COMPARISON OF THE UNITED STATES MODEL INCOME TAX CONVEN

OF SEPTEMBER 20, 1996 WITH THE UNITED STATES MODEL 

INCOME TAX CONVENTION OF NOVEMBER 15, 2006 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

May 8, 2007 

JCX-27-07
i 

CONTENTS 

INTRODUCTION .....................................................................................................................................................

I. COMPARISON OF THE UNITED STATES MODEL INCOME TAX CONVENTION OF SEPTEMBE

WITH THE UNITED STATES MODEL INCOME TAX CONVENTION OF NOVEMBER 15, 2006....1. General Scope ..........................................................................................................................................2. Taxes Covered .........................................................................................................................................3. General Definitions..................................................................................................................................4. Resident....................................................................................................................................................5. Permanent Establishment.........................................................................................................................6. Income from Real Property......................................................................................................................7. Business Profits........................................................................................................................................8. Shipping and Air Transport .....................................................................................................................9. Associated Enterprises.............................................................................................................................10. Dividends. ................................................................................................................................................11. Interest......................................................................................................................................................12. Royalties ..................................................................................................................................................13. Gains. .......................................................................................................................................................14. Income From Employment ......................................................................................................................15. Directors’ Fees.........................................................................................................................................16. Entertainers and Sportsmen .....................................................................................................................17. Pensions, Social Security, Annuities, Alimony, and Child Support........................................................18. Pension Funds ..........................................................................................................................................19. Government Service.................................................................................................................................20. Students and Trainees ..............................................................................................................................21. Other Income ...........................................................................................................................................22. Limitation on Benefits .............................................................................................................................23. Relief From Double Taxation ..................................................................................................................24. Non-Discrimination .................................................................................................................................25. Mutual Agreement Procedure..................................................................................................................26. Exchange of Information and Administrative Assistance .......................................................................
ii 

27. Members of Diplomatic Missions and Consular Posts............................................................................28. Entry Into Force .......................................................................................................................................29. Termination..............................................................................................................................................

II. DETAILED DESCRIPTION OF CERTAIN ARTICLES ............................................................................

Article 18. Pension Funds.............................................................................................................................Article 20. Students and Trainees .................................................................................................................Article 22. Limitation on Benefits ................................................................................................................
1 

INTRODUCTION 

This pamphlet,1 prepared by the staff of the Joint Committee on Taxation, compares the Model Income T

September 20, 1996 with the Model Income Tax Convention of November 15, 2006. Part I of the pamphlet prov

summary of certain differences on an article-by-article basis. Part II provides a fuller explanation of the differen

articles that were significantly modified in November 2006.

1 This pamphlet may be cited as follows: Joint Committee on Taxation, Comparison of the United States Model In

of September 20, 1996 with the United States Model Income Tax Convention of November 15, 2006 (JCX-27-07), May 8, 2

Code” are to the U.S. Internal Revenue Code of 1986, as amended. This document is available on line at www.house.gov/j
2 

I. COMPARISON OF THE UNITED STATES MODEL INCOME TAX CONVENTION OF SEPTE

WITH THE UNITED STATES MODEL INCOME TAX CONVENTION OF NOVEMBER 

ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

1. General Scope Sets forth general rules relating to applicability of certain articles and other agreements. 

The Convention generally does not restrict benefits accorded under other agreements between the Contracting States (also referred to herein as “treaty countries”). The 1996 Model provides that nondiscrimination provisions of the Convention generally govern taxation measures of the Contracting States. In the event that other agreements providing national treatment or most-favored-nation obligations also include nondiscrimination provisions, those of the Convention generally override those in the other agreements. An exception to this override is provided for the nondiscrimination provisions under the General Agreement on Tariffs and Trade (“GATT”). For purposes of the saving clause (which provides that the Convention does not affect the taxation by a Contracting State of its citizens and residents), a citizen includes a former citizen or long-term resident whose loss of this status was to avoid tax, but only for 10 years. 

The Convention gebenefits accorded uwhich the Contractas modified, the Corestrict benefits un(as well as bilateraUnlike the 1996 Mgenerally override provisions in other overrides only the of Article XVII of Trade in Services (GATT in the 1996 Model. The saving clause United States to tax long-term resident Code (i.e., for 10 ysuch status). The pthe requirement of 
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

 Exceptions to the saving clause did not include 

a reference to paragraph 1(b) of the Article relating to Pensions, Social Security, Annuities, Alimony, and Child Support. The rule relating to income, profit or gain derived through a fiscally transparent entity was in Article 4. This rule provides that items derived through a fiscally transparent entity are treated as derived by a resident of a Contracting State to the extent that that the items are so treated under that Contracting State’s tax law. 

Exceptions to the sincluding a referenthe Article relating Annuities, Alimon17). This preservearising in one Contfrom tax in that Stain the pensioner’s The rule relating to derived through a fmoved from Articl

2. Taxes Covered Describes the specific U.S. taxes and taxes of the other treaty country. 

The article lists the specific taxes covered for both of the Contracting States. 

To move closer to the Organisation foand Development (broadens the scope taxes on income imContracting State iwhich they are levimay cover certain that are not substanenumerated taxes. taxes imposed on tof income, includinalienation of prope
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

 The article lists specified U.S taxes to which the 

Convention applies: Federal income taxes imposed by the Internal Revenue Code (but excluding social security taxes), and the Federal excise taxes imposed with respect to private foundations. The Technical Explanation (“Technical Explanation”) to the United States Model Income Tax Convention of September 20, 1996 additionally excludes Federal unemployment taxes. The competent authorities of the Contracting States are required to notify each other of significant changes in their taxation laws or of other laws that affect their obligations under the Convention. The competent authorities are also obligated to notify each other of any official published materials concerning the application of the Convention, including explanations, regulations, rulings or judicial decisions. 

