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[Senate Executive Report 111-4]
[From the U.S. Government Publishing Office]

111th Congress                                              Exec. Rept.
                                 SENATE
 2d Session                                                       111-4

======================================================================

 
                 PROTOCOL AMENDING TAX CONVENTION WITH 
                              NEW ZEALAND

                                _______
                                

                  June 30, 2010.--Ordered to be printed

                                _______
                                

          Mr. Kerry, from the Committee on Foreign Relations,
                        submitted the following

                                 REPORT

                    [To accompany Treaty Doc. 111-3]

    The Committee on Foreign Relations, to which was referred 
the Protocol Amending the Convention between the United States 
of America and New Zealand for the Avoidance of Double Taxation 
and the Prevention of Fiscal Evasion with Respect to Taxes on 
Income, signed on December 1, 2008, at Washington (the 
``Protocol'') (Treaty Doc. 111-3), 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.................................................3
  V. Implementing Legislation.........................................3
 VI. Committee Action.................................................3
VII. Committee Recommendation and Comments............................3
VIII.Text of Resolution of Advice and Consent to Ratification.........4

 IX. Annex I--Technical Explanation...................................5

                               I. Purpose

    The purpose of the Protocol, along with the underlying 
treaty, is to promote and facilitate trade and investment 
between the United States and New Zealand, and bring the 
existing treaty with New Zealand into conformity with current 
U.S. tax treaty policy. Principally, the Protocol would amend 
the existing tax treaty with New Zealand (the ``Treaty'') in 
order to eliminate or reduce withholding taxes on certain 
cross-border dividend and royalty payments and strengthen 
existing obligations against the inappropriate use of the 
treaty by third-country residents and for the exchange of 
information between tax authorities in both countries.

                             II. Background

    The United States has a tax treaty with New Zealand that is 
currently in force, which was concluded in 1982. The Protocol 
was negotiated to modernize our relationship with New Zealand 
in this area and to update the 1982 treaty to better reflect 
current U.S. and New Zealand domestic tax policy.

                         III. Major Provisions

    A detailed article-by-article analysis of the Protocol 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 Protocol, JCX-51-09 (November 6, 2009), which 
was of great assistance to the committee in reviewing the 
Protocol. A summary of the key provisions of the Protocol is 
set forth below.

Taxation of Investment Income

    The withholding tax rates on investment income under the 
Protocol would generally be the same or lower than those in the 
existing treaty. The Protocol would reduce or eliminate source-
country taxation of intercompany dividends distributed by a 
company resident in one Contracting State to a resident in the 
other Contracting State. See Article X. More specifically, the 
Protocol would provide for the elimination of source-country 
taxation of certain direct dividends (where an 80 percent 
ownership threshold is met). See Article X. The Protocol would 
allow for taxation at source of 5 percent on dividends when a 
10 percent ownership threshold is met, and 15 percent on all 
other dividends. See Article X. The Protocol would also replace 
the existing treaty's 5 percent limit on source-country 
withholding tax on cross-border royalty payments with an 
exemption from source-country withholding tax on such payments. 
See Article XII.

Taxation of Business and Personal Services Income

    The Protocol would preserve the U.S. right to impose its 
branch profits tax on U.S. branches of New Zealand 
corporations. See Article VII. The Protocol would replace the 
existing Convention's rules regarding the taxation of 
independent personal services by individuals. Under the 
Protocol, an individual performing services in the other 
country would become taxable in the other country only if the 
individual has a fixed place of business in that country.

Limitation on Benefits

    The Protocol would strengthen the existing treaty's 
``Limitation of Benefits'' provision and make it more 
consistent with current U.S. tax treaty practice. The new 
provision is designed to address ``treaty shopping,'' which is 
the inappropriate use of a tax treaty by third-country 
residents. It would also incorporate updated rules that provide 
that a former citizen or long-term resident of the United 
States may, for the period of ten years following the loss of 
such status, be taxed in accordance with the laws of the United 
States.

Exchange of Information

    The Protocol would replace the existing Convention's tax 
information exchange provisions with updated rules that are 
consistent with current U.S. tax treaty practice. The Protocol 
would allow the tax authorities of each country to exchange 
information relevant to carrying out the provisions of the 
Convention or the domestic tax laws of either country. It would 
also enable the United States to obtain information (including 
from financial institutions) from New Zealand whether or not 
New Zealand needs the information for its own tax purposes.

                          IV. Entry Into Force

    The proposed Protocol will enter into force between the 
United States and New Zealand on the date of the later note in 
an exchange of diplomatic notes in which the Parties notify 
each other that their respective applicable procedures for 
ratification have been satisfied. The various provision of the 
Protocol will have effect as described in paragraphs 2 and 3 of 
Article XVI.

                      V. Implementing Legislation

    As is the case generally with income tax treaties, the 
Protocol is self-executing and does not require implementing 
legislation for the United States.

                          VI. Committee Action

    The committee held a public hearing on the Protocol 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. A 
transcript of the hearing is included in Senate Executive 
Report 111-3.
    On April 13, 2010, the committee considered the Protocol 
and ordered it favorably reported by voice vote, with a quorum 
present and without objection.

                        VII. Committee Comments

    The Committee on Foreign Relations believes that the 
Protocol will stimulate increased trade and investment, 
strengthen rules for denying treaty-shoppers the benefits of 
the underlying tax treaty, and promote closer co-operation 
between the United States and New Zealand. The committee 
therefore urges the Senate to act promptly to give advice and 
consent to ratification of the Protocol, as set forth in this 
report and the accompanying resolution of advice and consent.
    The committee has included one declaration in the 
recommended resolution of advice and consent. The declaration 
states that the Protocol 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.

