EXPLANATION OF THE PROPOSED 

INCOME TAX TREATY BETWEEN 

THE UNITED STATES AND 

THE PEOPLE’S REPUBLIC OF BANGLADESH 

Scheduled for a Hearing 

Before the 

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

On February 2, 2006 

____________ 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

January 26, 2006 

JCX-4-06
 

i 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

I. SUMMARY.............................................................................................................................. 2 

II. OVERVIEW OF U.S. TAXATION OF INTERNATIONAL TRADE AND 

INVESTMENT AND U.S. TAX TREATIES .......................................................................... 3 

A. U.S. Tax Rules .................................................................................................................... 3 

B. U.S. Tax Treaties ................................................................................................................ 5 

III. OVERVIEW OF BANGLADESH TAX LAWS ..................................................................... 7 

A. National Income Taxes ....................................................................................................... 7 

B. International Aspects Under Domestic Bangladesh Law ................................................... 8 

C. Other Taxes....................................................................................................................... 10 

IV. EXPLANATION OF PROPOSED TREATY........................................................................ 11 

Article 1. Personal Scope....................................................................................................... 11 

Article 2. Taxes Covered ....................................................................................................... 13 

Article 3. General Definitions................................................................................................ 13 

Article 4. Fiscal Domicile...................................................................................................... 14 

Article 5. Permanent Establishment....................................................................................... 17 

Article 6. Income From Immovable Property........................................................................ 19 

Article 7. Business Profits...................................................................................................... 20 

Article 8. Shipping and Air Transport ................................................................................... 24 

Article 9. Associated Enterprises........................................................................................... 25

Article 10. Dividends............................................................................................................. 26 

Article 11. Interest ................................................................................................................. 30 

Article 12. Royalties .............................................................................................................. 33 

Article 13. Capital Gains........................................................................................................ 34 

Article 14. Branch Tax........................................................................................................... 36 

Article 15. Independent Personal Services ............................................................................ 38 

Article 16. Dependent Personal Services............................................................................... 39 

Article 17. Limitation on Benefits ......................................................................................... 40 

Article 18. Entertainers and Athletes..................................................................................... 44 

Article 19. Pensions, Et Cetera .............................................................................................. 46 

Article 20. Government Service ............................................................................................ 47 

Article 21. Teachers, Students and Trainees.......................................................................... 48 

Article 22. Other Income ....................................................................................................... 49 

Article 23. Relief From Double Taxation.............................................................................. 50 

Article 24. Nondiscrimination ............................................................................................... 52

Article 25. Mutual Agreement Procedure.............................................................................. 53 

Article 26. Exchange of Information and Administrative Assistance ................................... 55
 Page

ii 

Article 27. Effect of Convention on Diplomatic Agents and Consular Officers, 

 Domestic Laws, and Other Treaties..................................................................... 56 

Article 28. Entry into Force ................................................................................................... 58 

Article 29. Termination.......................................................................................................... 58 

Exchange of Notes .................................................................................................................. 58 

V. ISSUES ................................................................................................................................... 60 

A. Developing-Country Concessions .................................................................................... 60 

B. Expatriation to Avoid Tax by Former U.S. Citizens and Long-Term Residents.............. 63 

C. Education and Training..................................................................................................... 65 

D. U.S. Model Income Tax Treaty ........................................................................................ 68 
 

1 

INTRODUCTION 

This pamphlet,1

 prepared by the staff of the Joint Committee on Taxation, describes the 

proposed income tax treaty between the United States and the People’s Republic of Bangladesh, 

as supplemented by an exchange of diplomatic notes (the “notes”). The proposed treaty and 

notes were signed on September 26, 2004. Unless otherwise specified, the proposed treaty and 

the notes are hereinafter referred to collectively as the “proposed treaty.” The Senate Committee 

on Foreign Relations has scheduled a public hearing on the proposed treaty for February 2, 

2006.2

Part I of the pamphlet provides a summary of the proposed treaty. Part II provides a brief 

overview of U.S. tax laws relating to international trade and investment and of U.S. income tax 

treaties in general. Part III contains a brief overview of Bangladesh tax laws. Part IV contains 

an article-by-article explanation of the proposed treaty. Part V contains a discussion of issues 

relating to the proposed treaty. 

 1

 This pamphlet may be cited as follows: Joint Committee on Taxation, Explanation of the 

Proposed Income Tax Treaty Between the United States and the People’s Republic of Bangladesh

(JCX-4-06), January 26, 2006. 

2

 For a copy of the proposed treaty, see Senate Treaty Doc. 109-5. 
 

2 

I. SUMMARY 

The principal purposes of the proposed treaty are to reduce or eliminate double taxation 

of income earned by residents of either country from sources within the other country and to 

prevent avoidance or evasion of the taxes of the two countries. The proposed treaty also is 

intended to promote close economic cooperation between the two countries and to eliminate 

possible barriers to trade and investment caused by overlapping taxing jurisdictions of the two 

countries. 

As in other U.S. tax treaties, these objectives principally are achieved through each 

country’s agreement to limit, in certain specified situations, its right to tax income derived from 

its territory by residents of the other country. For example, the proposed treaty contains 

provisions under which each country generally agrees not to tax business income derived from 

sources within that country by residents of the other country unless the business activities in the 

taxing country are substantial enough to constitute a permanent establishment (Article 7). 

Similarly, the proposed treaty contains “commercial visitor” exemptions under which residents 

of one country performing personal services in the other country will not be required to pay tax 

in the other country unless their contact with the other country exceeds specified minimums 

(Articles 15, 16, and 18). The proposed treaty provides that dividends, interest, royalties, and 

certain capital gains derived by a resident of either country from sources within the other country 

generally may be taxed by both countries (Articles 10, 11, 12, and 13); however, the rate of tax 

that the source country may impose on a resident of the other country on dividends, interest, and 

royalties may be limited by the proposed treaty (Articles 10, 11, and 12). 

In situations in which the country of source retains the right under the proposed treaty to 

tax income derived by residents of the other country, the proposed treaty generally provides for 

relief from the potential double taxation through the allowance by the country of residence of a 

tax credit for certain foreign taxes paid to the other country (Article 23). 

The proposed treaty contains the standard provision (the “saving clause”) included in 

U.S. tax treaties pursuant to which each country retains the right to tax its residents and citizens 

as if the treaty had not come into effect (Article 1). In addition, the proposed treaty contains the 

standard provision providing that the treaty may not be applied to deny any taxpayer any benefits 

the taxpayer would be entitled under the domestic law of a country or under any other agreement 

between the two countries (Article 1). 

The proposed treaty also contains a detailed limitation-on-benefits provision to prevent 

the inappropriate use of the treaty by third-country residents (Article 17). 

The United States and the People’s Republic of Bangladesh do not have an income tax 

treaty currently in force. The proposed treaty is similar to other recent U.S. income tax treaties, 

the 1996 U.S. model income tax treaty (“U.S. model”), the 1992 model income tax treaty of the 

Organization for Economic Cooperation and Development, as updated (“OECD model”), and the 

1980 United Nations Model Double Taxation Convention Between Developed and Developing 

Countries, as amended in 2001 (“U.N. model”). However, the proposed treaty contains certain 

substantive deviations from these treaties and models. 
 

3 

II. OVERVIEW OF U.S. TAXATION OF INTERNATIONAL TRADE 

AND INVESTMENT AND U.S. TAX TREATIES 

This overview briefly describes certain U.S. tax rules relating to foreign income and 

foreign persons that apply in the absence of a U.S. tax treaty. This overview also discusses the 

general objectives of U.S. tax treaties and describes some of the modifications to U.S. tax rules 

made by treaties. 

A. U.S. Tax Rules 

The United States taxes U.S. citizens, residents, and corporations on their worldwide 

income, whether derived in the United States or abroad. The United States generally taxes 

nonresident alien individuals and foreign corporations on all their income that is effectively 

connected with the conduct of a trade or business in the United States (sometimes referred to as 

“effectively connected income”). The United States also taxes nonresident alien individuals and 

foreign corporations on certain U.S.-source income that is not effectively connected with a U.S. 

trade or business. 

Income of a nonresident alien individual or foreign corporation that is effectively 

connected with the conduct of a trade or business in the United States generally is subject to U.S. 

tax in the same manner and at the same rates as income of a U.S. person. Deductions are 

allowed to the extent that they are related to effectively connected income. A foreign 

corporation also is subject to a flat 30-percent branch profits tax on its “dividend equivalent 

amount,” which is a measure of the effectively connected earnings and profits of the corporation 

that are removed in any year from the conduct of its U.S. trade or business. In addition, a foreign 

corporation is subject to a flat 30-percent branch-level excess interest tax on the excess of the 

amount of interest that is deducted by the foreign corporation in computing its effectively 

connected income over the amount of interest that is paid by its U.S. trade or business. 

U.S.-source fixed or determinable annual or periodical income of a nonresident alien 

individual or foreign corporation (including, for example, interest, dividends, rents, royalties, 

salaries, and annuities) that is not effectively connected with the conduct of a U.S. trade or 

business is subject to U.S. tax at a rate of 30 percent of the gross amount paid. Certain insurance 

premiums earned by a nonresident alien individual or foreign corporation are subject to U.S. tax 

at a rate of one or four percent of the premiums. These taxes generally are collected by means of 

withholding. 

Specific statutory exemptions from the 30-percent withholding tax are provided. For 

example, certain original issue discount and certain interest on deposits with banks or savings 

institutions are exempt from the 30-percent withholding tax. An exemption also is provided for 

certain interest paid on portfolio debt obligations. In addition, income of a foreign government 

or international organization from investments in U.S. securities is exempt from U.S. tax. 

U.S.-source capital gains of a nonresident alien individual or a foreign corporation that 

are not effectively connected with a U.S. trade or business generally are exempt from U.S. tax, 

with two exceptions: (1) gains realized by a nonresident alien individual who is present in the 
 

4 

United States for at least 183 days during the taxable year; and (2) certain gains from the 

disposition of interests in U.S. real property. 

Rules are provided for the determination of the source of income. For example, interest 

and dividends paid by a U.S. citizen or resident or by a U.S. corporation generally are considered 

U.S.-source income. Conversely, dividends and interest paid by a foreign corporation generally 

are treated as foreign-source income. Special rules apply to treat as foreign-source income (in 

whole or in part) interest paid by certain U.S. corporations with foreign businesses. Rents and 

royalties paid for the use of property in the United States are considered U.S.-source income. 

Because the United States taxes U.S. citizens, residents, and corporations on their 

worldwide income, double taxation of income can arise when income earned abroad by a U.S. 

person is taxed by the country in which the income is earned and also by the United States. The 

United States seeks to mitigate this double taxation generally by allowing U.S. persons to credit 

foreign income taxes paid against the U.S. tax imposed on their foreign-source income. A 

fundamental premise of the foreign tax credit is that it may not offset the U.S. tax liability on 

U.S.-source income. Therefore, the foreign tax credit provisions contain a limitation that ensures 

that the foreign tax credit offsets only the U.S. tax on foreign-source income. The foreign tax 

credit limitation generally is computed on a worldwide basis (as opposed to a “per-country” 

basis). The limitation is applied separately for certain classifications of income. In addition, a 

special limitation applies to the credit for foreign taxes imposed on foreign oil and gas extraction 

income. 

For foreign tax credit purposes, a U.S. corporation that owns 10 percent or more of the 

voting stock of a foreign corporation and receives a dividend from the foreign corporation (or is 

otherwise required to include in its income earnings of the foreign corporation) is deemed to 

have paid a portion of the foreign income taxes paid by the foreign corporation on its 

accumulated earnings. The taxes deemed paid by the U.S. corporation are included in its total 

foreign taxes paid and its foreign tax credit limitation calculations for the year in which the 

dividend is received. 
 

5 

B. U.S. Tax Treaties 

The traditional objectives of U.S. tax treaties have been the avoidance of international 

double taxation and the prevention of tax avoidance and evasion. Another related objective of 

U.S. tax treaties is the removal of the barriers to trade, capital flows, and commercial travel that 

may be caused by overlapping tax jurisdictions and by the burdens of complying with the tax 

laws of a jurisdiction when a person’s contacts with, and income derived from, that jurisdiction 

are minimal. To a large extent, the treaty provisions designed to carry out these objectives 

supplement U.S. tax law provisions having the same objectives; treaty provisions modify the 

generally applicable statutory rules with provisions that take into account the particular tax 

system of the treaty partner. 

The objective of limiting double taxation generally is accomplished in treaties through 

the agreement of each country to limit, in specified situations, its right to tax income earned from 

its territory by residents of the other country. For the most part, the various rate reductions and 

exemptions agreed to by the source country in treaties are premised on the assumption that the 

country of residence will tax the income at levels comparable to those imposed by the source 

country on its residents. Treaties also provide for the elimination of double taxation by requiring 

the residence country to allow a credit for taxes that the source country retains the right to 

impose under the treaty. In addition, in the case of certain types of income, treaties may provide 

for exemption by the residence country of income taxed by the source country. 

Treaties define the term “resident” so that an individual or corporation generally will not 

be subject to tax as a resident by both the countries. Treaties generally provide that neither 

country will tax business income derived by residents of the other country unless the business 

activities in the taxing jurisdiction are substantial enough to constitute a permanent establishment 

or fixed base in that jurisdiction. Treaties also contain commercial visitation exemptions under 

which individual residents of one country performing personal services in the other will not be 

required to pay tax in that other country unless their contacts exceed certain specified minimums 

(e.g., presence for a set number of days or earnings in excess of a specified amount). Treaties 

address passive income such as dividends, interest, and royalties from sources within one 

country derived by residents of the other country either by providing that such income is taxed 

only in the recipient’s country of residence or by reducing the rate of the source country’s 

withholding tax imposed on such income. In this regard, the United States agrees in its tax 

treaties to reduce its 30-percent withholding tax (or, in the case of some income, to eliminate it 

entirely) in return for reciprocal treatment by its treaty partner. 

In its treaties, the United States, as a matter of policy, generally retains the right to tax its 

citizens and residents on their worldwide income as if the treaty had not come into effect. The 

United States also provides in its treaties that it will allow a credit against U.S. tax for income 

taxes paid to the treaty partners, subject to the various limitations of U.S. law. 

The objective of preventing tax avoidance and evasion generally is accomplished in 

treaties by the agreement of each country to exchange tax-related information. Treaties generally 

provide for the exchange of information between the tax authorities of the two countries when 

such information is necessary for carrying out provisions of the treaty or of their domestic tax 

laws. The obligation to exchange information under the treaties typically does not require either 
 

6 

country to carry out measures contrary to its laws or administrative practices or to supply 

information that is not obtainable under its laws or in the normal course of its administration or 

that would reveal trade secrets or other information the disclosure of which would be contrary to 

public policy. The Internal Revenue Service (the “IRS”), and the treaty partner’s tax authorities, 

also can request specific tax information from a treaty partner. This can include information to 

be used in a criminal investigation or prosecution. 

Administrative cooperation between countries is enhanced further under treaties by the 

inclusion of a “competent authority” mechanism to resolve double taxation problems arising in 

individual cases and, more generally, to facilitate consultation between tax officials of the two 

governments. 

Treaties generally provide that neither country may subject nationals of the other country 

(or permanent establishments of enterprises of the other country) to taxation more burdensome 

than that it imposes on its own nationals (or on its own enterprises). Similarly, in general, 

neither treaty country may discriminate against enterprises owned by residents of the other 

country. 

At times, residents of countries that do not have income tax treaties with the United 

States attempt to use a treaty between the United States and another country to avoid U.S. tax. 

To prevent third-country residents from obtaining treaty benefits intended for treaty country 

residents only, treaties generally contain an “anti-treaty shopping” provision that is designed to 

limit treaty benefits to bona fide residents of the two countries. 
 

7 

III. OVERVIEW OF BANGLADESH TAX LAWS3

A. National Income Taxes 

Overview

Bangladesh imposes income tax on net income at the national level. The definition of 

income subject to tax is expansive and includes most capital gains. Taxable business income is 

based on accounting income, adjusted for nondeductible expenses and statutory allowances. 

Bangladesh offers several tax incentives, including tax holidays specified by the National Board 

of Revenue and reduced tax rates for specific categories of income and investors.4

Individuals

Individuals resident in Bangladesh are subject to tax on their worldwide income. For 

most types of income, individual rate brackets are generally progressive from zero to 25 percent. 

Capital gains are generally subject to tax at progressive rates from zero to 15 percent. Dividends 

and interest are generally are taxable to residents at a rate of 10 percent. 

Companies

Companies resident in Bangladesh are subject to tax on their worldwide income. The 

general rate applicable for publicly traded companies having a registered office in Bangladesh 

and regularly distributing certain required dividends is 30 percent. The general rate for all other 

companies, including nonresident companies, is 40 percent. Banks, insurance companies, and 

other financial institutions are subject to income tax at a rate of 45 percent and to an excess 

profits surtax of 15 percent on profits exceeding 50 percent of capital and reserves. Dividends 

generally are subject to a withholding tax of 10 percent. 

 3

 The information in this section relates to foreign law and is based on the Joint Committee 

staff’s review of publicly available secondary sources. The description is intended to serve as a general 

overview; it may not be fully accurate in all respects, as many details have been omitted and simplifying 

generalizations made for ease of exposition. Major law changes under the Bangladesh proposed budget 

for fiscal year 2004–05, applicable from July 1, 2004, are noted. 

4

 The 2004-2005 fiscal year tax holiday provision expired on June 30, 2005. However, it has 

been extended for three years for some sectors to June 30, 2008. These sectors include textiles, 

pharmaceuticals, ceramics, fertilizers, ship building, container terminal and depots, computer hardware, 

and steel. 
 

8 

B. International Aspects Under Domestic Bangladesh Law 

Residency

Generally, resident individuals and companies are subject to income tax on their 

worldwide income, while nonresident individuals and companies are subject to tax only on their 

income from sources in Bangladesh. Individuals are generally resident for tax purposes if they 

are present for 182 days or more in a tax year, or are present in Bangladesh for more than 90 

days in a tax year and have been present in Bangladesh for a total of more than 364 days during 

the four preceding tax years. However, noncitizen technicians employed in Bangladesh are 

exempted from tax on their salaries for the first three years of employment upon approval by the 

tax department provided that the salaries are not taxed outside Bangladesh. After this three-year 

period, such individuals may be considered residents and taxed on their worldwide income. An 

employee present in Bangladesh for fewer than 182 days in a tax year is exempt from income tax 

on a salary received from an employer having the same country of residence, provided that the 

salary is not paid by a permanent establishment and neither taxed outside Bangladesh nor 

deducted from the employer’s taxable income in Bangladesh. A company is resident in 

Bangladesh if it is registered under the laws of Bangladesh or if the control and management of 

its business are exercised in Bangladesh. 

Sources of income

Income from sources in Bangladesh includes income derived from services rendered and 

activities carried out in Bangladesh, income from sales of property located within Bangladesh, 

and income reasonably attributable to the conduct of a business within Bangladesh. The concept 

of a “permanent establishment” is not used in Bangladesh internal tax law except in connection 

with the disallowance of an exemption from income tax for short-term foreign workers’ income 

earned there. 

Nonresident withholding

Nonresident individuals are generally subject to tax on Bangladesh-source income at a 

rate of 25 percent without allowance of deductions, exemptions or other relief. Nonresident 

companies are subject to tax on Bangladesh-source income at a rate of 40 percent without 

allowance of tax credits. 

Bangladesh imposes and requires withholding of tax on dividends paid by resident 

companies to nonresident companies at a rate of 40 percent. Dividends paid to nonresident 

individuals are subject to withholding tax at a rate of 25 percent. 

Bangladesh-source interest payments to nonresident corporations generally are subject to 

withholding tax at a rate of 40 percent. Interest payments to nonresident individuals are 

generally subject to withholding tax at a rate of 25 percent. As with dividends, the withholding 

tax rate is the income tax rate applicable to the recipient. 

Bangladesh-source royalties and technical assistance fees paid to nonresident individuals 

or nonresident companies are subject to a 10-percent withholding tax. 
 

9 

In the absence of a treaty, Bangladesh generally provides double tax relief by way of a 

credit against Bangladesh tax. 
 

