent establishment (alone or with the whole enterprise). Such gains may be

taxed in the State in which the permanent establishment is located.

A resident of Poland that is a partner in a partnership doing business in the United States
generally will have a permanent establishment in the United States as a result of the activities of
the partnership, assuming that the activities of the partnership rise to the level of a permanent
establishment. See Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under paragraph 4, the United
States generally may tax a partner's distributive share of income realized by a partnership on the
disposition of movable property forming part of the business property of the partnership in the
United States.

Paragraph 5 of Article 7 (Business Profits) provides that gains subject to paragraph 4 may
be taxed in the State in which the permanent establishment is located, regardless of whether the
permanent establishment exists at the time of the alienation. This rule incorporates the rule of
Code section 864(c)(6). Accordingly, income that is attributable to a permanent establishment,
but that is deferred and received after the permanent establishment no longer exists, may
nevertheless be taxed by the State in which the permanent establishment was located.

Paragraph 5

This paragraph limits the taxing jurisdiction of the State of source with respect to gains
from the alienation of ships or aircraft operated in international traffic by the enterprise
alienating the ship or aircraft and from property (other than real property) pertaining to the
operation or use of such ships or aircraft.

Under paragraph 5, such gains are taxable only in the Contracting State in which the
alienator is resident. Notwithstanding paragraph 4, the rules of this paragraph apply even if the
income is attributable to a permanent establishment maintained by the enterprise in the other
Contracting State. This result is consistent with the allocation of taxing rights under Article 8
(Shipping and Air Transport).

Paragraph 6

Paragraph 6 provides a rule similar to paragraph 5 with respect to gains from the
alienation of containers and related personal property. Such gains derived by a enterprise of a
Contracting State shall be taxable only in that Contracting State unless the containers were used
for the transport of goods or merchandise solely within the other Contracting State. The other
Contracting State may not tax even if the gain is attributable to a permanent establishment
maintained by the enterprise in that other Contracting State.

Paragraph 7

Paragraph 6 grants to the State of residence of the alienator the exclusive right to tax
gains from the alienation of property other than property referred to in paragraphs 1 through 6.
For example, gain derived from the alienation of shares, other than shares described in para-
graphs 2 or 3, debt instruments and various financial instruments, may be taxed only in the State
of residence, to the extent such income is not otherwise characterized as income taxable under

another article (e.g., Article 10 (Dividends) or Article 11 (Interest)). Similarly gain derived from
the alienation of tangible personal property, other than tangible personal property described in
paragraph 3, may be taxed only in the State of residence of the alienator.

Gain derived from the alienation of any property, such as a patent or copyright, that
produces income covered by Article 13 (Royalties) is governed by the rules of Article 13 and not
by this article, provided that such gain is of the type described in paragraph 3(b) of Article 13
(i.e., it is contingent on the productivity, use, or disposition of the property).

Gains derived by a resident of a Contracting State from real property located in a third
state are not taxable in the other Contracting State, even if the sale is attributable to a permanent
establishment located in the other Contracting State.

Relationship to Other Articles

Notwithstanding the foregoing limitations on taxation of certain gains by the State of source, the
saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its
citizens and residents as if the Convention had not come into effect. Thus, any limitation in this
Article on the right of the United States to tax gains does not apply to gains of a U.S. citizen or
resident.

The benefits of this Article are also subject to the provisions of Article 22 (Limitation on
Benefits). Thus, only a resident of a Contracting State that satisfies one of the conditions in
Article 22 is entitled to the benefits of this Article.

Paragraph 5 of Article 23 (Relief from Double Taxation) coordinates the tax systems of
the Contracting States to avoid double taxation that could result from the imposition of exit tax
regimes on individuals who relinquish citizenship or long-term residence status.

ARTICLE 15 (INCOME FROM EMPLOYMENT)

Article 15 apportions taxing jurisdiction over remuneration derived by a resident of a
Contracting State as an employee between the States of source and residence.

Paragraph 1

The general rule of Article 15 is contained in paragraph 1. Article 15 applies to any form
of compensation for employment, including payments in kind. Remuneration derived by a
resident of a Contracting State as an employee may be taxed by the State of residence, and the
remuneration also may be taxed by the other Contracting State to the extent derived from
employment exercised (i.e., services performed) in that other Contracting State. Paragraph 1
also provides that the more specific rules of Articles 16 (Directors' Fees), 18 (Pensions, Social
Security, Annuities, Alimony and Child Support), and 19 (Government Service) apply in the case
of employment income described in one of those Articles. Thus, even though the State of source
has a right to tax employment income under Article 15, it may not have the right to tax that

income under the Convention if the income is described, for example, in Article 18 (Pensions,
Social Security, Annuities, Alimony and Child Support) and is not taxable in the State of source
under the provisions of that Article.

Article 15 applies regardless of the timing of actual payment for services. Consequently,
a person who receives the right to a future payment in consideration for services rendered in a
Contracting State would be taxable in that State even if the payment is received at a time when
the recipient is a resident of the other Contracting State. Thus, a bonus paid to a resident of a
Contracting State with respect to services performed in the other Contracting State with respect
to a particular taxable year would be subject to Article 15 for that year even if it was paid after
the close of the year. An annuity received for services performed in a taxable year could be
subject to Article 15 despite the fact that it was paid in subsequent years. In that case, it would
be necessary to determine whether the payment constitutes deferred compensation, taxable under
Article 15, or a qualified pension subject to the rules of Article 18. Article 15 also applies to
income derived from the exercise of stock options granted with respect to services performed in
the host State, even if those stock options are exercised after the employee has left the host State.
If Article 15 is found to apply, whether such payments were taxable in the State where the
employment was exercised would depend on whether the tests of paragraph 2 were satisfied in
the year in which the services to which the payment relates were performed.

Paragraph 2

Paragraph 2 sets forth an exception to the general rule that employment income may be
taxed in the State where it is exercised. Under paragraph 2, the State where the employment is
exercised may not tax the income from the employment if three conditions are satisfied: (a) the
individual is present in the other Contracting State for a period or periods not exceeding 183 days
in any 12-month period that begins or ends during the relevant taxable year (i.e., in the United
States, the calendar year in which the services are performed); (b) the remuneration is paid by, or
on behalf of, an employer who is not a resident of that other Contracting State; and (c) the
remuneration is not borne as a deductible expense by a permanent establishment that the
employer has in that other State. In order for the remuneration to be exempt from tax in the
source State, all three conditions must be satisfied. This exception is identical to that set forth in
the OECD Model.

The 183-day period in subparagraph 2(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. (See Rev. Rul. 56-24, 1956-1 C.B. 851.) Thus, days that
are counted include the days of arrival and departure; weekends and holidays on which the
employee does not work but is present within the country; vacation days spent in the country
before, during or after the employment period, unless the individual's presence before or after the
employment can be shown to be independent of his presence there for employment purposes; and
time during periods of sickness, training periods, strikes, etc., when the individual is present but
not working. If illness prevented the individual from leaving the country in sufficient time to
qualify for the benefit, those days will not count. Also, any part of a day spent in the host
country while in transit between two points outside the host country is not counted. If the
individual is a resident of the host country for part of the taxable year concerned and a non-

resident for the remainder of the year, the individual's days of presence as a resident do not count
for purposes of determining whether the 183-day period is exceeded.

Subparagraphs 2(b) and 2(c) are intended to ensure that a Contracting State will not be
required to allow a deduction to the payor for compensation paid and at the same time to exempt
the employee on the amount received. Accordingly, if a foreign person pays the salary of an
employee who is employed in the host State, but a host State corporation or permanent
establishment reimburses the payor with a payment that can be identified as a reimbursement,
neither subparagraph 2(b) nor 2(c), as the case may be, will be considered to have been fulfilled.

The reference to remuneration "borne by" a permanent establishment is understood to
encompass all expenses that economically are incurred and not merely expenses that are
currently deductible for tax purposes. Accordingly, the expenses referred to include expenses
that are capitalizable as well as those that are currently deductible. Further, salaries paid by
residents that are exempt from income taxation may be considered to be borne by a permanent
establishment notwithstanding the fact that the expenses will be neither deductible nor
capitalizable since the payor is exempt from tax.

For the purpose of determining the profits attributable to a permanent establishment
pursuant to paragraph 2 of Article 7 (Business Profits), the remuneration paid to an employee of
an enterprise of a Contracting State for employment services rendered in the other State for the
benefit of the permanent establishment of the enterprise situated in that other State may, given
the circumstances, either give rise to a direct deduction or give rise to the deduction of a notional
charge, e.g., for services rendered to the permanent establishment by another part of the
enterprise. In the latter case, since the notional charge required by the legal fiction of the
separate and independent enterprise that is applicable under paragraph 2 of Article 7 is merely a
mechanism provided for by that paragraph for the sole purpose of determining the profits
attributable to the permanent establishment, this fiction does not affect the determination of
whether or not the remuneration is borne by the permanent establishment.

Paragraph 3

Paragraph 3 contains a special rule applicable to remuneration for services performed by
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 State of residence of the
employee if the services are performed as a member of the regular complement of the ship or
aircraft. The "regular complement" includes the crew. In the case of a cruise ship, for example,
it may also include others, such as entertainers, lecturers, etc., employed by the shipping
company to serve on the ship throughout its voyage. The use of the term "regular complement"
is intended to clarify that a person who exercises his employment as, for example, an insurance
salesman while aboard a ship or aircraft is not covered by this paragraph.

If a U.S. citizen who is resident in Poland performs services as an employee in the United
States and meets the conditions of paragraph 2 for source country exemption, he nevertheless is
taxable in the United States by virtue of the saving clause of paragraph 4 of Article 1 (General
Scope), subject to the special foreign tax credit rule of paragraph 4 of Article 23 (Relief from

Double Taxation).

ARTICLE 16 (DIRECTORS' FEES)

This Article provides that a Contracting State may tax the fees and other compensation
paid by a company that is a resident of that State to a n individual resident of the other
Contracting State in his capacity as a director of the company. This rule is an exception to the
more general rules of Articles 7 (Business Profits) and 15 (Income from Employment). Thus, for
example, in determining whether a director’s fee paid to a non-employee director is subject to tax
in the country of residence of the corporation, it is not relevant to establish whether the fee is
attributable to a permanent establishment in that State.

Relationship with other Articles

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope).

ARTICLE 17 (ENTERTAINERS AND SPORTSMEN)

This Article deals with the taxation in a Contracting State of entertainers and sportsmen
resident in the other Contracting State from the performance of their services as such. The
Article applies both to the income of an entertainer or sportsman who performs services on his
own behalf and one who performs services on behalf of another person, either as an employee of
that person, or pursuant to any other arrangement. The rules of this Article take precedence, in
some circumstances, over those of Articles 7 (Business Profits) and 15 (Income from
Employment).

This Article applies only with respect to the income of entertainers and sportsmen.
Others involved in a performance or athletic event, such as producers, directors, technicians,
managers, coaches, etc., remain subject to the provisions of Articles 7 and 15. In addition, except
as provided in paragraph 2, income earned by juridical persons is not covered by Article 17.

Paragraph 1

Paragraph 1 describes the circumstances in which a Contracting State may tax the
performance income of an entertainer or sportsman who is a resident of the other Contracting
State. Under the paragraph, income derived by an individual resident of a Contracting State
from activities as an entertainer or sportsman exercised in the other Contracting State may be
taxed in that other State if the amount of the gross receipts derived by the performer exceeds
$20,000 (or its equivalent in Polish legal tender) for the taxable year. The $20,000 includes
expenses reimbursed to the individual or borne on his behalf. If the gross receipts exceed
$20,000, the full amount, not just the excess, may be taxed in the State of performance.

The OECD Model provides for taxation by the country of performance of the
remuneration of entertainers or sportsmen with no dollar or time threshold. This Convention
introduces the monetary threshold to distinguish between two groups of entertainers and athletes
–those who are paid relatively large sums of money for very short periods of service, and who

would, therefore, normally be exempt from host country tax under the standard personal services
income rules, and those who earn relatively modest amounts and are, therefore, not easily
distinguishable from those who earn other types of personal service income. The United States
has entered a reservation to the OECD Model on this point.

Tax may be imposed under paragraph 1 even if the performer would have been exempt
from tax under Article 7 (Business Profits) or Article 15 (Income from Employment). On the
other hand if the performer would be exempt from host-country tax under Article 17, but would
be taxable under either Article 7 or Article 15, tax may be imposed under either of those Articles.
Thus, for example, if a performer derives remuneration from his activities in an independent
capacity, and the performer does not have a permanent establishment in the host State, he may be
taxed by the host State in accordance with Article 17 if his remuneration exceeds $20,000
annually, despite the fact that he generally would be exempt from host State taxation under
Article 7. However, a performer who receives less than the $20,000 threshold amount and
therefore is not taxable under Article 17 nevertheless may be subject to tax in the host country
under Article 7 or Article 15 if the tests for host-country taxability under the relevant Article are
met. For example, if an entertainer who is an independent contractor earns $14,000 of income in
a State for the calendar year, but the income is attributable to his permanent establishment in the
State of performance, that State may tax his income under Article 7.

Since it frequently is not possible to know until year-end whether the income an
entertainer or sportsman derived from performances in a Contracting State will exceed $20,000,
nothing in the Convention precludes that Contracting State from withholding tax during the year
and refunding it after the close of the year if the taxability threshold has not been met.

As explained in paragraph 9 of the Commentary to Article 17 of the OECD Model,
Article 17 of the Convention applies to all income connected with a performance by the
entertainer, such as appearance fees, award or prize money, and a share of the gate receipts.
Income derived from a Contracting State by a performer who is a resident of the other
Contracting State from other than actual performance, such as royalties from record sales and
payments for product endorsements, is not covered by this Article, but by other articles of the
Convention, such as Article 13 (Royalties) or Article 7. For example, if an entertainer receives
royalty income from the sale of live recordings, the royalty income would be exempt from source
State tax under Article 12, even if the performance was conducted in the source country,
although the entertainer could be taxed in the source country with respect to income from the
performance itself under Article 17 if the dollar threshold is exceeded.

In determining whether income falls under Article 17 or another Article, the controlling
factor will be whether the income in question is predominantly attributable to the performance
itself or to other activities or property rights. For instance, a fee paid to a performer for
endorsement of a performance in which the performer will participate would be considered to be
so closely associated with the performance itself that it normally would fall within Article 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. As indicated in paragraph 9 of the Commentary to Article 17 of the OECD Model,
however, a cancellation fee would not be considered to fall within Article 16 but would be dealt

with under Article 7 or15.

As indicated in paragraph 4 of the Commentary 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.

Consistent with Article 15, Article 17 also applies regardless of the timing of actual
payment for services. Thus, a bonus paid to a resident of a Contracting State with respect to a
performance in the other Contracting State during a particular taxable year would be subject to
Article 17 for that year even if it was paid after the close of the year. The determination as to
whether the $20,000 threshold has been exceeded is determined separately with respect to each
year of payment. Accordingly, if an actor who is a resident of one Contracting State receives
residual payments over time with respect to a movie that was filmed in the other Contracting
State, the payments do not have to be aggregated from one year to another to determine whether
the total payments have finally exceeded $20,000. Otherwise, residual payments received many
years later could retroactively subject all earlier payments to tax by the other Contracting State.

Paragraph 2

Paragraph 2 is intended to address the potential for circumvention of the rule in paragraph
1 when a performer's income does not accrue directly to the performer himself, but to another
person. Foreign performers frequently perform in the United States as employees of, or under
contract with, a company or other person.