The article lists speConvention applieimposed by the Intexcluding social seunemployment taxtaxes imposed with foundations. The competent autobligated to notify published materialof the Convention. 

3. General Definitions Sets forth certain definitions generally applicable to the convention. 

No definition is provided for the term “enterprise.” No definition is provided for the term “business.” 

The term “enterpriof any business. The term “businessof professional serof an independent 
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

 Defines “qualified governmental entity.” This 

definition includes governmental noncommercial entities and governmental pension funds and is relevant to Article 4 (Residence), Article 10 (Dividends) (zero rate), and Article 22 (Limitation on Benefits). 

No longer defines entity.” As a consethose of pension fuits political subdivsubject to tax on dicountry. (ActivitieUnited States rema892.) Defines “pension f(Resident), Article (Limitation of Ben(Pension Funds). A person established generally exempt fcountry and is operadminister or provbenefits, or (b) to eone or more person
6 

ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

4. Resident Provides rules for determining whether a person is a resident of a Contracting State for purposes of the Model Convention. Under those rules, residence is determined by looking first to a person’s liability to tax as a resident under the respective taxation laws of the Contracting States. Tie-breaker rules are provided to address situations in which a person is a resident of both Contracting States on the basis of this first rule. 

Paragraph 1(c) provides that a “qualified governmental entity,” which includes the government of a Contracting State, or of a political subdivision of local authority thereof, and an entity wholly owned by such a government, is to be treated as a resident of the Contracting State in which it is established. Paragraph 1(d) provides that when an item of income, profit, or gain is derived through an entity that is fiscally transparent under the laws of either Contracting State, it shall be considered to be derived by a resident of a State to the extent that the item is treated for tax purposes in that State as the income, profit, or gain of a resident. Paragraph 3 provides that if a company is a resident of both Contracting States under the provisions of paragraph 1, but is created under the laws of one of the Contracting States, it shall be treated as a resident of that State. The Model Convention does not address other situations in which a company may be a dual resident under paragraph 1. 

Paragraph 1 providState, or any politiauthority thereof, iThis change reflec“qualified governmterm in the Model The residence treatprofit, or gain derivtransparent entities Article 1 of the MoParagraph 4 providresident of both Coprovisions of paragorganized under thContracting Statesresident of that Stacompetent authoritthe mode of applicConvention to that authorities cannot be treated as a resiState for purposes Convention. 
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

5. Permanent Establishment Defines the term “permanent establishment,” a concept that is significant for several Articles of the Model Income Tax Convention. The existence of a permanent establishment in a treaty country is necessary for the taxation by that country of the business profits of a resident of the other treaty country. The concept is also relevant in determining the taxation of dividends, interest, and royalties (as well as the taxation of gains and other income) by the source country. 

Paragraph 4 expressly provides that certain activities will not, by themselves, create a permanent establishment; among these are the maintenance or use of facilities, goods or merchandise for certain purposes (subparagraphs (a) through (e)), as well as the maintenance of a fixed place of business solely for any combination of the activities described in subparagraphs (a) through (e) (paragraph 4(f)). 

No significant chanadded to paragraph the maintenance of solely for any comlisted in paragraphexcluded from permtreatment only if thplace of business rcombination is of a nature. 

6. Income from Real Property Provides rules for the taxation of income from real property derived by residents of one treaty country from real property situated in the other treaty country. Permits these residents to elect net-basis taxation of this real property income.

The term used to describe the property to which the article applies is “real property (immovable property).” The definition of “real property (immovable property)” is the same as the definition under the law of the treaty country in which the property in question is located. 

The term used to dthe article applies iThe definition of “include additional regardless of the lawhich the property of property includeaccessory to real pand equipment useand rights to variabconsideration for th
8 

ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

The general rules of the article apply to income from real property of an enterprise and to income from real property used for the performance of independent personal services. 

work, mineral deponatural resources. include ships and aThe reference to inused for the perforpersonal services ithe deletion of the services article froConvention). 

7. Business Profits Provides rules for the taxation by a treaty country of the profits of an enterprise carried on by a resident of the other treaty country. In general, the profits of an enterprise of a treaty country are not taxable by the other treaty country unless the enterprise carries on business in the other treaty country through a permanent establishment. 

Paragraph 2 provides, inter alia, that profits to be attributed to a permanent establishment include “only the profits derived from the assets or activities of the permanent establishment.” Paragraph 3 provides that in determining the business profits of a permanent establishment, deductions are allowed for expenses incurred for the purposes of the permanent establishment, including a reasonable allocation of certain listed categories of expenses, whether incurred in the treaty country in which the permanent establishment is located or elsewhere. 

Paragraph 2 is modprofits derived from permanent establisderived from assetperformed) among permanent establisThe specific list of replaced with a refgeneral administrathe Model treaty cofor inclusion in a pthat the OECD Trashall apply by analprofits attributable establishment. 
9 

ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

 Paragraph 7 defines “business profits” to mean 

income from any trade or business, including income derived by an enterprise from the performance of personal services, and from the rental of tangible personal property. Under the 1996 Model Convention, income from the provision of independent personal services is addressed by Article 14 (Independent Personal Services). 

The paragraph defibeen stricken, as thby the definition of Article 3, paragrapThe Model treaty einstead, because ththe meaning of the income is now govProfits). 

8. Shipping and Air Transport Sets forth special rules for taxation of the operation of ships, aircraft, and ancillary equipment used in international traffic. 

Contains minor chsubstantially identiConvention. 