                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 
Protocol Amending the Convention between the United States of 
America and New Zealand for the Avoidance of Double Taxation 
and the Prevention of Fiscal Evasion with Respect to Taxes on 
Income, signed on December 1, 2008, at Washington (the 
``Protocol'') (Treaty Doc. 111-3), 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 Protocol is self-executing.
                   IX. Annex I--Technical Explanation

                              ----------                              

   Department of the Treasury, Technical Explanation of the Protocol 
    Between the United States of America and New Zealand, Signed at 
 Washington on December 1, 2008, Amending the Convention and Protocol 
Between the United States of America and New Zealand for the Avoidance 
of Double Taxation and the Prevention of Fiscal Evasion With Respect to 
         Taxes on Income, Signed at Wellington on July 23, 1982

    This is a technical explanation of the Protocol between the 
United States and New Zealand signed at Washington on December 
1, 2008 (the ``Protocol'') amending the Convention and Protocol 
between the United States and New Zealand for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income signed at Wellington on July 23, 
1982 (the ``existing Convention'').
    Negotiations took into account the U.S. Treasury 
Department's current tax treaty policy, and the Treasury 
Department's Model Income Tax Convention, published on November 
15, 2006 (the ``U.S. Model''). Negotiations also took into 
account the Model Tax Convention on Income and on Capital, 
published by the Organisation for Economic Cooperation and 
Development (the ``OECD Model''), and recent tax treaties 
concluded by 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 to the ``existing 
Convention'' are intended to put various provisions of the 
Protocol into context. The Technical Explanation does not, 
however, provide a complete comparison between the provisions 
of the existing Convention and the amendments by the Protocol. 
The Technical Explanation is not intended to provide a complete 
guide to the existing Convention as amended by the Protocol. To 
the extent that a paragraph from the existing Convention has 
not been amended by the Protocol, the technical explanations to 
the existing Convention remain the official explanation. 
References in this Technical Explanation to ``he'' or ``his'' 
should be read to mean ``he or she'' or ``his and her.'' 
References to the ``Code'' are to the Internal Revenue Code of 
1986, as amended.

                               ARTICLE I

Paragraph 1
    Article I of the Protocol amends paragraph 3 of Article 1 
(General Scope) of the existing Convention.
    New paragraph 3 contains the traditional saving clause 
found in all U.S. tax treaties. The Contracting States reserve 
their rights, except as provided in paragraph 4, 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 New Zealand 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 New Zealand 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 
4(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 New Zealand. See paragraph 4 
of Article 22 (Relief from Double Taxation).
    For purposes of the saving clause, ``residence'' is 
determined under Article 4 (Residence). 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 New 
Zealand 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 liability. For example, in determining under Code section 
957 whether a foreign corporation is a controlled foreign 
corporation, shares in that corporation held by the individual 
would be considered to be held by a U.S. resident. As a result, 
other U.S. citizens or residents might be deemed to be United 
States shareholders of a controlled foreign corporation subject 
to current inclusion of Subpart F income recognized by the 
corporation. See Treas. Reg. section 301.7701(b)-7(a)(3).
    Under paragraph 3, the United States 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 with 
respect to income from sources within the United States 
(including income deemed under the domestic law of the United 
States to arise from such sources). Thus, paragraph 3 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 thresholds for the average annual net income tax are 
adjusted annually for inflation. 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 if such individual is treated as a resident of 
a foreign country under the provisions of a tax treaty between 
the United States and the foreign country and the individual 
does not waive the benefits of such treaty applicable to 
residents of the foreign country.
Paragraph 2
    Paragraph 2 amends Article I of the existing Convention by 
adding new paragraphs 5 and 6.
    New paragraph 5 specifically relates to non-discrimination 
obligations of the Contracting States under the General 
Agreement on Trade in Services (the ``GATS''). The provisions 
of paragraph 5 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 5(a) provides that, unless the competent 
authorities determine that a taxation measure is not within the 
scope of the Convention, the national treatment obligations of 
the GATS shall not apply with respect to that measure. Further, 
any question arising as to the interpretation 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 23 (Non-
Discrimination) of the Convention.
    The term ``measure'' for these purposes is defined broadly 
in subparagraph 5(b). It would include, for example, a law, 
regulation, rule, procedure, decision, administrative action or 
guidance, or any other form of measure.
    New 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 (Income from Real Property) through 15 (Dependent Personal 
Services) and 17 (Artistes and Athletes) through 21 (Other 
Income), 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 that is treated as fiscally 
transparent under the laws of either Contracting State. 
Entities falling under this description in the United States 
include partnerships, common investment trusts under section 
584 of the Code, 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 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 New 
Zealand pays interest to an entity that is treated as fiscally 
transparent for U.S. tax purposes, the interest will be 
considered derived by a resident of the United States 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 any benefit under the 
Convention for the interest paid to the entity, because they 
are not residents of the United States for purposes of claiming 
this treaty benefit. If, however, they are treated as residents 
of a third country under the provisions of an income tax 
convention which that country has with New Zealand, 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 New Zealand 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 New Zealand (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 New Zealand. 
These results also obtain regardless of where the entity is 
organized (i.e., in the United States, in New Zealand 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 New Zealand as a corporation 
and is owned by a shareholder who is a resident of New Zealand 
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.
    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 New Zealand, 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 New 
Zealand only to the extent that the laws of New Zealand treat X 
as deriving the income for its tax purposes, perhaps through 
application of rules similar to the U.S. ``grantor trust'' 
rules.
    As another example, assume income from U.S. sources is 
received by a New Zealand accumulation trust created by a New 
Zealand resident settlor, with a NZ trustee, and one New 
Zealand beneficiary and one third-country beneficiary. For New 
Zealand tax purposes, the trustee is viewed as liable for tax 
because the income is being accumulated in the trust. 
Therefore, the trustee, as the legal owner of the income, is 
considered as deriving the income for purposes of applying the 
Convention.
    Paragraph 6 is not an exception to the saving clause of 
paragraph 3. 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 New Zealand 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 New Zealand views the LLC as 
fiscally transparent.

                               ARTICLE II

    Article II of the Protocol replaces Article 2 (Taxes 
Covered) of the existing Convention. Article 2 specifies the 
U.S. taxes and the taxes of New Zealand 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 23 
(Non-Discrimination) and 25 (Exchange of Information and 
Administrative Assistance). Article 23 applies with respect to 
all taxes, including those imposed by state and local 
governments. Article 25 (Exchange of Information and 
Administrative Assistance) applies with respect to all taxes 
imposed at the national level.
Paragraph 1 of Article 2
    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 
23, state and local taxes are not covered by the Convention.
Paragraph 2 of Article 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 23.
Paragraph 3 of Article 2
    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 New Zealand are identified in 
subparagraph 3(a), as the income tax.
    Subparagraph 3(b) provides that the existing U.S. taxes 
subject to the rules of the Convention are the Federal income 
taxes imposed by the Code, together with the excise taxes 
imposed with respect to the investment income of foreign 
private foundations (Code section 4940). Social security and 
unemployment taxes (Code sections 1401, 3101, 3111 and 3301) 
are excluded from coverage.
Paragraph 4 of Article 2
    Paragraph 4 is in all material respects the same as 
paragraph 2 of Article 2 of the existing Convention. 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 December 1, 2008, the date of 
signature of the Protocol. 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 significantly affect 
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 III

