89–119 

111TH CONGRESS EXEC. REPT. " ! SENATE 2d Session 111–3 

TAX CONVENTION WITH MALTA 

JUNE 30, 2010.—Ordered to be printed 

Mr. KERRY, from the Committee on Foreign Relations, 

submitted the following 

R E P O R T 

[To accompany Treaty Doc. 111–1] 

The Committee on Foreign Relations, to which was referred the 

Convention between the Government of the United States of America and the Government of Malta with respect to Taxes on Income, 

signed on August 8, 2008, at Valletta (the ‘‘Convention’’) (Treaty 

Doc. 111–1), having considered the same, reports favorably thereon 

with one declaration, as indicated in the resolution of advice and 

consent, and recommends that the Senate give its advice and consent to ratification thereof, as set forth in this report and the accompanying resolution of advice and consent. 

CONTENTS 

Page 

I. Purpose ........................................................................................................... 1 

II. Background .................................................................................................... 2 

III. Major Provisions ............................................................................................ 2 

IV. Entry Into Force ............................................................................................ 4 

V. Implementing Legislation ............................................................................. 4 

VI. Committee Action .......................................................................................... 4 

VII. Committee Recommendation and Comments .............................................. 5 

VIII. Text of Resolution of Advice and Consent to Ratification .......................... 6 

IX. Annex I—Technical Explanation .................................................................. 7 

X. Annex II—Transcript of Hearing Held November 10, 2009 ....................... 97 

I. PURPOSE

The purpose of the new Malta Convention is to promote and facilitate trade and investment between the United States and 

Malta. Principally, the Convention provides for reduced withholding rates on cross-border payments of dividends, interest, royalties, and other income, as well as the elimination of withholding 

taxes on cross-border dividend payments to pension funds. The 

Convention contains rigorous protections designed to protect 

against ‘‘treaty shopping,’’ which is the inappropriate use of a tax 

treaty by third-country residents, and provisions to ensure the exVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00001 Fmt 6659 Sfmt 6602 H:\DOCS\TD111-1.TXT MIKEB
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change of information between tax authorities in both countries. 

While the proposed Convention generally follows the 2006 U.S. 

Model Income Tax Treaty (the ‘‘U.S. Model’’), it deviates from the 

U.S. Model in certain respects, including by providing enhanced 

protections against treaty shopping. 

II. BACKGROUND

There is no income tax treaty currently in force between the 

United States and Malta. The previous U.S.-Malta tax treaty 

(signed on March 21, 1980) was terminated by the United States 

on January 1, 1997, due to concerns that changes to Maltese tax 

law provided an incentive for ‘‘treaty shopping’’ and that Malta was 

unable to satisfactorily exchange tax information. After Malta 

changed its tax law in an effort to address these concerns, the 

United States negotiated and concluded the Convention. While the 

changes to Malta’s tax law were critical to the Treasury Department’s willingness to re-engage Malta in a double taxation treaty, 

it was nonetheless deemed necessary to include protections against 

‘‘treaty shopping’’ that go beyond those in the U.S. model. The Convention was signed on August 8, 2008. 

III. MAJOR PROVISIONS

A detailed article-by-article analysis of the Convention may be 

found in the Technical Explanation Published by the Department 

of the Treasury on November 10, 2009. In addition, the staff of the 

Joint Committee on Taxation prepared an analysis of the Convention, JCX–50–09 (November 6, 2009), which was of great assistance 

to the committee in reviewing the Convention. A summary of the 

key provisions of the Convention is set forth below. 

General Scope 

Article 1 provides that the scope of the Convention would generally apply only to ‘‘residents’’ of the United States and Malta. It 

contains a standard ‘‘saving clause’’ pursuant to which each country retains the right to tax its residents and citizens as if the Treaty had not come into effect. This article also contains a standard 

provision providing in general that the Convention may not be applied to deny a taxpayer any benefits to which the taxpayer would 

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

agreement between the two countries. 

Covered taxes 

Pursuant to Article 2, the Convention would apply to all taxes on 

income, including gains-irrespective of the manner in which they 

are levied. Except with respect to the benefits provided by Article 

24 (Non-Discrimination), state and local taxes, including property 

taxes, do not fall within the scope of the proposed treaty. 

Dividends 

Articles 10 and 13 provide that dividends and certain gains derived by a resident of either country from sources within the other 

country (residence-country taxation) may be taxed by both countries. However, the proposed treaty limits the rate of taxation that 

the source country may impose on certain dividends paid to a resiVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00002 Fmt 6659 Sfmt 6602 H:\DOCS\TD111-1.TXT MIKEB
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dent of the other country. The withholding tax rates on dividends 

are generally consistent with those contained in the U.S. Model 

Treaty, but they represent a departure from the exemption from 

source-country withholding tax provided by several recent U.S. 

treaties and protocols thereto for dividends paid by subsidiaries to 

parent corporations resident in the other treaty countries. 

Interest and Royalties 

Article 11 limits the rate of source-country tax that may be imposed on interest arising in one treaty country (the source country) 

and beneficially owned by a resident of the other country so that 

it may not exceed 10 percent of the gross amount of the interest. 

See Article 11(2). Similarly, Article 12 provides that a royalty payment arising in a treaty country and beneficially owned by a resident of the other treaty country may be subject to a source country 

tax of up to 10 percent of the gross amount of the royalty. See Article 12(2). These provisions differ from the corresponding rules of 

the U.S. Model Treaty, which provides an exemption from sourcecountry taxation for most interest and royalty payments beneficially owned by a resident of the other country. Although the U.S. 

Model Treaty eliminates source-country withholding tax on most 

payments of interest, royalties or other income, exemption from 

withholding tax was deemed not appropriate in this case, in light 

of Malta’s unique tax system. The Convention therefore provides 

for withholding at a rate of 10 percent on interest, royalties, and 

other income. 

Pensions and Similar Remuneration 

Under Articles 17 and 18, pensions and similar remuneration 

paid to a resident of one country may be taxed only by that country 

and only at the time and to the extent that a pension distribution 

is made. These articles are exceptions to the rule permitting the 

residence country to tax cross-border pensions. Under these provisions, the residence country may not tax any amount of such a pension or similar remuneration that would be exempt from taxation 

in the other country if the beneficial owner was a resident of that 

other country. The other remuneration covered by these articles includes social security benefits, annuities, alimony, child support 

(Article 17) and pension funds (Article 18). As noted previously, the 

Convention would generally eliminate withholding tax on cross-border dividend payments to pension funds. The Convention’s treatment of pensions differs from the U.S. Model Treaty in some respects. Like the U.S. Model Treaty, the Convention provides that 

pension distributions (or similar remuneration) owned by a resident of a contracting country are only taxable in the recipient’s 

country of residence. See Article 17. In addition, a pension beneficiary’s country of residence must exempt from taxation a pension 

amount that would be exempt from tax in the other country where 

the pension fund is established. However, the Convention differs 

from the U.S. Model Treaty in that it does not contain certain provisions that deal with the tax treatment of cross-border pension 

contributions. These provisions typically cover, among other things, 

the tax treatment of pension contributions (paid by an individual 

or an individual’s employer) when an individual is a participant or 

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beneficiary of a pension fund resident in one country, but employed 

in another country. 

Limitation on Benefits 

Consistent with current U.S. treaty policy, Article 22 includes a 

‘‘Limitation on Benefits’’ provision, which is designed to avoid treaty-shopping by limiting the indirect use of a treaty’s benefits by 

persons who were not intended to take advantage of those benefits. 

The limitation on benefits provision states that in situations in 

which the country of source retains the right under the Convention 

to tax income derived by residents of the other country, the Convention provides for relief from the potential double taxation 

through allowance by the country of residence of a tax credit for 

certain foreign taxes paid to the other country. This article’s limitation on benefits provision generally reflects the anti-treaty-shopping provisions included in the U.S. Model Treaty and more recent 

U.S. income tax treaties, but it is more stringent in a number of 

respects to ensure that third-country residents do not inappropriately benefit from the Convention. 

Exchange of Information 

The Convention provides that the United States and Malta shall 

exchange certain tax information. Under Article 26, the United 

States is allowed to obtain such information from Malta regardless 

of whether Malta needs the information for its own tax purposes. 

Changes to Maltese tax law since the previous treaty was terminated, including at the request of the United States during the negotiating process, will facilitate the exchange of tax information 

and made it possible for Malta to agree to comprehensive information exchange obligations in the Convention. The exchange of information provision set out in Article 26 is substantially similar to the 

provision found in the U.S. Model Treaty. 

IV. ENTRY INTO FORCE

The Convention will enter into force on the date of the exchange 

of instruments of ratification, yet certain provisions will not have 

effect immediately. See Article 28. 

V. IMPLEMENTING LEGISLATION

As is the case generally with income tax treaties, the Convention 

is self-executing and does not require implementing legislation for 

the United States. 

VI. COMMITTEE ACTION

The committee held a public hearing on the Convention on November 10, 2009. Testimony was received from Manal Corwin, 

International Tax Counsel, U.S. Department of Treasury, and 

Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation. 

The transcript of this hearing can be found in Annex II. 

On April 13, 2010, the committee considered the Convention and 

ordered it favorably reported by voice vote, with a quorum present 

and without objection. 

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VII. COMMITTEE COMMENTS

The Committee on Foreign Relations believes that the Convention will stimulate increased trade and investment, reduce treatyshopping incentives, and promote closer co-operation between the 

United States and Malta. The committee therefore urges the Senate to act promptly to give advice and consent to ratification of the 

Convention, as set forth in this report and the accompanying resolution of advice and consent. 

A. LIMITATION ON BENEFITS

As noted above, the previous U.S.-Malta tax treaty was terminated by the United States on January 1, 1997, in large part due 

to provisions of Maltese domestic law that created strong incentives 

for treaty-shopping. Such abuses may undermine the integrity of a 

bilateral tax relationship, and the committee applauds the Treasury Department’s significant efforts to address treaty shopping 

both in this Convention and in other bilateral tax treaties. 

After careful examination of this Convention, as well as testimony and responses to questions for the record from the Treasury 

Department, the committee is of the view that the Convention’s 

protections against treaty-shopping are robust and will substantially deny treaty shoppers the benefit of the Convention. The limitation on benefits provision, Article 22, is more restrictive than 

that in the 2006 U.S. Model tax treaty or in any existing U.S. tax 

treaty. In conjunction with this extensive limitation on benefits 

provision, the Convention contains relatively high rates for source 

country taxation of dividends, interest, and royalties, which will 

make the Convention less attractive to treaty shoppers. These 

issues are addressed in more detail in the Treasury Department’s 

responses to questions for the record, which are included in the 

hearing record appended to this report beginning at page 131. The 

committee believes that it is critical for the Treasury Department 

to closely monitor and keep the committee informed on the effectiveness of the above-mentioned provisions in discouraging and 

eliminating treaty-shopping under the Convention. 

B. DECLARATION ON THE SELF-EXECUTING NATURE

OF THE CONVENTION

The committee has included one declaration in the recommended 

resolution of advice and consent. The declaration states that the 

Convention is self-executing, as is the case generally with income 

tax treaties. Prior to the 110th Congress, the committee generally 

included such statements in the committee’s report, but in light of 

the Supreme Court decision in Medellin v. Texas, 128 S. Ct. 1346 

(2008), the committee determined that a clear statement in the 

Resolution is warranted. A further discussion of the committee’s 

views on this matter can be found in Section VIII of Executive Report 110–12. 

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VIII. TEXT OF RESOLUTION OF ADVICE AND CONSENT TO

RATIFICATION

Resolved (two-thirds of the Senators present concurring therein), 

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION 

The Senate advises and consents to the ratification of the Convention Between the Government of the United States of America 

and the Government of Malta for the Avoidance of Double Taxation 

and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on August 8, 2008, at Valletta (the ‘‘Convention’’) 

(Treaty Doc. 111–1), subject to the declaration of section 2. 

SECTION 2. DECLARATION 

The advice and consent of the Senate under section 1 is subject 

to the following declaration: 

The Convention is self-executing. 

(7) 

IX. ANNEX I—TECHNICAL EXPLANATION

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES

OF AMERICA AND THE GOVERNMENT OF MALTA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME SIGNED AT VALLETTA

ON AUGUST 8, 2008 

This is a technical explanation of the Convention between the 

Government of the United States and the Government of Malta For 

the Avoidance Of Double Taxation and the Prevention of Fiscal 

Evasion with Respect to Taxes on Income, signed on August 8, 

2008 (the ‘‘Convention’’). 

Negotiations took into account the U.S. Treasury Department’s 

current tax treaty policy, and the Treasury Department’s Model Income Tax Convention. Negotiations also took into account the 

Model Tax Convention on Income and on Capital, published by the 

Organisation for Economic Cooperation and Development (the 

‘‘OECD Model’’), and recent tax treaties concluded by both countries. 

The Technical Explanation is an official guide to the Convention. 

It reflects the policies behind particular Convention provisions, as 

well as understandings reached during the negotiations with respect to the application and interpretation of the Convention. References in the Technical Explanation to ‘‘he’’ or ‘‘his’’ should be 

read to mean ‘‘he or she’’ or ‘‘his and her.’’ 

ARTICLE 1 (GENERAL SCOPE)

Paragraph 1 

Paragraph 1 of Article 1 provides that the Convention applies 

only to residents of the United States or Malta except where the 

terms of the Convention provide otherwise. Under Article 4 (Resident) a person is generally treated as a resident of a Contracting 

State if that person is, under the laws of that State, liable to tax 

therein by reason of his domicile, citizenship, residence, or other 

similar criteria. However, if a person is considered a resident of 

both Contracting States, Article 4 provides rules for determining a 

State of residence (or no State of residence). This determination 

governs for all purposes of the Convention. 

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

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Paragraph 2 

Paragraph 2 states the generally accepted relationship both between the Convention and domestic law and between the Convention and other agreements between the Contracting States. That is, 

no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other benefit accorded by the tax laws of 

the Contracting States, or by any other agreement between the 

Contracting States. The relationship between the non-discrimination provisions of the Convention and the General Agreement on 

Trade in Services (the ‘‘GATS’’) is addressed in paragraph 3. 

Under paragraph 2, for example, if a deduction would be allowed 

under the U.S. Internal Revenue Code (the ‘‘Code’’) in computing 

the U.S. taxable income of a resident of Malta, the deduction also 

is allowed to that person in computing taxable income under the 

Convention. Paragraph 2 also means that the Convention may not 

increase the tax burden on a resident of a Contracting States beyond the burden determined under domestic law. Thus, a right to 

tax given by the Convention cannot be exercised unless that right 

also exists under internal law. 

It follows that, under the principle of paragraph 2, a taxpayer’s 

U.S. tax liability need not be determined under the Convention if 

the Code would produce a more favorable result. A taxpayer may 

not, however, choose among the provisions of the Code and the 

Convention in an inconsistent manner in order to minimize tax. 

Thus, a taxpayer may use the Convention to reduce its taxable income, but may not use both treaty and Code rules where doing so 

would thwart the intent of either set of rules. For example, assume 

that a resident of Malta has three separate businesses in the 

United States. One is a profitable permanent establishment and 

the other two are trades or businesses that would earn taxable income under the Code but that do not meet the permanent establishment threshold tests of the Convention. One is profitable and 

the other incurs a loss. Under the Convention, the income of the 

permanent establishment is taxable in the United States, and both 

the profit and loss of the other two businesses are ignored. Under 

the Code, all three would be subject to tax, but the loss would offset the profits of the two profitable ventures. The taxpayer may not 

invoke the Convention to exclude the profits of the profitable trade 

or business and invoke the Code to claim the loss of the loss trade 

or business against the profit of the permanent establishment. (See 

Rev. Rul. 84–17, 1984–1 C.B. 308.) If, however, the taxpayer invokes the Code for the taxation of all three ventures, he would not 

be precluded from invoking the Convention with respect, for example, to any dividend income he may receive from the United States 

that is not effectively connected with any of his business activities 

in the United States. 

Similarly, nothing in the Convention can be used to deny any 

benefit granted by any other agreement between the United States 

and Malta. For example, if certain benefits are provided for military personnel or military contractors under a Status of Forces 

Agreement between the United States and Malta, those benefits or 

protections will be available to residents of the Contracting States 

regardless of any provisions to the contrary (or silence) in the Convention. 

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Paragraph 3 

Paragraph 3 specifically relates to non-discrimination obligations 

of the Contracting States under the GATS. The provisions of paragraph 3 are an exception to the rule provided in paragraph 2 of 

this Article under which the Convention shall not restrict in any 

manner any benefit now or hereafter accorded by any other agreement between the Contracting States. 

Subparagraph (a) of paragraph 3 provides that, unless the competent authorities determine that a taxation measure is not within 

the scope of the Convention, the national treatment obligations of 

the GATS shall not apply with respect to that measure. Further, 

any question arising as to the interpretation of the Convention, including in particular whether a measure is within the scope of the 

Convention shall be considered only by the competent authorities 

of the Contracting States, and the procedures under the Convention exclusively shall apply to the dispute. Thus, paragraph 3 of Article XXII (Consultation) of the GATS may not be used to bring a 

dispute before the World Trade Organization unless the competent 

authorities of both Contracting States have determined that the 

relevant taxation measure is not within the scope of Article 24 

(Non-Discrimination) of the Convention. 

The term ‘‘measure’’ for these purposes is defined broadly in subparagraph (b) of paragraph 3. It would include, for example, a law, 

regulation, rule, procedure, decision, administrative action or guidance, or any other form of measure. 

Paragraph 4 

Paragraph 4 contains the traditional saving clause found in all 

U.S. treaties. The Contracting States reserve their rights, except as 

provided in paragraph 5, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the 

Convention to the contrary. For example, if a resident of Malta performs professional services in the United States and the income 

from the services is not attributable to a permanent establishment 

in the United States, Article 7 (Business Profits) would by its terms 

prevent the United States from taxing the income. If, however, the 

resident of Malta is also a citizen of the United States, the saving 

clause permits the United States to include the remuneration in 

the worldwide income of the citizen and subject it to tax under the 

normal Code rules (i.e., without regard to Code section 894(a)). 

However, subparagraph 5(a) of Article 1 preserves the benefits of 

special foreign tax credit rules applicable to the U.S. taxation of 

certain U.S. income of its citizens resident in Malta. See paragraph 

4 of Article 23 (Relief from Double Taxation). 

For purposes of the saving clause, ‘‘residence’’ is determined 

under Article 4 (Resident). Thus, an individual who is a resident 

of the United States under the Code (but not a U.S. citizen) but 

who is determined to be a resident of the other Contracting State 

under the tie-breaker rules of Article 4 would be subject to U.S. tax 

only to the extent permitted by the Convention. The United States 

would not be permitted to apply its statutory rules to that person 

to the extent the rules are inconsistent with the treaty. 

However, the person would be treated as a U.S. resident for U.S. 

tax purposes other than determining the individual’s U.S. tax liVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00009 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
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ability. For example, in determining under Code section 957 whether a foreign corporation is a controlled foreign corporation, shares 

in that corporation held by the individual would be considered to 

be held by a U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States shareholders of a controlled foreign corporation subject to current inclusion of Subpart 

F income recognized by the corporation. See, Treas. Reg. section 

301.7701(b)–7(a)(3). 

Under paragraph 4, each Contracting State also reserves its 

right to tax former citizens and former long-term residents for a period of ten years following the loss of such status. Thus, paragraph 

4 allows the United States to tax former U.S. citizens and former 

U.S. long-term residents in accordance with Section 877 of the 

Code. Section 877 generally applies to a former citizen or long-term 

resident of the United States who relinquishes citizenship or terminates long-term residency before June 17, 2008 if he fails to certify 

that he has complied with U.S. tax laws during the 5 preceding 

years, or if either of the following criteria exceed established 

thresholds: (a) the average annual net income tax of such individual for the period of 5 taxable years ending before the date of 

the loss of status, or (b) the net worth of such individual as of the 

date of the loss of status. 

The United States defines ‘‘long-term resident’’ as an individual 

(other than a U.S. citizen) who is a lawful permanent resident of 

the United States in at least 8 of the prior 15 taxable years. An 

individual is not treated as a lawful permanent resident for any 

taxable year in which the individual is treated as a resident of 

Malta under this Convention, or as a resident of any country other 

than the United States under the provisions of any other U.S. tax 

treaty, and the individual does not waive the benefits of the relevant tax treaty. 

Paragraph 5 

Paragraph 5 sets forth certain exceptions to the saving clause. 

The referenced provisions are intended to provide benefits to citizens and residents even if such benefits do not exist under internal 

law. Paragraph 5 thus preserves these benefits for citizens and 

residents of the Contracting States. 

Subparagraph (a) lists certain provisions of the Convention that 

are applicable to all citizens and residents of a Contracting State, 

despite the general saving clause rule of paragraph 4: 

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants 

the right to a correlative adjustment with respect to income tax 

due on profits reallocated under Article 9. 

(2) Paragraphs 1(b), 2, and 5 of Article 17 (Pensions, Social 

Security, Annuities, Alimony and Child Support) provide exemptions from source or residence State taxation for certain 

pension distributions, social security payments and child support. 

(3) Article 18 (Pensions Funds) provides an exemption for 

certain investment income of pension funds located in the 

other Contracting State. 

(4) Article 23 (Relief from Double Taxation) confirms to citizens and residents of one Contracting State the benefit of a 

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credit for income taxes paid to the other or an exemption for 

income earned in the other State. 

(5) Article 24 (Non-Discrimination) protects residents and 

nationals of one Contracting State against the adoption of certain discriminatory taxation practices in the other Contracting 

State. 

(6) Article 25 (Mutual Agreement Procedure) confers certain 

benefits on citizens and residents of the Contracting States in 

order to reach and implement solutions to disputes between 

the two Contracting States. For example, the competent authorities are permitted to use a definition of a term that differs 

from an internal law definition. The statute of limitations may 

be waived for refunds, so that the benefits of an agreement 

may be implemented. 

Subparagraph (b) of paragraph 5 provides a different set of exceptions to the saving clause. The benefits referred to are all intended to be granted to temporary residents of a Contracting State 

(for example, in the case of the United States, holders of non-immigrant visas), but not to citizens or to persons who have acquired 

permanent residence in that State. If beneficiaries of these provisions travel from one of the Contracting States to the other, and 

remain in the other long enough to become residents under its internal law, but do not acquire permanent residence status (i.e., in 

the U.S. context, they do not become ‘‘green card’’ holders) and are 

not citizens of that State, the host State will continue to grant 

these benefits even if they conflict with the statutory rules. The 

benefits preserved by this paragraph are the host country exemptions for government service salaries and pensions under Article 19 

(Government Service), certain income of visiting students and 

trainees under Article 20 (Students and Trainees), and the income 

of diplomatic agents and consular officers under Article 27 (Members of Diplomatic Missions and Consular Posts). 

Paragraph 6 

Paragraph 6 addresses special issues presented by fiscally transparent entities such as partnerships and certain estates and trusts. 

Because countries may take different views as to when an entity 

is fiscally transparent, the risk of both double taxation and double 

non-taxation is relatively high. The intention of paragraph 6 is to 

eliminate a number of technical problems that arguably would 

have prevented investors using such entities from claiming treaty 

benefits, even though such investors would be subject to tax on the 

income derived through such entities. The provision also prevents 

the use of such entities to claim treaty benefits in circumstances 

where the person investing through such an entity is not subject 

to tax on the income in its State of residence. The provision, and 

the corresponding requirements of the substantive rules of Articles 

6 through 21, should be read with those two goals in mind. 

In general, paragraph 6 relates to entities that are not subject 

to tax at the entity level, as distinct from entities that are subject 

to tax, but with respect to which tax may be relieved under an integrated system. This paragraph applies to any resident of a Contracting State who is entitled to income derived through an entity 

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tracting State. Entities falling under this description in the United 

States include partnerships, common investment trusts under section 584, and grantor trusts. This paragraph also applies to U.S. 

limited liability companies (‘‘LLCs’’) that are treated as partnerships or as disregarded entities for U.S. tax purposes. 

Under paragraph 6, an item of income, profit or gain derived by 

such a fiscally transparent entity will be considered to be derived 

by a resident of a Contracting State if a resident is treated under 

the taxation laws of that State as deriving the item of income. For 

example, if a company that is a resident of Malta pays interest to 

an entity that is treated as fiscally transparent for U.S. tax purposes, the interest will be considered derived by a resident of the 

U.S. only to the extent that the taxation laws of the United States 

treats one or more U.S. residents (whose status as U.S. residents 

is determined, for this purpose, under U.S. tax law) as deriving the 

interest for U.S. tax purposes. In the case of a partnership, the persons who are, under U.S. tax laws, treated as partners of the entity 

would normally be the persons whom the U.S. tax laws would treat 

as deriving the interest income through the partnership. Also, it 

follows that persons whom the United States treats as partners but 

who are not U.S. residents for U.S. tax purposes may not claim a 

benefit for the interest paid to the entity under the Convention, because they are not residents of the United States for purposes of 

claiming this treaty benefit. (If, however, the country in which they 

are treated as resident for tax purposes, as determined under the 

laws of that country, has an income tax convention with Malta, 

they may be entitled to claim a benefit under that convention.) In 

contrast, if, for example, an entity is organized under U.S. laws 

and is classified as a corporation for U.S. tax purposes, interest 

paid by a company that is a resident of Malta to the U.S. entity 

will be considered derived by a resident of the United States since 

the U.S. corporation is treated under U.S. taxation laws as a resident of the United States and as deriving the income. 

The same result obtains even if the entity were viewed differently under the tax laws of Malta (e.g., as not fiscally transparent in the first example above where the entity is treated as a 

partnership for U.S. tax purposes). Similarly, the characterization 

of the entity in a third country is also irrelevant, even if the entity 

is organized in that third country. The results follow regardless of 

whether the entity is disregarded as a separate entity under the 

laws of one jurisdiction but not the other, such as a single owner 

entity that is viewed as a branch for U.S. tax purposes and as a 

corporation for tax purposes under the laws of Malta. These results 

also obtain regardless of where the entity is organized (i.e., in the 

United States, in Malta or, as noted above, in a third country). 

For example, income from U.S. sources received by an entity organized under the laws of the United States, which is treated for 

tax purposes under the laws of Malta as a corporation and is 

owned by a shareholder who is a resident of Malta for its tax purposes, is not considered derived by the shareholder of that corporation even if, under the tax laws of the United States, the entity is 

treated as fiscally transparent. Rather, for purposes of the treaty, 

the income is treated as derived by the U.S. entity. 

13 

These principles also apply to trusts to the extent that they are 

fiscally transparent in either Contracting State. For example, if X, 

a resident of Malta, creates a revocable trust in the United States 

and names persons resident in a third country as the beneficiaries 

of the trust, the trust’s income would be regarded as being derived 

by a resident of Malta only to the extent that the laws of Malta 

treat X as deriving the income for its tax purposes, perhaps 

through application of rules similar to the U.S. ‘‘grantor trust’’ 

rules. 

Paragraph 6 is not an exception to the saving clause of paragraph 4. Accordingly, paragraph 6 does not prevent a Contracting 

State from taxing an entity that is treated as a resident of that 

State under its tax law. For example, if a U.S. LLC with members 

who are residents of Malta elects to be taxed as a corporation for 

U.S. tax purposes, the United States will tax that LLC on its 

worldwide income on a net basis, without regard to whether Malta 

views the LLC as fiscally transparent. 

ARTICLE 2 (TAXES COVERED)

This Article specifies the U.S. taxes and the taxes of Malta to 

which the Convention applies. With two exceptions, the taxes specified in Article 2 are the covered taxes for all purposes of the Convention. A broader coverage applies, however, for purposes of Articles 24 (Non-Discrimination) and 26 (Exchange of Information and 

Administrative Assistance). Article 24 (Non-Discrimination) applies 

with respect to all taxes, including those imposed by state and local 

governments. Article 26 (Exchange of Information and Administrative Assistance) applies with respect to all taxes imposed at the national level. 

Paragraph 1 

Paragraph 1 identifies the category of taxes to which the Convention applies. Paragraph 1 is based on the U.S. and OECD Models 

and defines the scope of application of the Convention. The Convention applies to taxes on income, including gains, imposed on behalf 

of a Contracting State, irrespective of the manner in which they 

are levied. Except with respect to Article 24 (Non-Discrimination), 

state and local taxes are not covered by the Convention. 

Paragraph 2 

Paragraph 2 also is based on the U.S. and OECD Models and 

provides a definition of taxes on income and on capital gains. The 

Convention covers taxes on total income or any part of income and 

includes tax on gains derived from the alienation of property. The 

Convention does not apply, however, to social security charges, or 

any other charges where there is a direct connection between the 

levy and individual benefits. Nor does it apply to property taxes, 

except with respect to Article 24 (Non-Discrimination). 

Paragraph 3 

Paragraph 3 lists the taxes in force at the time of signature of 

the Convention to which the Convention applies. 

The existing covered taxes of Malta are identified in subparagraph 3(a) as the income tax. 

14 

Subparagraph 3(b) provides that the existing U.S. taxes subject 

to the rules of the Convention are the Federal income taxes imposed by the Code, together with the excise taxes imposed with respect to private foundations (Code sections 4940 through 4948). Social security and unemployment taxes (Code sections 1401, 3101, 

3111 and 3301) are specifically excluded from coverage. 

Paragraph 4 

Under paragraph 4, the Convention will apply to any taxes that 

are identical, or substantially similar, to those enumerated in paragraph 3, and which are imposed in addition to, or in place of, the 

existing taxes after August 8, 2008, the date of signature of the 

Convention. The paragraph also provides that the competent authorities of the Contracting States will notify each other of any 

changes that have been made in their laws, whether tax laws or 

non-tax laws, that affect significantly their obligations under the 

Convention. Non-tax laws that may affect a Contracting State’s obligations under the Convention may include, for example, laws affecting bank secrecy. 

ARTICLE 3 (GENERAL DEFINITIONS)

Article 3 provides general definitions and rules of interpretation 

applicable throughout the Convention. Certain other terms are defined in other articles of the Convention. For example, the term 

‘‘resident of a Contracting State’’ is defined in Article 4 (Resident). 

The term ‘‘permanent establishment’’ is defined in Article 5 (Permanent Establishment). These definitions are used consistently 

throughout the Convention. Other terms, such as ‘‘dividends,’’ ‘‘interest’’ and ‘‘royalties’’ are defined in specific articles for purposes 

only of those articles. 

Paragraph 1 

Paragraph 1 defines a number of basic terms used in the Convention. The introduction to paragraph 1 makes clear that these 

definitions apply for all purposes of the Convention, unless the context requires otherwise. This latter condition allows flexibility in 

the interpretation of the treaty in order to avoid results not intended by the treaty’s negotiators. 

Subparagraph 1(a) defines the term ‘‘person’’ to include an individual, a trust, a partnership, a company and any other body of 

persons. The definition is significant for a variety of reasons. For 

example, under Article 4, only a ‘‘person’’ can be a ‘‘resident’’ and 

therefore eligible for most benefits under the treaty. Also, all ‘‘persons’’ are eligible to claim relief under Article 25 (Mutual Agreement Procedure). 

The term ‘‘company’’ is defined in subparagraph 1(b) as a body 

corporate or an entity treated as a body corporate for tax purposes 

in the state where it is organized. The definition refers to the law 

of the state in which an entity is organized in order to ensure that 

an entity that is treated as fiscally transparent in its country of 

residence will not get inappropriate benefits, such as the reduced 

withholding rate provided by subparagraph 2(a)(i) of Article 10 

(Dividends). It also ensures that the Limitation on Benefits provisions of Article 22 will be applied at the appropriate level. 

15 

The terms ‘‘enterprise of a Contracting State’’ and ‘‘enterprise of 

the other Contracting State’’ are defined in subparagraph 1(c) as an 

enterprise carried on by a resident of a Contracting State and an 

enterprise carried on by a resident of the other Contracting State. 

An enterprise of a Contracting State need not be carried on in that 

State. It may be carried on in the other Contracting State or a 

third state (e.g., a U.S. corporation doing all of its business in the 

other Contracting State would still be a U.S. enterprise). 

Subparagraph 1(c) further provides that these terms also encompass an enterprise conducted through an entity (such as a partnership) that is treated as fiscally transparent in the Contracting 

State where the entity’s owner is resident. The definition makes 

this point explicitly to ensure that the purpose of the Convention 

is not thwarted by an overly technical application of the term ‘‘enterprise of a Contracting State’’ to activities carried on through 

partnerships and similar entities. In accordance with Article 4 

(Resident), entities that are fiscally transparent in the country in 

which their owners are resident are not considered to be residents 

of a Contracting State (although income derived by such entities 

may be taxed as the income of a resident, if taxed in the hands of 

resident partners or other owners). It could be argued that an enterprise conducted by such an entity is not conducted by a resident 

of a Contracting State, and therefore would not benefit from provisions applicable to enterprises of a Contracting State. The definition is intended to make clear that an enterprise conducted by such 

an entity will be treated as carried on by a resident of a Contracting State to the extent its partners or other owners are residents. This approach is consistent with the Code, which under section 875 attributes a trade or business conducted by a partnership 

to its partners and a trade or business conducted by an estate or 

trust to its beneficiaries. 

Subparagraph (d) defines the term ‘‘enterprise’’ as any activity or 

set of activities that constitutes the carrying on of a business. The 

term ‘‘business’’ is not defined, but subparagraph (e) provides that 

it includes the performance of professional services and other activities of an independent character. Both subparagraphs are identical to definitions added to the OECD Model in connection with 

the deletion of Article 14 (Independent Personal Services) from the 

OECD Model. The inclusion of the two definitions is intended to 

clarify that income from the performance of professional services or 

other activities of an independent character is dealt with under Article 7 (Business Profits) and not Article 21 (Other Income). 

Subparagraph 1(f) defines the term ‘‘international traffic.’’ The 

term means any transport by a ship or aircraft except when such 

transport is solely between places within a Contracting State. This 

definition is applicable principally in the context of Article 8 (Shipping and Air Transport). The definition combines with paragraphs 

2 and 3 of Article 8 to exempt from tax by the source State income 

from the rental of ships or aircraft that is earned both by lessors 

that are operators of ships and aircraft and by those lessors that 

are not (e.g., a bank or a container leasing company). 

The exclusion from international traffic of transport solely between places within a Contracting State means, for example, that 

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cago would not be treated as international traffic, whether carried 

by a U.S. or a foreign carrier. The substantive taxing rules of the 

Convention relating to the taxation of income from transport, principally Article 8 (Shipping and Air Transport), therefore, would not 

apply to income from such carriage. Thus, if the carrier engaged in 

internal U.S. traffic were a resident of Malta (assuming that were 

possible under U.S. law), the United States would not be required 

to exempt the income from that transport under Article 8. The income would, however, be treated as business profits under Article 

7 (Business Profits), and therefore would be taxable in the United 

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

the foreign carrier, and then only on a net basis. The gross basis 

U.S. tax imposed by section 887 would never apply under the circumstances described. If, however, goods or passengers are carried 

by a carrier resident in Malta from a non-U.S. port to, for example, 

New York, and some of the goods or passengers continue on to Chicago, the entire transport would be international traffic. This would 

be true if the international carrier transferred the goods at the 

U.S. port of entry from a ship to a land vehicle, from a ship to a 

lighter, or even if the overland portion of the trip in the United 

States was handled by an independent carrier under contract with 

the original international carrier, so long as both parts of the trip 

were reflected in original bills of lading. For this reason, the Convention, following the U.S. Model, refers, in the definition of ‘‘international traffic,’’ to ‘‘such transport’’ being solely between places in 

the other Contracting State, while the OECD Model refers to the 

ship or aircraft being operated solely between such places. The formulation in the Convention is intended to make clear that, as in 

the above example, even if the goods are carried on a different aircraft for the internal portion of the international voyage than is 

used for the overseas portion of the trip, the definition applies to 

that internal portion as well as the external portion. 

Finally, a ‘‘cruise to nowhere,’’ i.e., a cruise beginning and ending 

in a port in the same Contracting State with no stops in a foreign 

port, would not constitute international traffic. 

Subparagraph 1(g) designates the ‘‘competent authorities’’ for the 

other Contracting State and the United States. The U.S. competent 

authority is the Secretary of the Treasury or his delegate. The Secretary of the Treasury has delegated the competent authority function to the Commissioner of Internal Revenue, who in turn has delegated the authority to the Deputy Commissioner (International) 

LMSB. With respect to interpretative issues, the Deputy Commissioner (International) LMSB acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue Service. 

In the case of Malta, the competent authority is the Minister responsible for finance or his authorized representative. 

The geographical scope of the Convention with respect to the 

United States is set out in subparagraph 1(h). It encompasses the 

United States of America, including the states, the District of Columbia and the territorial sea of the United States. The term does 

not include Puerto Rico, the Virgin Islands, Guam or any other 

U.S. possession or territory. For certain purposes, the term ‘‘United 

States’’ includes the sea bed and subsoil of undersea areas adjacent 

to the territorial sea of the United States. This extension applies 

17 

to the extent that the United States exercises sovereignty in accordance with international law for the purpose of natural resource 

exploration and exploitation of such areas. This extension of the 

definition applies, however, only if the person, property or activity 

to which the Convention is being applied is connected with such 

natural resource exploration or exploitation. Thus, it would not include any activity involving the sea floor of an area over which the 

United States exercised sovereignty for natural resource purposes 

if that activity was unrelated to the exploration and exploitation of 

natural resources. This result is consistent with the result that 

would be obtained under Section 638, which treats the continental 

shelf as part of the United States for purposes of natural resource 

exploration and exploitation. 

The geographical scope of the Convention with respect to Malta 

is set out in subparagraph 1(i). The term ‘‘Malta’’ means the Republic of Malta and, when used in a geographical sense, means the 

island of Malta, the Island of Gozo, and the other islands of the 

Maltese archipelago including the territorial waters thereof as well 

as any area of the sea-bed, it’s sub-soil and the superjacent water 

column adjacent to the territorial waters, where the Republic of 

Malta exercises sovereign rights, jurisdiction or control in accordance with international law and its national law, including its legislation relating to the exploration of the Continental Shelf and exploitation of its natural resources. 

The term ‘‘national,’’ as it relates to the United States and to 

Malta, is defined in subparagraph 1(j). This term is relevant for 

purposes of Articles 19 (Government Service) and 24 (Non-Discrimination). A national of one of the Contracting States is (1) an 

individual who is a citizen or national of that State, and (2) any 

legal person, partnership or association deriving its status, as such, 

from the law in force in the State where it is established. 

Subparagraph (k) defines the term ‘‘pension fund’’ to include any 

person established in a Contracting State that, in the case of the 

United States, is generally exempt from income taxation, and in 

the case of Malta, is a licensed fund or scheme subject to tax only 

on income derived from immovable property situated in Malta, and 

that is operated principally to provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements. In the case of the United States, the term ‘‘pension fund’’ 

includes the following: a trust providing pension or retirement benefits under a Code section 401(a) qualified pension plan, profit 

sharing or stock bonus plan, Code section 403(a) qualified annuity 

plan, a Code section 403(b) plan, a trust that is an individual retirement account under Code section 408, a Roth individual retirement account under Code section 408A, or a simple retirement account under Code section 408(p), a trust providing pension or retirement benefits under a simplified employee pension plan under 

Code section 408(k), a trust described in section 457(g) providing 

pension or retirement benefits under a Code section 457(b) plan, 

and the Thrift Savings Fund (section 7701(j)). Section 401(k) plans 

and group trusts described in Revenue Ruling 81–100 and meeting 

the conditions of Revenue Ruling 2004–67 qualify as pension funds 

to the extent that they are Code section 401(a) plans and other 

pension funds. 

18 

Paragraph 2 

Terms that are not defined in the Convention are dealt with in 

paragraph 2. 

Paragraph 2 provides that in the application of the Convention, 

any term used but not defined in the Convention will have the 

meaning that it has under the law of the Contracting State whose 

tax is being applied, unless the context requires otherwise, or the 

competent authorities have agreed on a different meaning pursuant 

to Article 25 (Mutual Agreement Procedure). If the term is defined 

under both the tax and non-tax laws of a Contracting State, the 

definition in the tax law will take precedence over the definition in 

the non-tax laws. Finally, there also may be cases where the tax 

laws of a State contain multiple definitions of the same term. In 

such a case, the definition used for purposes of the particular provision at issue, if any, should be used. 

If the meaning of a term cannot be readily determined under the 

law of a Contracting State, or if there is a conflict in meaning 

under the laws of the two States that creates difficulties in the application of the Convention, the competent authorities, as indicated 

in paragraph 3(c)(iv) of Article 25 (Mutual Agreement Procedure), 

may establish a common meaning in order to prevent double taxation or to further any other purpose of the Convention. This common meaning need not conform to the meaning of the term under 

the laws of either Contracting State. 

The reference in paragraph 2 to the internal law of a Contracting 

State means the law in effect at the time the treaty is being applied, not the law as in effect at the time the treaty was signed. 

The use of ‘‘ambulatory’’ definitions, however, may lead to results 

that are at variance with the intentions of the negotiators and of 

the Contracting States when the treaty was negotiated and ratified. The reference in both paragraphs 1 and 2 to the ‘‘context otherwise requir[ing]’’ a definition different from the treaty definition, 

in paragraph 1, or from the internal law definition of the Contracting State whose tax is being imposed, under paragraph 2, refers to a circumstance where the result intended by the Contracting States is different from the result that would obtain under 

either the paragraph 1 definition or the statutory definition. Thus, 

flexibility in defining terms is necessary and permitted. 

ARTICLE 4 (RESIDENT)

This Article sets forth rules for determining whether a person is 

a resident of a Contracting State for purposes of the Convention. 

As a general matter only residents of the Contracting States may 

claim the benefits of the Convention. The treaty definition of residence is to be used only for purposes of the Convention. The fact 

that a person is determined to be a resident of a Contracting State 

under Article 4 does not necessarily entitle that person to the benefits of the Convention. In addition to being a resident, a person also 

must qualify for benefits under Article 22 (Limitation on Benefits) 

in order to receive benefits conferred on residents of a Contracting 

State. 

The determination of residence for treaty purposes looks first to 

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ation laws of the Contracting States. As a general matter, a person 

who, under those laws, is a resident of one Contracting State and 

not of the other need look no further. For purposes of the Convention, that person is a resident of the State in which he is resident 

under internal law. If, however, a person is resident in both Contracting States under their respective taxation laws, the Article 

proceeds, where possible, to use tie-breaker rules to assign a single 

State of residence to such a person for purposes of the Convention. 

Paragraph 1 

The term ‘‘resident of a Contracting State’’ is defined in paragraph 1. In general, this definition incorporates the definitions of 

residence in U.S. law and that of Malta by referring to a resident 

as a person who, under the laws of a Contracting State, is subject 

to tax there by reason of his domicile, residence, citizenship, place 

of management, place of incorporation or any other similar criterion. Thus, residents of the United States include aliens who are 

considered U.S. residents under Code section 7701(b). Paragraph 1 

also specifically includes the two Contracting States, and political 

subdivisions and local authorities of the two States, as residents for 

purposes of the Convention. 

Certain entities that are nominally subject to tax but that in 

practice are rarely required to pay tax also would generally be 

treated as residents and therefore accorded treaty benefits. For example, a U.S. Regulated Investment Company (RIC) and a U.S. 

Real Estate Investment Trust (REIT) are residents of the United 

States for purposes of the treaty. Although the income earned by 

these entities normally is not subject to U.S. tax in the hands of 

the entity, they are taxable to the extent that they do not currently 

distribute their profits, and therefore may be regarded as liable to 

tax. They also must satisfy a number of requirements under the 

Code in order to be entitled to special tax treatment. 

A person who is liable to tax in a Contracting State only in respect of income from sources within that State or capital situated 

therein or of profits attributable to a permanent establishment in 

that State will not be treated as a resident of that Contracting 

State for purposes of the Convention. Thus, a consular official of 

Malta who is posted in the United States, who may be subject to 

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

the United States on non-U.S. source income (see Code section 

7701(b)(5)(B)), would not be considered a resident of the United 

States for purposes of the Convention. Similarly, an enterprise of 

Malta with a permanent establishment in the United States is not, 

by virtue of that permanent establishment, a resident of the United 

States. The enterprise generally is subject to U.S. tax only with respect to its income that is attributable to the U.S. permanent establishment, not with respect to its worldwide income, as it would 

be if it were a U.S. resident. 

Paragraph 2 

Paragraph 2 provides that certain tax-exempt entities such as 

pension funds and charitable organizations will be regarded as 

residents of a Contracting State regardless of whether they are 

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lished. The paragraph applies to legal persons organized under the 

laws of a Contracting State and established and maintained in that 

State to provide pensions or other similar benefits pursuant to a 

plan, or exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes. Thus, a section 501(c) organization 

organized in the United States (such as a U.S. charity) that is generally exempt from tax under U.S. law is a resident of the United 

States for all purposes of the Convention. In the case of Malta, the 

Exchange of Notes accompanying the Convention provides that 

paragraph 2 applies to entities exempt from taxation under Maltese law as philanthropic institutions, philharmonic societies, or 

sports clubs. 

Paragraph 3 

If, under the laws of the two Contracting States, and, thus, 

under paragraph 1, an individual is deemed to be a resident of both 

Contracting States, a series of tie-breaker rules are provided in 

paragraph 3 to determine a single State of residence for that individual These tests are to be applied in the order in which they are 

stated. The first test is based on where the individual has a permanent home. If that test is inconclusive because the individual has 

a permanent home available to him in both States, he will be considered to be a resident of the Contracting State where his personal 

and economic relations are closest (i.e., the location of his ‘‘center 

of vital interests’’). If that test is also inconclusive, or if he does not 

have a permanent home available to him in either State, he will 

be treated as a resident of the Contracting State where he maintains a habitual abode. If he has a habitual abode in both States 

or in neither of them, he will be treated as a resident of the Contracting State of which he is a national. If he is a national of both 

States or of neither, the matter will be considered by the competent 

authorities, who will assign a single State of residence. 

Paragraph 4 

Paragraph 4 seeks to settle dual-residence issues for companies. 

A company is treated as resident in the United States if it is created or organized under the laws of the United States or a political 

subdivision. Because a company can be treated as a resident of 

Malta if it is either incorporated or managed and controlled there, 

dual residence can arise in the case of a U.S. company that is managed and controlled in Malta. In other cases, a company may be a 

dual resident because it was originally incorporated in one Contracting State but has ‘‘continued’’ into the other Contracting State. 

Paragraph 4 attempts to deal with each of these situations. 

Under paragraph 4, the residence of a dual-resident company 

will be in the Contracting State under the laws of which it is created or organized if it is created or organized under the laws of 

only one of the other Contracting States. Thus, if a company is a 

resident of the United States because it is incorporated under the 

laws of one of the states and is a resident of Malta because its 

place of effective management is in Malta, then it will be a resident 

only of the United States. However, if the incorporation test does 

not resolve the question because, for example, the company was incorporated in one Contracting State and continued into the other 

21 

Contracting State, but the first-mentioned Contracting State does 

not recognize the migration and continues to treat the company as 

a resident, then the competent authorities will try to determine a 

single State of residence for the company. 

If the competent authorities do not reach an agreement on a single State of residence, that company may not claim any benefit accorded to residents of a Contracting State by the Convention. The 

company may, however, claim any benefits that are not limited to 

residents, such as those provided by paragraph 1 of Article 24 

(Non-Discrimination). Thus, for example, a State cannot discriminate against a dual resident company. 

Dual resident companies also may be treated as a resident of a 

Contracting State for purposes other than that of obtaining benefits 

under the Convention. For example, if a dual resident company 

pays a dividend to a resident of Malta, the U.S. paying agent would 

withhold on that dividend at the appropriate treaty rate because 

reduced withholding is a benefit enjoyed by the resident of Malta, 

not by the dual resident company. The dual resident company that 

paid the dividend would, for this purpose, be treated as a resident 

of the United States under the Convention. In addition, information relating to dual resident companies can be exchanged under 

the Convention because, by its terms, Article 26 (Exchange of Information and Administrative Assistance) is not limited to residents 

of the Contracting States. 

Paragraph 5 

Dual residents other than individuals or companies (such as 

trusts or estates) are addressed by paragraph 5. If such a person 

is, under the rules of paragraph 1, resident in both Contracting 

States, the competent authorities shall seek to determine a single 

State of residence for that person for purposes of the Convention. 