10 

C. Other Taxes 

In addition to the taxes described above, other taxes are levied at the national level. A 

value-added tax is imposed at a standard 15 percent rate, which is reduced to 1.5 percent for all 

sales of goods in metropolitan and municipal areas. A turnover tax is imposed on local products 

and services at a rate of four percent if total annual turnover is less than 2 million taka 

(approximately $30,000).5 Excise taxes are imposed upon certain luxury goods and services, 

vehicles, natural gas, liquor, cigarettes and certain other goods and services. A stamp tax of 10 

percent is imposed upon transfers of real property. Duties of 7.5 to 25 percent are imposed upon 

exports. Gross receipts of nonresident air transport companies, nonresident shipping companies, 

and nonresident companies engaged in oil exploration are taxed at rates of three percent, eight 

percent, and 3.75 percent respectively. 

 5

 This U.S. dollar equivalent was calculated using an exchange rate of 66 Bangladesh taka to one 

U.S. dollar. 
 

11

IV. EXPLANATION OF PROPOSED TREATY 

Article 1. Personal Scope

In general

The personal scope article describes the persons who may claim the benefits of the 

proposed treaty. The proposed treaty generally applies to residents of the United States and to 

residents of Bangladesh, with specific modifications. The determination of whether a person is a 

resident of the United States or Bangladesh is made under the provisions of Article 4 (Fiscal 

Domicile). 

Saving clause

Like all U.S. income tax treaties and the U.S. model, the proposed treaty includes a 

“saving clause.” Under this clause, with specific exceptions described below, the proposed 

treaty does not affect the taxation by either treaty country of its residents or its citizens. By 

reason of this saving clause, unless otherwise specifically provided in the proposed treaty, the 

United States will continue to tax its citizens who are residents of Bangladesh as if the treaty 

were not in force. 

As in other U.S. income tax treaties, the saving clause in the proposed treaty contains a 

provision under which the saving clause (and therefore U.S. taxing jurisdiction to the full extent 

of U.S. internal law in most respects) applies to a former U.S. citizen or long-term resident 

whose loss of citizenship or resident status had as one of its principal purposes the avoidance of 

U.S. income tax.6

 The term “long-term resident” means any individual who was a lawful 

permanent resident of the United States for eight or more of the preceding 15 taxable years.7

 

This provision was included to allow the United States to apply its special expatriation tax 

regime, set forth in section 877 of the Code.8

First enacted in 1966, this regime was designed to reduce opportunities for U.S. citizens 

to renounce their citizenship for the purpose of avoiding U.S. taxes. The regime has the main 

effect of expanding the scope of income that is subject to taxation by the United States, such that 

a former citizen or long-term resident to whom the rules apply is subject to U.S. tax on a 

 6

 Although included in the proposed treaty in order to accommodate U.S. internal law, this 

provision is reciprocal, and thus could apply in a case involving a former citizen or long-term resident of 

Bangladesh. This description focuses on the impact of the provision with respect to the U.S. tax rules. 

7

 An individual is not treated as a lawful permanent resident for any taxable year if such 

individual is treated as a resident of a foreign country for such year under the provisions of a tax treaty 

between the United States and the foreign country and the individual does not waive the benefits of such 

treaty applicable to residents of the foreign country. 

8

 The Code also includes special expatriation-related rules for purposes of the estate and gift 

taxes. See Code secs. 2107 and 2501(a)(3). References to the “Code” are to the U.S. Internal Revenue 

Code of 1986, as amended. 
 

12

somewhat broader basis than other nonresident aliens, but still on a narrower basis than a current 

U.S. citizen or resident. This special tax treatment applies for a period of 10 years, and thus the 

provision of the proposed treaty applies only for the 10-year period following the loss of U.S. 

citizenship or termination of residency. 

Substantial changes to the special expatriation rules were included in the American Jobs 

Creation Act of 2004 (“AJCA”), which was signed into law on October 22, 2004 (roughly one 

month after the proposed treaty was signed, on September 26, 2004). The proposed treaty thus 

does not reflect these recent changes. 

AJCA eliminated prior law’s subjective determinations of tax-avoidance purpose and 

replaced them with objective rules for determining the applicability of the special tax regime for 

expatriates. Under the regime as amended by AJCA, a former citizen or former long-term 

resident is subject to the special income, estate, and gift tax rules for expatriates unless the 

individual: (1) establishes that his or her average annual net income tax liability for the five 

preceding years does not exceed $124,000 (adjusted for inflation after 2004) and his or her net 

worth is less than $2 million, or alternatively satisfies limited, objective exceptions for dual 

citizens and minors who have had no substantial contact with the United States; and (2) certifies 

under penalties of perjury that he or she has complied with all Federal tax obligations for the 

preceding five years and provides such evidence of compliance as the Treasury Secretary may 

require. Thus, as a result of AJCA, the application of the expatriation tax regime no longer turns 

on determinations of whether a person had a principal purpose of tax avoidance, as it often did 

prior to AJCA. 

The Treasury Department’s technical explanation of the proposed treaty (“Technical 

Explanation”) notes that while AJCA eliminated the ruling process and the “tax avoidance 

purpose” language in section 877, it retained the objective net worth and net income tax tests. 

According to the Treasury Department, the objective tests in section 877 represent the 

administrative means by which the United States determines whether a taxpayer has a tax 

avoidance purpose for purposes of reserving the taxing rights contained in the saving clause. 

The Technical Explanation maintains that section 877, as amended by AJCA, is consistent with 

paragraph 2 of Article 29 and paragraph 2 allows the United States to exercise its full taxing 

jurisdiction with respect to former citizens and long-term residents. 

Exceptions to saving clause

Exceptions to the saving clause are provided for the following benefits conferred by a 

treaty country: the allowance of correlative adjustments when the profits of an associated 

enterprise are adjusted by the other country (Article 9, paragraph 2); the exemption from sourceand residence-country tax for certain public pension, social security, alimony, and child support 

payments (Article 19, paragraphs 2 and 5); relief from double taxation through the provision of a 

foreign tax credit (Article 23); protection from discriminatory tax treatment with respect to 

transactions with residents of the other country (Article 24); and benefits under the mutual 

agreement procedures (Article 25). These exceptions to the saving clause permit residents or 

citizens of the United States or Bangladesh to obtain such benefits of the proposed treaty with 

respect to their country of residence or citizenship. 
 

13

In addition, the saving clause does not apply to certain benefits conferred by one of the 

countries upon individuals who neither are citizens of that country nor have been admitted for 

permanent residence in that country. Under this set of exceptions to the saving clause, the 

specified treaty benefits are available to, for example, a citizen of Bangladesh who spends 

enough time in the United States to be taxed as a U.S. resident but who has not acquired U.S. 

permanent residence status (i.e., does not hold a “green card”). The benefits that are covered 

under this set of exceptions are the exemptions from host-country tax for certain compensation 

from government service (Article 20), certain income received by visiting students and trainees 

(Article 21), and the income of diplomatic agents and consular officers (Article 27). 

Article 2. Taxes Covered

The proposed treaty generally applies to the income and capital gains taxes of the United 

States and Bangladesh. Article 24 (Nondiscrimination) of the proposed treaty, however, is 

applicable to all taxes imposed at all levels of government, including state and local taxes. 

In the case of the United States, the proposed treaty applies to the Federal income taxes 

imposed by the Code; it does not apply to social security taxes. In the case of Bangladesh, the 

proposed treaty applies to the income tax, including any surcharges that are calculated by 

reference to income taxes. 

The proposed treaty also will apply to any taxes that are identical or substantially similar 

to the taxes described in the preceding paragraph and that are imposed after the signing of the 

proposed treaty in addition to or in place of existing taxes. This provision generally is found in 

U.S. income tax treaties. The proposed treaty obligates the competent authority of each country 

to notify the competent authority of the other country of any changes in its internal taxation or 

other laws that significantly affect a country’s obligations under the proposed treaty. The 

Technical Explanation states that the use of the term “significantly” means that a change must be 

reported if it is significant to the operation of the proposed treaty. 

Article 3. General Definitions

Article 3 defines several terms used in the treaty. Certain of the standard definitions 

found in most U.S. income tax treaties are included in the proposed treaty. 

The term “person” includes an individual, a partnership, a company, an estate, a trust, and 

any other body of persons. 

A “company” under the proposed treaty is any body corporate or any entity that is treated 

as a body corporate for tax purposes under the laws of the Contracting State in which it is 

organized or has its place of effective management. 

The terms “enterprise of a Contracting State” and “enterprise of the other Contracting 

State” mean, respectively, an enterprise carried on by a resident of a treaty country and an 

enterprise carried on by a resident of the other treaty country. The term “enterprise” is not 

defined in the proposed treaty, but the Technical Explanation states that, as under the OECD 

model, the term refers to the carrying on of any business. In contrast with the definitions in the 

U.S. model, the proposed treaty’s definitions of “enterprise of a Contracting State” and 
 

14

“enterprise of the other Contracting State” do not explicitly refer to fiscally transparent 

enterprises. The Technical Explanation, however, states that the terms encompass an enterprise 

conducted through an entity (such as a partnership) that is treated as fiscally transparent in the 

country in which the entity’s owner is resident. 

The proposed treaty defines “international traffic” as any transport by a ship or aircraft, 

except when the transport is solely between places in a treaty country. Accordingly, as described 

in the Technical Explanation, the carriage of goods solely between, for example, New York and 

Chicago by either a U.S. or a Bangladesh carrier does not constitute international traffic. 

The U.S. “competent authority” is the Secretary of the Treasury or his delegate. The U.S. 

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 Director, International. On 

interpretative issues, the latter acts with the concurrence of the Associate Chief Counsel 

(International) of the IRS. The Bangladesh “competent authority” is the National Board of 

Revenue or its authorized representative. 

The term “United States” means the United States of America, including the States 

thereof and the District of Columbia, but does not include Puerto Rico, the Virgin Islands, Guam, 

or any other U.S. possession or territory. The term is defined to include the territorial sea, and 

the sea bed and subsoil of the submarine areas adjacent to that territorial sea, over which the 

United States exercises sovereign rights in accordance with international law. According to the 

Technical Explanation, the extension of the definition to include certain sea and undersea areas 

generally applies to the extent that the United States exercises its sovereignty over those areas for 

natural resource exploration and exploitation, but only if the person, property, or activity to 

which the proposed treaty is being applied is connected with that exploration or exploitation. 

The term “Bangladesh” means the People’s Republic of Bangladesh. The term is defined 

to include the territorial sea, and the sea bed and subsoil of the submarine areas adjacent to that 

territorial sea, over which Bangladesh exercises sovereign rights in accordance with international 

law. 

The term “national” means, in relation to the United States, all individuals who are 

United States citizens, and in the case of Bangladesh, all individuals possessing the nationality of 

Bangladesh. In the case of both the United States and Bangladesh, a national is any legal person, 

partnership, or association deriving its status as such from the laws of the country in which it is 

established. 

The proposed treaty includes the standard provision that, unless the context otherwise 

requires or the competent authorities agree upon a common meaning under Article 25 (Mutual 

Agreement Procedure), any term not defined in the proposed treaty has the meaning that it has 

under the tax laws of the country that is applying the treaty. 

Article 4. Fiscal Domicile

The assignment of a country of residence is important because the benefits of the 

proposed treaty generally are available only to a resident of one of the treaty countries as that 

term is defined in the proposed treaty. Issues arising because of dual residency, including 
 

15

situations of double taxation, may be avoided by the assignment of one treaty country as the 

country of residence when under the internal laws of the treaty countries a person is a resident of 

both countries. 

Internal taxation rules

United States

Under U.S. law, the residence of an individual is important because a resident alien, like 

a U.S. citizen, is taxed on his or her worldwide income, while a nonresident alien is taxed only 

on certain U.S.-source income and on income that is effectively connected with a U.S. trade or 

business. An individual who spends sufficient time in the United States in any year or over a 

three-year period generally is treated as a U.S. resident. A permanent resident for immigration 

purposes (that is, a “green card” holder) also is treated as a U.S. resident. 

Under U.S. law, a company is taxed on its worldwide income if it is a “domestic 

corporation.” A domestic corporation is one that is created or organized in the United States or 

under the laws of the United States, a State, or the District of Columbia. 

Bangladesh

Under Bangladesh law, resident individuals and companies generally are subject to 

income tax on their worldwide income. By contrast, nonresident individuals and companies 

generally are subject to Bangladesh tax only on their Bangladesh-source income. 

Individuals generally are Bangladesh residents for tax purposes if they are present in 

Bangladesh for 182 days or more in a tax year, or are present in Bangladesh for more than 90 

days in a tax year and have been present in Bangladesh for a total of more than 364 days during 

the four preceding tax years. 

Upon approval by the Bangladesh tax authorities, noncitizen technicians employed in 

Bangladesh may be exempt from Bangladesh tax on their salaries for the first three years of 

employment if the salaries are not taxed outside Bangladesh. After this three-year period, 

noncitizen technicians may be considered residents and will be taxed by Bangladesh on their 

worldwide income. An employee present in Bangladesh for fewer than 182 days in a tax year is 

exempt from income tax on a salary received from an employer having the same country of 

residence, provided that the salary is not paid by a Bangladesh permanent establishment and is 

neither taxed outside Bangladesh nor deducted from the employer’s taxable income in 

Bangladesh. 

A company is resident in Bangladesh if it is registered under the laws of Bangladesh or if 

the control and management of its business are exercised in Bangladesh. 

Proposed treaty rules

Article 4 provides rules to determine whether a person is a resident of the United States 

or Bangladesh under the proposed treaty. The rules generally are consistent with the rules of the 

U.S. model. 
 

16

The proposed treaty generally defines “resident of a Contracting State” to mean any 

person who, under the laws of that State, is liable to tax in that State by reason of the person’s 

domicile, residence, citizenship, place of management, place of incorporation, or any other 

criterion of a similar nature. The term “resident of a Contracting State” does not include any 

person who is liable to tax in that State only on income from sources in that State. Accordingly, 

although not explicitly stated in the proposed treaty, an enterprise of Bangladesh with a 

permanent establishment in the United States does not become a resident of the United States as 

a result of its U.S. permanent establishment: The enterprise generally is liable to tax by the 

United States only on income attributable to its U.S. permanent establishment, not on its 

worldwide income. 

The proposed treaty makes explicit the generally understood practice of including in the 

definition of “resident of a Contracting State” the government of that State and any political 

subdivision or local authority of that State. 

The proposed treaty provides special rules to treat as a resident of a treaty country an 

organization that is generally exempt from tax in that country and that is established and 

maintained (1) exclusively for a religious, charitable, educational, scientific or other similar 

purpose; or (2) to provide pensions or other similar benefits to employees pursuant to a plan. 

The proposed treaty provides a series of tie-breaker rules to determine residence in the 

case of an individual who, under the basic residence definition, would be considered to be a 

resident of both countries. These tie-breaker rules are to be applied in the order in which they 

are described below. Under these rules, an individual is deemed to be a resident of the country in 

which he or she has a permanent home available. If the individual has a permanent home in both 

countries or in neither country, the individual’s residence is deemed to be the country with which 

his or her personal and economic relations are closer (that is, the individual’s “center of vital 

interests”). If it cannot be determined in which country the individual has his or her center of 

vital interests, the individual is deemed to be a resident of the country in which he or she has an 

habitual abode. If the individual has an habitual abode in both countries or in neither country, 

the individual is deemed to be a resident of the country of which he or she is a national. If the 

individual is a national of both countries or of neither country, the competent authorities of the 

countries will settle the question of residence by mutual agreement. 

The proposed treaty also provides a tie-breaker rule for dual-resident companies. If, 

under the general residence rules described above, a company is a resident of both the United 

States and Bangladesh, the company is treated as a resident of the country under the laws of 

which it is organized or created. The following example illustrates the operation of this tiebreaker rule. A company is treated as a resident of the United States if it is created or organized 

under the laws of the United States or a political subdivision. Under Bangladesh law, a company 

is treated as a resident of Bangladesh if it is either incorporated there or managed and controlled 

there. Dual residence, therefore, can arise in the case of a company that is organized in the 

United States and is managed and controlled in Bangladesh. The tie-breaker rule provides that 

the residence of such a company would be in the country under the laws of which it is created or 

organized (in the example, the United States). 
 

17

If, under the general residence rules described previously, a person other than an 

individual or company is a resident of both countries, the proposed treaty requires the competent 

authorities to endeavor to settle the issue of residence by mutual agreement and to determine the 

mode of application of the proposed treaty to that person. 

Fiscally transparent entities

The proposed treaty sets forth a special residence rule for partnerships, trusts, and estates 

(fiscally transparent entities). Under this rule, income derived through an entity that is a 

partnership, trust, or estate under the laws of either treaty country is considered to be the income 

of a resident of one of the treaty countries only to the extent that the income is subject to tax in 

that country as the income of a resident. For example, if a Bangladesh company pays interest to 

an entity that is treated as fiscally transparent for U.S. tax purposes, the interest will be 

considered to be derived by a resident of the United States only to the extent that U.S. tax laws 

treat one or more U.S. residents (whose status as U.S. residents is determined under U.S. tax 

laws) as deriving the interest income for U.S. tax purposes. 

The Technical Explanation states that the rule for income derived through fiscally 

transparent entities applies regardless of where the entity is organized (in the United States, 

Bangladesh, or a third country). The Technical Explanation also states that these rules apply 

even if an entity that is fiscally transparent in the country in which it is organized is viewed 

differently under the tax laws of the other country. As an example, the Technical Explanation 

states that income from Bangladesh sources received by an entity organized under the laws of 

Bangladesh, which is treated for U.S. tax purposes as a corporation and is owned by a U.S. 

shareholder who is a U.S. resident for U.S. tax purposes, is not considered derived by the 

shareholder of that corporation even if, under the tax laws of Bangladesh, the entity is treated as 

fiscally transparent. Rather, for purposes of the proposed treaty, the income is treated as derived 

by an entity resident in Bangladesh. 

Article 5. Permanent Establishment

The proposed treaty contains a definition of the term “permanent establishment” that 

generally follows the pattern of other recent U.S. income tax treaties, the U.S. model, and the 

OECD model. The definition, however, also includes deviations from the U.S. and OECD 

models. These deviations are described below and are discussed separately in Part V of this 

pamphlet, dealing with developing-country concessions. 

The permanent establishment concept is one of the basic devices used in income tax 

treaties to limit the taxing jurisdiction of the host country and thus to mitigate double taxation. 

Generally, an enterprise that is a resident of one country is not taxable by the other country on its 

business profits unless those profits are attributable to a permanent establishment of the resident 

in the other country. The permanent establishment concept also is used to determine whether the 

reduced rates of, or exemptions from, tax provided for dividends, interest, and royalties apply, or 

whether those items of income will be taxed as business profits. 

In general, under the proposed treaty, a permanent establishment is a fixed place of 

business through which the business of an enterprise is wholly or partly carried on. A permanent 
 

18

establishment includes a place of management, a branch, an office, a factory, a workshop, a store 

or other sales outlet, a warehouse in relation to a person providing storage facilities for others, 

and a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources. It 

also includes a building site, a construction or assembly project, or an installation or drilling rig 

used for the exploration of natural resources, if the site, project, or activity lasts for more than 

183 days. The Technical Explanation states that the 183-day test applies separately to each site 

or project, with a series of contracts or projects that are interdependent both commercially and 

geographically treated as a single project. The Technical Explanation further states that if the 

183-day threshold is exceeded, the site or project constitutes a permanent establishment as of the 

first day of the activity. These rules are similar to the rules in the U.S. model, but the U.S. model 

uses a threshold of 12 months instead of 183 days. The 183-day threshold is consistent with the 

U.N. model and with other treaties that the United States has concluded with developing 

countries. 

Under the proposed treaty, the following activities are deemed not to constitute a 

permanent establishment: (1) the use of facilities solely for storing or displaying goods or 

merchandise belonging to the enterprise; (2) the maintenance of a stock of goods or merchandise 

belonging to the enterprise solely for storage or display or solely for processing by another 

enterprise; and (3) the maintenance of a fixed place of business solely for the purchase of goods 

or merchandise or for the collection of information for the enterprise. The proposed treaty also 

provides that the maintenance of a fixed place of business solely for the purpose of carrying on 

any other activity of a preparatory or auxiliary character does not constitute a permanent 

establishment. The proposed treaty further provides that no combination of the excepted 

activities described above will give rise to a permanent establishment, provided the overall 

activity of the fixed place of business resulting from the combination is of a preparatory or 

auxiliary character. This rule is similar to the rule in the U.S. model except that the U.S. model 

(unlike the OECD model) does not include the additional preparatory or auxiliary requirement. 