9. Associated Enterprises Incorporates in the Model Convention the arm’s-length principle reflected in U.S. domestic transfer pricing provisions. It provides that when related enterprises engage in non-arm’s-length transactions, the Contracting States may make appropriate adjustments to the taxable income and tax liability of those entities to reflect what their income and tax would have been had the transactions been at arm’s-length. 

No significant chan
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

10. Dividends Provides rules for the taxation of dividends paid by a resident of one treaty country to a resident of the other treaty country. Sets forth special rules for dividends paid by U.S. regulated investment companies and U.S. real estate investment trusts.

The general rules of Article 10 apply to dividends paid by a resident of one treaty country to a resident of the other treaty country.There are no special rules for dividends beneficially owned by a pension fund. A pension fund is included in the definition of a “qualified governmental entity.” Dividends received by a qualified governmental entity are taxed according to the rules described immediately below. Notwithstanding the general allowance of either 5-percent or 15-percent source-country taxation of dividends, dividends may not be taxed by the source country if the dividends are beneficially owned by a resident of the other treaty country and that resident is a qualified governmental entity and does not control the person paying the dividends. The reduced five-percent source-country tax rate for dividends beneficially owned by 10-percent corporate shareholders is not available for dividends paid by a U.S. regulated investment company (“RIC”) or real estate 

The general rules odividends paid by of one treaty counttreaty country. ThModel Convention OECD Model treatUnder an exception Article 10, dividena resident of one trtaxed by that countthe dividends is a pof the other treaty does not derive the a trade or business associated enterpriAs a conforming celimination of the cgovernmental entitConvention elimindividends beneficiagovernmental entitThe 2006 Model Creduced 15-percenapplies to dividendrule described abovowned by pension 
11 

ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

 investment trust (“REIT”). Dividends paid by a 

REIT also are not eligible for the reduced 15-percent source-country tax rate unless the dividends are beneficially owned by an individual who has a less-than-10-percent interest in the REIT. An exclusion from the general source-country taxing limitations applies to dividends attributable to a permanent establishment situated in the source country or to a fixed base in the source country from which independent personal services are performed. The provision permitting a source country to impose a branch profits tax on certain income of a resident of the other treaty country applies to income of a corporation. 

dividends paid by a REIT, the 15-perand the special rule only if the dividendby an individual or case holding an intpercent or less; (ii) publicly-traded stoowned by a person five-percent interestock; or (iii) are pare beneficially ow10-percent-or smalThe exclusion from taxing limitations arespect to shares thwith (rather than atcountry permanent “effectively connec“attributable to” coOECD Model treatelimination of the iarticle, the referencThe provision permapplies to income ocorporation). The to the OECD Mode
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

11. Interest Provides rules for the taxation of interest paid by a resident of one treaty country to a resident of the other treaty country. Generally, interest arising in one treaty country and beneficially owned by a resident of the other treaty country is taxed only in the country of residence, subject to certain exceptions. 

In the case of certain “contingent interest” arising in a Contracting State, such interest may be taxed in that State according to the laws of that State; however, if the beneficial owner is a resident of the other Contracting State, the gross amount of the interest may be taxed at a rate not to exceed the rate prescribed for the taxation of dividends under Article 10, paragraph 2(b). The treaty provides an exception to the general rule of residence taxation. The exception allows source-country taxation of interest where the beneficial owner of the interest, resident of a Contracting State, carries on business through a permanent establishment situated in the other Contracting State, and “the interest is attributable to” such permanent establishment. A similar exception to the general rule of residence taxation applies where the beneficial owner of the interest performs independent personal services from a fixed base situated in 

This formulation is interest arising in tand paid to U.S. reconverse, a separatprovides that intereStates that is contindoes not qualify as United States law mexceeding the treatModel treaty drops to Article 10, paragthat the same maxito such contingent dividends under thThis exception now claim in respect of effectively connectestablishment. The connected with” raconforms with langtreaty. Separately, clarification, the exapplies to the speciinterest as well as tParagraph 1. The exception for iis eliminated to conold Article 14 (and profits” to include 
13 

ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

 the other Contracting State, and the interest is 

attributable to such fixed base. 

12. Royalties Sets forth rules for taxation of cross-border royalties. 

“Royalties” are defined as any consideration for the use of, or the right to use, any copyright of literary, artistic, scientific or other work (including computer software, cinematographic films, audio or video tapes or disks, and other means of image or sound reproduction), any patent, trademark, design or model, plan, secret formula, or process, or other like right or 

property, or for information concerning industrial, commercial or scientific experience; and gain derived from the alienation of any property described above, provided that such gain is contingent on the productivity, use, or disposition of the property. The business profits article applies when royalty income is “attributable to” a permanent establishment. 

“Royalties” are defreceived as a consiright to use, any coscientific or other wcinematographic fidesign or model, pprocess, or for infoindustrial, commerand gain derived frproperty described gain is contingent odisposition of the pbeen narrowed by like right or properThe business profiright or property ware paid is “effectivpermanent establis“effectively connec“attributable to” coOECD Model treat
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

13. Gains Provides rules for the taxation of gains from the sale of real property situated in one treaty country by a resident of the other treaty country. Also sets forth rules governing the taxation of gains from the sale of ships, aircraft, containers, and movable property that is part of a permanent establishment. Prohibits sourcecountry taxation of gains from sales of all property not otherwise specifically addressed.

The definition of “real property situated in the other Contracting State” applies for purposes of the Model Convention. For real property situated in the territory of the United States’s treaty partner, the term “real property situated in the other Contracting State” includes an “equivalent interest in real property” to a United States real property interest. The article permits source country taxation of gains from the alienation of personal property that are attributable to (i) a permanent establishment that an enterprise resident in the other country has in the source country, or (ii) a fixed base in the source country that is available to a resident of the other country for the purpose of performing independent personal services. 