ARTICLE 5 (PERMANENT ESTABLISHMENT)

This Article defines the term ‘‘permanent establishment,’’ a term 

that is significant for several articles of the Convention. The existence of a permanent establishment in a Contracting State is necessary under Article 7 (Business Profits) for the taxation by that 

State of the business profits of a resident of the other Contracting 

State. Articles 10 (Dividends), 11 (Interest), and 12 (Royalties) provide for reduced rates of tax at source on payments of these items 

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

not attributable to a permanent establishment that the recipient 

has in the source State. The concept is also relevant in determining 

which Contracting State may tax certain gains under Article 13 

(Gains) and certain ‘‘other income’’ under Article 21 (Other Income). 

Paragraph 1 

The basic definition of the term ‘‘permanent establishment’’ is 

contained in paragraph 1. As used in the Convention, the term 

means a fixed place of business through which the business of an 

enterprise is wholly or partly carried on. As indicated in the OECD 

Commentary to Article 5 (see paragraphs 4 through 8), a general 

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tablishment exists is that the place of business must be ‘‘fixed’’ in 

the sense that a particular building or physical location is used by 

the enterprise for the conduct of its business, and that it must be 

foreseeable that the enterprise’s use of this building or other physical location will be more than temporary. 

Paragraph 2 

Paragraph 2 lists a number of types of fixed places of business 

that constitute a permanent establishment. This list is illustrative 

and non-exclusive. According to paragraph 2, the term permanent 

establishment includes a place of management, a branch, an office, 

a factory, a workshop, and a mine, oil or gas well, quarry or other 

place of extraction of natural resources. 

Paragraph 3 

This paragraph provides rules to determine whether a building 

site or a construction, assembly or installation project, or an installation or drilling rig or ship used for the exploration of natural resources constitutes a permanent establishment for the contractor, 

driller, etc. Such a site or activity does not create a permanent establishment unless the site, project, etc. lasts, or the exploration 

activity continues, for more than twelve months. It is only necessary to refer to ‘‘exploration’’ and not ‘‘exploitation’’ in this context because exploitation activities are defined to constitute a permanent establishment under subparagraph 2(f). Thus, a drilling rig 

does not constitute a permanent establishment if a well is drilled 

in only six months, but if production begins in the following month 

the well becomes a permanent establishment as of that date. 

The twelve-month test applies separately to each site or project. 

The twelve-month period begins when work (including preparatory 

work carried on by the enterprise) physically begins in a Contracting State. A series of contracts or projects by a contractor that 

are interdependent both commercially and geographically are to be 

treated as a single project for purposes of applying the twelvemonth threshold test. For example, the construction of a housing 

development would be considered as a single project even if each 

house were constructed for a different purchaser. 

In applying this paragraph, time spent by a sub-contractor on a 

building site is counted as time spent by the general contractor at 

the site for purposes of determining whether the general contractor 

has a permanent establishment. However, for the sub-contractor 

itself to be treated as having a permanent establishment, the subcontractor’s activities at the site must last for more than 12 

months. If a sub-contractor is on a site intermittently, then, for 

purposes of applying the 12-month rule, time is measured from the 

first day the sub-contractor is on the site until the last day (i.e., 

intervening days that the sub-contractor is not on the site are 

counted). 

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

paragraph 3 of Article 5 of the Convention. 

23 

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

Paragraph 4 

This paragraph contains exceptions to the general rule of paragraph 1, listing a number of activities that may be carried on 

through a fixed place of business but which nevertheless do not create a permanent establishment. The use of facilities solely to store, 

display or deliver merchandise belonging to an enterprise does not 

constitute a permanent establishment of that enterprise. The maintenance of a stock of goods belonging to an enterprise solely for the 

purpose of storage, display or delivery, or solely for the purpose of 

processing by another enterprise does not give rise to a permanent 

establishment of the first-mentioned enterprise. The maintenance 

of a fixed place of business solely for the purpose of purchasing 

goods or merchandise, or for collecting information, for the enterprise, or for other activities that have a preparatory or auxiliary 

character for the enterprise, such as advertising, or the supply of 

information, do not constitute a permanent establishment of the 

enterprise. Moreover, subparagraph 4(f) provides that a combination of the activities described in the other subparagraphs of paragraph 4 will not give rise to a permanent establishment if the combination results in an overall activity that is of a preparatory or 

auxiliary character. 

Paragraph 5 

Paragraphs 5 and 6 specify when activities carried on by an 

agent or other person acting on behalf of an enterprise create a 

permanent establishment of that enterprise. Under paragraph 5, a 

person is deemed to create a permanent establishment of the enterprise if that person has and habitually exercises an authority to 

conclude contracts that are binding on the enterprise. If, however, 

for example, his activities are limited to those activities specified 

in paragraph 4 which would not constitute a permanent establishment if carried on by the enterprise through a fixed place of business, the person does not create a permanent establishment of the 

enterprise. 

The Convention uses the U.S. Model language ‘‘binding on the 

enterprise,’’ rather than the OECD Model language ‘‘in the name 

of that enterprise.’’ This difference in language is not intended to 

be a substantive difference. As indicated in paragraph 32 to the 

OECD Commentaries on Article 5, paragraph 5 of the Article is intended to encompass persons who have ‘‘sufficient authority to bind 

the enterprise’s participation in the business activity in the State 

concerned.’’ 

The contracts referred to in paragraph 5 are those relating to the 

essential business operations of the enterprise, rather than ancillary activities. For example, if the person has no authority to conclude contracts in the name of the enterprise with its customers 

for, say, the sale of the goods produced by the enterprise, but it can 

enter into service contracts in the name of the enterprise for the 

enterprise’s business equipment, this contracting authority would 

not fall within the scope of the paragraph, even if exercised regularly. 

24 

Paragraph 6 

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

carries on business in that State through an independent agent, including a broker or general commission agent, if the agent is acting 

in the ordinary course of his business as an independent agent. 

Thus, there are two conditions that must be satisfied: the agent 

must be both legally and economically independent of the enterprise, and the agent must be acting in the ordinary course of its 

business in carrying out activities on behalf of the enterprise. 

Whether the agent and the enterprise are independent is a factual determination. Among the questions to be considered are the 

extent to which the agent operates on the basis of instructions from 

the enterprise. An agent that is subject to detailed instructions regarding the conduct of its operations or comprehensive control by 

the enterprise is not legally independent. 

In determining whether the agent is economically independent, 

a relevant factor is the extent to which the agent bears business 

risk. Business risk refers primarily to risk of loss. An independent 

agent typically bears risk of loss from its own activities. In the absence of other factors that would establish dependence, an agent 

that shares business risk with the enterprise, or has its own business risk, is economically independent because its business activities are not integrated with those of the principal. Conversely, an 

agent that bears little or no risk from the activities it performs is 

not economically independent and therefore is not described in 

paragraph 6. 

Another relevant factor in determining whether an agent is economically independent is whether the agent acts exclusively or 

nearly exclusively for the principal. Such a relationship may indicate that the principal has economic control over the agent. A number of principals acting in concert also may have economic control 

over an agent. The limited scope of the agent’s activities and the 

agent’s dependence on a single source of income may indicate that 

the agent lacks economic independence. It should be borne in mind, 

however, that exclusivity is not in itself a conclusive test; an agent 

may be economically independent notwithstanding an exclusive relationship with the principal if it has the capacity to diversify and 

acquire other clients without substantial modifications to its current business and without substantial harm to its business profits. 

Thus, exclusivity should be viewed merely as a pointer to further 

investigation of the relationship between the principal and the 

agent. Each case must be addressed on the basis of its own facts 

and circumstances. 

Paragraph 7 

This paragraph clarifies that a company that is a resident of a 

Contracting State is not deemed to have a permanent establishment in the other Contracting State merely because it controls, or 

is controlled by, a company that is a resident of that other Contracting State, or that carries on business in that other Contracting 

State. The determination whether a permanent establishment exists is made solely on the basis of the factors described in paragraphs 1 through 6 of the Article. Whether a company is a permaVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00024 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
25 

nent establishment of a related company, therefore, is based solely 

on those factors and not on the ownership or control relationship 

between the companies. 

ARTICLE 6 (INCOME FROM REAL (IMMOVABLE) PROPERTY)

This article deals with the taxation of income from real (immovable) property situated in a Contracting State (the ‘‘situs State’’). 

The Article does not grant an exclusive taxing right to the situs 

State; the situs State is merely given the primary right to tax. The 

Article does not impose any limitation in terms of rate or form of 

tax imposed by the situs State, except that, as provided in paragraph 5, the situs State must allow the taxpayer an election to be 

taxed on a net basis. 

Paragraph 1 

The first paragraph of Article 6 states the general rule that income of a resident of a Contracting State derived from real (immovable) property situated in the other Contracting State may be taxed 

in the Contracting State in which the property is situated. The 

paragraph specifies that income from real (immovable) property includes income from agriculture and forestry. Given the availability 

of the net election in paragraph 5, taxpayers generally should be 

able to obtain the same tax treatment in the situs country regardless of whether the income is treated as business profits or real 

(immovable) property income. 

Paragraph 2 

The term ‘‘real (immovable) property’’ is defined in paragraph 2 

by reference to the internal law definition in the situs State. In the 

case of the United States, the term has the meaning given to it by 

Reg. § 1.897–1(b). In addition to the statutory definitions in the two 

Contracting States, the paragraph specifies certain additional 

classes of property that, regardless of internal law definitions, are 

within the scope of the term for purposes of the Convention. This 

expanded definition conforms to that in the OECD Model. The definition of ‘‘real (immovable) property’’ for purposes of Article 6 is 

more limited than the expansive definition of ‘‘real (immovable) 

property’’ in paragraph 1 of Article 13 (Capital Gains). The Article 

13 term includes not only real (immovable) property as defined in 

Article 6 but certain other interests in real (immovable) property. 

Paragraph 3 

Paragraph 3 makes clear that all forms of income derived from 

the exploitation of real (immovable) property are taxable in the 

Contracting State in which the property is situated. This includes 

income from any use of real (immovable) property, including, but 

not limited to, income from direct use by the owner (in which case 

income may be imputed to the owner for tax purposes) and rental 

income from the letting of real (immovable) property. In the case 

of a net lease of real (immovable) property, if a net election pursuant to paragraph 5 has not been made, the gross rental payment 

(before deductible expenses incurred by the lessee) is treated as income from the property. 

26 

Other income closely associated with real (immovable) property 

is covered by other Articles of the Convention, however, and not 

Article 6. For example, income from the disposition of an interest 

in real (immovable) property is not considered ‘‘derived’’ from real 

(immovable) property; taxation of that income is addressed in Article 13 (Gains). Interest paid on a mortgage on real (immovable) 

property would be covered by Article 11 (Interest). Distributions by 

a U.S. Real Estate Investment Trust or certain regulated investment companies would fall under Article 13 in the case of distributions of U.S. real property gain or Article 10 (Dividends) in the case 

of distributions treated as dividends. Finally, distributions from a 

United States Real Property Holding Corporation are not considered to be income from the exploitation of real (immovable) property; such payments would fall under Article 10 or 13. 

Paragraph 4 

This paragraph specifies that the basic rule of paragraph 1 (as 

elaborated in paragraph 3) applies to income from real (immovable) 

property of an enterprise. This clarifies that the situs country may 

tax the real (immovable) property income (including rental income) 

of a resident of the other Contracting State in the absence of attribution to a permanent establishment in the situs State. This provision represents an exception to the general rule under Articles 7 

(Business Profits) that income must be attributable to a permanent 

establishment in order to be taxable in the situs State. 

Paragraph 5 

The paragraph provides that a resident of one Contracting State 

that derives real (immovable) property income from the other may 

elect, for any taxable year, to be subject to tax in that other State 

on a net basis, as though the income were attributable to a permanent establishment in that other State. In the case of real property 

situated in the United States, the election may be terminated only 

with the consent of the competent authority of the United States. 

Termination of such election will be granted in accordance with the 

provisions of Treas. Reg. § 1.871–10(d)(2). 

ARTICLE 7 (BUSINESS PROFITS)

This Article provides rules for the taxation by a Contracting 

State of the business profits of an enterprise of the other Contracting State. 

Paragraph 1 

Paragraph 1 states the general rule that business profits of an 

enterprise of one Contracting State may not be taxed by the other 

Contracting State unless the enterprise carries on business in that 

other Contracting State through a permanent establishment (as defined in Article 5 (Permanent Establishment)) situated there. When 

that condition is met, the State in which the permanent establishment is situated may tax the enterprise on the income that is attributable to the permanent establishment. 

Although the Convention does not include a definition of ‘‘business profits,’’ the term is intended to cover income derived from 

any trade or business. In accordance with this broad definition, the 

27 

term ‘‘business profits’’ includes income attributable to notional 

principal contracts and other financial instruments to the extent 

that the income is attributable to a trade or business of dealing in 

such instruments or is otherwise related to a trade or business (as 

in the case of a notional principal contract entered into for the purpose of hedging currency risk arising from an active trade or business). Any other income derived from such instruments is, unless 

specifically covered in another article, dealt with under Article 21 

(Other Income). 

The term ‘‘business profits’’ also includes income derived by an 

enterprise from the rental of tangible personal property (unless 

such tangible personal property consists of aircraft, ships or containers, income from which is addressed by Article 8 (Shipping and 

Air Transport)). The inclusion of income derived by an enterprise 

from the rental of tangible personal property in business profits 

means that such income earned by a resident of a Contracting 

State can be taxed by the other Contracting State only if the income is attributable to a permanent establishment maintained by 

the resident in that other State, and, if the income is taxable, it 

can be taxed only on a net basis. Income from the rental of tangible 

personal property that is not derived in connection with a trade or 

business is dealt with in Article 21 (Other Income). 

In addition, as a result of the definitions of ‘‘enterprise’’ and 

‘‘business’’ in Article 3 (General Definitions), the term includes income derived from the furnishing of personal services. Thus, a consulting firm resident in one State whose employees or partners perform services in the other State through a permanent establishment may be taxed in that other State on a net basis under Article 

7, and not under Article 14 (Income from Employment), which applies only to income of employees. With respect to the enterprise’s 

employees themselves, however, their salary remains subject to Article 14. 

Because this article applies to income earned by an enterprise 

from the furnishing of personal services, the article also applies to 

income derived by a partner resident in a Contracting State that 

is attributable to personal services performed in the other Contracting State through a partnership with a permanent establishment in that other State. Income which may be taxed under this 

article includes all income attributable to the permanent establishment in respect of the performance of the personal services carried 

on by the partnership (whether by the partner himself, other partners in the partnership, or by employees assisting the partners) 

and any income from activities ancillary to the performance of 

those services (e.g., charges for facsimile services). 

The application of Article 7 to a service partnership may be illustrated by the following example: a partnership formed in Malta has 

five partners (who agree to split profits equally), four of whom are 

resident and perform personal services only in Malta at Office A, 

and one of whom performs personal services at Office B, a permanent establishment in the United States. In this case, the four 

partners of the partnership resident in Malta may be taxed in the 

United States in respect of their share of the income attributable 

to the permanent establishment, Office B. The services giving rise 

to income which may be attributed to the permanent establishment 

28 

would include not only the services performed by the one resident 

partner, but also, for example, if one of the four other partners 

came to the United States and worked on an Office B matter there, 

the income in respect of those services. Income from the services 

performed by the visiting partner would be subject to tax in the 

United States regardless of whether the visiting partner actually 

visited or used Office B while performing services in the United 

States. 

Paragraph 2 

Paragraph 2 provides rules for the attribution of business profits 

to a permanent establishment. The Contracting States will attribute to a permanent establishment the profits that it would have 

earned had it been a distinct and separate enterprise engaged in 

the same or similar activities under the same or similar conditions. 

This language incorporates the arm’s-length standard for purposes 

of determining the profits attributable to a permanent establishment. The computation of business profits attributable to a permanent establishment under this paragraph is subject to the rules of 

paragraph 3 for the allowance of expenses incurred for the purposes of earning the profits. 

The ‘‘attributable to’’ concept of paragraph 2 is analogous but not 

entirely equivalent to the ‘‘effectively connected’’ concept in Code 

section 864(c). The profits attributable to a permanent establishment may be from sources within or without a Contracting State. 

Paragraph 2 also provides that the business profits attributed to 

a permanent establishment include only those derived from the assets used, risks assumed and activities performed by the permanent establishment. This rule is consistent with the ‘‘asset-use’’ and 

‘‘business activities’’ tests of Code section 864(c)(2). 

Paragraph 3 

Paragraph 3 provides that in determining the business profits of 

a permanent establishment, deductions shall be allowed for the expenses incurred for the purposes of the permanent establishment, 

ensuring that business profits will be taxed on a net basis. This 

rule is not limited to expenses incurred exclusively for the purposes 

of the permanent establishment, but includes expenses incurred for 

the purposes of the enterprise as a whole, or that part of the enterprise that includes the permanent establishment. Deductions are to 

be allowed regardless of which accounting unit of the enterprise 

books the expenses, so long as they are incurred for the purposes 

of the permanent establishment. For example, a portion of the interest expense recorded on the books of the home office in one State 

may be deducted by a permanent establishment in the other if 

properly allocable thereto. This rule permits (but does not require) 

each Contracting State to apply the type of expense allocation rules 

provided by U.S. law (such as in Treas. Reg. sections 1.861–8 and 

1.882–5). 

Paragraph 3 does not permit a deduction for expenses charged to 

a permanent establishment by another unit of the enterprise. Thus, 

a permanent establishment may not deduct a royalty deemed paid 

to the head office. Similarly, a permanent establishment may not 

increase its business profits by the amount of any notional fees for 

29 

ancillary services performed for another unit of the enterprise, but 

also should not receive a deduction for the expense of providing 

such services, since those expenses would be incurred for purposes 

of a business unit other than the permanent establishment. 

Paragraph 4 

Paragraph 4 provides that no business profits can be attributed 

to a permanent establishment merely because it purchases goods or 

merchandise for the enterprise of which it is a part. This paragraph is essentially identical to paragraph 5 of Article 7 of the 

OECD Model. This rule applies only to an office that performs 

functions for the enterprise in addition to purchasing. The income 

attribution issue does not arise if the sole activity of the office is 

the purchase of goods or merchandise because such activity does 

not give rise to a permanent establishment under Article 5 (Permanent Establishment). A common situation in which paragraph 4 is 

relevant is one in which a permanent establishment purchases raw 

materials for the enterprise’s manufacturing operation conducted 

outside the United States and sells the manufactured product. 

While business profits may be attributable to the permanent establishment with respect to its sales activities, no profits are attributable to it with respect to its purchasing activities. 

Paragraph 5 

Paragraph 5 provides that profits shall be determined by the 

same method each year, unless there is good reason to change the 

method used. This rule assures consistent tax treatment over time 

for permanent establishments. It limits the ability of both the Contracting State and the enterprise to change accounting methods to 

be applied to the permanent establishment. It does not, however, 

restrict a Contracting State from imposing additional requirements, such as the rules under Code section 481, to prevent 

amounts from being duplicated or omitted following a change in accounting method. 

Paragraph 6 

Paragraph 6 coordinates the provisions of Article 7 and other 

provisions of the Convention. Under this paragraph, when business 

profits include items of income that are dealt with separately under 

other articles of the Convention, the provisions of those articles 

will, except when they specifically provide to the contrary, take 

precedence over the provisions of Article 7. For example, the taxation of dividends will be determined by the rules of Article 10 

(Dividends), and not by Article 7, except where, as provided in 

paragraph 6 of Article 10, the dividend is attributable to a permanent establishment. In the latter case the provisions of Article 7 

apply. Thus, an enterprise of one State deriving dividends from the 

other State may not rely on Article 7 to exempt those dividends 

from tax at source if they are not attributable to a permanent establishment of the enterprise in the other State. By the same 

token, if the dividends are attributable to a permanent establishment in the other State, the dividends may be taxed on a net income basis at the source State full corporate tax rate, rather than 

on a gross basis under Article 10. 

30 

As provided in Article 8 (Shipping and Air Transport), income derived from shipping and air transport activities in international 

traffic described in that Article is taxable only in the country of 

residence of the enterprise regardless of whether it is attributable 

to a permanent establishment situated in the source State. 

Paragraph 7 

Paragraph 7 incorporates into the Convention the rule of Code 

section 864(c)(6). Like the Code section on which it is based, paragraph 7 provides that any income or gain attributable to a permanent establishment during its existence is taxable in the Contracting State where the permanent establishment is situated, even 

if the payment of that income or gain is deferred until after the 

permanent establishment ceases to exist. This rule applies with respect to this Article, paragraph 6 of Article 10, paragraph 5 of Article 11 (Interest), paragraph 4 of Articles 12 (Royalties), paragraph 

3 of Article 13 (Gains) and paragraph 2 of Article 21 (Other Income). 

The effect of this rule can be illustrated by the following example. Assume a company that is a resident of the other Contracting 

State and that maintains a permanent establishment in the United 

States winds up the permanent establishment’s business and sells 

the permanent establishment’s inventory and assets to a U.S. 

buyer at the end of year 1 in exchange for an interest-bearing installment obligation payable in full at the end of year 3. Despite 

the fact that Article 13’s threshold requirement for U.S. taxation 

is not met in year 3 because the company has no permanent establishment in the United States, the United States may tax the deferred income payment recognized by the company in year 3. 

Relationship to Other Articles 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope) of the Model. Thus, if a citizen of the United 

States who is a resident of Malta under the treaty derives business 

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

subject to the special foreign tax credit rules of paragraph 4 of Article 23 (Relief from Double Taxation), tax those profits, notwithstanding the provision of paragraph 1 of this Article which would 

exempt the income from U.S. tax. 

The benefits of this Article are also subject to Article 22 (Limitation on Benefits). Thus, an enterprise of Malta and that derives income effectively connected with a U.S. trade or business may not 

claim the benefits of Article 7 unless the resident carrying on the 

enterprise qualifies for such benefits under Article 22. 

ARTICLE 8 (SHIPPING AND AIR TRANSPORT)

This Article governs the taxation of profits from the operation of 

ships and aircraft in international traffic. The term ‘‘international 

traffic’’ is defined in subparagraph 1(f) of Article 3 (General Definitions). The Exchange of Notes accompanying the Convention provides that neither the provisions of Article 8 nor any other provision of the Convention shall affect the continued validity and application of the provisions of the Agreement between the United 

31 

States and Malta regarding the Taxation of Shipping and Aircraft 

effected by exchange of notes dated at Washington December 26, 

1996, and March 11, 1997. 

Paragraph 1 

Paragraph 1 provides that profits derived by an enterprise of a 

Contracting State from the operation in international traffic of 

ships or aircraft are taxable only in that Contracting State. Because paragraph 6 of Article 7 (Business Profits) defers to Article 

8 with respect to shipping income, such income derived by a resident of one of the Contracting States may not be taxed in the other 

State even if the enterprise has a permanent establishment in that 

other State. Thus, if a U.S. airline has a ticket office in Malta, 

Malta may not tax the airline’s profits attributable to that office 

under Article 7. Since entities engaged in international transportation activities normally will have many permanent establishments in a number of countries, the rule avoids difficulties that 

would be encountered in attributing income to multiple permanent 

establishments if the income were covered by Article 7. 

Paragraph 2 

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

In addition to income derived directly from the operation of ships 

and aircraft in international traffic, this definition also includes 

certain items of rental income. First, income of an enterprise of a 

Contracting State from the rental of ships or aircraft on a full basis 

(i.e., with crew) is income of the lessor from the operation of ships 

and aircraft in international traffic and, therefore, is exempt from 

tax in the other Contracting State under paragraph 1. Also, paragraph 2 encompasses income from the lease of ships or aircraft on 

a bareboat basis (i.e., without crew), either when the income is incidental to other income of the lessor from the operation of ships or 

aircraft in international traffic, or when the ships or aircraft are 

operated in international traffic by the lessee. If neither of those 

two conditions apply, income from the bareboat rentals would constitute business profits. The coverage of Article 8 is therefore 

broader than that of Article 8 of the OECD Model, which covers 

bareboat leasing only when it is incidental to other income of the 

lessor from the operation of ships of aircraft in international traffic. 

Paragraph 2 also clarifies, consistent with the Commentary to 

Article 8 of the OECD Model, that income earned by an enterprise 

from the inland transport of property or passengers within either 

Contracting State falls within Article 8 if the transport is undertaken as part of the international transport of property or passengers by the enterprise. Thus, if a U.S. shipping company contracts to carry property from Malta to a U.S. city and, as part of 

that contract, it transports the property by truck from its point of 

origin to an airport in Malta (or it contracts with a trucking company to carry the property to the airport) the income earned by the 

U.S. shipping company from the overland leg of the journey would 

be taxable only in the United States. Similarly, Article 8 also would 

apply to all of the income derived from a contract for the interVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00031 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
32 

national transport of goods, even if the goods were transported to 

the port by a lighter, not by the vessel that carried the goods in 

international waters. 

Finally, certain non-transport activities that are an integral part 

of the services performed by a transport company, or are ancillary 

to the enterprise’s operation of ships or aircraft in international 

traffic, are understood to be covered in paragraph 1, though they 

are not specified in paragraph 2. These include, for example, the 

provision of goods and services by engineers, ground and equipment maintenance and staff, cargo handlers, catering staff and customer services personnel. Where the enterprise provides such goods 

to, or performs services for, other enterprises and such activities 

are directly connected with or ancillary to the enterprise’s operation of ships or aircraft in international traffic, the profits from 

the provision of such goods and services to other enterprises will 

fall under this paragraph. 

For example, enterprises engaged in the operation of ships or aircraft in international traffic may enter into pooling arrangements 

for the purposes of reducing the costs of maintaining facilities 

needed for the operation of their ships or aircraft in other countries. For instance, where an airline enterprise agrees (for example, 

under an International Airlines Technical Pool agreement) to provide spare parts or maintenance services to other airlines landing 

at a particular location (which allows it to benefit from these services at other locations), activities carried on pursuant to that agreement will be ancillary to the operation of aircraft in international 

traffic by the enterprise. 

Also, advertising that the enterprise may do for other enterprises 

in magazines offered aboard ships or aircraft that it operates in 

international traffic or at its business locations, such as ticket offices, is ancillary to its operation of these ships or aircraft. Profits 

generated by such advertising fall within this paragraph. Income 

earned by concessionaires, however, is not covered by Article 8. 

These interpretations of paragraph 1 also are consistent with the 

Commentary to Article 8 of the OECD Model. 

Paragraph 3 

Under this paragraph, profits of an enterprise of a Contracting 

State from the use, maintenance or rental of containers (including 

equipment for their transport) are exempt from tax in the other 

Contracting State, unless those containers are used for transport 

solely in the other Contracting State. This result obtains under 

paragraph 3 regardless of whether the recipient of the income is 

engaged in the operation of ships or aircraft in international traffic, 

and regardless of whether the enterprise has a permanent establishment in the other Contracting State. Only income from the use, 

maintenance or rental of containers that is incidental to other income from international traffic is covered by Article 8 of the OECD 

Model. 

Paragraph 4 

This paragraph clarifies that the provisions of paragraphs 1 and 

3 also apply to profits derived by an enterprise of a Contracting 

State from participation in a pool, joint business or international 

33 

operating agency. This refers to various arrangements for international cooperation by carriers in shipping and air transport. For 

example, airlines from two countries may agree to share the transport of passengers between the two countries. They each will fly 

the same number of flights per week and share the revenues from 

that route equally, regardless of the number of passengers that 

each airline actually transports. Paragraph 4 makes clear that with 

respect to each carrier the income dealt with in the Article is that 

carrier’s share of the total transport, not the income derived from 

the passengers actually carried by the airline. This paragraph corresponds to paragraph 4 of Article 8 of the OECD Model. 

Relationship to Other Articles 

The taxation of gains from the alienation of ships, aircraft or containers is not dealt with in this Article but in paragraph 4 of Article 13 (Gains). 

As with other benefits of the Convention, the benefit of exclusive 

residence country taxation under Article 8 is available to an enterprise only if it is entitled to benefits under Article 22 (Limitation 

on Benefits). 

This Article also is subject to the saving clause of paragraph 4 

of Article 1 (General Scope) of the Model. Thus, if a citizen of the 

United States who is a resident of Malta derives profits from the 

operation of ships or aircraft in international traffic, notwithstanding the exclusive residence country taxation in paragraph 1 

of Article 8, the United States may, subject to the special foreign 

tax credit rules of paragraph 4 of Article 23 (Relief from Double 

Taxation), tax those profits as part of the worldwide income of the 

citizen. (This is an unlikely situation, however, because non-tax 

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

ARTICLE 9 (ASSOCIATED ENTERPRISES)

This Article incorporates in the Convention the arm’s-length 

principle reflected in the U.S. domestic transfer pricing provisions, 

particularly Code section 482. It provides that when related enterprises engage in a transaction on terms that are not arm’s-length, 

the Contracting States may make appropriate adjustments to the 

taxable income and tax liability of such related enterprises to reflect what the income and tax of these enterprises with respect to 

the transaction would have been had there been an arm’s-length 

relationship between them. 

Paragraph 1 

This paragraph addresses the situation where an enterprise of a 

Contracting State is related to an enterprise of the other Contracting State, and there are arrangements or conditions imposed 

between the enterprises in their commercial or financial relations 

that are different from those that would have existed in the absence of the relationship. Under these circumstances, the Contracting States may adjust the income (or loss) of the enterprise to 

reflect what it would have been in the absence of such a relationship. 

34 

The paragraph identifies the relationships between enterprises 

that serve as a prerequisite to application of the Article. As the 

Commentary to the OECD Model makes clear, the necessary element in these relationships is effective control, which is also the 

standard for purposes of section 482. Thus, the Article applies if an 

enterprise of one State participates directly or indirectly in the 

management, control, or capital of the enterprise of the other State. 

Also, the Article applies if any third person or persons participate 

directly or indirectly in the management, control, or capital of enterprises of different States. For this purpose, all types of control 

are included, i.e., whether or not legally enforceable and however 

exercised or exercisable. 

The fact that a transaction is entered into between such related 

enterprises does not, in and of itself, mean that a Contracting State 

may adjust the income (or loss) of one or both of the enterprises 

under the provisions of this Article. If the conditions of the transaction are consistent with those that would be made between independent persons, the income arising from that transaction should 

not be subject to adjustment under this Article. 

Similarly, the fact that associated enterprises may have concluded arrangements, such as cost sharing arrangements or general services agreements, is not in itself an indication that the two 

enterprises have entered into a non-arm’s-length transaction that 

should give rise to an adjustment under paragraph 1. Both related 

and unrelated parties enter into such arrangements (e.g., joint venturers may share some development costs). As with any other kind 

of transaction, when related parties enter into an arrangement, the 

specific arrangement must be examined to see whether or not it 

meets the arm’s-length standard. In the event that it does not, an 

appropriate adjustment may be made, which may include modifying the terms of the agreement or re-characterizing the transaction to reflect its substance. 

It is understood that the ‘‘commensurate with income’’ standard 

for determining appropriate transfer prices for intangibles, added 

to Code section 482 by the Tax Reform Act of 1986, was designed 

to operate consistently with the arm’s-length standard. The implementation of this standard in the section 482 regulations is in accordance with the general principles of paragraph 1 of Article 9 of 

the Convention, as interpreted by the OECD Transfer Pricing 

Guidelines. 

This Article also permits tax authorities to deal with thin capitalization issues. They may, in the context of Article 9, scrutinize 

more than the rate of interest charged on a loan between related 

persons. They also may examine the capital structure of an enterprise, whether a payment in respect of that loan should be treated 

as interest, and, if it is treated as interest, under what circumstances interest deductions should be allowed to the payor. 

Paragraph 2 of the Commentary to Article 9 of the OECD Model, 

together with the U.S. observation set forth in paragraph 15, sets 

forth a similar understanding of the scope of Article 9 in the context of thin capitalization. 

35 

Paragraph 2 

When a Contracting State has made an adjustment that is consistent with the provisions of paragraph 1, and the other Contracting State agrees that the adjustment was appropriate to reflect arm’s-length conditions, that other Contracting State is obligated to make a correlative adjustment (sometimes referred to as 

a ‘‘corresponding adjustment’’) to the tax liability of the related person in that other Contracting State. Although the OECD Model 

does not specify that the other Contracting State must agree with 

the initial adjustment before it is obligated to make the correlative 

adjustment, the Commentary makes clear that the paragraph is to 

be read that way. 

As explained in the Commentary to Article 9 of the OECD Model, 

Article 9 leaves the treatment of ‘‘secondary adjustments’’ to the 

laws of the Contracting States. When an adjustment under Article 

9 has been made, one of the parties will have in its possession 

funds that it would not have had at arm’s length. The question 

arises as to how to treat these funds. In the United States the general practice is to treat such funds as a dividend or contribution to 

capital, depending on the relationship between the parties. Under 

certain circumstances, the parties may be permitted to restore the 

funds to the party that would have the funds had the transactions 

been entered into on arm’s length terms, and to establish an account payable pending restoration of the funds. See Rev. Proc. 99– 

32, 1999–2 C.B. 296. 

The Contracting State making a secondary adjustment will take 

the other provisions of the Convention, where relevant, into account. For example, if the effect of a secondary adjustment is to 

treat a U.S. corporation as having made a distribution of profits to 

its parent corporation in the other Contracting State, the provisions of Article 10 (Dividends) will apply, and the United States 

may impose a 5 percent withholding tax on the dividend. Also, if 

under Article 23 (Relief from Double Taxation) the other State generally gives a credit for taxes paid with respect to such dividends, 

it would also be required to do so in this case. 

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

made by a Contracting State under paragraph 1 was appropriate. 

If a correlative adjustment is made under paragraph 2, it is to 

be implemented, pursuant to paragraph 2 of Article 25 (Mutual 

Agreement Procedure), notwithstanding any time limits or other 

procedural limitations in the law of the Contracting State making 

the adjustment. If a taxpayer has entered a closing agreement (or 

other written settlement) with the United States prior to bringing 

a case to the competent authorities, the U.S. competent authority 

will endeavor only to obtain a correlative adjustment from Malta. 

See, Rev. Proc. 2006–54, 2006–49 I.R.B. 1035, Section 7.05. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) 

does not apply to paragraph 2 of Article 9 by virtue of an exception 

to the saving clause in subparagraph 5(a) of Article 1. Thus, even 

36 

if the statute of limitations has run, a refund of tax can be made 

in order to implement a correlative adjustment. Statutory or procedural limitations, however, cannot be overridden to impose additional tax, because paragraph 2 of Article 1 provides that the Convention cannot restrict any statutory benefit. 

ARTICLE 10 (DIVIDENDS)

Article 10 provides rules for the taxation of dividends paid by a 

company that is a resident of one Contracting State to a beneficial 

owner that is a resident of the other Contracting State. The Article 

provides for full residence-State taxation of such dividends and a 

limited source-State right to tax. Article 10 also provides rules for 

the imposition of a tax on branch profits by the State of source. Finally, the article prohibits a State from imposing taxes on a company resident in the other Contracting State, other than a branch 

profits tax, on undistributed earnings. 

Paragraph 1 

The right of a shareholder’s country of residence to tax dividends 

arising in the source country is preserved by paragraph 1, which 

permits a Contracting State to tax its residents on dividends paid 

to them by a company that is a resident of the other Contracting 

State. For dividends from any other source paid to a resident, Article 21 (Other Income) grants the residence country exclusive taxing 

jurisdiction (other than for dividends attributable to a permanent 

establishment in the other State). 

Paragraph 2 

The State of source also may tax dividends beneficially owned by 

a resident of the other State, subject to the limitations of paragraphs 2 and 3. With respect to dividends paid by a company resident in the United States, paragraph 2(a) generally limits the rate 

of U.S. withholding tax State to 15 percent of the gross amount of 

the dividend. If, however, the beneficial owner of the dividend is a 

company resident in Malta and owns directly shares representing 

at least 10 percent of the voting power of the company paying the 

dividend, then the rate of withholding tax in the United States is 

limited to 5 percent of the gross amount of the dividend. Shares are 

considered voting shares if they provide the power to elect, appoint 

or replace any person vested with the powers ordinarily exercised 

by the board of directors of a U.S. corporation. With respect to dividends paid by a company resident in Malta to a beneficial owner 

that is a resident of the United States, subparagraph 2(b) limits 

the tax that may be charged by Malta to the Maltese tax chargeable on the profits out of which the dividends are paid. 

The benefits of paragraph 2 may be granted at the time of payment by means of reduced rate of withholding tax at source. It also 

is consistent with the paragraph for tax to be withheld at the time 

of payment at full statutory rates, and the treaty benefit to be 

granted by means of a subsequent refund so long as such procedures are applied in a reasonable manner. 

The determination of whether the ownership threshold for subparagraph 2(a)(i) is met for purposes of the 5 percent maximum 

rate of withholding tax is made on the date on which entitlement 

37 

to the dividend is determined. Thus, the determination would generally be made on the dividend record date. 

Paragraph 2 does not affect the taxation of the profits out of 

which the dividends are paid. The taxation by a Contracting State 

of the income of its resident companies is governed by the internal 

law of the Contracting State, subject to the provisions of paragraph 

4 of Article 24 (Non-Discrimination). 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined as under the internal law of the State 

granting treaty benefits (i.e., the source State). The beneficial 

owner of the dividend for purposes of Article 10 is the person to 

which the income is attributable under the laws of the source 

State. Thus, if a dividend paid by a corporation that is a resident 

of one of the States (as determined under Article 4 (Residence)) is 

received by a nominee or agent that is a resident of the other State 

on behalf of a person that is not a resident of that other State, the 

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

dividend received by a nominee on behalf of a resident of that other 

State would be entitled to benefits. These limitations are confirmed 

by paragraph 12 of the Commentary to Article 10 of the OECD 

Model. See also paragraph 24 of the Commentary to Article 1 of the 

OECD Model. 

Special rules, however, apply to shares that are held through fiscally transparent entities. In that case, the rules of paragraph 6 of 

Article 1 (General Scope) will apply to determine whether the dividends should be treated as having been derived by a resident of a 

Contracting State. Residence-State principles shall be used to determine who derives the dividend, to assure that the dividends for 

which the source State grants benefits of the Convention will be 

taken into account for tax purposes by a resident of the residence 

State. Source State principles of beneficial ownership shall then 

apply to determine whether the person who derives the dividends, 

or another resident of the other Contracting State, is the beneficial 

owner of the dividend. If the person who derives the dividend 

under paragraph 6 of Article 1 would not be treated a nominee, 

agent, custodian, conduit, etc. under the source State’s principles 

for determining beneficial ownership as, that person will be treated 

as the beneficial owner of the income, profits or gains for purposes 

of the Convention. 

Assume for instance, that a company resident in Malta pays a 

dividend to LLC, an entity that is treated as fiscally transparent 

for U.S. tax purposes but is treated as a company for Maltese tax 

purposes. USCo, a company incorporated in the United States, is 

the sole interest holder in LLC. Paragraph 6 of Article 1 provides 

that USCo derives the dividend. Malta’s principles of beneficial 

ownership shall then be applied to USCo. If under the laws of 

Malta USCo is found not to be the beneficial owner of the dividend, 

USCo will not be entitled to the benefits of Article 10 with respect 

to such dividend. The payment may be entitled to benefits, however, if USCo is found to be a nominee, agent, custodian, or conduit 

for another person who is a resident of the United States. 

Beyond identifying the person to whom the principles of beneficial ownership shall be applied, the principles of paragraph 6 of 

Article 1 will also apply when determining whether other requireVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00037 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
38 

ments, such as the ownership threshold of subparagraph 2(a)(i) 

have been satisfied. 

For example, assume that MCo, a company that is a resident of 

Malta, owns all of the outstanding shares in ThirdDE, an entity 

that is disregarded for U.S. tax purposes that is resident in a third 

country. ThirdDE owns 100% of the stock of USCo. Malta views 

ThirdDE as fiscally transparent under its domestic law, and taxes 

MCo currently on the income derived by ThirdDE. In this case, 

MCo is treated as deriving the dividends paid by USCo under paragraph 6 of Article 1. Moreover, MCo is treated as owning the 

shares of USCo directly. The Convention does not address what 

constitutes direct ownership for purposes of Article 10. As a result, 

whether ownership is direct is determined under the internal law 

of the State granting treaty benefits (i.e., the source State) unless 

the context otherwise requires. Accordingly, a company that holds 

stock through such an entity will generally be considered to directly own such stock for purposes of Article 10. 

This result may change, however, if ThirdDE is regarded as nonfiscally transparent under the laws of Malta. Assuming that 

ThirdDE is treated as non-fiscally transparent by Malta, the income will not be treated as derived by a resident of Malta for purposes of the Convention. However, ThirdDE may still be entitled to 

the benefits of the U.S. tax treaty, if any, with its country of residence. 

The same principles would apply in determining whether companies holding shares through fiscally transparent entities such as 

partnerships, trusts, and estates would qualify for benefits. As a result, companies holding shares through such entities may be able 

to claim the benefits of subparagraph (a)(i) under certain circumstances. The lower rate applies when the company’s proportionate share of the shares held by the intermediate entity meets 

the 10 percent threshold, and the company meets the requirements 

of subparagraph 6 of Article 1 (i.e., the company’s country of residence treats the intermediate entity as fiscally transparent) with 

respect to the dividend. Whether this ownership threshold is satisfied may be difficult to determine and often will require an analysis 

of the partnership or trust agreement. 

Paragraph 3 

Paragraph 3 provides that dividends beneficially owned by a pension fund may not be taxed in the Contracting State of which the 

company paying the tax is a resident, unless such dividends are derived from the carrying on of a business, directly or indirectly, by 

the pension fund or through an associated enterprise. For these 

purposes, the term ‘‘pension fund’’ is defined in subparagraph 1(k) 

of Article 3 (General Definitions). 

Paragraph 4 

Paragraph 4 imposes limitations on the rate reductions provided 

by paragraphs 2 and 3 in the case of dividends paid by RIC or a 

REIT. 

The first sentence of subparagraph 4(a) provides that dividends 

paid by a RIC or REIT are not eligible for the 5 percent rate of 

withholding tax of subparagraph 2(a)(i). 

39 

The second sentence of subparagraph 4(a) provides that the 15 

percent maximum rate of withholding tax of subparagraph 2(a)(ii) 

applies to dividends paid by RICs and that the elimination of 

source-country withholding tax of paragraph 3 applies to dividends 

paid by RICs and beneficially owned by a pension fund. 

The third sentence of subparagraph 4(a) provides that the 15 

percent rate of withholding tax also applies to dividends paid by a 

REIT and that the elimination of source-country withholding tax of 

paragraph 3 applies to dividends paid by REITs and beneficially 

owned by a pension fund, provided that one of the three following 

conditions is met. First, the beneficial owner of the dividend is an 

individual or a pension fund, in either case holding an interest of 

not more than 10 percent in the REIT. Second, the dividend is paid 

with respect to a class of stock that is publicly traded and the beneficial owner of the dividend is a person holding an interest of not 

more than 5 percent of any class of the REIT’s shares. Third, the 

beneficial owner of the dividend holds an interest in the REIT of 

not more than 10 percent and the REIT is ‘‘diversified.’’ 

Subparagraph (b) provides a definition of the term ‘‘diversified.’’ 

A REIT is diversified if the gross value of no single interest in real 

property held by the REIT exceeds 10 percent of the gross value 

of the REIT’s total interest in real property. Foreclosure property 

is not considered an interest in real property, and a REIT holding 

a partnership interest is treated as owning its proportionate share 

of any interest in real property held by the partnership. 

The restrictions set out above are intended to prevent the use of 

these entities to gain inappropriate U.S. tax benefits. For example, 

a company resident in Malta that wishes to hold a diversified portfolio of U.S. corporate shares could hold the portfolio directly and 

would bear a U.S. withholding tax of 15 percent on all of the dividends that it receives. Alternatively, it could hold the same diversified portfolio by purchasing 10 percent or more of the interests in 

a RIC that in turn held the portfolio. Absent the special rule in 

paragraph 4, such use of the RIC could transform portfolio dividends, taxable in the United States under the Convention at a 15 

percent maximum rate of withholding tax, into direct investment 

dividends taxable at a 5 percent maximum rate of withholding tax 

or eligible for the elimination of source-country withholding tax on 

dividends paid to pension funds. 

Similarly, a resident of Malta directly holding U.S. real property 

would pay U.S. tax upon the sale of the property either at a 30 percent rate of withholding tax on the gross income or at graduated 

rates on the net income. As in the preceding example, by placing 

the real property in a REIT, the investor could, absent a special 

rule, transform income from the sale of real estate into dividend income from the REIT, taxable at the rates provided in Article 10, 

significantly reducing the U.S. tax that otherwise would be imposed. Paragraph 4 prevents this result and thereby avoids a disparity between the taxation of direct real estate investments and 

real estate investments made through REITs. In the cases in which 

paragraph 4 allows a dividend from a REIT to be eligible for the 

15 percent rate of withholding tax, the holding in the REIT is not 

considered the equivalent of a direct holding in the underlying real 

property. 

40 

Paragraph 5 

Paragraph 5 defines the term dividends broadly and flexibly. The 

definition is intended to cover all arrangements that yield a return 

on an equity investment in a corporation as determined under the 

tax law of the state of source, as well as arrangements that might 

be developed in the future. 

The term includes income from shares, or other corporate rights 

that are not treated as debt under the law of the source State, that 

participate in the profits of the company. The term also includes 

income that is subjected to the same tax treatment as income from 

shares by the law of the State of source. Thus, a constructive dividend that results from a non-arm’s length transaction between a 

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

United States the term dividend includes amounts treated as a dividend under U.S. law upon the sale or redemption of shares or 

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

92–85, 1992–2 C.B. 69 (sale of foreign subsidiary’s stock to U.S. sister company is a deemed dividend to extent of the subsidiary’s and 

sister company’s earnings and profits). Further, a distribution from 

a U.S. publicly traded limited partnership, which is taxed as a corporation under U.S. law, is a dividend for purposes of Article 10. 

However, a distribution by a limited liability company is not taxable by the United States under Article 10, provided the limited liability company is not characterized as an association taxable as a 

corporation under U.S. law. 

Finally, a payment denominated as interest that is made by a 

thinly capitalized corporation may be treated as a dividend to the 

extent that the debt is recharacterized as equity under the laws of 

the source State. 

Paragraph 6 

Paragraph 6 provides a rule for taxing dividends paid with respect to holdings that form part of the business property of a permanent establishment. In such case, the rules of Article 7 (Business Profits) shall apply. Accordingly, the dividends will be taxed 

on a net basis using the rates and rules of taxation generally applicable to residents of the State in which the permanent establishment is located, as such rules may be modified by the Convention. 

An example of dividends paid with respect to the business property 

of a permanent establishment would be dividends derived by a 

dealer in stock or securities from stock or securities that the dealer 

held for sale to customers. 

Paragraph 7 

The right of a Contracting State to tax dividends paid by a company that is a resident of the other Contracting State is restricted 

by paragraph 7 to cases in which the dividends are paid to a resident of that Contracting State or are attributable to a permanent 

establishment or fixed base in that Contracting State. Thus, a Contracting State may not impose a ‘‘secondary’’ withholding tax on 

dividends paid by a nonresident company out of earnings and profits from that Contracting State. 

The paragraph also restricts the right of a Contracting State to 

impose corporate level taxes on undistributed profits, other than a 

41 

branch profits tax. The paragraph does not restrict a State’s right 

to tax its resident shareholders on undistributed earnings of a corporation resident in the other State. Thus, the authority of the 

United States to impose taxes on subpart F income and on earnings deemed invested in U.S. property, and its tax on income of a 

passive foreign investment company that is a qualified electing 

fund is in no way restricted by this provision. 

Paragraph 8 

Paragraph 8 permits a Contracting State to impose a branch 

profits tax on a company resident in the other Contracting State. 

The tax is in addition to other taxes permitted by the Convention. 

The term ‘‘company’’ is defined in subparagraph 1(b) of Article 3 

(General Definitions). 