Unlike the U.S. model (but like the U.N. model), the proposed treaty does not exclude 

from permanent establishment status the use of facilities or the maintenance of a stock of goods 

solely for the purpose of delivery. The proposed treaty, however, includes a separate rule that 

the term “permanent establishment” does not include the use of facilities or the maintenance of a 

stock of goods or merchandise belonging to the enterprise for the purpose of “occasional 

delivery” of the goods or merchandise. The Technical Explanation states that a permanent 

establishment does exist if deliveries are made on a regular basis from a warehouse or other 

storage facility. 

The proposed treaty sets forth two circumstances in which a dependent agent of an 

enterprise constitutes a permanent establishment of the enterprise. First, a dependent agent 

acting in a treaty country on behalf of an enterprise of the other country is a permanent 

establishment in the first country if the agent has, and habitually exercises in that first country, 

the authority to conclude contracts in the name of the enterprise. This rule does not apply where 

the activities are limited to the preparatory and auxiliary activities described in the two preceding 

paragraphs. Second, even if a dependent agent of an enterprise of one treaty country has no 

authority to conclude contracts, the dependent agent will give rise to a permanent establishment 

of the enterprise in the second treaty country if the agent maintains in the second treaty country a 

stock of goods or merchandise from which the agent regularly fills orders or makes deliveries on 
 

19

behalf of the enterprise, and additional activities conducted in the first treaty country on behalf of 

the enterprise have contributed to the conclusion of the sale of the goods or merchandise. This 

second provision is a departure from the U.S. model but is similar to a provision in the U.N. 

model. 

Under the proposed treaty, an enterprise is not treated as having a permanent 

establishment in a treaty country merely because it carries on business in that country through a 

broker, general commission agent, or any other agent of independent status, provided that the 

agent is acting in the ordinary course of its business. The Technical Explanation states that 

whether an enterprise and an agent are independent is a factual determination and that the 

relevant factors in making this determination include the extent to which the agent operates on 

the basis of instructions from the enterprise; the extent to which the agent bears business risk; 

and whether the agent has an exclusive or nearly exclusive relationship with the enterprise. 

The proposed treaty provides that the fact that a company that is a resident of one country 

controls or is controlled by a company that is a resident of the other country or that carries on 

business in the other country does not by itself cause either company to be a permanent 

establishment of the other. 

Article 6. Income From Immovable Property

This article covers income from immovable property. The rules covering gains from the 

sale of immovable property are included in Article 13 (Capital Gains). Under the proposed 

treaty, income derived by a resident of one country from real property situated in the other 

country may be taxed in the country where the property is situated. This rule and, in general, the 

other rules of this article are consistent with the rules in the U.S. and OECD models. 

The Technical Explanation states that the term “immovable property” is intended to have 

the same meaning as the term “real property.” The term “immovable property” is the term used 

in the OECD model. 

The term “real property” generally has the meaning that it has under the law of the 

country in which the property in question is situated.9

 The proposed treaty provides that income 

from real property includes income from property accessory to real property, livestock and 

equipment used in agriculture, forestry, and fishery, rights to which the provisions of general law 

respecting real property apply, usufruct of real property, and rights to variable or fixed payments 

as consideration for the working of, or the right to work, mineral deposits and other natural 

resources. Ships, boats, aircraft, and containers are not regarded as real property. The inclusion 

in Article 6 of income from equipment used in fishery is worthy of note because it does not 

appear in any U.S. tax treaty, although it does appear in several Bangladesh tax treaties. 

The proposed treaty specifies that the country in which the property is situated also may 

tax income derived from the direct use, letting, or use in any other form of real property. The 

 9

 In the case of the United States, according to the Technical Explanation, the term “real 

property” has the meaning given to it by Treas. Reg. sec. 1.897-1(b). 
 

20

rules of this Article, permitting source-country taxation, also apply to the income from real 

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

independent personal services. 

The proposed treaty does not grant an exclusive taxing right to the country where the 

property is situated; such country is merely given the primary right to tax. The proposed treaty 

does not include paragraph 5 of Article 6 of the U.S. model, regarding the allowance of an 

election to be taxed on a net basis on income from real property. However, both the United 

States and (according to the Technical Explanation) Bangladesh allow non-residents to be taxed 

on income from real property on a net basis in the same manner as residents. 

Article 7. Business Profits

Internal taxation rules

United States

U.S. law distinguishes between the U.S. business income and the other U.S. income of a 

nonresident alien or foreign corporation. A nonresident alien or foreign corporation is subject to 

a flat 30-percent rate (or lower treaty rate) of tax on certain U.S.-source income if that income is 

not effectively connected with the conduct of a trade or business within the United States. The 

regular individual or corporate rates apply to income (from any source) that is effectively 

connected with the conduct of a trade or business within the United States. The performance of 

personal services within the United States may constitute a trade or business within the United 

States. 

The treatment of income as effectively connected with a U.S. trade or business depends 

upon whether the source of the income is U.S. or foreign. In general, U.S.-source periodic 

income (such as interest, dividends, rents, and wages) and U.S.-source capital gains are 

effectively connected with the conduct of a trade or business within the United States if the asset 

generating the income is used in (or held for use in) the conduct of the trade or business or if the 

activities of the trade or business were a material factor in the realization of the income. All 

other U.S.-source income of a person engaged in a trade or business in the United States is 

treated as effectively connected with the conduct of a trade or business in the United States 

(under what is referred to as a “force of attraction” rule). 

The income of a nonresident alien individual from the performance of personal services 

within the United States is excluded from U.S.-source income, and therefore is not taxed by the 

United States in the absence of a U.S. trade or business, if the following criteria are met: (1) the 

individual is not in the United States for over 90 days during the taxable year; (2) the 

compensation does not exceed $3,000; and (3) the services are performed as an employee of, or 

under a contract with, a foreign person not engaged in a trade or business in the United States, or 

are performed for a foreign office or place of business of a U.S. person. 

Foreign-source income generally is effectively connected income only if the foreign 

person has an office or other fixed place of business in the United States and the income is 

attributable to that place of business. Only three types of foreign-source income are considered 

to be effectively connected income: rents and royalties for the use of certain intangible property 
 

21

derived from the active conduct of a U.S. business; certain dividends and interest either derived 

in the active conduct of a banking, financing or similar business in the United States or received 

by a corporation the principal business of which is trading in stocks or securities for its own 

account; and certain sales income attributable to a U.S. sales office. Special rules apply for 

purposes of determining the foreign-source income that is effectively connected with a U.S. 

business of an insurance company. 

Any income or gain of a foreign person for any taxable year that is attributable to a 

transaction in another year is treated as effectively connected with the conduct of a U.S. trade or 

business if it would have been so treated had it been taken into account in that other year (Code 

sec. 864(c)(6)). In addition, if any property ceases to be used or held for use in connection with 

the conduct of a trade or business within the United States, the determination of whether any 

income or gain attributable to a sale or exchange of that property occurring within ten years after 

the cessation of business is effectively connected with the conduct of a trade or business within 

the United States is made as if the sale or exchange occurred immediately before the cessation of 

business (Code sec. 864(c)(7)). 

An excise tax is imposed on insurance premiums paid to a foreign insurer or reinsurer 

with respect to U.S. risks. The rate of tax is either four percent or one percent. The rate of the 

excise tax is four percent of the premium on a policy of casualty insurance or indemnity bond 

that is (1) paid by a U.S. person on risks wholly or partly within the United States, or (2) paid by 

a foreign person on risks wholly within the United States. The rate of the excise tax is one 

percent of the premium paid on a policy of life, sickness or accident insurance, or an annuity 

contract. The rate of the excise tax is also one percent of any premium for reinsurance of any of 

the foregoing types of contracts. 

Two exceptions to the application of the insurance excise tax are provided. One 

exception is for amounts that are effectively connected with the conduct of a U.S. trade or 

business (provided no treaty provision exempts the amounts from U.S. taxation). Thus, under 

this exception, the insurance excise tax does not apply to amounts that are subject to U.S. income 

tax in the hands of a foreign insurer or reinsurer pursuant to its election to be taxed as a domestic 

corporation under Code section 953(d), or pursuant to its election under Code section 953(c) to 

treat related person insurance income as effectively connected to the conduct of a U.S. trade or 

business. The other exception applies to premiums on an indemnity bond to secure certain 

pension and other payments by the United States government. 

Bangladesh

Nonresident individuals and companies generally are subject to tax in Bangladesh only 

on income from Bangladesh sources. 

Nonresident individuals are generally subject to tax on Bangladesh-source income at a 

rate of 25 percent without allowance of deductions, exemptions, or other relief. Nonresident 

companies generally are subject to tax on Bangladesh-source income at a rate of 40 percent 

without allowance of tax credits. 
 

22

Proposed treaty limitations on internal law

Under the proposed treaty, business profits of an enterprise of a treaty country are taxable 

in the other treaty country only to the extent that they are attributable to a permanent 

establishment in the other country through which the enterprise carries on business. This rule is 

one of the basic treaty limitations on a country’s right to tax income of a resident of the other 

country. The rule is similar to the rules found in the U.S. and OECD models. 

The proposed treaty defines “business profits” as income derived from any trade or 

business carried on by an individual, a company, an enterprise, or any other person or group of 

persons. The term includes income from the rental of tangible personal property and the 

performance of personal services by an enterprise. 

The Technical Explanation discusses significant features of the definition of “business 

profits.” First, the inclusion in the definition of income of an enterprise from personal services is 

consistent with the long-standing U.S. position that an enterprise’s personal services income is 

business profits. Accordingly, a consulting firm resident in one treaty country whose employees 

perform services in the other treaty country through a permanent establishment may be taxed in 

that other country under Article 7 (and not under Article 15 (Independent Personal Services) 

because that article applies only to individuals). Second, 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 financial instruments is, according to the Technical Explanation, addressed 

in Article 22 (Other Income), unless specifically governed by another article. 

The proposed treaty provides rules for the attribution of business profits to a permanent 

establishment. Under these rules, the treaty countries will attribute to a permanent establishment 

the business profits that the permanent establishment might be expected to make if it were a 

distinct and independent enterprise engaged in the same or similar activities under the same or 

similar conditions. The Technical Explanation states that this rule incorporates the arm’s-length 

standard for purposes of determining the profits attributable to a permanent establishment. 

The Technical Explanation discusses certain features of the proposed treaty’s rules for 

attributing business profits to a permanent establishment. First, the “attributable to” inquiry is 

analogous to the “effectively connected” concept of Code section 864(c) described above. In 

particular, business profits are attributed to a permanent establishment only if the profits are 

derived from the permanent establishment’s assets or activities -- a rule similar to the asset-use 

and business activities tests of Code section 864(c)(2). The limited force of attraction rule of 

Code section 864(c)(3) is not included in the proposed treaty rules. Second, the business profits 

article does not include a rule found in the OECD model under which a treaty country in certain 

circumstances may determine the profits attributable to a permanent establishment on the basis 

of an apportionment of the total profits of the enterprise. The Technical Explanation states that 

this rule is unnecessary because total profits apportionment is authorized even without the rule so 

long as the apportionment is designed to approximate an arm’s-length result. Third, the 

exchange of notes between the United States and Bangladesh provides that if the information 
 

23

available to the tax authority of a treaty country is not sufficient to measure accurately the 

business profits of a permanent establishment, the determination of those profits may be made on 

a reasonable basis using available information, provided the determination seeks to reflect an 

arm’s-length result. 

The proposed treaty provides that in computing taxable business profits of a permanent 

establishment, deductions are allowed for expenses, wherever incurred, that are for the purposes 

of the permanent establishment. These deductions include a reasonable allocation of executive 

and general administrative expenses, research and development expenses, interest, and other 

expenses incurred for the purposes of the enterprise as a whole or the part of the enterprise that 

includes the permanent establishment. The Technical Explanation states that deductions are 

allowed regardless of which accounting unit of the enterprise books the expenses, so long as the 

expenses are incurred for the purposes of the permanent establishment. The Technical 

Explanation also states that this rule permits, but does not require, each treaty country to apply 

the type of expense allocation rules provided by U.S. internal law.10

Although the proposed treaty (like the U.S. model and unlike the U.N. model) does not 

explicitly address the issue, the Technical Explanation states that the proposed treaty does not 

permit a deduction for payments charged to a permanent establishment by another unit of the 

enterprise. Consequently, according to the Technical Explanation, a permanent establishment (1) 

may not deduct a royalty deemed to be paid to the head office and (2) may neither include in its 

business profits any notional fees for ancillary services performed for another unit of the 

enterprise nor take a deduction for the expense of providing those services. 

Like the U.S. model and the OECD model, the proposed treaty provides that business 

profits are not attributed to a permanent establishment merely by reason of the purchase of goods 

or merchandise by the permanent establishment for the enterprise of which it is a part. 

According to the Technical Explanation, this rule applies only to an office that performs 

functions in addition to purchasing because purchasing does not by itself give rise to a permanent 

establishment under Article 5 (Permanent Establishment) to which income can be attributed. 

When it applies, the rule provides that business profits may be attributable to a permanent 

establishment for its non-purchasing activities (e.g., sales activities), but not for its purchasing 

activities. 

The proposed treaty requires that the determination of the business profits of a permanent 

establishment be made using the same method year by year unless there is a good and sufficient 

reason to the contrary. 

Where business profits include items of income that are dealt with separately in other 

articles of the proposed treaty, those other articles, and not the business profits article, generally 

govern the treatment of those items of income. Thus, for example, the taxation of dividends is 

determined under the rules of Article 10 (Dividends), and not by the rules of Article 7 (Business 

 10 See, e.g., Treas. reg. secs. 1.861-8 and 1.882-5. 
 

24

Profits), except as specifically provided in Article 10 (that is, when dividends are attributable to a 

permanent establishment or a fixed base). 

The proposed treaty provides that, for purposes of the taxation of business profits, income 

may be attributable to a permanent establishment (and therefore may be taxable in the source 

country) even if the payment of the income is deferred until after the permanent establishment or 

fixed base has ceased to exist. This rule incorporates into the proposed treaty the rule of Code 

section 864(c)(6) described above. This rule applies in the implementation of the rules for 

business profits (Article 7, paragraphs 1 and 2), dividends (Article 10, paragraph 5), interest 

(Article 11, paragraph 4), royalties (Article 12, paragraph 4), capital gains (Article 13, paragraph 

2), independent personal services (Article 15), and other income (Article 22, paragraph 2). 

The Technical Explanation notes that Article 7 is subject to the savings clause of 

paragraph 2 of Article 1 (Personal Scope), and to Article 17 (Limitation on Benefits). Thus, in 

the case of the savings clause, if a U.S. citizen who is a resident of Bangladesh derives business 

profits from the United States that are not attributable to a permanent establishment in the United 

States, the United States may tax those profits, notwithstanding that paragraph 1 of this article 

would exempt the income from U.S. tax. 

Article 8. Shipping and Air Transport

Article 8 of the proposed treaty covers income from the operation of ships and aircraft in 

international traffic. The rules governing income from the disposition of ships, aircraft, and 

containers are in Article 13 (Capital Gains). 

The United States generally taxes the U.S.-source income of a foreign person from the 

operation of ships or aircraft to or from the United States. An exemption from U.S. tax is 

provided if the income is earned by a corporation that is organized in, or an alien individual who 

is resident in, a foreign country that grants an equivalent exemption to U.S. corporations and 

residents. The United States has entered into agreements with a number of countries providing 

such reciprocal exemptions. 

Paragraph 1 of Article 8 of the proposed treaty provides that profits that are derived by an 

enterprise of one country from the operation in international traffic of ships or aircraft are taxable 

only in that country, regardless of the existence of a permanent establishment in the other 

country. “International traffic” is defined in Article 3(1)(d) (General Definitions) as any 

transport by a ship or aircraft, except where such transport is solely between places in a treaty 

country. The rule of paragraph 1 and the related definition are the same as those in the U.S. 

model, and include, for example, the carriage of passengers or goods by a Bangladesh carrier 

between a non-U.S. port and a U.S. port, even if there is an interim stop at a second U.S. port, 

and even if the leg between the two U.S. ports is overland and handled by an independent carrier 

under contract with the Bangladesh carrier, as long as both parts of the trip are reflected in the 

original bill of lading. 

The proposed treaty provides that profits from the operation of ships or aircraft in 

international traffic include (in addition to profits derived directly) profits derived from the rental 

of ships or aircraft on a full (i.e., with crew, on a time or voyage basis) or bareboat basis of ships 
 

25

or aircraft if either (1) such ships or aircraft are operated in international traffic by the lessee, or 

(2) such rental profits are incidental to other profits of the lessor that are directly derived from 

the operation of ships or aircraft in international traffic. This provision is similar to that in the 

U.S. model. Unlike the OECD model, however, the provision covers non-incidental bareboat 

leasing. 

The Technical Explanation states that certain non-transport activities that are an integral 

part of the services performed by a transport company are understood to be covered by Article 8, 

for example, the performance of some maintenance or catering services by one airline for 

another airline, if such services are incidental to the provision of those services by the airline for 

itself. However, income earned by concessionaires is not covered by Article 8. 

The proposed treaty provides that profits of an enterprise of a country from the rental or 

maintenance of containers (including trailers, barges, and related equipment for the transport of 

containers) that are used for the transport of goods in international traffic are taxable only in that 

country. The Technical Explanation states that this rule, like the corresponding rule in the U.S. 

model, applies without regard to whether the recipient of the income is engaged in the operation 

of ships or aircraft in international traffic or whether the enterprise has a permanent 

establishment in the other country. 

As under the U.S. model, the shipping and air transport provisions of the proposed treaty 

apply to profits derived 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. 

The Technical Explanation notes that this article is subject to Article 23 (Limitation on 

Benefits), as well as the saving clause of paragraph 2 of Article 1 (General Scope). Thus, if a 

citizen of the United States who is a resident of Bangladesh derives profits from the operation of 

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 3 of Article 23 (Relief from Double Taxation), tax those profits as part of the 

worldwide income of the citizen. However, this situation is unlikely because non-tax 

considerations (e.g., insurance) generally result in shipping activities being carried on in 

corporate form. 

Article 9. Associated Enterprises

The proposed treaty, like most other U.S. tax treaties, contains an arm’s-length pricing 

provision. The proposed treaty recognizes the right of each country to make an allocation of 

profits to an enterprise of that country in the case of transactions between related enterprises, if 

conditions are made or imposed between the two enterprises in their commercial or financial 

relations which differ from those which would be made between independent enterprises. In 

such a case, a country may allocate to such an enterprise the profits which it would have accrued 

but for the conditions so imposed. This treatment is consistent with the U.S. model. 

For purposes of the proposed treaty, an enterprise of one country is related to an 

enterprise of the other country if one of the enterprises participates directly or indirectly in the 
 

26

management, control, or capital of the other enterprise. Enterprises are also related if the same 

persons participate directly or indirectly in the enterprises’ management, control, or capital. 

Under the proposed treaty, when a redetermination of tax liability has been made by one 

country under the provisions of this article, the other country will make an appropriate 

adjustment to the amount of tax paid in that country on the redetermined income. In making 

such adjustment, due regard is to be given to other provisions of the proposed treaty. The 

proposed treaty’s saving clause retaining full taxing jurisdiction in the country of residence or 

citizenship does not apply in the case of such adjustments. Accordingly, an internal statute of 

limitations would not prevent the allowance of appropriate correlative adjustments. 

The proposed treaty does not limit any provisions of either country’s internal law that 

permit the distribution, apportionment, or allocation of income, deductions, credits, or 

allowances between related parties as necessary to prevent evasion of taxes or clearly to reflect 

the income of any such party. The Technical Explanation states that any such adjustments are 

permitted even if they are different from, or go beyond, those specifically authorized by this 

article of the proposed treaty, as long as they are in accord with general arm’s-length principles. 

Article 10. Dividends

Internal taxation rules

United States

The United States generally imposes a 30-percent withholding tax on the gross amount of 

U.S.-source dividends paid by domestic corporations to nonresident alien individuals and foreign 

corporations. Dividends paid by a U.S. corporation generally are U.S.-source income. The 

30-percent tax does not apply if the foreign recipient is engaged in a trade or business in the 

United States and the dividends are effectively connected with that trade or business. In such a 

case, the foreign recipient is subject to U.S. tax on such dividends on a net basis at graduated 

rates in the same manner that a U.S. person would be taxed. 

Under U.S. law, the term dividend generally means any distribution of property made by 

a corporation to its shareholders, either from accumulated earnings and profits or current 

earnings and profits. However, liquidating distributions generally are treated as payments in 

exchange for stock and, thus, are not subject to the 30-percent withholding tax described above 

(see discussion of capital gains in connection with Article 13 below). 

In general, corporations are not entitled under U.S. law to a deduction for dividends paid. 