The definition of “other Contracting Sthis Article 13. As not apply for purpofrom Real PropertyFor real property sUnited States’s treproperty situated in includes (i) shares other than shares in trading on a stock all their value direcproperty otherwise and (ii) an interest extent the assets of consist of real prop(i) above. The article permits gains from the alieforming part of the permanent establisresident in the othecountry. In conforConvention’s elimpersonal services a1996 Model Convebase available for ppersonal services. 
15 

ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

 Gains derived by an enterprise of a treaty 

country from the alienation of ships, aircraft, or containers operated or used in international traffic or from the alienation of personal property pertaining to the operation or use of such ships, aircraft, or containers are taxable only in that country. 

The article providefrom the alienation permits only residederived from the al(including trailers, equipment for the tfor the transport of unless those contaisolely between placountry. 

14. Income From Employment Provides rules for the taxation of employment income derived by a resident of one treaty country from services performed in the other treaty country. 

Article 14 (Independent Personal Services) addresses income derived by an individual who is a resident of a Contracting State in respect of the performance of personal services of an independent character. Article 15 (Dependent Personal Services) addresses salaries, wages, and other remuneration derived by a resident of a Contracting State, and provides that such amounts shall be taxable only in that State unless the employment is exercised in the other Contracting State (in which case such remuneration may be taxed in that other State). 

The 2006 Model CArticle 14; insteadfall within the measuch income is now (Business Profits). Article 14 (Income substantially identiPersonal Services) Convention. 
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

15. Directors’ Fees Provides that a Contracting State may tax the fees and other compensation paid by a company that is a resident of that State for services performed in that State by a resident of the other Contracting State in his capacity as a director of the company. 

No significant chan

16. Entertainers and Sportsmen Provides that income derived by a resident of a Contracting State as an entertainer or as a sportsman, from his personal activities as such exercised in the other Contracting State, may generally be taxed in that other State even if the income would otherwise be exempt from tax in that other State under other articles of the Model Convention. This rule does not apply if the income does not exceed $20,000 in the taxable year of payment. A special rule addresses cases in which income in respect of the performer’s activities does not accrue directly to the performer himself but to another person. 

Paragraph 2 provides that when income accrues to a person other than the performer, that other person may be taxed in the Contracting State in which the services are performed even if the income would otherwise be exempt from tax in that State under other articles of the Model Convention, unless it is established that neither the performer nor persons related to the performer participate directly or indirectly in the profits of that other person in any manner. 

Paragraph 2 providto a person other thperson may be taxewhich the services income would othethat State under othConvention, unless which the personal allows that other pindividual who is tactivities. 
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17. Pensions, Social Security, Annuities, Alimony, and Child Support Sets forth the taxation rules for cross-border payments of pension distributions, social security, annuities, alimony, and child support. 

A general rule of exclusive residence-based taxation of pensions applies, except to the extent that the other treaty country had taxed amounts prior to distribution. The treaty country in which the individual is resident is not permitted to tax distributions to the extent attributable to such taxed amounts. “Annuities” is defined as a stated sum paid periodically at stated times during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). The definition does not specifically include periodic payments for life. If alimony is paid by a resident of one treaty country to a resident of other treaty country, and is deductible by the payor in the country of the payor’s residence, the recipient may be taxed only by the country of the recipient’s residence. 

A general rule of etaxation of pensionresidence state muthe source state worecipient were a re“Annuities” is defiperiodically at statnumber of years, oto make the paymefull consideration (rendered). The defperiodic payments If alimony is paid bcountry to a residerecipient may be tathe recipient’s resideductibility by the payor’s residence. 

18. Pension Funds Sets forth the taxation rules applicable to pension funds, contributions and benefits accruals. 

New article that caportion of Article 1Convention. See thII. 
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

19. Government Service Generally provides that remuneration paid to an individual in respect of services rendered to a Contracting State shall be taxable only in that State. In the case of remuneration other than pensions, however, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who is either a national of that State or did not become a resident of that State solely for purposes of rendering the services. In the case of pensions, such remuneration shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State. 

The Technical Explanation states that if an individual receives remuneration paid from the public funds of a Contracting State in respect of services rendered to that State for the discharge of functions that are not of a governmental nature, then the rules of Articles 14-17 of the Model Convention, and not the rules of Article 19, will apply. 

Paragraph 3 more cremuneration an inconnection with a bContracting State iArticles 14-17 of thnot the rules of Art

20. Students and Trainees Sets forth special rules for taxation of certain income of students and trainees. 

Payments received by students, apprentices or business trainees visiting the Contracting State, who are residents of the other Contracting State, are tax exempt in the host country if the purpose of their visit is to engage in full time education at an accredited educational institution or for full time training. The payments must arise outside of the host country and must be used for education, maintenance and training. In the case 

of business trainees, the exemption from income tax in the host country applies only for a period of one year from the time the visitor first arrives in the host country for training.

See separate discus
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

21. Other Income Sets forth rules for taxation of income other than income dealt with in other articles. 

Substantially identConvention. 

22. Limitation on Benefits Provides rules intended to prevent inappropriate treaty shopping. Treaty shopping refers to planning by third-country residents to qualify for treaty benefits intended to be available only to residents of the two treaty countries. 

See separate discus

23. Relief From Double Taxation Describes the manner in which each treaty country undertakes to relieve double taxation. 

The 2006 Model Csourcing” rule: groresident of the Unitreaty, may be taxeState, shall be deemsources in the otheis intended to ensuobtain an appropriatax credit for taxes country when the tcountry to tax such The article is otherfrom the 1996 Mod
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ARTICLE (2006 MODEL CONVENTION) 1996 MODEL CONVENTION 2006 MOD

24. Non-Discrimination Provides that nationals and residents of a Contracting State may not be subject, directly or indirectly, to discriminatory taxation in the other Contracting State. 