A Contracting State may impose a branch profits tax on a company if the company has income attributable to a permanent establishment in that Contracting State, derives income from real (immovable) property in that Contracting State that is taxed on a net 

basis under Article 6 (Income from Real (Immovable) Property), or 

realizes gains taxable in that State under paragraph 1 of Article 

13 (Gains). In the case of the United States, the imposition of such 

tax is limited, however, to the portion of the aforementioned items 

of income that represents the amount of such income that is the 

‘‘dividend equivalent amount.’’ This is consistent with the relevant 

rules under the U.S. branch profits tax, and the term dividend 

equivalent amount is defined under U.S. law. Section 884 defines 

the dividend equivalent amount as an amount for a particular year 

that is equivalent to the income described above that is included 

in the corporation’s effectively connected earnings and profits for 

that year, after payment of the corporate tax under Articles 6 (Income from Real (Immovable) Property), 7 (Business Profits) or 13 

(Gains), reduced for any increase in the branch’s U.S. net equity 

during the year or increased for any reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg. section 1.884–1. 

The dividend equivalent amount for any year approximates the 

dividend that a U.S. branch office would have paid during the year 

if the branch had been operated as a separate U.S. subsidiary company. If Malta also imposes a branch profits tax, the base of its tax 

must be limited to an amount that is analogous to the dividend 

equivalent amount. 

As discussed in the explanation of paragraph 2 of Article 1 (General Scope), consistency principles prohibit a taxpayer from applying provisions of the Code and this Convention inconsistently. In 

the context of the branch profits tax, this consistency requirement 

means that if a Maltese company uses the principles of Article 7 

to determine its U.S. taxable income then it must also use those 

principles to determine its dividend equivalent amount. Similarly, 

if the Maltese company instead uses the Code to determine its U.S. 

taxable income it must also use the Code to determine its dividend 

equivalent amount. As in the case of Article 7, if a Maltese company, for example, does not from year to year consistently apply 

the Code or the Convention to determine its dividend equivalent 

amount, then the Maltese company must make appropriate adjustVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00041 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
42 

ments or recapture amounts that would otherwise be subject to 

U.S. branch profits tax if it had consistently applied the Code or 

the Convention to determine its dividend equivalent amount from 

year to year. 

Subparagraph (b) provides that the branch profits tax shall not 

be imposed at a rate exceeding five percent. It is intended that subparagraph (b) apply equally if a taxpayer determines its taxable income under the laws of a Contracting State or under the provisions 

of Article 7. For example, as discussed above, consistency principles 

require a Maltese company that determines its U.S. taxable income 

under the Code to also determine its dividend equivalent amount 

under the Code. In that case, subparagraph (b) would apply even 

though the Maltese company did not determine its dividend equivalent amount using the principles of Article 7. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 4 of Article 1 

permits the United States to tax dividends received by its residents 

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

The benefits of this Article are also subject to the provisions of 

Article 22 (Limitation on Benefits). Thus, if a resident of the other 

Contracting State is the beneficial owner of dividends paid by a 

U.S. corporation, the shareholder must qualify for treaty benefits 

under at least one of the tests of Article 22 in order to receive the 

benefits of this Article. 

ARTICLE 11 (INTEREST)

Article 11 provides rules for the taxation of interest arising in 

one Contracting State and paid to a beneficial owner that is a resident of the other Contracting State. 

Paragraph 1 

Paragraph 1 grants to the State of residence the non-exclusive 

right to tax interest beneficially owned by its residents and arising 

in the other Contracting State. 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined under the internal law of the State granting treaty benefits (i.e., the source State). The beneficial owner of 

the interest for purposes of Article 11 is the person to which the 

income is attributable under the laws of the source State. Thus, if 

interest arising in a Contracting State is received by a nominee or 

agent that is a resident of the other State on behalf of a person 

that is not a resident of that other State, the interest is not entitled to the benefits of Article 11. However, interest received by a 

nominee on behalf of a resident of that other State would be entitled to benefits. These limitations are confirmed by paragraph 9 of 

the OECD Commentary to Article 11. 

Paragraph 2 

Paragraph 2 provides that the State of source also may tax interest beneficially owned by a resident of the other Contracting State, 

43 

but the rate of tax shall be limited to 10 percent of the gross 

amount of the interest. 

Paragraph 3 

Paragraph 3 provides anti-abuse exceptions to paragraphs 1 and 

2 for two classes of interest payments. 

The first class of interest, dealt with in subparagraph (a) is U.S.- 

source contingent interest of a type that does not qualify as portfolio interest under U.S. domestic law. The cross-reference to the 

U.S. definition of contingent interest, which is found in section 

871(h)(4) of the Code, is intended to ensure that the exceptions of 

section 871(h)(4)(c) will be applicable. Any such interest may be 

taxed in the United States according to U.S. domestic law. If the 

beneficial owner is a resident of Malta, however, the gross amount 

of the interest may be taxed at a rate not exceeding 15 percent. 

The second class of interest is dealt with in subparagraph c) of 

paragraph 2. This exception is consistent with the policy of Code 

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

a real estate mortgage investment conduit (REMIC) should bear 

full U.S. tax in all cases. Without a full tax at source foreign purchasers of residual interests would have a competitive advantage 

over U.S. purchasers at the time these interests are initially offered. Also, absent this rule, the U.S. fisc would suffer a revenue 

loss with respect to mortgages held in a REMIC because of opportunities for tax avoidance created by differences in the timing of 

taxable and economic income produced by these interests. 

Paragraph 4 

The term ‘‘interest’’ as used in Article 11 is defined in paragraph 

4 to include, inter alia, income from debt claims of every kind, 

whether or not secured by a mortgage. Penalty charges for late 

payment are excluded from the definition of interest. Interest that 

is paid or accrued subject to a contingency is within the ambit of 

Article 11. This includes income from a debt obligation carrying the 

right to participate in profits. The term does not, however, include 

amounts that are treated as dividends under Article 10 (Dividends). 

The term interest also includes amounts subject to the same tax 

treatment as income from money lent under the law of the State 

in which the income arises. Thus, for purposes of the Convention, 

amounts that the United States will treat as interest include (i) the 

difference between the issue price and the stated redemption price 

at maturity of a debt instrument (i.e., original issue discount 

(‘‘OID’’)), which may be wholly or partially realized on the disposition of a debt instrument (section 1273), (ii) amounts that are imputed interest on a deferred sales contract (section 483), (iii) 

amounts treated as interest or OID under the stripped bond rules 

(section 1286), (iv) amounts treated as original issue discount 

under the below-market interest rate rules (section 7872), (v) a 

partner’s distributive share of a partnership’s interest income (section 702), (vi) the interest portion of periodic payments made under 

a ‘‘finance lease’’ or similar contractual arrangement that in substance is a borrowing by the nominal lessee to finance the acquisition of property, (vii) amounts included in the income of a holder 

44 

of a residual interest in a REMIC (section 860E), because these 

amounts generally are subject to the same taxation treatment as 

interest under U.S. tax law, and (viii) interest with respect to notional principal contracts that are re-characterized as loans because 

of a ‘‘substantial non-periodic payment.’’ 

Paragraph 5 

Paragraph 5 provides a rule for taxing interest in cases where 

the beneficial owner of the interest carries on business through a 

permanent establishment in the State of source situated in that 

State and the interest is attributable to that permanent establishment. In such cases the provisions of Article 7 (Business Profits) 

will apply and the State of source will retain the right to impose 

tax on such interest income. 

In the case of a permanent establishment that once existed in 

the State of source but that no longer exists, the provisions of paragraph 5 also apply, by virtue of paragraph 7 of Article 7, to interest 

that would be attributable to such a permanent establishment or 

fixed base if it did exist in the year of payment or accrual. See the 

Technical Explanation of paragraph 7 of Article 7. 

Paragraph 6 

Paragraph 6 provides a source rule for interest that is identical 

in substance to the interest source rule of the OECD Model. Interest is considered to arise in a Contracting State if paid by a resident of that State. As an exception, interest on a debt incurred in 

connection with a permanent establishment in one of the States 

and borne by the permanent establishment is deemed to arise in 

that State. For this purpose, interest is considered to be borne by 

a permanent establishment if it is allocable to taxable income of 

that permanent establishment 

Paragraph 7 

Paragraph 7 provides that in cases involving special relationships between the payor and the beneficial owner of interest income, Article 11 applies only to that portion of the total interest 

payments that would have been made absent such special relationships (i.e., an arm’s-length interest payment). Any excess amount 

of interest paid remains taxable according to the laws of the United 

States and Malta, respectively, with due regard to the other provisions of the Convention. Thus, if the excess amount would be treated under the source country’s law as a distribution of profits by a 

corporation, such amount could be taxed as a dividend rather than 

as interest, but the tax would be subject, if appropriate, to the rate 

limitations of paragraph 2 of Article 10 (Dividends). 

The term ‘‘special relationship’’ is not defined in the Convention. 

In applying this paragraph the United States considers the term to 

include the relationships described in Article 9, which in turn corresponds to the definition of ‘‘control’’ for purposes of section 482 

of the Code. 

This paragraph does not address cases where, owing to a special 

relationship between the payer and the beneficial owner or between 

both of them and some other person, the amount of the interest is 

less than an arm’s-length amount. In those cases a transaction may 

45 

be characterized to reflect its substance and interest may be imputed consistent with the definition of interest in paragraph 4. The 

United States would apply section 482 or 7872 of the Code to determine the amount of imputed interest in those cases. 

Paragraph 8 

Paragraph 8 permits the United States to impose its branch level 

interest tax on a corporation resident in Malta. The base of this tax 

is the excess, if any, of the interest deductible in the United States 

in computing the profits of the corporation that are subject to tax 

in the United States and either attributable to a permanent establishment in the United States or subject to tax in the United States 

under Article 6 (Income from Real Property) or paragraph 1 of Article 13 (Alienation of Property) of the Convention over the interest 

paid by the permanent establishment or trade or business in the 

United States. Such excess interest may be taxed as if it were interest arising in the United States and beneficially owned by the 

corporation resident in Malta. Thus, such excess interest may be 

taxed by the United States at a rate not to exceed the 10 percent 

rate provided for in paragraph 2. 

Relationship to Other Articles 

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

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

force. 

As with other benefits of the Convention, the benefits of Article 

11 are available to a resident of the other State only if that resident is entitled to those benefits under the provisions of Article 22 

(Limitation on Benefits). 

ARTICLE 12 (ROYALTIES)

Article 12 provides rules for the taxation of royalties arising in 

one Contracting State and paid to a beneficial owner that is a resident of the other Contracting State. 

Paragraph 1 

Paragraph 1 grants to the State of residence the non-exclusive 

right to tax royalties beneficially owned by its residents and arising 

in the other Contracting State. 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined under the internal law of the State granting treaty benefits (i.e., the source State). The beneficial owner of 

the royalty for purposes of Article 12 is the person to which the income is attributable under the laws of the source State. Thus, if a 

royalty arising in a Contracting State is received by a nominee or 

agent that is a resident of the other State on behalf of a person 

that is not a resident of that other State, the royalty is not entitled 

to the benefits of Article 12. However, a royalty received by a nominee on behalf of a resident of that other State would be entitled 

to benefits. These limitations are confirmed by paragraph 4 of the 

OECD Commentary to Article 12. 

46 

Paragraph 2 

Paragraph 2 provides that the State of source also may tax royalties beneficially owned by a resident of the other Contracting State, 

but the rate of tax shall be limited to 10 percent of the gross 

amount of the royalties. 

Paragraph 3 

Paragraph 3 defines the term ‘‘royalties,‘‘ as used in Article 12, 

to include any consideration for the use of, or the right to use, any 

copyright of literary, artistic, scientific or other work (such as cinematographic films), any patent, trademark, design or model, plan, 

secret formula or process, or for information concerning industrial, 

commercial, or scientific experience. The term ‘‘royalties’’ also includes gain derived from the alienation of any right or property 

that would give rise to royalties, to the extent the gain is contingent on the productivity, use, or further alienation thereof. Gains 

that are not so contingent are dealt with under Article 13 (Gains). 

The term ‘‘royalties,’’ however, does not include income from leasing personal property. 

The term royalties is defined in the Convention and therefore is 

generally independent of domestic law. Certain terms used in the 

definition are not defined in the Convention, but these may be defined under domestic tax law. For example, the term ‘‘secret process or formulas’’ is found in the Code, and its meaning has been 

elaborated in the context of sections 351 and 367. See Rev. Rul. 55– 

17, 1955–1 C.B. 388; Rev. Rul. 64–56, 1964–1 C.B. 133; Rev. Proc. 

69–19, 1969–2 C.B. 301. 

Consideration for the use or right to use cinematographic films, 

or works on film, tape, or other means of reproduction in radio or 

television broadcasting is specifically included in the definition of 

royalties. It is intended that, with respect to any subsequent technological advances in the field of radio or television broadcasting, 

consideration received for the use of such technology will also be 

included in the definition of royalties. 

If an artist who is resident in one Contracting State records a 

performance in the other Contracting State, retains a copyrighted 

interest in a recording, and receives payments for the right to use 

the recording based on the sale or public playing of the recording, 

then the right of such other Contracting State to tax those payments is governed by Article 12. See Boulez v. Commissioner, 83 

T.C. 584 (1984), affd, 810 F.2d 209 (D.C. Cir. 1986). By contrast, 

if the artist earns in the other Contracting State income covered 

by Article 16 (Entertainers and Sportsmen), for example, endorsement income from the artist’s attendance at a film screening, and 

if such income also is attributable to one of the rights described in 

Article 12 (e.g., the use of the artist’s photograph in promoting the 

screening), Article 16 and not Article 12 is applicable to such income. 

Computer software generally is protected by copyright laws 

around the world. Under the Convention, consideration received for 

the use, or the right to use, computer software is treated either as 

royalties or as business profits, depending on the facts and circumstances of the transaction giving rise to the payment. 

47 

The primary factor in determining whether consideration received for the use, or the right to use, computer software is treated 

as royalties or as business profits is the nature of the rights transferred. See Treas. Reg. section 1.861-18. The fact that the transaction is characterized as a license for copyright law purposes is 

not diapositive. For example, a typical retail sale of ‘‘shrink wrap’’ 

software generally will not be considered to give rise to royalty income, even though for copyright law purposes it may be characterized as a license. 

The means by which the computer software is transferred are not 

relevant for purposes of the analysis. Consequently, if software is 

electronically transferred but the rights obtained by the transferee 

are substantially equivalent to rights in a program copy, the payment will be considered business profits. 

The term ‘‘industrial, commercial, or scientific experience’’ (sometimes referred to as ‘‘know-how’’) has the meaning ascribed to it in 

paragraph 11 et seq. of the Commentary to Article 12 of the OECD 

Model. Consistent with that meaning, the term may include information that is ancillary to a right otherwise giving rise to royalties, 

such as a patent or secret process. 

Know-how also may include, in limited cases, technical information that is conveyed through technical or consultancy services. It 

does not include general educational training of the user’s employees, nor does it include information developed especially for the 

user, such as a technical plan or design developed according to the 

user’s specifications. Thus, as provided in paragraph 11.3 of the 

Commentary to Article 12 of the OECD Model, the term ‘‘royalties’’ 

does not include payments received as consideration for after-sales 

service, for services rendered by a seller to a purchaser under a 

warranty, or for pure technical assistance. 

The term ‘‘royalties’’ also does not include payments for professional services (such as architectural, engineering, legal, managerial, medical, software development services). For example, income 

from the design of a refinery by an engineer (even if the engineer 

employed know-how in the process of rendering the design) or the 

production of a legal brief by a lawyer is not income from the transfer of know-how taxable under Article 12, but is income from services taxable under either Article 7 (Business Profits) or Article 14 

(Income from Employment). Professional services may be embodied 

in property that gives rise to royalties, however. Thus, if a professional contracts to develop patentable property and retains rights 

in the resulting property under the development contract, subsequent license payments made for those rights would be royalties. 

Paragraph 4 

This paragraph provides a rule for taxing royalties in cases 

where the beneficial owner of the royalties carries on business 

through a permanent establishment in the state of source and the 

royalties are attributable to that permanent establishment. In such 

cases the provisions of Article 7 will apply. 

The provisions of paragraph 7 of Article 7 apply to this paragraph. For example, royalty income that is attributable to a permanent establishment and that accrues during the existence of the 

permanent establishment, but is received after the permanent esVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00047 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
48 

tablishment no longer exists, remains taxable under the provisions 

of Article 7, and not under this Article. 

Paragraph 5 

Paragraph 5 contains the source rule for royalties. Under paragraph 5, royalties are treated as arising in a Contracting State 

when they are in consideration for the use of, or the right to use, 

property, information or experience in that State. This source rule 

parallels the source rule in section 861(a)(4) of the Code. 

Paragraph 6 

Paragraph 6 provides that in cases involving special relationships between the payor and beneficial owner of royalties, Article 

12 applies only to the extent the royalties would have been paid 

absent such special relationships (i.e., an arm’s-length royalty). 

Any excess amount of royalties paid remains taxable according to 

the laws of the two Contracting States, with due regard to the 

other provisions of the Convention. If, for example, the excess 

amount is treated as a distribution of corporate profits under domestic law, such excess amount will be taxed as a dividend rather 

than as royalties, but the tax imposed on the dividend payment 

will be subject to the rate limitations of paragraph 2 of Article 10 

(Dividends). 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of royalties, the saving clause of paragraph 4 of Article 1 

(General Scope) permits the United States to tax its residents and 

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

4 of Article 23 (Relief from Double Taxation), as if the Convention 

had not come into force. 

As with other benefits of the Convention, the benefits of Article 

12 are available to a resident of the other State only if that resident is entitled to those benefits under Article 22 (Limitation on 

Benefits). 

ARTICLE 13 (GAINS)

Article 13 assigns either primary or exclusive taxing jurisdiction 

over gains from the alienation of property to the State of residence 

or the State of source. 

Paragraph 1 

Paragraph 1 of Article 13 preserves the non-exclusive right of the 

State of source to tax gains attributable to the alienation of real 

property situated in that State. The paragraph therefore permits 

the United States to apply section 897 of the Code to tax gains derived by a resident of Malta that are attributable to the alienation 

of real property situated in the United States (as defined in paragraph 2). Gains attributable to the alienation of real property include gains from any other property that is treated as a real property interest within the meaning of paragraph 2. 

Paragraph 1 refers to gains ‘‘attributable to the alienation of real 

(immovable) property’’ rather than the OECD Model phrase ‘‘gains 

from the alienation’’ to clarify that the United States will look 

49 

through distributions made by a REIT and certain RICs. Accordingly, distributions made by a REIT or certain RICs are taxable 

under paragraph 1 of Article 13 (not under Article 10 (Dividends)) 

when they are attributable to gains derived from the alienation of 

real property. 

Paragraph 2 

This paragraph defines the term ‘‘real (immovable) property situated in the other Contracting State.’’ The term includes real (immovable) property referred to in Article 6 (i.e., an interest in the 

real (immovable) property itself), a ‘‘United States real property interest’’ (when the United States is the other Contracting State 

under paragraph 1), and an equivalent interest in real (immovable) 

property situated in Malta (when Malta is the other Contracting 

State under paragraph 1). 

Under section 897(c) of the Code the term ‘‘United States real 

property interest’’ includes shares in a U.S. corporation that owns 

sufficient U.S. real property interests to satisfy an asset-ratio test 

on certain testing dates. The term also includes certain foreign corporations that have elected to be treated as U.S. corporations for 

this purpose. Section 897(i). 

Paragraph 3 

Paragraph 3 of Article 13 deals with the taxation of certain gains 

from the alienation of movable property forming part of the business property of a permanent establishment that an enterprise of 

a Contracting State has in the other Contracting State. This also 

includes gains from the alienation of such a permanent establishment (alone or with the whole enterprise). Such gains may be taxed 

in the State in which the permanent establishment is located. 

A resident of Malta that is a partner in a partnership doing business in the United States generally will have a permanent establishment in the United States as a result of the activities of the 

partnership, assuming that the activities of the partnership rise to 

the level of a permanent establishment. Rev. Rul. 91–32, 1991–1 

C.B. 107. Further, under paragraph 3, the United States generally 

may tax a partner’s distributive share of income realized by a partnership on the disposition of movable property forming part of the 

business property of the partnership in the United States. 

The gains subject to paragraph 3 may be taxed in the State in 

which the permanent establishment is located, regardless of whether the permanent establishment exists at the time of the alienation. This rule incorporates the rule of section 864(c)(6) of the 

Code. Accordingly, income that is attributable to a permanent establishment, but that is deferred and received after the permanent 

establishment no longer exists, may nevertheless be taxed by the 

State in which the permanent establishment was located. 

Paragraph 4 

This paragraph limits the taxing jurisdiction of the State of 

source with respect to gains from the alienation of ships or aircraft 

operated in international traffic by the enterprise alienating the 

ship or aircraft and from property (other than real (immovable) 

50 

property) pertaining to the operation or use of such ships, aircraft, 

or containers. 

Under paragraph 4, such income is taxable only in the Contracting State in which the alienator is resident. Notwithstanding 

paragraph 3, the rules of this paragraph apply even if the income 

is attributable to a permanent establishment maintained by the enterprise in the other Contracting State. This result is consistent 

with the allocation of taxing rights under Article 8 (Shipping and 

Air Transport). 

Paragraph 5 

Paragraph 5 provides a rule similar to paragraph 4 with respect 

to gains from the alienation of containers and related personal 

property. Such gains derived by an enterprise of a Contracting 

State shall be taxable only in that Contracting State unless the 

containers were used for the transport of goods or merchandise 

solely within the other Contracting State. The other Contracting 

State may not tax the gain, even if the gain is attributable to a 

permanent establishment maintained by the enterprise in that 

other Contracting State. 

Paragraph 6 

Paragraph 6 grants to the State of residence of the alienator the 

exclusive right to tax gains from the alienation of property other 

than property referred to in paragraphs 1 through 5. For example, 

gain derived from shares, other than shares described in paragraphs 2 or 3, debt instruments and various financial instruments, 

may be taxed only in the State of residence, to the extent such income is not otherwise characterized as income taxable under another article (e.g., Article 10 (Dividends) or Article 11 (Interest)). 

Similarly gain derived from the alienation of tangible personal 

property, other than tangible personal property described in paragraph 3, may be taxed only in the State of residence of the alienator. 

Gain derived from the alienation of any property, such as a patent or copyright, that produces income covered by Article 12 (Royalties) is governed by the rules of Article 12 and not by this article, 

provided that such gain is of the type described in paragraph 3(b) 

of Article 12 (i.e., it is contingent on the productivity, use, or disposition of the property). 

Gains derived by a resident of a Contracting State from real (immovable) property located in a third state are not taxable in the 

other Contracting State, even if the sale is attributable to a permanent establishment located in the other Contracting State. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on taxation of certain 

gains by the State of source, the saving clause of paragraph 4 of 

Article 1 (General Scope) permits the United States to tax its citizens and residents as if the Convention had not come into effect. 

Thus, any limitation in this Article on the right of the United 

States to tax gains does not apply to gains of a U.S. citizen or resident. 

51 

The benefits of this Article are also subject to the provisions of 

Article 22 (Limitation on Benefits). Thus, only a resident of a Contracting State that satisfies one of the conditions in Article 22 is 

entitled to the benefits of this Article. 

ARTICLE 14 (INCOME FROM EMPLOYMENT)

Article 14 apportions taxing jurisdiction over remuneration derived by a resident of a Contracting State as an employee between 

the States of source and residence. 

Paragraph 1 

The general rule of Article 14 is contained in paragraph 1. Remuneration derived by a resident of a Contracting State as an employee may be taxed by the State of residence, and the remuneration also may be taxed by the other Contracting State to the extent 

derived from employment exercised (i.e., services performed) in 

that other Contracting State. Paragraph 1 also provides that the 

more specific rules of Articles 15 (Directors’ Fees), 17 (Pensions, Social Security, Annuities, Alimony and Child Support), and 19 (Government Service) apply in the case of employment income described 

in one of those articles. Thus, even though the State of source has 

a right to tax employment income under Article 14, it may not have 

the right to tax that income under the Convention if the income is 

described, for example, in Article 17 and is not taxable in the State 

of source under the provisions of that article. 

Article 14 applies to any form of compensation for employment, 

including payments in kind. Paragraph 1.1 of the Commentary to 

Article 16 of the OECD Model confirms that interpretation. 

Consistent with section 864(c)(6) of the Code, Article 14 also applies regardless of the timing of actual payment for services. Consequently, a person who receives the right to a future payment in 

consideration for services rendered in a Contracting State would be 

taxable in that State even if the payment is received at a time 

when the recipient is a resident of the other Contracting State. 

Thus, a bonus paid to a resident of a Contracting State with respect to services performed in the other Contracting State with respect to a particular taxable year would be subject to Article 14 for 

that year even if it was paid after the close of the year. An annuity 

received for services performed in a taxable year could be subject 

to Article 14 despite the fact that it was paid in subsequent years. 

In that case, it would be necessary to determine whether the payment constitutes deferred compensation, taxable under Article 14, 

or a qualified pension subject to the rules of Article 17. Article 14 

also applies to income derived from the exercise of stock options 

granted with respect to services performed in the host State, even 

if those stock options are exercised after the employee has left the 

source country. If Article 14 is found to apply, whether such payments were taxable in the State where the employment was exercised would depend on whether the tests of paragraph 2 were satisfied in the year in which the services to which the payment relates 

were performed. 

52 

Paragraph 2 

Paragraph 2 sets forth an exception to the general rule that employment income may be taxed in the State where it is exercised. 

Under paragraph 2, the State where the employment is exercised 

may not tax the income from the employment if three conditions 

are satisfied: (a) the individual is present in the other Contracting 

State for a period or periods not exceeding 183 days in any 12- 

month period that begins or ends during the relevant taxable year 

(i.e., in the United States, the calendar year in which the services 

are performed); (b) the remuneration is paid by, or on behalf of an 

employer who is not a resident of that other Contracting State; and 

(c) the remuneration is not borne as a deductible expense by a permanent establishment that the employer has in that other State. 

In order for the remuneration to be exempt from tax in the source 

State, all three conditions must be satisfied. This exception is identical to that set forth in the OECD Model. 

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

‘‘days of physical presence’’ method. Under this method, the days 

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

spent in the host country. (Rev. Rul. 56–24, 1956–1 C.B. 851.) 

Thus, days that are counted include the days of arrival and departure; weekends and holidays on which the employee does not work 

but is present within the country; vacation days spent in the country before, during or after the employment period, unless the individual’s presence before or after the employment can be shown to 

be independent of his presence there for employment purposes; and 

time during periods of sickness, training periods, strikes, etc., when 

the individual is present but not working. If illness prevented the 

individual from leaving the country in sufficient time to qualify for 

the benefit, those days will not count. Also, any part of a day spent 

in the host country while in transit between two points outside the 

host country is not counted. If the individual is a resident of the 

host country for part of the taxable year concerned and a nonresident for the remainder of the year, the individual’s days of 

presence as a resident do not count for purposes of determining 

whether the 183-day period is exceeded. 

Conditions (b) and (c) are intended to ensure that a Contracting 

State will not be required to allow a deduction to the payor for 

compensation paid and at the same time to exempt the employee 

on the amount received. Accordingly, if a foreign person pays the 

salary of an employee who is employed in the host State, but a host 

State corporation or permanent establishment reimburses the 

payor with a payment that can be identified as a reimbursement, 

neither condition (b) nor (c), as the case may be, will be considered 

to have been fulfilled. 

The reference to remuneration ‘‘borne by’’ a permanent establishment is understood to encompass all expenses that economically 

are incurred and not merely expenses that are currently deductible 

for tax purposes. Accordingly, the expenses referred to include expenses that are capitalizable as well as those that are currently deductible. Further, salaries paid by residents that are exempt from 

income taxation may be considered to be borne by a permanent establishment notwithstanding the fact that the expenses will be neiVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00052 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
53 

ther deductible nor capitalizable since the payor is exempt from 

tax. 

Paragraph 3 

Paragraph 3 contains a special rule applicable to remuneration 

for services performed by a resident of a Contracting State as an 

employee aboard a ship or aircraft operated in international traffic. 

Such remuneration may be taxed only in the State of residence of 

the employee if the services are performed as a member of the regular complement of the ship or aircraft. The ‘‘regular complement’’ 

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

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

by the shipping company to serve on the ship throughout its voyage. The use of the term ‘‘regular complement’’ is intended to clarify that a person who exercises his employment as, for example, an 

insurance salesman while aboard a ship or aircraft is not covered 

by this paragraph. 

If a U.S. citizen who is resident in Malta performs services as an 

employee in the United States and meets the conditions of paragraph 2 for source country exemption, he nevertheless is taxable in 

the United States by virtue of the saving clause of paragraph 4 of 

Article 1 (General Scope), subject to the special foreign tax credit 

rule of paragraph 4 of Article 23 (Relief from Double Taxation). 

ARTICLE 15 (DIRECTORS’ FEES)

This Article provides that a Contracting State may tax the fees 

and other compensation paid by a company that is a resident of 

that State for services performed in that State by a resident of the 

other Contracting State in his capacity as a director of the company. This rule is an exception to the more general rules of Articles 

7 (Business Profits) and 14 (Income from Employment). Thus, for 

example, in determining whether a director’s fee paid to a non-employee director is subject to tax in the country of residence of the 

corporation, it is not relevant to establish whether the fee is attributable to a permanent establishment in that State. 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, if a U.S. citizen who is a resident of 

Malta is a director of a U.S. corporation, the United States may tax 

his full remuneration regardless of where he performs his services. 

ARTICLE 16 (ENTERTAINERS AND SPORTSMEN)

This Article deals with the taxation in a Contracting State of entertainers and sportsmen resident in the other Contracting State 

from the performance of their services as such. The Article applies 

both to the income of an entertainer or sportsman who performs 

services on his own behalf and one who performs services on behalf 

of another person, either as an employee of that person, or pursuant to any other arrangement. The rules of this Article take precedence, in some circumstances, over those of Articles 7 (Business 

Profits) and 14 (Income from Employment). 

This Article applies only with respect to the income of entertainers and sportsmen. Others involved in a performance or athletic event, such as producers, directors, technicians, managers, 

coaches, etc., remain subject to the provisions of Articles 7 and 14. 

54 

In addition, except as provided in paragraph 2, income earned by 

juridical persons is not covered by Article 16. 

Paragraph 1 

Paragraph 1 describes the circumstances in which a Contracting 

State may tax the performance income of an entertainer or sportsman who is a resident of the other Contracting State. Under the 

paragraph, income derived by an individual resident of a Contracting State from activities as an entertainer or sportsman exercised in the other Contracting State may be taxed in that other 

State if the amount of the gross receipts derived by the performer 

exceeds $20,000 (or its equivalent in Euros) for the taxable year. 

The $20,000 includes expenses reimbursed to the individual or 

borne on his behalf. If the gross receipts exceed $20,000, the full 

amount, not just the excess, may be taxed in the State of performance. 

The Convention introduces this monetary threshold to distinguish between two groups of entertainers and athletes—those who 

are paid relatively large sums of money for very short periods of 

service, and who would, therefore, normally be exempt from host 

country tax under the standard personal services income rules, and 

those who earn relatively modest amounts and are, therefore, not 

easily distinguishable from those who earn other types of personal 

service income. 

Tax may be imposed under paragraph 1 even if the performer 

would have been exempt from tax under Article 7 or 14. On the 

other hand, if the performer would be exempt from host-country 

tax under Article 16, but would be taxable under either Article 7 

or 14, tax may be imposed under either of those Articles. Thus, for 

example, if a performer derives remuneration from his activities in 

an independent capacity, and the performer does not have a permanent establishment in the host State, he may be taxed by the host 

State in accordance with Article 16 if his remuneration exceeds 

$20,000 annually, despite the fact that he generally would be exempt from host State taxation under Article 7. However, a performer who receives less than the $20,000 threshold amount and 

therefore is not taxable under Article 16 nevertheless may be subject to tax in the host country under Article 7 or 14 if the tests for 

host-country taxability under the relevant Article are met. For example, if an entertainer who is an independent contractor earns 

$14,000 of income in a State for the calendar year, but the income 

is attributable to his permanent establishment in the State of performance, that State may tax his income under Article 7. 

Since it frequently is not possible to know until year-end whether 

the income an entertainer or sportsman derived from performances 

in a Contracting State will exceed $20,000, nothing in the Convention precludes that Contracting State from withholding tax during 

the year and refunding it after the close of the year if the taxability 

threshold has not been met. 

As explained in paragraph 9 of the Commentary to Article 17 of 

the OECD Model, Article 16 of the Convention applies to all income 

connected with a performance by the entertainer, such as appearance fees, award or prize money, and a share of the gate receipts. 

Income derived from a Contracting State by a performer who is a 

55 

resident of the other Contracting State from other than actual performance, such as royalties from record sales and payments for 

product endorsements, is not covered by this Article, but by other 

articles of the Convention, such as Article 12 (Royalties) or Article 

7. For example, if an entertainer receives royalty income from the 

sale of live recordings, the royalty income would be subject to the 

provisions of Article 12, even if the performance was conducted in 

the source country, although the entertainer could be taxed in the 

source country with respect to income from the performance itself 

under Article 16 if the dollar threshold is exceeded. 

In determining whether income falls under Article 16 or another 

article, the controlling factor will be whether the income in question is predominantly attributable to the performance itself or to 

other activities or property rights. For instance, a fee paid to a performer for endorsement of a performance in which the performer 

will participate would be considered to be so closely associated with 

the performance itself that it normally would fall within Article 16. 

Similarly, a sponsorship fee paid by a business in return for the 

right to attach its name to the performance would be so closely associated with the performance that it would fall under Article 16 

as well. As indicated in paragraph 9 of the Commentary to Article 

17 of the OECD Model, however, a cancellation fee would not be 

considered to fall within Article 16 but would be dealt with under 

Article 7 or 14. 

As indicated in paragraph 4 of the Commentary to Article 17 of 

the OECD Model, where an individual fulfills a dual role as performer and non-performer (such as a player-coach or an actor-director), but his role in one of the two capacities is negligible, the predominant character of the individual’s activities should control the 

characterization of those activities. In other cases there should be 

an apportionment between the performance-related compensation 

and other compensation. 

Consistent with Article 14, Article 16 also applies regardless of 

the timing of actual payment for services. Thus, a bonus paid to 

a resident of a Contracting State with respect to a performance in 

the other Contracting State during a particular taxable year would 

be subject to Article 16 for that year even if it was paid after the 

close of the year. The determination as to whether the $20,000 

threshold has been exceeded is determined separately with respect 

to each year of payment. Accordingly, if an actor who is a resident 

of one Contracting State receives residual payments over time with 

respect to a movie that was filmed in the other Contracting State, 

the payments do not have to be aggregated from one year to another to determine whether the total payments have finally exceeded $20,000. Otherwise, residual payments received many years 

later could retroactively subject all earlier payments to tax by the 

other Contracting State. 

Paragraph 2 

Paragraph 2 is intended to address the potential for circumvention of the rule in paragraph 1 when a performer’s income does not 

accrue directly to the performer himself, but to another person. 

Foreign performers frequently perform in the United States as employees of, or under contract with, a company or other person. 

56 

The relationship may truly be one of employee and employer, 

with no circumvention of paragraph 1 either intended or realized. 

On the other hand, the ‘‘employer’’ may, for example, be a company 

established and owned by the performer, which is merely acting as 

the nominal income recipient in respect of the remuneration for the 

performance (a ‘‘star company’’). The performer may act as an ‘‘employee,’’ receive a modest salary, and arrange to receive the remainder of the income from his performance from the company in 

another form or at a later time. In such case, absent the provisions 

of paragraph 2, the income arguably could escape host-country tax 

because the company earns business profits but has no permanent 

establishment in that country. The performer may largely or entirely escape host-country tax by receiving only a small salary, perhaps small enough to place him below the dollar threshold in paragraph 1. The performer might arrange to receive further payments 

in a later year, when he is not subject to host-country tax, perhaps 

as dividends or liquidating distributions. 

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

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

Convention when there is a legitimate employee-employer relationship between the performer and the person providing his services. 

Under paragraph 2, when the income accrues to a person other 

than the performer, the income may be taxed in the Contracting 

State where the performer’s services are exercised, without regard 

to the provisions of the Convention concerning business profits (Article 7) or income from employment (Article 14), unless the contract 

pursuant to which the personal activities are performed allows the 

person other than the performer to designate the individual who is 

to perform the personal activities. This rule is based on the U.S. 

domestic law provision characterizing income from certain personal 

service contracts as foreign personal holding company income in 

the context of the foreign personal holding company provisions. See 

Code section 954(c)(1)(H). The premise of this rule is that, in a case 

where a performer is using another person in an attempt to circumvent the provisions of paragraph 1, the recipient of the services 

of the performer would contract with a person other than that performer (i.e., a company employing the performer) only if the recipient of the services were certain that the performer himself would 

perform the services. If instead the person is allowed to designate 

the individual who is to perform the services, then likely the person is a service company not formed to circumvent the provisions 

of paragraph 1. The following example illustrates the operation of 

this rule: 

Example. Company M, a resident of Malta, is engaged in the 

business of operating an orchestra. Company M enters into a contract with Company A pursuant to which Company M agrees to 

carry out two performances in the United States in consideration 

of which Company A will pay Company M $200,000. The contract 

designates two individuals, a conductor and a flautist, that must 

perform as part of the orchestra, and allows Company M to designate the other members of the orchestra. Because the contract 

does not give Company M any discretion to determine whether the 

conductor or the flautist perform personal services under the contract, the portion of the $200,000 which is attributable to the perVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00056 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
57 

sonal services of the conductor and the flautist may be taxed by the 

United States pursuant to paragraph 2. The remaining portion of 

the $200,000, which is attributable to the personal services of performers that Company M may designate, is not subject to tax by 

the United States pursuant to paragraph 2. 

In cases where paragraph 2 is applicable, the income of the ‘‘employer’’ may be subject to tax in the host Contracting State even 

if it has no permanent establishment in the host country. Taxation 

under paragraph 2 is on the person providing the services of the 

performer. This paragraph does not affect the rules of paragraph 

1, which apply to the performer himself. The income taxable by virtue of paragraph 2 is reduced to the extent of salary payments to 

the performer, which fall under paragraph 1. 

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

gross income in respect of the services of the performer. 

Pursuant to Article 1 (General Scope) the Convention only applies to persons who are residents of one of the Contracting States. 

Thus, income of a star company that is not a resident of one of the 

Contracting States would not be eligible for benefits of the Convention. 

Relationship to Other Articles 

This Article is subject to the provisions of the saving clause of 

paragraph 4 of Article 1 (General Scope). Thus, if an entertainer 

or a sportsman who is resident in Malta 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 to the special foreign tax credit provisions of paragraph 4 of Article 23 (Relief from Double Taxation)). In addition, 

benefits of this Article are subject to the provisions of Article 22 

(Limitation on Benefits). 

ARTICLE 17 (PENSIONS, SOCIAL SECURITY, ANNUITIES, ALIMONY, AND

CHILD SUPPORT)

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

Paragraph 1 

Paragraph 1 provides that distributions from pensions and other 

similar remuneration beneficially owned by a resident of a Contracting State in consideration of past employment are taxable only 

in the State of residence of the beneficiary. The term ‘‘pensions and 

other similar remuneration’’ includes both periodic and single sum 

payments. 

The phrase ‘‘pensions and other similar remuneration’’ is intended to encompass payments made by qualified private retirement plans. In the United States, the plans encompassed by Paragraph 1 include: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part 

of a simplified employee pension plan that satisfies section 408(k), 

individual retirement accounts and section 408(p) accounts), section 

58 

403(a) qualified annuity plans, and section 403(b) plans. Distributions from section 457 plans may also fall under Paragraph 1 if 

they are not paid with respect to government services covered by 

Article 19. The competent authorities may agree that distributions 

from other plans that generally meet similar criteria to those applicable to the listed plans also qualify for the benefits of Paragraph 

1. 

Pensions in respect of government services covered by Article 19 

are not covered by this paragraph. They are covered either by paragraph 2 of this Article, if they are in the form of social security 

benefits, or by paragraph 2 of Article 19 (Government Service). 

Thus, Article 19 generally covers section 457(g), 401(a), 403(a), and 

403(b) plans established for government employees, including the 

Thrift Savings Plan (section 7701(j)). 

Subparagraph (b) contains an exception to the State of residence’s right to tax pensions and other similar remuneration under 

subparagraph (a). Under subparagraph (b), the State of residence 

must exempt from tax any amount of such pensions or other similar remuneration that would be exempt from tax in the Contracting 

State in which the pension fund is established if the recipient were 

a resident of that State. Thus, for example, a distribution from a 

U.S. ‘‘Roth IRA’’ to a resident of Malta would be exempt from tax 

in Malta to the same extent the distribution would be exempt from 

tax in the United States if it were distributed to a U.S. resident. 

The same is true with respect to distributions from a traditional 

IRA to the extent that the distribution represents a return of nondeductible contributions. Similarly, if the distribution were not subject to tax when it was ‘‘rolled over’’ into another U.S. IRA (but not, 

for example, to a pension fund in the other Contracting State), then 

the distribution would be exempt from tax in Malta. 

Paragraph 2 

The treatment of social security benefits is dealt with in paragraph 2. This paragraph provides that, notwithstanding the provision of paragraph 1 under which private pensions are taxable exclusively in the State of residence of the beneficial owner, payments made by one of the Contracting States under the provisions 

of its social security or similar legislation to a resident of the other 

Contracting State or to a citizen of the United States will be taxable only in the Contracting State making the payment. The reference to U.S. citizens is necessary to ensure that a social security 

payment by Malta to a U.S. citizen who is not resident in the 

United States will not be taxable by the United States. 

This paragraph applies to social security beneficiaries whether 

they have contributed to the system as private sector or Government employees. The phrase ‘‘similar legislation’’ is intended to 

refer to United States tier 1 Railroad Retirement benefits. 

Paragraph 3 

Under paragraph 3, annuities that are derived and beneficially 

owned by a resident of a Contracting State are taxable only in that 

State. An annuity, as the term is used in this paragraph, means 

a stated sum paid periodically at stated times during a specified 

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59 

ment in return for adequate and full consideration (other than for 

services rendered). An annuity received in consideration for services rendered would be treated as either deferred compensation 

that is taxable in accordance with Article 14 (Income from Employment) or a pension that is subject to the rules of paragraph 1. 

Paragraphs 4 and 5 

Paragraphs 4 and 5 deal with alimony and child support payments. Both alimony, under paragraph 4, and child support payments, under paragraph 5, are defined as periodic payments made 

pursuant to a written separation agreement or a decree of divorce, 

separate maintenance, or compulsory support. Paragraph 4, however, deals only with payments of that type that are taxable to the 

payee. Under that paragraph, alimony paid by a resident of a Contracting State to a resident of the other Contracting State is taxable under the Convention only in the State of residence of the recipient. Paragraph 5 deals with those periodic payments that are 

for the support of a child and that are not covered by paragraph 

4. These types of payments by a resident of a Contracting State to 

a resident of the other Contracting State are taxable in neither 

Contracting State. 

Relationship to Other Articles 

Paragraphs 1 (a), 3 and 4 of Article 17 are subject to the saving 

clause of paragraph 4 of Article 1 (General Scope). Thus, a U.S. citizen who is resident in Malta and receives either a pension, annuity or alimony payment from the United States, may be subject to 

U.S. tax on the payment, notwithstanding the rules in those three 

paragraphs that give the State of residence of the recipient the exclusive taxing right. Paragraphs 1(b), 2 and 5 are excepted from 

the saving clause by virtue of subparagraph 5(a) of Article 1. Thus, 

the United States will not tax U.S. citizens and residents on the 

income described in those paragraphs even if such amounts otherwise would be subject to tax under U.S. law. 

ARTICLE 18 (PENSION FUNDS)

This Article provides that, if a resident of a Contracting State 

participates in a pension fund established in the other Contracting 

State, the State of residence will not tax the income of the pension 

fund with respect to that resident until a distribution is made from 

the pension fund. Thus, for example, if a U.S. citizen contributes 

to a U.S. qualified plan while working in the United States and 

then establishes residence in Malta, this Article prevents Malta 

from taxing currently the plan’s earnings and accretions with respect to that individual. When the resident receives a distribution 

from the pension fund, that distribution may be subject to tax in 

Malta, subject to paragraph 1 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support). 

Relationship to other Articles 

Article 18 is excepted from the saving clause of paragraph 4 of 

Article 1 by virtue of paragraph 5(a) of Article 1. Thus, the United 

States will allow U.S. citizens and residents the benefits of Article 

18. 

60 

ARTICLE 19 (GOVERNMENT SERVICE)

Paragraph 1 

Subparagraphs (a) and (b) of paragraph 1 deal with the taxation 

of government compensation (other than a pension addressed in 

paragraph 2). Subparagraph (a) provides that remuneration paid to 

any individual who is rendering services to a Contracting State, political subdivision or local authority is exempt from tax by the 

other State. Under subparagraph (b), such payments are, however, 

taxable exclusively in the other State (i.e., the host State) if the 

services are rendered in that other State and the individual is a 

resident of that State who is either a national of that State or a 

person who did not become resident of that State solely for purposes of rendering the services. The paragraph applies to anyone 

performing services for a government, whether as a government 

employee, an independent contractor, or an employee of an independent contractor. 

Paragraph 2 

Paragraph 2 deals with the taxation of pensions paid by, or out 

of funds created by, one of the States, or a political subdivision or 

a local authority thereof, to an individual in respect of services rendered to that State or subdivision or authority. Subparagraph (a) 

provides that such pensions are taxable only in that State. Subparagraph (b) provides an exception under which such pensions are 

taxable only in the other State if the individual is a resident of, 

and a national of, that other State. 

Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When benefits paid by a State in respect of services rendered to that State or a subdivision or authority are in the form 

of social security benefits, however, those payments are covered by 

paragraph 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support). As a general matter, the result will be 

the same whether Article 17 or 19 applies, since social security 

benefits are taxable exclusively by the source country and so are 

government pensions. The result will differ only when the payment 

is made to a citizen and resident of the other Contracting State, 

who is not also a citizen of the paying State. In such a case, social 

security benefits continue to be taxable at source while government 

pensions become taxable only in the residence country. 

Paragraph 3 

Paragraph 3 provides that the remuneration described in paragraph 1 will be subject to the rules of Articles 14 (Income from Employment), 15 (Directors’ Fees), 16 (Entertainers and Sportsmen) or 

17 (Pensions, Social Security, Annuities, Alimony, and Child Support) if the recipient of the income is employed by a business conducted by a government. 

Relationship to Other Articles 

Under subparagraph 5(b) of Article 1 (General Scope), the saving 

clause of paragraph 4 of Article 1 does not apply to the benefits 

conferred by one of the States under Article 19 if the recipient of 

61 

the benefits is neither a citizen of that State, nor a person who has 

been admitted for permanent residence there (i.e., in the United 

States, a ‘‘green card’’ holder). Thus, a resident of the United 

States who in the course of performing functions of a governmental 

nature becomes a resident of Malta (but not a permanent resident), 

would be entitled to the benefits of this Article. Similarly, an individual who receives a pension paid by the Government of Malta in 

respect of services rendered to the Government of Malta shall be 

taxable on this pension only in Malta unless the individual is a 

U.S. citizen or acquires a U.S. green card. 

ARTICLE 20 (STUDENTS AND TRAINEES)

This Article provides rules for host-country taxation of visiting 

students and business trainees. Persons who meet the tests of the 

Article will be exempt from tax in the State that they are visiting 

with respect to designated classes of income. Several conditions 

must be satisfied in order for an individual to be entitled to the 

benefits of this Article. 

First, the visitor must have been, either at the time of his arrival 

in the host State or immediately before, a resident of the other 

Contracting State. 

Second, the purpose of the visit must be the full-time education 

or training of the visitor. Thus, if the visitor comes principally to 

work in the host State but also is a part-time student, he would 

not be entitled to the benefits of this Article, even with respect to 

any payments he may receive from abroad for his maintenance or 

education, and regardless of whether or not he is in a degree program. Whether a student is to be considered full-time will be determined by the rules of the educational institution at which he is 

studying. 