    Article III of the Protocol amends Article 3 (General 
Definitions) of the existing Convention.
Paragraph 1
    Paragraph 1 of the Protocol amends subparagraph 1(b) of 
Article 3 of the existing Convention by including a new 
definition of the term ``company.'' The term ``company'' is 
defined in subparagraph 1(b) as a body corporate or an entity 
treated as a body corporate for tax purposes in the state where 
it is organized. The definition refers to the law of the state 
in which an entity is organized in order to ensure that an 
entity that is treated as fiscally transparent in its country 
of residence will not get inappropriate benefits, such as the 
reduced withholding rate provided by subparagraph 2(b) of 
Article 10 (Dividends). It also ensures that the Limitation on 
Benefits provisions of Article 16 will be applied at the 
appropriate level.
Paragraph 2
    Paragraph 2 of the Protocol replaces subparagraph 1(d) of 
Article 3 of the existing Convention by defining the terms 
``enterprise of a Contracting State'' and ``enterprise of the 
other Contracting State'' as an enterprise carried on by a 
resident of a Contracting State and an enterprise carried on by 
a resident of the other Contracting State. 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 New 
Zealand would still be a U.S. enterprise).
    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. In accordance with Article 4 (Resident), entities 
that are fiscally transparent in the Contracting State in which 
their owners are resident are not considered to be residents of 
that 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). 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.
Paragraph 3
    Paragraph 3 of the Protocol replaces paragraph 1(g) of 
Article 3 of the existing Convention. Paragraph 3 of the 
Protocol sets out the geographical scope of the Convention with 
respect to the United States. It encompasses the United States 
of America, including the states, the District of Columbia and 
the territorial sea of the United States. The term does not 
include Puerto Rico, the United States Virgin Islands, Guam the 
Commonwealth of the Northern Mariana Islands or any other U.S. 
possession or territory. For certain purposes, the term 
``United States'' includes the sea bed and subsoil of undersea 
areas adjacent to the territorial sea of the United States. 
This extension applies to the extent that the United States 
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 Code 
section 638, which treats the continental shelf as part of the 
United States for purposes of natural resource exploration and 
exploitation.
Paragraph 4
    Paragraph 4 of the Protocol replaces paragraph 1(h) of 
Article 3 of the existing Convention. Paragraph 4 of the 
Protocol sets out the geographical scope of the Convention with 
respect to New Zealand. The term ``New Zealand'' encompasses 
the territory of New Zealand but does not include Tokelau; it 
also includes any area beyond the territorial sea designated 
under New Zealand legislation and in accordance with 
international law as an area in which New Zealand may exercise 
sovereign rights with respect to natural resources.
Paragraph 5
    Paragraph 5 of the Protocol amends paragraph 1(j) of 
Article 3 of the existing Convention by deleting the final 
period and replacing it with a comma.
Paragraph 6
    Paragraph 6 of the Protocol amends paragraph 1 of Article 3 
of the existing Convention by adding four new subparagraphs 
(k), (l), (m), and (n) to paragraph 1 of Article 3 of the 
existing Convention.
    Subparagraph l(k) defines the term ``national,'' as it 
relates to the United States and to New Zealand. This term is 
relevant for purposes of Articles 19 (Government Service) and 
23 (Non-Discrimination). A national of one of the Contracting 
States is (1) an individual who is a citizen 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 (l) defines the term ``pension fund'' to 
include any person established in a Contracting State that is 
operated principally to administer or provide pension or 
retirement benefits or to earn income for the benefit of one or 
more such arrangements and in the case of the United States is 
generally exempt from income taxation. In the case of New 
Zealand, the term refers to a superannuation scheme registered 
under the Superannuation Schemes Act 1989, a KiwiSaver Scheme 
registered under the KiwiSaver Act 2006, the New Zealand 
Superannuation Fund, or the Government Superannuation Fund.
    For application of the Convention by 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, a 
Code section 403(a) qualified annuity plan, a Code section 
403(b) plan, a trust that is an individual retirement account 
under Code section 408, a Roth individual retirement account 
under Code section 408A, or a simple retirement account under 
Code section 408(p), a trust providing pension or retirement 
benefits under a simplified employee pension plan under Code 
section 408(k), a trust described in section 457(g) providing 
pension or retirement benefits under a Code section 457(b) 
plan, and the Thrift Savings Fund (section 7701(j)). Section 
401(k) plans and group trusts described in Rev. Rul. 81100, 
1981-1 C.B. 326, and meeting the conditions of Rev. Rul. 2004-
67, 2204-2 C.B. 28, qualify as pension funds to the extent they 
are covered by Code section 401(a) plans and other pension 
funds.
    Subparagraph (m) 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 (n) provides that it includes the performance of 
professional services and other activities of an independent 
character. The introduction of this definition is necessary in 
connection with the deletion of Article 14 (Independent 
Personal Services) as provided in Article X of the Protocol. 
Both subparagraphs are identical to definitions recently added 
to the OECD Model in connection with the deletion of Article 14 
from the OECD Model. The inclusion of the two definitions in 
subparagraph (m) and (n) 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).
Paragraph 7
    Paragraph 7 of the Protocol replaces paragraph 3 of Article 
3 of the existing Convention and addresses the terms that are 
not defined in the Convention.
    New paragraph 3 of Article 3 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 24 (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(f) of 
Article 24, 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 new paragraph 3 to the internal law of a 
Contracting State means the law in effect at the time the 
Convention is being applied, not the law as in effect at the 
time the Convention 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 Convention was negotiated and ratified. The 
reference in both paragraphs 1 and 3 of the Convention to the 
``context otherwise requir[ing]'' a definition different from 
the Convention definition, in paragraph 1, or from the internal 
law definition of the Contracting State whose tax is being 
imposed, under paragraph 3, 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 IV