Thus, the withholding tax on dividends theoretically represents imposition of a second level of 

tax on corporate taxable income. Treaty reductions of this tax reflect the view that where the 

United States already imposes corporate-level tax on the earnings of a U.S. corporation, a 

30-percent withholding rate may represent an excessive level of source-country taxation. 

Moreover, the reduced rate of tax often applied by treaty to dividends paid to direct investors 

reflects the view that the source-country tax on payments of profits to a substantial foreign 

corporate shareholder may properly be reduced further to avoid double corporate-level taxation 

and to facilitate international investment. 
 

27

A real estate investment trust (“REIT”) is a corporation, trust, or association that is 

subject to the regular corporate income tax, but that receives a deduction for dividends paid to its 

shareholders if certain conditions are met. In order to qualify for the deduction for dividends 

paid, a REIT must distribute most of its income. Thus, a REIT is treated, in essence, as a conduit 

for federal income tax purposes. Because a REIT is taxable as a U.S. corporation, a distribution 

of its earnings is generally treated as a dividend rather than income of the same type as the 

underlying earnings. Such distributions are subject to the U.S. 30-percent withholding tax when 

paid to foreign owners. However, the receipt of a distribution from a REIT is generally treated 

as a disposition of a U.S. real property interest by the recipient to the extent that it is attributable 

to a sale or exchange of a U.S. real property interest by the REIT11 (see discussion of capital 

gains in connection with Article 13 below). 

A REIT is generally organized to allow persons to diversify ownership in primarily 

passive real estate investments. As such, the principal income of a REIT often is rentals from 

real estate holdings. Like dividends, U.S.-source rental income of foreign persons generally is 

subject to the 30-percent withholding tax (unless the recipient makes an election to have such 

rental income taxed in the United States on a net basis at the regular graduated rates). Unlike the 

withholding tax on dividends, however, the withholding tax on rental income generally is not 

reduced in U.S. income tax treaties. When rental income (or interest income) of a REIT is 

distributed to a foreign shareholder as a REIT dividend, it is treated as a dividend under U.S. 

internal law. 

U.S. internal law also generally treats a regulated investment company (“RIC”) as both a 

corporation and a conduit for income tax purposes. The purpose of a RIC is to allow investors to 

hold a diversified portfolio of securities. Dividends paid by a RIC are generally treated as 

dividends received by the payee, and the RIC generally pays no tax because it is permitted to 

deduct dividends paid to its shareholders in computing its taxable income. However, a RIC 

generally may pass through to its shareholders the character of its net long-term and, before 

January 1, 2008, net short-term, capital gains by designating a dividend it pays as a long-term or 

short-term capital gain dividend, to the extent that the RIC has such net capital gains. 

Nonresident aliens and foreign corporations are generally not subject to tax on capital gains. 

Notwithstanding, a distribution made by a RIC to a nonresident alien or a foreign corporation 

before January 1, 2008 is treated as gain recognized by such person from the sale or exchange of 

a U.S. real property interest to the extent such gain is attributable to gain from sales or exchanges 

of U.S. real property interests (see discussion of capital gains in connection with Article 13 

below). 

Similarly, a RIC that earns interest income that would not be subject to U.S. tax if earned 

by a foreign person directly (“qualified interest income”)12 may generally designate a dividend it 

 11 There is an exception for distributions to a shareholder that owns five percent or less of the 

REIT, if the REIT stock is regularly traded on an established securities market located in the United 

States. Sec. 897(h)(1). Such distributions are treated as dividends under U.S. internal law. 

12 Qualified interest income of the RIC is equal to the sum of its U.S.-source income with respect 

to: (1) bank deposit interest; (2) short term original issue discount that is currently exempt from the 
 

28

pays prior to January 1, 2008 as derived from such interest income, to the extent of such income. 

Nonresident aliens and foreign corporations are not subject to tax on such interest-related 

dividends. The aggregate amount that may be designated by a RIC as interest-related dividends 

generally is limited to the sum of qualified interest income less the amount of expenses of the 

RIC properly allocable to such interest income. 

Bangladesh

Bangladesh imposes and requires withholding of tax on dividends paid by resident 

companies to nonresident companies at a rate of 40 percent. Dividends paid to nonresident 

individuals are subject to withholding tax at a rate of 25 percent. 

Proposed treaty limitations on internal law

Under the proposed treaty, dividends paid by a company that is a resident of a treaty 

country to a resident of the other country may be taxed in such other country. Such dividends 

also may be taxed by the country in which the payor company is resident (the “source country”), 

but the rate of such tax is limited. Under the proposed treaty, source-country taxation of 

dividends is generally limited to 15 percent of the gross amount of the dividends paid to residents 

of the other treaty country; except that source-country taxation of dividends is limited to 10 

percent of the gross amount of dividends paid to a company that is resident in the other country 

and that owns 10 percent or more of the voting stock of the company paying the dividends. Such 

ownership may be direct or through tiers of companies, but only voting shares are taken into 

account for determining if the 10-percent threshold is met. 

The proposed treaty defines the term “dividends” as income from shares (or other 

participation rights to the extent not treated as debt under the law of the source country), as well 

as other amounts that are subject to the same tax treatment as income from shares by the source 

country (e.g., constructive dividends). 

The term “beneficial owner” is not defined in the proposed treaty, and thus is defined 

under the internal law of the source country. The Technical Explanation states that the beneficial 

owner of a dividend for purposes of this article is the person to which the dividend income is 

attributable for tax purposes under the laws of the source country. Further, companies holding 

shares through fiscally transparent entities such as partnerships are considered to hold their 

proportionate interest in the shares, according to the Technical Explanation. 

The 10-percent maximum withholding rate for large shareholders does not apply to 

dividends paid by a REIT or a RIC to a resident of Bangladesh. The 15-percent maximum treaty 

 

gross-basis tax under section 871; (3) any interest (including amounts recognized as ordinary income in 

respect of original issue discount, market discount, or acquisition discount under the provisions of 

sections 1271-1288, and such other amounts as regulations may provide) on an obligation which is in 

registered form, unless it is earned on an obligation issued by a corporation or partnership in which the 

RIC is a 10-percent shareholder or is contingent interest not treated as portfolio interest under section 

871(h)(4); and (4) any interest-related dividend from another RIC. 
 

29

rate of withholding tax is allowed for dividends paid by a RIC to a resident of Bangladesh. In 

the case of dividends paid by a REIT to a resident of Bangladesh, the 15-percent maximum rate 

of withholding tax is allowed only if one of three conditions is met: (1) the person beneficially 

entitled to the dividends is an individual holding an interest of not more than 10 percent in the 

REIT; (2) the dividends are paid with respect to a class of stock that is publicly traded, and the 

person beneficially entitled to the dividends is a person holding an interest of not more than five 

percent of any class of the REIT’s stock; or (3) the person beneficially entitled to the dividends 

holds an interest in the REIT of not more than 10 percent, and the REIT is “diversified” (i.e., 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 interests in real property). 

The Technical Explanation indicates that the restrictions on availability of the lower rates 

with respect to RICs and REITs are intended to prevent the use of these entities to gain 

unjustifiable source-country benefits for certain shareholders resident in Bangladesh. For 

example, a corporation resident in Bangladesh that wishes to hold a diversified portfolio of U.S. 

corporate shares may hold the portfolio directly and pay a U.S. withholding tax of 15 percent on 

all of the dividends that it receives. Alternatively, it may acquire a diversified portfolio by 

purchasing a 10-percent (or greater) interest in a RIC. Since the RIC may be a pure conduit, 

there may be no U.S. tax costs to interposing the RIC in the chain of ownership. Absent the 

special rule for RICs, such use of the RIC could transform portfolio dividends, taxable in the 

United States under the proposed treaty at 15 percent, into direct investment dividends taxable 

only at 10 percent. 

For another example, a resident of Bangladesh directly holding U.S. real property would 

be required to pay U.S. tax either at a 30-percent rate on gross income or at graduated rates on 

the net income from the property. By placing the property in a REIT, the investor could 

transform real estate income into dividend income, taxable at the 10-percent rate provided in the 

proposed treaty. The limitations on REIT dividend benefits are intended to protect against this 

result. 

The proposed treaty’s reduced rates of tax on dividends do not apply if the dividend 

recipient carries on business through a permanent establishment in the source country or 

performs independent personal services from a fixed base in the source country, and the holding 

in respect of which the dividends are paid is effectively connected with such permanent 

establishment or fixed base. In such cases, the dividends effectively connected to the permanent 

establishment may be taxed as business profits (Article 7) or independent personal services 

income (Article 15), as the case may be. 

The Technical Explanation notes that the saving clause of paragraph 2 of Article 1 

(Personal Scope) permits the United States to tax dividends received by its residents and citizens, 

subject to the foreign tax credit rules of paragraph 3 of Article 23 (Relief from Double Taxation), 

as if the proposed treaty had not come into effect. 

The benefits of the dividends article are also subject to the provisions of Article 17 

(Limitation on Benefits). Thus, if a resident of Bangladesh is the beneficial owner of dividends 

paid by a U.S. company, the shareholder must qualify for treaty benefits under at least one of the 

tests of Article 17 in order to receive the benefits of the dividends article. 
 

30

Article 11. Interest

Internal taxation rules

United States

Subject to several exceptions (such as those for portfolio interest, bank deposit interest, 

and short-term original issue discount), the United States generally imposes a 30-percent 

withholding tax on U.S.-source interest paid to foreign persons under the same rules that apply to 

dividends. U.S.-source interest, for purposes of the 30-percent tax, generally is interest on the 

debt obligations of a U.S. person, other than a U.S. person that meets specified foreign business 

requirements. Interest paid by the U.S. trade or business of a foreign corporation generally also 

is subject to the 30-percent tax. A foreign corporation is subject to a branch-level excess interest 

tax with respect to certain “excess interest” of a U.S. trade or business of such corporation. 

Under this rule, an amount equal to the excess of the interest deduction allowed with respect to 

the U.S. business over the amount of interest paid by the business is treated as if paid by a U.S. 

corporation to a foreign parent and, therefore, is subject to the 30-percent withholding tax. 

Portfolio interest generally is defined as any U.S.-source interest that is not effectively 

connected with the conduct of a trade or business if the interest (1) is paid on an obligation that 

satisfies certain registration requirements or specified exceptions to the requirements, and (2) is 

not received by a 10-percent owner of the issuer of the obligation, taking into account shares 

owned by attribution. The portfolio interest exemption does not, however, apply to certain 

contingent interest income. 

If an investor holds an interest in a fixed pool of real estate mortgages that is a real estate 

mortgage interest conduit (“REMIC”), the REMIC generally is treated for U.S. tax purposes as a 

pass-through entity and the investor is subject to U.S. tax on a portion of the REMIC’s income 

(generally, interest income). If the investor holds a so-called “residual interest” in the REMIC, 

the Code provides that a portion of the net income of the REMIC that is taxed in the hands of the 

investor -- referred to as the investor’s “excess inclusion” -- may not be offset by any net 

operating losses of the investor, must be treated as unrelated business income if the investor is an 

organization subject to the unrelated business income tax, and is not eligible for any reduction in 

the 30-percent rate of withholding tax (by treaty or otherwise) that would apply if the investor 

were otherwise eligible for such a rate reduction. 

Bangladesh

Bangladesh-source interest payments to nonresident corporations generally are subject to 

withholding tax at a rate of 40 percent. Interest payments to nonresident individuals generally 

are subject to withholding tax at a rate of 25 percent. 

Proposed treaty limitations on internal law

The proposed treaty provides that interest derived by a resident of a treaty country from 

sources within the other treaty country (the source country) generally may be taxed by both 

countries. This rule is contrary to the rule of the U.S. model that interest that is sourced in one 
 

31

treaty country and is beneficially owned by a resident of the other treaty country may be taxed 

only by the residence country. 

The proposed treaty limits the rate of source-country tax that may be imposed on interest 

income. Under the proposed treaty, the source-country tax on interest derived and beneficially 

owned by a resident of the other treaty country generally may not exceed 10 percent of the gross 

amount of the interest. This rate is higher than the U.S. model rate of zero. The 10-percent 

source-country rate is modified for certain categories of interest. As described below, some 

categories are exempt from source-country tax and other categories are subject to source-country 

tax at a five percent rate. According to the Technical Explanation, the reduced source-country 

tax rates, and the exemption from source-country tax, may be granted at the time of payment 

through a reduction or elimination of withholding tax or at a subsequent time by a refund. 

The term “beneficial owner” is not defined in the proposed treaty and therefore has the 

meaning given to it by the internal law of the country imposing the tax. According to the 

Technical Explanation, the beneficial owner of the interest is the person to which the interest 

income is attributable for tax purposes under the laws of the source country. Consequently, 

interest arising in one treaty country that is received by an agent that is a resident of the other 

country on behalf of a person who is not a resident of that other country is not entitled to the 

benefits of Article 11. 

The proposed treaty provides a complete exemption from source-country tax for interest 

arising in a treaty country if (1) the interest is derived by the Government of the other treaty 

country or an instrumentality of the Government (including the Bangladesh Bank, the Federal 

Reserve Banks of the United States, the Export-Import Bank of the United States, and the 

Overseas Private Investment Corporation of the United States), or (2) the interest is on a debt 

obligation guaranteed or insured by the Government of that treaty country or an instrumentality 

of that Government. The proposed treaty provides a maximum source-country tax rate of five 

percent of the gross amount of the interest for interest arising in a treaty country and derived and 

beneficially owned by (1) a bank or other financial institution (including an insurance company) 

that is a resident of the other treaty country, or (2) a resident of the other treaty country in 

connection with a sale on credit to an enterprise of the source country of any industrial, 

commercial, or scientific equipment or of any merchandise. 

The reductions in source-country tax on interest under the proposed treaty do not apply if 

the beneficial owner of the interest carries on business through a permanent establishment in the 

source country and the interest paid is attributable to the permanent establishment. In that case, 

the interest is taxed under Article 7 (Business Profits). The reduced rates of tax on interest under 

the proposed treaty also do not apply if the beneficial owner is a treaty country resident who 

performs independent personal services from a fixed base located in the other treaty country and 

the interest is attributable to the fixed base. In that case, the interest attributable to the fixed base 

is taxed under Article 15 (Independent Personal Services). 

The proposed treaty addresses the issue of non-arm’s-length interest charges between 

related parties by stating that Article 11 applies only to the amount of arm’s-length interest. Any 

amount of interest paid in excess of the arm’s-length interest is taxable according to the laws of 

each country, taking into account the other provisions of the proposed treaty. For example, 
 

32

excess interest paid to a parent corporation may be treated as a dividend under local law and, 

thus, subject to the rules of Article 10 (Dividends). The Technical Explanation states that if the 

amount of interest paid by one person to another is less than the amount that would have been 

paid in the absence of the special relationship between the persons, a treaty country may 

characterize a transaction to reflect its substance and impute interest in a manner consistent with 

the definition of interest described above. 

The proposed treaty defines “interest” as interest from debt-claims of every kind, whether 

or not secured by mortgage and whether or not carrying a right to participate in the debtor’s 

profits, and, in particular, income from government securities and income from bonds or 

debentures, including premiums and prizes attached to the instruments. The term “interest” also 

includes an excess inclusion with respect to a REMIC, and it includes all other income that is 

treated as interest under the internal law of the country in which the income arises. As described 

in the Technical Explanation, amounts that the United States will treat as interest include original 

issue discount and imputed interest on a deferred sales contract. Interest does not, however, 

include income covered in Article 10 (Dividends). 

The proposed treaty provides two anti-abuse exceptions to the general source-country 

reduction in tax described above. The first exception provides that the reductions in and 

exemption from source-country tax do not apply to excess inclusions with respect to a residual 

interest in a REMIC. That income may be taxed in accordance with each country’s internal law. 

The second anti-abuse exception relates to “contingent interest” payments. Contingent interest 

paid by a source-country resident to a resident of the other country may be taxed in the source 

country in accordance with that country’s internal laws if the interest is of a type that does not 

qualify as portfolio interest under U.S. law (or is of a similar type under the internal laws of 

Bangladesh).13 If, however, the beneficial owner of the interest is a resident of the other country, 

the interest may not be taxed at a rate exceeding 15 percent (the rate prescribed in paragraph 2(b) 

of Article 10 (Dividends)). 

The proposed treaty provides that interest is treated as arising in a treaty country if the 

payer is a resident of that country.14 If, however, the interest expense is borne by a permanent 

establishment or a fixed base, the interest will have as its source the country in which the 

permanent establishment or fixed base is located, regardless of the residence of the payer. Thus, 

for example, if a Canadian resident has a permanent establishment in Bangladesh and that 

Canadian resident incurs indebtedness to a U.S. person, the interest on which is borne by the 

Bangladesh permanent establishment, the interest would be treated as having its source in 

Bangladesh. 

 13 See Code secs. 871(h)(4) and 881(c)(4). The Technical Explanation describes such interest as 

interest that is determined by reference to the receipts, sales, income, profits or other cash flow of the 

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

to any dividend, partnership distribution or similar payment made by the debtor or a related person. 

14 This rule is consistent with the general rule of U.S. law that interest income has as its source 

the country in which the payer is resident. 
 

33

Article 12. Royalties

The proposed treaty retains source-country taxation of royalties but generally limits the 

maximum level of tax to 10 percent of the gross amount of a royalty. 

Internal taxation rules

United States

Under the same system that applies to dividends and interest, the United States imposes a 

30-percent withholding tax on U.S.-source royalties paid to foreign persons. U.S.-source 

royalties include royalties for the use of or the right to use intangible property in the United 

States. 

Bangladesh

Bangladesh generally imposes a 10-percent withholding tax on Bangladesh-source 

royalties and technical assistance fees paid to nonresident individuals or nonresident companies. 

Proposed treaty limitations on internal law

The proposed treaty provides that royalties derived by a resident of one treaty country 

from sources within the other treaty country may be taxed by both countries. The proposed 

treaty, however, limits to 10 percent of the gross amount of royalties the source country’s 

taxation of royalties derived and beneficially owned by a resident of the other treaty country. 

This rule differs from the U.S. model rule. The U.S. model provides for a zero source-country 

rate. 

The Technical Explanation states that the beneficial owner of a royalty payment (the 

person eligible for benefits under Article 12) is a person resident in a treaty country to whom that 

country attributes the payment for purposes of its tax. 

The proposed treaty defines “royalties” as payments of any kind received as 

consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific 

work, including cinematograph films or tapes used for radio or television broadcasting, and any 

patent, trademark, design, model, plan, secret formula or process, or other similar property or 

rights, or for information about industrial, commercial, or scientific experience. Gain from the 

disposition of any property or right described above constitutes royalty income to the extent that 

the amount realized on the disposition is contingent on the productivity, use, or further 

disposition of the property or right. The proposed treaty provides that royalties do not include 

any payments for the working of, or the right to work, mineral deposits, sources, and other 

natural resources. According to the Technical Explanation, royalties also do not include income 

from leasing personal property. 

The reduced source country tax rate on royalties does not apply where the beneficial 

owner has a permanent establishment in the source country or performs independent personal 

services from a fixed base in the source country, and the right or property giving rise to the 

royalties is effectively connected with the permanent establishment or fixed base. In that case 
 

34

the royalties will be taxed as business profits (Article 7) or income from the performance of 

independent personal services (Article 15). 

Under the proposed treaty, royalties are deemed to arise from a treaty country when the 

royalties are in consideration for the use of or the right to use in that country property, 

information, or experience. This rule is consistent with the place-of-use rule under internal U.S. 

law. 

The proposed treaty provides that in the case of royalty payments between related 

persons, only the portion of the payment that represents an arm’s-length royalty will be treated as 

a royalty under the treaty. Payments in excess of the arm’s-length amount may be taxed 

according to the laws of each country with due regard being given for the other provisions of the 

treaty. Thus, for example, any excess amount might be treated as a dividend subject to the taxing 

limitations of Article 10 (Dividends). 

Article 13. Capital Gains

Internal taxation rules of United States

Generally, gain realized by a nonresident alien or a foreign corporation from the sale of a 

capital asset is not subject to U.S. tax unless the gain is effectively connected with the conduct of 

a U.S. trade or business. A regulated investment company (“RIC”) generally may pass through 

to its shareholders the character of its net long-term and, before January 1, 2008, net short-term, 

capital gains by designating a dividend it pays as a long-term or short-term capital gain dividend, 

to the extent that the RIC has such net capital gains. 