The host-country exemption applies to payments received by the 

student or business trainee for the purpose of his maintenance, 

education or training that arise outside the host State. A payment 

will be considered to arise outside the host State if the payer is located outside the host State. Thus, if an employer from one of the 

Contracting States sends an employee to the other Contracting 

State for full-time training, the payments the trainee receives from 

abroad from his employer for his maintenance or training while he 

is present in the host State will be exempt from tax in the host 

State. Where appropriate, substance prevails over form in determining the identity of the payer. Thus, for example, payments 

made directly or indirectly by a U.S. person with whom the visitor 

is training, but which have been routed through a source outside 

the United States (e.g., a foreign subsidiary), are not treated as 

arising outside the United States for this purpose. 

The Article also provides a limited exemption for remuneration 

from personal services rendered in the host State with a view to 

supplementing the resources available to him for such purposes to 

the extent of $9,000 United States dollars (or its equivalent in 

Euros) per taxable year. The specified amount is intended to equalize the position of a U.S. resident who is entitled to the standard 

deduction and the personal exemption with that of a student who 

files as a nonresident alien and therefore is not. Accordingly, the 

competent authorities are instructed to adjust this amount every 

62 

five years, if necessary, to take into account changes in the amount 

of the U.S. standard deduction and personal exemption and in the 

Maltese personal tax rates. 

In the case of a business trainee, the benefits of the Article will 

extend only for a period of one year from the time that the visitor 

first arrives in the host country. If, however, a trainee remains in 

the host country for a second year, thus losing the benefits of the 

Article, he would not retroactively lose the benefits of the Article 

for the first year. The term ‘‘business trainee’’ is defined as a person who is in the country temporarily for the purpose of securing 

training that is necessary to qualify to pursue a profession or professional specialty. Moreover, the person must be employed or 

under contract with a resident of the other Contracting State and 

must be receiving the training from someone who is not related to 

its employer. Thus, a business trainee might include a lawyer employed by a law firm in one Contracting State who works for one 

year as a stagiaire in an unrelated law firm in the other Contracting State. However, the term would not include a manager 

who normally is employed by a parent company in one Contracting 

State who is sent to the other Contracting State to run a factory 

owned by a subsidiary of the parent company. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) 

does not apply to this Article with respect to an individual who is 

neither a citizen of the host State nor has been admitted for permanent residence there. The saving clause, however, does apply 

with respect to citizens and permanent residents of the host State. 

Thus, a U.S. citizen who is a resident of Malta and who visits the 

United States as a full-time student at an accredited university 

will not be exempt from U.S. tax on remittances from abroad that 

otherwise constitute U.S. taxable income. A person, however, who 

is not a U.S. citizen, and who visits the United States as a student 

and remains long enough to become a resident under U.S. law, but 

does not become a permanent resident (i.e., does not acquire a 

green card), will be entitled to the full benefits of the Article. 

ARTICLE 21 (OTHER INCOME)

Article 21 assigns taxing jurisdiction over income not dealt with 

in the other articles (Articles 6 through 20) of the Convention. In 

order for an item of income to be ‘‘dealt with’’ in another article it 

must be the type of income described in the article and, in most 

cases, it must have its source in a Contracting State. For example, 

all royalty income that arises in a Contracting State and that is 

beneficially owned by a resident of the other Contracting State is 

‘‘dealt with’’ in Article 12 (Royalties). However, profits derived in 

the conduct of a business are ‘‘dealt with’’ in Article 7 (Business 

Profits) whether or not they have their source in one of the Contracting States. 

Examples of items of income covered by Article 21 include income 

from gambling, punitive (but not compensatory) damages and covenants not to compete. The article would also apply to income from 

a variety of financial transactions, where such income does not 

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63 

ple, income from notional principal contracts and other derivatives 

would fall within Article 21 if derived by persons not engaged in 

the trade or business of dealing in such instruments, unless such 

instruments were being used to hedge risks arising in a trade or 

business. It would also apply to securities lending fees derived by 

an institutional investor. Further, in most cases guarantee fees 

paid within an intercompany group would be covered by Article 21, 

unless the guarantor were engaged in the business of providing 

such guarantees to unrelated parties. 

Article 21 also applies to items of income that are not dealt with 

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

a third State that is not attributable to a permanent establishment, therefore, is subject to Article 21. 

Distributions from partnerships are not generally dealt with 

under Article 21 because partnership distributions generally do not 

constitute income. Under the Code, partners include in income 

their distributive share of partnership income annually, and partnership distributions themselves generally do not give rise to income. This would also be the case under U.S. law with respect to 

distributions from trusts. Trust income and distributions that, 

under the Code, have the character of the associated distributable 

net income would generally be covered by another article of the 

Convention. See Code section 641 et seq. 

Paragraph 1 

The general rule of Article 21 is contained in paragraph 1. Items 

of income not dealt with in other articles and beneficially owned by 

a resident of a Contracting State will be taxable in the State of residence. This right of taxation applies whether or not the residence 

State exercises its right to tax the income covered by the Article. 

As discussed in greater detail below, however, where such income 

arises in the other Contracting State, paragraph 3 permits limited 

source-State taxation. 

The reference in this paragraph to ‘‘items of income beneficially 

owned by a resident of a Contracting State’’ rather than simply 

‘‘items of income of a resident of a Contracting State,’’ as in the 

OECD Model, is intended merely to make explicit the implicit understanding that the limits on source-State taxation provided by 

paragraphs 1 and 3 apply only when a resident of a Contracting 

State is the beneficial owner of the income. Thus, source taxation 

of income not dealt with in other articles of the Convention is not 

limited by paragraphs 1 and 3 if it is nominally paid to a resident 

of the other Contracting State, but is beneficially owned by a resident of a third State. However, income received by a nominee on 

behalf of a resident of that other State would be entitled to benefits. 

The term ‘‘beneficially owned’’ is not defined in the Convention, 

and is, therefore, defined as under the internal law of the State 

granting treaty benefits (i.e., the source State). The person who 

beneficially owns the income for purposes of Article 21 is the person to which the income is attributable for tax purposes under the 

laws of the source State. 

64 

Paragraph 2 

This paragraph provides an exception to the general rule of paragraph 1 for income that is attributable to a permanent establishment maintained in a Contracting State by a resident of the other 

Contracting State. The taxation of such income is governed by the 

provisions of Article 7 (Business Profits). Therefore, income arising 

outside the United States that is attributable to a permanent establishment maintained in the United States by a resident of 

Malta generally would be taxable by the United States under the 

provisions of Article 7. This would be true even if the income is 

sourced in a third State. 

Paragraph 3 

This paragraph provides for limited source-State taxation of income not dealt with in the foregoing Articles of the Convention. 

Such income of a resident of one of the Contracting States from 

sources in the other State may be taxed in the source State, but 

the rate may not exceed 10 percent of the amount of such items. 

Relationship to Other Articles 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States may tax the income 

of a resident of the other Contracting State that is not dealt with 

elsewhere in the Convention, if that resident is a citizen of the 

United States. The Article is also subject to the provisions of Article 22 (Limitation on Benefits). Thus, if a resident of the other Contracting State earns income that falls within the scope of paragraph 1 of Article 21, but that is taxable by the United States 

under U.S. law, the income would be exempt from U.S. tax under 

the provisions of Article 21 only if the resident satisfies one of the 

tests of Article 22 for entitlement to benefits. 

ARTICLE 22 (LIMITATION ON BENEFITS)

Article 22 contains anti-treaty-shopping provisions that are intended to prevent residents of third countries from benefiting from 

what is intended to be a reciprocal agreement between two countries. In general, the provision does not rely on a determination of 

purpose or intention but instead sets forth a series of objective 

tests. A resident of a Contracting State that satisfies one of the 

tests will receive benefits regardless of its motivations in choosing 

its particular business structure. However, the Exchange of Notes 

accompanying the Convention provides that a company resident in 

Malta that is an ‘‘international trading company,’’ as defined in article 2 of the Income Tax Act of Malta, shall be entitled to receive 

only the benefits of the Convention (subject to all applicable conditions or limitations) other than the benefits of Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 21 (Other Income) of the 

Convention. 

The structure of the Article is as follows: Paragraph 1 states the 

general rule that residents are entitled to benefits otherwise accorded to residents only to the extent provided in the Article. Paragraph 2 lists a series of attributes of a resident of a Contracting 

State, the presence of any one of which will entitle that person to 

65 

all the benefits of the Convention. Paragraph 3 provides a so-called 

‘‘derivative benefits’’ test under which certain categories of income 

may qualify for benefits. Paragraph 4 provides that, regardless of 

whether a person qualifies for benefits under paragraph 2, benefits 

may be granted to that person with regard to certain income 

earned in the conduct of an active trade or business. Paragraph 5 

provides special rules for so-called ‘‘triangular cases,’’ notwithstanding the other provisions of the Article. Paragraph 6 provides 

that benefits also may be granted if the competent authority of the 

State from which benefits are claimed determines that it is appropriate to provide benefits in that case. Paragraph 7 addresses the 

application of the Convention where a remittance system of taxation is used. Paragraph 8 defines certain terms used in the Article. 

Paragraph 1 

Paragraph 1 provides that, except as otherwise provided, a resident of a Contracting State will be entitled to all the benefits otherwise accorded to residents of a Contracting State under the Convention only to the extent provided in the Article. 

The benefits otherwise accorded to residents under the Convention include all limitations on source-based taxation under Articles 

6 through 21, the treaty-based relief from double taxation provided 

by Article 23 (Relief from Double Taxation), and the protection afforded to residents of a Contracting State under Article 24 (NonDiscrimination). Some provisions do not require that a person be 

a resident in order to enjoy the benefits of those provisions. Article 

25 (Mutual Agreement Procedure) is not limited to residents of the 

Contracting States, and Article 27 (Members of Diplomatic Missions and Consular Posts) applies to diplomatic agents or consular 

officials regardless of residence. Article 22 accordingly does not 

limit the availability of treaty benefits under these provisions. 

Article 22 and the anti-abuse provisions of domestic law complement each other, as Article 22 effectively determines whether an 

entity has a sufficient nexus to the Contracting State to be treated 

as a resident for treaty purposes, while domestic anti-abuse provisions (e.g., business purpose, substance-over-form, step transaction 

or conduit principles) determine whether a particular transaction 

should be recast in accordance with its substance. Thus, internal 

law principles of the source Contracting State may be applied to 

identify the beneficial owner of an item of income, and Article 22 

then will be applied to the beneficial owner to determine if that 

person is entitled to the benefits of the Convention with respect to 

such income. 

Paragraph 2 

Paragraph 2 has six subparagraphs, each of which describes a 

category of residents that are entitled to all benefits of the Convention. 

It is intended that the provisions of paragraph 2 will be self-executing. Unlike the provisions of paragraph 6, discussed below, 

claiming benefits under paragraph 2 does not require advance competent authority ruling or approval. The tax authorities may, of 

66 

course, on review, determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the benefits claimed. 

Individuals—Subparagraph 2(a) 

Subparagraph 2(a) provides that individual residents of a Contracting State will be entitled to all treaty benefits. If such an individual receives income as a nominee on behalf of a third country 

resident, benefits may be denied under the respective articles of 

the Convention by the requirement that the beneficial owner of the 

income be a resident of a Contracting State. 

Governments—Subparagraph 2(b) 

Subparagraph 2(b) provides that the Contracting States and any 

political subdivision or local authority thereof will be entitled to all 

benefits of the Convention. 

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

Subparagraph 2(c) applies to two categories of companies: publicly traded companies and subsidiaries of publicly traded companies. A company resident in a Contracting State is entitled to all 

the benefits of the Convention under subparagraph 2(c)(i) if (a) the 

principal class of its shares, and any disproportionate class of 

shares, is listed on a recognized stock exchange located in the company’s State of residence, (b) the principal class of its shares, and 

any disproportionate class of shares, regularly traded on one or 

more recognized stock exchanges in the company’s State of residence, (c) the principal class of its shares is primarily traded on 

one or more recognized stock exchanges located in company’s State 

of residence, and (d) and the company satisfies the base erosion 

test of subparagraph 2(f)(ii). 

The term ‘‘recognized stock exchange’’ is defined in subparagraph 

(a) of paragraph 8. It includes (i) the NASDAQ System and any 

stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934, (ii) the Malta Stock Exchange, and (iii) 

any other stock exchange agreed upon by the competent authorities 

of the Contracting States. 

If a company has only one class of shares, it is only necessary 

to consider whether the shares of that class meet the relevant trading requirements. If the company has more than one class of 

shares, it is necessary as an initial matter to determine which class 

or classes constitute the ‘‘principal class of shares.’’ The term ‘‘principal class of shares’’ is defined in subparagraph 8(b) to mean the 

ordinary or common shares of the company representing the majority of the aggregate voting power and value of the company. If the 

company does not have a class of ordinary or common shares representing the majority of the aggregate voting power and value of 

the company, then the ‘‘principal class of shares’’ is that class or 

any combination of classes of shares that represents, in the aggregate, a majority of the voting power and value of the company. Although in a particular case involving a company with several classes of shares it is conceivable that more than one group of classes 

could be identified that account for more than 50% of the shares, 

it is only necessary for one such group to satisfy the requirements 

67 

of this subparagraph in order for the company to be entitled to benefits. Benefits would not be denied to the company even if a second, 

non-qualifying, group of shares with more than half of the company’s voting power and value could be identified. 

A company whose principal class of shares is regularly traded on 

a recognized stock exchange will nevertheless not qualify for benefits under subparagraph 2(c)(i) if it has a disproportionate class of 

shares that is not regularly traded on a recognized stock exchange. 

The term ‘‘disproportionate class of shares’’ is defined in subparagraph 8(c). A company has a disproportionate class of shares if it 

has outstanding a class of shares which is subject to terms or other 

arrangements that entitle the holder to a larger portion of the company’s income, profit, or gain in the other Contracting State than 

that to which the holder would be entitled in the absence of such 

terms or arrangements. Thus, for example, a company resident in 

Malta meets the test of subparagraph 8(c) if it has outstanding a 

class of ‘‘tracking stock’’ that pays dividends based upon a formula 

that approximates the company’s return on its assets employed in 

the United States. 

The following example illustrates this result. 

Example. MCo is a corporation resident in Malta. MCo has two 

classes of shares: Common and Preferred. The Common shares are 

listed and regularly traded on the Malta Stock Exchange. The Preferred shares have no voting rights and are entitled to receive dividends equal in amount to interest payments that MCo receives 

from unrelated borrowers in the United States. The Preferred 

shares are owned entirely by a single investor that is a resident of 

a country with which the United States does not have a tax treaty. 

The Common shares account for more than 50 percent of the value 

of MCo and for 100 percent of the voting power. Because the owner 

of the Preferred shares is entitled to receive payments corresponding to the U.S. source interest income earned by MCo, the 

Preferred shares are a disproportionate class of shares. Because the 

Preferred shares are not regularly traded on a recognized stock exchange, MCo will not qualify for benefits under subparagraph 

2(c)(i). 

The term ‘‘regularly traded’’ is not defined in the Convention. In 

accordance with paragraph 2 of Article 3 (General Definitions), this 

term will be defined by reference to the domestic tax laws of the 

State from which treaty benefits are sought. In the case of the 

United States, this term is understood to have the meaning it has 

under Treas. Reg. section 1.884–5(d)(4)(i)(B), relating to the branch 

tax provisions of the Code. Under these regulations, a class of 

shares is considered to be ‘‘regularly traded’’ if two requirements 

are met: trades in the class of shares are made in more than de 

minimis quantities on at least 60 days during the taxable year, and 

the aggregate number of shares in the class traded during the year 

is at least 10 percent of the average number of shares outstanding 

during the year. Sections 1.884–5(d)(4)(i)(A), (ii) and (iii) will not be 

taken into account for purposes of defining the term ‘‘regularly 

traded’’ under the Convention. 

The regular trading requirement can be met by trading on any 

recognized exchange or exchanges located in either State. Trading 

on one or more recognized stock exchanges may be aggregated for 

68 

purposes of this requirement. Thus, a U.S. company could satisfy 

the regularly traded requirement through trading, in whole or in 

part, on a recognized stock exchange located in Malta. Authorized 

but unissued shares are not considered for purposes of this test. 

The term ‘‘primarily traded’’ is not defined in the Convention. In 

accordance with paragraph 2 of Article 3, this term will have the 

meaning it has under the laws of the State concerning the taxes 

to which the Convention applies, generally the source State. In the 

case of the United States, this term is understood to have the 

meaning it has under Treas. Reg. section 1.884–5(d)(3), relating to 

the branch tax provisions of the Code. Accordingly, stock of a corporation is ‘‘primarily traded’’ if the number of shares in the company’s principal class of shares that are traded during the taxable 

year on all recognized stock exchanges in the Contracting State of 

which the company is a resident exceeds the number of shares in 

the company’s principal class of shares that are traded during that 

year on established securities markets in any other single foreign 

country. 

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

A company resident in a Contracting State is entitled to all the 

benefits of the Convention under subparagraph 2(c)(ii) if five or 

fewer publicly traded companies described in subparagraph 2(c)(i) 

are the direct or indirect owners of at least 75 percent of each class 

of the company’s shares, and the company satisfies the base erosion 

test of subparagraph 2(f)(ii). If the publicly-traded companies are 

indirect owners, however, each of the intermediate companies must 

be a resident of the same Contracting State that is also entitled to 

benefits of the Convention under subparagraph 2(c)(ii). 

Thus, for example, a company that is a resident of Malta, all the 

shares of which are owned by another company that is a resident 

of Malta, would qualify for benefits under subparagraph 2(c) if the 

principal class of shares (and any disproportionate classes of 

shares) of the parent company are regularly and primarily traded 

on the Malta Stock Exchange, and it satisfies the base erosion test 

of subparagraph 2(f)(ii). However, such a subsidiary would not 

qualify for benefits under clause (ii) if the publicly traded parent 

company were a resident of a third state. Furthermore, if a parent 

company in Malta indirectly owned the bottom-tier company 

through a chain of subsidiaries, each such subsidiary in the chain, 

as an intermediate owner, must be a resident of Malta entitled to 

the benefits of the convention under subparagraph 2(c)(ii) in order 

for the subsidiary to meet the test in clause (ii). 

Tax Exempt Organizations—Subparagraph 2(d) 

Subparagraph 2(d) provides rules by which the tax exempt organizations described in subparagraph 2(b) of Article 4 (Resident) will 

be entitled to all the benefits of the Convention. Entities qualifying 

under this rule generally are those that are exempt from tax in 

their State of residence and that are organized and operated exclusively to fulfill religious, charitable, scientific, artistic, cultural, or 

educational purposes. 

69 

Pension Funds—Subparagraph 2(e) 

A pension fund will qualify for benefits under subparagraph 2(e) 

if more than 75 percent of the beneficiaries, members or participants of the pension fund are individuals resident in either Contracting State. For purposes of this provision, the term ‘‘beneficiaries’’ should be understood to refer to the persons receiving 

benefits from the organization. 

Ownership/Base Erosion—Subparagraph 2(f) 

Subparagraph 2(f) provides an additional method to qualify for 

treaty benefits that applies to any form of legal entity that is a 

resident of a Contracting State. The test provided in subparagraph 

(e), the so-called ownership and base erosion test, is a two-part 

test. Both prongs of the test must be satisfied for the resident to 

be entitled to treaty benefits under subparagraph 2(e). 

The ownership prong of the test, under clause (i), requires that 

75 percent or more of each class of shares or other beneficial interests in the person is owned, directly or indirectly, on at least half 

the days of the person’s taxable year by persons who are residents 

of the Contracting State of which that person is a resident and that 

are themselves entitled to treaty benefits under subparagraphs 

2(a), 2(b), 2(c)(i), 2(d), or 2(e). In the case of indirect owners, however, each of the intermediate owners must be a qualified person 

that is also a resident of that Contracting State. 

Trusts may be entitled to benefits under this provision if they 

are treated as residents under Article 4 (Residence) and they otherwise satisfy the requirements of this subparagraph. For purposes 

of this subparagraph, the beneficial interests in a trust will be considered to be owned by its beneficiaries in proportion to each beneficiary’s actuarial interest in the trust. The interest of a remainder 

beneficiary will be equal to 100 percent less the aggregate percentages held by income beneficiaries. A beneficiary’s interest in a trust 

will not be considered to be owned by a person entitled to benefits 

under subparagraphs 2(a), 2(b), 2(c)(i), 2(d), or 2(e) if it is not possible to determine the beneficiary’s actuarial interest. Consequently, if it is not possible to determine the actuarial interest 

of the beneficiaries in a trust, the ownership test under clause i) 

cannot be satisfied, unless all possible beneficiaries are persons entitled to benefits under subparagraphs 2(a), 2(b), 2(c)(i), 2(d), or 

2(e). 

The base erosion prong of clause (ii) of subparagraph (f) is satisfied with respect to a person if less than 25 percent of the person’s 

gross income for the taxable year, as determined under the tax law 

in the person’s State of residence, is paid or accrued, directly or indirectly, to persons who are not residents of either Contracting 

State entitled to benefits under subparagraphs 2(a), 2(b), 2(c)(i), 

2(d), or 2(e), other than in the form of arm’s-length payments in 

the ordinary course of business for services or tangible property. 

Paragraph 3 

Paragraph 3 sets forth a derivative benefits test that is potentially applicable to all treaty benefits, although the test is applied 

to individual items of income. In general, a derivative benefits test 

entitles a company that is a resident of a Contracting State to treaVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
70 

ty benefits if the owner of the company would have been entitled 

to the same benefit had the income in question flowed directly to 

that owner. To qualify under this paragraph, the company must 

meet an ownership test and a base erosion test. 

Subparagraph (a) sets forth the ownership test. Under this test 

at least 95 percent of each class of shares of the company must be 

owned, directly or indirectly, by seven or fewer persons who are 

equivalent beneficiaries. The term ‘‘equivalent beneficiary’’ is defined in subparagraph 8(d). This definition may be met in two alternative ways, the first of which has two requirements. 

Under the first alternative, a person may be an equivalent beneficiary because it is entitled to equivalent benefits under a treaty 

between the country of source and the country in which the person 

is a resident. This alternative has two requirements. 

The first requirement is that the person must be a resident of 

a member state of the European Union, or of a European Economic 

Area state, or of Australia, or of a party to the North American 

Free Trade Agreement (collectively, ‘‘qualifying States’’). 

The second requirement of the definition of ‘‘equivalent beneficiary’’ is that the person must be entitled to equivalent benefits 

under an applicable treaty. To satisfy the second requirement, the 

person must be entitled to all the benefits of a comprehensive treaty between the Contracting State from which benefits of the Convention are claimed and a qualifying State under provisions that 

are analogous to the rules in subparagraphs 2(a), 2(b), 2(c)(i), 2(d), 

or 2(e) of this Article. If the treaty in question does not have a comprehensive limitation on benefits article, this requirement is met 

only if the person would be entitled to treaty benefits under the 

tests in subparagraphs 2(a), 2(b), 2(c)(i), 2(d), or 2(e) of this Article 

if the person were a resident of one of the Contracting States. 

In order to satisfy the second requirement necessary to qualify 

as an ‘‘equivalent beneficiary’’ under subparagraph 8(d)(i)(B) with 

respect to dividends, interest, royalties or branch tax, the person 

must be entitled to a rate of tax that is at least as low as the tax 

rate that would apply under the Convention to such income. Thus, 

the rates to be compared are: (1) the rate of tax that the source 

State would have imposed if a qualified resident of the other Contracting State was the beneficial owner of the income; and (2) the 

rate of tax that the source State would have imposed if the third 

State resident received the income directly from the source State. 

For example, USCo is a wholly owned subsidiary of MCo, a company resident in Malta. MCo is wholly owned by ICo, a corporation 

resident in Italy. Assuming MCo satisfied the requirements of 

paragraph 2 of Article 10 (Dividends), MCo would be eligible for a 

dividend withholding tax rate of 5 percent. The dividend withholding tax rate in the treaty between the United States and Italy 

is 5 percent. Thus, if ICo received the dividend directly from USCo, 

ICo would be subject to a 5 percent rate of withholding tax on the 

dividend. Because ICo would be entitled to a rate of withholding 

tax that is at least as low as the rate that would apply under the 

Convention to such income, ICo is treated as a resident of a member state of the European Union or a party to the North American 

Free Trade Agreement with respect to the withholding tax on dividends. 

71 

Subparagraph 8(e) provides a special rule to take account of the 

fact that withholding taxes on many inter-company dividends, interest and royalties are exempt within the European Union by reason of various EU directives, rather than by tax treaty. If a U.S. 

company receives such payments from a Maltese company, and 

that U.S. company is owned by a company resident in a member 

state of the European Union that would have qualified for an exemption from withholding tax if it had received the income directly, 

the parent company will be treated as an equivalent beneficiary. 

This rule is necessary because many European Union member 

countries have not re-negotiated their tax treaties to reflect the exemptions available under the directives. 

The requirement that a person be entitled to ‘‘all the benefits’’ of 

a comprehensive tax treaty eliminates those persons that qualify 

for benefits with respect to only certain types of income. Accordingly, the fact that a French parent of a Maltese company is engaged in the active conduct of a trade or business in France and 

therefore would be entitled to the benefits of the U.S.-France treaty 

if it received dividends directly from a U.S. subsidiary of the Maltese company is not sufficient for purposes of this paragraph. Further, the French company cannot be an equivalent beneficiary if it 

itself qualifies for benefits only with respect to certain income as 

a result of a ‘‘derivative benefits’’ provision in the U.S.-France treaty. However, it would be possible to look through the French company to its parent company to determine whether the parent company is an equivalent beneficiary. 

The second alternative for satisfying the ‘‘equivalent beneficiary’’ 

test is available only to residents of one of the two Contracting 

States. U.S. or Maltese residents who are eligible for treaty benefits by reason of subparagraphs 2(a), 2(b), 2(c)(i), 2(d), or 2(e) are 

equivalent beneficiaries for purposes of the relevant tests in this 

Article. Thus, a Maltese individual will be an equivalent beneficiary without regard to whether the individual would have been 

entitled to receive the same benefits if it received the income directly. A resident of a third country cannot qualify for treaty benefits under these provisions by reason of those paragraphs or any 

other rule of the treaty, and therefore does not qualify as an equivalent beneficiary under this alternative. Thus, a resident of a third 

country can be an equivalent beneficiary only if it would have been 

entitled to equivalent benefits had it received the income directly. 

The second alternative was included in order to clarify that ownership by certain residents of a Contracting State would not disqualify a U.S. or Maltese company under this paragraph. Thus, for 

example, if 90 percent of a Maltese company is owned by five companies that are resident in member states of the European Union 

who satisfy the requirements of subparagraph 8(d)(i), and 10 percent of the Maltese company is owned by a U.S. or Maltese individual, then the Maltese company still can satisfy the requirements 

of subparagraph 3(a). 

Subparagraph 3(b) sets forth the base erosion test. A company 

meets this base erosion test if less than 25 percent of its gross income (as determined in the company’s State of residence) for the 

taxable period is paid or accrued, directly or indirectly, to a person 

or persons who are not equivalent beneficiaries. These amounts do 

72 

not include arm’s-length payments in the ordinary course of business for services or tangible property. This test is the same as the 

base erosion test in subparagraph 2(f)(ii), except that the test in 

paragraph 3(b) focuses on base-eroding payments to persons who 

are not equivalent beneficiaries. 

Paragraph 4 

Paragraph 4 sets forth an alternative test under which a resident 

of a Contracting State may receive treaty benefits with respect to 

certain items of income that are connected to an active trade or 

business conducted in its State of residence. A resident of a Contracting State may qualify for benefits under paragraph 4 whether 

or not it also qualifies under paragraph 2 or 3. 

Subparagraph 4(a) sets forth the general rule that a resident of 

a Contracting State engaged in the active conduct of a trade or 

business in that State may obtain the benefits of the Convention 

with respect to an item of income derived in the other Contracting 

State. The item of income, however, must be derived in connection 

with or incidental to that trade or business. In addition, the resident must satisfy the base erosion test of clause (ii) of subparagraph 2(f). 

The term ‘‘trade or business’’ is not defined in the Convention. 

Pursuant to paragraph 2 of Article 3 (General Definitions), when 

determining whether a resident of Malta is entitled to the benefits 

of the Convention under paragraph 4 of this Article with respect 

to an item of income derived from sources within the United 

States, the United States will ascribe to this term the meaning 

that it has under the law of the United States. Accordingly, the 

U.S. competent authority will refer to the regulations issued under 

section 367(a) for the definition of the term ‘‘trade or business.’’ In 

general, therefore, a trade or business will be considered to be a 

specific unified group of activities that constitute or could constitute an independent economic enterprise carried on for profit. 

Furthermore, a corporation generally will be considered to carry on 

a trade or business only if the officers and employees of the corporation conduct substantial managerial and operational activities. 

The business of making or managing investments for the resident’s own account will be considered to be a trade or business only 

when part of banking or insurance activities conducted by a bank 

or an insurance company. Such activities conducted by a person 

other than a bank or insurance company will not be considered to 

be the conduct of an active trade or business, nor would they be 

considered to be the conduct of an active trade or business if conducted by a bank or insurance company but not as part of the company’s banking or insurance business. Because a headquarters operation is in the business of managing investments, a company that 

functions solely as a headquarters company will not be considered 

to be engaged in an active trade or business for purposes of paragraph 4. 

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

of business that ‘‘forms a part of or is ‘‘complementary’’ to the trade 

or business conducted in the State of residence by the income recipient. 

73 

A business activity generally will be considered to form part of 

a business activity conducted in the State of source if the two activities involve the design, manufacture or sale of the same products or type of products, or the provision of similar services. The 

line of business in the State of residence may be upstream, downstream, or parallel to the activity conducted in the State of source. 

Thus, the line of business may provide inputs for a manufacturing 

process that occurs in the State of source, may sell the output of 

that manufacturing process, or simply may sell the same sorts of 

products that are being sold by the trade or business carried on in 

the State of source. 

Example 1. USCo is a corporation resident in the United States. 

USCo is engaged in an active manufacturing business in the 

United States. USCo owns 100 percent of the shares of MCo, a corporation resident in Malta. MCo distributes USCo products in 

Malta. Since the business activities conducted by the two corporations involve the same products, MCo’s distribution business is considered to form a part of USCo’s manufacturing business. 

Example 2. The facts are the same as in Example 1, except that 

USCo does not manufacture. Rather, USCo operates a large research and development facility in the United States that licenses 

intellectual property to affiliates worldwide, including MCo. MCo 

and other USCo affiliates then manufacture and market the USCodesigned products in their respective markets. Since the activities 

conducted by MCo and USCo involve the same product lines, these 

activities are considered to form a part of the same trade or business. 

For two activities to be considered to be ‘‘complementary,’’ the activities need not relate to the same types of products or services, 

but they should be part of the same overall industry and be related 

in the sense that the success or failure of one activity will tend to 

result in success or failure for the other. Where more than one 

trade or business is conducted in the State of source and only one 

of the trades or businesses forms a part of or is complementary to 

a trade or business conducted in the State of residence, it is necessary to identify the trade or business to which an item of income 

is attributable. Royalties generally will be considered to be derived 

in connection with the trade or business to which the underlying 

intangible property is attributable. Dividends will be deemed to be 

derived first out of earnings and profits of the treaty-benefited 

trade or business, and then out of other earnings and profits. Interest income may be allocated under any reasonable method consistently applied. A method that conforms to U.S. principles for expense allocation will be considered a reasonable method. 

Example 3. Americair is a corporation resident in the United 

States that operates an international airline. MSub is a whollyowned subsidiary of Americair resident in Malta. MSub operates a 

chain of hotels in Malta that are located near airports served by 

Americair flights. Americair frequently sells tour packages that include air travel to Malta and lodging at MSub hotels. Although 

both companies are engaged in the active conduct of a trade or 

business, the businesses of operating a chain of hotels and operating an airline are distinct trades or businesses. Therefore MSub’s 

business does not form a part of Americair’s business. However, 

74 

MSub’s business is considered to be complementary to Americair’s 

business because they are part of the same overall industry (travel) 

and the links between their operations tend to make them interdependent. 

Example 4. The facts are the same as in Example 3, except that 

MSub owns an office building in Malta instead of a hotel chain. No 

part of Americair’s business is conducted through the office building. MSub’s business is not considered to form a part of or to be 

complementary to Americair’s business. They are engaged in distinct trades or businesses in separate industries, and there is no 

economic dependence between the two operations. 

Example 5. USFlower is a corporation resident in the United 

States. USFlower produces and sells flowers in the United States 

and other countries. USFlower owns all the shares of MHolding, a 

corporation resident in Malta. MHolding is a holding company that 

is not engaged in a trade or business. MHolding owns all the 

shares of three corporations that are resident in Malta: MFlower, 

MLawn, and MFish. MFlower distributes USFlower flowers under 

the USFlower trademark in Malta. MLawn markets a line of lawn 

care products in Malta under the USFlower trademark. In addition 

to being sold under the same trademark, MLawn and MFlower 

products are sold in the same stores and sales of each company’s 

products tend to generate increased sales of the other’s products. 

MFish imports fish from the United States and distributes it to fish 

wholesalers in Malta. For purposes of paragraph 4, the business of 

MFlower forms a part of the business of USFlower, the business of 

MLawn is complementary to the business of USFlower, and the 

business of MFish is neither part of nor complementary to that of 

USFlower. 

An item of income derived from the State of source is ‘‘incidental 

to’’ the trade or business carried on in the State of residence if production of the item facilitates the conduct of the trade or business 

in the State of residence. An example of incidental income is the 

temporary investment of working capital of a person in the State 

of residence in securities issued by persons in the State of source. 

Subparagraph 4(b) states a further condition to the general rule 

in clause (i) of subparagraph (a) in cases where the trade or business generating the item of income in question is carried on either 

by the person deriving the income or by any associated enterprises. 

Subparagraph 4(b) states that the trade or business carried on in 

the State of residence, under these circumstances, must be substantial in relation to the activity in the State of source. The substantiality requirement is intended to prevent a narrow case of 

treaty-shopping abuses in which a company attempts to qualify for 

benefits by engaging in de minimis connected business activities in 

the treaty country in which it is resident (i.e., activities that have 

little economic cost or effect with respect to the company business 

as a whole). 

A trade or business will be deemed substantial if, for each of the 

three preceding taxable years, the asset value, the gross income, 

and the payroll expense that are related to the trade or business 

in the first-mentioned Contracting State each equals at least 10 

percent of the resident’s (and any related parties’) proportionate 

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75 

tively, related to the activity that generated the income in the 

other Contracting State, and the average of the three ratios in each 

such year exceeds 15 percent. 

The determination in subparagraph 4(b) is made separately for 

each item of income derived from the State of source. It therefore 

is possible that a person would be entitled to the benefits of the 

Convention with respect to one item of income but not with respect 

to another. If a resident of a Contracting State is entitled to treaty 

benefits with respect to a particular item of income under paragraph 4, the resident is entitled to all benefits of the Convention 

insofar as they affect the taxation of that item of income in the 

State of source. 

The application of the substantiality requirement only to income 

from related parties focuses only on potential abuse cases, and does 

not hamper certain other kinds of non-abusive activities, even 

though the income recipient resident in a Contracting State may be 

very small in relation to the entity generating income in the other 

Contracting State. For example, if a small U.S. research firm develops a process that it licenses to a very large, unrelated, pharmaceutical manufacturer in Malta, the size of the U.S. research firm 

would not have to be tested against the size of the manufacturer. 

Similarly, a small U.S. bank that makes a loan to a very large unrelated company operating a business in Malta would not have to 

pass a substantiality test to receive treaty benefits under Paragraph 4. 

Subparagraph 4(c) provides special attribution rules for purposes 

of applying the substantive rules of subparagraphs 4(a) and 4(b). 

Thus, these rules apply for purposes of determining whether a person meets the requirement in subparagraph 4(a)(i) that it be engaged in the active conduct of a trade or business and that the item 

of income is derived in connection with that active trade or business, and for making the comparison required by the ‘‘substantiality’’ requirement in subparagraph 4(b). Subparagraph 4(c) attributes to a person activities conducted by persons ‘‘connected’’ to 

such person. A person (‘‘X’’) is connected to another person (‘‘Y’’) if 

X possesses 50 percent or more of the beneficial interest in Y (or 

if Y possesses 50 percent or more of the beneficial interest in X). 

For this purpose, X is connected to a company if X owns shares 

representing fifty percent or more of the aggregate voting power 

and value of the company or fifty percent or more of the beneficial 

equity interest in the company. X also is connected to Y if a third 

person possesses fifty percent or more of the beneficial interest in 

both X and Y. For this purpose, if X or Y is a company, the threshold relationship with respect to such company or companies is fifty 

percent or more of the aggregate voting power and value or fifty 

percent or more of the beneficial equity interest. Finally, X is connected to Y if, based upon all the facts and circumstances, X controls Y, Y controls X, or X and Y are controlled by the same person 

or persons. 

Paragraph 5 

Paragraph 5 deals with the treatment of income in the context 

of a so-called ‘‘triangular case.’’ 

76 

An example of a triangular case would be a structure under 

which a resident of Malta earns interest income from the United 

States. The resident of Malta, who is assumed to qualify for benefits under one or more of the provisions of this Article, sets up a 

permanent establishment in a third jurisdiction that imposes only 

a low rate of tax on the income of the permanent establishment. 

The Maltese resident lends funds into the United States through 

the permanent establishment. The permanent establishment, despite its third-jurisdiction location, is an integral part of a Maltese 

resident. Therefore the income that it earns on those loans, absent 

the provisions of paragraph 5, is entitled to a reduced rate of withholding tax under the Convention. Under a current Maltese income 

tax treaty with the host jurisdiction of the permanent establishment, the income of the permanent establishment is exempt from 

Maltese tax (alternatively, Malta may choose to exempt the income 

of the permanent establishment from Maltese income tax by statute). Thus, the interest income is exempt from U.S. tax, is subject 

to little tax in the host jurisdiction of the permanent establishment, 

and is exempt from Maltese tax. 

Paragraph 5 applies reciprocally. However, the United States 

does not exempt the profits of a third-jurisdiction permanent establishment of a U.S. resident from U.S. tax, either by statute or by 

treaty. 

Paragraph 5 provides that the tax benefits that would otherwise 

apply under the Convention will not apply to any item of income 

if the combined tax actually paid in the residence State and the 

third state is less than 60 percent of the tax that would have been 

payable in the residence State if the income were earned in that 

State by the enterprise and were not attributable to the permanent 

establishment in the third state. In the case of dividends, interest 

and royalties to which this paragraph applies, the withholding tax 

rates under the Convention are replaced with a 15 percent withholding tax. Any other income to which the provisions of paragraph 

5 apply is subject to tax under the domestic law of the source 

State, notwithstanding any other provisions of the Convention. 

In general, the principles employed under Code section 954(b)(4) 

will be employed to determine whether the profits are subject to an 

effective rate of taxation that is above the specified threshold. 

Paragraph 6 

Paragraph 6 provides that a resident of one of the States that is 

not entitled to the benefits of the Convention as a result of paragraphs 1 through 5 still may be granted benefits under the Convention at the discretion of the competent authority of the State from 

which benefits are claimed. 

The competent authority’s discretion is quite broad. It may grant 

all of the benefits of the Convention to the taxpayer making the request, or it may grant only certain benefits. For instance, it may 

grant benefits only with respect to a particular item of income in 

a manner similar to paragraph 4. Further, the competent authority 

may establish conditions, such as setting time limits on the duration of any relief granted. 

For purposes of implementing paragraph 6, a taxpayer will be 

permitted to present his case to the relevant competent authority 

77 

for an advance determination based on the facts. In these circumstances, it is also expected that, if the competent authority determines that benefits are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty provision or the establishment of the structure in question, whichever 

is later. 

Finally, there may be cases in which a resident of a Contracting 

State may apply for discretionary relief to the competent authority 

of his State of residence. This would arise, for example, if the benefit it is claiming is provided by the residence country, and not by 

the source country. So, for example, if a company that is a resident 

of the United States would like to claim the benefit of the resourcing rule of paragraph 3 of Article 23, but it does not meet any 

of the objective tests of paragraphs 2 through 4, it may apply to 

the U.S. competent authority for discretionary relief. 

Paragraph 7 

Paragraph 7 is included in this Article because Malta continues 

to maintain a remittance system of taxation for individuals who are 

resident but not domiciled in Malta. Such persons are subject to 

tax in Malta on non-Maltese source income only to the extent that 

the income or gains are remitted to Malta. Under paragraph 7, 

such persons are entitled to the benefits of the Convention in order 

to reduce or eliminate tax only to the extent that the relevant income is remitted to or received in Malta. For example, if a Maltese 

resident who is not domiciled in Malta maintains a brokerage account in a third country into which is paid $100 in U.S.-source dividend income, the U.S. may impose withholding tax at the statutory 

rate of 30 percent because the dividend income will not be taxed 

in Malta as it has not been remitted to Malta. If the dividend income instead is paid into a brokerage account in Malta, the Maltese resident will be subject to tax in Malta and the United States 

will reduce the rate of withholding tax to 15 percent. 

Paragraph 8 

Paragraph 5 defines several key terms for purposes of Article 22. 

Each of the defined terms is discussed above in the context in 

which it is used. 

ARTICLE 23 (RELIEF FROM DOUBLE TAXATION)

This Article describes the manner in which each Contracting 

State undertakes to relieve double taxation. The United States 

uses the foreign tax credit method under its internal law, and by 

treaty. 

Paragraph 1 

The United States agrees, in paragraph 1, to allow to its citizens 

and residents a credit against U.S. tax for income taxes paid or accrued to Malta. Paragraph 1 also provides that Malta’s covered 

taxes are income taxes for U.S. purposes. This provision is based 

on the Treasury Department’s review of Malta’s laws. 

Subparagraph 1(b) provides for a deemed-paid credit, consistent 

with section 902 of the Code, to a U.S. corporation in respect of 

dividends received from a corporation resident in Malta of which 

78 

the U.S. corporation owns at least 10 percent of the voting stock. 

This credit is for the tax paid by the corporation to Malta on the 

profits out of which the dividends are considered paid. 

The credits allowed under paragraph 1 are allowed in accordance 

with the provisions and subject to the limitations of U.S. law, as 

that law may be amended over time, so long as the general principle of the Article, that is, the allowance of a credit, is retained. 

Thus, although the Convention provides for a foreign tax credit, the 

terms of the credit are determined by the provisions, at the time 

a credit is given, of the U.S. statutory credit. 

Therefore, the U.S. credit under the Convention is subject to the 

various limitations of U.S. law (see, e.g., Code sections 901-908). 

For example, the credit against U.S. tax generally is limited to the 

amount of U.S. tax due with respect to net foreign source income 

within the relevant foreign tax credit limitation category (see Code 

section 904(a) and (d)), and the dollar amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g., 

Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits and other inter-year adjustments. 

There is a typographical error in the flush language following 

paragraph subparagraph 1(b), which describes the taxes that will 

be considered income taxes for purposes of paragraph 1. 

The provision as drafted refers to subparagraph 3(a) of Article 2 

(Taxes Covered), which describes the U.S. taxes covered by the 

Convention. It should refer instead to subparagraph 3(b). 

Paragraph 2 

Paragraph 2 provides that Malta will provide relief from double 

taxation through the credit method. Malta agrees in subparagraph 

2(a), in accordance with and subject to the provisions of the law of 

Malta, to allow a credit against Maltese tax for income taxes payable on U.S.-source income. 

Subparagraph 2(b) applies where a Maltese company owns at 

least 10 percent of the voting stock of a U.S. company from which 

the Maltese company receives dividends that are included in a 

Malta assessment in accordance with the Convention. In such a 

case, the income tax paid or accrued to the United States by or on 

behalf of the payer with respect to the profits out of which the dividends are paid shall, if those profits are included in a Malta assessment, be allowed as a credit against the relative Malta tax payable 

thereon. 

Paragraph 3 

Paragraph 3 provides a re-sourcing rule for gross income covered 

by paragraph 1. Paragraph 3 is intended to ensure that a U.S. resident can obtain an appropriate amount of U.S. foreign tax credit 

for income taxes paid to Malta when the Convention assigns to 

Malta primary taxing rights over an item of gross income. 

Accordingly, if the Convention allows Malta to tax an item of 

gross income (as defined under U.S. law) derived by a resident of 

the United States, the United States will treat that item of gross 

income as gross income from sources within Malta for U.S. foreign 

tax credit purposes. In the case of a U.S.-owned foreign corporation, however, section 904(g)(10) may apply for purposes of deterVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
79 

mining the U.S. foreign tax credit with respect to income subject 

to this re-sourcing rule. Section 904(g)(10) generally applies the foreign tax credit limitation separately to re-sourced income. Furthermore, the paragraph 3 re-sourcing rule applies to gross income, not 

net income. Accordingly, U.S. expense allocation and apportionment rules, see, e.g., Treas. Reg. section 1.861–9, continue to apply 

to income resourced under paragraph 3. 

Paragraph 4 

Paragraph 4 provides special rules for the tax treatment in both 

States of certain types of income derived from U.S. sources by U.S. 

citizens who are residents of Malta. Since U.S. citizens, regardless 

of residence, are subject to United States tax at ordinary progressive rates on their worldwide income, the U.S. tax on the U.S. 

source income of a U.S. citizen resident in Malta may exceed the 

U.S. tax that may be imposed under the Convention on an item of 

U.S. source income derived by a resident of Malta who is not a U.S. 

citizen. The provisions of paragraph 4 ensure that Malta does not 

bear the cost of U.S. taxation of its citizens who are residents of 

Malta. 

Subparagraph 4(a) provides, with respect to items of income from 

sources within the United States, special credit rules for Malta. 

These rules apply to items of U.S.-source income that would be either exempt from U.S. tax or subject to reduced rates of U.S. tax 

under the provisions of the Convention if they had been received 

by a resident of Malta who is not a U.S. citizen. The tax credit allowed under paragraph 4 with respect to such items need not exceed the U.S. tax that may be imposed under the Convention, other 

than tax imposed solely by reason of the U.S. citizenship of the taxpayer under the provisions of the saving clause of paragraph 4 of 

Article 1 (General Scope). 

For example, if a U.S. citizen resident in Malta receives a payment of royalties from sources within the United States, the foreign 

tax credit granted by Malta would be limited to 10 percent of the 

gross amount of the royalties—the U.S. tax that may be imposed 

under paragraph 2 of Article 12 (Royalties)—even if the shareholder is subject to U.S. net income tax because of his U.S. citizenship. 

Subparagraph 4(b) eliminates the potential for double taxation 

that can arise because subparagraph 4(a) provides that Malta need 

not provide full relief for the U.S. tax imposed on its citizens resident in Malta. Subparagraph 4(b) provides that the United States 

will credit the income tax paid or accrued to Malta, after the application of subparagraph 4(a). It further provides that in allowing 

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

amount that is taken into account in Malta in applying subparagraph 4(a). 

Since the income described in subparagraph 4(a) generally will 

be U.S. source income, special rules are required to re-source some 

of the income to Malta in order for the United States to be able 

to credit the tax paid to Malta. This re-sourcing is provided for in 

subparagraph 4(c), which deems the items of income referred to in 

subparagraph 4(a) to be from foreign sources to the extent necessary to avoid double taxation under paragraph 4(b). Clause (iii) 

80 

of subparagraph 3(c) of Article 25 (Mutual Agreement Procedure) 

provides a mechanism by which the competent authorities can resolve any disputes regarding whether income is from sources within the United States. 

The following two examples illustrate the application of paragraph 4 in the case of U.S.source royalties received by a U.S. citizen resident in Malta. In both examples, the U.S. rate of tax on 

residents of Malta, under paragraph 2 of Article 12 (Royalties) of 

the Convention, is 10 percent. In both examples, the U.S. income 

tax rate on the U.S. citizen is 35 percent. In example 1, the rate 

of income tax imposed in Malta on its resident (the U.S. citizen) is 

25 percent (below the U.S. rate), and in example 2, the rate imposed on its resident is 40 percent (above the U.S. rate). 