The relationship may truly be one of employee and employer, with no circumvention of
paragraph 1 either intended or realized. On the other hand, the “employer” may, for example, be
a company established and owned by the performer, which is merely acting as the nominal
income recipient in respect of the remuneration for the performance (a “star company”). The
performer may act as an “employee,” receive a modest salary, and arrange to receive the
remainder of the income from his performance from the company in another form or at a later
time. In such case, absent the provisions of paragraph 2, the income arguably could escape host-
country tax because the company earns business profits but has no permanent establishment in
that country. The performer may largely or entirely escape host-country tax by receiving only a
small salary, perhaps small enough to place him below the dollar threshold in paragraph 1. The
performer might arrange to receive further payments in a later year, when he is not subject to
host-country tax, perhaps as dividends or liquidating distributions.

Paragraph 2 seeks to prevent this type of abuse while at the same time protecting the
taxpayers' rights to the benefits of the Convention when there is a legitimate employee-employer
relationship between the performer and the person providing his services. Under paragraph 2,
when the income accrues to a person other than the performer, the income may be taxed in the
Contracting State where the performer's services are exercised, without regard to the provisions
of Article 7 or Article 15, unless the contract pursuant to which the personal activities are

performed allows such other person other than the performer to designate the individual who is
to perform the personal activities. This rule is based on the U.S. domestic law provision
characterizing income from certain personal service contracts as foreign personal holding
company income in the context of the foreign personal holding company provisions. See Code
section 954(c)(1)(I). The premise of this rule is that, in a case where a performer is using another
person in an attempt to circumvent the provisions of paragraph 1, the recipient of the services of
the performer would contract with a person other than that performer (i.e., a company employing
the performer) only if the recipient of the services were certain that the performer himself would
perform the services. If instead the person is allowed to designate the individual who is to
perform the services, then likely the person is a service company not formed to circumvent the
provisions of paragraph 1. The following example illustrates the operation of this rule.

Example.
Company O, a resident of Poland, is engaged in the business of operating an
orchestra. Company O enters into a contract with Company A pursuant to which Company O
agrees to carry out two performances in the United States in consideration of which Company A
will pay Company O $200,000. The contract designates two individuals, a conductor and a
flutist, that must perform as part of the orchestra, and allows Company O to designate the other
members of the orchestra. Because the contract does not give Company O any discretion to
determine whether the conductor or the flutist perform personal services under the contract, the
portion of the $200,000 which is attributable to the personal services of the conductor and the
flutist may be taxed by the United States pursuant to paragraph 2. The remaining portion of the
$200,000, which is attributable to the personal services of performers that Company O may
designate, is not subject to tax by the United States pursuant to paragraph 2.

In cases where paragraph 2 is applicable, the income of the “employer” may be subject to
tax in the host Contracting State even if it has no permanent establishment in the host country.
Taxation under paragraph 2 is on the person providing the services of the performer. This
paragraph does not affect the rules of paragraph 1, which apply to the performer himself. The
income taxable by virtue of paragraph 2 is reduced to the extent of salary payments to the
performer, which fall under paragraph 1.

For purposes of paragraph 2, income is deemed to accrue to another person (i.e., the
person providing the services of the performer) if that other person has control over, or the right
to receive, gross income in respect of the services of the performer.

Since pursuant to Article 1 (General Scope) the Convention only applies to persons who
are residents of one of the Contracting States, income of the star company would not be eligible
for benefits of the Convention if the company is not a resident of one of the Contracting States.

Relationship to other Articles

This Article is subject to the provisions of the saving clause of paragraph 4 of Article 1
(General Scope). Thus, if an entertainer or a sportsman who is resident in Poland is a citizen of
the United States, the United States may tax all of his income from performances in the United
States without regard to the provisions of this Article, subject, however, to the special foreign tax
credit provisions of paragraph 4 of Article 23 (Relief from Double Taxation). In addition,

benefits of this Article are subject to the provisions of Article 22 (Limitation on Benefits).

ARTICLE 18 (PENSIONS, SOCIAL SECURITY, ANNUITIES, ALIMONY, AND CHILD
SUPPORT)

This Article deals with the taxation of private (i.e.
, non-government service) pensions and
annuities, social security benefits, alimony and child support payments.

Paragraph 1

Paragraph 1 provides that distributions from pensions, annuities and other similar
payments beneficially owned by a resident of a Contracting State in consideration of past
employment are taxable only in the State of residence of the beneficiary. The terms “ pensions”
and “other similar payments” include both periodic and single sum payments.

The terms “pensions” and “other similar payments” are intended to encompass payments
made by qualified private retirement plans. In the United States, the plans encompassed by
paragraph 1 include: qualified plans under section 401(a), individual retirement plans (including
individual retirement plans that are part of a simplified employee pension plan that satisfies
section 408(k), individual retirement accounts and section 408(p) accounts), section 403(a)
qualified annuity plans, and section 403(b) plans. Distributions from section 457 plans may also
fall under paragraph 1 if they are not paid with respect to government services covered by Article
19 (Government Service).

Pensions in respect of government services covered by Article 19 are not covered by this
paragraph. They are covered either by paragraph 2 of this Article if they are in the form of social
security benefits, or by paragraph 2 of Article 19. Thus, Article 19 generally covers section
457(g), 401(a), 403(a) and 403(b) plans established for government employees, including the
Thrift Savings Plan (section 7701(j)).

Paragraph 2

Paragraph 2 contains an exception to the residence State’s right to tax pensions and other
similar remuneration under paragraph 1. Under paragraph 2, the State of residence must exempt
from tax any amount of such pensions or other similar remuneration that would be exempt from
tax in the Contracting State in which the pension fund is established if the recipient were a
resident of that State. Thus, for example, a distribution from a U.S. “Roth IRA” to a resident of
Poland would be exempt from tax in Poland to the same extent the distribution would be exempt
from tax in the United States if it were distributed to a U.S. resident. The same is true with
respect to distributions from a traditional IRA to the extent that the distribution represents a
return of non-deductible contributions. Similarly, if the distribution were not subject to tax when
it was “rolled over” into another U.S. IRA (but not, for example, to a pension fund in the other
Contracting State), then the distribution would be exempt from tax in Poland.

Paragraph 3

The treatment of social security benefits is dealt with in paragraph 3. This paragraph
provides that, notwithstanding the provision of paragraph 1 under which private pensions are
taxable exclusively in the State of residence of the beneficial owner, payments made by one of
the Contracting States under the provisions of its social security or similar legislation to a resi-
dent of the other Contracting State or to a citizen of the United States will be taxable only in the
Contracting State making the payment. The reference to U.S. citizens is necessary to ensure that
a social security payment by Poland to a U.S. citizen who is not resident in the United States will
not be taxable by the United States.

This paragraph applies to social security beneficiaries whether they have contributed to
the system as private sector or Government employees. The phrase “similar legislation” is
intended to refer to United States tier 1 Railroad Retirement benefits.

Paragraph 4

Paragraph 4 provides that, if a resident of a Contracting State participates in a pension
fund established in the other Contracting State, the State of residence will not tax the income of
the pension fund with respect to that resident until a distribution is made from the pension fund.
Thus, for example, if a U.S. citizen contributes to a U.S. qualified plan while working in the
United States and then establishes residence in Poland, paragraph 1 prevents Poland from taxing
currently the plan’s earnings and accretions with respect to that individual. When the resident
receives a distribution from the pension fund, that distribution may be subject to tax in Poland,
the State of residence, under paragraph 1 of Article 18. Paragraph 4 also provides that a transfer
from a pension fund located in a Contracting State to another pension fund located in that same
State shall not be taxed by either Contracting State.

Paragraph 5

Paragraph 5 provides that alimony and periodic payments for the support of a child made
pursuant to a written agreement or a decree of divorce, separate maintenance, or compulsory
support paid by a resident of a Contracting State to a resident of the other Contracting State shall
be exempt from tax in both Contracting States. The term “alimony” as used in this paragraph
means periodic payments made pursuant to a written separation agreement or a decree of
divorce, separate maintenance or compulsory support which are taxable to the recipient under the
laws of the State of which he is a resident.

Relationship to other Articles

Paragraphs 1 and 4 of Article 18 are subject to the saving clause of paragraph 4 of Article
1 (General Scope). Thus, a U.S. citizen who is resident in Poland, and receives a pension
distribution from the United States, may be subject to U.S. tax on the payment, notwithstanding
the rules in the paragraphs that give the State of residence of the recipient the exclusive taxing
right. Paragraphs 2, 3 and 5 are excepted from the saving clause by virtue of subparagraph 5(a)
of Article 1. Thus, the United States will not tax U.S. citizens and residents on the income
described in those paragraphs even if such amounts otherwise would be subject to tax under U.S.
law.

ARTICLE 19 (GOVERNMENT SERVICE)

Paragraph 1

Subparagraphs 1(a) and 1(b) deal with the taxation of government compensation (other
than a pension addressed in paragraph 2). Subparagraph 1(a) provides that remuneration paid to
any individual who is rendering services to that State, political subdivision or local authority is
exempt from tax by the other State. Under subparagraph 1(b), such payments are, however,
taxable exclusively in the other State (i.e., the host State) if the services are rendered in that other
State and the individual is a resident of that State who is either a national of that State or a person
who did not become resident of that State solely for purposes of rendering the services. The
paragraph applies to anyone performing services for a government, whether as a government
employee, an independent contractor, or an employee of an independent contractor.

Paragraph 2

Paragraph 2 deals with the taxation of pensions paid by, or out of funds created by, one of
the States, or a political subdivision or a local authority thereof, to an individual in respect of
services rendered to that State or subdivision or authority. Subparagraph 2(a) provides that such
pensions are taxable only in that State. Subparagraph 2(b) provides an exception under which
such pensions are taxable only in the other State if the individual is a resident of, and a national
of, that other State.

Pensions paid to retired civilian and military employees of a Government of either State
are intended to be covered under paragraph 2. When benefits paid by a State in respect of
services rendered to that State or a subdivision or authority are in the form of social security
benefits, however, those payments are covered by paragraph 3 of Article 18 (Pensions, Social
Security, Annuities, Alimony, and Child Support). As a general matter, the result will be the
same whether Article 18 or Article 19 applies, since social security benefits are taxable
exclusively by the source country and so are government pensions. The result will differ only
when the payment is made to a citizen and resident of the other Contracting State, who is not
also a citizen of the paying State. In such a case, social security benefits continue to be taxable
at source while government pensions become taxable only in the residence country.

Paragraph 3

Paragraph 3 provides that the remuneration described in paragraph 1 will be subject to the
rules of Articles 15 (Income from Employment), 16 (Directors' Fees), 17 (Entertainers and
Sportsmen) or 18 (Pensions, Social Security, Annuities, Alimony, and Child Support) if the
recipient of the income is employed by a business conducted by a government.

Relationship to other Articles

Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of
Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the

recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for
permanent residence there (i.e., in the United States, a "green card" holder). Thus, a resident of a
Contracting State who in the course of performing functions of a governmental nature becomes a
resident of the other State (but not a permanent resident), would be entitled to the benefits of this
Article. However, an individual who receives a pension paid by the Government of Poland in
respect of services rendered to the Government of Poland shall be taxable on this pension only in
Poland unless the individual is a U.S. citizen or acquires a U.S. green card.

ARTICLE 20 (STUDENTS AND TRAINEES)

This Article provides rules for host-country taxation of visiting students (including
pupils) and business trainees. Persons who meet the tests of the Article will be exempt from tax
in the State that they are visiting with respect to designated classes of income. Several
conditions must be satisfied in order for an individual to be entitled to the benefits of this Article.

First, the visitor must have been, either at the time of his arrival in the host State or
immediately before, a resident of the other Contracting State.

Second, the primary purpose of the visit must be the education or training of the visitor.
Thus, 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. If the student is engaged in full time study, the primary purpose of his visit to
the host State will be deemed to have as its primary purpose education. Whether a student is to
be considered full-time will be determined by the rules of the educational institution at which he
is studying.

Paragraph 1

The host-country exemption in paragraph 1 applies to payments received by the student
(including a pupil) or business trainee for the purpose of his maintenance, education or training
that arise outside the host State. A payment will be considered to arise outside the host State if
the payer 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 maintenance or training while he is present in the
host State will be exempt from tax in the host State. Where appropriate, substance prevails over
form in determining the identity of the payer. Thus, for example, payments made directly or
indirectly by a U.S. person with whom the visitor is training, but which have been routed through
a source outside the United States (e.g., a foreign subsidiary), are not treated as arising outside
the United States for this purpose.

In the case of a business trainee, the benefits of paragraph 1 will extend only for a period
of one year from the time that the visitor first arrives in the host country. If, however, a trainee
remains in the host country for a second year, thus losing the benefits of paragraph 1, he would
not retroactively lose the benefits of the paragraph for the first year.

Paragraph 2

Paragraph 2 provides a limited exemption for remuneration from personal services
rendered in the host State up to $9,000 United States dollars (or its equivalent in Polish legal
tender) per taxable year. The specified amount is intended to equalize the position of a U.S.
resident who is entitled to the standard deduction and the personal exemption with that of a
student who files as a non-resident alien and therefore is not entitled to such statutory benefits.

Paragraph 3

The term "business trainee" is defined as a person who is in the host State temporarily for
the purpose of securing training that is necessary to qualify to pursue a profession or professional
specialty. Moreover, the person must be employed or under contract with a resident of the other
Contracting State and must be receiving the training from someone who is not related to its
employer. Thus, a business trainee might include a lawyer employed by a law firm in one
Contracting State who works for one year as a stagiaire in an unrelated law firm in the other
Contracting State. However, the term would not include a manager who normally is employed
by a parent company in one Contracting State who is sent to the other Contracting State to run a
factory owned by a subsidiary of the parent company.

Relationship to other Articles

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this
Article with respect to an individual who is neither a citizen of the host State nor has been
admitted for permanent residence there. The saving clause, however, does apply with respect to
citizens and permanent residents of the host State. Thus, a U.S. citizen who is a resident of
Poland and who visits the United States as a full-time student at an accredited university will not
be exempt from U.S. tax on remittances from abroad that otherwise constitute U.S. taxable
income. A person, however, who is not a U.S. citizen, and who visits the United States as a
student and remains long enough to become a resident under U.S. law, but does not become a
permanent resident (i.e., does not acquire a green card), will be entitled to the full benefits of the
Article.

ARTICLE 21 (OTHER INCOME)

Article 21 generally assigns taxing jurisdiction over income not dealt with in the other
Articles (Articles 6 (Income from Real Property) through Article 20 (Students and Trainees)) of
the Convention to the State of residence of the beneficial owner of the income. In order for an
item of income to be "dealt with" in another article it must be the type of income described in the
article and, in most cases, it must have its source in a Contracting State. For example, all royalty
income that arises in a Contracting State and that is beneficially owned by a resident of the other
Contracting State is "dealt with" in Article 13 (Royalties). However, profits derived in the
conduct of a business are "dealt with" in Article 7 (Business Profits) whether or not they have
their source in one of the Contracting States.

Examples of items of income covered by Article 21 include income from gambling,

punitive (but not compensatory) damages and covenants not to compete. Article 21 would also
apply to income from a variety of financial transactions, where such income does not arise in the
course of the conduct of a trade or business. For example, income from notional principal
contracts and other derivatives would fall within Article 21 if derived by persons not engaged in
the trade or business of dealing in such instruments, unless such instruments were being used to
hedge risks arising in a trade or business. It would also apply to securities lending fees derived
by an institutional investor. Further, in most cases guarantee fees paid within an intercompany
group would be covered by Article 21, unless the guarantor were engaged in the business of
providing such guarantees to unrelated parties.

Article 21 also applies to items of income that are not “dealt with” in the other articles
because of their source or some other characteristic. For example, Article 11 (Interest) addresses
only the taxation of interest arising in a Contracting State. Interest arising in a third State that is
not attributable to a permanent establishment, therefore, is subject to Article 21.