The Foreign Investment in Real Property Tax Act (“FIRPTA”) extends the reach of U.S. 

taxation to dispositions of U.S. real property by foreign corporations and nonresident aliens.15 

Under FIRPTA, nonresident aliens and foreign corporations are subject to U.S. tax on their gains 

from the sale of U.S. real property interests, as if such gains were effectively connected with a 

trade or business conducted in the United States. “U.S. real property interests” generally include 

interests in certain corporations if at least 50 percent of the assets of the corporation consist of 

U.S. real property (“U.S. real property holding corporation”), except in the case of a 

“domestically controlled” real estate investment trust (“REIT”) or (before January 1, 2008) 

RIC.16 A distribution by a REIT and, before January 1, 2008, by a RIC, to a nonresident alien or 

a foreign corporation is generally treated as gain recognized by such person from the sale or 

exchange of a U.S. real property interest to the extent such gain is attributable to gain from sales 

or exchanges of U.S. real property interests. However, a distribution made by a REIT with 

respect to a class of stock publicly traded on an established securities market located in the 

 15 FIRPTA contained a provision expressly overriding any tax treaty but generally delaying such 

override until after December 31, 1984. See Foreign Investment in Real Property Tax Act, Pub. L. No. 

96-499, sec. 1125(c)(1) (1980). 

16 “Domestically controlled” REIT or RIC means one in which less than 50 percent of the value 

of the stock was held directly or indirectly by non-U.S. persons at all times during the testing period 

(generally the five-year period ending on the date of disposition). 
 

35

United States is not treated as gain from the sale or exchange of a U.S. real property interest if 

the shareholder did not own more than five percent of the class of stock at any time during the 

taxable year. 

Proposed treaty limitations on internal law

The proposed treaty specifies rules governing when a country may tax gains from the 

alienation of property by a resident of the other country. Generally, except as described below 

with respect to real property and certain other property, gains from disposition of any property 

are taxable only by the treaty country in which the alienator is resident. 

Under the proposed treaty, gains derived by a resident of one treaty country from the 

alienation of immovable property situated in the other country may be taxed in the country in 

which the property is situated. For the purposes of this article, immovable property includes 

“immovable property” situated in a treaty country, as defined in Article 6 (Income From 

Immovable Property) of the proposed treaty. That definition has the same meaning which it has 

under the laws of the treaty country in which the property in question is situated, and specifically 

includes real property, property accessory to real property, livestock and equipment used in 

agriculture, forestry, and fishery, rights to which the provisions of general law respecting landed 

property apply, usufruct of immovable property, and rights to variable or fixed payments as 

consideration for the working of, or the right to work, mineral deposits, sources and other natural 

resources. In the case of the United States, immovable property also includes a United States 

real property interest. In the case of Bangladesh, immovable property also includes an interest in 

the capital stock of a company the assets of which consist principally of immovable property 

situated in Bangladesh. 

Thus, the proposed treaty permits the United States to apply the FIRPTA rules to tax a 

resident of Bangladesh on the disposition of shares in a U.S. company that owns sufficient U.S. 

real property interests on certain testing dates to qualify as a U.S. real property holding 

corporation. The Technical Explanation states that in applying these rules, the United States will 

look through certain distributions made by a REIT or RIC. Accordingly, distributions made by a 

REIT or RIC are taxable under paragraph 1 of this article, and not under Article 10 (Dividends), 

when they are attributable to gains derived from the alienation of real property. However, a 

distribution made by a REIT with respect to a class of stock publicly traded on an established 

securities market located in the United States is not treated as gain from the sale or exchange of a 

U.S. real property interest if the shareholder did not own more than 5 percent of the class of 

stock during the taxable year. 

The proposed treaty contains a provision that permits a treaty country to tax gains from 

the alienation of property (other than real property) that forms a part of the business property of a 

permanent establishment located in that country. The rule also applies to a fixed base located in 

a treaty country that is available to a resident of the other treaty country for the purpose of 

performing independent personal services. This rule also applies to gains from the alienation of 

such a permanent establishment (alone or with the enterprise as a whole) or such fixed base. The 

Technical Explanation states that a resident of Bangladesh 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 
 

36

to the level of a permanent establishment.17 The Technical Explanation further states that under 

this provision, the United States generally may tax a partner’s distributive share of income 

realized by a partnership on the disposition of personal (movable) property forming part of the 

business property of the partnership in the United States. 

The proposed treaty provides that gains derived by an enterprise carried on by a resident 

of a treaty country from the alienation of ships, aircraft, or containers operated in international 

traffic are taxable only in such country. According to the Technical Explanation, the inclusion of 

trailers, barges and related equipment for the transport of containers in the definition of 

containers in Article 8 (Shipping and Air Transport) also applies to this article. 

Gains derived from the alienation of any right or property that produces income described 

in Article 12 (Royalties) are taxable only in accordance with Article 12. Such gains are those 

derived from the alienation of any right or property that gives rise to royalties that are contingent 

on the productivity, use, or disposition of such right or property. 

Gains from the alienation of any property of a type other than those discussed above are 

taxable under the proposed treaty only in the country in which the person alienating the property 

is resident, to the extent that such gains are not otherwise characterized as income taxable under 

another article (e.g., Article 10 (Dividends), Article 11 (Interest), or Article 12 (Royalties)). 

Notwithstanding the foregoing limitations of certain gains by the country of source, the 

saving clause of paragraph 2 of Article 1 (Personal Scope) permits the United States to tax its 

citizens and residents as if the treaty had not come into effect. The benefits of this article are 

also subject to the provisions of Article 17 (Limitation on Benefits). Thus, only a resident that 

satisfies one of the conditions in Article 17 is entitled to the benefits of this article. 

Article 14. Branch Tax

Internal taxation rules

United States

A foreign corporation engaged directly in the conduct of a trade or business in the United 

States is subject to a flat 30-percent branch profits tax on its “dividend equivalent amount,” in 

addition to corporate income tax. The dividend equivalent amount is the corporation’s earnings 

and profits which are attributable to its income that is effectively connected with its U.S. trade or 

business, decreased by the amount of such earnings that are reinvested in business assets located 

in the United States (or used to reduce liabilities of the U.S. business), and increased by any such 

previously reinvested earnings that are withdrawn from investment in the U.S. business. 

If a U.S. branch of a foreign corporation has allocated to it an interest deduction in excess 

of the interest actually paid by the branch, such excess interest is treated as if it were paid on a 

 17 See Rev. Rul. 91-32, 1991-1 C.B. 107. 
 

37

notional loan to a U.S. subsidiary from its foreign corporate parent. This excess interest is 

subject to a 30-percent withholding tax absent a specific statutory exemption. 

Bangladesh

According to the Technical Explanation, Bangladesh does not currently impose a branch 

profits tax or an excess interest tax on a foreign company with a branch in Bangladesh, but does 

impose a branch profit remittance tax. 

Proposed treaty limitations on internal law

The proposed treaty allows a treaty country to impose a branch profits tax on a company 

resident in the other treaty country, in addition to the other taxes permitted under the proposed 

treaty. 

The United States is allowed under the proposed treaty to impose its branch profits tax at 

a reduced rate of 10 percent on a Bangladesh corporation that has a permanent establishment in 

the United States or is subject to tax on a net basis in the United States on income from real 

property or gains from the disposition of interests in real property (other than an interest in a U.S. 

real property holding corporation). The tax is imposed on the dividend-equivalent amount, as 

defined in the Code (approximately the dividend amount a U.S. branch office would have paid 

to its parent for the year if it had been operated as a separate U.S. subsidiary). In cases in which 

a Bangladesh corporation conducts a trade or business in the United States but not through a 

permanent establishment, the proposed treaty completely eliminates the branch profits tax that 

the Code would otherwise impose on such corporation (unless the corporation earned income 

from real property as described above). 

Under the proposed treaty, Bangladesh is allowed to impose a branch profits tax (not to 

exceed a rate of 10 percent) in an amount sufficient to provide that a Bangladesh branch of a 

U.S. company or a U.S. company otherwise taxable on its net income in Bangladesh is taxed in a 

manner comparable to a similarly situated Bangladesh company and its U.S. shareholder. In 

practice, this will permit Bangladesh to impose its branch profit remittance tax at the rate of 10 

percent. 

The United States is also allowed under the proposed treaty to impose the branch excess 

interest tax, generally at a rate of 10 percent, the rate generally applicable under paragraph 2 of 

Article 11 to interest payments from U.S. sources to residents of Bangladesh, but subject to 

lower rates as provided in paragraph 3 of Article 11. For example, if a permanent establishment 

in Bangladesh is a branch of a U.S. financial institution, including an insurance company, the 

rate of tax on branch excess interest is limited to five percent, the rate applicable under paragraph 

3 of Article 11 to interest beneficially owned by financial institutions. 
 

38

Article 15. Independent Personal Services

Internal taxation rules

United States

The United States taxes the income of a nonresident alien individual at the regular 

graduated rates if the income is effectively connected with the conduct of a trade or business in 

the United States by the individual. The performance of personal services within the United 

States may constitute a trade or business within the United States. 

Under the Code, the income of a nonresident alien individual from the performance of 

personal services in the United States is excluded from U.S.-source income, and therefore is not 

taxed by the United States in the absence of a U.S. trade or business, if the following criteria are 

met: (1) the individual is not present in the United States for over 90 days during the taxable 

year; (2) the compensation does not exceed $3,000; and (3) the services are performed as an 

employee of, or under a contract with, a foreign person not engaged in a trade or business in the 

United States, or are performed for a foreign office or place of business of a U.S. person. 

Bangladesh

A nonresident individual engaged in a profession or a business in Bangladesh generally is 

subject to income tax at a flat rate of 25 percent and is not entitled to any deductions or other 

allowances. 

Proposed treaty limitations on internal law

Under the proposed treaty, income derived by an individual who is a resident of one 

treaty country from the performance of personal services in an independent capacity is generally 

taxable only in that country (the “residence country”). If, however, the services are performed in 

the other treaty country (the “source country”), the income also may be taxed by the source 

country if either: (1) the individual is present in the source country for a total of more than 183 

days during any 12-month period beginning or ending in the income year or taxable year at issue; 

or (2) the income is attributable to a “fixed base” regularly available to the individual in the 

source country for the purpose of performing the activities. 

The proposed treaty does not define the term “personal services in an independent 

capacity,” but the Technical Explanation states that the term clearly includes independent 

scientific, literary, artistic, educational, or teaching activities, and the independent activities of 

physicians, lawyers, engineers, architects, dentists, and accountants, to the extent not dealt with 

in other articles of the proposed treaty (for example, Article 18 (Entertainers and Athletes)). In 

determining whether the activities are “independent,” the focus is on whether the individual 

receives the income and bears the risk of loss arising from the activities, whether as a sole 

proprietor or as a partner. 

The Technical Explanation states that the term “fixed base” is understood to be similar, 

but not identical, to the term “permanent establishment,” as defined in Article 5 of the proposed 

treaty. According to the Technical Explanation, the determination of whether a fixed base is 
 

39

regularly available to an individual is made on the basis of all relevant facts and circumstances. 

The Technical Explanation states that a fixed base in a treaty country generally will be 

considered readily available to an individual if it is at the disposal of the individual whenever 

that individual performs services in that country. 

The provisions of this article represent a departure from the U.S. model, which provides 

for source-country taxation of independent personal services only to the extent of income that is 

attributable to a fixed base. The provisions of this article are, however, similar to the provisions 

of the U.N. model and to those found in other treaties that the United States has concluded with 

developing countries. 

This article is subject to the saving clause of paragraph 2 of Article 1 (Personal Scope). 

Thus, if a U.S. citizen who is resident in Bangladesh performs independent personal services in 

the United States, the United States may tax the income attributable to such services without 

regard to the restrictions of this article, subject to the foreign tax credit described in Article 23 

(Relief from Double Taxation). 

Article 16. Dependent Personal Services

Under the proposed treaty, salaries, wages, and other remuneration derived from services 

performed as an employee in one treaty country (the source country) by a resident of the other 

treaty country are taxable in the country of residence, and generally such remuneration may also 

be taxed in the source country if the employment is exercised in the source country. However, 

such income is taxable only by the country of residence if three requirements are met: (1) the 

individual is present in the source country for not more than 183 days in any 12-month period 

commencing or ending in the taxable year or year of assessment concerned; (2) the individual is 

paid by, or on behalf of, an employer who is not a resident of the source country; and (3) the 

remuneration is not borne by a permanent establishment or fixed base of the employer in the 

source country. These limitations on source country taxation are similar to the rules of the U.S. 

model and OECD model. The Technical Explanation states that this article of the proposed 

treaty applies to any form of compensation for employment, including payments in kind, 

regardless of whether the remuneration is similar to salaries and wages. 

The proposed treaty contains a special rule that permits remuneration derived by a 

resident of one treaty country with respect to employment as a regular member of the crew of a 

ship or aircraft operated in international traffic by an enterprise of the other treaty country to be 

taxed only in the treaty country of residence of the enterprise operating the ship or aircraft. This 

provision is contrary to the U.S. model, which provides that such remuneration may be taxed 

only in the treaty country of residence of the employee. 

The proposed treaty specifically provides that, notwithstanding the other provisions of 

this article and the separate article covering independent personal services (Article 15), if an 

individual who is a resident of one treaty country and receives director’s fees as a director of a 

company that is resident in the other treaty country, and if the individual is also a shareholder of 

the company, the portion of the director’s fee that exceeds what would have been paid had the 

individual not been a shareholder may be taxed by the first treaty country, but the rate of tax may 

not exceed 15 percent of that amount. Thus, the amount of the excess is subject to tax at the 
 

40

same 15-percent rate to which the proposed treaty generally limits source-country taxation of 

dividends (see Article 10). 

This article is subject to the provisions of the separate articles covering entertainers and 

athletes (Article 18), pensions (Article 19), government service income (Article 20), and 

teachers, students and trainees (Article 21). 

Article 17. Limitation on Benefits

In general

The proposed treaty contains a provision generally intended to limit the indirect use of 

the proposed treaty by persons who are not entitled to its benefits by reason of residence in the 

United States or Bangladesh. 

The proposed treaty is intended to limit double taxation caused by the interaction of the 

tax systems of the United States and Bangladesh as they apply to residents of the two countries. 

At times, however, residents of third countries may attempt to use the treaty. This use is known 

as “treaty shopping,” the situation in which a person who is not a resident of either treaty country 

seeks certain benefits under the income tax treaty between the two countries. Under certain 

circumstances, without appropriate safeguards, the third-country resident could secure these 

benefits indirectly by establishing a corporation or other entity in one of the treaty countries and 

having that entity claim treaty benefits as a treaty country resident. It also may be possible for 

the third-country resident to reduce the tax base of the treaty country resident by having the 

resident pay out interest, royalties, or other amounts under favorable conditions either through 

relaxed tax provisions in the distributing country or by passing the funds through other treaty 

countries until the funds can be repatriated under favorable terms. 

The proposed anti-treaty shopping article provides that a treaty country resident is 

entitled to all treaty benefits only if it is described in one of several specified categories. 

Generally, a resident of either country qualifies for the benefits accorded by the proposed treaty 

if the resident satisfies any other specified conditions for obtaining benefits and is, subject to the 

rules described in more detail below, (1) an individual; (2) a governmental entity; (3) an entity 

that satisfies an ownership test and a base erosion test; (4) a publicly-traded company; (5) a 

subsidiary of a publicly-traded company; or (6) a tax-exempt organization. 

A treaty country resident that does not fit into any of the above six categories may claim 

treaty benefits with respect to certain items of income under an active business test. A person 

that does not satisfy any of the above requirements, including the active business test, may be 

entitled to the benefits of the proposed treaty if the source country’s competent authority so 

determines. 

Individuals

Under the proposed treaty, an individual resident of one of the treaty countries is entitled 

to all treaty benefits. 
 

41

Governmental entities

Under the proposed treaty, the governments of the treaty countries and political 

subdivisions or local authorities are entitled to all treaty benefits. 

Companies that satisfy ownership and base erosion tests

Under the proposed treaty, an entity that is a resident of one of the countries is entitled to 

treaty benefits if it satisfies an ownership test and a base erosion test. Under the ownership test, 

certain persons entitled to treaty benefits under one of the categories described above or below 

(an individual; a governmental entity; a publicly-traded company; a subsidiary of a publiclytraded company; or a tax-exempt organization), or citizens of the United States, must own 

(directly or indirectly) more than 50 percent of the beneficial interests in the entity or, in the case 

of a company, more than 50 percent of the number of shares of each class of the company’s 

shares. 

The base erosion test is satisfied only if no more than 50 percent of the person’s gross 

income for the taxable period is used (directly or indirectly) to make deductible payments to 

persons who are not citizens of the United States and are not entitled to treaty benefits under 

other provisions of Article 17. The term “gross income” is not defined in the proposed treaty. In 

accordance with Article 3 (General Definitions) of the proposed treaty, the term will be defined 

under the domestic laws of the two countries. The Technical Explanation states that in 

determining whether a person deriving U.S.-source income is entitled to treaty benefits, the 

United States will define “gross income” as gross receipts less cost of goods sold. The Technical 

Explanation also states that deductible payments include interest and royalties; that trust 

distributions are deductible payments to the extent they are deductible from the taxable base; and 

that depreciation and amortization deductions are disregarded in applying the 50-percent test 

because they are not payments. 

The Technical Explanation states that a trust may be entitled to the benefits of this 

provision if it is treated as a resident of one of the countries and otherwise satisfies the 

requirements of the provision. 

Public companies

A company that is a resident of Bangladesh or the United States is entitled to treaty 

benefits if there is substantial and regular trading in its principal class of shares on a recognized 

stock exchange. The proposed treaty does not define “principal class of shares.” The Technical 

Explanation states that, consistent with other recent U.S. treaties and the U.S. model, the United 

States will interpret this term as meaning the class of shares that represents the majority of the 

voting power and value of the company. In most cases, according to the Technical Explanation, 

this class will be the common or ordinary shares of the company. If no single class of shares 

accounts for more than half of a company’s voting power and value, the Technical Explanation 

states that a group of two or more classes that satisfies the majority vote-and-value test must be 

identified, and each class of shares in the group must satisfy the regular trading requirement. 

The term “recognized stock exchange” means the NASDAQ; any stock exchange 

registered with the U.S. Securities and Exchange Commission as a national securities exchange 
 

42

under the U.S. Securities Exchange Act of 1934; the stock exchanges regulated by the 

Bangladesh Securities and Exchange Commission; and any other stock exchange agreed upon by 

the competent authorities of the two countries. 

The proposed treaty is silent as to when shares are considered “regularly traded,” and in 

accord with Article 3 (General Definitions), the term will be defined under the domestic laws of 

the two countries. The Technical Explanation states that for U.S. tax purposes the term is to 

have the meaning it has under Treas. Reg. sec. 1.884-5(d)(4)(i)(B).18 Under this regulation, a 

class of shares is considered to be “regularly traded” if two requirements are met: (1) trades in 

the class of shares are made in more than de minimis quantities on at least 60 days during the 

taxable year, and (2) 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. 

Subsidiaries of public companies

A company that is a resident of Bangladesh or the United States is entitled to treaty 

benefits if at least 50 percent of each class of shares in the company is owned (directly or 

indirectly) by five or fewer companies that satisfy the public company test described 

immediately above, provided that in the case of indirect ownership each intermediate owner is 

entitled to treaty benefits under one of the six categories enumerated in paragraph 1 of Article 17 

(an individual; a governmental entity; an entity that satisfies an ownership test and a base erosion 

test; a publicly-traded company; a subsidiary of a publicly-traded company; or a tax-exempt 

organization). 

Tax-exempt organizations

Under the proposed treaty an entity is entitled to treaty benefits if it is organized under 

the laws of a treaty country; is generally exempt from tax in that treaty country; and is 

established and maintained in that country either (1) exclusively for religious, charitable, 

educational, scientific, or other similar purposes, or (2) to provide pensions or other similar 

benefits to employees pursuant to a plan, provided that more than 50 percent of the beneficiaries, 

members, or participants are persons that are entitled to treaty benefits under Article 17. 

Active business test

Under the active business test, a resident of one of the countries is entitled to treaty 

benefits with respect to income derived from the other country if (1) the resident is engaged in 

the active conduct of a trade or business in its residence country, and (2) the income is derived in 

connection with, or is incidental to, that trade or business. If, however, the resident or any of its 

associated enterprises has an ownership interest in the income-producing activity in the other 

treaty country, the rule applies only if the trade or business in the residence country is substantial 

in relation to that income-producing activity. The proposed treaty provides that the business of 

 18 The Technical Explanation specifically states that Treas. Reg. sec. 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 proposed 

treaty. 
 