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. The Technical Explanation states that U.S. nationals who are subject to tax on a worldwide basis are not in the same circumstances as nationals of the other Contracting State who are not residents of the United States. 

Paragraph 1 providContracting State mor connected requiContracting State tthan the taxes and imposed upon a nathe same circumstaclearly states that Uto tax on a worldwcircumstances as nContracting State wUnited States. 

25. Mutual Agreement Procedure Sets forth procedures for dispute resolution with respect to issues arising under the treaty. 

Substantially identConvention; one mnonexclusive list ocompetent authoritparticular items of 
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26. Exchange of Information and Administrative Assistance Provides for the exchange of information between treaty countries to carry out the terms of the treaty or the tax laws of the treaty countries. 

Provides that the competent authorities of the treaty countries will exchange such information as is relevant to carry out the provisions of the proposed treaty, or the domestic laws of the two countries. This exchange of information generally is not restricted by Article 1 (General Scope) or Article 2 (Taxes Covered). Any information exchanged under the treaty is treated as secret in the same manner as information obtained under the domestic laws of the country receiving the information. Exchanged information may be disclosed in public court proceedings or in judicial decisions. 

No significant chanConvention. 

27. Members of Diplomatic Missions and Consular Posts Confirms that any fiscal privileges to which members of diplomatic missions or consular posts are entitled under general provisions of international law or under special agreements will apply notwithstanding any provisions to the contrary in the Model Convention. 

No significant chan
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28. Entry Into Force Sets forth the dates and taxable periods for which a treaty will be in effect. 

Provides that a treaty will enter into force on the later of the dates on which the respective treaty countries have notified each other in writing that the applicable procedures in their respective countries have been followed. With respect to withholding taxes, the article provides that a treaty will have effect for amounts paid or credited on or after the first day of the second month following the date on which the treaty enters into force. With respect to other taxes, the article provides that a treaty will have effect for taxable periods beginning on or after the first day of the January in the year following the date of entry into force of the treaty. 

Substantially identConvention, excepclarifies that the Exprovisions (Article of entry into force period to which the 

29. Termination Establishes procedures for terminating a treaty. Provides that a treaty will remain in force 

indefinitely, but that either of the treaty countries may terminate the treaty by giving notice to the other country through diplomatic channels. In the event of termination, the treaty will cease to have effect with respect to withholding taxes for amount paid or credited after the expiration of six months from the date notice of termination was given. With respect to other taxes, a treaty will cease to have effect for any taxable period on or after the expiration of six months from the date notice of termination was given. 

No significant chanConvention. 
23 

II. DETAILED DESCRIPTION OF CERTAIN ARTICLES 

Article 18. Pension Funds

Article 18 of the 2006 Model treaty is new. It incorporates paragraph 6 of Article 18 of 

the 1996 Model treaty with certain modifications, and adds certain new rules. In general, 

paragraph 6 of Article 18 of the 1996 Model treaty addresses situations in which an individual 

who is a participant in a pension plan that is established and legally recognized in a treaty 

country performs services in the other treaty country (i.e., the “host country”), regardless of the 

country in which such individual is resident. 

Under paragraph 6(b) of Article 18 of 1996 Model treaty, income earned by a pension 

plan established in a treaty country is not taxable in the host country until it is distributed from 

the plan. Paragraph 1 of Article 18 of the 2006 Model treaty modifies the focus of this rule from 

host country to residence country (in many cases, the host and residence countries will be one 

and the same). Under the 2006 Model treaty, if an individual resident of one treaty country is a 

member or beneficiary of, or a participant in, a pension fund that is resident in the other treaty 

country, income of the pension fund is not taxable to the individual in either country until it is 

distributed, subject to the rules of paragraph 1 of Article 17, relating to pension payments. 

Similarly, under the 1996 Model treaty, the individual may make a tax-free rollover distribution 

from the pension plan into a plan established in the host country. Under the 2006 Model treaty, 

the rollover is tax free only if made to another pension fund in the country in which the initial 

pension fund is resident. In other words, the 2006 Model treaty does not require tax-free 

treatment for a rollover from a pension fund in a treaty country to a pension fund in the country 

in which the individual is resident. 

The rules of paragraph 6(a) of Article 18 of the 1996 Model treaty, relating to tax 

treatment in the host treaty country of contributions and accrued benefits with respect to a 

pension plan that is resident in the other treaty country, remain substantially the same under 

paragraph 2 of Article 18 of the 2006 Model treaty. Contributions paid by or on behalf of the 

individual to the pension fund during the time that the individual performs such services in the 

host country are deductible or excludible from the individual’s tax base in the host country. Any 

accrued benefits or employer contributions are also excluded from the employee’s taxable 

income and such contributions are deductible from the employer’s income in the host state. 

These benefits are limited to the relief that would be allowed by the host country to residents of 

that country for contributions to, and benefits accrued under, a pension plan established in that 

country. 

Both Model treaties apply certain limitations on the application of the benefits described 

in the immediately preceding paragraph. For those benefits to apply, some contributions by or 

on behalf of the individual must have been made to the pension fund (or to another similar 

pension fund for which the first-mentioned pension fund was substituted) before the individual 

performed the services in the host country. Under paragraph 3 of Article 18 of the 2006 Model 

treaty, it is sufficient if such contributions were made by or on behalf of the individual’s 

employer. Under both Model treaties the competent authority of the host country must have 

agreed that the pension plan (or fund) generally corresponds to a pension plan (or fund) 
24 

established in that country. In practice, the competent authorities (or the IRS unilaterally) have 

periodically added newly legislated arrangements to the list of agreed pension plans. 