Distributions from partnerships are not generally “dealt with” under Article 21 because
partnership distributions generally do not constitute income. Under the Code, partners include in
income their distributive share of partnership income annually, and partnership distributions
themselves generally do not give rise to income. This would also be the case under U.S. law
with respect to distributions from trusts. Trust income and distributions that, under the Code,
have the character of the associated distributable net income would generally be covered by
another article of the Convention. See Code section 641 et seq.

Paragraph 1

The general rule of Article 21 is contained in paragraph 1. Items of income not dealt with
in other articles and beneficially owned by a resident of a Contracting State will be taxable only
in the State of residence. This exclusive right of taxation applies whether or not the residence
State exercises its right to tax the income covered by the Article.

The reference in this paragraph to "items of income beneficially owned by a resident of a
Contracting State" rather than simply "items of income of a resident of a Contracting State," as in
the OECD Model, is intended merely to make explicit the understanding in other treaties that the
exclusive residence taxation provided by paragraph 1 applies only when a resident of a
Contracting State is the beneficial owner of the income. Thus, source taxation of income not
dealt with in other articles of the Convention is not limited by paragraph 1 if it is nominally paid
to a resident of the other Contracting State, but is beneficially owned by a resident of a third
State. However, income received by a nominee on behalf of a resident of that other State would
be entitled to benefits.

The term "beneficially owned" is not defined in the Convention, and is, therefore, defined
as under the internal law of the country imposing tax (i.e., the source country). The person who
beneficially owns the income for purposes of Article 21 is the person to which the income is
attributable for tax purposes under the laws of the source State.

Paragraph 2

This paragraph provides an exception to the general rule of paragraph 1 for income from
a right or property that is effectively connected to a permanent establishment maintained in a
Contracting State by a resident of the other Contracting State. The taxation of such income is
governed by the provisions of Article 7 (Business Profits). Therefore, income arising outside the
United States from a right or property that is effectively connected to a permanent establishment
maintained in the United States by a resident of the other Contracting State generally would be
taxable by the United States under the provisions of Article 7. This would be true even if the
income is sourced in a third State.

Relationship to Other Articles

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope).
Thus, the United States may tax the income of a resident of Poland that is not dealt with
elsewhere in the Convention, if that resident is a citizen of the United States. The Article is also
subject to the provisions of Article 22 (Limitation on Benefits). Thus, if a resident of Poland
earns income that falls within the scope of paragraph 1 of Article 21, but that is taxable by the
United States under U.S. law, the income would be exempt from U.S. tax under the provisions of
Article 21 only if the resident satisfies one of the tests of Article 22 for entitlement to benefits.

ARTICLE 22 (LIMITATION ON BENEFITS)

Article 22 contains anti-treaty-shopping provisions that are intended to prevent residents
of third countries from benefiting from what is intended to be a reciprocal agreement between
two countries. In general, the provision does not rely on a determination of purpose or intention
but instead sets forth a series of objective tests. A resident of a Contracting State that satisfies
one of the tests will receive benefits regardless of its motivations in choosing its particular
business structure.

The structure of the revised Article is as follows: Paragraph 1 states the general rule that
residents are entitled to benefits otherwise accorded to residents only to the extent provided in
the Article. Paragraph 2 lists a series of attributes of a resident of a Contracting State, the
presence of any one of which will entitle that person to all the benefits of the Convention.
Paragraph 3 provides a derivative benefits rule. Paragraph 4 provides that, regardless of whether
a person qualifies for benefits under paragraph 2, benefits may be granted to that person with
regard to certain income earned in the conduct of an active trade or business. Paragraph 5
provides a test for headquarters companies. Paragraph 6 provides a special rule for so-called
“triangular cases” notwithstanding the other provisions of the Article. Paragraph 7 provides that
benefits also may be granted if the competent authority of the State from which benefits are
claimed determines that it is appropriate to provide benefits in that case. Paragraph 8 defines
certain terms used in the Article.

Paragraph 1

Paragraph 1 provides that a resident of a Contracting State will be entitled to the benefits
otherwise accorded to residents of a Contracting State under the Convention only to the extent

provided in the Article. The benefits otherwise accorded to residents under the Convention
include all limitations on source-based taxation under Articles 6 (Income from Real Property)
through Article 21 (Other Income), the treaty-based relief from double taxation provided by
Article 23 (Relief from Double Taxation), and the protection afforded to residents of a
Contracting State under Article 24 (Non-Discrimination). Some provisions do not require that a
person be a resident in order to enjoy the benefits of those provisions. For example, Article 25
(Mutual Agreement Procedure) is not limited to residents of the Contracting States, and Article
27 (Members of Diplomatic Missions and Consular Posts) applies to diplomatic agents or
consular officials regardless of residence. Article 22 accordingly does not limit the availability
of treaty benefits under these provisions.

Article 22 and the anti-abuse provisions of domestic law complement each other, as
Article 22 effectively determines whether an entity has a sufficient nexus to the Contracting State
to be treated as a resident for treaty purposes, while domestic anti-abuse provisions (e.g.,
business purpose, substance-over-form, step transaction or conduit principles) determine whether
a particular transaction should be recast in accordance with its substance. Thus, domestic law
principles of the source Contracting State may be applied to identify the beneficial owner of an
item of income, and Article 22 then will be applied to the beneficial owner to determine if that
person is entitled to the benefits of the Convention with respect to such income.

Paragraph 2

Paragraph 2 has five subparagraphs, each of which describes a category of residents that
will be considered qualified persons.

It is intended that the provisions of paragraph 2 will be self-executing. Unlike the
provisions of paragraph 7, discussed below, claiming benefits under paragraph 2 does not require
advance competent authority ruling or approval. The tax authorities may, of course, on review,
determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the
benefits claimed.

Individuals -- Subparagraph 2(a)

Subparagraph 2(a) provides that individual residents of a Contracting State will be
considered qualified persons. If such an individual receives income as a nominee on behalf of a
third country resident, benefits may be denied under the respective articles of the Convention by
the requirement that the beneficial owner of the income be a resident of a Contracting State.

Governments -- Subparagraph 2(b)

Subparagraph 2(b) provides that the Contracting States and any political subdivision or
local authority or instrumentality thereof will be considered qualified persons.

Publicly-Traded Corporations -- Subparagraph 2(c)(i)

Subparagraph 2(c) applies to two categories of companies: publicly traded companies and
subsidiaries of publicly traded companies. A company resident in a Contracting State will be
considered a qualified person under clause (i) of subparagraph (c) if the principal class of its
shares, and any disproportionate class of shares, is regularly traded on one or more recognized
stock exchanges and the company satisfies at least one of the following additional requirements.
First, under clause (A) in the case of a company resident in Poland, the company’s principal class
of shares must be primarily traded on one or more recognized stock exchanges located either in
Poland or within the European Union, and in the case of a company resident in the United States,
the company’s principal class or shares must be primarily traded on a recognized stock exchange
located either in the United States or in another state that is a party to the North American Free
Trade Agreement. If the company’s principal class of shares does not satisfy the trading
requirement set forth in clause (A), clause (B) provides that the regularly-traded company can
nevertheless satisfy the requirements of clause (i) if the company’s primary place of management
and control is in its State of residence.
The term “recognized stock exchange” is defined in subparagraph 8(a). It includes (i)
any stock exchange registered with the Securities and Exchange Commission as a national
securities exchange for purposes of the Securities Exchange Act of 1934; (ii) the Warsaw S tock
Exchange; (iii) the stock exchanges of Amsterdam, Brussels, Budapest, Frankfurt, London,
Mexico City, Montreal, Paris, Toronto, Vienna and Zurich, and (iv) any other stock exchange
agreed upon by the competent authorities of the Contracting States.

If a company has only one class of shares, it is only necessary to consider whether the
shares of that class meet the relevant trading requirements. If the company has more than one
class of shares, it is necessary as an initial matter to determine which class or classes constitute
the “principal class of shares”. The term “principal class of shares” is defined in subparagraph
8(b) to mean the ordinary or common shares of the company representing the majority of the
aggregate voting power and value of the company. If the company does not have a class of
ordinary or common shares representing the majority of the aggregate voting power and value of
the company, then the “principal class of shares” is that class or any combination of classes of
shares that represents, in the aggregate, a majority of the voting power and value of the company.
Although in a particular case involving a company with several classes of shares it is conceivable
that more than one group of classes could be identified that account for more than 50% of the
shares, it is only necessary for one such group to satisfy the requirements of this subparagraph in
order for the company to be entitled to benefits. Benefits would not be denied to the company
even if a second, non-qualifying, group of shares with more than half of the company's voting
power and value could be identified.
A company whose principal class of shares is regularly traded on a recognized stock
exchange will nevertheless not be considered a qualified person under subparagraph 2(c) if it has
a disproportionate class of shares that is not regularly traded on a recognized stock exchange.
The term “disproportionate class of shares” is defined in subparagraph 8(c). A company has a
disproportionate class of shares if it has outstanding a class of shares which is subject to terms or
other arrangements that entitle the holder to a larger portion of the company’s income, profit, or
gain in the other Contracting State than that to which the holder would be entitled in the absence
of such terms or arrangements. Thus, for example, a company resident in Poland has a

disproportionate class of shares if it has outstanding a class of “tracking stock” that pays
dividends based upon a formula that approximates the company’s return on its assets employed
in the United States.
The following example illustrates this result.
Example
. OCo is a corporation resident in Poland. OCo has two classes of shares:
Common and Preferred. The Common shares are listed and regularly traded on the Warsaw
Stock Exchange. The Preferred shares have no voting rights and are entitled to receive dividends
equal in amount to interest payments that OCo receives from unrelated borrowers in the United
States. The Preferred shares are owned entirely by a single investor that is a resident of a
country with which the United States does not have a tax treaty. The Common shares account for
more than 50 percent of the value of OCo and for 100 percent of the voting power. Because the
owner of the Preferred shares is entitled to receive payments corresponding to the U.S. source
interest income earned by OCo, the Preferred shares are a disproportionate class of shares.
Because the Preferred shares are not regularly traded on a recognized stock exchange, OCo will
not qualify for benefits under subparagraph (c) of paragraph 2.
The term "regularly traded" is not defined in the Convention. In accordance with
paragraph 2 of Article 3 (General Definitions), this term will be defined by reference to the
domestic tax laws of the State from which treaty benefits are sought, generally the source State.
In the case of the United States, this term is understood to have the meaning it has under Treas.
Reg. section 1.884-5(d)(4)(i)(B), relating to the branch tax provisions of the Code. Under these
regulations, a class of shares is considered to be "regularly traded" if two requirements are met:
trades in the class of shares are made in more than de minimis quantities on at least 60 days
during the taxable year, and the aggregate number of shares in the class traded during the year is
at least 10 percent of the average number of shares outstanding during the year. Sections 1.884-
5(d)(4)(i)(A), (ii) and (iii) will not be taken into account for purposes of defining the term
"regularly traded" under the Convention.

The regular trading requirement can be met by trading on any recognized exchange or
exchanges located in either State. Trading on one or more recognized stock exchanges may be
aggregated for purposes of this requirement. Thus, a U.S. company could satisfy the regularly
traded requirement through trading, in whole or in part, on any recognized stock exchange.
Authorized but unissued shares are not considered for purposes of this test.

The term “primarily traded” is defined in subparagraph 8(d). The shares of a company
shall be considered “primarily traded” on a recognized stock exchange if the number of shares in
the company’s principal class of shares that are traded during the taxable year on all recognized
stock exchanges in the Contracting State of which the company is a resident (or in the case of a
company resident in Poland, on a recognized stock exchange located within the European Union
or in any other European Free Trade Association (EFTA) state, or in the case of a company
resident in the United States, on a recognized stock exchange located in another state that is a
party to the North American Free Trade Agreement (NAFTA)) exceeds the number of shares in
the company’s principal class of shares that are traded during that year on established securities
markets in any other single foreign country. This treaty-based definition is consistent with

meaning of the term under Treas. Reg. section 1.884-5(d)(3), relating to the branch tax
provisions of the Code.

A company whose principal class of shares is regularly traded on a recognized exchange
but cannot meet the primarily traded test may claim treaty benefits if its primary place of
management and control is in its country of residence. This test is distinct from the “place of
effective management” test which is used in the OECD Model and by many other countries to
establish residence. In some cases, the place of effective management test has been interpreted
to mean the place where the board of directors meets. By contrast, the primary place of
management and control test looks to where day-to-day responsibility for the management of the
company (and its subsidiaries) is exercised. The company’s primary place of management and
control will be located in the State in which the company is a resident only if the executive
officers and senior management employees exercise day-to-day responsibility for more of the
strategic, financial and operational policy decision making for the company (including direct and
indirect subsidiaries) in that State than in the other State or any third state, and the staff that
support the management in making those decisions are also based in that State. Thus, the test
looks to the overall activities of the relevant persons to see where those activities are conducted.
In most cases, it will be a necessary, but not a sufficient, condition that the headquarters of the
company (that is, the place at which the CEO and other top executives normally are based) be
located in the Contracting State of which the company is a resident.
To apply the test, it will be necessary to determine which persons are to be considered
“executive officers and senior management employees”. In most cases, it will not be necessary
to look beyond the executives who are members of the Board of Directors (the “inside
directors”) in the case of a U.S. company. That will not always be the case, however; in fact, the
relevant persons may be employees of subsidiaries if those persons make the strategic, financial
and operational policy decisions. Moreover, it would be necessary to take into account any
special voting arrangements that result in certain board members making certain decisions
without the participation of other board members.

Subsidiaries of Publicly-Traded Corporations -- Subparagraph 2(c)(ii)

A company resident in a Contracting State is entitled to all the benefits of the
Convention under clause (ii) of subparagraph (c) of paragraph 2 if five or fewer publicly traded
companies described in clause (i) are the direct or indirect owners of at least 50 percent of the
aggregate vote and value of the company’s shares (and at least 50 percent of any
disproportionate class of shares). If the publicly-traded companies are indirect owners,
however, each of the intermediate companies must be a resident of one of the Contracting
States.
Thus, for example, a company that is a resident of Poland, all the shares of which are
owned by another company that is a resident of Poland, would qualify for benefits under the
Convention if the principal class of shares (and any disproportionate classes of shares) of the
parent company are regularly and primarily traded on a recognized stock exchange in Poland
(or within the European Union or EFTA). However, such a subsidiary would not qualify for
benefits under clause (ii) if the publicly traded parent company were a resident of a third state,

for example, and not a resident of the United States or Poland. Furthermore, if a parent
company in Poland indirectly owned the bottom-tier company through a chain of subsidiaries,
each such subsidiary in the chain, as an intermediate owner, must be a resident of the United
States or Poland in order for the subsidiary to meet the test in clause (ii).
Tax Exempt Organizations -- Subparagraph 2(d)

Subparagraph 2(d) provides rules by which the tax exempt organizations described in
paragraph 2 of Article 4 (Resident) will be considered qualified persons. A pension fund will
qualify for benefits if more than fifty percent of the beneficiaries, members or participants of the
organization are individuals resident in either Contracting State. For purposes of this provision,
the term "beneficiaries" should be understood to refer to the persons receiving benefits from the
organization. On the other hand, a tax-exempt organization other than a pension fund
automatically qualifies for benefits, without regard to the residence of its beneficiaries or
members. Entities qualifying under this rule generally are those that are exempt from tax in their
State of residence and that are organized and operated exclusively to fulfill religious, charitable,
scientific, artistic, cultural, or educational purposes.