43

making or managing investments for the resident’s own account does not constitute an active 

trade or business unless these activities are banking, insurance, or securities activities carried on 

by a bank, an insurance company, or a registered securities dealer. 

Under the proposed treaty, income is considered to be derived “in connection with” an 

active trade or business if the activity in the other country generating the item of income is a line 

of business that forms a part of or is complementary to the trade or business. The Technical 

Explanation states that a business activity generally is considered to form a part of a business 

activity conducted in the other country if the two activities involve the design, manufacture, or 

sale of the same products or type of products or the provision of similar services. According to 

the Technical Explanation, the line of business in the residence country may be upstream, 

downstream, or parallel to the activity in the source country. An example of an upstream 

business is the provision of inputs for a manufacturing process in the source country. A 

downstream activity might be selling the output of that manufacturing process. A parallel 

activity might be selling the same kinds of products that are being sold by the source country 

trade or business. The Technical Explanation states that in order for two activities to be 

considered “complementary,” the activities need not relate to the same types of products or 

services but that 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 of the other. 

The proposed treaty provides that income is “incidental to” a trade or business when it 

facilitates the conduct of the trade or business in the other country. The Technical Explanation 

gives as an example of incidental income the temporary investment of working capital derived 

from a trade or business. 

The proposed treaty provides that whether a trade or business in the residence country is 

substantial in relation to the activity in the other treaty country is determined on the basis of all 

the facts and circumstances. The Technical Explanation states that this inquiry takes into 

account the relative scale of the activities conducted in each country and the relative 

contributions made to the conduct of the trades or businesses in the two countries. According to 

the Technical Explanation, the substantiality requirement is intended to prevent a narrow case of 

treaty shopping in which a company attempts to qualify for treaty benefits by engaging in de 

minimis business activities in its residence country. The substantiality requirement therefore 

applies only to related party cases because activities involving unrelated parties may not be 

abusive even if the residence country trade or business is very small in relation to the activities in 

the other country. As an example of the application of the substantiality rule, the Technical 

Explanation states that if a small U.S. research firm licenses a process to a large, unrelated 

Bangladesh drug manufacturer, the size of the U.S. firm would not need to be tested against the 

size of the Bangladesh manufacturer. 

The term “trade or business” is not defined in the proposed treaty. Under Article 3 

(General Definitions), undefined terms are to have the meaning that they have under the laws of 

the country applying the proposed treaty. The Technical Explanation states that the U.S. 

competent authority will refer to the regulations issued under Code section 367(a) to define the 

term “trade or business.” In general, 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. 
 

44

Grant of treaty benefits by the competent authority

The proposed treaty provides a “safety-valve” for a person that has not established that it 

satisfies one of the other more objective tests but for which the allowance of treaty benefits 

would not give rise to abuse or otherwise be contrary to the purposes of the treaty. 

Consequently, a resident of one of the countries who is not otherwise entitled to benefits under 

the proposed treaty may be granted benefits if the competent authority of the country in which 

the income in question arises so determines. 

Consultation between competent authorities

The proposed treaty provides that the competent authorities may consult with one another 

to develop procedures for the common application of the limitation on benefits provisions. The 

proposed treaty also directs the competent authorities, in accordance with the provisions of 

Article 26 (Exchange of Information and Administrative Assistance) to exchange information 

necessary for carrying out the limitation on benefits rules. 

Article 18. Entertainers and Athletes

Like the U.S. and OECD models, the proposed treaty contains a separate set of rules that 

apply to the taxation of income earned by entertainers (such as theater, motion picture, radio, or 

television artistes or musicians) and athletes. 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. These rules are intended, in part, to prevent entertainers and athletes from 

using the treaty to avoid paying any tax on their income earned in one of the countries, and, 

accordingly, apply notwithstanding the inapplicability of the provisions dealing with the taxation 

of income from independent and dependent personal services (Articles 15 and 16). This article 

applies only with respect to the income of entertainers and athletes. Others involved in a 

performance or athletic event, such as producers, directors, technicians, managers, coaches, etc., 

remain subject to the provisions of Articles 15 and 16. In addition, except as provided in 

paragraph 2 of this Article, income earned by legal persons is not covered by this article. 

Under paragraph 1 of Article 18 of the proposed treaty, income derived by an entertainer 

or athlete who is a resident of one country from his or her personal activities as such in the other 

country may be taxed in the other country if the amount of the gross receipts derived by him or 

her from such activities exceeds $10,000 or its equivalent in Bangladesh taka for the taxable 

year. The $10,000 threshold includes expenses that are reimbursed to the entertainer or athlete 

or borne on his or her behalf. Under this rule, if a Bangladesh entertainer maintains no fixed 

base in the United States and performs (as an independent contractor) in the United States for 

total compensation of $9,000 during a taxable year, the United States would not tax that income. 

If, however, that entertainer’s total compensation were $11,000, the full amount would be 

subject to U.S. tax. On the other hand, if such an entertainer earned $9,000 during a taxable year 

in the United States through a fixed base regularly available to him in the United States, the 

United States could tax him under the provisions of Article 15 (Independent Personal Services). 

The U.S.-Sri Lanka income tax and U.S. model treaties provide thresholds of $6,000 and 

$20,000, respectively. 
 

45

As described in the Technical Explanation, Article 18 of the proposed treaty 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 treaty country by a performer 

who is a resident of the other treaty country from other than actual performance, such as royalties 

from record sales and payments for product endorsements, is not covered by this article, but is 

covered by other articles, such as Article 12 (Royalties) or Article 15 (Independent Personal 

Services). For example, if an entertainer receives royalty income from the sale of live 

recordings, the royalty income would be subject to source country tax under Article 12 if the 

requirements of that article are met. In addition, the entertainer would be taxed under this article 

by the source country with respect to income from the performance itself if the dollar threshold is 

exceeded. 

The Technical Explanation states that if 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 (Dependent Personal Services), Article 18 also applies 

regardless of the timing of actual payment for services. Thus, a bonus paid to a resident of a 

treaty country with respect to a performance in the other country occurring in a particular taxable 

year would be subject to Article 18 for that year even if it was paid after the close of the year. 

The proposed treaty provides that the rules above do not apply to income derived from 

activities performed in a treaty country by entertainers or athletes who are residents of the other 

country if such activities are wholly or mainly supported by public funds of the other treaty 

country or a political subdivision or local authority thereof. In such a case the income is not 

taxable in the country in which the activities are performed. The support rule of the proposed 

treaty is stricter than a similar rule contained in the recently ratified income tax treaty between 

the United States and Sri Lanka, which provides that the income of an entertainer who is resident 

in a treaty country is not taxed in the (other) treaty country in which the activities are exercised if 

the visit is directly or indirectly supported wholly or substantially from the public funds of either 

treaty country (or political subdivision or local authority).19

Paragraph 2 of this article provides that where income in respect of activities performed 

by an entertainer or athlete in his or her capacity as such accrues not to the entertainer or athlete 

but to another person, that other person’s income is taxable in the country in which the activities 

are performed unless it is established that neither the entertainer nor athlete, nor persons related 

to him or her, participate directly or indirectly in the profits of that other person in any manner, 

including the receipt of deferred remuneration, bonuses, fees, dividends, partnership 

distributions, or other distributions. This provision is intended to prevent highly-paid 

entertainers and athletes from avoiding tax in the country in which they perform by, for example, 

 19 See Joint Committee on Taxation, Explanation of Proposed Income Tax Treaty between the 

United States and the Democratic Socialist Republic of Sri Lanka (JCS-2-04), February 19, 2004. 
 

46

routing the compensation for their services through a personal holding company (a “star 

company”) located in the residence country that does not have a permanent establishment in the 

source country. At the same time, the provision is intended to protect a performer’s rights under 

the treaty when there is a legitimate employer-employee relationship between the performer and 

the person providing his services. If the star company is not a resident of the United States or 

Bangladesh, then the treaty (and this provision) does not apply. If the star company passes the 

residency threshold, however, this provision applies notwithstanding the articles governing 

business profits, income from independent personal services and income from dependent 

personal services (Articles 7, 15 and 16). The effect of this provision is that the star company 

may be taxed in the treaty country in which the performer’s services are exercised. The income 

taxable by virtue of this paragraph is reduced to the extent of salary payments taxed to the 

performer. 

This article is subject to the provisions of the saving clause of paragraph 2 of Article 1 

(Personal Scope). Thus, if an entertainer or an athlete who is resident in Bangladesh is a citizen 

of the United States, the United States may tax all of his income from performances in the United 

States without regard to the provisions of this article, subject, however, to the special foreign tax 

credit provisions of paragraph 3 of Article 23 (Relief from Double Taxation). In addition, the 

benefits of this article are subject to the provisions of Article 17 (Limitation on Benefits). 

Article 19. Pensions, Et Cetera

Paragraph 1 of Article 19 of the proposed treaty, like the U.S. model, generally provides 

that private pensions and other similar remuneration in consideration of past employment paid to 

a resident of one country may be taxed only in the recipient’s country of residence. However, in 

the case of a citizen of one country who is a resident of the other country, the saving clause of 

Article 1, paragraph 2, of the proposed treaty provides that, notwithstanding this provision, a 

country may tax its residents and citizens as if the proposed treaty were not in effect. The 

Technical Explanation states as an example that a U.S. citizen who is a resident of Bangladesh 

and receives a pension payment from the United States may be subject to U.S. income tax on the 

payment. 

The Technical Explanation states that, in the United States, the payments covered by the 

general rule of the provision include payments under qualified plans under Code section 401(a), 

individual retirement plans (including individual retirement plans that are part of a simplified 

employee pension plan that satisfies Code section 408(k), individual retirement accounts, 

individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), 

section 403(a) qualified annuity plans, and section 403(b) plans. Distributions from section 

457(b) governmental plans may also fall under paragraph 1 if they are not paid with respect to 

government services covered by Article 20 (Government Service). The Technical Explanation 

further notes that the competent authorities may agree that payments under other plans that 

generally meet similar criteria also qualify for benefits under the provision. 

Paragraph 1 of this article does not generally apply to pensions in respect of government 

service. Rather, such payments are covered either by paragraph 2 of this article if they are in the 

form of social security payments, or by paragraph 2 of Article 20, which provides generally that 

pensions paid from the public funds of one county in respect of government service may be taxed 
 

47

only in that country. If a pension in respect of government service is not covered by Article 20 

solely because the service is rendered in connection with a business carried on by the 

government of a treaty country, however, the pension is covered by this article. 

The treatment of pensions paid under a social security system is described in paragraph 2 

of this article, and follows the U.S. model. Under paragraph 2, social security payments and 

other public pensions paid by one country to a resident of the other country or to a citizen of the 

United States may be taxed only in the source country. The provision applies to social security 

payments of either private or government employees. The reference to other public pensions is 

intended to refer to United States tier 1 Railroad Retirement benefits. 

Paragraph 3 of this article provides that annuities derived by a resident of a treaty country 

are taxable only in that country. “Annuities” means a stated sum paid periodically at stated times 

during life or during a specified number of years, under an obligation to make the payments in 

return for adequate and full consideration, other than for services rendered. 

Paragraphs 4 and 5 deal with alimony and child support payments, which are different 

types of periodic payments made pursuant to a written separation agreement or a decree of 

divorce, separate maintenance, or compulsory support. Alimony payments are those taxable to 

the recipient under the laws of the treaty country of his or her residence, and under paragraph 4 

are not taxable by the other treaty country. Child support payments are payments for the support 

of a minor child that are exempt from tax under the laws of the country in which the recipient is 

resident, and, under paragraph 5, are exempt from tax in both treaty countries. 

The saving clause of Article 1 applies to private pension, annuity, and alimony payments. 

Thus, a U.S. citizen who is a resident of Bangladesh and receives a private pension, annuity, or 

alimony payment may be subject to U.S. tax on such payment. The saving clause does not apply 

with respect to the provisions relating to social security and child support payments. Thus, as 

noted in the Technical Explanation, a U.S. citizen is not subject to U.S. tax on Bangladesh social 

security payments. 

Article 20. Government Service

Under paragraph 1 of Article 20 of the proposed treaty, remuneration, other than a 

pension, paid by a treaty country (or a political subdivision or local authority thereof) to any 

individual for services rendered to that country (or subdivision or authority) is taxable only in 

that country. However, the services are taxable only in the other country if the services are 

rendered there and the individual is a resident of that other country who is either a national of 

that other country or who did not become a resident of that other country solely for the purpose 

of rendering the services. According to the Technical Explanation, the provision applies both to 

government employees and to independent contractors engaged by governments to perform 

services for them. 

Paragraph 2 covers pensions that are not in the form of social security benefits and are in 

respect of government service rendered to a treaty county (or subdivision or authority) by an 

individual. Such pensions are taxable only in that country. However, such pensions are taxable 

only in the other country if the individual is both a resident and a national of the other country. 
 

48

Pensions paid to retired civilian and military employees of the Government of either country are 

intended to be covered under paragraph 2. 

When benefits paid by a treaty country in respect of services rendered to that country (or 

subdivision or authority) are in the form of social security benefits, however, those payments are 

covered by paragraph 2 of Article 19 (Pensions, Et Cetera). As a general matter, the result will 

be the same whether Article 19 or 20 applies, since both social security benefits and government 

pensions are taxable exclusively by the source country. According to the Technical Explanation, 

the result differs only when the payment is made to a citizen and resident of the other country, 

who is not also a citizen of the paying country. In such a case, social security benefits continue 

to be taxable at source while government pensions are taxable only in the residence country. 

The treatment of payments described in paragraphs 1 and 2 of this article are subject to 

the provisions of those paragraphs and not to those of Articles 15 (Independent Personal 

Services), 16 (Dependent Personal Services), 18 (Entertainers and Athletes) or, except as noted 

above for social security payments, 19 (Pensions, Et Cetera). If, however, the remuneration or 

pension is paid for services performed in connection with a business carried on by a treaty 

country (or subdivision or authority), those other articles, and not this article, apply. 

The provisions of this article are exceptions to the proposed treaty’s saving clause 

(Article 1, paragraphs 2 and 3(b)) for individuals who are neither citizens nor persons admitted 

for permanent residence (in the United States, a “green card” holder) of the country where the 

benefits are conferred. Thus, for example, a salary paid by the government of Bangladesh to an 

employee resident in the United States who holds a green card is taxable in Bangladesh under 

paragraph 1 of this article and is taxable in the United States under the saving clause, subject to 

the provisions of Article 23 (Relief From Double Taxation). However, such employee would be 

taxable solely in the United States if the employee did not become a resident of the United States 

solely to render the services. 

Article 21. Teachers, Students and Trainees

Under the proposed treaty, a professor or teacher who visits a country (the host country) 

for the purpose of teaching or engaging in research at a university, college, or other recognized 

educational institution of a similar nature, and who immediately before that visit is, or was a 

resident of the other treaty country, generally is exempt from host country tax on any 

remuneration received for teaching or research. This exemption applies for not more than the 

two-year period beginning on the date of the professor’s or teacher’s arrival in the host country. 

Such a provision is not part of the U.S. model. Such a provision is not part of the OECD model. 

The treatment provided to students and business trainees under the proposed treaty 

generally corresponds to the provision in the U.S. model, with certain modifications, and is 

similar to the provision of the OECD model. Under the proposed treaty, a student or business 

trainee who visits a country (the host country) for the primary purpose of his or her full-time 

education, or for his or her full-time training, and who immediately before that visit is or was a 

resident of the other treaty country, generally is exempt from host country tax on payments he or 

she receives for the purpose of such maintenance, education, or training; provided, however, that 

such payments arise outside the host country. The proposed treaty also would provide that an 
 

49

individual who visits a country (the host country) for the primary purpose of studying or doing 

research as a recipient of a grant, allowance or award from a governmental, religious, charitable, 

or educational organization, and who immediately before that visit is, or was a resident of the 

other treaty country, is exempt from income tax in the host country with respect to the grant, 

allowance, or award. The provision only applies in the case of research undertaken in the public 

interest. Such a student, business trainee, or grant recipient also is exempt from host country tax 

on any remuneration for personal services rendered in the host country in an amount not 

exceeding $8,000 (or the equivalent in Bangladesh taka). In the case of a business trainee, this 

exemption is limited to the two-year period commencing on the date of the individual’s first 

arrival in the host country. There is no time-period limitation in the case of students or research 

grant recipients. The Technical Explanation clarifies that all such exemptions provided under 

Article 21 of the proposed treaty are in addition to other exemptions provided by the U.S. 

Internal Revenue Code. 

This article of the proposed treaty is an exception from the saving clause in the case of 

persons who are neither citizens nor lawful permanent residents of the host country. 

Article 22. Other Income

This article is a catch-all provision intended to cover items of income not specifically 

covered in other articles, and to assign to either the United States or Bangladesh the right to tax 

income from third countries. As a general rule, items of income not otherwise dealt with in the 

proposed treaty which are beneficially owned by a resident of one of the treaty countries are 

taxable only in the country of residence. 

The general rule described above is modified in two ways. First, income, other than 

income from real property, which is received by a resident of a treaty country and which is 

effectively connected with a permanent establishment or a fixed base maintained in the other 

treaty country may be taxed by that other country under the rules of Article 7 (Business Profits) 

and Article 15 (Independent Personal Services). This rule is consistent with the rule in the U.S. 

model. The Technical Explanation states that the rule applies even if the income is sourced in a 

third country. The carve-out of income from real property means that, consistent with the rules 

of Article 6 (Income from Immovable Property), income from real property located in the 

residence country or in a third country is taxable only in the residence country (and not the 

source country) even if the income is attributable to a permanent establishment or a fixed base in 

the source country. 

Second, the general rule described previously is modified to allow the source country a 

nonexclusive right to tax “other income” arising within the source country. As a result, both the 

residence country and the source country may tax this income, leaving the resulting double 

taxation to be resolved under Article 23 (Relief from Double Taxation). This provision is a 

departure from the U.S. model but is consistent with the U.N. model and with other treaties that 

the United States has concluded with developing countries. As an illustration of the kind of 

income to which this provision might apply, the Technical Explanation states that Bangladeshsource gambling income of a U.S. resident may be taxed by both the United States and 

Bangladesh. 
 

50

The Technical Explanation offers as additional examples of “other income” punitive 

damages, payments for a covenant not to compete, and income from certain financial 

instruments. The Technical Explanation also notes that the article applies to items of income that 

are not dealt with because of their source. For example, interest arising in a third country that is 

not attributable to a permanent establishment in the United States or Bangladesh is subject to 

Article 22. 

The Technical Explanation states that under U.S. tax law, partnership and trust income 

and distributions have the character of the associated distributable net income and thus generally 

are covered under other articles of the proposed treaty. 

This article is subject to the saving clause; U.S. citizens who are residents of Bangladesh 

will be taxable by the United States on income that is not dealt with elsewhere in the proposed 

treaty. The benefits of this article are also subject to the provisions of Article 17 (Limitation on 

Benefits). 

Article 23. Relief From Double Taxation

Internal taxation rules

United States

The United States taxes the worldwide income of its citizens and residents. It attempts 

unilaterally to mitigate double taxation generally by allowing taxpayers to credit the foreign 

income taxes that they pay against U.S. tax imposed on their foreign-source income. An indirect 

or “deemed-paid” credit is also provided. Under this rule, a U.S. corporation that owns ten 

percent or more of the voting stock of a foreign corporation and that receives a dividend from the 

foreign corporation (or an inclusion of the foreign corporation’s income) is deemed to have paid 

a portion of the foreign income taxes paid (or deemed paid) by the foreign corporation on its 

earnings. The taxes deemed paid by the U.S. corporation are included in its total foreign taxes 

paid for the year the dividend is received. 

A fundamental premise of the foreign tax credit is that it may not offset the U.S. tax on 

U.S.-source income. Therefore, the foreign tax credit provisions contain a limitation that ensures 

that the foreign tax credit only offsets U.S. tax on foreign-source income. The foreign tax credit 

limitation generally is computed on a worldwide consolidated basis. Hence, all income taxes 

paid to all foreign countries are combined to offset U.S. taxes on all foreign income. The 

limitation is computed separately for certain classifications of income (e.g., passive income) in 

order to prevent the crediting of foreign taxes on certain high-taxed foreign-source income 

against the U.S. tax on certain types of traditionally low-taxed foreign-source income. Other 

limitations may apply in determining the amount of foreign taxes that may be credited against 

the U.S. tax liability of a U.S. taxpayer. 