In addition to the above-described changes, paragraph 4 of Article 18 of the 2006 Model 

treaty provides a new set of rules for pension fund contributions and benefits with respect to U.S. 

citizens who are residents of the treaty country in which the pension fund is resident. These rules 

apply where such U.S. citizen exercises employment in such residence country, the income from 

such employment is taxable there, the contribution is borne by an employer who is either resident 

in such country or by a permanent establishment in such country, and the individual is a member 

or beneficiary of, or participant in, such pension plan. Under the new rules, contributions 

attributable to the employment paid by or on behalf of the individual during the employment 

period to the pension fund are deductible or excludible in computing the individual’s U.S. tax. 

Further, accrued pension benefits and contributions attributable to the employment made by the 

U.S. citizen’s employer during that period are not treated as income taxable to the individual in 

the United States. Benefits obtained under these rules are counted when determining such 

individual’s eligibility for benefits under a generally corresponding U.S.-based pension plan. 

The relief available under the rules of paragraph 4 are limited to the lesser of the amount 

of relief allowed for contributions and benefits under a pension fund established in the treaty 

country and the amount of relief that the United States would allow to its residents for 

contributions and benefits under a generally corresponding pension plan established in the 

United States. In addition, paragraph 4 applies only when the U.S. competent authority has 

agreed that the pension plan generally corresponds to an employer pension plan established in 

the United States. It is intended that notes or pronouncements specify these agreements. 

Paragraph 4 of Article 18 is excepted from the saving clause of paragraph 4 of Article 1. 

The rules of paragraph 4, in part, qualify the provisions of paragraph 2 of Article 18 of 

the 2006 Model treaty, discussed above, in situations in which the individual is a U.S. citizen and 

is a resident of the host country. 

Article 20. Students and Trainees

Under Article 20, paragraph 1 of the 2006 Model treaty, students and business trainees 

who are visiting a Contracting State and who immediately prior to visiting that Contracting State 

were resident in the other Contracting State will be exempt from income tax in the host country 

on certain payments received if the purpose of their visit is to engage in full-time education or 

full-time training. The exempt payments are limited to those payments the individual may 

receive for his or her maintenance, education or training as long as such payments are from 

sources outside the host country. In the case of business trainees, the exemption from income tax 

in the host country applies only for a period of one year from the time the visitor first arrives in 

the host country for training. 

Paragraph 1 is almost identical to Article 20 of the 1996 Model Treaty, except under the 

1996 Model the tax exemption applied to “students, apprentices and business trainees.” Also, 

under the 1996 Model, students were entitled to the exemption only if they engaged in full-time 

education at an accredited educational institution. The 2006 Model deleted the term 

“apprentice,” and the exemption now applies specifically to students and business trainees only. 
25 

The term “apprentice” was not defined in the 1996 Model treaty or in its Technical Explanation. 

Under the 2006 Model, the exemption for students is no longer limited to full-time education at 

an accredited educational institution. So long as the students and business trainees are engaged 

in full-time education or full-time training, they may qualify for the exemption. 

Paragraph 2 of Article 20 of the 2006 Model provides an additional exemption for 

remuneration from personal services performed in the host country to the extent of $9,000 or its 

equivalent in the currency of the other Contracting State annually. The $9,000 limit will be 

adjusted every five years to take into account changes in the U.S. personal exemption and 

standard deduction. The 1996 Model did not permit an exemption for personal services income. 

Paragraph 3 of Article 20 of the 2006 Model defines a business trainee as a person who is 

in a Contracting State temporarily for the purpose of securing training necessary to qualify the 

individual to practice a profession or professional specialty. A business trainee can also be a 

person who is employed, or under contract with, a resident of the other Contracting State for the 

primary purpose of acquiring technical, professional, or business experience from a person other 

than the employer or a person related to the employer. Under this definition, so long as the 

training is received from someone other than the employer or someone related to the employer, 

an employee can receive tax-free payments for maintenance, education, and training from the 

individual’s employer that resides outside the host country. In other words, the exemption for 

business trainees is qualified on receiving the training from someone other than the employer, 

but the payments subject to the exemption may be received from the employer. The 1996 Model 

did not define the term business trainee. 

With respect to business trainees, both the 1996 Model and the 2006 Model limit the 

exemption for payments received for the maintenance, education and training to a period of one 

year or less. The one-year limit also now applies to the new exemption for $9,000 in personal 

service income. 

Article 22. Limitation on Benefits

In general

Article 22 of the 2006 Model Convention includes significant changes to the limitation 

on benefits rules of the 1996 Model Convention. These changes generally are intended to make 

it more difficult under the new Convention than under the 1996 Convention for third country 

residents to use treaty shopping to benefit inappropriately from a treaty between two countries. 

The limitation on benefits rules of both the 1996 Model Convention and the 2006 Model 

Convention include three provisions under which a resident of a treaty country may qualify for 

treaty benefits. First, a treaty-country resident may qualify for all treaty benefits if it has any one 

of several listed attributes. For example, a resident of a treaty country may qualify for all treaty 

benefits if it is a company that satisfies certain public trading requirements. Second, a treatycountry resident that does not have one of the listed attributes may qualify for treaty benefits for 

income items that are derived from the other treaty country and that are related to a trade or 

business carried on in the residence country. Third, a treaty-country resident that would not be 

eligible for treaty benefits under the preceding two provisions may qualify for treaty benefits at 
26 

the discretion of the competent authority of the other treaty country. These three provisions are 

described in more detail below, and significant differences between the 1996 and 2006 Model 

Conventions are noted. 