Example 1 Example 2 

Subparagraph (a): 

U.S.-source royalty payment ........................................................................................... $100.00 $100.00 

Notional U.S. withholding tax (Article 10(2)(a)) ............................................................ 10.00 10.00 

Taxable income in Malta ................................................................................................ 100.00 100.00 

Maltese tax before credit ............................................................................................... 25.00 40.00 

Less: tax credit for notional U.S. withholding tax ......................................................... 10.00 10.00 

Net post-credit tax paid to Malta .................................................................................. 15.00 30.00 

Subparagraphs (b) and (c): 

U.S. pre-tax income ........................................................................................................ $100.00 $100.00 

U.S. pre-credit citizenship tax ........................................................................................ 35.00 35.00 

Notional U.S. withholding tax ......................................................................................... 10.00 10.00 

U.S. tax eligible to be offset by credit .......................................................................... 25.00 25.00 

Tax paid to Malta ........................................................................................................... 15.00 30.00 

Income re-sourced from U.S. to foreign source (see below) ......................................... 42.86 71.43 

U.S. pre-credit tax on re-sourced income ...................................................................... 15.00 25.00 

U.S. credit for tax paid to Malta ................................................................................... 15.00 25.00

Net post-credit U.S. tax .................................................................................................. 10.00 0.00 

Total U.S. tax .................................................................................................................. 20.00 10.00 

In both examples, in the application of subparagraph (a), Malta 

credits a 10 percent U.S. tax against its residence tax on the U.S. 

citizen. In the first example, the net tax paid to Malta after the foreign tax credit is $15.00; in the second example, it is $30.00. In the 

application of subparagraphs (b) and (c), from the U.S. tax due before credit of $35.00, the United States subtracts the amount of the 

U.S. source tax of $10.00, against which no U.S. foreign tax credit 

is allowed. This subtraction ensures that the United States collects 

the tax that it is due under the Convention as the State of source. 

In both examples, given the 35 percent U.S. tax rate, the maximum amount of U.S. tax against which credit for the tax paid to 

Malta may be claimed is $25 ($35 U.S. tax minus $10 U.S. withholding tax). Initially, all of the income in both examples was from 

sources within the United States. For a U.S. foreign tax credit to 

be allowed for the full amount of the tax paid to Malta, an appropriate amount of the income must be treated as foreign-source income under subparagraph (c). 

The amount that must be re-sourced depends on the amount of 

tax for which the U.S. citizen is claiming a U.S. foreign tax credit. 

In example 1, the tax paid to Malta was $15. For this amount to 

be creditable against U.S. tax, $42.86 ($15 tax divided by 35 percent U.S. tax rate) must be resourced as foreign-source income. 

When the tax is credited against the $15 of U.S. tax on this 

81 

resourced income, there is a net U.S. tax of $10 due after credit 

($25 U.S. tax eligible to be offset by credit, minus $15 tax paid to 

Malta). Thus, in example 1, there is a total of $20 in U.S. tax ($10 

U.S. withholding tax plus $10 residual U.S. tax). In example 2, the tax paid to Malta was $30, but, because the United States subtracts the U.S. withholding tax of $10 from the 

total U.S. tax of $35, only $25 of U.S. taxes may be offset by taxes 

paid to Malta. Accordingly, the amount that must be resourced to 

Malta is limited to the amount necessary to ensure a U.S. foreign 

tax credit for $25 of tax paid to Malta, or $71.43 ($25 tax paid to 

the other Contracting State divided by 35 percent U.S. tax rate). 

When the tax paid to Malta is credited against the U.S. tax on this 

re-sourced income, there is no residual U.S. tax ($25 U.S. tax 

minus $30 tax paid to Malta, subject to the U.S. limit of $25). 

Thus, in example 2, there is a total of $10 in U.S. tax ($10 U.S. 

withholding tax plus $0 residual U.S. tax). Because the tax paid to 

Malta was $30 and the U.S. tax eligible to be offset by credit was 

$25, there is $5 of excess foreign tax credit available for carryover. 

Relationship to Other Articles 

By virtue of subparagraph (a) of paragraph 5 of Article 1 (General Scope), Article 23 is not subject to the saving clause of paragraph 4 of Article 1. Thus, the United States will allow a credit to 

its citizens and residents in accordance with the Article, even if 

such credit were to provide a benefit not available under the Code 

(such as the re-sourcing provided by paragraph 3 and subparagraph 4(c)). 

ARTICLE 24 (NON-DISCRIMINATION)

This Article ensures that nationals of a Contracting State, in the 

case of paragraph 1, and residents of a Contracting State, in the 

case of paragraphs 2 through 5, will not be subject, directly or indirectly, to discriminatory taxation in the other Contracting State. 

Not all differences in tax treatment, either as between nationals of 

the two States, or between residents of the two States, are violations of the prohibition against discrimination. Rather, the nondiscrimination obligations of this Article apply only if the nationals 

or residents of the two States are comparably situated. 

Each of the relevant paragraphs of the Article provides that two 

persons that are comparably situated must be treated similarly. Although the actual words differ from paragraph to paragraph (e.g., 

paragraph 1 refers to two nationals ‘‘in the same circumstances,’’ 

paragraph 2 refers to two enterprises ‘‘carrying on the same activities’’ and paragraph 4 refers to two enterprises that are ‘‘similar’’), 

the common underlying premise is that if the difference in treatment is directly related to a tax-relevant difference in the situations of the domestic and foreign persons being compared, that difference is not to be treated as discriminatory (i.e., if one person is 

taxable in a Contracting State on worldwide income and the other 

is not, or tax may be collectible from one person at a later stage, 

but not from the other, distinctions in treatment would be justified 

under paragraph 1). Other examples of such factors that can lead 

to nondiscriminatory differences in treatment are noted in the discussions of each paragraph. 

82 

The operative paragraphs of the Article also use different language to identify the kinds of differences in taxation treatment that 

will be considered discriminatory. For example, paragraphs 1 and 

4 speak of ‘‘any taxation or any requirement connected therewith 

that is more burdensome,’’ while paragraph 2 specifies that a tax 

‘‘shall not be less favorably levied.’’ Regardless of these differences 

in language, only differences in tax treatment that materially disadvantage the foreign person relative to the domestic person are 

properly the subject of the Article. 

Paragraph 1 

Paragraph 1 provides that a national of one Contracting State 

may not be subject to taxation or connected requirements in the 

other Contracting State that are more burdensome than the taxes 

and connected requirements imposed upon a national of that other 

State in the same circumstances. The OECD Model prohibits taxation that is ‘‘other than or more burdensome’’ than that imposed 

on U.S. persons. This Convention omits the reference to taxation 

that is ‘‘other than’’ that imposed on U.S. persons because the only 

relevant question under this provision should be whether the requirement imposed on a national of the other Contracting State is 

more burdensome. A requirement may be different from the requirements imposed on U.S. nationals without being more burdensome. 

The term ‘‘national’’ in relation to a Contracting State is defined 

in subparagraph 1(j) of Article 3 (General Definitions). The term includes both individuals and juridical persons. A national of a Contracting State is afforded protection under this paragraph even if 

the national is not a resident of either Contracting State. Thus, a 

U.S. citizen who is resident in a third country is entitled, under 

this paragraph, to the same treatment in Malta as a national of 

Malta who is in similar circumstances (i.e., presumably one who is 

resident in a third State). 

As noted above, whether or not the two persons are both taxable 

on worldwide income is a significant circumstance for this purpose. 

For this reason, paragraph 1 specifically states that the United 

States is not obligated to apply the same taxing regime to a national of Malta who is not resident in the United States as it applies to a U.S. national who is not resident in the United States. 

United States citizens who are not residents of the United States 

but who are, nevertheless, subject to United States tax on their 

worldwide income are not in the same circumstances with respect 

to United States taxation as citizens of Malta who are not United 

States residents. Thus, for example, Article 24 would not entitle a 

national of Malta resident in a third country to taxation at graduated rates on U.S. source dividends or other investment income 

that applies to a U.S. citizen resident in the same third country. 

Paragraph 2 

Paragraph 2 of the Article, provides that a Contracting State 

may not tax a permanent establishment of an enterprise of the 

other Contracting State less favorably than an enterprise of that 

first-mentioned State that is carrying on the same activities. 

83 

The fact that a U.S. permanent establishment of an enterprise 

of Malta is subject to U.S. tax only on income that is attributable 

to the permanent establishment, while a U.S. corporation engaged 

in the same activities is taxable on its worldwide income is not, in 

itself, a sufficient difference to provide different treatment for the 

permanent establishment. There are cases, however, where the two 

enterprises would not be similarly situated and differences in treatment may be warranted. For instance, it would not be a violation 

of the non-discrimination protection of paragraph 2 to require the 

foreign enterprise to provide information in a reasonable manner 

that may be different from the information requirements imposed 

on a resident enterprise, because information may not be as readily 

available to the Internal Revenue Service from a foreign as from 

a domestic enterprise. Similarly, it would not be a violation of paragraph 2 to impose penalties on persons who fail to comply with 

such a requirement (see, e.g., sections 874(a) and 882(c)(2)). Further, a determination that income and expenses have been attributed or allocated to a permanent establishment in conformity with 

the principles of Article 7 (Business Profits) implies that the attribution or allocation was not discriminatory. 

Section 1446 of the Code imposes on any partnership with income that is effectively connected with a U.S. trade or business the 

obligation to withhold tax on amounts allocable to a foreign partner. In the context of the Convention, this obligation applies with 

respect to a share of the partnership income of a partner resident 

in Malta, and attributable to a U.S. permanent establishment. 

There is no similar obligation with respect to the distributive 

shares of U.S. resident partners. It is understood, however, that 

this distinction is not a form of discrimination within the meaning 

of paragraph 2 of the Article. No distinction is made between U.S. 

and non-U.S. partnerships, since the law requires that partnerships of both U.S. and non-U.S. domicile withhold tax in respect of 

the partnership shares of non-U.S. partners. Furthermore, in distinguishing between U.S. and non-U.S. partners, the requirement 

to withhold on the non-U.S. but not the U.S. partner’s share is not 

discriminatory taxation, but, like other withholding on nonresident 

aliens, is merely a reasonable method for the collection of tax from 

persons who are not continually present in the United States, and 

as to whom it otherwise may be difficult for the United States to 

enforce its tax jurisdiction. If tax has been over-withheld, the partner can, as in other cases of over-withholding, file for a refund. 

Paragraph 3 

Paragraph 3 makes clear that the provisions of paragraphs 1 and 

2 do not obligate a Contracting State to grant to a resident of the 

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

grants to its own residents on account of their civil status or family 

responsibilities. Thus, if a sole proprietor who is a resident of 

Malta has a permanent establishment in the United States, in assessing income tax on the profits attributable to the permanent establishment, the United States is not obligated to allow to the resident of Malta the personal allowances for himself and his family 

that he would be permitted to take if the permanent establishment 

84 

were a sole proprietorship owned and operated by a U.S. resident, 

despite the fact that the individual income tax rates would apply. 

Paragraph 4 

Paragraph 4 prohibits discrimination in the allowance of deductions. When a resident or an enterprise of a Contracting State pays 

interest, royalties or other disbursements to a resident of the other 

Contracting State, the first-mentioned Contracting State must 

allow a deduction for those payments in computing the taxable 

profits of the resident or enterprise as if the payment had been 

made under the same conditions to a resident of the first-mentioned Contracting State. Paragraph 4, however, does not require 

a Contracting State to give nonresidents more favorable treatment 

than it gives to its own residents. Consequently, a Contracting 

State does not have to allow nonresidents a deduction for items 

that are not deductible under its domestic law (for example, expenses of a capital nature). 

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

the person incurring the expense. 

An exception to the rule of paragraph 4 is provided for cases 

where the provisions of paragraph 1 of Article 9 (Associated Enterprises), paragraph 7 of Article 11 (Interest) or paragraph 6 of Article 12 (Royalties) apply. All of these provisions permit the denial 

of deductions in certain circumstances in respect of transactions between related persons. Neither State is forced to apply the non-discrimination principle in such cases. The exception with respect to 

paragraph 7 of Article 11 would include the denial or deferral of 

certain interest deductions under Code section 163(j). 

Paragraph 4 also provides that any debts of an enterprise of a 

Contracting State to a resident of the other Contracting State are 

deductible in the first-mentioned Contracting State for purposes of 

computing the capital tax of the enterprise under the same conditions as if the debt had been contracted to a resident of the firstmentioned Contracting State. Even though, for general purposes, 

the Convention covers only income taxes, under paragraph 7 of this 

Article, the nondiscrimination provisions apply to all taxes levied 

in both Contracting States, at all levels of government. Thus, this 

provision may be relevant for both States. The other Contracting 

State may have capital taxes and in the United States such taxes 

frequently are imposed by local governments. 

Paragraph 5 

Paragraph 5 requires that a Contracting State not impose more 

burdensome taxation or connected requirements on an enterprise of 

that State that is wholly or partly owned or controlled, directly or 

indirectly, by one or more residents of the other Contracting State 

than the taxation or connected requirements that it imposes on 

other similar enterprises of that first-mentioned Contracting State. 

For this purpose it is understood that ‘‘similar’’ refers to similar activities or ownership of the enterprise. 

85 

This rule, like all non-discrimination provisions, does not prohibit 

differing treatment of entities that are in differing circumstances. 

Rather, a protected enterprise is only required to be treated in the 

same manner as other enterprises that, from the point of view of 

the application of the tax law, are in substantially similar circumstances both in law and in fact. The taxation of a distributing 

corporation under section 367(e) on an applicable distribution to 

foreign shareholders does not violate paragraph 5 of the Article because a foreign-owned corporation is not similar to a domesticallyowned corporation that is accorded non-recognition treatment 

under sections 337 and 355. 

For the reasons given above in connection with the discussion of 

paragraph 2 of the Article, it is also understood that the provision 

in section 1446 of the Code for withholding of tax on non-U.S. partners does not violate paragraph 5 of the Article. 

It is further understood that the ineligibility of a U.S. corporation with nonresident alien shareholders to make an election to be 

an ‘‘S’’ corporation does not violate paragraph 5 of the Article. If 

a corporation elects to be an S corporation, it is generally not subject to income tax and the shareholders take into account their pro 

rata shares of the corporation’s items of income, loss, deduction or 

credit. (The purpose of the provision is to allow an individual or 

small group of individuals the protections of conducting business in 

corporate form while paying taxes at individual rates as if the business were conducted directly.) A nonresident alien does not pay 

U.S. tax on a net basis, and, thus, does not generally take into account items of loss, deduction or credit. Thus, the S corporation 

provisions do not exclude corporations with nonresident alien 

shareholders because such shareholders are foreign, but only because they are not net-basis taxpayers. Similarly, the provisions exclude corporations with other types of shareholders where the purpose of the provisions cannot be fulfilled or their mechanics implemented. For example, corporations with corporate shareholders are 

excluded because the purpose of the provision to permit individuals 

to conduct a business in corporate form at individual tax rates 

would not be furthered by their inclusion. 

Finally, it is understood that paragraph 5 does not require a 

Contracting State to allow foreign corporations to join in filing a 

consolidated return with a domestic corporation or to allow similar 

benefits between domestic and foreign enterprises. 

Paragraph 6 

Paragraph 6 of the Article confirms that no provision of the Article will prevent either Contracting State from imposing the branch 

profits tax described in paragraph 8 of Article 10 (Dividends). 

Paragraph 7 

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

purposes, for purposes of providing nondiscrimination protection 

this Article applies to taxes of every kind and description imposed 

by a Contracting State or a political subdivision or local authority 

thereof. Customs duties are not considered to be taxes for this purpose. 

86 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) 

does not apply to this Article by virtue of the exceptions in paragraph 5(a) of Article 1. Thus, for example, a U.S. citizen who is a 

resident of Malta may claim benefits in the United States under 

this Article. 

Nationals of a Contracting State may claim the benefits of paragraph 1 regardless of whether they are entitled to benefits under 

Article 22 (Limitation on Benefits), because that paragraph applies 

to nationals and not residents. They may not claim the benefits of 

the other paragraphs of this Article with respect to an item of income unless they are generally entitled to treaty benefits with respect to that income under a provision of Article 22. 

ARTICLE 25 (MUTUAL AGREEMENT PROCEDURE)

This Article provides the mechanism for taxpayers to bring to the 

attention of competent authorities issues and problems that may 

arise under the Convention. It also provides the authority for cooperation between the competent authorities of the Contracting 

States to resolve disputes and clarify issues that may arise under 

the Convention and to resolve cases of double taxation not provided 

for in the Convention. The competent authorities of the two Contracting States are identified in paragraph 1(g) of Article 3 (General Definitions). 

Paragraph 1 

This paragraph provides that where a resident of a Contracting 

State considers that the actions of one or both Contracting States 

will result in taxation that is not in accordance with the Convention he may present his case to the competent authority of either 

Contracting State. This rule is more generous than in most treaties, which generally allow taxpayers to bring competent authority 

cases only to the competent authority of their country of residence, 

or citizenship/nationality. Under this more generous rule, a U.S. 

permanent establishment of a corporation resident in Malta that 

faces inconsistent treatment in the two countries would be able to 

bring its request for assistance to the U.S. competent authority. If 

the U.S. competent authority can resolve the issue on its own, then 

the taxpayer need never involve the Maltese competent authority. 

Thus, the rule provides flexibility that might result in greater efficiency. 

Although the typical cases brought under this paragraph will involve economic double taxation arising from transfer pricing adjustments, the scope of this paragraph is not limited to such cases. For 

example, a taxpayer could request assistance from the competent 

authority if one Contracting State determines that the taxpayer 

has received deferred compensation taxable at source under Article 

14 (Income from Employment), while the taxpayer believes that 

such income should be treated as a pension that is taxable only in 

his country of residence pursuant to Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support). 

It is not necessary for a person requesting assistance first to 

have exhausted the remedies provided under the national laws of 

87 

the Contracting States before presenting a case to the competent 

authorities, nor does the fact that the statute of limitations may 

have passed for seeking a refund preclude bringing a case to the 

competent authority. Unlike the OECD Model, no time limit is provided within which a case must be brought. 

Paragraph 2 

Paragraph 2 sets out the framework within which the competent 

authorities will deal with cases brought by taxpayers under paragraph 1. It provides that, if the competent authority of the Contracting State to which the case is presented judges the case to 

have merit, and cannot reach a unilateral solution, it shall seek an 

agreement with the competent authority of the other Contracting 

State pursuant to which taxation not in accordance with the Convention will be avoided. 

Any agreement is to be implemented even if such implementation otherwise would be barred by the statute of limitations or by 

some other procedural limitation, such as a closing agreement. 

Paragraph 2, however, does not prevent the application of domestic-law procedural limitations that give effect to the agreement 

(e.g., a domestic-law requirement that the taxpayer file a return reflecting the agreement within one year of the date of the agreement). 

Where the taxpayer has entered a closing agreement (or other 

written settlement) with the United States before bringing a case 

to the competent authorities, the U.S. competent authority will endeavor only to obtain a correlative adjustment from Malta. See 

Rev. Proc. 200654, 2006–49 I.R.B. 1035, § 7.05. Because, as specified in paragraph 2 of Article 1 (General Scope), the Convention 

cannot operate to increase a taxpayer’s liability, temporal or other 

procedural limitations can be overridden only for the purpose of 

making refunds and not to impose additional tax. 

Paragraph 3 

Paragraph 3 authorizes the competent authorities to resolve difficulties or doubts that may arise as to the application or interpretation of the Convention. The paragraph includes a non-exhaustive 

list of examples of the kinds of matters about which the competent 

authorities may reach agreement. This list is purely illustrative; it 

does not grant any authority that is not implicitly present as a result of the introductory sentence of paragraph 3. 

The competent authorities may, for example, agree to the same 

allocation of income, deductions, credits or allowances between an 

enterprise in one Contracting State and its permanent establishment in the other or between related persons. These allocations are 

to be made in accordance with the arm’s length principle underlying Article 7 (Business Profits) and Article 9 (Associated Enterprises). Agreements reached under these subparagraphs may include agreement on a methodology for determining an appropriate 

transfer price, on an acceptable range of results under that methodology, or on a common treatment of a taxpayer’s cost sharing arrangement. 

As indicated in subparagraph 3(c), the competent authorities also 

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88 

vention. They may agree to settle conflicts regarding the characterization of particular items of income, the characterization of persons, the application of source rules to particular items of income, 

the meaning of a term, or the timing of an item of income. 

The competent authorities also may agree as to advance pricing 

arrangements. They also may agree as to the application of the 

provisions of domestic law regarding penalties, fines, and interest 

in a manner consistent with the purposes of the Convention. 

Since the list under paragraph 3 is not exhaustive, the competent 

authorities may reach agreement on issues not enumerated in 

paragraph 3 if necessary to avoid double taxation. For example, the 

competent authorities may seek agreement on a uniform set of 

standards for the use of exchange rates. Agreements reached by 

the competent authorities under paragraph 3 need not conform to 

the internal law provisions of either Contracting State. 

Finally, paragraph 3 authorizes the competent authorities to consult for the purpose of eliminating double taxation in cases not provided for in the Convention and to resolve any difficulties or doubts 

arising as to the interpretation or application of the Convention. 

This provision is intended to permit the competent authorities to 

implement the treaty in particular cases in a manner that is consistent with its expressed general purposes. It permits the competent authorities to deal with cases that are within the spirit of 

the provisions but that are not specifically covered. An example of 

such a case might be double taxation arising from a transfer pricing adjustment between two permanent establishments of a thirdcountry resident, one in the United States and one in Malta. Since 

no resident of a Contracting State is involved in the case, the Convention does not apply, but the competent authorities nevertheless 

may use the authority of this Article to prevent the double taxation 

of income. 

Paragraph 4 

Paragraph 4 authorizes the competent authorities to increase 

any dollar amounts referred to in the Convention to reflect economic and monetary developments. This refers only to Article 16 

(Entertainers and Sportsmen); Article 20 (Students and Trainees) 

separately instructs the competent authorities to adjust the exemption amount for students and trainees in accordance with specified 

guidelines. The rule under paragraph 4 is intended to operate as 

follows: if, for example, after the Convention has been in force for 

some time, inflation rates have been such as to make the $20,000 

exemption threshold for entertainers unrealistically low in terms of 

the original objectives intended in setting the threshold, the competent authorities may agree to a higher threshold without the 

need for formal amendment to the treaty and ratification by the 

Contracting States. This authority can be exercised, however, only 

to the extent necessary to restore those original objectives. This 

provision can be applied only to the benefit of taxpayers (i.e., only 

to increase thresholds, not to reduce them). 

Paragraph 5 

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89 

ment. This makes clear that the competent authorities of the two 

Contracting States may communicate without going through diplomatic channels. Such communication may be in various forms, including, where appropriate, through face-to-face meetings of representatives of the competent authorities. 

Treaty termination in relation to competent authority dispute resolution 

A case may be raised by a taxpayer after the Convention has 

been terminated with respect to a year for which a treaty was in 

force. In such a case the ability of the competent authorities to act 

is limited. They may not exchange confidential information, nor 

may they reach a solution that varies from that specified in its law. 

Triangular competent authority solutions 

International tax cases may involve more than two taxing jurisdictions (e.g., transactions among a parent corporation resident in 

country A and its subsidiaries resident in countries B and C). As 

long as there is a complete network of treaties among the three 

countries, it should be possible, under the full combination of bilateral authorities, for the competent authorities of the three States 

to work together on a three-sided solution. Although country A may 

not be able to give information received under Article 26 (Exchange 

of Information and Administrative Assistance) from country B to 

the authorities of country C, if the competent authorities of the 

three countries are working together, it should not be a problem for 

them to arrange for the authorities of country B to give the necessary information directly to the tax authorities of country C, as 

well as to those of country A. Each bilateral part of the trilateral 

solution must, of course, not exceed the scope of the authority of 

the competent authorities under the relevant bilateral treaty. 

Relationship to Other Articles 

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

Article 1 (General Scope) by virtue of the exceptions in subparagraph 5(a) of that Article. Thus, rules, definitions, procedures, etc. 

that are agreed upon by the competent authorities under this Article may be applied by the United States with respect to its citizens 

and residents even if they differ from the comparable Code provisions. Similarly, as indicated above, U.S. law may be overridden to 

provide refunds of tax to a U.S. citizen or resident under this Article. A person may seek relief under Article 25 regardless of whether he is generally entitled to benefits under Article 22 (Limitation 

on Benefits). As in all other cases, the competent authority is vested with the discretion to decide whether the claim for relief is justified. 

ARTICLE 26 (EXCHANGE OF INFORMATION AND ADMINISTRATIVE

ASSISTANCE)

This Article provides for the exchange of information and administrative assistance between the competent authorities of the Contracting States. 

90 

Paragraph 1 

The obligation to obtain and provide information to the other 

Contracting State is set out in Paragraph 1. The information to be 

exchanged is that which may be relevant for carrying out the provisions of the Convention or the domestic laws of the United States 

or of the other Contracting State concerning taxes of every kind applied at the national level. This language incorporates the standard 

in 26 U.S.C. Section 7602 which authorizes the IRS to examine 

‘‘any books, papers, records, or other data which may be relevant 

or material.’’ (Emphasis added.) In United States v. Arthur Young 

& Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that the 

language ‘‘may be’’ reflects Congress’s express intention to allow 

the IRS to obtain ‘‘items of even potential relevance to an ongoing 

investigation, without reference to its admissibility.’’ (Emphasis in 

original.) However, the language ‘‘may be’’ would not support a request in which a Contracting State simply asked for information 

regarding all bank accounts maintained by residents of that Contracting State in the other Contracting State, or even all accounts 

maintained by its residents with respect to a particular bank. 

Exchange of information with respect to each State’s domestic 

law is authorized to the extent that taxation under domestic law 

is not contrary to the Convention. Thus, for example, information 

may be exchanged with respect to a covered tax, even if the transaction to which the information relates is a purely domestic transaction in the requesting State and, therefore, the exchange is not 

made to carry out the Convention. An example of such a case is 

provided in paragraph 8(b) of the OECD Commentary: a company 

resident in one Contracting State and a company resident in the 

other Contracting State transact business between themselves 

through a third-country resident company. Neither Contracting 

State has a treaty with the third State. To enforce their internal 

laws with respect to transactions of their residents with the thirdcountry company (since there is no relevant treaty in force), the 

Contracting States may exchange information regarding the prices 

that their residents paid in their transactions with the third-country resident. 

Paragraph 1 clarifies that information may be exchanged that relates to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the 

taxes covered by the Convention. Thus, the competent authorities 

may request and provide information for cases under examination 

or criminal investigation, in collection, on appeals, or under prosecution. 

The taxes covered by the Convention for purposes of this Article 

constitute a broader category of taxes than those referred to in Article 2 (Taxes Covered). Exchange of information is authorized with 

respect to taxes of every kind imposed by a Contracting State at 

the national level. Accordingly, information may be exchanged with 

respect to U.S. estate and gift taxes, excise taxes or, with respect 

to Malta, value added taxes. 

Information exchange is not restricted by paragraph 1 of Article 

1 (General Scope). Accordingly, information may be requested and 

provided under this article with respect to persons who are not 

residents of either Contracting State. For example, if a third-counVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00090 Fmt 6601 Sfmt 6601 H:\DOCS\TD111-1.TXT MIKEB
91 

try resident has a permanent establishment in Malta, and that permanent establishment engages in transactions with a U.S. enterprise, the United States could request information with respect to 

that permanent establishment, even though the third-country resident is not a resident of either Contracting State. Similarly, if a 

third-country resident maintains a bank account in Malta, and the 

Internal Revenue Service has reason to believe that funds in that 

account should have been reported for U.S. tax purposes but have 

not been so reported, information can be requested from Malta 

with respect to that person’s account, even though that person is 

not the taxpayer under examination. 

Although the term ‘‘United States’’ does not encompass U.S. possessions for most purposes of the Convention, Section 7651 of the 

Code authorizes the Internal Revenue Service to utilize the provisions of the Internal Revenue Code to obtain information from the 

U.S. possessions pursuant to a proper request made under Article 

26. If necessary to obtain requested information, the Internal Revenue Service could issue and enforce an administrative summons 

to the taxpayer, a tax authority (or a government agency in a U.S. 

possession), or a third party located in a U.S. possession. 

Paragraph 2 

Paragraph 2 provides assurances that any information exchanged will be treated as secret, subject to the same disclosure 

constraints as information obtained under the laws of the requesting State. Information received may be disclosed only to persons, 

including courts and administrative bodies, involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of the of appeals in relation 

to, the taxes covered by the Convention. The information must be 

used by these persons in connection with the specified functions. 

Information may also be disclosed to legislative bodies, such as the 

tax-writing committees of Congress and the Government Accountability Office, engaged in the oversight of the preceding activities. 

Information received by these bodies must be for use in the performance of their role in overseeing the administration of U.S. tax 

laws. Information received may be disclosed in public court proceedings or in judicial decisions. 

Paragraph 2 also provides that the competent authority of the 

Contracting State that receives information under this Article may, 

with the written consent of the other Contracting State, make that 

information available to be used for other purposes allowed under 

the provisions of an existing mutual legal assistance treaty between the Contracting States that allows for the exchange of tax 

information. 

Paragraph 3 

Paragraph 3 provides that the obligations undertaken in paragraphs 1 and 2 to exchange information do not require a Contracting State to carry out administrative measures that are at 

variance with the laws or administrative practice of either State. 

Nor is a Contracting State required to supply information not obtainable under the laws or administrative practice of either State, 

92 

or to disclose trade secrets or other information, the disclosure of 

which would be contrary to public policy. 

Thus, a requesting State may be denied information from the 

other State if the information would be obtained pursuant to procedures or measures that are broader than those available in the requesting State. However, the statute of limitations of the Contracting State making the request for information should govern a 

request for information. Thus, the Contracting State of which the 

request is made should attempt to obtain the information even if 

its own statute of limitations has passed. In many cases, relevant 

information will still exist in the business records of the taxpayer 

or a third party, even though it is no longer required to be kept 

for domestic tax purposes. 

While paragraph 3 states conditions under which a Contracting 

State is not obligated to comply with a request from the other Contracting State for information, the requested State is not precluded 

from providing such information, and may, at its discretion, do so 

subject to the limitations of its internal law. 

Paragraph 4 

Paragraph 4 provides that when information is requested by a 

Contracting State in accordance with this Article, the other Contracting State is obligated to obtain the requested information as 

if the tax in question were the tax of the requested State, even if 

that State has no direct tax interest in the case to which the request relates. In the absence of such a paragraph, some taxpayers 

have argued that paragraph 3(a) prevents a Contracting State from 

requesting information from a bank or fiduciary that the Contracting State does not need for its own tax purposes. This paragraph clarifies that paragraph 3 does not impose such a restriction 

and that a Contracting State is not limited to providing only the 

information that it already has in its own files. 

Paragraph 5 

Paragraph 5 provides that a Contracting State may not decline 

to provide information because that information is held by financial 

institutions, nominees or persons acting in an agency or fiduciary 

capacity. Thus, paragraph 5 would effectively prevent a Contracting State from relying on paragraph 3 to argue that its domestic bank secrecy laws (or similar legislation relating to disclosure 

of financial information by financial institutions or intermediaries) 

override its obligation to provide information under paragraph 1. 

This paragraph also requires the disclosure of information regarding the beneficial owner of an interest in a person, such as the 

identity of a beneficial owner of bearer shares. 

Paragraph 6 

Paragraph 6 provides that the requesting State may specify the 

form in which information is to be provided (e.g., depositions of witnesses and authenticated copies of original documents). The intention is to ensure that the information may be introduced as evidence in the judicial proceedings of the requesting State. The requested State should, if possible, provide the information in the 

form requested to the same extent that it can obtain information 

93 

in that form under its own laws and administrative practices with 

respect to its own taxes. 

Paragraph 7 

Paragraph 7 provides that the requested State shall allow representatives of the applicant State to enter the requested State to 

interview individuals and examine books and records with the consent of the persons subject to examination. 

Paragraph 8 

Paragraph 8 states that the competent authorities of the Contracting States may develop an agreement upon the mode of application of the Article. The article authorizes the competent authorities to exchange information on a routine basis, on request in relation to a specific case, or spontaneously. It is contemplated that the 

Contracting States will utilize this authority to engage in all of 

these forms of information exchange, as appropriate. 

The competent authorities may also agree on specific procedures 

and timetables for the exchange of information. In particular, the 

competent authorities may agree on minimum thresholds regarding 

tax at stake or take other measures aimed at ensuring some measure of reciprocity with respect to the overall exchange of information between the Contracting States. 

Treaty effective dates and termination in relation to exchange of information 

Once the Convention is in force, the competent authority may 

seek information under the Convention with respect to a year prior 

to the entry into force of the Convention. Even if an earlier Convention with more restrictive provisions, or even no Convention, 

was in effect during the years in which the transaction at issue occurred, the exchange of information provisions of the Convention 

apply. In that case, the competent authorities have available to 

them the full range of information exchange provisions afforded 

under this Article. Paragraph 3 of Article 28 (Entry into Force) confirms this understanding with respect to the effective date of the 

Article. 

A tax administration may also seek information with respect to 

a year for which a treaty was in force after the treaty has been terminated. In such a case the ability of the other tax administration 

to act is limited. The treaty no longer provides authority for the tax 

administrations to exchange confidential information. They may 

only exchange information pursuant to domestic law or other international agreement or arrangement. 

ARTICLE 27 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR

POSTS)

This Article confirms that any fiscal privileges to which diplomatic or consular officials are entitled under general provisions of 

international law or under special agreements will apply notwithstanding any provisions to the contrary in the Convention. The 

agreements referred to include any bilateral agreements, such as 

consular conventions, that affect the taxation of diplomats and consular officials and any multilateral agreements dealing with these 

94 

issues, such as the Vienna Convention on Diplomatic Relations and 

the Vienna Convention on Consular Relations. The U.S. generally 

adheres to the latter because its terms are consistent with customary international law. 

The Article does not independently provide any benefits to diplomatic agents and consular officers. Article 19 (Government Service) 

does so, as do Code section 893 and a number of bilateral and multilateral agreements. In the event that there is a conflict between 

the Convention and international law or such other treaties, under 

which the diplomatic agent or consular official is entitled to greater 

benefits under the latter, the latter laws or agreements shall have 

precedence. Conversely, if the Convention confers a greater benefit 

than another agreement, the affected person could claim the benefit of the tax treaty. 

Pursuant to subparagraph 5(b) of Article 1 (General Scope), the 

saving clause of paragraph 4 of Article 1 does not apply to override 

any benefits of this Article available to an individual who is neither 

a citizen of the United States nor has immigrant status in the 

United States. 

ARTICLE 28 (ENTRY INTO FORCE)

This Article contains the rules for bringing the Convention into 

force and giving effect to its provisions. 

Paragraph 1 

Paragraph 1 provides for the ratification of the Convention by 

both Contracting States according to their constitutional and statutory requirements. Instruments of ratification shall be exchanged 

as soon as possible. 

In the United States, the process leading to ratification and entry 

into force is as follows: Once a treaty has been signed by authorized representatives of the two Contracting States, the Department 

of State sends the treaty to the President who formally transmits 

it to the Senate for its advice and consent to ratification, which requires approval by two-thirds of the Senators present and voting. 

Prior to this vote, however, it generally has been the practice for 

the Senate Committee on Foreign Relations to hold hearings on the 

treaty and make a recommendation regarding its approval to the 

full Senate. Both Government and private sector witnesses may 

testify at these hearings. After the Senate gives its advice and consent to ratification of the treaty, an instrument of ratification is 

drafted for the President’s signature. The President’s signature 

completes the process in the United States. 

Paragraph 2 

Paragraph 2 provides that the Convention will enter into force 

upon the exchange of instruments of ratification. The date on 

which a treaty enters into force is not necessarily the date on 

which its provisions take effect. Paragraph 2, therefore, also contains rules that determine when the provisions of the treaty will 

have effect. 

Under paragraph 2(a), the Convention will have effect with respect to taxes withheld at source (principally dividends, interest 

and royalties) for amounts paid or credited on or after the first day 

95 

of the second month following the date on which the Convention 

enters into force. For example, if instruments of ratification are exchanged on April 25 of a given year, the withholding rates specified 

in paragraph 2 of Article 10 (Dividends) would be applicable to any 

dividends paid or credited on or after June 1 of that year. This rule 

allows the benefits of the withholding reductions to be put into effect as soon as possible, without waiting until the following year. 

The delay of one to two months is required to allow sufficient time 

for withholding agents to be informed about the change in withholding rates. If for some reason a withholding agent withholds at 

a higher rate than that provided by the Convention (perhaps because it was not able to re-program its computers before the payment is made), a beneficial owner of the income that is a resident 

of the other Contracting State may make a claim for refund pursuant to section 1464 of the Code. 

For all other taxes, paragraph 2(b) specifies that the Convention 

will have effect for any taxable period beginning on or after January 1 of the year following entry into force. 

Paragraph 3 

As discussed under Article 26 (Exchange of Information), the 

powers afforded the competent authority under that article apply 

from the date of entry into force of the Convention, regardless of 

the taxable period to which the matter relates. 

ARTICLE 29 (TERMINATION)

The Convention is to remain in effect indefinitely, unless terminated by one of the Contracting States in accordance with the provisions of Article 29. The Convention may be terminated at any 

time after the year in which the Convention enters into force. If notice of termination is given, the provisions of the Convention with 

respect to withholding at source will cease to have effect after the 

expiration of a period of 6 months beginning with the delivery of 

notice of termination. For other taxes, the Convention will cease to 

have effect as of taxable periods beginning after the expiration of 

this 6 month period. 

Article 29 relates only to unilateral termination of the Convention by a Contracting State. Nothing in that Article should be construed as preventing the Contracting States from concluding a new 

bilateral agreement, subject to ratification, that supersedes, 

amends or terminates provisions of the Convention without the sixmonth notification period. 

Customary international law observed by the United States and 

other countries, as reflected in the Vienna Convention on Treaties, 

allows termination by one Contracting State at any time in the 

event of a ‘‘material breach’’ of the agreement by the other Contracting State. 

(97) 

X. ANNEX II—TRANSCRIPT OF HEARING HELD NOVEMBER 10, 2009 

TREATIES 

TUESDAY, NOVEMBER 10, 2009 

U.S. SENATE, 

COMMITTEE ON FOREIGN RELATIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 9 a.m., in room SD419, Dirksen Senate Office Building, Hon. Edward E. Kaufman, 

presiding. 

Present: Senator Kaufman. 

OPENING STATEMENT OF HON. EDWARD E. KAUFMAN, 

U.S. SENATOR FROM DELAWARE 

Senator KAUFMAN. I’ll say it again, good morning. 

VOICES. Good morning. 

Senator KAUFMAN. Today the committee will take up five treaties: two protocols that amend our existing tax treaties with France 

and New Zealand, a new tax treaty with Malta, a bilateral investment treaty with Rwanda, and an international convention on 

plant genetic resources for food and agriculture. 

The France and New Zealand tax protocols reflect our ongoing 

efforts to modernize existing tax treaties to conform to current 

United States policy. In addition to reducing or eliminating sourcecountry taxation on certain dividends and royalties, both protocols 

update the existing antiabuse and information exchange provisions 

enforced with France and New Zealand. 

These changes will help guard against nonresidents improperly 

benefiting from the treaties, and will facilitate the exchange of tax 

information, which will assist in detecting tax evasion. 

The France protocol also provides for mandatory arbitration, 

similar in many respects to recent treaties with Canada, Germany, 

and Belgium. 

The proposed tax treaty with Malta recognizes the significant 

changes that Malta has made to its domestic tax law in response 

to United States concerns that led to the termination of our original tax agreement with Malta in 1997. This proposed convention, 

like the protocols, generally follows the 2006 U.S. Model Tax Treaty; however, it deviates from the model in certain areas, including 

where deemed necessary to provide enhanced protection against 

treaty-shopping. 

98 

I would note that critical stakeholders, such as the U.S. Chamber 

of Commerce, the National Association of Manufacturers, the 

National Foreign Trade Council, are all on record in strong support 

of early ratification of the three tax treaties before us today. 

Moving from tax policy to investment policy, the United StatesRwanda Bilateral Investment Treaty is the first such agreement 

concluded between the United States and a sub-Saharan African 

country since 1998. Our negotiators engaged Rwanda in this endeavor in recognition of the Rwanda Government’s efforts to open 

its economy, improve its business climate, and embrace trade and 

investment as a means to boost economic development and alleviate poverty. 

In 2008 and 2009, less than two decades after the genocide from 

which Rwanda still strives to recover, Rwanda led the world in the 

World Bank’s review of doing business reforms, a first for a subSaharan economy. We anticipate that the Rwanda BIT will reinforce the government’s economic reform program and facilitate continued progress in the rebuilding and recovery that has taken place 

since the 1994 genocide. We would also hope to see similar openness in the expansion of political space in Rwanda. 

Last, by joining the International Plant Genetic Resources 

Treaty, the United States will ensure we continue to play a leading 

role in the conservation of critical plant resources for future generations. Recent experience with dramatic price increases and global food scarcity demonstrate the need to preserve and enhance access to these resources. By joining this convention, the United 

States will secure access to valuable plant genetic resources and information from other countries, a service which the Department of 

Agriculture is already authorized to provide at no cost. This treaty 

enjoys support from a broad range of stakeholders, including the 

American Sea Trade Association, the Biotechnology Industry 

Organization, Intellectual Property Owners Association, and the 

National Farms Unit. 

We are fortunate to have four—and I really mean that—four excellent witnesses today: Kerri-Ann Jones, the Assistant Secretary 

of State for the Bureau of Oceans and International Environmental 

and Scientific Affairs; Manal Corwin, international tax counsel for 

the Treasury Department; Wes Scholz, the Director of the Office of 

Investment Affairs at the State Department; and Thomas Barthold, 

chief of staff of the Joint Committee on Taxation. We will start 

with tax treaties, so I’ll turn first to Ms. Corwin and next to Mr. 

Barthold; after that, we’ll take up Rwanda, BIT, and the Plant 

Genetics Treaty. 

Ms. Corwin. 

STATEMENT OF MANAL CORWIN, INTERNATIONAL TAX 

COUNSEL, DEPARTMENT OF TREASURY 

Ms. CORWIN. Thank you, Senator Kaufman. I appreciate the 

opportunity to appear today to recommend, on behalf of the administration, favorable action on three tax treaties pending before this 

committee. We appreciate the committee’s interest in these treaties 

and in the U.S. tax treaty program overall. 

This administration is committed to eliminating barriers to crossborder trade and investment and preventing offshore tax evasion. 

99 

Tax treaties play a vital role in supporting both of these objectives. 

Tax treaties facilitate cross-border investment and provide greater 

certainty to taxpayers regarding their potential tax liability in foreign jurisdictions. They do so by allocating taxing rights between 

jurisdictions, minimizing incidences of double taxation, and ensuring that U.S. taxpayers are not subject to discriminatory treatment. 

Tax treaties also play an important role in preventing tax evasion. A key element of U.S. tax treaties is exchange of information 

between tax authorities. Because access to information from other 

countries is critically important to the full and fair enforcement of 

U.S. tax laws, information exchange is a top priority for the United 

States tax treaty program. 

The treaties before the committee today—with France, Malta, 

and New Zealand—serve to further our tax treaty program goals 

of facilitating cross-border trade and investment and preventing 

fiscal evasion. We urge the committee and the Senate to take 

prompt and favorable action on these agreements, which I will now 

describe very briefly. 

The proposed protocol with France is the second protocol amending the current tax convention with France signed in 1994. The 

most significant provisions in this agreement relate to the taxation 

of dividends and royalties, the adoption of mandatory arbitration to 

facilitate the resolution of disputes between the United States and 

French revenue authorities, and provisions to prevent treaty abuse 

and provide for full exchange of information for tax purposes. 

More specifically, the proposed protocol eliminates the source 

country withholding tax on certain intercompany dividends and on 

all royalty payments. The proposed protocol also makes a number 

of changes to the limitation on benefits article of the current convention, which is designed to protect against abuses of the treaty 

by third-country residents. 

Finally, the proposed protocol provides for mandatory binding arbitration of certain cases that have not been resolved by the competent authorities within a specified period. The mandatory binding arbitration provision included in the protocol with France is 

similar to provisions in our current treaties with Canada, Germany, and Belgium, which this committee and the Senate approved 

over the last 3 years. However, in recognition of the helpful comments offered by this committee with respect to the arbitration provisions in the prior agreements, the arbitration provision in the 

French protocol differs from the prior provisions in three key 

respects. 

First, the proposed arbitration rule with France permits the taxpayers whose tax liabilities are affected by the arbitration proceeding to submit a position paper directly to the arbitration panel. 

Second, the proposed rule prohibits employees of the tax administrations of either the United States or France from being appointed as members to the arbitration panel. 

Finally, the proposed rule does not establish a hierarchy of legal 

authorities for treaty interpretation. 

We are hopeful that these three modifications adequately address 

the concerns previously raised by this committee. We look forward 

to continuing to work with this committee to make arbitration an 

100 

effective tool in promoting fair and expeditious resolution of tax 

treaty disputes. 

The proposed income tax convention with Malta reestablishes a 

prior tax treaty relationship between Malta and the United States. 

In 1996, the United States terminated its tax treaty with Malta, 

originally signed in 1980, because of concerns related to abuses of 

the treaty by third-country residents and inadequate exchange of 

information. Since 1996, Malta has made important changes to its 

domestic law in order to make a treaty possible again. Most notably, Malta repealed its bank secrecy rules so that it could agree to 

a ‘‘full exchange of information’’ provision in the proposed treaty. 

The proposed convention with Malta is generally consistent with 

the current U.S. Model Income Tax Treaty. To take into account 

special features of Malta’s domestic law, however, the proposed 

treaty contains robust rules to prevent so-called ‘‘treaty shopping.’’ 

In particular, the proposed treaty includes a strict and comprehensive ‘‘limitation on benefits’’ article and provides for a positive withholding tax rate on dividends, royalties, and interest. 

Finally, the proposed convention provides for the full exchange of 

information. 

The proposed protocol with New Zealand is the first protocol 

amending our current tax treaty, which entered into force in 1983. 

The proposed protocol makes a number of changes to the current 

convention, including eliminating the source-country withholding 

tax on certain dividends and on all royalties. The proposed protocol 

also updates the ‘‘limitation on benefits’’ article, bringing into line 

with the U.S. Model Treaty. 

Let me conclude by thanking you for the opportunity to appear 

before the committee to discuss the administration’s efforts with 

respect to the three agreements under consideration. We thank the 

committee members and staff for devoting time and attention to 

the review of these agreements, and we are grateful for the assistance and cooperation of the staff of the Joint Committee on Taxation. I also would like to acknowledge and express my appreciation for the work done on the proposed treaties by the teams at 

Treasury, the Internal Revenue Service, and the State Department. 

On behalf of the administration, we urge the committee and the 

Senate to take prompt and favorable action on the agreements 

before you today. And I’m happy to respond to any questions you 

may have. 

[The prepared statement of Ms. Corwin follows:] 

PREPARED STATEMENT OF MANAL CORWIN, INTERNATIONAL TAX COUNSEL, 

DEPARTMENT OF TREASURY, WASHINGTON, DC 

Chairman Kerry, Ranking Member Lugar, and distinguished members of the committee, I appreciate the opportunity to appear today to recommend, on behalf of the 

administration, favorable action on three tax treaties pending before this committee. 

We appreciate the committee’s interest in these treaties and in the U.S. tax treaty 

network overall. 

This administration is committed to eliminating barriers to cross-border trade and 

investment, and tax treaties are the primary means for eliminating tax barriers to 

such trade and investment. Tax treaties provide greater certainty to taxpayers 

regarding their potential liability to tax in foreign jurisdictions; they allocate taxing 

rights between the two jurisdictions and include other provisions that reduce the 

risk of double taxation, including provisions that reduce gross-basis withholding 

taxes. Tax treaties also ensure that taxpayers are not subject to discriminatory taxation in the foreign jurisdiction. 

101 

This administration is also committed to preventing tax evasion, and our tax treaties play an important role in this area as well. A key element of U.S. tax treaties 

is exchange of information between tax authorities. Under tax treaties, one country 

may request from the other such information as may be relevant for the proper 

administration of the first country’s tax laws. Because access to information from 

other countries is critically important to the full and fair enforcement of U.S. tax 

laws, information exchange is a top priority for the United States in its tax treaty 

program. 