Bangladesh

Like the United States, Bangladesh generally provides unilateral double tax relief by 

allowing a foreign tax credit. The foreign tax credit cannot exceed the amount of Bangladesh tax 

imposed on the foreign-source income. 
 

51

Proposed treaty limitations on internal law

Overview

One of the principal purposes for entering into an income tax treaty is to limit double 

taxation of income earned by a resident of one of the countries that may be taxed by the other 

country. Unilateral efforts to limit double taxation are imperfect. Because of differences in rules 

as to when a person may be taxed on business income, a business may be taxed by two countries 

as if it were engaged in business in both countries. Also, a corporation or individual may be 

treated as a resident of more than one country and may be taxed on a worldwide basis by both 

countries. 

Part of the double tax problem is dealt with in other articles of the proposed treaty that 

limit the right of a source country to tax income. This article provides further relief where both 

Bangladesh and the United States otherwise still tax the same item of income. This article is not 

subject to the saving clause; therefore the country of citizenship or residence will waive its 

overriding taxing jurisdiction to the extent that this article applies. For example, as more fully 

discussed below, Bangladesh is required to provide a foreign tax credit for U.S. taxes paid or 

deemed paid by its citizens and residents. 

Proposed treaty restrictions on internal law

The proposed treaty generally provides that the United States will allow a U.S. citizen or 

resident a foreign tax credit for the income taxes paid or accrued to Bangladesh. The proposed 

treaty also requires the United States to allow a deemed-paid credit with respect to Bangladesh 

income tax, consistent with Code section 902, to any U.S. company that receives dividends from 

a Bangladesh company if the U.S. company owns ten percent or more of the voting stock of the 

Bangladesh company. The credit generally is to be computed in accordance with the provisions 

and subject to the limitations of U.S. law in effect at the time a credit is given (as such law may 

be amended from time to time without changing the general principle of the credit). For 

example, U.S. statutory law governs the foreign tax credit limitations imposed under Code 

section 904, the relevant currency translation rules, and the carryover periods for excess credits. 

This provision is similar to those found in the U.S. model and other U.S. income tax treaties. 

The proposed treaty provides that the taxes referred to in paragraphs 2(b) and 3 of Article 2 

(Taxes Covered) will be considered creditable income taxes for purposes of the U.S. foreign tax 

credit. 

The proposed treaty generally provides that Bangladesh will allow its residents a foreign 

tax credit for the income taxes paid or accrued to the United States. The proposed treaty also 

requires Bangladesh to allow a deemed-paid credit with respect to Bangladesh income tax to any 

Bangladesh company that receives dividends from a U.S. company if the Bangladesh company 

owns ten percent or more of the voting stock of the U.S. company. The credit generally is to be 

computed in accordance with the provisions and subject to the limitations of Bangladesh law in 

effect at the time a credit is given (as such law may be amended from time to time without 

changing the general principle of the credit). This provision is similar to those found in the U.S. 

model and other U.S. income tax treaties. The proposed treaty provides that the taxes referred to 
 

52

in paragraphs 2(a) and 3 of Article 2 (Taxes Covered) will be considered creditable income taxes 

for purposes of the Bangladesh foreign tax credit. 

The proposed treaty contains special rules for the tax treatment of certain U.S.-source 

income derived by a U.S. citizen who is a resident of Bangladesh. With respect to an item of 

income that would have been exempt from U.S. tax or subject to U.S. tax at a reduced rate if 

earned by a Bangladesh resident who was not a U.S. citizen, Bangladesh is required to allow a 

foreign tax credit only up to the amount of U.S. tax that the United States is allowed to impose 

under the proposed treaty, not including U.S. taxes that may be imposed solely by reason of 

citizenship under the treaty’s saving clause. In these cases, the United States is required to credit 

the income taxes paid or accrued to Bangladesh (after the application of the rule described in the 

preceding sentence) in determining the amount of U.S. tax owed with respect to this income. To 

the extent necessary to avoid double taxation, this otherwise U.S.-source income will be treated 

as Bangladesh-source in applying the U.S. foreign tax credit limitation. 

Article 24. Nondiscrimination

The proposed treaty contains a comprehensive nondiscrimination article. It is similar to 

the nondiscrimination article in the U.S. model and to provisions that have been included in other 

recent U.S. income tax treaties. 

In general, under the proposed treaty, one country cannot discriminate by imposing more 

burdensome taxes on nationals of the other country than it would impose on its own comparably 

situated nationals in the same circumstances.20 Not all instances of differential treatment are 

discriminatory. Differential treatment is permissible in some instances under this rule on the 

basis of tax-relevant differences (e.g., the fact that one person is subject to worldwide taxation in 

a contracting state and another person is not, or the fact that an item of income may be taxed at a 

later date in one person’s hands but not in another person’s hands). 

Under the proposed treaty, neither country may tax a permanent establishment of an 

enterprise of the other country less favorably than it taxes its own enterprises carrying on the 

same activities. 

Similar to the U.S. and OECD models, however, a country is not obligated to grant 

residents of the other country any personal allowances, reliefs, or reductions for tax purposes that 

are granted to its own residents or nationals. 

Subject to the anti-avoidance rules described in paragraph 1 of Article 9 (Associated 

Enterprises), paragraph 5 of Article 11 (Interest), and paragraph 5 of Article 12 (Royalties), each 

treaty country is required to allow its residents to deduct interest, royalties, and other 

disbursements paid by them to residents of the other country under the same conditions that it 

allows deductions for such amounts paid to residents of the same country as the payor. The 

 20 A national of a contracting state may claim protection under this article even if the national is 

not a resident of either contracting state. For example, a U.S. citizen who is resident in a third country is 

entitled to the same treatment in Bangladesh as a comparably situated Bangladeshi national. 
 

53

Technical Explanation states that 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. The Technical Explanation further states that the 

exception with respect to paragraph 5 of Article 11 (Interest) would include the denial or deferral 

of certain interest deductions under section 163(j) of the Code, thus preserving for the United 

States the ability to apply its earnings stripping rules. The proposed treaty also provides that this 

provision does not affect the application of the law of Bangladesh requiring that tax be deducted 

at source from payments of interest, royalties, and other disbursements, as a condition for 

deduction against income. In addition, any debts of a resident of one treaty country to a resident 

of the other treaty country are, for purposes of determining the taxable capital of the obligor, 

deductible under the same conditions as if they had been owed to a resident of the same treaty 

country. 

The nondiscrimination rules also apply to enterprises of one country that are owned in 

whole or in part by residents of the other country. Enterprises resident in one country, the capital 

of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents 

of the other country, are not subjected in the first country to any taxation (or any connected 

requirement) that is more burdensome than the taxation (or connected requirements) that the first 

country imposes or may impose on other similar enterprises. As noted above, some differences 

in treatment may be justified on the basis of tax-relevant differences in circumstances between 

two enterprises. In this regard, the Technical Explanation provides examples of Code provisions 

that are understood by the two countries not to violate the nondiscrimination provision of the 

proposed treaty, including the rules that tax U.S. corporations making certain distributions to 

foreign shareholders in what would otherwise be nonrecognition transactions, the rules that 

impose a withholding tax on non-U.S. partners of a partnership, and the rules that prevent foreign 

persons from owning stock in subchapter S corporations. 

The proposed treaty provides that nothing in the nondiscrimination article may be 

construed as preventing either of the countries from imposing branch taxes as described in 

Article 14 (Branch Tax). 

In addition, notwithstanding the definition of taxes covered in Article 2 (Taxes Covered), 

this article applies to taxes imposed by a treaty country or a political subdivision or local 

authority. The Technical Explanation states that customs duties are not regarded as taxes for this 

purpose. 

The saving clause does not apply to the nondiscrimination article. Thus, a U.S. citizen 

who is resident in Bangladesh may claim benefits with respect to the United States under this 

article. 

Article 25. Mutual Agreement Procedure

The proposed treaty contains the standard mutual agreement provision, with some 

variation, that authorizes the competent authorities of the two countries to consult together to 

attempt to alleviate individual cases of double taxation not in accordance with the proposed 

treaty. 
 

54

Under this article, a person who considers that the actions of one or both of the countries 

cause him or her to be subject to tax which is not in accordance with the provisions of the 

proposed treaty may (irrespective of internal law remedies) present his or her case to either 

competent authority. The Technical Explanation states that allowing a person to bring a case to 

either competent authority follows both the U.S. and OECD models. Under this approach, for 

example, a U.S. permanent establishment of a corporate resident in Bangladesh that faces 

inconsistent treatment in the two countries would be able to bring its complaint to the competent 

authority in either country. 

The proposed treaty provides that if the objection appears to be justified and that 

competent authority is not itself able to arrive at a satisfactory solution, that competent authority 

must endeavor to resolve the case by mutual agreement with the competent authority of the other 

country, with a view to the avoidance of taxation which is not in accordance with the proposed 

treaty. The proposed treaty provides that any agreement reached will be implemented 

notwithstanding any time limits or other procedural limitations under the domestic laws of either 

country (e.g., a country’s applicable statute of limitations). 

The competent authorities of the countries are to endeavor to resolve by mutual 

agreement any difficulties or doubts arising as to the interpretation or application of the proposed 

treaty. In particular, the competent authorities may agree to: (1) the same attribution of income, 

deductions, credits, or allowances of an enterprise of one treaty country to the enterprise’s 

permanent establishment situated in the other country; (2) the same allocation of income, 

deductions, credits, or allowances between persons; (3) the same characterization of particular 

items of income; (4) the same application of source rules with respect to particular items of 

income; and (5) a common meaning of a term. The Technical Explanation clarifies that this is a 

non-exhaustive list of examples of the kinds of matters about which the competent authorities 

may reach agreement. 

The proposed treaty also provides that the competent authorities may consult together for 

the elimination of double taxation regarding cases not provided for in the proposed treaty. 

The proposed treaty authorizes the competent authorities to communicate with each other 

directly for purposes of reaching an agreement in the sense of this mutual agreement article. The 

Technical Explanation states that this provision makes clear that it is not necessary to go through 

diplomatic channels in order to discuss problems arising in the application of the proposed treaty. 

The proposed treaty also authorizes the competent authorities to increase dollar 

amounts21 referred to in the proposed treaty. The Technical Explanation states that this authority 

allows the competent authorities to make changes to reflect economic or monetary 

developments. The Technical Explanation states this provision can be applied only to the benefit 

of taxpayers, i.e., only to increase dollar thresholds, not to reduce them. 

 21 The Technical Explanation states that this refers to specific dollar amounts referred to in the 

proposed treaty, such as the $10,000 exemption for entertainers and athletes (Article 18) and the $8,000 

exemption for students and trainees (Article 21). 
 

55

This article is not subject to the saving clause (Article 1) by virtue of the exceptions in 

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. 

The Technical Explanation provides that the provisions of Article 25 (Mutual Agreement 

Procedure) of the proposed treaty will have effect from the date of entry into force of the 

proposed treaty, without regard to the taxable or chargeable period to which the matter relates. 

Article 26. Exchange of Information and Administrative Assistance

The proposed treaty provides that the two competent authorities will exchange such 

information as is necessary22 to carry out the provisions of the proposed treaty, or the domestic 

laws of the two countries concerning all taxes covered by the treaty23 insofar as the taxation 

thereunder is not contrary to the proposed treaty. Unlike the U.S. model, the exchange of 

information under this article is limited to taxes that are identified in Article 2 (Taxes Covered). 

The Technical Explanation states that Bangladesh was unable to provide authority to exchange 

information with respect to all national level taxes, as in the U.S. and OECD models. 

This exchange of information is not restricted by Article 1 (General Scope). Therefore, 

information with respect to third-country residents is covered by these procedures. The 

Technical Explanation provides an example of a third-country resident with a permanent 

establishment in Bangladesh which engages in transactions with a U.S. enterprise. Under the 

proposed treaty, the United States could request information with respect to that permanent 

establishment, even though it is not a resident of either of the two countries. 

 Under the proposed treaty, the two competent authorities may exchange information on 

a routine basis, on request in relation to a specific case, or spontaneously. The Technical 

Explanation states that it is contemplated that all of these types of exchange will be utilized, as 

appropriate. 

Any information exchanged under the proposed treaty is treated as secret in the same 

manner as information obtained under the domestic laws of the country receiving the 

information. The exchanged information 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 to which the proposed treaty applies, or persons or authorities engaged in 

the oversight of such taxes (e.g., the tax-writing committees of Congress and the General 

 22 The U.S. model uses “relevant” instead of “necessary.” The Technical Explanation states that 

“necessary” has been consistently interpreted as being equivalent to “relevant,” and does not necessitate a 

demonstration that a State would be prevented from enforcing its tax laws absent the information. 

23 Under Article 2 (Taxes Covered), the treaty applies to Federal income taxes imposed by the 

Code in the United States and the income tax (including surcharges calculated by reference to income tax) 

in Bangladesh. 
 

56

Accounting Office). Such persons or authorities must use the information for such purposes 

only. Information received by these bodies must be for use in the performance of their role in 

overseeing the administration of U.S. tax laws. Exchanged information may be disclosed in 

public court proceedings or in judicial decisions. 

As is true under the U.S. model and the OECD model, under the proposed treaty, a 

country is not required to carry out administrative measures at variance with the laws and 

administrative practice of either country, to supply information that is not obtainable under the 

laws or in the normal course of the administration of either country, or to supply information that 

would disclose any trade, business, industrial, commercial, or professional secret or trade process 

or information, the disclosure of which would be contrary to public policy. 

If information is requested by a country in accordance with this article, the proposed 

treaty provides that the other country will obtain the requested information in the same manner 

and to the same extent as if the tax of the requesting country were the tax of the other country 

and were being imposed by that country, notwithstanding that such other country may not need 

such information at that time. Under the proposed treaty, the powers of each country’s 

competent authority to obtain information include the ability to obtain information held by 

financial institutions, nominees, or persons acting in an agency or fiduciary capacity. This does 

not include the ability to obtain information that would reveal confidential communications 

between a client and an attorney, where the client seeks legal advice. The Technical Explanation 

also provides that the competent authorities may obtain information relating to the ownership of 

legal persons, such as the identity of a beneficial owner of bearer shares. 

The proposed treaty provides that if specifically requested by the competent authority of 

a country, the competent authority of the other country must provide information under this 

article in the form of depositions of witnesses and authenticated copies of unedited original 

documents (including books, papers, statements, records, accounts, and writings), to the same 

extent such depositions and documents can be obtained under the laws and administrative 

practices of the requested country with respect to its own taxes. 

The Technical Explanation states that the provisions of Article 26 (Exchange of 

Information and Administrative Assistance) of the proposed treaty will have effect from the date 

of entry into force of the proposed treaty, without regard to the taxable or chargeable period to 

which the matter relates. Thus, once the proposed treaty is in force, the competent authority may 

seek information under the treaty with respect to a year prior to the entry into force of the treaty. 

Article 27. Effect of Convention on Diplomatic Agents and Consular Officers, Domestic 

Laws, and Other Treaties

Diplomatic agents

The proposed treaty contains the rule found in the U.S. model and other U.S. tax treaties 

that its provisions do not affect the fiscal privileges of members of diplomatic agents or consular 

officers under the general rules of international law or under the provisions of special 

agreements. Accordingly, the proposed treaty will not defeat the exemption from tax which a 

host country may grant to the salary of diplomatic officials of the other country. The saving 
 

57

clause does not apply in the application of this article to host country residents who are neither 

citizens nor lawful permanent residents of that country. Thus, for example, U.S. diplomats who 

are considered residents of Bangladesh may be protected from Bangladesh tax. 

Domestic laws and other treaties

The proposed treaty provides that it does not restrict in any manner any benefit accorded 

by internal law or by any other agreement between the United States and Bangladesh. Thus, the 

proposed treaty will not apply to increase the tax burden of a resident of either the United States 

or the Bangladesh. According to the Technical Explanation, the fact that the proposed treaty 

only applies to a taxpayer’s benefit does not mean that a taxpayer may select inconsistently 

among treaty and internal law provisions in order to minimize its overall tax burden. In this 

regard, the Technical Explanation sets forth the following example. Assume a resident of 

Bangladesh has three separate businesses in the United States. One business is profitable and 

constitutes a U.S. permanent establishment. The other two businesses generate effectively 

connected income as determined under the Code, but do not constitute permanent establishments 

as determined under the proposed treaty; one business is profitable and the other business 

generates a net loss. Under the Code, all three businesses would be subject to U.S. income tax, 

in which case the losses from the unprofitable business could offset the taxable income from the 

other businesses. On the other hand, only the income of the business which gives rise to a 

permanent establishment is taxable by the United States under the proposed treaty. The 

Technical Explanation makes clear that the taxpayer may not invoke the proposed treaty to 

exclude the profits of the profitable business that does not constitute a permanent establishment 

and invoke U.S. internal law to claim the loss of the unprofitable business that does not 

constitute a permanent establishment to offset the taxable income of the permanent 

establishment.24 If, however, the taxpayer invokes the Code for the taxation of all three ventures, 

he would not be precluded from invoking the proposed treaty 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. 

The proposed treaty provides that the dispute resolution procedures under its mutual 

agreement procedure article (Article 25) (and not the corresponding provisions of any other 

agreement to which the United States and Bangladesh are parties) exclusively apply in 

determining whether a measure is within the scope of the proposed treaty. Unless the competent 

authorities agree that a taxation measure is outside the scope of the proposed treaty, only the 

proposed treaty’s nondiscrimination rules, and not the nondiscrimination rules of any other 

agreement in effect between the United States and Bangladesh, generally apply to that law or 

other measure. The only exception to this general rule is such national treatment or most favored 

nation obligations as may apply to trade in goods under the General Agreement on Tariffs and 

Trade. For purposes of this provision, the term “measure” means a law, regulation, rule, 

procedure, decision, administrative action, or any other similar provision or action.

 24 See Rev. Rul. 84-17, 1984-1 C.B. 308. 
 

58 

Article 28. Entry into Force

The proposed treaty provides that the treaty is subject to ratification in accordance with 

the applicable procedures of each treaty country and that instruments of ratification will be 

exchanged as soon as possible. The proposed treaty will enter into force upon the exchange of 

instruments of ratification. 

With respect to taxes withheld at source, the individual provisions of the proposed treaty 

will be effective for amounts paid or credited on or after the first day of the second month 

following the date on which the proposed treaty enters into force. With respect to other taxes, 

the provisions of the proposed treaty will be effective for taxable periods in the United States and 

income years in Bangladesh beginning on or after January 1 of the year following entry into 

force. 

The Technical Explanation states that, as described in the explanations of Article 25 

(Mutual Agreement Procedure) and Article 26 (Exchange of Information and Administrative 

Assistance), the powers given to competent authority under those articles apply retroactively to 

taxable years preceding entry into force. 

Article 29. Termination

The proposed treaty will remain in force until terminated by either country. Either 

country may terminate the proposed treaty at any time after five years from the date of the 

treaty’s entry into force, provided the country has given at least six months prior written notice 

of termination to the other country through diplomatic channels. In that case, a termination is 

effective with respect to taxes withheld at source for amounts paid or credited on or after January 

1 next following the expiration of the six-month period following delivery of notice of 

termination. With respect to other taxes, a termination is effective for taxable periods in the 

United States and income years in Bangladesh beginning on or after January 1 next following the 

expiration of the six-month period. 

The Technical Explanation states that if the proposed treaty is terminated, the competent 

authorities of the treaty countries are not permitted on or after termination to exchange 

confidential taxpayer information, regardless of whether the treaty was in force for the year to 

which the information relates. Similarly, on or after termination the competent authorities are 

not permitted to reach mutual agreement departing from internal law, regardless of the taxable 

year to which the agreement relates. 

The Technical Explanation notes that customary international law as reflected in the 

Vienna Convention on Treaties permits termination by one treaty country at any time in the 

event of a “material breach” by the other treaty country. 

Exchange of Notes

At the signing of the proposed treaty, notes were exchanged dealing with two issues. 

First, the notes state that if the United States reaches agreement on the provision of a tax-sparing 

credit with any other country, the United States will reopen negotiations with Bangladesh with a 
 

59 

view to the conclusion of a protocol extending a tax-sparing credit under the proposed treaty. 

This protocol would be subject to the usual ratification procedures of both countries. 

This understanding between Bangladesh and the United States reflects the desire of 

Bangladesh and other developing countries that the United States adopt a tax-sparing credit. 