Rules for eligibility for all treaty benefits

Under both the 1996 and the 2006 Model Convention, a treaty-country resident may 

qualify for treaty benefits if it has one of the following attributes: it is (1) an individual; (2) a 

government (as further described below); (3) a company that satisfies public-trading or 

ownership tests described below; (4) a pension fund or other tax-exempt organization (if, in the 

case of a pension fund, more than 50 percent of the fund’s beneficiaries, members, or 

participants are individuals resident in either treaty country); or (5) a person other than an 

individual that satisfies ownership and base-erosion requirements described below. 

Government eligibility

The 2006 Model Convention’s limitation on benefits rule allowing treaty benefits to 

governments differs from the rule in the 1996 Model Convention. The 1996 Model Convention 

grants treaty benefits to a qualified governmental entity. The 2006 Model Convention eliminates 

the concept of a qualified governmental entity and grants treaty benefits instead to a treaty 

country government and to a political subdivision or local authority of that government. This 

grant of treaty benefits to governments and political subdivisions may be narrower than the 1996 

rule because the definition of qualified governmental entity in the 1996 Model Convention 

included certain quasi-governmental entities. 

Tax-exempt organization eligibility

The 1996 and 2006 Model Conventions use slightly different terms for describing taxexempt organizations other than pension funds. The 1996 Convention refers (in Article 4, 

Residence) to an entity established and maintained in a treaty country “exclusively for a 

religious, charitable, educational, scientific, or other similar purpose.” The 2006 Convention 

(also in Article 4) refers to an organization established and maintained in a treaty country 

“exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes.” This 

change reflects that the U.S. internal law definition of educational organizations includes 

organizations that serve artistic or cultural purposes. 

Company eligibility

A company that is a resident of a treaty country may be eligible for treaty benefits if it 

either satisfies a public-trading test or is a direct or indirect subsidiary of a company or 

companies that satisfy the public-trading test. The public-trading and subsidiary requirements 

differ in the 1996 and the 2006 Model Conventions. Under the 1996 Convention’s publictrading test, all the shares of a company in the class or classes of shares representing more than 

50 percent of the company’s voting power and value must be traded on a recognized stock 

exchange. The public-trading test in the 2006 Convention is more restrictive. This more 

restrictive test requires that the principal class of a company’s shares, and any disproportionate 

class of shares, be regularly traded on one or more recognized exchanges and either (1) that the 

principal class of shares is primarily traded on one or more recognized exchanges located in the 
27 

treaty country of which the company is a resident, or (2) that the company’s primary place of 

management and control is in the company’s country of residence. The 2006 Model Convention 

defines the term “principal class of shares” as the ordinary or common shares of the company if 

that class of shares represents the majority of the voting power and value of the company. If no 

single class of ordinary or common shares represents the majority of the voting power and value 

of a company, the term “principal class of shares” means the classes that in the aggregate 

represent the majority of the company’s voting power and value. The term “disproportionate 

class of shares” means, for the shares of a company resident in a treaty country, any class of 

shares that entitles the shareholder to disproportionately higher participation in the earnings 

generated in the other treaty country by particular assets or activities of the company. A 

company’s primary place of management and control is treated as being in the company’s 

country of residence only if executive officers and senior management employees exercise dayto-day responsibility for more of the company’s (and its subsidiaries’) strategic, financial, and 

operational policy decision-making in that country than in any other country and the staff of 

those executive officers and senior management employees conduct more of the day-to-day 

activities necessary for preparing and making those decisions in that country than in any other 

country. 

A company that does not satisfy the public-trading test may qualify for treaty benefits if it 

is a direct or an indirect subsidiary of a company or companies that do satisfy that test. Under 

the subsidiary rules of the 1996 Model Convention, at least 50 percent of each class of shares in 

a company must be owned directly or indirectly by companies entitled to treaty benefits under 

the public-trading test described in the preceding paragraph. Indirect ownership may be used to 

satisfy this rule only if each intermediate owner is entitled to all treaty benefits. The 2006 Model 

Convention changes these subsidiary rules in several ways. First, 50 percent is specifically 

defined as at least 50 percent of the aggregate vote and value of a company’s shares and at least 

50 percent of any disproportionate class of the company’s shares. Second, the 50-percent-ormore ownership must be concentrated in five or fewer companies entitled to benefits under the 

public-trading test described previously. Third, the 2006 Model Convention provides that a 

subsidiary may satisfy the 50-percent-or-more ownership rule through indirect ownership only if 

each intermediate owner is a resident of either treaty country, but it does not require that each 

intermediate owner be entitled to treaty benefits. 

Ownership and base-erosion test

A legal entity that is a resident of a treaty country may qualify for treaty benefits if it 

satisfies a two-part ownership and base-erosion test. Under the 1996 Model Convention’s 

ownership prong of the test, on at least half the days of the taxable year, persons who qualify for 

all treaty benefits under the rules described previously (for qualification as an individual, a 

government, a company, or a pension fund or other tax-exempt organization) must own, directly 

or indirectly (through a chain of ownership in which each person is entitled to all treaty benefits) 

at least 50 percent of each class of shares or other beneficial interests in the entity for which 

treaty benefits eligibility is being tested. The 2006 Model Convention changes this ownership 

rule in several ways. First, 50 percent is specifically defined as at least 50 percent of the 

aggregate voting power and value of the entity (and at least 50 percent of any disproportionate 

class of the entity’s shares). Second, the ownership test cannot be satisfied through ownership 

by an entity that qualifies for treaty benefits because it is a subsidiary of a company or 
28 

companies that satisfy the public-trading test described previously. Third, in the case of indirect 

ownership, the 2006 Model Convention provides that each intermediate owner must be a resident 

of the country of residence of the entity for which eligibility for treaty benefits is being tested but 

does not require that each intermediate owner be entitled to treaty benefits. 