A tax treaty reflects a balance of benefits that is agreed to when the treaty is 

negotiated. In some cases, changes in law or policy in one or both of the treaty partners make the partners more willing to increase the benefits beyond those provided 

by the original treaty; in these cases, negotiation of a revised treaty may be very 

beneficial. In other cases, developments in one or both countries, or international 

developments more generally, may make it desirable to revisit a treaty to prevent 

exploitation of treaty provisions and eliminate unintended and inappropriate consequences in the application of the treaty; in these cases, it may be expedient to 

modify the agreement. Both in setting our overall negotiation priorities and in negotiating individual treaties, our focus is on ensuring that our tax treaty network fulfills its goals of facilitating cross-border trade and investment and preventing fiscal 

evasion. 

The treaties before the committee today with France, Malta, and New Zealand 

serve to further the goals of our tax treaty network. The treaties with France and 

New Zealand would modify existing tax treaty relationships, to increase benefits in 

some instances and to eliminate inappropriate benefits in others. The tax treaty 

with Malta would reestablish a tax treaty relationship between our two countries 

that was interrupted when the United States terminated a prior tax treaty with 

Malta signed in 1980. We urge the committee and the Senate to take prompt and 

favorable action on all of these agreements. 

Before talking about the pending treaties in more detail, I would like to discuss 

some more general tax treaty matters. 

PURPOSES AND BENEFITS OF TAX TREATIES

Tax treaties set out clear ground rules that govern tax matters relating to trade 

and investment between the two countries. 

One of the primary functions of tax treaties is to provide certainty to taxpayers 

regarding the threshold question with respect to international taxation: whether a 

taxpayer’s cross-border activities will subject it to taxation by two or more countries. 

Tax treaties answer this question by establishing the minimum level of economic 

activity that must be engaged in within a country by a resident of the other before 

the first country may tax any resulting business profits. In general terms, tax treaties provide that if branch operations in a foreign country have sufficient substance 

and continuity, the country where those activities occur will have primary (but not 

exclusive) jurisdiction to tax. In other cases, where the operations in the foreign 

country are relatively minor, the home country retains the sole jurisdiction to tax. 

Another primary function is relief of double taxation. Tax treaties protect taxpayers from potential double taxation primarily through the allocation of taxing 

rights between the two countries. This allocation takes several forms. First, the 

treaty has a mechanism for resolving the issue of residence in the case of a taxpayer 

that otherwise would be considered to be a resident of both countries. Second, with 

respect to each category of income, the treaty assigns primary taxing rights to one 

country, usually (but not always) the country in which the income arises (the 

‘‘source’’ country), and the residual right to tax to the other country, usually (but 

not always) the country of residence of the taxpayer (the ‘‘residence’’ country). Third, 

the treaty provides rules for determining the country of source for each category of 

income. Finally, the treaty establishes the obligation of the residence country to 

eliminate double taxation that otherwise would arise from the exercise of concurrent 

taxing jurisdiction by the two countries. 

In addition to reducing potential double taxation, tax treaties also reduce potential ‘‘excessive’’ taxation by reducing withholding taxes that are imposed at source. 

Under U.S. law, payments to non-U.S. persons of dividends and royalties as well 

as certain payments of interest are subject to withholding tax equal to 30 percent 

of the gross amount paid. Most of our trading partners impose similar levels of withholding tax on these types of income. This tax is imposed on a gross, rather than 

net, amount. Because the withholding tax does not take into account expenses 

incurred in generating the income, the taxpayer that bears the burden of withholding tax frequently will be subject to an effective rate of tax that is significantly 

higher than the tax rate that would be applicable to net income in either the source 

102 

or residence country. The taxpayer may be viewed, therefore, as suffering excessive 

taxation. Tax treaties alleviate this burden by setting maximum levels for the withholding tax that the treaty partners may impose on these types of income or by 

providing for exclusive residence-country taxation of such income through the elimination of source-country withholding tax. Because of the excessive taxation that 

withholding taxes can represent, the United States seeks to include in tax treaties 

provisions that substantially reduce or eliminate source-country withholding taxes. 

As a complement to these substantive rules regarding allocation of taxing rights, 

tax treaties provide a mechanism for dealing with disputes between the countries 

regarding the treaties, including questions regarding the proper application of the 

treaties that arise after the treaty enters into force. To resolve disputes, designated 

tax authorities of the two governments—known as the ‘‘competent authorities’’ in 

tax treaty parlance—are to consult and to endeavor to reach agreement. Under 

many such agreements, the competent authorities agree to allocate a taxpayer’s income between the two taxing jurisdictions on a consistent basis, thereby preventing 

the double taxation that might otherwise result. The U.S. competent authority 

under our tax treaties is the Secretary of the Treasury or his delegate. That function 

has been delegated to the Deputy Commissioner (International) of the Large and 

Mid-Size Business Division of the Internal Revenue Service. 

Tax treaties also include provisions intended to ensure that cross-border investors 

do not suffer discrimination in the application of the tax laws of the other country. 

This is similar to a basic investor protection provided in other types of agreements, 

but the nondiscrimination provisions of tax treaties are specifically tailored to tax 

matters and, therefore, are the most effective means of addressing potential discrimination in the tax context. The relevant tax treaty provisions explicitly prohibit 

types of discriminatory measures that once were common in some tax systems. At 

the same time, tax treaties clarify the manner in which possible discrimination is 

to be tested in the tax context. 

In addition to these core provisions, tax treaties include provisions dealing with 

more specialized situations, such as rules coordinating the pension rules of the tax 

systems of the two countries or addressing the treatment of Social Security benefits 

and alimony and child-support payments in the cross-border context (the Social 

Security Administration separately negotiates and administers bilateral totalization 

agreements). These provisions are becoming increasingly important as more individuals move between countries or otherwise are engaged in cross-border activities. 

While these matters may not involve substantial tax revenue from the perspective 

of the two governments, rules providing clear and appropriate treatment are very 

important to the affected taxpayers. 

Tax treaties also include provisions related to tax administration. A key element 

of U.S. tax treaties is the provision addressing the exchange of information between 

the tax authorities. Under tax treaties, the competent authority of one country may 

request from the other competent authority such information as may be relevant for 

the proper administration of the first country’s tax laws; the information provided 

pursuant to the request is subject to the strict confidentiality protections that apply 

to taxpayer information. Because access to information from other countries is critically important to the full and fair enforcement of the U.S. tax laws, information 

exchange is a priority for the United States in its tax treaty program. If a country 

has bank secrecy rules that would operate to prevent or seriously inhibit the appropriate exchange of information under a tax treaty, we will not enter into a new tax 

treaty relationship with that country. Indeed, the need for appropriate information 

exchange provisions is one of the treaty matters that we consider nonnegotiable. 

TAX TREATY NEGOTIATING PRIORITIES AND PROCESS

The United States has a network of 59 income tax treaties covering 67 countries. 

This network covers the vast majority of foreign trade and investment of U.S. businesses and investors. In establishing our negotiating priorities, our primary objective is the conclusion of tax treaties that will provide the greatest benefit to the 

United States and to U.S. taxpayers. We communicate regularly with the U.S. business community and the Internal Revenue Service, seeking their input regarding 

the areas in which treaty network expansion and improvement efforts should be 

focused and seeking information regarding practical problems encountered under 

particular treaties and particular tax regimes. 

The primary constraint on the size of our tax treaty network may be the complexity of the negotiations themselves. Ensuring that the various functions to be 

performed by tax treaties are all properly taken into account makes the negotiation 

process exacting and time consuming. 

103 

Numerous features of a country’s particular tax legislation and its interaction 

with U.S. domestic tax rules are considered in negotiating a tax treaty. Examples 

include whether the country eliminates double taxation through an exemption system or a credit system, the country’s treatment of partnerships and other transparent entities, and how the country taxes contributions to pension funds, earnings 

of the funds, and distributions from the funds. 

Moreover, a country’s fundamental tax policy choices are reflected not only in its 

tax legislation but also in its tax treaty positions. These choices differ significantly 

from country to country, with substantial variation even across countries that seem 

to have quite similar economic profiles. A treaty negotiation must take into account 

all of these aspects of the particular treaty partner’s tax system and treaty policies 

to arrive at an agreement that accomplishes the United States tax treaty objectives. 

Obtaining the agreement of our treaty partners on provisions of importance to the 

United States sometimes requires concessions on our part. Similarly, the other country sometimes must make concessions to obtain our agreement on matters that are 

critical to it. Each tax treaty that we present to the Senate represents not only the 

best deal that we believe can be achieved with the particular country, but also constitutes an agreement that we believe is in the best interests of the United States. 

In some situations, the right result may be no tax treaty at all. Prospective treaty 

partners must evidence a clear understanding of what their obligations would be 

under the treaty, especially those with respect to information exchange, and must 

demonstrate that they would be able to fulfill those obligations. Sometimes a tax 

treaty may not be appropriate because a potential treaty partner is unable to do 

so. 

In other cases, a tax treaty may be inappropriate because the potential treaty 

partner is not willing to agree to particular treaty provisions that are needed to 

address real tax problems that have been identified by U.S. businesses operating 

there. If the potential treaty partner is unwilling to provide meaningful benefits in 

a tax treaty, investors would find no relief, and accordingly there would be no merit 

to entering into such an agreement. The Treasury Department would not enter into 

a tax treaty that did not provide benefits to investors or which could be construed 

as an indication to future potential treaty partners that we would settle for a tax 

treaty with inferior terms. 

Sometimes a potential treaty partner insists on provisions the United States will 

not agree to, such as providing a U.S. tax credit for investment in the foreign country (so-called ‘‘tax sparing’’). With other countries there simply may not be the type 

of cross-border tax issues that are best resolved by treaty. For example, if a country 

does not impose significant income taxes, there is little possibility of double taxation 

of cross-border income, and an agreement that focuses exclusively on the exchange 

of tax information (so called ‘‘tax information exchange agreements’’ or TIEAs) may 

be the most appropriate agreement. 

A high priority for improving our overall treaty network is continued focus on prevention of ‘‘treaty shopping.’’ The U.S. commitment to including comprehensive limitation on benefits provisions is one of the keys to improving our overall treaty network. Our tax treaties are intended to provide benefits to residents of the United 

States and residents of the particular treaty partner on a reciprocal basis. The 

reductions in source-country taxes agreed to in a particular treaty mean that U.S. 

persons pay less tax to that country on income from their investments there and 

residents of that country pay less U.S. tax on income from their investments in the 

United States. Those reductions and benefits are not intended to flow to residents 

of a third country. If third-country residents are able to exploit one of our tax treaties to secure reductions in U.S. tax, such as through the use of an entity resident 

in a treaty country that merely holds passive U.S. assets, the benefits would flow 

only in one direction, as third-country residents would enjoy U.S. tax reductions for 

their U.S. investments, but U.S. residents would not enjoy reciprocal tax reductions 

for their investments in that third country. Moreover, such third-country residents 

may be securing benefits that are not appropriate in the context of the interaction 

between their home country’s tax systems and policies and those of the United 

States. This use of tax treaties is not consistent with the balance of the deal negotiated in the underlying tax treaty. Preventing this exploitation of our tax treaties 

is critical to ensuring that the third country will sit down at the table with us to 

negotiate on a reciprocal basis, so we can secure for U.S. persons the benefits of 

reductions in source-country tax on their investments in that country. 

CONSIDERATION OF ARBITRATION

Tax treaties cannot facilitate cross-border investment and provide a more stable 

investment environment unless the treaty is effectively implemented by the tax 

104 

administrations of the two countries. Under our tax treaties, when a U.S. taxpayer 

becomes concerned about implementation of the treaty, the taxpayer can bring the 

matter to the U.S. competent authority who will seek to resolve the matter with the 

competent authority of the treaty partner. The competent authorities will work 

cooperatively to resolve genuine disputes as to the appropriate application of the 

treaty. 

The U.S. competent authority has a good track record in resolving disputes. Even 

in the most cooperative bilateral relationships, however, there will be instances in 

which the competent authorities will not be able to reach a timely and satisfactory 

resolution. Moreover, as the number and complexity of cross-border transactions 

increases, so does the number and complexity of cross-border tax disputes. Accordingly, we have considered ways to equip the U.S. competent authority with additional tools to resolve disputes promptly, including the possible use of arbitration 

in the competent authority mutual agreement process. 

The first U.S. tax agreement that contemplated arbitration was the United 

States-Germany income tax treaty signed in 1989. Tax treaties with some other 

countries, including Mexico and the Netherlands, incorporate authority for establishing voluntary binding arbitration procedures based on the provision in the prior 

United States-Germany treaty (although, these provisions have never been implemented). Although we believe that the presence of these voluntary arbitration provisions may have provided some limited incentive to reaching mutual agreements, it 

has become clear that the ability to enter into voluntary arbitration does not always 

provide sufficient incentive to resolve problem cases in a timely fashion. 

Over the past few years, we have carefully considered and studied various types 

of mandatory arbitration procedures that could be used as part of the competent 

authority mutual agreement process. In particular, we examined the experience of 

countries that adopted mandatory binding arbitration provisions with respect to tax 

matters. Many of them report that the prospect of impending mandatory arbitration 

creates a significant incentive to compromise before commencement of the process. 

Based on our review of the U.S. experience with arbitration in other areas of the 

law, the success of other countries with arbitration in the tax area, and the overwhelming support of the business community, we concluded that mandatory binding 

arbitration as the final step in the competent authority process can be an effective 

and appropriate tool to facilitate mutual agreement under U.S. tax treaties. 

One of the treaties before the committee, the Protocol with France, includes a type 

of mandatory arbitration provision that in general terms is similar to provisions in 

our current treaties with Canada, Germany, and Belgium, which this committee and 

the Senate have approved over the last 3 years. 

In the typical competent authority mutual agreement process, a U.S. taxpayer 

presents its problem to the U.S. competent authority and participates in formulating 

the position the U.S. competent authority will take in discussions with the treaty 

partner. Under the arbitration provision proposed in the France protocol, as in the 

similar provisions that are now part of our treaties with Canada, Germany, and Belgium, if the competent authorities cannot resolve the issue within 2 years, the competent authorities must present the issue to an arbitration board for resolution, 

unless both competent authorities agree that the case is not suitable for arbitration. 

The arbitration board must resolve the issue by choosing the position of one of the 

competent authorities. That position is adopted as the agreement of the competent 

authorities and is treated like any other mutual agreement (i.e., one that has been 

negotiated by the competent authorities) under the treaty. 

Because the arbitration board can only choose between the positions of each competent authority, the expectation is that the differences between the positions of the 

competent authorities will tend to narrow as the case moves closer to arbitration. 

In fact, if the arbitration provision is successful, difficult issues will be resolved 

without resort to arbitration. Thus, it is our expectation that these arbitration provisions will be rarely utilized, but that their presence will encourage the competent 

authorities to take approaches to their negotiations that result in mutually agreeable conclusions in the first place. 

The arbitration process proposed in the agreement with France, consistent with 

its predecessors, is mandatory and binding with respect to the competent authorities. However, consistent with the negotiation process under the mutual agreement 

procedure generally, the taxpayer can terminate the arbitration at any time by 

withdrawing its request for competent authority assistance. Moreover, the taxpayer 

retains the right to litigate the matter (in the United States or the treaty partner) 

in lieu of accepting the result of the arbitration, just as it would be entitled to litigate in lieu of accepting the result of a negotiation under the mutual agreement 

procedure. 

105 

In negotiating the arbitration rule in the proposed Protocol with France, we took 

into account concerns expressed by this committee over certain aspects of the arbitration rules with Canada, Germany, and Belgium. Accordingly, the proposed arbitration rule with France differs from its predecessors in three key respects. First, 

recognizing the committee’s instructions in its report on the Canada protocol that 

future arbitration rules should provide a mechanism for taxpayer input in the arbitration process, the proposed rule with France allows the taxpayers who presented 

the original case that is subjected to arbitration to submit a Position Paper directly 

to the arbitration panel. Second, the rule on the proposed France Protocol disallows 

a competent authority from appointing an employee from its own tax administration 

to the arbitration board. Finally, the rule in the proposed France Protocol does not 

prescribe a hierarchy of legal authorities that the arbitration panel will use in making its decision. Thus, customary international law rules on treaty interpretation 

will apply. The new protocol amending our tax treaty with Switzerland, signed in 

September 2009, also contains an arbitration rule that is substantially the same as 

the rule in the proposed France Protocol. The administration hopes to transmit the 

Switzerland protocol to the Senate for its advice and consent as soon as possible. 

Arbitration is a growing and developing field, and there are many forms of arbitration from which to choose. We intend to continue to study other arbitration provisions and to monitor the performance of the provisions in the agreements with Canada, Belgium, and Germany, as well as the performance of the provision in the 

agreement with France, if ratified. As requested by the Senate in its approval of 

the protocol with Canada in 2008, the Internal Revenue Service has published the 

administrative procedures necessary to implement the arbitration rules with Germany and Belgium, although to date no tax disputes with either country has been 

submitted to arbitration. The development of arbitration procedures are still under 

discussion with the Canadian tax authorities. 

We look forward to continuing to work with the committee to make arbitration 

an effective tool in promoting the fair and expeditious resolution of treaty disputes. 

The committee’s comments made with respect to the arbitration provisions with 

Canada, Germany, and Belgium have been very helpful and will continue to inform 

future negotiations of arbitration provisions. 

DISCUSSION OF PROPOSED TREATIES

I now would like to discuss the three tax treaties that have been transmitted for 

the Senate’s consideration. We have submitted a Technical Explanation of each 

treaty that contains detailed discussions of the provisions of each treaty. These 

Technical Explanations serve as the Treasury Department’s official guide to each 

tax treaty. 

France 

The proposed Protocol with France was signed in Paris on January 13, 2009, and 

is the second protocol of amendment to the current tax Convention with France, 

signed in 1994. The most significant provisions in this agreement relate to the taxation of dividends and royalties, the adoption of mandatory arbitration to facilitate 

the resolution of disputes between the United States and French revenue authorities, and provisions to prevent treaty abuse and provide for full exchange of information for tax purposes. The Protocol also makes a number of necessary updates 

to the current Convention to better reflect French and U.S. domestic law. 

The proposed Protocol makes a number of changes to the dividend article of the 

current Convention. The proposed Protocol eliminates the source-country withholding tax on many intercompany dividends. In general, a company receiving a dividend must have a substantial interest in the distributing corporation for a 12- 

month period and meet special limitation on benefits provisions to qualify for the 

exemption from withholding tax. The proposed Protocol also updates the dividend 

article to incorporate policies reflected in the U.S. Model provision, such as those 

regarding regulated investment companies (RICs) and real estate investment trusts 

(REITs). 

The proposed Protocol makes a significant change to the royalty article of the current Convention. The current Convention allows the source country to withhold on 

royalty payments to residents of the other treaty partner with respect to certain 

types of property, but limits the withholding rate to a maximum of 5 percent. The 

proposed Protocol eliminates source-country withholding on all royalty payments, 

bringing the Convention in line with the U.S. Model treaty. 

The proposed Protocol makes a number of changes to the limitation on benefits 

article of the current Convention. It tightens the limitation on benefits rules applicable to publicly traded companies to ensure a closer nexus between the company and 

its residence country through regional trading of its shares or local management 

106 

and control. The proposed Protocol further tightens the limitation on benefits provision by including a so-called ‘‘triangular provision’’ adopted in many U.S. tax treaties. The rule is designed to prevent the use of structures including third-country 

branches to avoid both source- and residence-country taxation. Under the provision, 

the United States needs not allow full treaty benefits to a French enterprise with 

respect to certain income attributable to a permanent establishment of the French 

enterprise located in a third country if the income is not subject to a sufficient combined level of tax in both France and the third country. 

The proposed Protocol updates the provision in the current Convention that preserves the U.S. right to tax certain former citizens also to cover certain former longterm residents to reflect changes in U.S. law. 

As previously noted, the proposed Protocol provides for mandatory arbitration of 

certain cases that have not been resolved by the competent authority within a specified period, generally 2 years from the commencement of the case. A Memorandum 

of Understanding accompanying the Protocol sets forth rules and procedures for arbitration. The arbitration board must deliver a determination within 6 months of 

the appointment of the chair of the arbitration board, and the determination must 

either be the proposed resolution submitted by the United States or the proposed 

resolution submitted by France. The board’s determination has no precedential 

value and that the board shall not provide a rationale for its determination. As mentioned above, in response to concerns expressed by the Senate in the approval of 

prior agreements, the arbitration rule in the proposed Protocol differs from earlier 

arbitration provisions in some key respects. First, the proposed Protocol permits the 

concerned taxpayers to summit written Position Papers to the arbitration board. 

Second, under the proposed Protocol, the competent authority of a Contracting State 

may not appoint an employee of its tax administration to be a member of the arbitration board. Finally, the proposed protocol does not prescribe a hierarchy of legal 

authorities to which the arbitration board must adhere. 

The proposed Protocol provides that the United States and France shall notify 

each other in writing, through diplomatic channels, when their respective constitutional and statutory requirements for entry into force of the proposed Protocol have 

been satisfied. The proposed Protocol will enter into force upon the date of receipt 

of the later of such notifications. For taxes withheld at source, it will have effect 

for amounts paid or credited on or after the first day of the January of the year 

in which the proposed Protocol enters into force. With respect to other taxes, the 

proposed Protocol will generally have effect for taxable years that begin on or after 

the first day of January next following the date on which the proposed Protocol 

enters into force. 

Malta 

The proposed income tax Convention and accompanying exchange of notes with 

Malta signed in Valletta on August 8, 2008, reestablishes a previous tax treaty relationship between Malta and the United States. The proposed Convention is generally consistent with the current U.S. Model income tax treaty and with treaties 

that the United States has with other countries, while incorporating special rules 

to take into account special features of Malta’s domestic tax law. 

Under the proposed Convention, the United States may impose withholding taxes 

on cross-border portfolio dividend payments at a maximum rate of 15 percent. When 

the beneficial owner of the dividend is a company that directly owns at least 10 percent of the stock of the company paying the dividend, the United States may impose 

withholding tax at a maximum rate of 5 percent. The proposed Convention also incorporates rules provided in the U.S. Model tax treaty for certain classes of investment income. For example, dividends paid by RICs and REITs are subject to special 

rules to prevent the use of these entities to transform what is otherwise higher 

taxed income into lower taxed income. 

The proposed Convention generally limits withholding taxes on cross-border interest and royalty payments to a maximum rate of 10 percent. The interest article of 

the proposed Convention also contains the U.S. Model rules regarding contingent 

interest and REMICs. 

The proposed Convention limits the taxation by one country of the business profits of a resident of the other country. The source country’s right to tax such profits 

is generally limited to cases in which the profits are attributable to a permanent 

establishment located in that country. 

Consistent with current U.S. tax treaty policy, the proposed Convention includes 

a comprehensive limitation on benefits article, which takes into account unique features of Malta’s tax system and is designed to deny treaty shoppers the benefits of 

the Convention. The proposed Convention provides for nondiscriminatory treatment 

by one country to residents and nationals of the other country. In addition, the proVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00106 Fmt 6601 Sfmt 6621 H:\DOCS\TD111-1.TXT MIKEB
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posed Convention provides for the full exchange between the tax authorities of each 

country of information relevant to carrying out the provisions of the agreement or 

the domestic tax laws of either country. This will facilitate the enforcement of U.S. 

domestic tax rules. The proposed Convention provides that information exchanged 

pursuant to the Convention may, with the written consent of the country providing 

the information, be used for certain nontax purposes as permitted under the provisions of an existing mutual legal assistance treaty between the two countries that 

allows for the exchange of tax information. 

The proposed Convention provides that the United States and Malta shall 

exchange instruments of ratification when their respective applicable procedures for 

approval of the proposed Convention. The proposed Convention will enter into force 

upon the exchange of instruments of ratification. It will have effect, with respect to 

taxes withheld at source, for amounts paid or credited on or after the first day of 

the second month next following the date on which the proposed Convention enters 

into force and, with respect to other taxes, for taxable years beginning on or after 

the first day of January in the year following the date upon which the proposed 

Convention enters into force. 

New Zealand 

The proposed Protocol with New Zealand was signed in Washington on December 

1, 2008, and amends the current tax Convention with New Zealand, which entered 

into force in 1983. The most significant provisions in this agreement relate to dividends, interest, royalties, taxation of income from personal services, antiabuse provisions, and exchange of information for tax purposes. The proposed Protocol deletes 

the current Convention’s denial of treaty benefits to certain categories of U.S. citizens. The Protocol also makes a number of necessary updates to the current Convention to better reflect New Zealand and U.S. domestic law. 

The proposed Protocol makes a number of changes to the dividend article of the 

current Convention. The proposed Protocol eliminates the source-country withholding tax on many intercompany dividends. In general, a company receiving a dividend must have a substantial interest in the distributing corporation for a 12-month 

period and meet special limitation on benefits provisions to qualify for the exemption from withholding tax. The proposed Protocol also updates the dividend article 

to incorporate policies reflected in the U.S. Model provision, such as those regarding 

dividends paid by RICs and REITs. 

The proposed Protocol amends the interest article of the current Convention. The 

current Convention allows the source country to withhold on interest payments to 

unrelated banks and certain financial enterprises at a maximum of 10 percent. The 

proposed Protocol eliminates source-country withholding on these payments, provided, in the case of New Zealand, that the payer of the interest has paid New Zealand’s ‘‘approved issuer levy’’ with respect to the interest. Moreover, the proposed 

Protocol secures the elimination of taxation by New Zealand on interest payments 

to unrelated U.S. banks and financial enterprises even if New Zealand changes the 

approved issuer levy regime in the future. 

The proposed Protocol makes significant changes to the royalty article of the current Convention. The current Convention allows the source country to withhold on 

royalty payments with respect to certain types of property to residents of the other 

treaty partner, but limits the withholding rate to a maximum of 10 percent. The 

proposed Protocol lowers that maximum withholding rate on royalties to 5 percent. 

Additionally, the proposed Protocol amends current Convention’s definition royalties 

by excluding from the definition payments for the rental of equipment and other, 

tangible personal property. 

As a result, these rental payments will be subject to the same tax treatment as 

business income. These changes will bring the current tax Convention into closer 

alignment with U.S. Model tax treaty policy. 

The proposed Protocol makes important changes to the taxation of individuals 

providing personal services. Under the current Convention, income from independent personal services (such as accounting, legal or consultancy services) may be 

taxed by the country in which the services are performed if the individual providing 

the services is present in that country for a period of 183 days or more. The proposed Protocol replaces this taxing right based on days of presence with the U.S. 

Model approach, which allows the country where the services are performed to tax 

the income only if the service provider has a fixed place of business in that country. 

The proposed Protocol makes changes to the scope of benefits of the current Convention available to U.S. citizens. Under the current Convention, treaty benefits are 

only available to U.S. citizens who are also resident in the United States. The proposed Protocol eliminates the residency requirement and makes all U.S. citizens, 

wherever resident, eligible for treaty benefits. This broader application, which is 

108 

consistent with the U.S. Model tax treaty, is appropriate policy, because all U.S. citizens are subject to tax by the United States on their worldwide income (and thus 

deserving of the benefits of U.S. tax treaties) regardless of their place of residence. 

The proposed Protocol replaces the limitation on benefits article of the current 

Convention with a provision that closely tracks the U.S. Model rule. It tightens the 

limitation on benefits rules applicable to publicly traded companies to ensure a 

closer nexus between the company and its residence country through trading of its 

shares on a local stock exchange or through local management and control. The proposed Protocol further tightens the limitation on benefits provision by including a 

so-called ‘‘triangular provision’’ adopted in many U.S. treaties. The rule is designed 

to prevent the use of structures including third-country branches to avoid both 

source- and residence-country taxation. Under the provision, the United States need 

not allow full treaty benefits to a New Zealand enterprise with respect to certain 

income attributable to a permanent establishment of the New Zealand enterprise 

located in a third country if the income is not subject to a sufficient combined level 

of tax in both New Zealand and the third country. 

The proposed Protocol includes other antiabuse rules. It extends the provision in 

the current Convention that preserves the U.S. right to tax certain former citizens 

also to cover certain former long-term residents, and updates the provision to reflect 

changes in U.S. law. The proposed Protocol conforms the interest article in the current Convention to the U.S. Model treaty by including special contingent interest 

and real estate mortgage investment—conduit exceptions to the elimination of withholding tax on interest payments. 

The proposed Protocol includes several other important administrative and technical amendments. Significantly, it updates the exchange of information provisions 

to specify the obligation to obtain and provide information held by financial institutions, and to otherwise reflect U.S. Model standards in this area. 

The proposed Protocol provides that the United States and New Zealand shall 

notify each other in writing, through diplomatic channels, when their respective 

applicable procedures for ratification have been satisfied. The proposed Protocol will 

enter into force upon the date of the later of the required notifications. For taxes 

withheld at source, the proposed Protocol will have effect on the first day of the second month following the date of entry into force. With respect to other taxes, the 

Protocol will have effect in the United States for taxable periods starting on or after 

the first day of the January next following the date of entry into force. In New Zealand, the proposed Protocol will have effect with respect to other taxes for taxable 

periods beginning on or after the first day of April next following the date of entry 

into force. 

TREATY PROGRAM PRIORITIES

A key continuing priority for the Treasury Department is updating the few 

remaining U.S. tax treaties that provide for significant withholding tax reductions 

but do not include the limitation on benefits provisions needed to protect against 

the possibility of treaty shopping. I am pleased to report that in this regard we have 

made significant progress. Most notably, in June 2009 we announced the conclusion 

of the negotiation of a new tax treaty with Hungary. The new Hungary treaty, 

which we hope to sign, soon will contain a comprehensive limitation on benefits provision that will ensure that only residents of the United States and Hungary will 

enjoy the benefits of the treaty. In addition, we recently concluded our second round 

of negotiations with Poland and plan to hold additional negotiations early next year. 

Concluding agreements that provide for the full exchange of information, including information held by banks and other financial institutions, is another key priority of the Treasury Department. 2009 has been a year of fundamental change in 

transparency, as many secrecy jurisdictions announced their intentions to comply 

with the international standard of full information exchange. In this changing environment, the Treasury has made many key achievements, including the conclusion 

of protocols of amendment to the U.S. tax treaties with Switzerland and Luxembourg that provide for full exchange of information, including bank account information. The administration hopes to transmit these agreements to the Senate for its 

consideration as soon as possible. Moreover, in the near future we hope to commence or reinvigorate tax treaty negotiations with a number of our other trading 

partners with bank secrecy rules once those countries have eliminated all domestic 

law impediments to full exchange of information. 

Beyond the two chief priorities of curbing treaty shopping and expanding 

exchange of information relationships, the Treasury Department continues to maintain a very active calendar of tax treaty negotiations. We have recently held formal 

109 

treaty negotiations with Colombia and Korea, and later this month will open formal 

negotiations with Israel. 

CONCLUSION

Mr. Chairman and Ranking Member Lugar, let me conclude by thanking you for 

the opportunity to appear before the committee to discuss the administration’s 

efforts with respect to the three agreements under consideration. We appreciate the 

committee’s continuing interest in the tax treaty program, and we thank the members and staff for devoting time and attention to the review of these new agreements. We are also grateful for the assistance and cooperation of the staff of the 

Joint Committee on Taxation. 

On behalf of the administration, we urge the committee to take prompt and favorable action on the agreements before you today. 

Senator KAUFMAN. Thank you. 

Mr. Barthold. 

STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, 

JOINT COMMITTEE ON TAXATION 

Mr. BARTHOLD. Thank you, Mr. Chairman. 

My name is Thomas A. Barthold. I’m the Chief of Staff for the 

Joint Committee on Taxation, and it’s my pleasure to present the 

testimony of the staff of the Joint Committee on Taxation today 

concerning the proposed income tax treaty with Malta and the proposed tax protocols with France and New Zealand. 

The Joint Committee Staff has prepared pamphlets covering the 

proposed treaty and protocols, including detailed descriptions of 

those documents, comparisons with the United States Model 

Income Tax Treaty, and detailed discussions of issues raised by the 

proposed treaty and protocols. I’ve provided the committee with a 

more detailed written statement, and I’ll try to just briefly summarize a few high points from that material. 

The proposed treaty and protocols generally follow the U.S. 

Model Treaty. However, there are some key differences, and I’d like 

to just briefly address three: treaty-shopping and the Malta treaty, 

about which Ms. Corwin spoke; binding arbitration and the French 

protocol, also discussed by my friend and colleague, Ms. Corwin; 

and the exchange of information provided under each document. 

As was noted, in 1997 the United States had terminated its thenexisting treaty with Malta, with the Treasury citing concerns over 

potential for treaty-shopping under the old treaty. Treaty-shopping 

is facilitated by a number of factors, among them weak limitation 

on benefits provisions of a treaty and certain favorable domestic 

law taxation of dividends, interest, and capital-gain income. 

At that time, in the mid-1990s, the Treasury had also noted that 

Malta did not generally permit sharing of bank information with 

foreign tax authorities. Now, subsequent to joining the European 

Union, Malta has revised its law to permit sharing of bank information with tax authorities, and the proposed treaty would create 

a ‘‘limitation on benefits’’ provision more stringent than that of the 

U.S. model. It would also, as was noted, permit nonzero withholding rates on interest, dividends, and royalties. 

However, Malta’s internal law, which was seen a decade ago as 

potentially facilitating treaty-shopping, is largely unchanged. And 

for that reason, it may be beneficial to ask the Treasury Department more specifically what factors led it to conclude that the conVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00109 Fmt 6601 Sfmt 6602 H:\DOCS\TD111-1.TXT MIKEB
110 

cerns of a decade ago have been adequately addressed by the overall balance of the proposed treaty and the changes in internal law. 

The proposed French protocol includes a requirement that disputes that the competent authorities of the two treaty countries are 

unable to resolve through consultation be settled by arbitration. 

The arbitration method is referred to as ‘‘last-best-offer arbitration,’’ and, as was noted, the United States currently has three tax 

treaties, those with Belgium, Canada, and Germany, that have 

similar provisions for mandatory arbitration. Nevertheless, this 

remains a unique feature of the U.S. income tax treaty network, 

and there are some differences, as were noted by Ms. Corwin, of 

the arbitration as proposed under the French protocol and those of 

the three existing treaties. 

By contrast with the tax treaties with Canada and Germany, but 

like that of the United States/Belgium treaty, the proposed protocol 

with France permits arbitration of any case involving the application of any article of the treaty, so long as the competent authorities have not agreed that the case is not suitable for arbitration. 

In the cases of Canada and Germany, mandatory arbitration is 

more prescribed. 

As noted by Ms. Corwin, a second and an important contrast 

with the three existing treaties is that the proposed protocol with 

France allows a taxpayer whose case is in mandatory arbitration 

to submit a position paper to the arbitration board. This is an important new development, and the committee may wish to inquire 

both about the scope of mandatory arbitration—the comparison of 

the four cases just noted—and the opportunity for taxpayer participation. More broadly, as arbitration was included in the French 

protocol, but not in the protocol with New Zealand, for example, 

the committee might inquire whether this is to become a standard 

feature of future United States tax treaties, or if the Treasury 

Department has particular goals in selectively choosing certain 

countries with which it negotiates such provisions. 

Also, I might note that, as the committee is aware, as a condition 

of ratifying the United States protocol with Canada just last year, 

the Senate required the Treasury Department to submit a report 

describing operation of the mandatory arbitration procedures under 

the Belgium, Canada, and Germany treaties. The committee may 

wish to consider whether it should require Treasury reporting to be 

expanded to encompass the arbitration proceedings that are proposed in the protocol with France. 

Each of the proposed treaty and the protocols include ‘‘exchange 

of information’’ articles, again largely following the U.S. model. 

There is a unique feature in the Malta treaty, however. The proposed treaty permits the recipient of information exchanged under 

the treaty to use that information for purposes sanctioned by the 

United States/Malta treaty on certain aspects of mutual legal 

assistance in criminal matters, the so-called ‘‘MLAT.’’ 

The inclusion of a cross-reference to the MLAT in the proposed 

treaty is unique among U.S. income tax treaties providing for 

exchange of information. The committee may wish to explore how 

this new rule will be reconciled with domestic restrictions on disclosure of tax return information if Malta, for example, were to request permission to use the information for nontax purposes. 

111 

1This document may be cited as follows: Joint Committee on Taxation, Testimony of the Staff 

of the Joint Committee on Taxation Before the Senate Committee on Foreign Relations Hearing 

on the Proposed Tax Treaty with Malta and the Proposed Tax Protocols with France and New 

Zealand (JCX 0954 0909), November 10, 2009. This publication can also be found at http:// 

www.jct.gov/. 2 Joint Committee on Taxation,‘‘ Explanation of Proposed Income Tax Treaty Between the 

United States and Malta’’ (JCX–50–09), November 6, 2009; Joint Committee on Taxation, 

‘‘Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and 

France’’ (JCX–49–09), November 6, 2009; Joint Committee on Taxation, ‘‘Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and New Zealand’’ (JCX– 

51–09), November 6, 2009. 

To the more general application of information exchange it is 

perhaps worth noting that automatic and specific information 

exchange, which are provided under the tax treaty and these protocols, may not always be useful. There are problems with automatic 

information exchange under existing U.S. tax treaties and the tax 

treaties of other countries, and these have included that information has not always been provided on a timely basis, the different 

treaty partners’ tax reporting periods may differ from one another, 

the recipient country sometimes has even had difficulty translating 

the information into its own language, and then, sometimes the 

information is so voluminous as to not be beneficial to the tax 

authority. 

So, the committee may wish to explore with the Treasury 

whether they foresee any practical impediments to the automatic 

information exchange provided with France, Malta, and New Zealand and the potential ease with which any impediments could be 

removed, and the likelihood that they, in fact, would be removed. 

A specific problem with specific exchange of information has been 

that some treaty countries have declined to exchange information 

in response to specific requests intended to identify limited classes 

of purposes. The committee may wish to seek assurances, under 

the proposed treaty with Malta and the proposed protocols with 

France and New Zealand, that the treaty countries are required to 

exchange information in response to specific requests that are comparable to John Doe summonses under present law. This was an 

issue that has been in the news over the last half year in our dealings under the Swiss Treaty in the well-known UBS case. 

I think those three main points are important highlights, and I’ll 

conclude my oral testimony with that. 

As always, I and my staff are happy to answer any questions 

that you or other members may have at this time or in the future. 

[The prepared statement of Mr. Barthold follows:] 

PREPARED STATEMENT OF THE STAFF OF THE JOINT COMMITTEE ON TAXATION 1

My name is Thomas A. Barthold. I am Chief of Staff of the Joint Committee on 

Taxation. It is my pleasure to present the testimony of the staff of the Joint Committee on Taxation today concerning the proposed income tax treaty with Malta and 

the proposed tax protocols with France and New Zealand. 

OVERVIEW

As in the past, the Joint Committee staff has prepared pamphlets covering the 

proposed treaty and protocols. The pamphlets provide detailed descriptions of the 

proposed treaty and protocols, including comparisons with the United States Model 

Income Tax Convention of November 15, 2006 (‘‘U.S. Model treaty’’), which reflects 

preferred U.S. tax treaty policy, and with other recent U.S. tax treaties. 2 The 

pamphlets also provide detailed discussions of issues raised by the proposed treaty 

and protocols. We consulted with the Treasury Department and with the staff of 

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your committee in analyzing the proposed treaty and protocols and in preparing the 

pamphlets. 

The principal purposes of the treaty and protocols 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 and protocols also are intended to promote close economic 

cooperation between the treaty countries and to eliminate possible barriers to trade 

and investment caused by overlapping taxing jurisdictions of the treaty 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. 

The proposed treaty with Malta would restore an income tax treaty relationship 

that the United States terminated with effect in 1997. The proposed protocol with 

France would amend an existing tax treaty that was signed in 1994 and that was 

amended by a previous protocol signed in 2004. The proposed protocol with New 

Zealand would amend an existing tax treaty that was signed in 1982. 

My testimony today will highlight some of the key features of the proposed treaty 

and protocols and certain issues that those agreements raise. 

U.S. MODEL TREATY

As a general matter, U.S. Model tax treaties provide a framework for U.S. tax 

treaty policy and a starting point for tax treaty negotiations with our treaty partners. These models provide helpful information to taxpayers, the Congress, and foreign governments about U.S. policies on tax treaty matters. The present U.S. Model 

treaty incorporates important developments in U.S. income tax treaty policy that 

had been reflected in U.S. income tax treaties signed in the years immediately preceding the Model’s publication in 2006. Treaties that the United States has negotiated since 2006 in large part follow the U.S. Model treaty. The proposed treaty 

and protocols that are the subject of this hearing are, accordingly, generally consistent with the provisions found in the U.S. Model treaty. There are, however, some 

key differences from the U.S. Model treaty that I will discuss. 

MALTA: TREATY SHOPPING

Limitation-on-benefits provisions 

Like the U.S. Model treaty, the proposed protocols with France and New Zealand 

and the proposed treaty with Malta include extensive limitation-on-benefits rules. 

Limitation-on-benefits provisions are intended to prevent third-country residents 

from benefiting inappropriately from a treaty that generally grants benefits only to 

residents of the two treaty countries. This practice is commonly referred to as 

‘‘treaty shopping.’’ A company may engage in treaty shopping by, for example, organizing a related treaty-country resident company that has no substantial presence 

in the treaty country. The third-country company may arrange, among other transactions, to have the related treaty-country company remove, or strip, income from 

the treaty country in a manner that reduces the overall tax burden on that income. 

Limitation-on-benefits rules may prevent these and other transactions by requiring 

that an individual or a company seeking treaty benefits have significant connections 

to a treaty country as a condition of eligibility for benefits. 

The limitation-on-benefits rules of the proposed protocols with France and New 

Zealand are generally consistent with the rules of the U.S. Model treaty. The limitation-on-benefits rules of the proposed treaty with Malta, by contrast, depart in several significant respects from parallel rules of the U.S. Model treaty. These departures generally make the rules of the proposed treaty with Malta more restrictive 

than the U.S. Model treaty’s limitation-on-benefits provision. For example, the 

departures include more restrictive tests, first, for determining whether a publicly 

traded company qualifies for treaty benefits and, second, for determining whether 

a nonpublicly traded company is eligible for treaty benefits based on the extent to 

which the company pays its gross income to persons who are not residents of either 

treaty country. 

Withholding tax rules 

The proposed treaty with Malta also departs from the U.S. Model treaty in its 

withholding tax rules for interest, royalties, and other income not covered by particular articles of the treaty. The U.S. Model treaty provides an exemption from 

source-country withholding tax on most payments of interest, royalties, and other 

income to a resident of the other treaty country. By contrast, the proposed treaty 

with Malta permits withholding at a 10-percent rate on these payments. 

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The proposed treaty with Malta is consistent with the U.S. Model treaty in its 

rules for dividend withholding tax, but these rules are less favorable to taxpayers 

than the dividend provisions of other recent U.S. tax treaties. Like the U.S. Model 

treaty, the proposed treaty with Malta permits imposition of source-country withholding tax at a 5-percent rate on dividends paid to a 10-percent-or-greater shareholder resident in the other treaty country and at a 15-percent rate on other dividends. The proposed protocol with France and many other recent U.S. tax treaties 

eliminate source-country withholding tax on dividends paid by an at least 80-percent-owned subsidiary to the parent corporation in the other treaty jurisdiction. 

Malta’s domestic law 

The strict limitation-on-benefits rules and the less taxpayer-favorable withholding 

tax rules of the proposed treaty with Malta are intended to restrict treaty shopping 

that might otherwise be attractive because of features of Malta’s internal tax laws. 

These features include, among others: (1) An exemption from Maltese corporate taxation for dividends received by a Malta corporation from certain foreign subsidiaries; 

(2) a corresponding exemption from Maltese corporate tax for gain from the sale of 

shares of these foreign subsidiaries; (3) the absence of Maltese withholding tax on 

dividend and interest payments to non-Maltese residents; and (4) an imputation system of corporate tax that has the effect of eliminating a shareholder-level tax on 

corporate profits. 

Appropriateness of entering into new treaty with Malta 

The previously mentioned U.S. termination of the prior income tax treaty with 

Malta was due in part to the Treasury Department’s concern that Malta’s internal 

tax law might have facilitated treaty shopping. At the time, Malta also did not generally permit sharing of bank information with foreign tax authorities. Malta has 

since joined the European Union (‘‘EU’’), implemented EU directives assuring mutual administrative assistance and compliance with international transparency 

norms, and revised its domestic laws to allow Maltese tax authorities to share bank 

information with foreign tax authorities. By contrast, the Maltese internal taxation 

rules that might have facilitated treaty shopping remain largely unchanged. To prevent possible treaty shopping, however, the proposed treaty includes the strict limitation-on-benefits and withholding tax provisions described above. 

In light of the prior treaty history, your committee may wish to ask the Treasury 

Department about the factors that led it to conclude that it was now appiopriate 

to enter into a new income tax treaty with Malta. Your committee may also wish 

to inquire whether the provisions of the proposed treaty and changes to Maltese 

domestic law, taken together, assuage the concerns that led the Treasury Department to terminate the prior treaty. 

FRANCE: MANDATORY ARBITRATION

The proposed protocol with France broadly follows the U.S. Model treaty. The proposed protocol does, however, differ from the U.S Model treaty in several provisions, 

including its requirement that disputes that the competent authorities of the two 

treaty countries are unable to resolve through consultation be settled by arbitration. 

U.S. income tax treaties provide mutual agreement procedures authorizing the 

competent authorities of the treaty countries to cooperate to resolve disputes, clarify 

issues, and address cases of double taxation. The present tax treaty with France and 

other U.S. income tax treaties permit the competent authorities and the affected 

taxpayer to agree to voluntary arbitration of a case that the competent authorities 

cannot resolve by mutual agreement. The proposed protocol with France replaces 

this optional arbitration procedure with rules for mandatory arbitration of some 

unresolved disputes. Three U.S. tax treaties—those with Belgium, Canada, and 

Germany—now contain similar rules for mandatory arbitration. These rules are a 

departure from the U.S. Model treaty. The proposed treaty with Malta and the proposed protocol with New Zealand do not include provisions for mandatory arbitration of unresolved cases. 

Although the mandatory arbitration provision of the proposed protocol with 

France is similar to the corresponding provisions of the U.S. tax treaties with Belgium, Canada, and Germany, there are two significant differences. First, by contrast 

with the U.S. tax treaties with Canada and Germany, but like the United StatesBelgium treaty, the proposed protocol with France permits arbitration of any case 

involving the application of any article of the treaty so long as the competent authorities have not agreed that the case is not suitable for arbitration. The U.S. tax 

treaties with Canada and Germany provide mandatory arbitration of cases involving 

the application of only certain treaty articles. Second, by contrast with the treaties 

with Belgium, Canada, and Germany, the proposed protocol with France allows a 

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taxpayer whose case is in mandatory arbitration to submit a position paper to the 

arbitration board. Your committee may wish to inquire about both the scope of mandatory arbitration and the opportunity for taxpayer participation. 

More broadly, your committee may wish to ask about the Treasury Department’s 

intentions for future U.S. income tax treaties and protocols. Does the Treasury 

Department expect that mandatory arbitration provisions following the proposed 

protocol and the treaties with Belgium, Canada, and Germany will become a standard feature of future U.S. tax treaties, or will the Treasury Department be selective 

in choosing the countries with which it negotiates those provisions? If the Treasury 

Department expects mandatory arbitration to become a standard feature in future 

U.S. tax treaties, will the Treasury Department revise the U.S. Model treaty to include mandatory arbitration rules? If mandatory arbitration is not expected to be 

a part of all or most future U.S. income tax treaties, it may be useful to ask what 

criteria the Treasury Department will use to determine whether a particular treaty 

should include mandatory arbitration. 

Your committee also is aware that as a condition of ratifying the U.S. protocol 

with Canada last year, the Senate required the Treasury Department to submit to 

the Joint Committee on Taxation and the Senate Finance Committee, among other 

information, a report describing the operation of the mandatory arbitration procedures of the treaties with Belgium, Canada, and Germany. This report must include 

information about the size and subject matter of cases before arbitration and the 

length of time of arbitration proceedings. This report must be provided within 60 

days after a determination is reached in the 10th arbitration proceeding conducted 

under the U.S. treaty with Belgium, Canada, or Germany, and similar reports must 

be submitted annually for 5 years thereafter. These required reports will not include 

information about the operation of the mandatory arbitration procedures of the proposed protocol with France. Your committee may wish to consider wheither the 

required Treasury reporting should be expanded to encompass arbitration proceedings under the proposed protocol with France. 