Ownership/Base Erosion -- Subparagraph 2(e)

Subparagraph 2(e) provides an additional method to qualify for treaty benefits that
applies to any form of legal entity that is a resident of a Contracting State. The test provided in
subparagraph (e), the so-called ownership and base erosion test, is a two-part test. Both prongs
of the test must be satisfied for the resident to be entitled to treaty benefits under subparagraph
2(e).
The ownership prong of the test, under clause (i), requires that 50 percent or more of each
class of shares or other beneficial interests in the person is owned, directly or indirectly, on at
least half the days of the person’s taxable year by persons who are residents of the Contracting
State of which that person is a resident and that are themselves entitled to treaty benefits under
subparagraphs (a), (b), (d) or clause (i) of subparagraph (c) of paragraph 2. In the case of
indirect owners, however, each of the intermediate owners must be a resident of that Contracting
State.
Trusts may be entitled to benefits under this provision if they are treated as residents
under Article 4 (Residence) and they otherwise satisfy the requirements of this subparagraph.
For purposes of this subparagraph, the beneficial interests in a trust will be considered to be
owned by its beneficiaries in proportion to each beneficiary's actuarial interest in the trust. The
interest of a remainder beneficiary will be equal to 100 percent less the aggregate percentages
held by income beneficiaries. A beneficiary's interest in a trust will not be considered to be
owned by a person entitled to benefits under the other provisions of paragraph 2 if it is not
possible to determine the beneficiary's actuarial interest. Consequently, if it is not possible to
determine the actuarial interest of the beneficiaries in a trust, the ownership test under clause (i)
cannot be satisfied, unless all possible beneficiaries are persons entitled to benefits under the
other subparagraphs of paragraph 2.

The base erosion prong of clause (ii) of subparagraph (e) is satisfied with respect to a
person if less than 50 percent of the person’s gross income for the taxable year, as determined
under the tax law in the person’s State of residence, is paid or accrued to persons who are not
residents of either Contracting State entitled to benefits under subparagraphs (a), (b), (d) or
clause (i) of subparagraph (c) of paragraph 2, in the form of payments deductible for tax
purposes in the payer’s State of residence. These amounts do not include arm’s-length payments
in the ordinary course of business for services or tangible property. To the extent they are
deductible from the taxable base, trust distributions are deductible payments. However,
depreciation and amortization deductions, which do not represent payments or accruals to other
persons, are disregarded for this purpose.
Paragraph 3

Paragraph 3 sets forth a “derivative benefits” test that is potentially applicable to all
treaty benefits, although the test is applied to individual items of income. In general, a
derivative benefits test entitles certain companies that are residents of a Contracting State to
treaty benefits if the owner of the company would have been entitled to the same benefit had
the income in question flowed directly to that owner. To qualify under this paragraph, the
company must meet an ownership test and a base erosion test.
Subparagraph 3(a) sets forth the ownership test. Under this test, seven or fewer
equivalent beneficiaries must own shares representing at least 95 percent of the aggregate
voting power and value of the company and at least 50 percent of any disproportionate class
of shares. Ownership may be direct or indirect.
The term “equivalent beneficiary” is defined in subparagraph 8(f). This definition
may be met in two alternative ways.
Under the first alternative, a person may be an equivalent beneficiary because it is
entitled to equivalent benefits under a tax treaty between the country of source and the
country in which the person is a resident. This alternative has two requirements.
The first requirement as set forth in clause (i) of subparagraph 8(f) is that the person
must be a resident of a member state of the European Union or any other European Free
Trade Association (EFTA) state or of a party to the North American Free Trade Agreement
(collectively, “qualifying States”). In addition, the person must be entitled to all the benefits
of a comprehensive tax treaty between the Contracting State from which benefits of the
Convention are claimed and a qualifying state under provisions that are analogous to the rules
in subparagraphs 2(a), 2(b), 2(c)(i), or 2(d) of this Article. If the treaty in question does not
have a comprehensive limitation on benefits article, this requirement is met only if the person
would be entitled to treaty benefits under the tests in subparagraphs 2(a), 2(b), 2(c)(i), or 2(d)
of this Article if the person were a resident of one of the Contracting States.
Clause (i)(B) of subparagraph 8(f) requires that with respect to, dividends, interest,
and royalties, the person must be entitled to a rate of tax that is at least as low as the tax rate
that would apply under the Convention to such income. Thus, the rates to be compared are:
(1) the rate of tax that the source State would have imposed if a qualified resident of the other

Contracting State was the beneficial owner of the income; and (2) the rate of tax that the
source State would have imposed if the third state resident had received the income directly
from the source State.
Subparagraph 8(g) provides a special rule to take account of the fact that withholding
taxes on many inter-company dividends, interest and royalties are exempt within the
European Union by reason of various EU directives, rather than by tax treaty. If a U.S.
company receives such payments from a Polish company, and that U.S. company is owned by
a company resident in a member state of the European Union that would have qualified for an
exemption from withholding tax if it had received the income directly, the parent company
will be treated as an equivalent beneficiary. This rule is necessary because many European
Union member countries have not re-negotiated their tax treaties to reflect the exemptions
available under the directives.
The requirement that a person be entitled to “all the benefits” of a comprehensive tax
treaty eliminates those persons that qualify for benefits with respect to only certain types of
income. Accordingly, the fact that a French parent of a Polish company is engaged in the
active conduct of a trade or business in France and therefore would be entitled to the benefits
of the U.S.-France treaty if it received dividends directly from a U.S. subsidiary of the Polish
company will not qualify such French company as an equivalent beneficiary. Further, the
French company cannot be an equivalent beneficiary if it qualifies for benefits only with
respect to certain income as a result of a “derivative benefits” provision in the U.S.-France
treaty. However, because such French company is a resident of a qualifying state, it would be
possible to look through the French company to its parent company to determine whether the
parent company is an equivalent beneficiary.
The second alternative for satisfying the "equivalent beneficiary" test is available only
to residents of one of the two Contracting States. U.S. or Polish residents who are eligible for
treaty benefits by reason of subparagraphs 2(a), 2(b), 2(c)(i), or 2(d) are equivalent
beneficiaries for purposes of the relevant tests in this Article. Thus, a Polish individual will
be an equivalent beneficiary without regard to whether the individual would have been
entitled to receive the same benefits if it received the income directly. A resident of a third
country cannot qualify for treaty benefits under these provisions by reason of those
paragraphs or any other rule of the treaty, and therefore does not qualify as an equivalent
beneficiary under this alternative. Thus, a resident of a third country can be an equivalent
beneficiary only if it would have been entitled to equivalent benefits had it received the
income directly.
The second alternative was included in order to clarify that ownership by certain
residents of a Contracting State would not disqualify a U.S. or Polish company under this
paragraph. Thus, for example, if 90 percent of a Polish company is owned by five companies
that are resident in member states of the European Union who satisfy the requirements of
subparagraph 8(g)(i), and 10 percent of the Polish company is owned by a U.S. or Polish
individual, then the Polish company still can satisfy the requirements of subparagraph 3(a).
Subparagraph 3(b) sets forth the base erosion test. A company meets this base erosion
test if less than 50 percent of its gross income (as determined in the company’s State of

residence) for the taxable period is paid or accrued, directly or indirectly, to a person or persons
who are not equivalent beneficiaries in the form of payments deductible for tax purposes in
company’s State of residence. These amounts do not include arm’s-length payments in the
ordinary course of business for services or tangible property. This test is qualitatively the same
as the base erosion test in subparagraph 2(e)(ii), except that the test in paragraph 3(b) focuses on
base-eroding payments to persons who are not equivalent beneficiaries.

Paragraph 4

Paragraph 4 sets forth an alternative test under which a resident of a Contracting State
may receive treaty benefits with respect to certain items of income that are connected to an
active trade or business conducted in its State of residence. A resident of a Contracting State
may qualify for benefits under paragraph 4 whether or not it also qualifies under paragraph 2
or 3.
Subparagraph 4(a) sets forth the general rule that a resident of a Contracting State
engaged in the active conduct of a trade or business in that State may obtain the benefits of the
Convention with respect to an item of income derived in the other Contracting State. The item
of income, however, must be derived in connection with or incidental to that trade or business.
The term “trade or business” is not defined in the Convention. Pursuant to paragraph 2
of Article 3 (General Definitions), when determining whether a resident of Poland is entitled to
the benefits of the Convention under paragraph 3 of this Article with respect to an item of
income derived from sources within the United States, the United States will ascribe to this
term the meaning that it has under the law of the United States. Accordingly, the U.S.
competent authority will refer to the regulations issued under Code section 367(a) for the
definition of the term “trade or business.” In general, therefore, a trade or business will be
considered to be a specific unified group of activities that constitutes or could constitute an
independent economic enterprise carried on for profit. Furthermore, a corporation generally
will be considered to carry on a trade or business only if the officers and employees of the
corporation conduct substantial managerial and operational activities.
The business of making or managing investments for the resident’s own account will be
considered to be a trade or business only when part of banking, insurance or securities activities
conducted by a bank, an insurance company, or a registered securities dealer respectively. Such
activities conducted by a person other than a bank, insurance company or registered securities
dealer will not be considered to be the conduct of an active trade or business, nor would they be
considered to be the conduct of an active trade or business if conducted by a bank, insurance
company or registered securities dealer but not as part of the company’s banking, insurance or
dealer business. Because a headquarters operation is in the business of managing investments, a
company that functions solely as a headquarters company will not be considered to be engaged
in an active trade or business for purposes of paragraph 4.

An item of income is derived in connection with a trade or business if the income-
producing activity in the State of source is a line of business that “forms a part of” or is

“complementary” to the trade or business conducted in the State of residence by the income
recipient.
A business activity generally will be considered to form part of a business activity
conducted in the State of source if the two activities involve the design, manufacture or sale of
the same products or type of products, or the provision of similar services. The line of business
in the State of residence may be upstream, downstream, or parallel to the activity conducted in
the State of source. Thus, the line of business may provide inputs for a manufacturing process
that occurs in the State of source, may sell the output of that manufacturing process, or simply
may sell the same sorts of products that are being sold by the trade or business carried on in the
State of source.
Example 1
. USCo is a corporation resident in the United States. USCo is engaged in an
active manufacturing business in the United States. USCo owns 100 percent of the shares of
FCo, a corporation resident in Poland. FCo distributes USCo products in Poland. Since the
business activities conducted by the two corporations involve the same products, FCo's
distribution business is considered to form a part of USCo's manufacturing business.

Example 2. The facts are the same as in Example 1, except that USCo does not
manufacture. Rather, USCo operates a large research and development facility in the United
States that licenses intellectual property to affiliates worldwide, including FCo. FCo and other
USCo affiliates then manufacture and market the USCo-designed products in their respective
markets. Since the activities conducted by FCo and USCo involve the same product lines, these
activities are considered to form a part of the same trade or business.

For two activities to be considered to be “complementary,” the activities need not relate
to the same types of products or services, but they should be part of the same overall industry
and be related in the sense that the success or failure of one activity will tend to result in success
or failure for the other. Where more than one trade or business is conducted in the State of
source and only one of the trades or businesses forms a part of or is complementary to a trade or
business conducted in the State of residence, it is necessary to identify the trade or business to
which an item of income is attributable. Royalties generally will be considered to be derived in
connection with the trade or business to which the underlying intangible property is attributable.
Dividends will be deemed to be derived first out of earnings and profits of the treaty-benefited
trade or business, and then out of other earnings and profits. Interest income may be allocated
under any reasonable method consistently applied. A method that conforms to U.S. principles
for expense allocation will be considered a reasonable method.
Example 3
. Americair is a corporation resident in the United States that operates an
international airline. FSub is a wholly-owned subsidiary of Americair resident in Poland. FSub
operates a chain of hotels in Poland that are located near airports served by Americair flights.
Americair frequently sells tour packages that include air travel to Polnd and lodging at FSub
hotels. Although both companies are engaged in the active conduct of a trade or business, the
businesses of operating a chain of hotels and operating an airline are distinct trades or businesses.
Therefore FSub's business does not form a part of Americair's business. However, FSub's
business is considered to be complementary to Americair's business because they are part of the

same overall industry (travel) and the links between their operations tend to make them
interdependent.

Example 4
. The facts are the same as in Example 3, except that FSub owns an office
building in Poland instead of a hotel chain. No part of Americair's business is conducted through
the office building. FSub's business is not considered to form a part of or to be complementary
to Americair's business. They are engaged in distinct trades or businesses in separate industries,
and there is no economic dependence between the two operations.

Example 5. USFlower is a corporation resident in the United States. USFlower produces
and sells flowers in the United States and other countries. USFlower owns all the shares of
ForHolding, a corporation resident in Poland. ForHolding is a holding company that is not
engaged in a trade or business. ForHolding owns all the shares of three corporations that are
resident in Poland: ForFlower, ForLawn, and ForFish. ForFlower distributes USFlower flowers
under the USFlower trademark in Poland. ForLawn markets a line of lawn care products in
Poland under the USFlower trademark. In addition to being sold under the same trademark,
ForLawn and ForFlower products are sold in the same stores and sales of each company's
products tend to generate increased sales of the other's products. ForFish imports fish from the
United States and distributes it to fish wholesalers in Poland. For purposes of paragraph 3, the
business of ForFlower forms a part of the business of USFlower, the business of ForLawn is
complementary to the business of USFlower, and the business of ForFish is neither part of nor
complementary to that of USFlower.

An item of income derived from the State of source is “incidental to” the trade or
business carried on in the State of residence if production of the item facilitates the conduct of
the trade or business in the State of residence. An example of incidental income is the
temporary investment of working capital of a person in the State of residence in securities
issued by persons in the State of source.
Subparagraph (b) of paragraph 4 states a further condition to the general rule in
subparagraph (a) in cases where the trade or business generating the item of income in question
is carried on either by the person deriving the income or by any associated enterprises.
Subparagraph (b) states that the trade or business carried on in the State of residence, under
these circumstances, must be substantial in relation to the activity in the State of source. The
substantiality requirement is intended to prevent a narrow case of treaty-shopping abuses in
which a company attempts to qualify for benefits by engaging in de minimis connected business
activities in the treaty country in which it is resident (i.e., activities that have little economic cost
or effect with respect to the company business as a whole).
The determination of substantiality is made based upon all the facts and circumstances
and takes into account the comparative sizes of the trades or businesses in each Contracting
State, the nature of the activities performed in each Contracting State and the relative
contributions made to that trade or business in each Contracting State. In any case, in making
each determination or comparison, due regard will be given to the relative sizes of the
economies in the two Contracting States.

The determination in subparagraph (b) also is made separately for each item of income
derived from the State of source. It therefore is possible that a person would be entitled to the
benefits of the Convention with respect to one item of income but not with respect to another. If
a resident of a Contracting State is entitled to treaty benefits with respect to a particular item of
income under paragraph 4, the resident is entitled to all benefits of the Convention insofar as
they affect the taxation of that item of income in the State of source.
The application of the substantiality requirement only to income from related parties
focuses only on potential abuse cases, and does not hamper certain other kinds of non-abusive
activities, even though the income recipient resident in a Contracting State may be very small in
relation to the entity generating income in the other Contracting State. For example, if a small
U.S. research firm develops a process that it licenses to a very large, unrelated, pharmaceutical
manufacturer in Poland, the size of the U.S. research firm would not have to be tested against the
size of the manufacturer. Similarly, a small U.S. bank that makes a loan to a very large unrelated
company operating a business in Poland would not have to pass a substantiality test to receive
treaty benefits under paragraph 4.
Subparagraph (c) of paragraph 3 provides special attribution rules for purposes of
applying the substantive rules of subparagraphs (a) and (b). Thus, these rules apply for
purposes of determining whether a person meets the requirement in subparagraph (a) that it be
engaged in the active conduct of a trade or business and that the item of income is derived in
connection with that active trade or business, and for making the comparison required by the
"substantiality" requirement in subparagraph (b). Subparagraph (c) attributes to a person
activities conducted by persons “connected” to such person. A person (“X”) is connected to
another person (“Y”) if X possesses 50 percent or more of the beneficial interest in Y (or if Y
possesses 50 percent or more of the beneficial interest in X). For this purpose, X is connected to
a company if X owns shares representing fifty percent or more of the aggregate voting power
and value of the company or fifty percent or more of the beneficial equity interest in the
company. X also is connected to Y if a third person possesses fifty percent or more of the
beneficial interest in both X and Y. For this purpose, if X or Y is a company, the threshold
relationship with respect to such company or companies is fifty percent or more of the aggregate
voting power and value or fifty percent or more of the beneficial equity interest. Finally, X is
connected to Y if, based upon all the facts and circumstances, X controls Y, Y controls X, or X
and Y are controlled by the same person or persons.
Paragraph 5

Paragraph 5 provides that a resident of one of the Contracting States is entitled to all the
benefits of the Convention if that person functions as a recognized headquarters company for a
multinational corporate group. The provisions of this paragraph are consistent with the other
U.S. tax treaties where this provision has been adopted. For this purpose, the multinational
corporate group includes all corporations that the headquarters company supervises, and
excludes affiliated corporations not supervised by the headquarters company. The headquarters
company does not have to own shares in the companies that it supervises. In order to be
considered a headquarters company, the person must meet several requirements that are
enumerated in paragraph 5. These requirements are discussed below.