Paragraph 1
    Paragraph 1 of Article IV of the Protocol replaces 
paragraph 1 of Article 4 (Residence) of the existing 
Convention. 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 New Zealand 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 Convention. 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.
    Under paragraph 1 of Article 4 of the Convention, a person 
who is liable to tax in a Contracting State only in respect of 
income from sources within that State or of profits 
attributable to a permanent establishment in that State will 
not be treated as a resident of that Contracting State for 
purposes of the Convention. Thus, a consular official of New 
Zealand 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 New Zealand 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 amends subparagraph 2(c) of Article 4 of the 
existing Convention by deleting the word ``citizen'' and 
replacing it with the word ``national.''
Paragraph 3
    Paragraph 3 amends subparagraph 2(d) of Article 4 of the 
existing Convention by deleting the word ``citizen'' and 
replacing it with the word ``national.''
Paragraph 4
    Paragraph 4 amends paragraph 4 of Article 4 of the existing 
Convention by deleting the words ``shall be treated as a 
resident of neither Contracting State for purposes of the 
Convention'' and replacing them with the words ``will not be 
treated as a resident of either Contracting Stated for purposes 
of its claiming any benefits provided by the Convention.''
    Dual residents other than individuals (such as companies, 
trusts, or estates) are addressed by paragraph 4. If such a 
person is, under the rules of paragraph 1 or 2, 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. If the competent authorities do not 
reach an agreement on a single State of residence, that dual 
resident may not claim any benefit accorded to residents of a 
Contracting State by the Convention. The dual resident may, 
however, claim any benefits that are not limited to residents, 
such as those provided by paragraph 1 of Article 23 (Non-
Discrimination). Thus, for example, a State cannot impose 
discriminatory taxation on a dual resident company.
    Dual residents 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 New Zealand, 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 New Zealand, 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 
residents can be exchanged under the Convention because, by its 
terms, Article 25 (Exchange of Information and Administrative 
Assistance) is not limited to residents of the Contracting 
States.

                               ARTICLE V

    Article V of the Protocol amends Article 7 (Business 
Profits) of the existing Convention by adding new paragraphs 8 
and 9.
    New paragraph 8 incorporates into the existing Convention 
the rule of Code section 864(c)(6). Like the Code section on 
which it is based, paragraph 8 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 paragraphs 1 
and 2 of Article 7, paragraph 6 of Article 10 (Dividends), 
paragraph 4 of Article 11 (Interest), paragraph 4 of Articles 
12 (Royalties) and paragraph 6 of Article 13 (Capital Gains).
    The effect of this rule can be illustrated by the following 
example. Assume a company that is a resident of New Zealand 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.
    New paragraph 9 clarifies the treatment of fiscally 
transparent entities (including trusts) and beneficial owners 
thereof under Article 7 of the Convention. New Zealand 
requested this clarification because, under New Zealand law, 
the trustees of a trust, as the legal owner of the trust 
property, might be regarded as the only person having a 
permanent establishment (rather than the beneficiaries of the 
trust, who have a beneficial entitlement to the income but no 
legal ownership). Thus, absent this clarification, any 
permanent establishment resulting from that trade or business 
might be considered to be that of the trustees, rather than 
that of the beneficiaries.
    New paragraph 9 provides that if a fiscally transparent 
entity (or trustee) has a permanent establishment in a 
Contracting State and a resident of the other Contracting State 
is beneficially entitled to a share of the business profits 
from the business that is carried on by the fiscally 
transparent entity (or trustee) through that permanent 
establishment, then the beneficial owner is treated as carrying 
on a business through a permanent establishment in that 
Contracting State, and its share of business profits therefrom 
are attributed to the permanent establishment. Thus, if a trust 
with a U.S. beneficiary carries on a business in New Zealand 
through its trustee, and that trustee's actions rise to the 
level of a permanent establishment, then the U.S. beneficiary 
will be treated as having a permanent establishment in New 
Zealand and the profits of the trust associated with that 
permanent establishment will be treated as business profits 
under Article 7. Since paragraph 9 is added solely to address 
the New Zealand law relating to trusts, the absence of similar 
language in other U.S. tax treaties should not be read as 
implying that a resident may avoid permanent establishment 
treatment and business profits by investing through a fiscally 
transparent entity.