Under the base-erosion prong of the two-part test in the 1996 Model Convention, an 

entity may not pay or accrue, directly or indirectly, to non-treaty-country residents deductible 

payments (as determined for income tax purposes in that entity’s country of residence) totaling 

50 percent or more of the entity’s gross income for the taxable year. A payment made to 

someone other than a treaty-country resident does not count toward the less-than-50-percent 

deductible payment limitation if the payment is attributable to a permanent establishment in 

either treaty country. The 2006 Model Convention changes these base erosion rules in several 

ways. First, under the new base-erosion prong, deductible payments to a resident of a treaty 

country count toward the less-than-50-percent deductible payment limitation if the resident to 

which the payments are made does not qualify for treaty benefits under any one of certain of the 

limitation on benefits rules. Second, arm’s length payments in the ordinary course of business 

for services or tangible property do not count toward the less-than-50-percent limitation. Third, 

the 2006 Model Convention clarifies that to determine whether the base erosion test is satisfied, 

an entity’s gross income is determined under the laws of the entity’s country of residence. 

Fourth, the exception for payments attributable to a permanent establishment in either treaty 

country is eliminated. 

Eligibility for treaty benefits for particular items of income

Under both the 1996 Model Convention and the 2006 Model Convention, a resident of a 

treaty country may be eligible for treaty benefits for a specific income item derived from the 

other treaty country. Under the 1996 Model Convention, a resident of a treaty country not 

otherwise eligible for treaty benefits is entitled to benefits with respect to an item of income 

derived from the other treaty country if the resident is engaged in the active conduct of a trade or 

business in its country of residence; the income item is connected with or incidental to the trade 

or business; and the trade or business is substantial in relation to the activity in the source 

country generating the income. The 1996 Model Convention provides an objective test for 

whether a trade or business is substantial in relation to the activity in the source country that 

generates the income. The Convention also describes the circumstances in which income is 

derived in connection with or is incidental to a trade or business. And the Convention provides 

that the business of making or managing investments is not considered an active trade or 

business unless the activity is banking, insurance, or securities activity conducted by a bank, an 

insurance company, or a registered securities dealer. 

The income item eligibility rule in the 2006 Model Convention generally is similar to the 

rule in the 1996 Model Convention, but the details of the rules differ. The 2006 Model 

Convention provides that a resident of a treaty country is entitled to treaty benefits with respect 

to an item of income derived from the other treaty country, regardless of whether the resident 

otherwise qualifies for treaty benefits, if the resident is engaged in the active conduct of a trade 

or business in its country of residence and the income derived from the other treaty country is 

derived in connection with or is incidental to that trade or business. The substantial activity 

requirement is stated differently in the 2006 Convention than in the 1996 Convention. Under the 
29 

2006 Convention, if a resident of a treaty country derives an item of income from a trade or 

business activity that it conducts in the other treaty country, or derives an income item arising in 

that other country from a related person, the income item eligibility rule is considered satisfied 

for that income item only if the trade or business activity carried on by the resident in its country 

of residence is substantial in relation to the trade or business activity carried on by the resident or 

the related person in the other country. Unlike the 1996 Model Convention, the 2006 Model 

Convention provides no objective test for whether a trade or business activity is substantial; 

instead it provides that the determination is made based on all the facts and circumstances. 

Unlike the 1996 Model Convention, the 2006 Model Convention does not describe 

circumstances in which an item of income is considered to be derived in connection with or is 

incidental to a trade or business. The 2006 Convention, however, provides a new rule for 

determining when activities conducted by one person are treated as conducted by another person. 

Activities of one person are attributed to another person if the persons are connected to one 

another. A person is considered to be connected to another person if one person owns at least 50 

percent of the beneficial interest in the other person or if a third person owns at least 50 percent 

of the beneficial interest in each person. In the case of a company, the 50-percent requirement 

means at least 50 percent of the aggregate vote and value of the company’s shares or of the 

beneficial equity interest in the company. The 2006 Model Convention also provides that in all 

cases a person is connected with another person if based on all relevant facts and circumstances 

one has control of the other or both are under the common control of the same person or persons. 

The 2006 Model Convention’s exception from income item eligibility for income derived 

from certain financial activity differs from the 1996 Model Convention’s exception. Instead of 

denying active trade or business status for the business of making or managing investments 

whenever that business is conducted by a person other than a bank, an insurance company, or a 

registered securities dealer, the 2006 Model Convention precludes from active trade or business 

status only the business of making or managing investments for one’s own account (other than 

when that business is part of banking, insurance, or securities activities conducted by a bank, an 

insurance company, or a registered securities dealer, in which case active trade or business status 

is not automatically denied). 

Grant of treaty benefits by a competent authority

Under both the 1996 and 2006 Model Conventions, a resident of a treaty country not 

otherwise eligible for treaty benefits may be eligible for benefits based on a determination by the 

competent authority of the relevant treaty country. The 1996 Convention provides that a resident 

of a treaty country not otherwise entitled to benefits may be granted benefits of the Convention if 

the competent authority of the country from which benefits are claimed so determines. The 2006 

Model Convention adds details to this rule. First, the Convention clarifies that the competent 

authority that may grant benefits to a resident of a treaty country is the competent authority of 

the other treaty country. Second, the 2006 provision provides that a competent authority may 

grant general treaty benefits or may grant benefits for a specific item of income. Third, the 2006 

Model Convention provides that a competent authority may grant benefits only if it determines 

that the establishment, acquisition, or maintenance of the resident for which treaty benefits are 

sought, and the conduct of that resident’s operations, did not have as one of its principal purposes 

the obtaining of benefits under the Convention.