Overall Supervision and Administration

Subparagraph 5(a) provides that the person must provide a substantial portion of the
overall supervision and administration of the group. This activity may include group financing,
but group financing may not be the principal activity of the person functioning as the
headquarters company. A person only will be considered to engage in supervision and
administration if it engages in a number of the following activities: group financing, pricing,
marketing, internal auditing, internal communications, and management. Other activities also
could be part of the function of supervision and administration.

In determining whether a “substantial portion” of the overall supervision and
administration of the group is provided by the headquarters company, its headquarters-related
activities must be substantial in relation to the same activities for the same group performed by
other entities. Subparagraph 5(a) does not require that the group that is supervised include
persons in the other State. However, it is anticipated that in most cases the group will include
such persons, due to the requirement in subparagraph 5(g), discussed below, that the income
derived in the other Contracting State by the headquarters company be derived in connection
with or be incidental to an active trade or business supervised by the headquarters company.

Active Trade or Business

Subparagraph 5(b) is the first of several requirements intended to ensure that the relevant
group is truly “multinational.” This subparagraph provides that the corporate group supervised
by the headquarters company must consist of corporations resident in, and engaged in active
trades or businesses in, at least five countries. Furthermore, at least five countries must each
contribute substantially to the income generated by the group, as the rule requires that the
business activities carried on in each of the five countries (or groupings of countries) generate at
least 10 percent of the gross income of the group. For purposes of the 10 percent gross income
requirement, the income from multiple countries may be aggregated into non-overlapping
groupings, as long as there are at least five individual countries or groupings that each satisfies
the 10 percent requirement. If the gross income requirement under this subparagraph is not met
for a taxable year, the taxpayer may satisfy this requirement by applying the 10 percent gross
income test to the average of the gross incomes for the four years preceding the taxable year.

Example. PHQ is a corporation resident in Poland. PHQ functions as a headquarters
company for a group of companies. These companies are resident in the United States, Canada,
New Zealand, the United Kingdom, Malaysia, the Philippines, Singapore, and Indonesia. The
gross income generated by each of these companies for 2012 and 2013 is as follows:

Country 2012 2013
United States $40 $45
Canada $25 $15
New Zealand $10 $20
United Kingdom $30 $35
Malaysia $10 $12

Philippines $7 $10
Singapore $10 $8
Indonesia $5 $10
Total $137 $155

For 2012, 10 percent of the gross income of this group is equal to $13.70. Only the
United States, Canada, and the United Kingdom satisfy this requirement for that year. The other
countries may be aggregated to meet this requirement. Because New Zealand and Malaysia have
a total gross income of $20, and the Philippines, Singapore, and Indonesia have a total gross
income of $22, these two groupings of countries may be treated as the fourth and fifth members
of the group for purposes of subparagraph 5(b).

In the following year, 10 percent of the gross income is $15.50. Only the United States,
New Zealand, and the United Kingdom satisfy this requirement. Because Canada and Malaysia
have a total gross income of $27, and the Philippines, Singapore, and Indonesia have a total
gross income of $28, these two groupings of countries may be treated as the fourth and fifth
members of the group for purposes of subparagraph 5(b). The fact that Canada replaced New
Zealand in a group is not relevant for this purpose. The composition of the grouping may change
from year to year.

Single Country Limitation

Subparagraph 5(c) provides that the business activities carried on in any one country
other than the headquarters company’s State of residence must generate less than 50 percent of
the gross income of the group. If the gross income requirement under this subparagraph is not
met for a taxable year, the taxpayer may satisfy this requirement by applying the 50 percent
gross income test to the average of the gross incomes for the four years preceding the taxable
year. The following example illustrates the application of this clause.

Example. PHQ is a corporation resident in Poland. PHQ functions as a headquarters
company for a group of companies. PHQ derives dividend income from a United States
subsidiary in the 2008 taxable year. The state of residence of each of these companies, the situs
of their activities and the amounts of gross income attributable to each for the years 2008 through
2012 are set forth below.

Country Situs 2012 2011 2010 2009 2008
United States U.S. $100 $100 $95 $90 $85
Mexico U.S. $10 $8 $5 $0 $0
Canada U.S. $20 $18 $16 $15 $12
United Kingdom U.K $30 $32 $30 $28 $27
New Zealand N.Z. $35 $42 $38 $36 $35
Japan Japan $35 $32 $30 $30 $28
Singapore Singapore $30 $25 $24 $22 $20
Total $260 $257 $238 $221 $207

Because the United States’ total gross income of $130 in 2012 is not less than 50 percent
of the gross income of the group, subparagraph 5(c) is not satisfied with respect to dividends
derived in 2012. However, the United States’ average gross income for the preceding four years
may be used in lieu of the preceding year’s average. The United States’ average gross income
for the years 2008-11 is $111.00 ($444/4). The group’s total average gross income for these
years is $230.75 ($923/4). Because $111 represents 48.1 percent of the group’s average gross
income for the years 2008 through 2011, the requirement under subparagraph 5(c) is satisfied.

Other State Gross Income Limitation

Subparagraph 5(d) provides that no more than 25 percent of the headquarters company’s
gross income may be derived from the other Contracting State. Thus, if the headquarters
company’s gross income for the taxable year is $200, no more than $50 of this amount may be
derived from the other Contracting State. If the gross income requirement under this
subparagraph is not met for a taxable year, the taxpayer may satisfy this requirement by applying
the 25 percent gross income test to the average of the gross incomes for the four years preceding
the taxable year.

Independent Discretionary Authority

Subparagraph 5(e) requires that the headquarters company have and exercise independent
discretionary authority to carry out the functions referred to in subparagraph 5(a). Thus, if the
headquarters company was nominally responsible for group financing, pricing, marketing and
other management functions, but merely implemented instructions received from another entity,
the headquarters company would not be considered to have and exercise independent
discretionary authority with respect to these functions. This determination is made individually
for each function. For instance, a headquarters company could be nominally responsible for
group financing, pricing, marketing and internal auditing functions, but another entity could be
actually directing the headquarters company as to the group financing function. In such a case,
the headquarters company would not be deemed to have independent discretionary authority for
group financing, but it might have such authority for the other functions. Functions for which
the headquarters company does not have and exercise independent discretionary authority are
considered to be conducted by an entity other than the headquarters company for purposes of
subparagraph 5(a).

Income Taxation Rules

Subparagraph 2(f) requires that the headquarters company be subject to the generally
applicable income taxation rules in its country of residence. This reference should be understood
to mean that the company must be subject to the income taxation rules to which a company
engaged in the active conduct of a trade or business would be subject. Thus, if one of the
Contracting States has or introduces special taxation legislation that imposes a lower rate of
income tax on headquarters companies than is imposed on companies engaged in the active
conduct of a trade or business, or provides for an artificially low taxable base for such
companies, a headquarters company subject to these rules is not entitled to the benefits of the
Convention under paragraph 5.

In Connection With or Incidental to Trade or Business

Subparagraph 5(g) requires that the income derived in the other Contracting State be
derived in connection with or be incidental to the active business activities referred to
subparagraph 5(b). This determination is made under the principles set forth in paragraph 3. For
instance, assume that a Polish company satisfies the other requirements in paragraph 5 and acts
as a headquarters company for a group that includes a U.S. corporation. If the group is engaged
in the design and manufacture of computer software, but the U.S. corporation is also engaged in
the design and manufacture of photocopying machines, the income that the Polish company
derives from the United States would have to be derived in connection with or be incidental to
the income generated by the computer business in order to be entitled to the benefits of the
Convention under paragraph 5. Interest income received from the U.S. corporation also would
be entitled to the benefits of the Convention under this subparagraph as long as the interest was
attributable to the computer business supervised by the headquarters company. Interest income
derived from an unrelated party would normally not, however, satisfy the requirements of this
clause.

Paragraph 6

Paragraph 6 deals with the treatment of income in the context of a so-called “triangular
case.” The term “triangular case” refers to the use of a structure like the one described in the
following paragraph by a resident of Poland to earn income from the United States:

A resident of Poland, who would, absent paragraph 6, qualify for benefits under one or
more of the provisions of this Article, sets up a permanent establishment in a third state that
imposes a low or zero rate of tax on the income of the permanent establishment. The resident of
Poland lends funds into the United States through the permanent establishment. The permanent
establishment, despite its third-jurisdiction location, is an integral part of the resident of Poland.
Therefore, the income that it earns on those loans, absent the provisions of paragraph 6, is
entitled to exemption from U.S. withholding tax under the Convention. Under a current income
tax treaty between Poland and the host jurisdiction of the permanent establishment, the income
of the permanent establishment is exempt from tax by Poland (alternatively, Poland may choose
to exempt the income of the permanent establishment from income tax). Thus, the interest
income, absent paragraph 6, would be exempt from U.S. tax, subject to little or no tax in the host
jurisdiction of the permanent establishment, and exempt from tax in Poland.

Paragraph 6 provides that the tax benefits that would otherwise apply under the
Convention will not apply to any item of income if the combined aggregate effective tax rate in
the residence State and the third state is less than 60 percent of the general rate of company tax
applicable in the residence State. In the case of dividends, interest and royalties to which this
paragraph applies, the withholding tax rates under the Convention are replaced with a 15 percent
withholding tax. Any other income to which the provisions of paragraph 6 apply is subject to tax
under the domestic law of the source State, notwithstanding any other provisions of the
Convention.

In general, the principles employed under Code section 954(b)(4) will be employed to
determine whether the profits are subject to an effective rate of taxation that is above the
specified threshold.

Notwithstanding the level of tax on interest and royalty income of the permanent
establishment, paragraph 6 will not apply under certain circumstances. In the case of royalties,
paragraph 6 will not apply if the royalties are received as compensation for the use of, or the
right to use, intangible property produced or developed by the permanent establishment itself. In
the case of any other income, paragraph 6 will not apply if that income is derived in connection
with, or is incidental to, the active conduct of a trade or business carried on by the permanent
establishment in the third state. The business of making, managing or simply holding
investments is not considered to be an active trade or business, unless these are securities
activities carried on by a registered securities dealer.

Paragraph 6 applies reciprocally. However, the United States does not exempt the profits
of a third-jurisdiction permanent establishment of a U.S. resident from U.S. tax, either by statute
or by treaty.

Paragraph 7
Paragraph 7 provides that a resident of one of the States that is not entitled to the benefits
of the Convention as a result of paragraphs 1 through 3 still may be granted benefits under the
Convention at the discretion of the competent authority of the State from which benefits are
claimed if the resident demonstrates that neither its establishment, acquisition, or maintenance,
nor the conduct of its operations, has or had as one of its principal purposes the obtaining of
benefits under the Convention. Thus, persons that establish operations in one of the Contracting
States with a principal purpose of obtaining the benefits of the Convention will not be granted
benefits of the Convention under paragraph 7. In order to be granted benefits under paragraph 7,
a company must establish to the satisfaction of the competent authority of the State from which
benefits are being claimed clear non-tax business reasons for its formation, acquisition, or
maintenance in the other Contracting State, which demonstrate a sufficient nexus or relationship
to the other Contracting State, taking into account considerations other than those addressed
through the objective tests in paragraphs 1 through 3, and that the allowance of benefits would
not otherwise be contrary to the purposes of the Convention. For example, in the case of a
resident subsidiary company with a parent in a third state, the fact that the relevant withholding
rate provided in the Convention is at least as low as the corresponding withholding rate in the tax
treaty between the State of source and the third state is not by itself evidence of a nexus or
relationship to the other Contracting State. Similarly, where a foreign corporation is engaged in
a portable business such as financing, or where the domestic law of a Contracting State provides
a special tax treatment for certain activities conducted offshore (e.g., licensing intangibles) or in
special zones, those factors will not be evidence of a non-tax business reason for locating in that
State. In such cases, additional favorable business factors must be present to establish a nexus to
that State.
The competent authority's discretion is quite broad. It may grant all of the benefits of the
Convention to the taxpayer making the request, or it may grant only certain benefits. For

instance, it may grant benefits only with respect to a particular item of income in a manner
similar to paragraph 3. Further, the competent authority may establish conditions, such as setting
time limits on the duration of any relief granted.
For purposes of implementing paragraph 7, a taxpayer will be permitted to present his
case to the relevant competent authority for an advance determination based on the facts. In
these circumstances, it is also expected that, if the competent authority determines that benefits
are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant
treaty provision or the establishment of the structure in question, whichever is later.
Finally, there may be cases in which a resident of a Contracting State may apply for
discretionary relief to the competent authority of his State of residence. This would arise, for
example, if the benefit it is claiming is provided by the residence country, and not by the source
country. So, for example, if a company that is a resident of the United States would like to claim
the benefit of the re-sourcing rule of paragraph 3 of Article 23, but it does not meet any of the
objective tests of paragraphs 2 and 3, it may apply to the U.S. competent authority for
discretionary relief.

Paragraph 8

Paragraph 8 defines several key terms for purposes of the Article. Each of the defined
terms is discussed above in the context in which it is used.

ARTICLE 23 (RELIEF FROM DOUBLE TAXATION)

This Article describes the manner in which each Contracting State undertakes to relieve
double taxation. The United States uses the foreign tax credit method under its domestic law and
by treaty.

Paragraph 1

Paragraph 1 provides that Poland will apply two rules to avoid double taxation. First,
under subparagraph 1(a), where a resident of Poland derives income which, in accordance with
the provisions of this Convention may be taxed in the United States, Poland shall, subject to the
provisions of subparagraph 1(b), exempt such income from tax. Second, under subparagraph
1(b), where a resident of Poland derives income or capital gains which, in accordance with the
provisions of Articles 10 (Dividends), 11 (Interest), 13 (Royalties), 14 (Capital Gains) or 21
(Other Income) may be taxed in the United States, Poland shall allow as a deduction from the tax
on the income or capital gains of that resident an amount equal to the tax paid to the United
States. Such deduction shall not, however, exceed that part of the tax, as computed before the
deduction is given, which is attributable to such income or capital gains derived from the United
States. Subparagraph 1(c) provides a so-called “exemption with progression” rule. Where in
accordance with any provision of this Convention, income derived by a resident of Poland is
exempt from tax in Poland, Poland may nevertheless, in calculating the amount of tax on the
remaining income of such resident, take into account the exempted income.

Paragraph 2

The United States agrees, in paragraph 2, to allow to its citizens and residents a credit
against U.S. tax for income taxes paid or accrued to Poland. Paragraph 2 also provides that the
other Contracting State’s covered taxes are income taxes for U.S. purposes.

Subparagraph 2(b) provides for a deemed-paid credit, consistent with section 902 of the
Code, to a U.S. corporation in respect of dividends received from a corporation resident in
Poland of which the U.S. corporation owns at least 10 percent of the voting stock. This credit is
for the tax paid by the corporation to the other Contracting State on the profits out of which the
dividends are considered paid.