                               ARTICLE VI

    Article VI of the Protocol replaces Article 10 (Dividends) 
of the existing Convention. 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 country taxation of such dividends and a limited 
source-State right to tax. Article 10, as amended by the 
Protocol, 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 of Article 10
    Paragraph 1 is in all material respects the same as 
paragraph 1 of Article 10 of the existing Convention. 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 20 (Other Income) grants the State 
of residence exclusive taxing jurisdiction (other than for 
dividends attributable to a permanent establishment in the 
other State).
Paragraph 2 of Article 10
    The State of source also may tax dividends beneficially 
owned by a resident of the other State, subject to the 
limitations of paragraphs 2 and 3. Paragraph 2 generally limits 
the rate of withholding tax in the State of source on dividends 
paid by a company resident in that State to 15 percent of the 
gross amount of the dividend. If, however, the beneficial owner 
of the dividend is a company resident in the other State and 
owns directly shares representing at least 10 percent of the 
voting power of the company paying the dividend, then the rate 
of withholding tax in the State of source is limited to 5 
percent of the gross amount of the dividend. For purposes of 
the application of paragraph 2, the term ``voting power'' 
refers to the voting stock in a company. 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.
    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) is met for purposes of the 5 percent maximum 
rate of withholding tax is made on the date on which 
entitlement to the dividend is determined. Thus, in the case of 
a dividend from a U.S. company, the determination of whether 
the ownership threshold is met generally would be made on the 
dividend record date.
    Paragraph 2 does not affect the taxation of the profits out 
of which the dividends are paid. The taxation by a Contracting 
State of the income of its resident companies is governed by 
the internal law of the Contracting State, subject to the 
provisions of paragraph 4 of Article 23 (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 
country). The beneficial owner of the dividend for purposes of 
Article 10 is the person to which the dividend income is 
attributable for tax purposes under the laws of the source 
State. Thus, if a dividend paid by a corporation that is a 
resident of one of the States (as determined under Article 4 
(Resident)) 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.
    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. The source State may 
conclude that the person who derives the dividend in the 
residence State is a mere nominee, agent, conduit, etc., for a 
third country resident and deny benefits of the Convention. If 
the person who derives the dividend under paragraph 6 of 
Article 1 would not be treated under the source State's 
principles for determining beneficial ownership as a nominee, 
agent, custodian, conduit, etc., 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 New 
Zealand pays a dividend to LLC, an entity which is treated as 
fiscally transparent for U.S. tax purposes but is treated as a 
company for New Zealand 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. New Zealand's principles of beneficial ownership 
shall then be applied to USCo. If under the laws of New Zealand 
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 a 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 requirements, such as the ownership threshold of 
subparagraph 2(a) have been satisfied.
    For example, assume that NZCo, a company that is a resident 
of New Zealand, owns all of the outstanding shares in ThirdDE, 
an entity that is disregarded for U.S. tax purposes and that is 
resident in a third country. ThirdDE owns 100 percent of the 
stock of USCo. New Zealand views ThirdDE as fiscally 
transparent under its domestic law, and taxes NZCo currently on 
the income derived by ThirdDE. In this case, NZCo is treated as 
deriving the dividends paid by USCo under paragraph 6 of 
Article 1. Moreover, NZCo 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 
country) 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 
non-fiscally transparent under the laws of New Zealand. 
Assuming that ThirdDE is treated as non-fiscally transparent by 
New Zealand, the income will not be treated as derived by a 
resident of New Zealand 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) 
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 Article 1(6) (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 for exclusive residence country 
taxation of dividends (i.e., an elimination of withholding tax) 
with respect to certain dividends distributed by a company 
resident in one Contracting State to a company resident in the 
other Contracting State. As described further below, this 
elimination of withholding tax is available with respect to 
certain inter-company dividends.
    Subparagraph 3(a) provides for the elimination of 
withholding tax on dividends beneficially owned by a company 
that has owned 80 percent or more of the voting power of the 
company paying the dividend for the 12-month period ending on 
the date entitlement to the dividend is determined. The 
determination of whether the beneficial owner of the dividends 
owns at least 80 percent of the voting power of the paying 
company is made by taking into account stock owned both 
directly and indirectly through one or more residents of either 
Contracting State.
    Eligibility for the elimination of withholding tax provided 
by subparagraph (a) is subject to additional restrictions based 
on, and supplementing, the rules of Article 16 (Limitation of 
Benefits). Accordingly, a company that meets the holding 
requirements described above will qualify for the benefits of 
paragraph 3 only if it also: (1) meets the ``publicly traded'' 
test of subparagraph 2(c) of Article 16, (2) meets the 
``ownership-base erosion'' and ``active trade or business'' 
tests described in clause (i) and (ii) of subparagraph 2(e) and 
paragraph 3 of Article 16, or (3) is granted the benefits of 
paragraph 3 of Article 10 by the competent authority of the 
source State pursuant to paragraph 4 of Article 16.
    These restrictions are necessary because of the increased 
pressure on the limitation of benefits tests resulting from the 
fact that the United States has relatively few treaties that 
provide for such elimination of withholding tax on inter-
company dividends. The additional restrictions are intended to 
prevent companies from reorganizing in order to become eligible 
for the elimination of withholding tax in circumstances where 
the limitation of benefits provision does not provide 
sufficient protection against treaty shopping.
    For example, assume that ThirdCo is a company resident in a 
third country that does not have a tax treaty with the United 
States providing for the elimination of withholding tax on 
intercompany dividends. ThirdCo owns directly 100 percent of 
the issued and outstanding voting stock of USCo, a U.S. 
company, and of NZCo, a New Zealand company. NZCo is a 
substantial company that manufactures widgets; USCo distributes 
those widgets in the United States. If ThirdCo contributes to 
NZCo all the stock of USCo, dividends paid by USCo to NZCo 
would qualify for treaty benefits under the active trade or 
business test of paragraph 3 of Article 16. However, allowing 
ThirdCo to qualify for the elimination of withholding tax, 
which is not available to it under the third state's treaty 
with the United States (if any), would encourage treaty-
shopping.
    In order to prevent this type of treaty shopping, paragraph 
3(b) of Article 10 requires NZCo to meet the ownership-base 
erosion requirements of clause (i) and (ii) of subparagraph 
2(e) of Article 16, in addition to the active trade or business 
test of paragraph 3 of Article 16. Thus, NZCo would not qualify 
for the exemption from withholding tax unless (i) on at least 
half the days of the taxable year, at least 50 percent of each 
class of its shares was owned by persons that are residents of 
New Zealand and eligible for treaty benefits under certain 
specified tests and (ii) less than 50 percent of NZCo's gross 
income is paid in deductible payments to persons that are not 
residents of either Contracting State eligible for benefits 
under those specified tests. Because NZCo is wholly owned by a 
third country resident, NZCo could not qualify for the 
elimination of withholding tax on dividends from USCo under the 
ownership-base erosion test and the active trade or business 