Many developed countries provide tax-sparing credits as a way of preventing developing 

countries’ tax incentives for foreign direct investment from being offset by increased taxation of 

the investment by the developed countries (in the form of reduced foreign tax credits). A taxsparing credit is an income tax credit provided by a country (typically a developed country) 

against its own tax on income from a developing country. The credit generally equals the full 

amount of the developing country’s nominal tax on the income, notwithstanding the developing 

country’s reduction or elimination of the tax as part of an investment incentive program. Many 

developing countries, for example, provide “tax holidays” to residents of other countries who 

invest in the developing country. Under these tax holidays developing countries typically forgo 

tax on the profits from the foreign-owned business for a period of time. Absent a tax-sparing 

credit, those profits typically would be taxed in full by the country of residence of the business’ 

foreign owner upon repatriation in dividend form. The United States has declined to give taxsparing credits. 

 The diplomatic notes also provide that if the tax authorities of the treaty countries do not 

have information sufficient to determine the profits to be attributed under Article 7 (Business 

Profits) to a permanent establishment, the determination may be made on a reasonable basis 

using principles consistent with Article 7. 
 

60 

V. ISSUES 

A. Developing-Country Concessions 

In general

The proposed treaty contains a number of developing-country concessions, some of 

which are found in other U.S. income tax treaties with developing countries. The most 

significant of these concessions are described below. Following that description is a discussion 

of the issues raised by these concessions. 

Definition of permanent establishment

In several ways, the proposed treaty permits broader source-basis taxation than does the 

U.S. model. An example of this broadened source taxation is the proposed treaty’s permanent 

establishment article. This article permits the country in which business activities are performed 

to tax the income from these activities in a broader range of circumstances than would be 

permitted under the U.S. model. The most important differences between the permanent 

establishment articles in the proposed treaty and the U.S. model are described below. 

Under the proposed treaty, a building site, a construction or installation project, or an 

installation or drilling rig used for the exploration or development of natural resources 

constitutes a permanent establishment if the site, project, or installation or rig lasts more than 183 

days. The U.S. model’s threshold, by contrast, is 12 months. 

The proposed treaty expands the circumstances in which a dependent agent’s activities 

give rise to permanent establishment status. Under the U.S. model, a dependent agent’s activities 

in a treaty country create a permanent establishment in that country for the enterprise on behalf 

of which the agent is acting only if the agent has and habitually exercises in that country 

authority to conclude binding contracts for the enterprise. The proposed treaty includes this 

general rule but also provides that if a dependent agent has no authority to conclude contracts, 

the agent’s activities nonetheless create a permanent establishment in a treaty country if the agent 

habitually maintains in that country a stock of goods or merchandise belonging to the enterprise 

from which the agent regularly fills orders or makes deliveries on behalf of the enterprise, and 

additional activities conducted in that country on behalf of the enterprise contribute to the 

conclusion of the sale of the goods or merchandise. 

The proposed treaty’s conception of a permanent establishment is broader than the U.S. 

model’s conception in two additional respects. First, under the proposed treaty, the maintenance 

of a fixed place of business solely for any combination of certain activities involving the storage, 

display, purchase, or maintenance of goods or merchandise does not give rise to a permanent 

establishment if the overall character of the fixed place of business is of a preparatory or an 

auxiliary character. The U.S. model does not include this preparatory or auxiliary character 

requirement for the exclusion from permanent establishment status. Second, the proposed treaty 

excludes from permanent establishment status the use of facilities or the maintenance of a stock 

of goods for the purpose of occasional delivery of the goods or merchandise. The U.S. model’s 

exclusion applies regardless of whether delivery is only occasional. 
 

61 

Other concessions to source-basis taxation

In several instances, the proposed treaty allows higher rates of source-country tax than 

the U.S. model allows. Like the U.S. model, the proposed treaty allows a maximum rate of 

source-country taxation of 15 percent on dividends. When, however, the beneficial owner of a 

dividend is a company that owns at least 10 percent of the dividend paying company’s voting 

stock, the maximum source-country tax rates under the proposed treaty and the U.S. model 

differ. The proposed treaty’s maximum source-country rate in this circumstance is 10 percent, 

while the U.S. model’s maximum rate is 5 percent. The proposed treaty’s 10-percent rate in this 

circumstance is, however, lower than the 15-percent maximum rate permitted in the U.S.-Sri 

Lanka income tax treaty (as amended by a protocol signed in 2002). The proposed treaty also 

allows source-country taxation of interest and royalties at a maximum rate of 10 percent, 

whereas the U.S. model generally does not permit source-country taxation of interest or royalties. 

The proposed treaty also allows the source country a non-exclusive right to tax “other income” 

(that is, income not specifically dealt with in other provisions of the treaty), whereas the U.S. 

model provides for exclusive residence-based taxation of that income. 

The proposed treaty permits source-country taxation of income derived by an individual 

resident of the other treaty country from the performance of independent personal services in the 

source country if the individual is present in that country for a total of more than 183 days during 

any 12-month period, even if the income is not attributable to a fixed base or permanent 

establishment. The U.S. model requires as a condition of source-country taxation that the 

income be attributable to a fixed base or permanent establishment in the source country. 

The proposed treaty also includes a lower dollar threshold than the U.S. model’s 

threshold for source-country taxation of income of entertainers and athletes. Under the proposed 

treaty, the source country may tax the income from activities performed in that country by 

entertainers and athletes if the income exceeds $10,000 (or the equivalent amount in Bangladesh 

taka) in a year. The U.S. model’s threshold is $20,000. By comparison, the threshold in the 

U.S.-Sri Lanka income tax treaty is $6,000. 

Issues

One purpose of the proposed treaty is to reduce tax barriers to direct investment by U.S. 

firms in Bangladesh. The practical effect of the developing-country concessions in the proposed 

treaty could be greater Bangladesh taxation (or less U.S. taxation) of activities of U.S. firms in 

Bangladesh than would be the case under rules comparable to those of the U.S. model. 

Some existing U.S. treaties with developing countries include concessions similar to 

those in the proposed treaty. An issue is whether these developing-country concessions represent 

appropriate U.S. treaty policy, and if so, whether Bangladesh is an appropriate recipient of these 

concessions. There is a possibility that the inclusion of these concessions in the proposed treaty 

could result in additional pressure on the United States to include similar concessions in future 

treaties negotiated with developing countries. On the other hand, concessions of this kind 

arguably are necessary for the conclusion of tax treaties with developing countries. 
 

62 

Tax treaties with developing countries can be in the interest of the United States because 

they provide reductions in the taxation by those countries of U.S. investors and a clearer 

framework for the taxation of U.S. investors. Treaties also provide dispute-resolution and 

nondiscrimination rules that benefit U.S. investors, as well as information-exchange procedures 

that aid in the administration and enforcement of the tax laws. 
 

63 

B. Expatriation to Avoid Tax by Former U.S. Citizens 

and Long-Term Residents 

There is a potential conflict between the special expatriation tax regime of U.S. internal 

law and the proposed treaty. The saving clause that the proposed treaty would adopt uses the 

obsolete “principal purposes of tax avoidance” formulation in determining whether the special 

tax regime may apply to individuals who expatriate, even though the subjective determinations 

of tax-avoidance purpose under prior law were recently eliminated and replaced with objective 

rules for determining the applicability of the special tax regime.25

The saving clause of the proposed treaty applies to former U.S. citizens and long-term 

residents whose loss of citizenship or termination of residency status had as one of its principal 

purposes the avoidance of U.S. income tax. The provision is limited to the 10-year period 

following the loss of U.S. citizenship. 

Before section 877 was amended by AJCA, individuals who met a specified income tax 

liability threshold or a specified net worth threshold generally were considered to have lost 

citizenship or resident status for a principal purpose of U.S. tax avoidance, but the law allowed 

for subjective determinations of tax-avoidance purpose. Certain categories of individuals, 

including a very limited class of dual residents or citizens, could avoid being deemed to have a 

tax avoidance purpose for relinquishing citizenship or terminating residency by submitting a 

ruling request to the IRS for a determination as to whether the relinquishment of citizenship or 

termination of residency had as one of its principal purposes the avoidance of U.S. income, estate 

or gift taxes. 

Under the regime prior to its amendment by AJCA, if a former U.S. citizen or long-term 

resident relinquished U.S. citizenship or terminated U.S. residency with a principal purpose of 

avoiding U.S. taxes, the individual was subject to a special set of income, estate, and gift tax 

rules for the 10-year period following such loss of status. Under present and prior law, these 

rules mainly have the effect of expanding the scope of income and wealth transfers that are 

subject to taxation by the United States, such that the individual is subject to U.S. tax on a 

somewhat broader basis than other nonresident aliens, but still on a narrower basis than a current 

U.S. citizen or resident. Under prior law, for purposes of determining the applicability of the 

regime, an individual who relinquished citizenship or terminated residency was treated as having 

done so with a principal purpose of tax avoidance if the individual’s average Federal income tax 

liability or net worth exceeded certain monetary thresholds, but certain categories of individuals 

(e.g., dual residents) could avoid this presumption by requesting a ruling from the IRS that they 

did not have such a principal purpose, based on the relevant facts and circumstances. 

AJCA eliminated these subjective determinations of tax-avoidance purpose and replaced 

them with objective rules. Under the regime as amended by AJCA, a former citizen or former 

 25 Substantial changes to the special expatriation rules were included in AJCA, which was signed 

into law on October 22, 2004 (roughly one month after the proposed treaty was signed, on September 26, 

2004). The proposed treaty thus does not reflect these recent changes. 
 

64 

long-term resident is subject to the special income, estate, and gift tax rules for expatriates unless 

the individual: (1) establishes that his or her average annual net income tax liability for the five 

preceding years does not exceed $124,000 (adjusted for inflation after 2004) and his or her net 

worth is less than $2 million, or alternatively satisfies limited, objective exceptions for dual 

citizens and minors who have had no substantial contact with the United States; and (2) certifies 

under penalties of perjury that he or she has complied with all Federal tax obligations for the 

preceding five years and provides such evidence of compliance as the Treasury Secretary may 

require. Thus, as a result of AJCA, the application of the expatriation tax regime no longer turns 

on determinations of whether a person had a principal purpose of tax avoidance, as it often did 

prior to AJCA. 

The Technical Explanation notes that under the proposed treaty, the determination of 

whether there was a principal purpose of tax avoidance with respect to former citizens or longterm residents of the United States is made under the laws of the United States. The Technical 

Explanation further states that the new objective tests “represent the administrative means by 

which the United States determines whether a taxpayer has a tax avoidance purpose.” Thus, 

although the proposed treaty employs the now-obsolete concept of a tax-avoidance purpose, the 

Technical Explanation maintains that this language should be understood as fully preserving U.S. 

taxing jurisdiction under the expatriation tax rules in their current form. 

The Committee may wish to satisfy itself that the language included in the proposed 

treaty allows the United States to exercise its full taxing jurisdiction with respect to former 

citizens and long-term residents. The Committee also may wish to inquire as to why the 

language of the proposed treaty was not updated to eliminate potential conflicts with section 877, 

as revised by AJCA. 
 

65 

C. Education and Training 

Treatment under proposed treaty

Under Article 21 of the proposed treaty, U.S. taxpayers who are visiting Bangladesh and 

individuals who immediately prior to visiting the United States were resident in Bangladesh will 

be exempt from income tax in the host country on certain payments received if the purpose of 

their visit is to teach or engage in research at university, college or other educational institution, 

to engage in full-time education, to engage in full-time training, or to undertake public interest 

research as a grant recipient. In the case of individuals engaged in teaching or research at a 

college, university, or other educational institution, the exemption covers any remuneration for 

such teaching or research. In the case of individuals other than teachers, 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, the amount of grant 

or award, and up to $8,000 (or the equivalent in Bangladesh taka) in personal services income. 

In the case of an individual engaged in teaching or research at a university, college, or other 

educational institution, and in the case of a business trainee, the exemption from income tax in 

the host country applies for a period of two years. 

Issues

Full-time students and persons engaged in full-time training.–The proposed treaty 

generally has the effect of exempting payments received for the maintenance, education, and 

training of full-time students and persons engaged in full-time training as a visitor from the 

United States to Bangladesh or as a visitor from Bangladesh to the United States from the 

income tax of both the United States and Bangladesh. This conforms to the U.S. model with 

respect to students and generally conforms to the OECD model provisions with respect to 

students and trainees. In addition, under the proposed treaty such individuals may earn up to 

$8,000 per year in personal services income free of tax. The allowance of an exemption for 

personal service income earned in the host country departs from both the U.S. and OECD 

models. 

The proposed treaty applies a more stringent standard when the visiting individual is an 

employee of a person in his or her home country undertaking training in the host country. For 

such an individual the exemption for payments received for the maintenance, education, and 

training and up to $8,000 in personal service income is limited to two years. In this regard the 

proposed treaty departs from both the U.S. model and the OECD model. The U.S. model limits 

exemptions for payments of maintenance, education, and training for one year in the case of 

business trainees but does not provide any exemption related to personal services income. The 

OECD model does not limit the duration of exemption for payments for maintenance, education, 

and training for business trainees and does not provide any exemption related to personal 

services income. 

This provision generally would have the effect of reducing the cost of such education and 

training received by visitors. This may encourage individuals in both countries to consider study 

abroad in the other country. Such cross-border visits by students and trainees may foster the 

advancement of knowledge and redound to the benefit of residents of both countries. 
 

66 

It could be argued that the training or education of an employee relates primarily to 

specific job skills of value to the individual or the individual’s employer rather than enhancing 

general knowledge and cross-border understanding, as may be the case in the education or 

training of a non-employee visitor. This could provide a rationale for providing more openended treaty benefits in the case of non-employee students and trainees as opposed to employees. 

However, if employment provides the underlying rationale for disparate treaty benefits, a 

question might arise as to why training requiring two years or less is preferred to training that 

requires a longer visit to the host country. As such, the proposed treaty would favor certain types 

of training arrangements over others. On the other hand, there may be few training programs 

that exceed two years duration. 

Teachers and professors.–The proposed treaty is inconsistent with the U.S. model in 

which no such exemption would be provided for the remuneration of visiting teachers, 

professors, or academic researchers. While the position of the U.S. model is to provide no such 

exemption, an exemption for visiting teachers and professors has been included in many bilateral 

tax treaties. Of the more than 50 bilateral income tax treaties in force, 31 include provisions 

exempting from host country taxation the income of a visiting individual engaged in teaching or 

research at an educational institution, and an additional 11 treaties provide a more limited 

exemption from taxation in the host county for a visiting individual engaged in research. Four of 

the most recently ratified income tax treaties did contain such a provision.26 

Under the Code, a U.S. person earning income abroad may exempt from U.S. tax up to 

$80,000 of foreign earned income.27 Thus, in the case of a U.S. person temporarily locating in 

Bangladesh to teach, the proposed treaty would provide the U.S. person with up to $80,000 in 

tax-free income. The effect of such exemptions for the remuneration of visiting teachers, 

professors, and academic researchers generally is to make such cross-border visits more 

attractive financially. Increasing the financial reward may serve to encourage cross-border visits 

by academics. Such cross-border visits by academics for teaching and research may foster the 

advancement of knowledge and redound to the benefit of residents of both countries. On the 

other hand, such an exemption from income tax may be seen as unfair when compared to persons 

engaged in other occupations whose occupation or employment may cause them to relocate 

temporarily abroad. Such exemptions for remuneration of teachers, professors, and academic 

researchers could be said to violate the principle of horizontal equity by treating otherwise 

similarly economically situated taxpayers differently. 

 26 The treaties with Slovenia and Venezuela, both considered in 1999, the treaty with the United 

Kingdom considered in 2003, and the treaty with Japan considered in 2004, contain provisions exempting 

the remuneration of visiting teachers and professors from host country income taxation. The treaties with 

Denmark, Estonia, Latvia, and Lithuania, also considered in 1999, did not contain such an exemption, but 

did contain a more limited exemption for visiting researchers. The treaty with Sri Lanka considered in 

2004 contained no exemption for visiting teachers, professors, or researchers. 

27 Sec. 911. Amounts greater than $80,000 generally are included in income for the purpose of 

computing the U.S. person’s tax liability on worldwide income. If the U.S. person paid foreign income 

taxes, the U.S. person may be able to claim the foreign tax credit for income taxes paid. 
 

67 

The Committee may wish to satisfy itself that such an exemption with respect to 

Bangladesh is appropriate. Looking beyond the U.S.-Bangladesh treaty relationship, the 

Committee may wish to determine whether an exemption from host country taxation for visiting 

teachers and professors is consistent with recent trends in U.S. tax treaty policy. Specifically, the 

Committee may want to know whether the Treasury Department intends to include such 

exemptions in other proposed treaties in the future.28

 28 See Part V.D., below, for a discussion of divergence from the U.S. model tax treaty. 
 

68 

D. U.S. Model Income Tax Treaty 

It has been longstanding practice for the Treasury Department to maintain, and update as 

necessary, a model income tax treaty that reflects the current policies of the United States 

pertaining to income tax treaties. Some of the purposes of this model are explained by the 

Treasury Department in its Technical Explanation of the U.S. model: 

[T]he Model is not intended to represent an ideal United States income tax treaty. 

Rather, a principal function of the Model is to facilitate negotiations by helping 

the negotiators identify differences between income tax policies in the two 

countries. In this regard, the Model can be especially valuable with respect to the 

many countries that are conversant with the OECD Model. ... Another purpose of 

the Model and the Technical Explanation is to provide a basic explanation of U.S. 

treaty policy for all interested parties, regardless of whether they are prospective 

treaty partners.29

U.S. model tax treaties provide a framework for U.S. treaty policy. These models 

provide helpful information to taxpayers, the Congress, and foreign governments as to U.S. 

policies on often complicated treaty matters. In order to promote clarity, transparency, and 

meaningful Congressional oversight in this area, the U.S. model tax treaties should reflect the 

most current positions on U.S. treaty policy. Periodically updating the U.S. model tax treaties to 

reflect changes, revisions, developments, and the viewpoints of Congress with regard to U.S. 

treaty policy would ensure that the model treaties remain meaningful and relevant.30 

With assistance from the staff of the Joint Committee on Taxation, the Committee on 

Foreign Relations reviews tax treaties negotiated and signed by the Treasury Department before 

ratification by the full Senate is considered. The U.S. model is an important part of this review 

process, because it helps the Senate determine the Administration’s most recent treaty policy and 

understand the reasons for diverging from the U.S. model in a particular tax treaty. To the extent 

that a particular tax treaty adheres to the U.S. model, transparency of the policies encompassed in 

the tax treaty is increased and the risk of technical flaws and unintended consequences resulting 

from the tax treaty is reduced. 

It is recognized that tax treaties often diverge from the U.S. model due to, among other 

things, the unique characteristics of the legal and tax systems of treaty partners, the outcome of 

negotiations with treaty partners, and recent developments in U.S. treaty policy. However, even 

without taking into account the central features of tax treaties that predictably diverge from the 

U.S. model (e.g., withholding rates, limitation on benefits, exchange of information), the 

 29 Treasury Department, Technical Explanation of the United States Model Income Tax 

Convention, at 3 (September 20, 1996). 

30 The staff of the Joint Committee on Taxation has recommended that the Treasury Department 

update and publish U.S. model tax treaties once per Congress. Joint Committee on Taxation, Study of the 

Overall State of the Federal Tax System and Recommendations for Simplification, Pursuant to Section 

8022(3)(B) of the Internal Revenue Code of 1986 (JCS-3-01), April 2001, vol. II, pp. 445-447. 
 

69 

technical provisions of recent U.S. tax treaties have diverged substantively from the U.S. model 

with increasing frequency. This development suggests that the U.S. model, which has not been 

updated since 1996, is becoming obsolete. 

In testimony before the Committee in February 2004, the Treasury Department stated that 

it intended to update the U.S. model, and to work with the staffs of this Committee and the Joint 

Committee on Taxation in this regard.31 In testimony before the Committee in September 2004, 

the Treasury Department stated that it had begun work on an update to the U.S. model, and was 

looking forward to working with the staffs of this Committee and the Joint Committee on 

Taxation on this project.32 The Committee may wish to inquire of the Treasury Department as to 

the current status of this project. 

 31 Testimony of Barbara M. Angus, International Tax Counsel, U.S. Treasury Department, 

Before the Senate Committee on Foreign Relations Hearing on Pending Income Tax Agreements, 

February 25, 2004. 

32 Testimony of Barbara M. Angus, International Tax Counsel, U.S. Treasury Department, 

Before the Senate Committee on Foreign Relations Hearing on Pending Income Tax Agreements, 

September 24, 2004.