EXCHANGE OF INFORMATION

The U.S. Model treaty and U.S. income tax treaties generally provide exchange 

of information rules requiring the competent authorities of the two treaty countries 

to exchange information that may be relevant for carrying out the treaties or the 

domestic laws of the treaty countries concerning all taxes imposed by a treaty country. The exchange of information article of the proposed protocol with New Zealand 

closely follows the information exchange rules of the U.S. Model treaty. The exchange of information articles of the proposed treaty with Malta and the proposed 

protocol with France largely follow the corresponding rules of the U.S. Model treaty 

but do differ in certain respects. The Joint Committee staff’s pamphlets describe 

these differences and provide detailed overviews of the information exchange articles of the two proposed protocols and the proposed treaty. Here I wish to highlight 

issues related to the proposed treaty relationship with Malta and related to the 

effectiveness of information exchange under income tax treaties generally. 

Information exchange with Malta 

As described previously, the United States terminated its prior income tax treaty 

with Malta with effect in 1997. At the time, Malta did not generally permit sharing 

of bank information with foreign tax authorities. Malta has since joined the European Union and implemented EU directives concerning transparency and legal 

assistance. Last year, Malta revised its banking law to grant Maltese tax authorities 

access to bank information for the purpose of exchanging the information with tax 

authorities of other countries under information exchange agreements. Malta has 

entered into 45 agreements that require exchange of information in compliance with 

standards set by the Organisation for Economic Co-operation and Development 

(‘‘OECD’’). Malta is now considered to have fully committed to the transparency 

standards of the OECD. 

To the extent that there were perceived deficiencies in the former information 

exchange relationship with Malta that contributed to the decision to terminate the 

prior treaty, and to the extent that the United States may have little recent practical experience in cooperating with Malta on tax matters, your committee may wish 

to seek reassurances that any obstacles to effective information exchange have been 

eliminated. 

The information exchange article of the proposed treaty with Malta includes one 

difference from the corresponding article of the U.S. Model treaty. The proposed 

treaty permits the recipient of information exchanged under the treaty to use that 

information for purposes sanctioned by the United States-Malta Treaty on Certain 

Aspects of Mutual Legal Assistance in Criminal Matters (‘‘MLAT’’). The Senate ratiVerDate Nov 24 2008 08:22 Jul 01, 2010 Jkt 000000 PO 00000 Frm 00114 Fmt 6601 Sfmt 6621 H:\DOCS\TD111-1.TXT MIKEB
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3The other method of information exchange is spontaneous exchange. Spontaneous exchange 

occurs when one treaty country determines that information in its possession may be relevant 

to the other treaty country’s tax administration and thus transmits the information to the other 

country. 4For example, a petition to enforce a John Doe summons served by the United States on UBS, 

AG was filed on February 21, 2009, accompanied by an affidavit of Barry B. Shoff, the U.S. competent authority for the United States-Switzerland income tax treaty. Paragraph 16 of that affidavit notes that Switzerland had traditionally taken the position that a specific request must 

identify the taxpayer. See United States v. UBS AG, Civil No. 09–20423 (S.D. Fla.). On August 

19, 2009, after extensive negotiations between the Swiss and U.S. Governments, the United 

States and UBS announced that UBS had agreed to provide information on over 4,000 U.S. persons with accounts at UBS. 5 Under a John Doe summons, the U.S. Internal Revenue Service (‘‘IRS’’) asks for information 

to identify unnamed ‘‘John Doe’’ taxpayers. The IRS may issue a John Doe summons only with 

judicial approval, and judicial approval is given only if there is a reasonable basis to believe 

that taxes have been avoided and that the information sought pertains to an ascertainable 

group of taxpayers and is not otherwise available. 

fied that treaty last year, but it has not yet entered into effect. The extent to which 

this deviation from the U.S. Model treaty is intended to expand the scope of permitted exchange of information is not clear. The inclusion of a cross-reference to the 

MLAT in the proposed treaty is unique among U.S. income tax treaties, although 

it is consistent with both the OECD Convention on Mutual Assistance in Tax Matters (in Article 4) and the 2005 OECD Model Convention on Income and on Capital 

(in Article 26). Your committee may wish to explore how this new rule is to be reconciled with domestic restrictions on disclosure of return information if Malta 

requests permission to use the information for nontax purposes. 

Effectiveness of information exchange 

The Joint Committee staff’s pamphlets describe in detail several practical issues 

related to information exchange under income tax treaties. I will briefly note two 

issues here. First, automatic and specific information exchange under tax treaties, 

two of three broad methods of exchange of information, may not always be fully useful.3 Under automatic exchange, the parties to a tax treaty typically enter into a 

memorandum of understanding to share, on an ongoing basis, information that is 

deemed consistently relevant to the tax administration of the other treaty country; 

the treaty countries are not required to specifically request this information from 

one another. The United States, for example, provides to its treaty partners information about U.S.-source income received by residents of those treaty countries. 

Specific exchange occurs when one treaty country provides information to the other 

treaty country in response to a request by the latter country for information that 

is relevant to an ongoing investigation of a particular tax matter. 

Problems with automatic exchange under U.S. tax treaties and the tax treaties 

of other countries have included that information has not been provided on a timely 

basis; treaty countries’ tax reporting periods have differed from one another; the 

recipient country has had difficulty translating information into its own language; 

and information flows have been voluminous. Your committee may wish to inquire 

about whether there are any practical impediments to automatic information exchange with France, Malta, and New Zealand and the ease with which any impediments could be removed and the likelihood that they would be removed. 

One problem with specific exchange has been that some treaty countries have 

declined to exchange information in response to specific requests intended to identify limited classes of persons.4 Your committee may wish to seek assurances that, 

under the proposed treaty with Malta and the proposed protocols with France and 

New Zealand, treaty countries are required to exchange information in response to 

specific requests that are comparable to John Doe summonses under domestic law.5

Second, the United States has been criticized for Federal and State rules that 

may facilitate attempts by foreign persons to evade their home country tax laws. 

One criticism is that the U.S. ‘‘know your customer’’ rules for financial institutions 

may be less strict than other countries in their requirements for the determination 

of beneficial owners of financial accounts. A second criticism has been that the 

entity formation laws of some U.S. States make it difficult for government officials 

to ascertain the identities of owners of entities. Your committee may wish to ask 

about the extent to which it may be appropriate to consider policy changes to ensure 

that the United States is able to respond effectively to information requests from 

its treaty partners. 

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ARTICLE-BY-ARTICLE SUMMARIES

The Joint Committee staff’s pamphlets provide detailed article-by-article explanations of the proposed treaty and the two proposed protocols. Below is a summary 

of significant features of each agreement. 

Malta 

Like other U.S. tax treaties, the proposed treaty with Malta includes rules that 

limit each country’s right, in specified situations, 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 certain 

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 14 and 16). The 

proposed treaty also provides that pensions and other similar remuneration paid to 

a resident of one country may be taxed only by that country and only at the time 

and to the extent that a pension distribution is made (Articles 17 and 18). 

The proposed treaty provides that dividends and certain gains derived by a resident of either country from sources within the other country generally may be taxed 

by both countries (Articles 10 and 13); however, the proposed treaty limits the rate 

of tax that the source country may impose on certain dividends paid to a resident 

of the other country. As described previously, these rules are consistent with the 

corresponding provisions of the U.S. Model treaty, but they represent a departure 

from the exemption from source-country withholding tax provided by several recent 

U.S. treaties and protocols for dividends paid by subsidiaries to parent corporations 

resident in the other treaty countries. 

The proposed treaty’s rule for Maltese taxation of Malta-source dividends paid to 

residents of the United States takes into account the Maltese imputation system of 

corporate tax. The rule provides that the tax that may be charged by Malta on dividends paid by a Maltese company to a U.S. resident is limited to the Maltese tax 

chargeable on the profits out of which the dividends are paid. 

The proposed treaty generally limits the rate of source-country tax that may be 

imposed on interest arising in one treaty country (the source country) and beneficially owned by a resident of the other treaty so that it may not exceed 10 percent 

of the gross amount of the interest (Article 11). Similarly, the proposed treaty provides that a royalty payment arising in a treaty country and beneficially owned by 

a resident of the other treaty country may be subject to a source country tax of up 

to 10 percent of the gross amount of the royalty (Article 12). As described previously, these provisions differ from the corresponding rules of the U.S. Model 

treaty. The U.S. Model treaty provides an exemption from source-country tax for 

most interest and royalty payments beneficially owned by a resident of the other 

country. 

Unlike the U.S. Model treaty, the proposed treaty permits limited source-country 

taxation of income not dealt with in other articles of the treaty. That income may 

be taxed by the source country at a rate not greater than 10 percent (Article 21). 

As described previously, the U.S. Model treaty, by contrast, exempts this income 

from source-country taxation. 

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 22). 

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 to which 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 (Article 20) generally provides that students and business 

trainees who are residents of one treaty country and who visit the other treaty country (the host country) are exempt from host-country taxation on certain types of payments received from sources in their home country for their maintenance, education, 

or training. 

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The proposed treaty provides authority for the two countries to resolve disputes 

(Article 25) and exchange information (Article 26) in order to carry out the provisions of the proposed treaty. As noted above, unlike the U.S. Model treaty exchange 

of information rules, the proposed treaty permits the use of tax information received 

under the tax treaty for purposes that are consistent with the scope of the MLAT 

between the United States and Malta. 

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

prevent the inappropriate use of the treaty by third-country residents (Article 22). 

This provision generally reflects the anti-treaty-shopping provisions included in the 

U.S. Model treaty and more recent U.S. income tax treaties, but, as was described 

previously, is more stringent in a number of respects. 

The provisions of the proposed treaty generally take effect on or after the first 

day of January following the date that the proposed treaty enters into force. With 

respect to withholding taxes (principally on dividends, interest, and royalties), the 

provisions of the proposed treaty take effect 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. 

France 

The proposed protocol with France makes changes to Article 4 (Resident) of the 

present treaty that in general make the rules conform more closely to the rules of 

other recent U.S. income tax treaties and protocols. Among other changes, the proposed protocol provides a special rule for French qualified partnerships and includes 

rules for fiscally transparent entities, which are entities that are not subject to tax 

at the entity level, that are similar to rules found in other recent U.S. income tax 

treaties. One difference from recent U.S. treaties is the addition of a requirement 

that, when a fiscally transparent entity formed or organized outside the United 

States or France derives an item of income, profit, or gain from U.S. or French 

sources, the fiscally transparent entities rules apply only if the country in which the 

entity is organized has concluded with the treaty country from which the income, 

profit, or gain is derived an agreement including an exchange of information provision intended to prevent tax evasion. 

The proposed protocol replaces Article 10 (Dividends) of the present treaty. The 

new article generally allows full residence-country taxation and limited sourcecountry taxation of dividends. The proposed protocol retains both the generally applicable 15-percent maximum withholding rate and the reduced 5-percent maximum 

rate for dividends received by a company owning at least 10 percent of the dividendpaying company. As described previously, like several other recent treaties and protocols, the proposed protocol provides for a zero rate of withholding tax on certain 

dividends received by a parent company from a subsidiary that is at least 80-percent 

owned by the parent. As in the present treaty, special rules apply to dividends received from a regulated investment company, a real estate investment trust, and a 

socie ́te ́ d’investissement a` capital variable; under the proposed protocol, these rules 

are extended to a ‘‘socie ́te ́ d’investissement immobilier cote ́e’’ and a ‘‘socie ́te ́ de placement a` pre ́ponde ́rance immobilie`re a` capital variable.’’ 

Article 12 (Royalties) of the present treaty is revised to provide that royalties arising in a treaty country (the source country) and beneficially owned by a resident 

of the other treaty country are exempt from taxation in the source country. Under 

the present treaty, the source country may impose up to a 5-percent withholding 

tax on gross royalty payments. 

The proposed protocol makes conforming changes to Article 13 (Capital Gains) to 

reflect revisions made to Article 12 (Royalties). It also updates Article 17 (Artistes 

and Sportsmen) to reflect the fact that the French currency is now the euro. 

The proposed protocol clarifies that the exclusive source-country tax rule of Article 

18 (Pensions) for payments arising under the social security legislation or similar 

legislation of one of the treaty countries to a resident of the other treaty country 

applies, in the case of payments arising under France’s social security legislation, 

to payments made not only to residents of the United States, but also to citizens 

of the United States who are residents of France. Accordingly, notwithstanding the 

saving clause of paragraph 2 of Article 29 (Miscellaneous Provisions), the United 

States may not tax French social security payments made to a U.S. citizen resident 

in France. 

Article 22 (Other Income) of the present treaty is replaced with a new article that 

conforms to the corresponding U.S. Model treaty provision. The article generally 

assigns taxing jurisdiction over income not dealt with in the other articles of the 

treaty to the residence country of the beneficial owner of the income. 

The proposed protocol switches the order of two paragraphs of Article 24 (Relief 

from Double Taxation), clarifies that companies that are French residents may elect 

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to be taxed on a worldwide basis subject to a credit in lieu of applying the general 

exemption system in France to foreign business income, and makes several conforming changes. 

The proposed protocol changes cross-references that Article 25 (Non-Discrimination) makes to provisions of Articles 10 (Dividends) and 12 (Royalties). These 

changes in cross-references reflect the proposed protocol’s renumbering of certain 

paragraphs of Articles 10 and 12. 

As described previously, the proposed protocol changes the voluntary arbitration 

procedure of Article 26 (Mutual Agreement Procedure) of the treaty to a mandatory 

arbitration procedure that is sometimes referred to as ‘‘last best offer’’ arbitration, 

in which each of the competent authorities proposes one and only one figure for settlement, and the arbitrator must select one of those figures as the award. Under 

the proposed protocol, unless a taxpayer or other ‘‘concerned person’’ (in general, a 

person whose tax liability is affected by the arbitration determination) does not 

accept the arbitration determination, it is binding on the treaty countries with 

respect to the case. A mandatory and binding arbitration procedure is included in 

the U.S. income tax treaties with Belgium, Canada, and Germany. 

Mutual administrative assistance is modernized under the proposed protocol. The 

proposed protocol replaces Article 27 (Exchange of Information) of the present treaty 

with rules that conform closely to the U.S. Model treaty. The proposed rules generally provide that the two competent authorities will exchange such information as 

may be relevant in carrying out the provisions of the domestic laws of the United 

States and France concerning taxes imposed at a national level, to the extent the 

taxation under those laws is not contrary to the treaty. The proposed protocol’s 

information exchange article deviates from the U.S. Model treaty’s article in its conditions under which entry into a treaty country’s sovereign territory is permitted. 

The proposed protocol requires that a treaty country permit representatives of the 

other treaty country enter its territory to interview a taxpayer or to examine a taxpayer’s books and records if the taxpayer has consented. This rule is narrower than 

the corresponding rules of the U.S. Model treaty because the proposed protocol’s rule 

does not permit entry for interviewing or examining the books and records of consenting third parties. 

Article 28 (Assistance in Collection) of the present treaty is modified to remove 

an obsolete reference to former paragraph 4 of Article 10 (Dividends). 

The proposed protocol amends Article 29 (Miscellaneous Provisions) of the present 

treaty, updating the saving clause to provide that France may tax entities that have 

their place of effective management in France, and which are subject to tax in 

France, notwithstanding the new fiscally transparent entity provision in Article 4 

(Resident). It also updates the definition of former citizen and long-term residents 

to conform with the changes to section 877 of the Code and makes conforming 

changes to other paragraphs in Article 29. The proposed protocol adds a new rule 

to Article 29 that payments made by French Government agencies to lawful permanent residents of the United States will be taxable only in the United States. 

As described previously, Article 30 (Limitation on Benefits) of the present treaty 

is replaced with a new article that reflects the anti-treaty-shopping, provisions 

included in the U.S. Model treaty and more recent U.S. income tax treaties. The 

new rules are intended to prevent the indirect use of the treaty by persons who are 

not entitled to its benefits solely by reason of residence in France or the United 

States. 

The proposed protocol modifies Article 32 (Provisions for Implementation) of the 

present treaty to delete obsolete references to former paragraph 4(i) of Article 10 

(Dividends) and former paragraph 8 of Article 30 (Limitation on Benefits). 

Finally, Article XVI of the proposed protocol provides for the entry into force of 

the proposed protocol. The treaty countries will notify each other in writing when 

their respective constitutional and statutory requirements for entry into force of the 

protocol have been satisfied. The proposed protocol will enter into force on the date 

of receipt of the latter of such notifications. For withholding taxes, the proposed protocol has effect with respect to amounts paid or credited on or after January 1st 

of the calendar year in which the proposed protocol enters into force. For all other 

taxes, the proposed protocol has effect for taxes imposed for tax periods beginning 

on or after January 1st of the year immediately after the date on which the proposed protocol enters into force. With respect to the binding arbitration rules of Article 26 (Mutual Agreement Procedures), the proposed protocol is effective for cases 

under consideration by the competent authorities as of the date the proposed protocol enters into force and cases that come under consideration thereafter. 

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New Zealand 

Articles I (General Scope), II (Taxes Covered), III (General Definitions) and X 

(Independent Personal Services) of the proposed protocol with New Zealand 

generally update the provision of the present treaty to conform to the U.S. Model 

treaty. 

The proposed protocol replaces the definition of ‘‘resident of a Contracting State’’ 

in Article 4 (Residence) of the present treaty with one that is identical to the definition in the U.S. Model treaty. The proposed protocol’s definition of a resident of a 

Contracting State reverses an exclusion from the definition in the present treaty for 

a person who is subject to tax in a treaty country by reason of that person’s citizenship but who is not a resident of that country. Consequently, under the proposed 

protocol, a nonresident citizen of the United States may (subject to the article’s 

other rules) be treated as a resident of the United States. The proposed protocol also 

conforms to the U.S. Model treaty’s two tie-breaker rules for determining the residence of an individual who otherwise would be a resident of both treaty countries. 

Accordingly, residence under these tie-breaker rules is determined based on the 

country of which the individual is a national, rather than, as under the present 

treaty, on the individual’s country of citizenship. 

The proposed protocol adds new paragraphs 8 and 9 to Article 7 (Business Profits) 

of the present treaty. New paragraph 8, like the U.S. Model treaty, provides that 

business profits 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 has ceased to exist. New paragraph 9 differs from the U.S. Model and OECD Model treaties, and specifically addresses New 

Zealand law relating to trusts. It provides that (1) if a fiscally transparent entity, 

or trustee, has a permanent establishment in one treaty country, and (2) a resident 

of the other treaty country is beneficially entitled to a share of profits from a business carried on by the entity or trustee through a permanent establishment in the 

first country, then the beneficial owner is treated as carrying on the business 

through the permanent establishment. 

The proposed protocol replaces Article 10 (Dividends) of the present treaty with 

a new article that generally allows full residence-country taxation and limited 

source-country taxation of dividends. The proposed protocol retains the generally 

applicable maximum rate of withholding at source of 15 percent, but also adds a 

reduced 5-percent maximum rate for dividends received by a company owning at 

least 10 percent of the voting power of dividend-paying company. Like several other 

recent treaties and protocols, the proposed protocol also provides for a zero rate of 

withholding tax on certain dividends received by a parent company from a subsidiary that is at least 80-percent owned by the parent. The proposed protocol adds 

special rules that apply to dividends received from regulated investment companies 

and real estate investment trusts which are similar to provisions included in other 

recent treaties and protocols. 

The proposed protocol replaces Article 11 (Interest) of the present treaty with a 

new article that retains source-country taxation, of interest at a maximum withholding rate of 10 percent, but allows a special zero rate of withholding for certain 

financial institutions and governmental entities. 

The proposed protocol revises Article 12 (Royalties) of the present treaty. It provides that royalties arising in a treaty country (the source country) and beneficially 

owned by a resident of the other treaty country may be subject to a source country 

tax of up to 5 percent. This is a reduction from the 10-percent rate provided in the 

present treaty, but any source-country taxation of royalties remains above the exemption provided in the U.S. Model treaty. 

The proposed protocol makes two modifications to Article 13 (Alienation of Property). The proposed protocol makes a conforming change to reflect the elimination 

of Article 14 (Independent Personal Services) of the present treaty in a manner consistent with the OECD Model treaty. Additionally, to avoid double taxation, the proposed protocol updates the present treaty to allow U.S. individuals who expatriate 

to New Zealand (who are required to recognize taxable gain on a deemed sale of 

all of their property under section 877A of the Code) to get a step up in tax basis 

for New Zealand tax purposes by treating the property deemed sold as immediately 

repurchased at its fair market value. 

The proposed protocol replaces Article 16 (Limitation on Benefits) of the present 

treaty with a new article that reflects the anti-treaty-shopping provisions included 

in the U.S. Model treaty and more recent U.S. income tax treaties. The new rules 

are intended to prevent the indirect use of the treaty by persons who are not entitled to its benefits solely by reason of residence in New Zealand or the United 

States. 

120 

The proposed protocol makes certain conforming changes to Article 22 (Relief from 

Double Taxation) of the present treaty to reflect changes by the proposed protocol 

to Article 2 (Taxes Covered). The proposed protocol also deletes the last sentence 

of paragraph 2 of Article 22 of the present treaty. The deleted sentence provides 

that dividends received from a U.S. company by a New Zealand company that owns 

at least 10 percent of the paid-up share capital of the U.S. company (being dividends 

that would be exempt from New Zealand tax under New Zealand law at the time 

of the signing of the present treaty) are exempt from New Zealand tax. 

The proposed protocol replaces the nondiscrimination rules of Article 23 of the 

present treaty with new rules that are similar to the nondiscrimination provisions 

of the U.S. Model treaty and other recent U.S. income tax treaties. These rules generally forbid each treaty country from discriminating against nationals of the other 

country by imposing on those nationals more burdensome taxes than it would impose on its own comparably situated nationals in the same circumstances. Similarly, 

neither treaty 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. The nondiscrimination provision does not include the U.S. Model treaty 

rule which provides that the nondiscrimination rules apply to taxes of every kind 

and description imposed by a treaty country or by a political subdivision or local 

authority of that treaty country. Accordingly, the nondiscrimination rules apply only 

to taxes covered by the present treaty (as modified by the proposed protocol) and 

not, for example, to U.S. State and local taxes. 

The proposed protocol does not change the provisions of Article 24 (Mutual Agreement Procedure) of the treaty. Thus, the treaty, as modified by the proposed protocol, does not include a mandatory arbitration procedure similar to the rules of the 

proposed protocol with France and the treaties with Belgium, Canada, and 

Germany. 

The proposed protocol replaces Article 25 (Exchange of Information) of the present 

treaty with rules that conform closely to the U.S. Model treaty. The proposed rules 

generally provide that the two competent authorities will exchange such information 

as may be relevant in carrying out the provisions of the domestic laws of the United 

States and New Zealand concerning taxes imposed at a national level, to the extent 

the taxation under those laws is not contrary to the treaty, as modified by the proposed protocol. It provides—for the first time—for mutual assistance in the collection of tax debts between the United States and New Zealand. Such assistance is 

limited to tax debts that arise from improperly granted treaty benefits. 

The proposed protocol replaces paragraph 1 of the protocol to the present treaty, 

which was signed on the same day as the treaty. Under the proposed protocol, New 

Zealand is required to consult with the United States for purposes of providing the 

same treatment on a reciprocal basis if (1) it enters into a double taxation treaty 

with any country (and not just with an OECD member) and (2) that treaty limits 

the withholding tax rates on interest or royalties (but not dividends) to a rate lower 

than the one provided for in the treaty with the United States. 

Under the provisions of Article XVI, the proposed protocol enters into force on the 

date of the later of the notifications. The relevant date is the date on the second 

of the notification documents, and not the date on which the second notification is 

delivered to the other treaty country. Generally, the proposed protocol is effective 

on a prospective basis. However, the competent authority provisions under Article 

26 (Exchange of Information) are effective retroactively to taxable periods preceding 

the entry into force of the proposed protocol. 

CONCLUSION

These provisions and issues are all discussed in more detail in the Joint Committee staff pamphlets on the proposed treaty and protocols. 

Senator KAUFMAN. Thank you. 

Mr. Scholz. 

STATEMENT OF WESLEY SCHOLZ, DIRECTOR, OFFICE OF 

INVESTMENT AFFAIRS, BUREAU OF ECONOMIC, ENERGY, 

AND BUSINESS AFFAIRS, DEPARTMENT OF STATE 

Mr. SCHOLZ. Thank you, Senator Kaufman. It’s a privilege to be 

here to testify before the Senate Foreign Relations Committee as 

the administration seeks advice and consent of the Senate to ratification of the United States-Rwanda Bilateral Investment Treaty. 

121 

Foreign investment is an important source of economic growth in 

the United States and around the globe. It improves productivity, 

provides good jobs, and spurs healthy competition. Foreign investment is a platform for U.S. exports. In 2007, 22 percent of U.S. 

exports of goods were shipped to foreign subsidiaries of U.S. firms. 

Foreign investment can also be a powerful tool for economic 

development. BITs play an important role by establishing rules 

that protect the rights of investors abroad and provide market access for future U.S. investment. 

Since the inception of the U.S. Bilateral Investment Treaty Program in the early 1980s, successive U.S. administrations have 

negotiated BITs with the objective of protecting U.S. investment 

abroad, encouraging the adoption of open, transparent, and nondiscriminatory investment polices, and supporting the development 

of international legal standards consistent with these objectives. 

The United States presently is a party to BITs with 40 countries. 

Five of these treaties are with sub-Saharan African countries, 

although the BIT with Rwanda is the first such treaty signed by 

the United States with a sub-Saharan African country in almost a 

decade. 

The United States chose to negotiate a BIT with Rwanda, in part 

based on its strong economic reform program, which has helped to 

rebuild the Rwandan economy since the 1994 genocide. The Rwandan Government has opened its economy, improved its business climate, and embraced trade and investment as a means to boost economic development and help alleviate poverty. 

In the World Bank’s Doing Business 2010 Report, Rwanda was 

the world’s most improved country for its record of business-related 

reforms, a first for a sub-Saharan African economy. Rwanda also 

maintains a consistent policy of attempting to combat corruption. 

As the result of these reforms, foreign investors are increasingly 

giving Rwanda serious consideration as a destination for investment. According to our Embassy, United States-led investment in 

Rwanda is poised to grow from less than $50 million pre-2008 to 

more than $600 million in 3 to 5 years. 

These improvements could increase access to energy significantly 

for Rwandans and their regional neighbors, expand the number of 

Rwandan university-educated students from the thousands to the 

tens of thousands, and provide low-cost green housing for middleincome Rwandans. 

United States investment has the potential to change Rwanda’s 

economic landscape and play a significant role in assisting Rwandan Government’s efforts to become an economic hub for central 

Africa. 

The Department of State and the Office of U.S. Trade Representative co-led the negotiation of this treaty, with the participation of 

the Departments of Commerce and Treasury and other U.S. Government agencies. The treaty, which was signed on February 19, 

2008, closely adheres to the text of the 2004 U.S. model. The treaty 

will complement Rwanda’s reform efforts, help Rwanda attract 

more foreign investment that is vital to economic prosperity, and 

deepen our economic relationship with an important partner in 

Africa. It would also set a very positive example for others in the 

region. 

122 

1The other U.S. BITs with sub-Saharan African countries are with: Cameroon, the Democratic 

Republic of Congo, Mozambique, the Republic of Congo, and Senegal. 

Looking ahead, the administration is interested in exploring possibilities for new U.S. BITs in Africa. On August 5, at an event 

during the African Growth and Opportunity Act Forum in Nairobi, 

Secretary of State Clinton and U.S. Trade Representative Kirk 

announced that the United States would also start negotiations 

toward a Bilateral Investment Treaty with Mauritius. Mauritius is 

another partner in sub-Saharan Africa that has taken serious steps 

to enact reforms and improve its business climate. At that time, 

Secretary Clinton echoed President Obama’s call to do more to promote investment in Africa and commented that the launch of negotiations with Mauritius is in keeping with our broader interest in 

engaging other potential partners in Africa. 

In conclusion, the administration wishes to thank the committee 

for its consideration of the treaty, and we urge you to report it 

favorably to the full Senate for action. 

I’d be happy to answer any of your questions. 

[The prepared statement of Mr. Scholz follows:] 

PREPARED STATEMENT OF WESLEY S. SCHOLZ, DIRECTOR, OFFICE OF INVESTMENT

AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, DC 

Mr. Chairman, thank you for the opportunity to testify before the Foreign Relations Committee as the administration seeks advice and consent of the Senate to 

ratification of the United States-Rwanda Bilateral Investment Treaty (BIT). 

Foreign investment is an important source of economic growth in the United 

States and around the globe. It improves productivity, provides good jobs, and spurs 

healthy competition. Foreign investment is a platform for U.S. exports. In 2007, 22 

percent of U.S. goods exports were shipped to foreign subsidiaries of U.S. firms. Foreign investment can also be a powerful tool for economic development. BITs play 

an important role by establishing rules that protect the rights of U.S. investors 

abroad and provide market access for future U.S. investment. Since the inception 

of the U.S. BIT program in the early 1980s, successive U.S. administrations have 

negotiated BITs with the objective of protecting U.S. investment abroad, encouraging the adoption of open, transparent, and nondiscriminatory investment policies, 

and supporting the development of international legal standards consistent with 

these objectives. U.S. BITs build on the principles contained in earlier U.S. treaties 

of Friendship, Commerce, and Navigation. The United States presently is a party 

to BITs with 40 countries. Five of these treaties are with sub-Saharan African countries, although the BIT with Rwanda is the first such treaty signed by the United 

States with a sub-Saharan African country in almost a decade.1

The United States chose to negotiate a BIT with Rwanda in part based on its 

strong economic reform program, which has helped to rebuild the Rwandan economy 

since the 1994 genocide. The Rwandan Government has opened its economy, improved its business climate, and embraced trade and investment as a means to boost 

economic development and help alleviate poverty. In 2008–2009, Rwanda was the 

world’s most improved country in the World Bank’s review of ‘‘doing business’’ 

reforms—a first for a sub-Saharan African country. The report cited Rwanda’s 

progress in areas such as reducing the time necessary to start a business, making 

it easier to obtain credit, and providing rules to facilitate trade and the registration 

of property. Rwanda also maintains a consistent policy of combating corruption. 

As the result of these reforms, foreign investors are increasingly giving Rwanda 

serious consideration as a destination for investment. According to our Embassy, 

U.S.-led investment in Rwanda is poised to grow from less than $50 million pre2008 to more than $600 million in 3 to 5 years. These investments could increase 

access to energy significantly for Rwandans and their regional neighbors, expand 

the number of Rwanda university-educated students from the thousands to the tens 

of thousands, and provide low-cost ‘‘green’’ housing for middle-income Rwandans. 

U.S. investment has the potential to change Rwanda’s economic landscape and play 

a significant role in assisting the Rwandan Government’s efforts to become an economic hub for Central Africa. The BIT with Rwanda, once in force, would reinforce 

123 

the Rwandan Government’s efforts to further reform its economy and promote a 

strong business climate. It would also set a very positive example in the region. 

The Department of State and the Office of the U.S. Trade Representative co-led 

the negotiation of this treaty, with the participation of the Departments of Commerce, the Treasury, and other U.S. Government agencies. The treaty, which was 

signed on February 19, 2008, adheres closely to the text of the 2004 U.S. Model BIT. 

As such, it contains a set of core investor protections, which include: 

—National treatment and most-favored-nation treatment for the full life cycle of investment, including in the establishment, acquisition, operation, management, 

and ultimate disposition of an investment; 

—The free transfer of investment-related funds; 

—Prompt, adequate, and effective compensation in the event of an expropriation; 

—A minimum standard of treatment grounded in customary international law; 

—Freedom of investment from specified performance requirements; 

—Prohibitions on nationality-based restrictions for the hiring of senior managers; 

and 

—Provisions on transparency in publication of investment-related laws, regulations, 

and other measures, and the opportunity, to the extent possible, for interested 

parties to comment on such proposed measures. 

The treaty also provides investors with the opportunity to resolve investment disputes with a host government through international arbitration. 

This investment treaty is based on the 2004 U.S. Model BIT, which, compared to 

earlier BITs, includes a number of provisions designed to improve the operation of 

the treaty. These developments include greater specificity with respect to key substantive provisions, and rules of procedure designed to eliminate frivolous claims 

and to enhance efficiency, transparency, and public participation in the arbitration 

process. The Parties also recognize in the treaty that it would be inappropriate to 

encourage investment by weakening or reducing the protections afforded in domestic 

environmental and labor laws. Under the Model, each Party may take limited exceptions to the core obligations related to national treatment, most-favored-nation 

treatment, performance requirements, and senior management and boards of directors. In this area, Rwanda has taken only a few, narrow exceptions; the treaty thus 

sends a powerful signal about Rwanda’s openness to foreign investment. 

In sum, this treaty will complement Rwanda’s reform efforts, help Rwanda attract 

more foreign investment that is vital to economic prosperity, and deepen our economic relationship with an important partner in Africa. 

Looking ahead, the administration is interested in exploring possibilities for new 

U.S. BITs in Africa. On August 5, at an event during the African Growth and 

Opportunity Act Forum in Nairobi, Secretary of State Clinton and U.S. Trade 

Representative Kirk announced that the United States would start negotiations toward a BIT with Mauritius. Mauritius is another partner in sub-Saharan African 

that has taken serious steps to enact reforms and improve its business climate. At 

that time, Secretary Clinton echoed President Obama’s call to do more to promote 

investment in Africa, and commented that the launch of negotiations with Mauritius 

is in keeping with our broader interest in engaging other potential BIT partners in 

Africa. 

In conclusion, the administration wishes to thank the committee for its consideration of the treaty and we urge you to report it favorably to the full Senate for 

action. 

Senator KAUFMAN. Thank you. 

Ms. Jones. 

STATEMENT OF HON. KERRI-ANN JONES, ASSISTANT SECRETARY, BUREAU OF OCEANS AND INTERNATIONAL ENVIRONMENTAL AND SCIENTIFIC AFFAIRS, DEPARTMENT OF STATE 

Dr. JONES. Mr. Chairman, thank you for the opportunity to testify today in support of the International Treaty on Plant Genetic 

Resources for Food and Agriculture. 

The security of U.S. agriculture depends on the stability and 

high yield of U.S. crops, which in turn is contingent on the continued development of new crop varieties. The crops we grow are 

always under threats from diseases, pests, drought, and floods. Our 

124 

food security will depend in part upon breeding new crops with 

new traits. 

To develop such varieties, breeders and researchers require 

access to a broad spectrum of genetic raw material which contains 

traits, such as resistance to virulent pests and disease. Each 

nation, including the United States, is interdependent on many 

other nations for access to that genetic material. Consequently, 

protecting what is termed, ‘‘plant genetic resources for food and agriculture’’ and facilitating international access to such material are 

critical priorities for the United States and the entire international 

community. 

For the past 40 years, political and legal uncertainty has characterized the environment for international exchanges of agricultural 

plant genetic resources. During this period, U.S. researchers found 

it increasingly difficult to gain access to plant breeding materials 

in other countries. Meanwhile, technological advances significantly 

improved our ability to identify, characterize, and utilize agricultural genetic resources, thereby increasing the importance of access 

to gene pools outside of our borders. 

By establishing a stable, legal framework for international 

germplasm exchanges, the treaty benefits both research and commercial interests in the United States. This treaty promotes global 

food security through the conservation and sustainable use of plant 

genetic resources for food and agriculture. It creates a multilateral 

system for access to and benefit-sharing regarding certain plant 

genetic resources to be used for research, breeding, and training for 

food and agriculture. 

The treaty currently covers the exchange of material for 64 food 

and feed crops. More may be added in the future through the 

agreement of the parties. 

The treaty entered into force in 2004 and now has a 120 parties. 

The United States signed the treaty in 2002. The President 

forwarded it to the Senate for consideration in July 2008. Throughout the negotiating process, the United States was firmly committed to creating a system that promotes U.S. and global food security and protects U.S. access to genetic resources held outside of 

our borders. 

The United States also sought to protect the ability of the 

international agricultural research centers, the centers that were 

largely responsible for the Green Revolution, to continue to genetically improve crops that underpin global food security. 

The treaty enjoys broad stakeholder support, as you have already 

mentioned, including several prominent industrial organizations, 

such as the ones you mentioned, but also the American Soybean 

Association and the National Association of Wheat Growers. 

The treaty is consistent with existing U.S. practice and may be 

implemented under existing U.S. authorities. No statutory changes 

are needed. 

The Agricultural Research Service, in their role as manager of 

the National Plant Germplasm System, would play a major role in 

domestic treaty implementation. For more than 50 years, the U.S. 

National Plant Germplasm System has distributed samples of 

germplasm to breeders and researchers worldwide and free of 

charge, and thereby already contributes significantly to the global 

125 

effort to safeguard plant germplasm for food security now and in 

the future. 

Consequently, the United States is already in compliance with 

key provisions of the treaty, so ratification would not entail major 

policy or technical changes to the current National Plant Germplasm System as it operates. 

Mr. Chairman, the United States Department of Agriculture has 

long been recognized as the world leader in plant germplasm conservation and distribution. As a party to the treaty, U.S. entities 

would gain guaranteed access to plant genetic resources covered by 

the treaty. Ratification of the treaty would underscore our continued leadership, and it would help U.S. farmers and researchers 

sustain and improve their crops and promote food security for 

future generations, not only in the United States, but globally. 

Thank you, Mr. Chairman, for this opportunity to convey our 

support for ratification. I would be happy to answer any questions. 

[The prepared statement of Ms. Jones follows:] 

PREPARED STATEMENT OF ASSISTANT SECRETARY DR. KERRI-ANN JONES, BUREAU OF

OCEANS AND INTERNATIONAL ENVIRONMENTAL AND SCIENTIFIC AFFAIRS, DEPART- MENT OF STATE, WASHINGTON, DC 

Mr. Chairman and members of the committee, thank you for the opportunity to 

testify today in support of the International Treaty on Plant Genetic Resources for 

Food and Agriculture (‘‘the Treaty’’). 

Mr. Chairman, the security of U.S. agriculture depends on the stability and high 

yield of U.S. crops which, in turn, is contingent on the continual development of new 

crop varieties. The crops we grow are always under threats from diseases, pests, 

droughts and floods. Globalization has acted to bring continuous threats of new 

pests and diseases into crop-producing areas, which can devastate crops or reduce 

yields. Our food security will in part depend upon breeding new crops that need less 

water but still produce high yields. To develop these new crop varieties, breeders 

and researchers require access to a broad spectrum of ‘‘genetic raw material’’ containing key traits such as immunity to virulent pests and diseases. Each nation— 

including the United States—is dependent on many other nations for access to that 

genetic material. Consequently, facilitating international access to what is termed 

‘‘plant genetic resources for is a critical priority for the United States and the entire 

international community. 

Over time, U.S researchers have found it increasingly difficult to gain access to 

plant breeding materials in other countries. Meanwhile, technological advances significantly improved our ability to identify, characterize and utilize agricultural 

genetic resources, thereby increasing the importance of access to gene pools outside 

of our borders. By establishing a stable legal framework for international germplasm exchanges, this Treaty benefits both research and commercial interests in the 

United States. The Treaty also promotes global food security through the conservation and sustainable use of plant genetic resources for food and agriculture. 

The centerpiece of the Treaty is the establishment of a ‘‘Multilateral System’’ for 

access to, and benefit-sharing regarding, certain plant genetic resources to be used 

for research, breeding, and training for food and agriculture. The scope of the Treaty’s coverage currently encompasses genetic resources of 64 crops and forages that 

are maintained by International Agricultural Research Centers or that are under 

the management and control of national governments and in the public domain. Access to covered germplasm is granted through a Standard Material Transfer Agreement, a contract that defines the terms of access and benefit-sharing. Furthermore, 

the Treaty provides a mechanism for enabling developing countries to acquire the 

capacities needed to conserve and sustainably use plant germplasm essential for 

food security, including facing the global challenges associated with climate change. 

The Treaty entered into force in 2004 and now has 120 Parties. The United States 

signed the Treaty in 2002. The President forwarded it to the Senate for consideration in July 2008, after negotiations of the Standard Material Transfer Agreement 

were completed. Throughout the Treaty negotiating process, the United States was 

firmly committed to creating a system that promotes U.S. and global food security 

and protects U.S. access to genetic resources held outside our borders. The United 

States also sought to protect the ability of the International Agricultural Research 

126 

Centers—the institutions largely responsible for the ‘‘Green Revolution’’ which saved 

billions of lives—to continue to genetically improve crops that underpin global food 

security. The Treaty enjoys broad stakeholder support, including support for U.S. 

ratification from several prominent industry organizations such as the American 

Seed Trade Association, the National Farmers Union, the American Soybean Association, the National Association of Wheat Growers, the National Corn Growers 

Association, the Biotechnology Industry Organization and the Intellectual Property 

Owners of America. 

Mr. Chairman, the Treaty is consistent with existing U.S. practice and may be 

implemented under existing U.S. authorities. No statutory changes are needed. The 

Agricultural Research Service, in its capacity as manager of the National Plant 

Germplasm System, would play a major role in domestic Treaty implementation. 

For more than 50 years, the U.S. National Plant Germplasm System has distributed 

samples of germplasm to plant breeders and researchers worldwide and free of 

charge, thereby already contributing significantly to the global effort to safeguard 

plant germplasm for food security, now and in the future. Consequently, the United 

States is already in compliance with key provisions of the Treaty, and ratification 

would not entail major policy or technical changes to current National Plant 

Germplasm System operations. 

Mr. Chairman, the United States Department of Agriculture has long been recognized as the world leader in plant germplasm conservation and distribution. If the 

U.S. ratified the Treaty, U.S. entities would gain guaranteed access to plant genetic 

resources covered by the Treaty. As I have highlighted before, global access to plant 

genetic resources is critical to the efforts of researchers and plant breeders to 

develop new crop varieties that are more nutritious, are resistant to pests and diseases, show improved yields, and are better able to tolerate environmental stresses. 

The emergence of new biotechnology-based plant breeding tools only heightens the 

importance of open access to plant genetic resources. 

Ratification of the Treaty would not only underscore our continued leadership but 

it would also help U.S. farmers and researchers sustain and improve their crops and 

promote food security for future generations, not only in the United States but 

globally. 

Senator KAUFMAN. Thank you very much. 

Ms. Corwin, as has been pointed out, our existing treaties with 

Belgium, Germany, and Canada have mandatory arbitration 

requirements. How does Treasury decide whether treaties should 

include mandatory arbitration? 

Ms. CORWIN. Thank you, Mr. Kaufman. 

We look at arbitration as an appropriate extension of our current 

competent authority process to resolve disputes, and we think it is 

appropriate to resolve disputes in almost every treaty. At the moment, we consider arbitration on a case-by-case basis, looking to 

what the other treaty country thinks about the provision, but also 

the history of disputes and the difficulty of disputes we have with 

a particular jurisdiction—you know, the historic aspects of it. 

Senator KAUFMAN. Are you thinking about making it standard 

for all treaties? 

Ms. CORWIN. It is something, again, we think is appropriate as 

a dispute resolution mechanism. At the moment we are not making 

it—going to make it part of our model, but we are going to continue 

to study it as an effective tool and consider that for the future. 

Senator KAUFMAN. How do you feel about the idea of reporting 

on these arbitration? 

Ms. CORWIN. I’m sorry? 

Senator KAUFMAN. How do you feel about reporting more on the 

arbitration process in these treaties? 

Ms. CORWIN. We are comfortable continuing to report on the 

process and continue to work with this committee on refining the 

effectiveness of it as a tool. 

127 

Senator KAUFMAN. And you feel pretty good about the Malta 

treaty, that we’ve overcome the problems we’ve had in the past and 

are ready to terminate the former treaty? 

Ms. CORWIN. Yes, we are comfortable. Since the treaty was terminated, a number of significant changes have been made in 

Malta. They, mostly importantly, as of 2008, repealed their bank 

secrecy rules that were an impediment to information exchange. 

Since 1996, they’ve also acceded to the EU, which has caused them 

to implement a number of EU directives—like the money laundering directive, the savings directive—that have assured their participation in mutual assistance programs, and also ensured that 

they would have to commit to international transparency standards. 

With regard to the treaty-shopping concerns, there are a number 

of factors that make a jurisdiction an attractive target for treatyshoppers. As my colleague has mentioned, the internal domestic 

laws of that jurisdiction are one of those factors, but other factors 

include the attractiveness of the treaty itself that’s in existence in 

terms of the source-country withholding rates, as well as the limitation on benefits. In this treaty, we have not—unlike a lot of our 

treaties, where we have gone to zero on withholding source-country 

withholding with respect to dividends, interest, and royalties, we 

have, in this treaty, included positive rates of withholding, which 

makes it a less attractive target for treaty-shoppers. But most importantly, we have included a very robust ‘‘limitation on benefits’’ 

provision that makes it very difficult for a third country to use 

Malta to strip income out of the United States with a—and notably, a provision that prevents payments out of a Maltese corporation to a third country that would, we feel, ‘‘alleve’’ our treaty-shopping concerns. 

Senator KAUFMAN. Great. 

Mr. Barthold, can you kind of summarize—you have a number 

of concerns about the mandatory arbitration—can you talk a little 

bit about that? 

Mr. BARTHOLD. Well, our concerns were more just questions of 

direction and consistency. The one that I noted was, in two cases 

now, we have that arbitration will be available with respect to any 

aspect of the treaty. In two of the other existing treaties, it’s a narrower scope. So, our question was really, ‘‘Why the broader scope 

in some cases, the narrower scope in others?’’ Going forward, if it 

is the intent, as might have been suggested, to use this as an additional tool to resolve disputes, how broadly should it be applied, or 

should it be applied in more narrow circumstances? 

We also had some questions about the precise role of the taxpayer position paper. I guess I would say that it’s somewhat unclear to us what benefit that necessarily brings to the process, since 

the two parties would be, hopefully, fully—the two countries— 

would hopefully be fully explaining the position that they took. I 

guess it is conceivable the taxpayer could provide some additional 

information, but one would think that the taxpayer might have 

been working in concert with one of the two contracting states to 

begin with. 

Then there’s also the issue related to the arbitration proceedings 

and the results as to what sort of precedents they might provide 

128 

for future cases of dispute. Across the four possible arbitration 

countries, that’s left somewhat unclear, in that, while each of the 

treaties said there’s no precedential value—at least in the case of 

the German Treaty, it’s—while there’s no precedential value, if you 

get a similar dispute, it’s hoped that you get a similar outcome. 

And that’s stated as part of the explanation of how arbitration 

would work. 

So, I think our questions or our concerns are just a little bit more 

of the unknown. How does Treasury think this will be refined, 

going into the future. 

Senator KAUFMAN. And do you think there should be some kind 

of a standard arbitration provision? 

Mr. BARTHOLD. Well, if we think that this is an important thing 

to do, an important part of providing for dispute resolution, I think 

it would be important to outline that as part of the model treaty. 

Now, of course, in practice, when the Treasury negotiates with 

other countries, you never get a result that looks exactly like the 

model, because the other country has opposing goals. I mean, the 

model lays out what we think is a good, reasonable approach, and 

a lot of times we end up there, but I wouldn’t expect that we’d have 

uniformity across all provisions. But, the model, in stating what we 

think would be a good, reasoned approach, does also help guide us 

when we go forward in negotiations. So, I think there would be 

some benefit to thinking through what would be a good, reasoned 

approach. 

Senator KAUFMAN. And you asked—you think we should ask 

questions about additional reporting requirements. What would be 

the objective of additional reporting requirements, in your mind? 

Mr. BARTHOLD. The reporting requirements? I was just pointing 

out that, technically, the requirement of the Senate from last year 

only applies to the treaties with Belgium, Canada, and Germany. 

So, you’d have to broaden that requirement to bring in France. 

Now, in practice, there really can’t be any reporting until there’s 

arbitration. And I believe it’s 10 cases. Right? And, it’s largely the 

hope, I believe, of the countries that have negotiated arbitration as 

part of the treaties, that they may never get to arbitration; that, 

in fact, arbitration itself will be seen as either an embarrassment 

to the competent authorities or an additional spur that helps the 

competent authorities reach a resolution. And then, we don’t actually get to arbitration, in most cases, until after a 2-year clock has 

started. 

So, I don’t imagine we’re anywhere near to getting anybody into 

arbitration quite yet, and it’ll take a while to build up 10 cases. 