The credits allowed under paragraph 2 are in accordance with the provisions and subject
to the limitations of U.S. law, as that law may be amended over time, so long as the general
principle of the Article, that is, the relief of double taxation, is retained. Thus, although the
Convention provides for a foreign tax credit, the terms of the credit are generally determined by
the U.S. domestic law in effect for the taxable year for which the credit is allowed. See, e.g.,
Code sections 901-909 and the regulations thereunder. For example, the credit against U.S. tax
generally is limited to the amount of U.S. tax due with respect to net foreign source income
within the relevant foreign tax credit limitation category (see, Code section 904(a) and (d)), and
the dollar amount of the credit is determined in accordance with U.S. currency translation rules
(see, e.g., Code section 986). Similarly, U.S. law applies to determine carryover periods for
excess credits and other inter-year adjustments.

Paragraph 3

Paragraph 3 provides that certain items of gross income that would be otherwise treated
as from sources within the United States will be treated as from sources within Poland for
purposes of paragraph 2. Paragraph 3 is intended to ensure that a U.S. resident can obtain an
appropriate amount of U.S. foreign tax credit for income taxes paid to Poland when the
Convention assigns to Poland primary taxing rights over an item of gross income.

Accordingly, if the Convention allows Poland to tax an item of gross income (as defined
under U.S. law) derived by a resident of the United States, the United States will treat that item
of gross income as gross income from sources within Poland for U.S. foreign tax credit purposes.
In the case of a U.S.-owned foreign corporation, however, section 904(h)(10) may apply for
purposes of determining the U.S. foreign tax credit with respect to income subject to this re-
sourcing rule. Section 904(h)(10) generally applies the foreign tax credit limitation separately to
re-sourced income. See also, Code sections 865(h) and 904(d)(6). Because paragraph 3 applies
to items of gross income, not net income, U.S. expense allocation and apportionment rules (see,
e.g., Treas. Reg. 1.861-9 and -9T) continue to apply to income resourced under paragraph 3.

Paragraph 4

Paragraph 4 provides special rules for the tax treatment in both States of certain types of
income derived from U.S. sources by U.S. citizens who are residents of Poland. Since U.S.

citizens, regardless of residence, are subject to United States 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
Poland may exceed the U.S. tax that may be imposed under the Convention on an item of U.S.-
source income derived by a resident of Poland who is not a U.S. citizen. The provisions of
paragraph 4 ensure that Poland does not bear the cost of U.S. taxation of its citizens who are
residents of Poland.

Subparagraph 4(a) provides, with respect to items of income from sources within the
United States, special credit rules for the other Contracting State. These rules apply to items of
U.S.-source income that would be either exempt from U.S. tax or subject to reduced rates of U.S.
tax under the provisions of the Convention if they had been received by a resident of Poland who
is not a U.S. citizen. The tax credit allowed under paragraph 4 with respect to such items need
not exceed the U.S. tax that may be imposed under the Convention, other than tax imposed
solely by reason of the U.S. citizenship of the taxpayer under the provisions of the saving clause
of paragraph 4 of Article 1 (General Scope).

For example, if a U.S. citizen resident in Poland receives portfolio dividends from
sources within the United States, the foreign tax credit granted by Poland 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.

Subparagraph 4(b) eliminates the potential for double taxation that can arise because
subparagraph 4(a) provides that Poland need not provide full relief for the U.S. tax imposed on
its citizens resident in the other Contracting State. The subparagraph provides that the United
States will credit the income tax paid or accrued to Poland, after the application of subparagraph
4(a). It further provides that in allowing the credit, the United States will not reduce its tax
below the amount that is taken into account in Poland in applying subparagraph 4(a).

Since the income described in paragraph 4(a) generally will be U.S. source income,
special rules are required to re-source some of the income to Poland in order for the United
States to be able to credit the tax paid to the other Contracting State. This re-sourcing is
provided for in subparagraph 4(c), which deems the items of income referred to in subparagraph
4(a) to be from foreign sources to the extent necessary to avoid double taxation under paragraph
4(b).

The following two examples illustrate the application of paragraph 4 in the case of a
U.S.-source portfolio dividend received by a U.S. citizen resident in Poland. In both examples,
the U.S. rate of tax on residents of the Poland, under subparagraph 2(b) of Article 10 (Dividends)
of the Convention, is 15 percent. In both examples, the U.S. income tax rate on the U.S. citizen is
35 percent. In example 1, the rate of income tax imposed in Poland on its resident (the U.S.
citizen) is 25 percent (below the U.S. rate), and in example 2, the rate imposed on its resident is
40 percent (above the U.S. rate).

Example 1
Example 2
Subparagraph (a)

U.S. dividend declared $100.00 $100.00
Notional U.S. withholding tax (Article 10(2)(b)) 15.00 15.00
Taxable income in Poland 100.00 100.00
Polish tax before credit 25.00 40.00
Less: tax credit for notional U.S. withholding tax 15.00 15.00
Net post-credit tax paid to Poland 10.00 25.00

Subparagraphs (b) and (c)

U.S. pre-tax income $100.00 $100.00
U.S. pre-credit citizenship tax 35.00 35.00
Notional U.S. withholding tax 15.00 15.00
U.S. tax eligible to be offset by credit 20.00 20.00
Tax paid to Poland 10.00 25.00
Income re-sourced from U.S. to foreign source (see below) 28.57 57.14
U.S. pre-credit tax on re-sourced income 10.00 20.00
U.S. credit for tax paid to Poland 10.00 20.00
Net post-credit U.S. tax 10.00 0.00
Total U.S. tax 25.00 15.00

In both examples, in the application of subparagraph 4(a), Poland credits a 15 percent
U.S. tax against its residence tax on the U.S. citizen. In the first example, the net tax paid to
Poland after the foreign tax credit is $10.00; in the second example, it is $25.00. In the
application of subparagraphs 4(b) and 4(c), from the U.S. tax due before credit of $35.00, the
United States subtracts the amount of the U.S. source tax of $15.00, against which no U.S.
foreign tax credit is allowed. This subtraction ensures that the United States collects the tax that
it is due under the Convention as the State of source.

In both examples, given the 35 percent U.S. tax rate, the maximum amount of U.S. tax
against which credit for the tax paid to Poland may be claimed is $20 ($35 U.S. tax minus $15
U.S. withholding tax). Initially, all of the income in both examples was from sources within the
United States. For a U.S. foreign tax credit to be allowed for the full amount of the tax paid to
Poland, an appropriate amount of the income must be re-sourced to Poland under subparagraph
4(c).

The amount that must be re-sourced depends on the amount of tax for which the U.S.
citizen is claiming a U.S. foreign tax credit. In example 1, the tax paid to Poland was $10. For
this amount to be creditable against U.S. tax, $28.57 ($10 tax divided by 35 percent U.S. tax
rate) must be resourced to Poland. When the tax is credited against the $10 of U.S. tax on this
resourced income, there is a net U.S. tax of $10 due after credit ($20 U.S. tax eligible to be offset
by credit, minus $10 tax paid to the other Contracting State). Thus, in example 1, there is a total
of $25 in U.S. tax ($15 U.S. withholding tax plus $10 residual U.S. tax).

In example 2, the tax paid to Poland was $25, but, because the United States subtracts the
U.S. withholding tax of $15 from the total U.S. tax of $35, only $20 of U.S. taxes may be offset

by taxes paid to Poland. Accordingly, the amount that must be resourced to Poland is limited to
the amount necessary to ensure a U.S. foreign tax credit for $20 of tax paid to Poland, or $57.14
($20 tax paid to Poland divided by 35 percent U.S. tax rate). When the tax paid to Poland is
credited against the U.S. tax on this re-sourced income, there is no residual U.S. tax ($20 U.S.
tax minus $25 tax paid to the other Contracting State, subject to the U.S. limit of $20). Thus, in
example 2, there is a total of $15 in U.S. tax ($15 U.S. withholding tax plus $0 residual U.S. tax).
Because the tax paid to Poland was $25 and the U.S. tax eligible to be offset by credit was $20,
there is $5 of excess foreign tax credit available for carryover.

The above examples illustrate the application of paragraph 4 to a single item of gross
income. However, taxpayers may encounter situations in which they may have to calculate the
foreign tax credit on net income, in which case other methodologies could be applied to achieve
the intent of paragraph 4.

Paragraph 5

Paragraph 5 coordinates the tax systems of the Contracting States to avoid double
taxation that could result from the imposition of exit tax regimes on individuals who relinquish
citizenship or long-term residence status. In the case of the United States, paragraph 5 addresses
the mark-to-market exit tax regime applicable to “covered expatriates” within the meaning of
Code section 877A(g)(1). Paragraph 5 would also address any analogous taxes imposed by
Poland. This rule is intended to coordinate taxation by the United States and Poland of taxable
gains in the case of a timing mismatch. Such a mismatch may occur, for example, where a U.S.
citizen or long-term resident (within the meaning of Code section 877(e)(2)) recognizes, for U.S.
tax purposes, taxable gain on a deemed sale of all property on the day before the individual
expatriates to Poland.

To avoid double taxation, paragraph 5 provides that where an individual who, upon
ceasing to be a resident (as determined under paragraph 1 of Article 4 (Resident)) of one
Contracting State, is treated for purposes of taxation by that State as having alienated property
and is taxed by that State by reason thereof, the individual may elect to be treated for the
purposes of taxation by the other Contracting State as having sold and repurchased the property
for its fair market value on the day before the expatriation date. The election in paragraph 5
therefore may be available to any U.S. citizen or long-term resident who expatriates from the
United States to Poland. The effect of the election will be to give the individual an adjusted
basis in Poland for tax purposes equal to the fair market value of the property as of the date of
the deemed alienation in the United States, with the result that only post-emigration gain will be
subject to tax in Poland when there is an actual alienation of the property while the individual is
a resident of Poland.

Individuals may make the election provided by paragraph 5 only with respect to property
that is subject to a Contracting State’s deemed disposition rules and only with respect to which
gain on a deemed alienation is recognized for that Contracting State’s tax purposes in the taxable
year of the deemed alienation. In the United States, the following types of property are excluded
from the deemed disposition rules in the case of individuals who cease to be citizens or long term
residents of the United States: (1) an eligible deferred compensation item as defined under Code

section 877A(d)(3), and (2) an interest in a non-grantor trust as defined under Code section
877A(f)(3) (unless the individual elects to take the value of the interest in the trust into account
pursuant to procedures prescribed by the IRS pursuant to Code section 877A(f)(4)(B)).

If an individual recognizes in one Contracting State losses and gains from the deemed
alienation of multiple properties, then the individual must apply this paragraph consistently with
respect to all such properties in both Contracting States. An individual who is deemed to have
alienated multiple properties may only make the election under this paragraph if the deemed
alienation of all such properties results in a net taxable gain. If the deemed alienation of the
multiple properties results in a net loss, then an election under this paragraph may not be made
with respect to any such properties.

The other Contracting State is only required to provide a basis adjustment to the extent
that tax is actually paid in the first-mentioned Contracting State. Thus, to the extent that the
deemed alienation of properties results in a net gain, but no tax is actually paid on such gain due
to an exclusion provision or other mechanism provided under the domestic law of the first-
mentioned Contracting State, the other Contracting State is not required to provide a basis
adjustment. Under the domestic law of the United States, Code section 877A(a)(3) provides an
exclusion for certain gain up to $600,000 (as indexed for inflation). Poland also is not required
to provide a basis adjustment with respect to tax that is deferred pursuant to Code section
877A(b).

Relationship to other Articles

By virtue of subparagraph 5(a) of Article 1 (General Scope), Article 23 is not subject to
the saving clause of paragraph 4 of Article 1. Thus, the United States will allow a credit to its
citizens and residents in accordance with the Article, even if such credit were to provide a benefit
not available under the Code (such as the re-sourcing provided by paragraph 3 and subparagraph
4(c)). In addition, even though the United States is explicitly granting U.S. citizens and residents
a benefit under paragraph 5, the exception to the saving clause clarifies that under paragraph 5,
the United States will not tax individuals that become U.S. citizens or residents on certain pre-
emigration gain that it couldn’t otherwise tax under the Convention at the time of the deemed
disposition pursuant to a paragraph 5 election.

ARTICLE 24 (NON-DISCRIMINATION)

This Article ensures that nationals of a Contracting State, in the case of paragraph 1, and
residents of a Contracting State, in the case of paragraphs 2 through 5, will not be subject,
directly or indirectly, to discriminatory taxation in the other Contracting State. Not all
differences in tax treatment, either as between nationals of the two States, or between residents
of the two States, are violations of the prohibition against discrimination. Rather, the non-
discrimination obligations of this Article apply only if the nationals or residents of the two States
are comparably situated.

Each of the relevant paragraphs of the Article provides that two persons that are
comparably situated must be treated similarly. Although the actual words differ from paragraph

to paragraph (e.g., paragraph 1 refers to two nationals "in the same circumstances," paragraph 2
refers to two enterprises "carrying on the same activities," and paragraph 4 refers to two
enterprises that are "similar"), the common underlying premise is that if the difference in
treatment is directly related to a tax-relevant difference in the situations of the domestic and
foreign persons being compared, that difference is not to be treated as discriminatory (i.e ., if one
person is taxable in a Contracting State on worldwide income and the other is not, or tax may be
collectible from one person at a later stage, but not from the other, distinctions in treatment
would be justified under paragraph 1). Other examples of such factors that can lead to non-
discriminatory differences in treatment are noted in the discussions of each paragraph.

The operative paragraphs of the Article also use different language to identify the kinds
of differences in taxation treatment that will be considered discriminatory. For example,
paragraphs 1 and 4 speak of “any taxation or any requirement connected therewith that is more
burdensome,” while paragraph 2 specifies that a tax “shall not be less favorably levied.”
Regardless of these differences in language, only differences in tax treatment that materially
disadvantage the foreign person relative to the domestic person are properly the subject of the
Article.

Paragraph 1

Paragraph 1 provides that a national of one Contracting State may not be subject to
taxation or connected requirements in the other Contracting State that are more burdensome than
the taxes and connected requirements imposed upon a national of that other State in the same
circumstances. Since paragraph 1 prevents different treatment based on nationality, but only
with respect to persons “in the same circumstances, in particular with respect to residence,” it is
important to distinguish, for purposes of the paragraph, a different treatment that is solely based
on nationality from a different treatment that relates to other circumstances and, in particular,
taxation on worldwide income.

The term “national” in relation to a Contracting State is defined in subparagraph 1(j) of
Article 3 (General Definitions). The term includes both individuals and juridical persons.
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 Poland as a national of Poland
who is in similar circumstances (i.e., presumably one who is resident in a third State).

As noted above, whether or not the two persons are both taxable on worldwide income is
a significant circumstance for this purpose. Accordingly, the United States is not obligated to
apply the same taxing regime to a national of Poland who is not resident in the United States as it
applies to a U.S. national who is not resident in the United States. U. S. citizens who are not
residents of the United States but who are nevertheless subject to U. S. tax on their worldwide
income are not in the same circumstances with respect to U. S. taxation as citizens of Poland
who are not U. S. residents. Thus, for example, Article 24 would not entitle a national of Poland
resident in a third country to taxation at graduated rates on U.S. source dividends or other invest-
ment income that applies to a U.S. citizen resident in the same third country.

Paragraph 2

Paragraph 2 of the Article, provides that a Contracting State may not tax a permanent
establishment of an enterprise of the other Contracting State less favorably than an enterprise of
that first-mentioned State that is carrying on the same activities.