test. Consequently, NZCo would need to qualify under another 
test or obtain discretionary relief from the competent 
authority under Article 16(4). For purposes of Article 
10(3)(b), it is not sufficient for a company to qualify for 
treaty benefits generally under the active trade or business 
test or the ownership-base erosion test unless it qualifies for 
treaty benefits under both.
    Alternatively, companies that are publicly traded or 
subsidiaries of publicly-traded companies will generally 
qualify for the elimination of withholding tax under 
subparagraph 3(a) of Article 10. Thus, a company that is a 
resident of New Zealand and that meets the requirements of 
clause (i) or (ii) of subparagraph 2(c) of Article 16, as 
amended by the Protocol, will be entitled to the elimination of 
withholding tax, subject to the 12-month holding period 
requirement of Article 10(3).
    If a company does not qualify for the elimination of 
withholding tax under any of the foregoing objective tests, it 
may request a determination from the relevant competent 
authority pursuant to paragraph 4 of Article 16. Benefits may 
be granted with respect to an item of income if the competent 
authority of the Contracting State in which the income arises 
determines that the establishment, acquisition or maintenance 
of such resident and the conduct of its operations did not have 
as one of its principal purposes the obtaining of benefits 
under the Convention.
Paragraph 4 of Article 10
    Paragraph 4 imposes limitations on the rate reductions 
provided by paragraphs 2 and 3 in the case of dividends paid by 
a RIC or a REIT.
    The first sentence of subparagraph 4(a) provides that 
dividends paid by a RIC or a REIT are not eligible for the 5 
percent rate of withholding tax of subparagraph 2(a) or the 
elimination of withholding tax of paragraph 3.
    The second sentence of subparagraph 4(a) provides that the 
15 percent maximum rate of withholding tax of subparagraph 2(b) 
applies to dividends paid by RICs.
    The third sentence of subparagraph 4(a) provides that the 
15 percent rate of withholding tax also applies to dividends 
paid by a REIT provided that one of the three following 
conditions is met. First, the beneficial owner of the dividend 
is an individual or a pension fund, in either case holding an 
interest of not more than 10 percent in the REIT. Second, the 
dividend is paid with respect to a class of stock that is 
publicly traded and the beneficial owner of the dividend is a 
person holding an interest of not more than 5 percent of any 
class of the REIT's shares. Third, the beneficial owner of the 
dividend holds an interest in the REIT of not more than 10 
percent and the REIT is ``diversified.'' Subparagraph 4(b) 
provides that 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 New Zealand 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 as provided in paragraph 3.
    Similarly, a resident of New Zealand 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 REIT conduits. 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.
Paragraph 5 of Article 10
    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.
    New Zealand has certain statutory instruments referred to 
as ``FC1'' and ``FC2'' debentures which correspond to their 
statutory numbering under The Income Tax Act of 1994. Even 
though these debentures are debt instruments, New Zealand taxes 
these instruments as equity and subjects them to their Foreign 
Investor Tax Credit (``FITC'') regime, which provides a 
mechanism for reducing company tax in respect of profits 
distributed to non-residents. However, because these debentures 
are regarded as profit distributions, no deductions are allowed 
to the company paying them out. The FC1 debentures are debt 
instruments on which the return is calculated with a reference 
to profits. The FC2 debentures are debt instruments on which 
the amount of the debenture is determined by reference to the 
number of shares the debenture holder holds; thus, the rate is 
constant but the amount of the debenture fluctuates as it is 
related to the number of shares. Accordingly, returns from the 
FCI and FC2 debentures will be treated as dividends under 
Article 10.
    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 of Article 10
    Paragraph 6 is in all material respects the same as 
paragraph 3 of Article 10 of the existing Convention. The only 
change is the deletion of references to ``fixed base'' and 
``Article 14 (Independent Personal Services),'' to conform to 
changes made by Article X of the Protocol.
    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 of Article 10
    The right of a Contracting State to tax dividends paid by a 
company that is a resident of the other Contracting State is 
restricted by paragraph 7 to cases in which the dividends are 
paid to a resident of that Contracting State or are 
attributable to a permanent establishment in that Contracting 
State. Thus, a Contracting State may not impose a ``secondary'' 
withholding tax on dividends paid by a nonresident company out 
of earnings and profits from that Contracting State.
    The paragraph also restricts the right of a Contracting 
State to impose corporate level taxes on undistributed profits, 
other than a branch profits tax. The paragraph does not 
restrict a State's right to tax its resident shareholders on 
undistributed earnings of a corporation resident in the other 
State. Thus, the authority of the United States to impose taxes 
on subpart F income and on earnings deemed invested in U.S. 
property, and its tax on income of a passive foreign investment 
company that is a qualified electing fund is in no way 
restricted by this provision.
Paragraph 8 of Article 10
    Paragraph 8 permits the United States to impose a branch 
profits tax on a company resident in New Zealand. 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).
    The United States may impose a branch profits tax on a New 
Zealand company if the company has income attributable to a 
permanent establishment in the United States, derives income 
from real property in the United States that is taxed on a net 
basis under Article 6 (Income from Real Property)), or realizes 
gains taxable in the United States under paragraph 1 of Article 
13 (Alienation of Property). 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 of the Code 
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 Article 6, Article 7, or Article 13, 
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.
    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 New Zealand 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 New Zealand 
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 New 
Zealand company, for example, does not from year to year 
consistently apply the Code or the Convention to determine its 
dividend equivalent amount, then the New Zealand company must 
make appropriate adjustments or recapture amounts that would 
otherwise be subject to U.S. branch profits tax if it had 
consistently applied the Code or the Convention to determine 
its dividend equivalent amount from year to year.
Paragraph 9 of Article 10
    Paragraph 9 provides that the tax referred to in paragraph 
8, the branch profits tax, shall not be imposed at a rate 
exceeding the rate specified in subparagraph 2(a), the direct 
investment dividend withholding rate of five percent. However, 
this tax shall not be imposed on a company that satisfies 
either the public trading requirements of clause (i) or (ii) of 
subparagraph 2(c) of Article 16 (Limitation on Benefits), the 
ownership and base erosion conditions of clause (i) and (ii) of 
subparagraph 2(e) of Article 16 provided that the company 
satisfies the active trade or business test of paragraph 3 of 
Article 16 with respect to an item of income, profit or gain 
described in paragraph 8 of the Article, as revised by the 
Protocol, or that has received a determination by the competent 
authorities pursuant to paragraph 4 of Article 16.
    It is intended that paragraph 9 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 in the explanation to paragraph 8, consistency 
principles require a New Zealand company that determines its 
U.S. taxable income under the Code to also determine its 
dividend equivalent amount under the Code. In that case, 
paragraph 9 would apply even though the New Zealand 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 3 of 
Article 1 (General Scope) 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 
22 (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 16. Thus, if a resident of New Zealand 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 16 in order to receive the benefits 
of this Article.