But, if we were to include reporting on possible French arbitration 

cases, given the differences in scope across the different treaties, 

given the fact that France will permit taxpayer participation, a 

report would be very interesting, just to see how the incomes matter, how the report of the taxpayer matters, how the breadth or 

narrowness of the scope matters. So, we think it would be a worthwhile thing for the committee to request in regard to the mandatory arbitration in the French protocol. 

Senator KAUFMAN. Thanks. 

Mr. Scholz, do you expect investment in Rwanda to increase significantly once we enter into this treaty? 

129 

Mr. SCHOLZ. As I mentioned in my testimony, our investment in 

Rwanda in 2008 amounted to about $50 million, and the Embassy 

has projected that that could go up as much as—up to $600 million 

in the next few years. 

There is interest on the part of United States investors in the 

areas of green housing, education, infrastructure—particularly energy infrastructure—in Rwanda. So, those are important areas 

where we could see some actual growth in U.S. investment flows. 

Senator KAUFMAN. Again, what businesses do you think would be 

going in there—what United States businesses will be investing in 

Rwanda, do you think, after the treaty? 

Mr. SCHOLZ. Well, again, it would—it—there are firms in those 

sectors that we’ve been told have been interested. I can’t give you 

specific companies at this point, but I’d be happy to followup with 

more specifics. 

Senator KAUFMAN. That’d be great. 

[The information provided by Mr. Scholz follows:] 

I can provide a few examples of U.S. companies that have made or are making 

significant investments in Rwanda. In March of this year, U.S. firm ContourGlobal 

announced that it reached agreement with the Government of Rwanda to invest 

$325 million in methane gas extraction and power generation. U.S. firm Eco-Fuel 

and a British partner recently announced they will undertake a $300 million renewable energy project using jatropha to produce biofuel in Rwanda. Sorwathe, a U.S. 

tea company that has invested Rwanda since 1978, recently opened a new $2 million 

tea factory in the country. Also this year, Starbucks Coffee opened a ‘‘Farmer Support Center’’ in Kigali, the first such investment by the company in Africa. We understand from our Embassy in Kigali that a number of other U.S. firms are giving 

Rwanda a serious look as a potential investment destination. 

Of course, the existence of a BIT is one of many factors that investors may consider in making their investment decisions, but bringing the BIT into force would 

further improve the attractiveness of Rwanda’s investment climate. 

Senator KAUFMAN. Thank you very much. 

How does a treaty fit into our bilateral relations with Rwanda on 

human rights? 

Mr. SCHOLZ. We’ve—Rwanda’s made admirable advances over 

the last decade in economic development and making significant 

progress in adjudicating an enormous backlog of genocide cases. 

Despite these advances, Rwanda continues to face significant challenges regarding reconciliation, human rights, democratization, as 

it continues its efforts to rebuild a society torn asunder by war and 

genocide. The United States and the international community continue to work toward the goal of a stable, growing, democratic 

Rwanda with improved respect for human rights. Specifically, the 

United States works with the Government of Rwanda to open the 

political space, increase civil liberties, and to strengthen the 

judiciary. 

The treaty itself can promote economic development and employment in Rwanda, as well as improve the rule of law and transparency. These objectives are complementary to our efforts to work 

with the Rwandan Government to improve human rights and 

democracy in Rwanda. 

We also continue to use other channels to raise our views on 

issues of human rights and democratization. These include our 

bilateral dialogues and other contacts and the Annual AGOA Country Review and the Department’s Annual Human Rights Report. 

130 

Senator KAUFMAN. Good. This is important, that we keep talking 

to them about these human rights. I mean, they’ve—civil society 

abuse, torture, you know, a number of things going on there. Yes, 

they’ve come a long way, but they still have a way to go. 

Mr. SCHOLZ. Yes—— 

Senator KAUFMAN. Thank you. 

Mr. SCHOLZ [continuing]. Well it’s an important objective for the 

Department. 

Senator KAUFMAN. It is. 

Ms. Jones, Plant Genetic Resources Treaty. Can you give us 

some examples of a problem this treaty will help solve? 

Dr. JONES. Yes, thank you, Mr. Chairman. 

I think that the kind of problems that need to be solved, from 

the sense of what’s happening around the world regarding crops 

being under stress, is the sort of thing that we’re seeing with 

wheat rust. This is a disease that has emerged—reemerged 

recently, a virulent strain that is likely to affect the U.S. wheat 

crops. Eighty percent of them are—look like they are vulnerable to 

it. 

It’s the sort of thing where we would need to go outside of our 

own genetic resource base to see if we can help ourselves, as well 

as the world, to find resistance to this kind of disease. And with 

this particular example, we’re working with two of the international agricultural research centers—the one that deals with wheat 

and the one that deals with dryland agriculture—looking at their 

genetic resources. 

And so, having access to these resources is hugely important, 

because we need to be able to look broadly for traits that solve 

problems, as well as bring forward new strains and varieties that 

could be more resistant and more productive. 

Senator KAUFMAN. Can you tell me a little bit about how this 

will help global food security? 

Dr. JONES. Certainly. 

It helps global food security in that it stimulates research and it 

allows important food crops to be researched in a way that will 

help them be more productive, and also be able to grow in areas 

that are more marginal and more stressed. And that’s likely—and 

we see it now, that’s what’s happening in agriculture around the 

world. Lands are being affected by a number of things, including 

climate change. And so, we will need crops that have different 

kinds of resiliencies. And to find that, we will have to look to 

genetic databases, genetic resources around the world. 

And so, it’s an underpinning to food security, in that it’s a resource that will let us get to the crops that we will eventually need 

worldwide. 

Senator KAUFMAN. Good. 

I want to thank the witnesses for their testimony and for their 

questions. 

Because tomorrow’s a holiday, I’ll leave the record open until 

noon on Thursday. 

That said, I understand the chairman will take up the French— 

France protocol at a business meeting on November the 17th, so 

it’ll be best to submit any questions on the record for the treaty by 

close of business today, if possible. 

131 

Thank you very much. 

[Whereupon, at 9:40 a.m., the hearing was adjourned.] 

ADDITIONAL QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD

RESPONSES OF MANAL CORWIN TO QUESTIONS SUBMITTED BY

SENATOR JOHN F. KERRY

Question. Michael McIntyre, professor of law at Wayne State University and Robert S. McIntyre, Director of Citizens for Tax Justice, have criticized the information 

exchange provisions in the France and New Zealand protocols and the Malta treaty 

as inadequate and obsolete. They are concerned the provisions would only provide 

for an exchange of information on specific request. They assert that the emerging 

international standard for effective exchange of information requires information 

not only on specific request but also automatic and spontaneous exchanges. Why do 

the information exchange provisions for these treaties not include automatic and 

spontaneous exchanges? 

Answer. The provisions for exchange of information in the proposed tax treaty 

with Malta and the proposed protocols with France and New Zealand comply with 

the U.S. and international standards for full exchange of information under income 

tax treaties. The treaty provisions permit information exchange on request, on a 

routine (or automatic) basis, and on a spontaneous basis. This level of information 

exchange is consistent with international standards. The United States is committed 

to robust information exchange for tax purposes and has been a leader in efforts 

to improve information exchange worldwide. We continue to work with colleagues 

in other jurisdictions to improve mechanisms for information exchange, including 

with respect to ‘‘routine’’ or ‘‘automatic’’ exchange. 

Question. The United States has automatic exchanges of information under its tax 

treaties with Canada and Mexico. France is supporting automatic exchanges of information with its EU partners. Why should the treaty with France be different 

than the treaties with Canada and Mexico? 

Answer. As is the case with the U.S. Model tax treaty and all modern U.S. tax 

treaties, the tax treaties with Canada and Mexico permit, but do not require, the 

revenue authorities to exchange information on an automatic basis. The provisions 

for exchange of information in the proposed protocol with France similarly permit, 

but do not require, the revenue authorities to exchange information on an automatic 

basis. In this regard the treaty with France is fully consistent with U.S. and international standards as they have existed for a number of years. The Treasury 

Department is working with other treaty countries to encourage and improve the 

mechanisms for effective exchange of information, including mechanisms for routine 

or automatic information exchange. 

Question. Problems related to bank secrecy have been highlighted recently by the 

UBS case. Do you think the Malta treaty and the France and New Zealand protocols 

would improve the exchange of information in a manner sufficient to prevent 

another UBS from happening? 

Answer. The information exchange articles in the Malta treaty and the France 

and New Zealand protocols conform with U.S. and international standards for information exchange and thus override any domestic bank secrecy provisions. However, 

even in countries with which the United States has an effective comprehensive 

exchange of information program that conforms to international standards, uncooperative foreign banks can in some circumstances conceal overseas investments by 

U.S. persons. Thus, in addition to focusing on information exchange in bilateral 

negotiations, the Treasury Department is pursuing a multipronged approach that 

includes legislative proposals, multilateral initiatives to improve transparency and 

information exchange in tax matters, and IRS enforcement actions. This multipronged approach is intended to provide the IRS with the information (from taxpayers, third parties, and other countries) and the tools needed to tackle offshore 

tax evasion. 

Question. One of the reasons the tax treaty was terminated with Malta was concerns about the exchange of information. Why do you believe now that there will 

be an adequate exchange of information? 

Answer. Concerns about inadequate information exchange were among the factors 

that led the United States to terminate the prior tax treaty with Malta. The negotiations focused heavily on addressing this concern. Since 1997, Malta has made key 

132 

changes to its domestic law regarding exchange of tax information. Most importantly, in 2008 Malta changed its law to permit the exchange of information held 

by financial institutions. This change made it possible for Malta to agree to comprehensive information exchange obligations in the proposed treaty that meet U.S. 

and international standards. As a member of the European Union, Malta is also 

required to conform to international transparency norms. Because of these recent 

developments in Malta, the Treasury Department believes that Malta will be able 

to comply with its information exchange obligations under the proposed treaty. 

Question. Is the limitations on benefits article included in the Malta treaty sufficient to prevent the use of the treaty by persons that are not residents of the United 

States or Malta? 

Answer. Yes. The features of Malta’s tax system were taken into account in negotiating the limitation on benefits provision of the proposed treaty. As a result, the 

limitation on benefits article in the proposed treaty with Malta is significantly more 

restrictive than the limitation on benefits provisions in the 2006 U.S. Model tax 

treaty or in any existing U.S. tax treaty. The Treasury Department believes that 

this limitation on benefits article is sufficient to prevent abuse of the treaty by 

third-country investors. In addition, the proposed treaty also provides relatively 

high rates for source-country taxation of dividends, royalties, and interest which 

make Malta unattractive as a treaty shopping jurisdiction. 

RESPONSES OF MANAL CORWIN TO QUESTIONS SUBMITTED BY SENATOR RICHARD G. 

LUGAR RELATING TO THE TAX CONVENTION WITH MALTA

TREATY SHOPPING

Question. November 16, 1995, the United States delivered a notice of termination 

to Malta stating that the income tax treaty between the two countries would cease 

to have effect as of January 1, 1997. The termination of the treaty was due, at least 

in significant part, to Treasury’s concern with changes in prior Maltese law that 

might have inappropriately facilitated the use of the treaty by persons who were not 

residents of Malta or the United States. 

• In light of the prior treaty history, what considerations were taken by Treasury 

to determine that it was appropriate to enter into a new income tax treaty with 

Malta? 

Answer. The United States terminated the prior tax treaty with Malta because 

of concerns about the potential for treaty shopping and because of Malta’s inability 

to adequately exchange information with the United States. Since 1997, significant 

changes in Malta’s domestic law relating to exchange of information have been enacted and Malta has agreed to provisions in the proposed treaty that protect against 

treaty shopping concerns. Most importantly, in 2008 Malta changed its law to permit the exchange of information held by financial institutions. This change made 

it possible for Malta to agree to include comprehensive information exchange obligations in the proposed treaty that meet U.S. and international standards. In addition, 

Malta acceded to the European Union in 2004. As a member of the European Union, 

Malta is required to conform to international transparency norms. Finally, Malta 

agreed to antitreaty shopping rules in the proposed treaty designed to ensure that 

treaty benefits would be restricted to bona fide residents of the United States and 

Malta. The limitation on benefits article in the proposed treaty is more restrictive 

than the limitation on benefits article found in the 2006 U.S. Model tax treaty or 

in any existing U.S. tax treaty. Moreover, the proposed treaty also provides relatively high rates for source country taxation of dividends, royalties, and interest. 

Taken together, these recent developments in Malta’s domestic law and the strong 

protections in the proposed limitation on benefits article have lead Treasury to conclude that it is appropriate to enter into the proposed treaty with Malta. 

Question. Do the provisions of the proposed treaty, taken together, alleviate all 

concerns that led the Treasury Department to terminate the prior treaty? 

Answer. Yes. The provisions of the proposed tax treaty differ from the terms of 

the prior tax treaty with Malta in two key aspects. First, the proposed tax treaty 

provides for a full exchange of information that meets U.S. and international standards. This includes the obligation to obtain and provide information held by banks. 

Second, the proposed tax treaty contains a comprehensive limitation on benefits provision that would restrict treaty benefits to residents of the United States and 

Malta. The proposed treaty also provides relatively high rates for source country 

taxation of dividends, royalties, and interest. 

133 

Question. According to the Joint Committee on Taxation Explanation on this proposed treaty, Maltese law still includes a number of characteristics that are conducive to some of the concerns that led to the termination of the previous treaty with 

Malta. For example, payment of dividends and interest to foreign persons are not 

subject to withholding tax in Malta. In addition, tax treatments of foreign subsidiaries in Malta might contribute to tax treaty benefits being extended to non-United 

States and Malta residents. 

• Considering these concerns, is the limitation-on-benefits article sufficient to prevent the use of the proposed treaty by persons that are not residents of the 

United States or Malta? 

Answer. Yes. There are several factors that make a jurisdiction an attractive location for treaty shopping. A favorable domestic tax regime is only one of those factors. Other essential factors, however, include favorable treaty rates on source country taxation and an ability to access those rates by qualifying for treaty benefits. 

The rates for source-country taxation of dividends, interest, and royalties in the proposed treaty with Malta are higher than most U.S. income tax treaties. In addition, 

the limitation on benefits provision in the proposed treaty is significantly more 

restrictive than the limitation on benefits provisions in the 2006 U.S. Model tax 

treaty, or in any existing U.S. tax treaty making it very difficult for a non-resident 

investing in the United States through Malta to qualify for the benefits of the 

treaty. This limitation on benefits article is sufficient to prevent abuse of the treaty 

by persons that are not residents of the United States or Malta. 

Question. Since the limitation-on-benefits article is a deviation from the U.S. 

Model tax treaty, will legitimate persons be able to qualify for benefits under the 

proposed treaty? 

Answer. Yes. The objective tests in the proposed limitation on benefits article are 

designed to allow residents of the United States and Malta to enjoy the benefits of 

the tax treaty. In addition, as is the case with all U.S. tax treaties containing modern limitation on benefits provisions, legitimate investors who nevertheless fail to 

satisfy any of the objective criteria may be granted treaty benefits at the discretion 

of the revenue authorities of the relevant jurisdiction. 

WITHHOLDING RATES

Question. Under the proposed treaty, the withholding rates are a deviation from 

the U.S. Model tax treaty and may discourage non-United States and Malta residents from receiving benefits. When does the Treasury Department believe that is 

appropriate to deviate from the withholding tax rates provided in the U.S. Model 

treaty? 

Answer. The withholding rate reductions in income tax treaties are negotiated on 

a case-by-case basis, taking into account several factors, including the bilateral economic relationship with the proposed treaty partner, the cross-border flows of income between the two countries and the particular features of the tax system of the 

proposed treaty partner. As a result, the withholding rate limitations agreed to in 

a particular treaty will sometimes differ from the withholding rate reductions provided in the U.S. Model tax treaty. 

TRIANGULAR ARRANGEMENTS

Question. The proposed treaty includes special antiabuse rules intended to deny 

treaty benefits in certain circumstances in which a Malta-resident company earns 

U.S.-source income attributable to a third-country permanent establishment and is 

subject to little or no tax in the third jurisdiction and Malta. 

• What criteria will the Treasury Department consider in determining when 

antiabuse rules applicable to triangular arrangements will be included in future 

treaty negotiations? 

Answer. Under prior policy, the Treasury Department sought to include a limitation on benefits provision to address so-called ‘‘triangular arrangements’’ only when 

the treaty partner used an exemption system to eliminate double taxation. However, 

in recent years the Treasury Department has chosen to seek the inclusion of such 

a rule in all new income tax treaties. A rule addressing triangular arrangements 

will likely be included in the next revision of the U.S. Model tax treaty. 

134 

RESPONSE OF MANAL CORWIN TO QUESTION SUBMITTED BY SENATOR RICHARD G. 

LUGAR RELATING TO THE PROTOCOL AMENDING THE TAX CONVENTION WITH NEW

ZEALAND

Question. Why does the tax protocol with New Zealand not include an arbitration 

provision such as has been included in recent tax treaties with Canada, Germany, 

and Belgium along with the recently negotiated protocol to the tax treaty with 

France? 

Answer. The Treasury Department believes that mandatory binding arbitration 

can be an effective tool to facilitate the resolution of disputes between the revenue 

authorities of the two countries party to a tax treaty. The Treasury intends to raise 

the inclusion of an arbitration provision with our treaty partners on a case-by-case 

basis. While we discussed with New Zealand the possibility of including an arbitration provision, we ultimately decided not to do so, because we have not had any difficulties or disputes with the New Zealand tax authorities in the application of the 

existing tax treaty. 

RESPONSES OF MANAL CORWIN TO QUESTIONS SUBMITTED BY SENATOR RICHARD G. 

LUGAR REGARDING THE PROTOCOL AMENDING THE UNITED STATES-FRANCE TAX

TREATY

ARBITRATION

Question. The France Protocol is the fourth tax treaty Treasury has concluded 

that contains binding arbitration procedures for resolving disputes between the competent authorities regarding the application of the Convention. What criteria will 

the Treasury Department use to determine whether a future treaty should include 

mandatory binding arbitration? 

Answer. The Treasury Department believes that mandatory binding arbitration, 

as an extension of the competent authority negotiation process, is an effective tool 

to strengthen the Mutual Agreement Procedure and to achieve prompt and efficient 

settlement of disputes between two tax authorities. The Treasury Department has 

been discussing mandatory binding arbitration in general terms with our treaty 

partners, and intends to continue to raise inclusion of a mandatory binding arbitration provision with our treaty partners in future negotiations. In considering a mandatory binding arbitration provision with our treaty partners, the volume of cases, 

the nature of the relationship between the two competent authorities, and the treaty 

partner’s views with respect to such a provision are important factors. Mandatory 

binding arbitration remains a relatively new mechanism for resolving disputes 

under our tax treaties, and going forward we will study the effectiveness of the arbitration provisions we have concluded so far. The Treasury Department welcomes 

input from the committee concerning the factors that should be taken into account 

when considering whether to include an arbitration provision in the context of the 

negotiation of a particular agreement. 

Question. The arbitration provision in the France Protocol permits the arbitration 

of any case under any article of the treaty, unless the competent authorities agree 

that the case is not suitable for arbitration. Under the Canada and Germany treaties, similar arbitration procedures apply only to disputes arising under specified 

articles of the treaty. What factors did Treasury consider in deciding to adopt a 

broader scope for arbitration of disputes under the France Protocol than under the 

Canada and Germany treaties? 

Answer. The Treasury Department believes that mandatory binding arbitration 

can be beneficial in resolving all disputes that might arise under an income tax convention. France agreed with the United States in this regard. However, the scope 

of an arbitration provision in a particular agreement is a matter that must be negotiated with the treaty partner. As a first step, some countries may only be willing 

to cover specific articles of a treaty. We believe it is important to make that first 

step with appropriate treaty partners. Also, it should be noted that while the mandatory binding arbitration provision in the agreements with Canada and Germany 

are limited to certain articles, other issues are eligible for arbitration if the competent authorities agree that the particular case is suitable for arbitration. 

Question. Describe Treasury’s experience to date with the arbitration provisions 

in the tax treaties with Belgium, Canada, and Germany? Has the possibility of arbitration facilitated negotiated resolution of disputes under these treaties? Does 

Treasury envision significant numbers of cases being submitted to arbitration under 

these treaties in the next 2 years? 

135 

Answer. With respect to the arbitration provision in the agreement with Germany, on December 8, 2008, the U.S. and German competent authorities entered 

into a memorandum of understanding and agreed on arbitration guidelines concerning a number of procedural matters to ensure the effective implementation of the 

arbitration provision. Similarly, with respect to the Belgian arbitration provision, on 

May 6, 2009, the U.S. and Belgian competent authorities entered into a memorandum of understandingand agreed on arbitration guidelines. In compliance with the 

arbitration reporting requirements described in the report of the Senate Foreign 

Relations Committee on the 2007 United States-Canada protocol, the Treasury 

Department transmitted these documents to the Committees on Finance and Foreign Relations of the Senate and the Joint Committee on Taxation on November 9, 

2009. 

With respect to the arbitration provision in the agreement with Canada, the U.S. 

competent authority began discussions with Canada earlier this year to provide 

guidance on procedural aspects of the arbitration provision. 

The agreements with Belgium, Canada, and Germany have only been in force for 

a short period of time. (The Germany and Belgium agreements entered into force 

in December 2007, and the agreement with Canada entered into force in December 

2008.) No cases have yet been submitted to arbitration under the agreements with 

Germany, Belgium, or Canada. However, we believe that the prospect of impending 

mandatory binding arbitration creates an incentive for the competent authorities to 

reach agreement on a case before the arbitration process commences. Consequently, 

we expect MAP negotiations to continue to resolve the great majority of cases and 

do not anticipate a significant number of cases to require resolution through arbitration. The Treasury Department will monitor the performance of the provisions in 

the agreements with Belgium, Canada, and Germany, as well as the performance 

of the provision with France, if ratified. 

Question. Describe the opportunities for taxpayer participation under the arbitration provisions of the French Tax Protocol. What issues will taxpayers have the 

opportunity to address in submissions to the arbitration panel? Will taxpayers have 

the opportunity to address the proposed resolutions submitted by the competent 

authorities? 

Answer. The Treasury Department contemplates that if the proposed protocol 

with France is approved, the U.S. competent authority will work closely with the 

French competent authority to provide procedural guidance on the application of the 

United States-French arbitration provision, just as the U.S. competent authority has 

recently done with the German and Belgian competent authorities and is doing with 

the Canadian competent authority. The Treasury Department expects that such 

guidance will include guidance on the provision permitting affected persons to submit a position paper to the arbitration panel. Under the Memorandum of Understanding with France, the taxpayer is permitted to submit a position paper within 

90 days of the appointment of the chair of the arbitration panel. The Memorandum 

of Understanding does not limit the issues that the taxpayer may address in its position paper, nor does it prevent the taxpayer from addressing the proposed resolutions submitted by the competent authorities. If the proposed protocol is approved, 

the Treasury Department will monitor the operation of the arbitration provision, including the rule allowing affected persons to submit a position paper. The Treasury 

Department is committed, in future discussions with our treaty partners concerning 

the inclusion of an arbitration provision, to striking the appropriate balance between allowing taxpayer input while maintaining the efficiency and effectiveness of 

the competent authority process, and the Treasury Department welcomes further 

input on this provision from the committee. 

AUTOMATIC INFORMATION EXCHANGE AND JOHN DOE SUMMONSES

Question. Given language barriers and translation difficulties, potentially vast 

amounts of information, and different tax reporting periods, are there any practical 

impediments to automatic information exchange with France? 

Answer. The question identifies some of the impediments the IRS faces in any 

automatic exchange process. A major practical impendent to utilization of information received through automatic exchange is the lack of a U.S. tax identification 

number (TIN) associated with the information received. 

Question. If the protocol to the French Tax Treaty goes into force, what mechanisms are in place to facilitate the removal of any impediments that have been identified in the previous question? 

Answer. The IRS and Treasury are addressing the practical impediments for effective automatic exchange of information, including the lack of a TIN, by working 

136 

with specific treaty partners, including France, and also through OECD committees 

whose goal is to adopt tax identification numbers as a tool and collect foreign tax 

identification numbers when possible so that such identification numbers can be 

included in automatic exchange. 

Question. Does the Treasury Department expect any practical impediments from 

existing Federal or State law or rules in fulfilling obligations under the French Tax 

Protocol? 

Answer. The United States fully complies with its exchange-of-information obligations under its tax treaties. 

Question. Under the French Tax Protocol, will France be required to exchange 

information in response to specific requests that are comparable to John Doe summonses under U.S. domestic law? 

Answer. The protocol authorizes the competent authorities to exchange information as may be relevant for carrying out the provisions of the Convention or to the 

administration or enforcement of the domestic laws concerning taxes imposed by the 

Contracting States, insofar as the taxation under those domestic laws is not contrary to the Convention. A specific request under the French tax treaty must generally identify the taxpayer (or taxpayers) whose income tax liability is in question 

and explain how the requested information may be relevant for carrying out the provisions of the treaty or the tax laws of the requesting state. A request may be possible in the case of an unnamed taxpayer or taxpayers if the taxpayer or group can 

be indentified through other means, such as by a specified account number that the 

taxpayer is known to have used or some other identifying characteristics. 

RESPONSES OF WESLEY SCHOLZ TO QUESTIONS SUBMITTED BY SENATOR RICHARD G. 

LUGAR REGARDING THE UNITED STATES-RWANDA BILATERAL INVESTMENT TREATY

Question. In its 2008 decision in Medellin v. Texas, 128 S.Ct. 1346 (2008), the 

Supreme Court concluded that the United States lacked the authority in U.S. law 

to give effect to a judgment of the International Court of Justice relating to U.S. 

obligations under the Vienna Convention on Consular Relations. The Foreign Relations Committee has previously stressed its view that it is important that the 

United States comply with its treaty obligations, and has observed that the committee generally does not recommend that the Senate give advice and consent to 

treaties unless it is satisfied that the United States has sufficient domestic legal authority to implement them. With these considerations in mind, please indicate what 

authorities Federal and State governments will rely on to implement the various obligations the United States would assume upon becoming party to this treaty. 

Answer. The United States is able to implement the proposed United StatesRwanda Bilateral Investment Treaty (BIT) sufficiently under existing legal authority and thus no further legal authority is necessary to implement the treaty. The 

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as 

codified in the Federal Arbitration Act, 9 U.S.C. § 201, and the Convention on the 

Settlement of Investment Disputes Between States and Nationals of Other States, 

as implemented domestically, 22 U.S.C. § 1650a, would apply, as relevant, in the 

context of enforcement of investor-State arbitration awards rendered pursuant to 

the proposed BIT. 

Question. Article 37 of the treaty provides for certain disputes between the parties 

to the treaty concerning its interpretation or application to be submitted to binding 

arbitration. What authorities would the administration intend to rely upon to implement any state-to-state arbitral decisions awarded against the United States pursuant to this article? 

Answer. State-to-State arbitrations are extremely rare. In fact, no State-to-State 

arbitrations have taken place to date under U.S. bilateral investment treaties. 

Nevertheless, there are various tools at our disposal for implementing a State-toState award should the situation arise. 

Articles 3 through 10 of the BIT and other provisions that qualify or create exceptions to these Articles, such as Article 15, are self-executing but do not confer a private right of action. All remaining articles of the BIT are non-self-executing. As a 

result, should an arbitral decision conclude that U.S. State law is inconsistent with 

the BIT, the U.S. Government could, if necessary, choose to initiate a legal action 

against the State to ensure compliance with a self-executing provision of the BIT. 

To the extent an arbitral decision determines that Federal law is inconsistent with 

the BIT and an award addresses a self-executing provision of the BIT, then as long 

137 

as the statute in question predated the entry into force of the treaty, the later-intime self-executing BIT provision would prevail over the earlier inconsistent statute. 

To the extent an award addresses Article 11 of the BIT, which is a non-selfexecuting provision of the BIT establishing investment protections and subject to 

State-to-State arbitration, the U.S. Government could seek legislation where no 

other existing authority permitted it to comply with the award or take other appropriate steps, such as seeking to interpret the statute in a manner that is consistent 

with the arbitral decision. Under current U.S. law, however, existing Federal 

authorities, for example, the Administrative Procedures Act, 5 U.S.C. § 551 et. seq., 

along with comparable state-level authorities, adequately ensure compliance with 

the transparency standards established in Article 11 of the BIT. 

Finally, were a State-to-State tribunal to award money damages against the 

United States, funds to satisfy such an award could be sought from appropriated 

funds, if any, or from the Judgment Fund (31 U.S.C. § 1304) to the extent appropriate. 

In brief, should a dispute between the Parties lead to arbitration pursuant to the 

mechanism provided for in Article 37, there are a number of options available for 

implementing State-to-State arbitral decisions. 

Question. What is the value of existing investments in the United States by 

Rwandan investors? What are the most significant sectors in which such investments occur? 

Answer. According to the Department of Commerce’s Bureau of Economic Analysis, there is no direct investment in the United States from Rwanda as a foreign 

parent. 

Question. By how much does the administration expect Rwandan investment in 

the United States to increase if the treaty enters into force? 

Answer. It is difficult to say with precision what impact a U.S. bilateral investment treaty (BIT) may have on investment flows given the wide range of factors 

that investors consider when making investment decisions. There is presently no 

foreign direct investment in the United States from Rwanda as a foreign parent, 

according to the Department of Commerce’s Bureau of Economic Analysis. According 

to UNCTAD, Rwanda’s outward foreign direct investment flows worldwide were $14 

million in 2008. 

Question. What is the value of existing investments in Rwanda by U.S. investors? 

What are the most significant sectors in which such investments occur? 

Answer. According to the Department of Commerce’s Bureau of Economic Analysis, U.S. direct investment in Rwanda on a historical cost basis was $1 million in 

2008, concentrated in the wholesale trade sector. A number of new U.S. investments 

in Rwanda were undertaken or announced in 2009. For example, in March 2009, 

U.S. firm ContourGlobal announced that it reached agreement with the government 

of Rwanda to invest $325 million in methane gas extraction and power generation. 

U.S. firm Eco-Fuel and a British partner recently announced they will undertake 

a $300 million renewable energy project growing jatropha to produce biofuel in 

Rwanda. Sorwathe, a U.S. tea company that has invested in Rwanda since 1978, 

recently opened a new $2 million tea factory in the country. Also this year, Starbucks Coffee opened a ‘‘Farmer Support Center’’ in Kigali, the first such investment 

by the company in Africa. We understand from our Embassy in Kigali that a number of other U.S. firms are considering Rwanda as a potential investment 

destination. 

Question. By how much does the administration expect U.S. investment in Rwanda to increase if the treaty enters into force? 

Answer. U.S. bilateral investment treaties (BITs) play an important role by establishing rules that protect the rights of U.S. investors and providing market access 

for future U.S. investment. They also promote transparency and the rule of law. In 

doing so, we believe the BIT will assist Rwanda’s efforts to improve its investment 

climate and attract more foreign investment. It is difficult to say with precision 

what effect a U.S. BIT may have on investment levels given the wide range of factors that investors consider when making investment decisions. 

Question. As you mentioned in your recent testimony before the committee, Bilateral Investment Treaties have been negotiated ‘‘with the objective of protecting U.S. 

investment abroad, encouraging the adoption of open, transparent, and nondiscriminatory investment policies, and supporting the development of international legal 

standards consistent with these objectives.’’ How will the Department of State ensure that these and other objectives continue to be met and developed in Rwanda? 

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Answer. Once in force, the treaty will provide a strong framework of protections 

that support the objectives identified in my testimony. In the event of an investment 

dispute, the treaty provides an investor-State arbitration procedure that allows 

investors to bring claims against the host government for alleged breaches of the 

treaty. The treaty also contains a State-State dispute settlement mechanism. 

The Department and other executive branch agencies will also continue to use 

other channels to promote these objectives. These efforts include our bilateral contacts with the Rwandan Government generally, the United States-Rwanda Trade 

and Investment Council, led by the Office of the U.S. Trade Representative, and the 

Overseas Private Investment Corporation’s programs in Rwanda (which are authorized under a separate bilateral Investment Incentive Agreement between the two 

governments). 

Question. If this proposed treaty comes into force, what affect does the Department of State estimate it will have on the region and Rwanda’s neighbors? 

Answer. As the treaty embodies high standards of investor protection, market 

access, and transparency, we believe it will set a very positive example in the region. This is particularly the case as countries in the region compete with one another to attract foreign direct investment that supports economic growth and jobs. 

Question. Besides the recently announced negotiations with Mauritius, is the 

administration considering announcing the commencement of other BIT negotiations 

before the review of the current U.S. model BIT treaty is concluded? 

Answer. Although we continue to work to identify candidates for U.S. bilateral 

investment treaty (BIT) negotiations, we have no current plans to announce any 

new BIT negotiations. The administration is working to finalize the review of the 

model BIT as expeditiously as possible. 

RESPONSES OF ASSISTANT SECRETARY KERRI-ANN JONES TO QUESTIONS SUBMITTED

BY SENATOR RICHARD G. LUGAR REGARDING THE TREATY ON PLANT GENETIC

RESOURCES FOR FOOD AND AGRICULTURE

Question. In its 2008 decision in Medellin v. Texas, 128 S.Ct. 1346 (2008), the 

Supreme Court concluded that the United States lacked the authority in U.S. law 

to give effect to a judgment of the International Court of Justice relating to U.S. 

obligations under the Vienna Convention on Consular Relations. The Foreign Relations Committee has previously stressed its view that it is important that the 

United States comply with its treaty obligations, and has observed that the committee generally does not recommend that the Senate give advice and consent to 

treaties unless it is satisfied that the United States has sufficient domestic legal authority to implement them. With these considerations in mind, please indicate what 

authorities Federal and State governments will rely on to implement the various obligations the United States would assume upon becoming party to this treaty. 

Answer. The United States currently has all necessary authority to implement the 

Treaty. Please see pp. 2–8 of Treaty Transmittal package for a description of such 

authorities. As described in that package, the Treaty’s core obligations are to be implemented primarily using USDA and USAID authorities, such as the authority to 

operate the National Germplasm System found in 7 U.S.C. § 5841. 

Question. Article 3 of the Treaty specifies that the Treaty relates to plant genetic 

resources ‘‘for food and agriculture.’’ Are there specific other uses for plant genetic 

resources that this scope was intended to exclude? Would the Treaty’s provisions 

apply to energy-related uses of plant genetic resources? 

Answer. Access to plant genetic resources via the Multilateral System is to be 

‘‘provided solely for the purpose of utilization and conservation for research, breeding, and training for food and agriculture, provided that such purpose does not 

include chemical, pharmaceutical and/or other nonfood/feed industrial uses.’’ See 

Article 12.3(a). Energy-related uses of plant genetic resources are understood to be 

a nonfood/feed industrial use, and the Multilateral System would not provide for access to the plant genetic resource for research, breeding and training for such an 

industrial use. 

Question. Article 9 of the Treaty addresses ‘‘Farmers Rights.’’ 

• Please indicate whether the administration interprets Article 9 of the Treaty to 

require States Parties to afford particular rights to farmers under their domestic laws. 

• Please indicate what steps the administration intends to take to implement 

Article 9, and what authorities it would rely upon. 

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Answer. No; the Treaty does not require States Parties to afford any particular 

rights to farmers under domestic laws. Instead it specifically envisions that each 

Party would define its own particular measures in this regard. The United States 

already recognizes the importance of consultation and recognition as contemplated 

by this article, including in a variety of national and state laws, regulations, and 

orders, including contract laws, unfair competition laws, intellectual property laws, 

and Executive Order 13175 (November 6, 2000) ‘‘Consultation and Coordination 

with Indian Tribal Governments.’’ Further, USDA has long conveyed extensive nonmonetary benefits to farmers through land grant universities and extension services 

authorized under, inter alia, 7 U.S.C. §§ 301 et. seq., 322 et. seq. and 341 et seq. 

USDA also provides services specifically to indigenous communities through, inter 

alia, Title V of P.L. 103–382 (Oct. 20, 1994); Title XVI, § 1677, P.L. 101–64 (1990 

Farm Bill); 7 U.S.C. § 3241 and 20 U.S.C. § 1059d. 

Question. Please indicate whether the administration intends that Article 9, or 

any other provision in the Treaty, would confer private rights enforceable in U.S. 

courts if the United States became a party to the Treaty. 

Answer. Neither Article 9 nor any other provision of the Treaty would confer 

directly enforceable rights in U.S. courts. 

Question. The transmittal package for the Treaty indicates that the United States 

interprets Article 12 of the Treaty as not diminishing the availability or exercise of 

intellectual property rights under national laws. 

• Is the administration aware of any instances in which parties to the Treaty 

have expressed contrary interpretations of Article 12? 

• Is the administration aware of any practice under the Treaty that confirms or 

contradicts the interpretation of the United States on this issue? 

Answer. We are not aware of any instances in which Parties have expressed contrary interpretations of Article 12 nor are we aware of any practices under the 

Treaty that contradict our interpretation of Article 12. Consistent with the United 

States interpretation of Article 12, a number of Parties have submitted declarations 

that plant genetic resources for food and agriculture or their genetic parts or components which have undergone innovation may be subject to intellectual property 

rights, provided that the criteria relating to such rights are met. 

Question. Article 11.2 of the Treaty provides that the Multilateral System established under the Treaty ‘‘shall include all plant genetic resources for food and agriculture listed in Annex I that are under the management and control of the Contracting Parties and in the public domain.’’ Please indicate to what extent, if any, 

this Article would require the United States to make available plant genetic 

resources not currently made available under the U.S. National Plant Germplasm 

System. 

Answer. There is no requirement to make any genetic resources available beyond 

those already made available by the National Plant Germplasm System. 

Question. Article 13.2(a) of the Treaty provides for parties to the Treaty to make 

available specified information about plant genetic resources included in the Multilateral System established under the Treaty. Please indicate whether these provisions would obligate the United States to make publicly available information about 

plant genetic resources that it does not currently make available in connection with 

the operation of the U.S. National Plant Germplasm System. 

Answer. There are no requirements to make any information available beyond 

that already freely distributed by the U.S. Department of Agriculture and the 

National Plant Germplasm System. The Treaty language exempts confidential information. The requirement to make information available is also subject to national 

law, such as legal privileges and the Trade Secrets Act 18 U.S.C. § 1905. 

Question. Please indicate what steps the administration intends to take to implement the provisions of Article 13.2(b) of the Treaty addressing access to and transfer 

of technology. 

Answer. The U.S. Department of Agriculture’s existing programs and practices 

are consistent with Article 13.2(b) of the Treaty. The National Plant Germplasm 

System and the Germplasm Resources Information Network will continue to provide 

germplasm and related information freely. Joint bilateral research projects between 

USDA and its counterparts in Party countries will continue, as long as they continue to address priorities of the United States and its counterparts, and if funds 

continue to be available. 

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Question. Under Article 13.2(d) of the Treaty, the standard Material Transfer 

Agreement (MTA) includes a requirement that a recipient who commercializes a 

product that includes material accessed under the Treaty must, under certain circumstances, pay to a Trust Account established under the Treaty ‘‘an equitable 

share of the benefits arising from the commercialization of that product.’’ According 

to the transmittal package for the Convention, the MTA adopted by Treaty Governing Body ‘‘includes a payment level of 1.1 percent of gross sales of a product incorporating material from the Multilateral System minus a standard deduction of 

30 percent.’’ 

a. What factors went into the Governing Body’s decision to set the required 

payment at this level? 

b. How does this required payment compare to the terms under which U.S. 

entities accessed plant genetic resources from foreign sources prior to the entry 

into force of the Treaty? 

c. How much revenue has been generated for the Trust Account to date from 

payments made pursuant to this provision of the MTA? How much revenue does 

the administration expect such payments to generate over the life of the Treaty? 

Answer. 

a. The payment level defined in the Treaty’s standard material transfer agreement (SMTA) was determined through a multilateral negotiation process in which 

the United States participated. Article 13.2(d)(iii) of the Treaty requires the Governing Body to ‘‘determine the level, form, and manner of the payment, in line with 

commercial practice.’’ The payment level is considered by the U.S. seed industry to 

be reasonable and consistent with existing commercial practice with respect to current industry royalty rates. Joining the Convention would give the United States 

a veto over any attempt to raise the payment level established, which currently 

works out to be 0.77 percent of gross sales. 

b. Some materials under the control of Treaty Parties have not been available to 

U.S. entities under any terms. The Treaty will guarantee access to such materials 

that might not otherwise be available. Under the terms of the SMTA, payment is 

not required for access. Payment is required when a product is commercialized, but 

only if that product is not freely available for further research and breeding. The 

SMTA grants recipients the right to commercialize products under a fixed royalty 

rate that the United States and other governments have prenegotiated. U.S. entities 

may decide whether this rate is reasonable for a particular product prior to accessing materials in the Multilateral System. Moreover, U.S. ratification of the Treaty 

will not affect whether U.S. entities accessing material from the Multilateral System 

must pay such a rate, because foreign seed banks are already requiring acceptance 

of the SMTA terms as a condition of access to such material. In other words, the 

royalty payment would arise under private contracts that are already in widespread 

use, and would not depend on whether the United States has joined the Treaty. 

c. To date, there have been no payments to the Trust Account. The Treaty entered 

into force in June 2004. Scientific research and plant breeding require years to accomplish their goals, and only a small percentage of such efforts yields any commercial products. Thus, there will likely be a lengthy ‘‘lag time’’ between the date of 

initial access to plant genetic resources for food and agriculture from the Multilateral System and the date of commercialization of any products resulting from that 

research and development. Consequently, no revenue has been generated to date for 

the Trust Account from payments made pursuant to this provision of the MTA. We 

are uncertain how much revenue such payments will generate, but forecast them 

to be in line with what might be expected, based on current commercial practice, 

from payments generated by licensing of unimproved genetic resources from publicsector sources to U.S. private-sector companies. The Treaty anticipates generating 

other revenues through voluntary contributions to the Trust from both public and 

private sectors. 

Question. Article 13.2(d)(ii) of the Treaty provides that the Treaty’s Governing 

Body ‘‘may, from time to time, review the levels of payment [provided for in the 

MTA] with a view to achieving a fair and equitable sharing of benefits.’’ 

a. Under what circumstances would the administration support a decision by 

the Governing Body to change the payment level referred to in Article 

13.2(d)(ii)? 

b. Does the administration intend to consult with the Congress before supporting a decision by the Governing Body to change the payment level referred 

to in Article 13.2(d)(ii)? 

Answer. 

141 

a. If U.S. stakeholders supported a change in the payment level referred to in 

Article 13.2(d)(ii), the United States would support a change. To date, all indications 

are that the payment level is consistent with existing commercial practice. 

b. The U.S. would consult as appropriate with all interested stakeholders, including Congress, on this matter. 

Question. Please provide the amount of the annual budget for the most recent 

year approved by the Treaty’s Governing Body, and for the immediate two previous 

years. 

Answer. The approved operating budgets for 2008, 2009, 2010, and 2011 are 

$1,844,426; $2,826,885; $2,244,366; and $2,821,566 respectively. 

Question. Article 13.3 of the Treaty provides that ‘‘benefits arising from the use 

of plant genetic resources for food and agriculture that are shared under the multilateral system should flow primarily, directly and indirectly, to farmers in all countries, especially in developing countries, and countries with economies in transition, 

who conserve and sustainably utilize plant genetic resources for food and agriculture.’’ Does the administration expect that U.S. farmers will share in the benefits 

referred to in Article 13.3 of the Treaty? If so, how will such benefits be allocated 

and distributed to U.S. farmers? 

Answer. It is expected that plant genetic resources made available under the 

Treaty’s Multilateral System will be incorporated into U.S. public and private-sector 

research and breeding programs. We do not anticipate a need for an allocation or 

distribution scheme as the benefits in question are general in nature. For example, 

U.S. farmers will benefit by having access to improved varieties, developed by those 

breeding programs, that are resistant to emerging diseases, to environmental 

stresses such as drought, or which have increased product value and/or nutritional 

content. 

Question. To what purposes does the administration expect revenues accruing to 

the Trust Account referred to in paragraph 19.3(f) of the Treaty will be put? Given 

that decisions on the use of such funds require consensus of the Treaty’s Parties, 

and thus could not be approved over U.S. objections, what considerations will guide 

the administration’s policy on the appropriate uses of such funds? 

Answer. Revenues will be used primarily for capacity-building activities that support the goals of conservation and sustainable use of plant genetic resources that 

are critical for international food security. The distribution of the funds in the Trust 

Account will be subject to a funding strategy, which is reviewed and approved by 

the Governing Body (i.e., by consensus of the Parties to the Treaty). The administration’s policy on the appropriate uses of the funds will include consideration of 

consistency with the Treaty’s objectives, as well as efficiency, effectiveness, and 

accountability in the use of funds. 

Question. Article 18.4(d) of the Treaty provides that states parties to the Treaty 

‘‘agree [] to undertake, and provide financial resources for national activities for the 

conservation and sustainable use of plant genetic resources for food and agriculture 

in accordance with its national capabilities and financial resources. The financial 

resources provided shall not be used to ends inconsistent with this Treaty, in particular in areas related to international trade in commodities.’’ 

a. Does the administration interpret this Article to require the United States 

to provide specific amounts of funding available for the programs described? 

b. What steps does the administration plan to take to implement this Article? 

c. What restrictions on existing U.S. programs would be imposed by the Treaty’s requirement that financial resources ‘‘not be used to ends inconsistent with 

this Treaty, in particular in areas related to international trade in commodities?’’ 

d. Would the Treaty’s requirement that financial resources ‘‘not be used to 

ends inconsistent with this Treaty, in particular in areas related to international trade in commodities’’ apply to funding for programs implemented by 

state or local governments in the United States? Are any such state and local 

programs currently implemented in a manner consistent with this requirement? 

Answer. 

a. No, Article 18.4(d) does not obligate Parties to contribute specific amounts of 

financial resources for national activities for the conservation and sustainable use 

of plant genetic resources. Further, there are no assessed contributions from Parties 

to the Treaty. 

b. Existing U.S. practice is consistent with Article 18.4(d). 

142 

c. Existing U.S. practice is consistent with Article 18.4(d). 

d. No, 18.4(d) would not apply to funding for programs implemented by state or 

local governments. Furthermore, the few state and local programs devoted to conservation and sustainable use of plant genetic resources, such as local crop 

genebanks, are currently implemented in a manner consistent with the Treaty. 

Question. Article 18.4(f) of the Treaty envisions that activities undertaken pursuant to the Treaty will be funded, in part, by voluntary contributions from States 

Parties to the Treaty. Please indicate whether the administration would intend to 

provide any voluntary contributions toward the Treaty’s budget if the United States 

became Party to the Treaty. Please indicate the amount of any such envisioned 

contributions. 

Answer. There are no plans to make voluntary financial contributions toward the 

Treaty’s budget at this time. 

Question. Under Article 22 of the Treaty, Parties have the option of accepting 

compulsory dispute settlement in the form of arbitration or submission of disputes 

to the International Court of Justice. Please indicate whether the executive branch 

recommends that the United States submit to binding dispute resolution under either or both of these mechanisms. 

Answer. No; the administration does not make such a recommendation. 

Question. Article 23 of the Treaty establishes rules applicable to amending the 

Treaty and its annexes. What process does the executive branch intend to follow 

with respect to considering any such amendments? Does the executive branch intend to submit any such amendments to the Senate for advice and consent? 

Answer. While we would anticipate that ordinarily any amendment to the main 

body of the Treaty would warrant the advice and consent of the Senate, our expectation is that amendments to Annex I, which lists crops and forages covered by the 

Multilateral System, would be procedural and technical in nature and would not, 

in the normal course, require the advice and consent of the Senate. If, however, a 

proposed amendment to Annex I were to go beyond the current mandate of the 

Annex and raise more substantive issues, the executive branch would consult with 

the committee in a timely manner regarding the question of whether advice and 

consent is warranted. In the case of Annex II, as noted in an earlier question, the 

executive branch does not recommend that the United States submit to binding dispute resolution under Article 22 of the Treaty and thus it is anticipated that amendments to Part I of Annex II would, even if accepted, have no legal effect on the 

United States. An amendment to Part II of Annex II, which deals with conciliation, 

could have an effect on the United States and the executive branch would consult 

with the committee on whether such an amendment would warrant the advice and 

consent of the Senate. 

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