The fact that a U.S. permanent establishment of an enterprise of Poland is subject to U.S.
tax only on income that is attributable to the permanent establishment, while a U.S. corporation
engaged in the same activities is taxable on its worldwide income is not, in itself, a sufficient
difference to provide different treatment for the permanent establishment. There are cases,
however, where the two enterprises would not be similarly situated and differences in treatment
may be warranted. For instance, it would not be a violation of the non-discrimination protection
of paragraph 2 to require the foreign enterprise to provide information in a reasonable manner
that may be different from the information requirements imposed on a resident enterprise,
because information may not be as readily available to the Internal Revenue Service from a
foreign as from a domestic enterprise. Similarly, it would not be a violation of paragraph 2 to
impose penalties on persons who fail to comply with such a requirement (see, e.g., sections
874(a) and 882(c)(2)). Further, a determination that income and expenses have been attributed
or allocated to a permanent establishment in conformity with the principles of Article 7
(Business Profits) implies that the attribution or allocation was not discriminatory.

Section 1446 of the Code imposes the obligation to withhold tax on amounts allocable to
a foreign partner on any partnership with income that is effectively connected with a U.S. trade
or business. In the context of the Convention, this obligation applies with respect to a share of
the partnership income of a partner resident in Poland, and attributable to a U.S. permanent
establishment. There is no similar obligation with respect to the distributive shares of U.S.
resident partners. It is understood, however, that this distinction is not a form of discrimination
within the meaning of paragraph 2 of the Article. No distinction is made between U.S. and non-
U.S. partnerships, since the law requires that partnerships of both U.S. and non-U.S. domicile
withhold tax in respect of the partnership shares of non-U.S. partners. Furthermore, in
distinguishing between U.S. and non-U.S. partners, the requirement to withhold on the non-U.S.
but not the U.S. partner's share is not discriminatory taxation, but, like other withholding on
nonresident aliens, is merely a reasonable method for the collection of tax from persons who are
not continually present in the United States, and as to whom it otherwise may be difficult for the
United States to enforce its tax jurisdiction. If tax has been over-withheld, the partner can, as in
other cases of over-withholding, file for a refund.

Paragraph 3

Paragraph 3 makes clear that the provisions of paragraphs 1 and 2 do not obligate a
Contracting State to grant to a resident of the other Contracting State any tax allowances, reliefs,
etc., that it grants to its own residents on account of their civil status or family responsibilities.
Thus, if a sole proprietor who is a resident of Poland has a permanent establishment in the United
States, in assessing income tax on the profits attributable to the permanent establishment, the
United States is not obligated to allow to the resident of Poland the personal allowances for
himself and his family that he would be permitted to take if the permanent establishment were a

sole proprietorship owned and operated by a U.S. resident, despite the fact that the individual
income tax rates would apply.

Paragraph 4

Paragraph 4 prohibits discrimination in the allowance of deductions. When a resident or
an enterprise of a Contracting State pays interest, royalties or other disbursements to a resident of
the other Contracting State, the first-mentioned Contracting State must allow a deduction for
those payments in computing the taxable profits of the resident or enterprise as if the payment
had been made under the same conditions to a resident of the first-mentioned Contracting State.
Paragraph 3, however, does not require a Contracting State to give non-residents more favorable
treatment than it gives to its own residents. Consequently, a Contracting State does not have to
allow non-residents a deduction for items that are not deductible under its domestic law (for
example, expenses of a capital nature).

The term "other disbursements" is understood to include a reasonable allocation of
executive and general administrative expenses, research and development expenses and other
expenses incurred for the benefit of a group of related persons that includes the person incurring
the expense.

An exception to the rule of paragraph 4 is provided for cases where the provisions of
paragraph 1 of Article 9 (Associated Enterprises), paragraph 8 of Article 11 (Interest) or para-
graph 6 of Article 13 (Royalties) apply. All of these provisions permit the denial of deductions
in certain circumstances in respect of transactions between related persons. Neither State is
forced to apply the non-discrimination principle in such cases. The exception with respect to
paragraph 8 of Article 11 would include the denial or deferral of certain interest deductions
under Code section 163(j).

Paragraph 4 also provides that any debts of an enterprise of a Contracting State to a
resident of the other Contracting State are deductible in the first-mentioned Contracting State for
purposes of computing the capital tax of the enterprise under the same conditions as if the debt
had been contracted to a resident of the first-mentioned Contracting State. Even though, for
general purposes, the Convention covers only income taxes, under paragraph 7 of this Article,
the non-discrimination provisions apply to all taxes levied in both Contracting States, at all levels
of government. Thus, this provision may be relevant for both States. The other Contracting
State may have capital taxes and in the United States such taxes frequently are imposed by local
governments.

Paragraph 5

Paragraph 5 requires that a Contracting State not impose more burdensome taxation or
connected requirements on an enterprise of that State that is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other Contracting State than the
taxation or connected requirements that it imposes on other similar enterprises of that first-
mentioned Contracting State. For this purpose it is understood that “similar” refers to similar
activities or ownership of the enterprise.

This rule, like all non-discrimination provisions, does not prohibit differing treatment of
entities that are in differing circumstances. Rather, a protected enterprise is only required to be
treated in the same manner as other enterprises that, from the point of view of the application of
the tax law, are in substantially similar circumstances both in law and in fact. The taxation of a
distributing corporation under section 367(e) on an applicable distribution to foreign
shareholders does not violate paragraph 5 of the Article because a foreign-owned corporation is
not similar to a domestically-owned corporation that is accorded non-recognition treatment under
sections 337 and 355.

For the reasons given above in connection with the discussion of paragraph 2 of the
Article, it is also understood that the provision in section 1446 of the Code for withholding of tax
on non-U.S. partners does not violate paragraph 5 of the Article.

It is further understood that the ineligibility of a U.S. corporation with nonresident alien
shareholders to make an election to be an "S" corporation does not violate paragraph 5 of the
Article. If a corporation elects to be an S corporation, it is generally not subject to income tax
and the shareholders take into account their pro rata shares of the corporation's items of income,
loss, deduction or credit. A nonresident alien does not pay U.S. tax on a net basis, and, thus,
does not generally take into account items of loss, deduction or credit. Therefore, the S
corporation provisions do not exclude corporations with nonresident alien shareholders because
such shareholders are foreign, but only because they are not net-basis taxpayers. Similarly, the
provisions exclude corporations with other types of shareholders where the purpose of the
provisions cannot be fulfilled or their mechanics implemented. For example, corporations with
corporate shareholders are excluded because the purpose of the provision to permit individuals to
conduct a business in corporate form at individual tax rates would not be furthered by their
inclusion.

Finally, it is understood that paragraph 5 does not require a Contracting State to allow
foreign corporations to join in filing a consolidated return with a domestic corporation or to
allow similar benefits between domestic and foreign enterprises.

Paragraph 6

Paragraph 6 of the Article confirms that no provision of the Article will prevent either
Contracting State from imposing the branch profits tax described in paragraph 1 of Article 12
(Branch Profits).

Paragraph 7

As noted above, notwithstanding the specification of taxes covered by the Convention in
Article 2 (Taxes Covered) for general purposes, 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.

Relationship to Other Articles

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this
Article by virtue of the exceptions in subparagraph 5(a) of Article 1. Thus, for example, a U.S.
citizen who is a resident of the other Contracting State may claim benefits in the United States
under this Article.

Nationals of a Contracting State may claim the benefits of paragraph 1 regardless of
whether they are entitled to benefits under Article 22 (Limitation on Benefits), because that
paragraph applies to nationals and not residents. They may not claim the benefits of the other
paragraphs of this Article with respect to an item of income unless they are generally entitled to
treaty benefits with respect to that income under a provision of Article 22.

ARTICLE 25 (MUTUAL AGREEMENT PROCEDURE)

This Article provides the mechanism for taxpayers to bring to the attention of competent
authorities issues and problems that may arise under the Convention. It also provides the
authority for cooperation between the competent authorities of the Contracting States to resolve
disputes and clarify issues that may arise under the Convention and to resolve cases of double
taxation not provided for in the Convention. The competent authorities of the two Contracting
States are identified in paragraph 1(g) of Article 3 (General Definitions).

Paragraph 1

This paragraph provides that, where a resident of a Contracting State considers that the
actions of one or both Contracting States will result in taxation that is not in accordance with the
Convention, he may, irrespective of the remedies provided by the domestic laws of the two
Contracting States including any prescribed times limits for presenting claims for refund,
present his case to the competent authority of the Contracting State of which he is a resident, or
if his case comes under paragraph 1 of Article 24 (Non-Discrimination), to that of the
Contracting State of which he is a national. Paragraph 1 requires that the case must be presented
within three years from the first notification of the action resulting in taxation not in accordance
with the provisions of the Convention.

Although the typical cases brought under this paragraph will involve economic double
taxation arising from transfer pricing adjustments, the scope of this paragraph is not limited to
such cases. For example, a taxpayer could request assistance from the competent authority if one
Contracting State determines that the taxpayer has received deferred compensation taxable at
source under Article 14 (Income from Employment), while the taxpayer believes that such
income should be treated as a pension that is taxable only in his country of residence pursuant to
Article 18 (Pensions, Social Security, Annuities, Alimony, and Child Support).

Paragraph 2

Paragraph 2 sets out the framework within which the competent authorities will deal with
cases brought by taxpayers under paragraph 1. It provides that, if the competent authority of the

Contracting State to which the case is presented judges the case to have merit, and cannot reach a
unilateral solution, it shall seek an agreement with the competent authority of the other
Contracting State pursuant to which taxation not in accordance with the Convention will be
avoided.

Any agreement is to be implemented even if such implementation otherwise would be
barred by the statute of limitations or by some other procedural limitation, such as a closing
agreement. Paragraph 2, however, does not prevent the application of domestic-law procedural
limitations that give effect to the agreement (e.g., a domestic-law requirement that the taxpayer
file a return reflecting the agreement within one year of the date of the agreement).

Where the taxpayer has entered a closing agreement (or other written settlement) with
the United States before bringing a case to the competent authorities, the U.S. competent
authority will endeavor only to obtain a correlative adjustment from the other Contracting State.
See Rev. Proc. 2002-52, 2002-31 I.R.B. 242, § 7.04 (or any similarly applicable or successor
procedures). Because, as specified in paragraph 2 of Article 1 (General Scope), the Convention
cannot operate to increase a taxpayer’s liability, temporal or other procedural limitations can be
overridden only for the purpose of making refunds and not to impose additional tax. Thus, even
if the statute of limitations has expired, a refund of tax can be made in order to implement a
correlative adjustment.

Paragraph 3

Paragraph 3 authorizes the competent authorities to resolve difficulties or doubts that may
arise as to the application or interpretation of the Convention.

The competent authorities may, for example, agree to the same allocation of income,
deductions, credits or allowances between an enterprise in one Contracting State and its
permanent establishment in the other or between related persons. These allocations are to be
made in accordance with the arm's length principle underlying Article 7 (Business Profits) and
Article 9 (Associated Enterprises). Agreements reached under these subparagraphs may include
agreement on a methodology for determining an appropriate transfer price, on an acceptable
range of results under that methodology, or on a common treatment of a taxpayer's cost sharing
arrangement.

The competent authorities also may agree to settle a variety of conflicting applications of
the Convention. They may agree to settle conflicts regarding the characterization of particular
items of income, the characterization of persons, the application of source rules to particular
items of income, the meaning of a term, or the timing of an item of income.

The competent authorities may agree as to advance pricing arrangements. They also may
agree as to the application of the provisions of domestic law regarding penalties, fines, and
interest in a manner consistent with the purposes of the Convention.

The competent authorities may seek agreement on a uniform set of standards for the use
of exchange rates. Agreements reached by the competent authorities under paragraph 3 need not

conform to the internal law provisions of either Contracting State.

Paragraph 3 authorizes the competent authorities to consult for the purpose of eliminating
double taxation in cases not provided for in the Convention and to resolve any difficulties or
doubts arising as to the interpretation or application of the Convention. This provision is
intended to permit the competent authorities to implement the treaty in particular cases in a
manner that is consistent with its expressed general purposes. It permits the competent
authorities to deal with cases that are within the spirit of the provisions but that are not
specifically covered. An example of such a case might be double taxation arising from a transfer
pricing adjustment between two permanent establishments of a third-country resident, one in the
United States and one in Poland. Since no resident of a Contracting State is involved in the case,
the Convention does not apply, but the competent authorities nevertheless may use the authority
of this Article to prevent the double taxation of income.

Paragraph 4

Paragraph 4 provides that the competent authorities may communicate with each other
for the purpose of reaching an agreement. This makes clear that the competent authorities of the
two Contracting States may communicate without going through diplomatic channels. Such
communication may be in various forms, including, where appropriate, through a joint
commission consisting of themselves or their representatives.

Treaty termination in relation to competent authority dispute resolution

A case may be raised by a taxpayer under a treaty with respect to a year for which a
treaty was in force after the treaty has been terminated. In such a case the ability of the
competent authorities to act is limited. They may not exchange confidential information, nor
may they reach a solution that varies from that specified in its law.

Triangular competent authority solutions

International tax cases may involve more than two taxing jurisdictions (e.g., transactions
among a parent corporation resident in country A and its subsidiaries resident in countries B and
C). As long as there is a complete network of treaties among the three countries, it should be
possible, under the full combination of bilateral authorities, for the competent authorities of the
three States to work together on a three-sided solution. Although country A may not be able to
give information received under Article 26 (Exchange of Information) from country B to the
authorities of country C, if the competent authorities of the three countries are working together,
it should not be a problem for them to arrange for the authorities of country B to give the
necessary information directly to the tax authorities of country C, as well as to those of country
A. Each bilateral part of the trilateral solution must, of course, not exceed the scope of the
authority of the competent authorities under the relevant bilateral treaty.

Relationship to Other Articles

This Article is not subject to the saving clause of paragraph 4 of Article 1 (General

Scope) by virtue of the exceptions in paragraph 5(a) of that Article. Thus, rules, definitions,
procedures, etc. that are agreed upon by the competent authorities under this Article may be
applied by the United States with respect to its citizens and residents even if they differ from the
comparable Code provisions. Similarly, as indicated above, U.S. law may be overridden to
provide refunds of tax to a U.S. citizen or resident under this Article. A person may seek relief
under this Article regardless of whether he is generally entitled to benefits under Article 22
(Limitation on Benefits). As in all other cases, the competent authority is vested with the
discretion to decide whether the claim for relief is justified.

ARTICLE 26 (EXCHANGE OF INFORMATION)

This Article provides for the exchange of information and administrative assistance
between the competent authorities of the Contracting States. While mutual agreement
procedures are addressed in Article 25 (Mutual Agreement Procedure), exchanges of information
for purposes of the mutual agreement procedures are governed by this Article.

Paragraph 1

The obligation to obtain and provide information to the other Contracting State is set out
in Paragraph 1. The information to be exchanged is that which is foreseeably relevant for
carrying out the provisions of the Convention or the domestic laws of the United States or Poland
concerning taxes of every kind applied at the national level. This language incorporates the
standard of the OECD Model. The Contracting States intend for the phrase “is foreseeably
relevant” to be interpreted to permit the exchange of information that “may be relevant” for
purposes of Section 7602 of the Code, which authorizes the IRS to examine “any books, papers,
records, or other data which may be relevant or material” (emphasis added). In United States v.
Arthur Young & Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that the language
“may be” reflects Congress’s express intention to allow the IRS to obtain “items of even
potential relevance to an ongoing investigation, without reference to its admissibility” (emphasis
in original.) However, the language “may be” would not support a request in which a
Contracting State simply asked for information regarding all bank accounts maintained by
residents of that Contracting State in the other Contracting State. Thus, the language of
paragraph 1 is intended to provide for exchange of information in tax matters to the widest extent
possible, while clarifying that Contracting States are not at liberty to engage in “fishing
expeditions” or otherwise to request information that is unlikely to be relevant to the tax affairs
of a given taxpayer.