                              ARTICLE VII

    Article VII of the Protocol replaces Article 11 (Interest) 
of the existing Convention and specifies the taxing 
jurisdictions over interest arising in one Contracting State 
and paid to a resident of the other Contracting State.
Paragraph 1 of Article 11
    Paragraph 1 is in all material respects the same as 
paragraph 1 of Article 11 of the existing Convention. Paragraph 
1 generally grants to the State of residence the non-exclusive 
right to tax interest arising in the other Contracting State 
and paid to its residents.
Paragraph 2 of Article 11
    Paragraph 2 is in all material respects the same as 
paragraph 2 of Article 11 of the existing Convention. Paragraph 
2 provides that the State of source also may tax the interest, 
but if the interest is beneficially owned by a resident of the 
other Contracting State, the rate of tax will be limited to 10 
percent of the gross amount of the interest.
    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 State of 
source). The beneficial owner of the interest for purposes of 
Article 11 is the person to which the income is attributable 
under the laws of the source State. Thus, if interest arising 
in a Contracting State is received by a nominee or agent that 
is a resident of the other State on behalf of a person that is 
not a resident of that other State, the interest is not 
entitled to the benefits of Article 11. However, interest 
received by a nominee on behalf of a resident of that other 
State would be entitled to benefits. These limitations are 
confirmed by paragraph 9 of the OECD Commentary to Article 11.
Paragraph 3 of Article 11
    Paragraph 3 provides for exclusive residence-based taxation 
in certain cases.
    Under subparagraph 3(a), interest beneficially owned by a 
Contracting State or an instrumentality of that Contracting 
State which is not subject to tax on its income by that State, 
(i.e., in the United States, a State or local government) is 
subject to exclusive residence-based taxation.
    Under subparagraph 3(b), interest beneficially owned by a 
resident of a Contracting State with respect to debt 
obligations guaranteed or insured by the Contracting State or 
an instrumentality of that State which is not subject to tax on 
its income by that State is subject to exclusive residence-
based taxation.
    Under subparagraph 3(c), interest beneficially owned by a 
resident of the other Contracting State that is a bank that is 
unrelated to the payer of the interest or an enterprise 
substantially deriving its gross income inform the active and 
regular conduct of a lending of finance business involving 
transactions with unrelated parties that is unrelated to the 
payer of the interest is subject to exclusive residence-based 
taxation.
    For purposes of subparagraph 3(c), the term ``lending or 
finance business'' is defined to include the business of making 
loans; purchasing or discounting accounts receivable, notes, or 
installment obligations; engaging in finance leasing (including 
entering into finance leases and purchasing, servicing, and 
disposing of finance leases and related leased assets); issuing 
letters of credit or providing guarantees; or providing charge 
and credit card services.
Paragraph 4 of Article 11
    Paragraph 4 is in all material respects the same as 
paragraph 4 of Article 11 of the existing Convention. The only 
change is the deletion of references to ``fixed base'' and 
``Article 14 (Independent Personal Services), to conform to 
changes made by Article X of the Protocol.
    Paragraph 4 provides an exception to the rules of 
paragraphs 2 and 3 in cases where the beneficial owner of the 
interest carries on business through a permanent establishment 
in the State of source 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 but that no longer exists, the provisions of 
paragraph 4 also apply to interest that would be attributable 
to such a permanent establishment if it did exist in the year 
of payment or accrual. See the Technical Explanation to Article 
V of the Protocol.
Paragraph 5 of Article 11
    Paragraph 5 provides a source rule for determining the 
source of 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 that State itself, a 
political subdivision, a local authority, or 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 considered to arise 
in that State. For this purpose, interest is considered to be 
borne by a permanent establishment if it is allocable to 
taxable income of that permanent establishment.
Paragraph 6 of Article 11
    Paragraph 6 is in all material respects the same as 
paragraph 6 of Article 11 of the existing Convention. Paragraph 
6 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 New Zealand, 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 and 3 of Article 10 (Dividends).
    The term ``special relationship'' is not defined in the 
Convention. In applying this paragraph the United States 
considers the term to include the relationships described in 
Article 9, which in turn corresponds to the definition of 
``control'' for purposes of Code section 482. This paragraph 
does not address cases where, owing to a special relationship 
between the payor and the beneficial owner or between both of 
them and some other person, the amount of the interest is less 
than an arm's-length amount. In those cases a transaction may 
be characterized to reflect its substance and interest may be 
imputed consistent with the definition of interest in paragraph 
7. The United States would apply Code section 482 or 7872 to 
determine the amount of imputed interest in those cases.
Paragraph 7 of Article 11
    The term ``interest'' as used in Article 11 is defined in 
paragraph 7 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.
    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 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 8 of Article 11
    Paragraph 8 provides anti-abuse exceptions to the rules of 
paragraphs 1, 2, and 3 for two classes of interest payments.
    The first class of interest, dealt with in subparagraph (a) 
is so-called ``contingent interest.'' With respect to interest 
arising in the United States, subparagraph (a) refers to 
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 Code section 871(h)(4), is intended to ensure that the 
exceptions of Code section 871(h)(4)(c) will be applicable. Any 
interest dealt with in subparagraph (a) may be taxed in the 
source State at a rate not exceeding 10 percent of the gross 
amount of the interest.
    The second class of interest is dealt with in subparagraph 
(b). 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 9 of Article 11
    Paragraph 9 permits a Contracting State to impose its 
branch level interest tax on a corporation resident in the 
other Contracting State. The base of this tax is the excess, if 
any, of the interest deductible in the first-mentioned 
Contracting State in computing the profits of the corporation 
that are subject to tax in the first-mentioned Contracting 
State and either attributable to a permanent establishment in 
the first-mentioned Contracting State or subject to tax in the 
first-mentioned Contracting State under Article 6 (Income from 
Real Property) or Article 13 (Alienation of Property) of the 
Convention over the interest paid by the permanent 
establishment or trade or business in the first-mentioned 
Contracting State. Such excess interest may be taxed as if it 
were interest arising in the first- mentioned Contracting State 
and beneficially owned by the corporation resident in the other 
Contracting State. Thus, such excess interest may be taxed by 
the Contracting State of source at a rate not to exceed the 10 
percent rate provided for in paragraph 2, and shall be exempt 
from tax by the Contracting State of source if the recipient is 
described in paragraph 3.
Paragraph 10 of Article 11
    Paragraph 10 provides an exception to the rule of 
subparagraph 3(c) of this Article. Interest that is 
beneficially owned by a bank that is unrelated to the payer of 
the interest or an enterprise substantially deriving its gross 
income from the active and regular conduct of a lending or 
finance business involving transactions with unrelated parties 
that is unrelated to the payer of the interest may be taxed in 
the State of source at a rate not exceeding 10 percent of the 
gross amount of the interest if the requirements of either 
subparagraph 10(a) or (b) are met.
    Subparagraph 10(a) was included at the request of New 
Zealand in order to clarify the coordination of this Article 
with New Zealand's domestic law. New Zealand's Approved Issuer 
Levy (``AIL'') regime is an alternative to the non-resident 
withholding tax (the ``NRWT'') regime. The AIL regime requires 
New Zealand borrowers who borrow from non-resident unrelated 
lenders to pay AIL in respect of the interest. The AIL is 
capped at two percent of the gross amount of the interest, and 
imposed on the New Zealand borrower, rather than the non-
resident lender. The AIL mechanism requires two approvals: (1) 
the financial arrangement must be a registered security, and 
(2) the payer of the interest must be an approved issuer. Under 
New Zealand's domestic law, if the New Zealand borrower pays 
the AIL, the interest with respect to which the AIL was paid 
will be exempt from NRWT.
    Subparagraph 10(a) allows source country taxation on 
interest payments at a rate not exceeding 10 percent of the 
gross amount of the interest if the interest is paid by a 
person that has not paid the AIL in respect of the interest 
payment. However, subparagraph 10(a) shall not apply if New 
Zealand repeals the AIL regime, or the payer of the interest is 
not eligible to elect to pay the AIL, or if the rate of the AIL 
payable in respect of such interest exceeds two percent of the 
gross amount of the interest. The term ``approved issuer levy'' 
is intended to include any identical or substantially similar 
charge payable by the payer of interest arising in New Zealand 
enacted after the date of this Convention in place of the AIL. 
Thus, the combined effect of subparagraph 3(c) and paragraph 10 
is to preserve the interest withholding exemptions currently 
provided under New Zealand domestic law.
    Subparagraph 10(b) allows source country taxation on 
interest payments at a rate not exceeding 10 percent of the 
gross amount of the interest if the interest is paid as a part 
of a back-to-back loan or an arrangement that is economically 
similar to and has the effect of a back-to-back loan. By 
referencing arrangements that are economically similar to, and 
that have the effect of, a back-to-back loan, subparagraph 
(10)(b) applies to transactions that would not meet the legal 
requirements of a loan, but would nevertheless serve that 
purpose economically. For example, the term would encompass 
securities issued at a discount, or certain swap arrangements 
intended to operate as the economic equivalent of a back-to-
back loan.
Paragraph 11 of Article 11
    Paragraph 11 provides that nothing in Article 11 is 
intended to limit or restrict, in any manner, the right and 
ability of a Contracting State to apply and enforce any anti-
avoidance provisions of its taxation laws.
Relationship to Other Articles
    Notwithstanding the foregoing limitations on source country 
taxation of interest, the saving clause of paragraph 3 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 22 (Relief from Double 
Taxation), as if the Convention had not come into force.
    As with other benefits of the Convention, the benefits of 
this Article are available to a resident of the other State 
only if that resident is entitled to those benefits under the 
provisions of Article 16 (Limitation on Benefits).