Consistent with the OECD Model, a request for information does not constitute a “fishing
expedition” solely because it does not provide the name or address (or both) of the taxpayer
under examination or investigation. In cases where the requesting State does not provide the
name or address (or both) of the taxpayer under examination or investigation, the requesting
State must provide other information sufficient to identify the taxpayer. Similarly, paragraph 1
does not necessarily require the request to include the name and/or address of the person
believed to be in possession of the information.

The standard of “foreseeable relevance” can be met in cases dealing with both one

taxpayer (whether identified by name or otherwise) or several taxpayers (whether identified by
name or otherwise). Where a Contracting State undertakes an investigation into an ascertainable
group or category of persons in accordance with its laws, any request related to the investigation
will typically serve the objective of carrying out the domestic tax laws of the requesting State
and thus will comply with the requirements of paragraph 1, provided it meets the standard of
“foreseeable relevance.” In such cases, the requesting State should provide, supported by a clear
factual basis, a detailed description of the group or category of persons and of the specific facts
and circumstances that have led to the request, as well as an explanation of the applicable law
and why there is reason to believe that the taxpayers in the group or category of persons for
whom information is requested have been non-compliant with that law. The requesting State
should further show that the requested information would assist in determining compliance by
the taxpayers in the group or category of persons.

Exchange of information with respect to each State’s domestic law is authorized to the
extent that taxation under domestic law is not contrary to the Convention. Thus, for example,
information may be exchanged under this Article even if the transaction to which the information
relates is a purely domestic transaction in the requesting State and, therefore, the exchange is not
made to carry out the Convention. An example of such a case is provided in subparagraph 8(b) of
the OECD Commentary: a company resident in one Contracting State and a company resident in
the other Contracting State transact business between themselves through a third-country
resident company. Neither Contracting State has a treaty with the third state. To enforce their
internal laws with respect to transactions of their residents with the third-country company (since
there is no relevant treaty in force), the Contracting States may exchange information regarding
the prices that their residents paid in their transactions with the third-country resident.

Paragraph 1 clarifies that information may be exchanged that relates to the assessment or
collection of, the enforcement or prosecution in respect of, or the determination of appeals in
relation to, taxes of every kind imposed by a Contracting State at the national level. Accordingly,
the competent authorities may request and provide information for cases under examination or
criminal investigation, in collection, on appeals, or under prosecution, and information may be
exchanged with respect to U.S. estate and gift taxes.

Information exchange is not restricted by paragraph 1 of Article 1 (General Scope).
Accordingly, information may be requested and provided under this Article with respect to
persons who are not residents of either Contracting State. For example, if a third-country resident
has a permanent establishment in the other Contracting State, and that permanent establishment
engages in transactions with a U.S. enterprise, the United States could request information with
respect to that permanent establishment, even though the third-country resident is not a resident
of either Contracting State. Similarly, if a third-country resident maintains a bank account in the
other Contracting State, and the Internal Revenue Service has reason to believe that funds in that
account should have been reported for U.S. tax purposes but have not been so reported,
information can be requested from the other Contracting State with respect to that person’s
account, even though that person is not the taxpayer under examination.

Although the term "United States" does not encompass U.S. possessions or territories for
most purposes of the Convention, section 7651 of the Code authorizes the Internal Revenue

Service to utilize the administrative and enforcement provisions of the Code in the U.S.
possessions or territories, including to obtain information pursuant to a proper request made
under Article 26. If necessary to obtain requested information, the Internal Revenue Service
could issue and enforce an administrative summons to the taxpayer, a tax authority (or other U.S.
possession or territory government agency), or a third party located in a U.S. possession or
territory.

Paragraph 2

Paragraph 2 provides assurances that any information exchanged will be treated as secret,
subject to the same disclosure constraints as information obtained under the laws of the
requesting State. The confidentiality rules cover communications between the competent
authorities (including the letter requesting information) as well as references to exchanged
information that may occur in other documents, such as advice by government attorneys to their
respective competent authorities. At the same time, it is understood that the requested State can
disclose the minimum information contained in a competent authority letter (but not the letter
itself) necessary for the requested State to be able to obtain or provide the requested information
to the requesting State, without frustrating the efforts of the requesting State. If, however, court
proceedings or the like under the domestic laws of the requested State necessitate the disclosure
of the competent authority letter itself, the competent authority of the requested State may
disclose such a letter unless the requesting State otherwise specifies.

Information received may be disclosed only to persons or authorities, including courts
and administrative bodies, involved in the assessment, collection, or administration of, the
enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes
referred to in paragraph 1. Under this standard, information may be communicated to the
taxpayer or his proxy. The information must be used by these persons only for the purposes
mentioned in paragraph 2. Information may also be disclosed to legislative bodies, such as the
tax-writing committees of the U.S. Congress and the U.S. Government Accountability Office,
engaged in the oversight of the preceding activities. Information received by these bodies must
be for use in the performance of their role in overseeing the administration of U.S. tax laws.
Information received may be disclosed in public court proceedings or in judicial decisions.

In situations in which the requested State determines that the requesting State does not
comply with its duties regarding the confidentiality of the information exchanged under this
Article, the requested State may suspend assistance under this Article until such time as proper
assurance is given by the requesting State that those duties will indeed be respected. If
necessary, the competent authorities may enter into specific arrangements or memoranda of
understanding regarding the confidentiality of the information exchanged under this Article.

Paragraph 3

Paragraph 3 provides that the obligations undertaken in paragraphs 1 and 2 to exchange
information do not require a Contracting State to carry out administrative measures that are at
variance with the laws or administrative practice of either State. Nor is a Contracting State

required to supply information not obtainable under the laws or administrative practice of either
State, or to disclose trade secrets or other information, the disclosure of which would be contrary
to public policy.

Thus, a requesting State may be denied information from the other State if the
information would be obtained pursuant to procedures or measures that are broader than those
available in the requesting State. However, the statute of limitations of the Contracting State
making the request for information should govern a request for information. Thus, the
Contracting State of which the request is made should attempt to obtain the information even if
its own statute of limitations has passed. In many cases, relevant information will still exist in the
business records of the taxpayer or a third party, even though it is no longer required to be kept
for domestic tax purposes.

While paragraph 3 states conditions under which a Contracting State is not obligated to
comply with a request from the other Contracting State for information, the requested State is not
precluded from providing such information, and may, at its discretion, do so subject to the
limitations of its internal law.

Paragraph 4

Paragraph 4 provides that when information is requested by a Contracting State in
accordance with this Article, the other Contracting State is obligated to obtain the requested
information as if the tax in question were the tax of the requested State, even if that State has no
direct tax interest in the case to which the request relates. In the absence of such a paragraph,
some taxpayers have argued that paragraph 3(a) prevents a Contracting State from requesting
information from a bank or fiduciary that the Contracting State does not need for its own tax
purposes. This paragraph clarifies that paragraph 3 does not impose such a restriction and that a
Contracting State is not limited to providing only the information that it already has in its own
files.

Paragraph 5

Paragraph 5 provides that a Contracting State may not decline to provide information
because that information is held by banks, other financial institutions, nominees or persons
acting in an agency or fiduciary capacity or because it relates to ownership interests in a person.
Thus, paragraph 5 would effectively prevent a Contracting State from relying on paragraph 3 to
argue that its domestic bank secrecy laws (or similar legislation relating to disclosure of financial
information by financial institutions or intermediaries) override its obligation to provide
information under paragraph 1. This paragraph also requires the disclosure of information
regarding the beneficial owner of an interest in a person, such as the identity of a beneficial
owner of bearer shares.

Subparagraphs (3)(a) and (b) do not permit the requested State to decline a request where
paragraph 4 or 5 applies. Paragraph 5 would apply, for instance, in situations in which the
requested State’s inability to obtain the information was specifically related to the fact that the
requested information was believed to be held by a bank or other financial institution. Thus, the

application of paragraph 5 includes situations in which the tax authorities’ information gathering
powers with respect to information held by banks and other financial institutions are subject to
different requirements than those that are generally applicable with respect to information held
by persons other than banks or other financial institutions. This would, for example, be the case
where the tax authorities can only exercise their information gathering powers with respect to
information held by banks and other financial institutions in instances where specific information
on the taxpayer under examination or investigation is available. This would also be the case
where, for example, the use of information gathering measures with respect to information held
by banks and other financial institutions requires a higher probability that the information
requested is held by the person believed to be in possession of the requested information than the
degree of probability required for the use of information gathering measures with respect to
information believed to be held by persons other than banks or financial institutions.

Paragraph 6

Paragraph 6 provides that the requesting State may specify the form in which information
is to be provided (e.g., depositions of witnesses and authenticated copies of original documents).
The intention is to ensure that the information may be introduced as evidence in the judicial
proceedings of the requesting State. The requested State should, if possible, provide the
information in the form requested to the same extent that it can obtain information in that form
under its own laws and administrative practices with respect to its own taxes.

Paragraph 7

Paragraph 7 states that the competent authorities of the Contracting States may develop
an agreement upon the mode of application of the Article. The Article authorizes the competent
authorities to exchange information on an automatic basis, on request in relation to a specific
case, or spontaneously. It is contemplated that the Contracting States will utilize this authority to
engage in all of these forms of information exchange, as appropriate.

The competent authorities may also agree on specific procedures and timetables for the
exchange of information. In particular, the competent authorities may agree on minimum
thresholds regarding tax at stake or take other measures aimed at ensuring some measure of
reciprocity with respect to the overall exchange of information between the Contracting States.

Treaty effective dates and termination in relation to exchange of information

Once the Convention is in force, the competent authority may seek information under the
Convention with respect to a year prior to the entry into force of the Convention. Even if an
earlier Convention with more restrictive provisions, or even no Convention, was in effect during
the years in which the transaction at issue occurred, the exchange of information provisions of
the Convention apply. In that case, the competent authorities have available to them the full
range of information exchange provisions afforded under this Article.

In contrast, if the Convention is terminated in accordance with the provisions of Article
29 (Termination), it would cease to authorize, as of the date of termination, any exchange of

information, even with respect to a year for which the Convention was in force. In such case, the
tax administrations of the two countries would only be able to exchange information to the extent
allowed under either domestic law or another international agreement or arrangement.

ARTICLE 27 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS)

This Article confirms that any fiscal privileges to which diplomatic or consular officials
are entitled under general provisions of international law or under special agreements will apply
notwithstanding any provisions to the contrary in the Convention. The agreements referred to
include any bilateral agreements, such as consular conventions, that affect the taxation of
diplomats and consular officials and any multilateral agreements dealing with these issues, such
as the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular
Relations. The U.S. generally adheres to the latter because its terms are consistent with
customary international law.

The Article does not independently provide any benefits to diplomatic agents and
consular officers. Article 19 (Government Service) does so, as do Code section 893 and a
number of bilateral and multilateral agreements. In the event that there is a conflict between the
Convention and international law or such other treaties, under which the diplomatic agent or
consular official is entitled to greater benefits under the latter, the latter laws or agreements shall
have precedence. Conversely, if the Convention confers a greater benefit than another
agreement, the affected person could claim the benefit of the tax treaty.

Pursuant to subparagraph 5(b) of Article 1, the saving clause of paragraph 4 of Article 1
(General Scope) does not apply to override any benefits of this Article available to an individual
who is neither a citizen of the United States nor has immigrant status in the United States.

ARTICLE 28 (ENTRY INTO FORCE)

This Article contains the rules for bringing the Convention into force and giving effect to
its provisions.

Paragraph 1

Paragraph 1 provides for the ratification of the Convention by both Contracting States
according to their constitutional and statutory requirements. This paragraph requires the
Contracting States to notify each other in writing, through diplomatic channel, when their
respective applicable procedures have been satisfied.

In the United States, the process leading to ratification and entry into force is as follows:
Once a treaty has been signed by authorized representatives of the two Contracting States, the
Department of State sends the treaty to the President who formally transmits it to the Senate for
its advice and consent to ratification, which requires approval by two-thirds of the Senators
present and voting. Prior to this vote, however, it generally has been the practice for the Senate
Committee on Foreign Relations to hold hearings on the treaty and make a recommendation
regarding its approval to the full Senate. Both Government and private sector witnesses may

testify at these hearings. After the Senate gives its advice and consent to ratification of the
protocol or treaty, an instrument of ratification is drafted for the President's signature. The
President's signature completes the process in the United States.

Paragraph 2

Paragraph 2 provides that the Convention will enter into force on the date of the later of
the diplomatic notes referred to in paragraph 1. The date on which a treaty enters into force is not
necessarily the date on which its provisions take effect. Paragraph 2, therefore, also contains
rules that determine when the provisions of the treaty will have effect.

Under subparagraph 2(a), the Convention will have effect with respect to taxes withheld
at source (principally dividends, interest and royalties) for amounts paid or credited on or after
the first day of the second month following the date on which the Convention enters into force.
For example, if instruments of ratification are exchanged on April 25 of a given year, the
withholding rates specified in paragraph 2 of Article 10 (Dividends) would be applicable to any
dividends paid or credited on or after June 1 of that year. This rule allows the benefits of the
withholding reductions to be put into effect as soon as possible, without waiting until the
following year. The delay of one to two months is required to allow sufficient time for
withholding agents to be informed about the change in withholding rates. If for some reason a
withholding agent withholds at a higher rate than that provided by the Convention (perhaps
because it was not able to re-program its computers before the payment is made), a beneficial
owner of the income that is a resident of the other Contracting State may make a claim for refund
pursuant to section 1464 of the Code.

For all other taxes, subparagraph 2(b) specifies that the Convention will have effect for
any taxable period beginning on or after January 1 of the year following entry into force.

Paragraph 3

Paragraph 3 provides that the Convention between the Government of the United States
of America and the Government of the Polish People’s Republic for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income signed at
Washington on October 8, 1974 (hereinafter referred to as “the 1974 convention”) shall cease to
have effect in relation to any tax from the date upon which this Convention has effect in respect
of such tax in accordance with the provisions of paragraph 2 of this Article. The 1974
convention shall terminate on the last date on which it has effect in relation to any tax in
accordance with the foregoing provisions of this paragraph.

Paragraph 4

Paragraph 4 provides that notwithstanding the entry into force of this Convention, an
individual who was entitled to benefits of Article 17 (Teachers), Article 18 (Students and
Trainees) or Article 19 (Government Functions) of the 1974 convention at the time of the entry
into force of this Convention shall continue to be entitled to such benefits until such time as the
individual would cease to be entitled to such benefits if the 1974 convention remained in force.

ARTICLE 29 (TERMINATION)

The Convention is to remain in effect indefinitely, unless terminated by one of the
Contracting States in accordance with the provisions of Article 29. The Convention may be
terminated at any time after the year in which the Convention enters into force. The Article
requires that any notices of termination must be given through diplomatic channels, and must be
delivered on or before June 30 in any calendar beginning after the year in which the Convention
enters into force. If such notice of termination is given, the provisions of the Convention with
respect to withholding at source will cease to have effect on or after the first day of January of
the calendar year next following the date on which the notice has been given. For other taxes,
the Convention will cease to have effect as of taxable periods beginning on or after the first day
of January of the calendar year next following the date on which the notice is given.

Article 29 relates only to unilateral termination of the Convention by a Contracting State.
Nothing in that Article should be construed as preventing the Contracting States from concluding
a new bilateral agreement, subject to ratification, that supersedes, amends or terminates provi-
sions of the Convention without the six-month notification period.

Customary international law observed by the United States and other countries, as
reflected in the Vienna Convention on Treaties, allows termination by one Contracting State at
any time in the event of a "material breach" of the agreement by the other Contracting State.

Technical Explanation of Convention between US And Poland… Taxes on Income, Convention signed February 13, 2013

Continue sua pesquisa no ChatGPT ou Claude