                              ARTICLE VIII

    Article 8 of the Protocol replaces Article 12 (Royalties) 
of the Convention, and provides rules for the taxation of 
royalties arising in one Contracting State and paid to a 
resident of the other Contracting State.
Paragraph 1 of Article 12
    Paragraph 1 is in all material respects the same as 
paragraph 1 of Article 12 of the existing Convention. Paragraph 
1 grants the State of residence the non-exclusive right to tax 
a royalty arising in the other Contracting State and paid to 
its residents.
Paragraph 2 of Article 12
    Paragraph 2 allows the State of source to tax royalties 
arising in that State. If, however, the beneficial owner of the 
royalty is a resident of the other Contracting State, the tax 
may not exceed 5 percent of the gross amount of the royalties.
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, defined under the internal law 
of the State granting treaty benefits (i.e., the State of 
source). 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.
Paragraph 3 of Article 12
    Paragraph 3 defines the term ``royalties,'' as used in this 
Article, to mean any consideration for the use of, or the right 
to use, any copyright of literary, artistic, scientific or 
other work (including cinematographic films and films or video 
tapes for use in connection with television or tapes for use in 
connection with radio broadcasting), 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 
(Alienation of Property). The Protocol amends the definition of 
``royalty'' by omitting from that definition payments of any 
kind received as consideration for the use of, or the right to 
use, industrial, commercial, or scientific equipment other than 
payments under a hire-purchase agreement.
    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 Code 
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 and films or video tapes for use in connection with 
television or tapes for use in connection with radio 
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 of the Convention. 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 17 of the Convention (Artistes and Athletes), 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 17 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.
    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 dispositive. For example, a 
typical retail sale of ``shrink wrap'' software generally will 
not be considered to give rise to royalty income, even though 
for copyright law purposes it may be characterized as a 
license.
    The means by which the computer software is transferred are 
not relevant for purposes of the analysis. Consequently, if 
software is electronically transferred but the rights obtained 
by the transferee are substantially equivalent to rights in a 
program copy, the payment will be considered business profits.
    The term ``industrial, commercial, or scientific 
experience'' (sometimes referred to as ``know-how'') has the 
meaning ascribed to it in paragraph 11 et seq. of the 
Commentary to Article 12 of the OECD Model. Consistent with 
that meaning, the term may include information that is 
ancillary to a right otherwise giving rise to royalties, such 
as a patent or secret process.
    Know-how also may include, in limited cases, technical 
information that is conveyed through technical or consultancy 
services. It does not include general educational training of 
the user's employees, nor does it include information developed 
especially for the user, such as a technical plan or design 
developed according to the user's specifications. Thus, as 
provided in paragraph 11.4 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) of the Convention or 
Article 15 (Dependent Personal Services). 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 of Article 12
    Paragraph 4 is in all material respects the same as 
paragraph 4 of Article 12 of the existing Convention. The only 
change is the deletion of references to ``fixed base'' and 
``Article 14 (Independent Personal Services), to conform with 
changes made by Article X of the Protocol. This paragraph 
provides an exception to the manner of allocating taxing rights 
specified in paragraph 2 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 (Business Profits) will apply.
    The provisions of paragraph 8 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 establishment no longer exists, remains taxable under 
the provisions of Article 7, and not under this Article.
Paragraph 5 of Article 12
    Paragraph 5 is in all material respects the same as 
paragraph 5 of Article 12 of the existing Convention. The only 
change is the deletion of references to ``fixed base.'' 
Paragraph 5 contains a source rule for determining the source 
of royalties. Under paragraph 5, royalties are treated as 
arising in a Contracting State if paid by a resident of that 
State. As an exception, royalties that are attributable to a 
permanent establishment in a Contracting State and borne by the 
permanent establishment are considered to arise in that State. 
Where, however, the payor of the royalties is not a resident of 
either Contracting State, and the royalties are not borne by a 
permanent establishment in either Contracting State, but the 
royalties relate to the use of, or the right to use, in one of 
the Contracting States, any property or right described in 
paragraph 3, the royalties are deemed to arise in that State.
Paragraph 6 of Article 12
    Paragraph 6 is identical to paragraph 6 of Article 12 of 
the existing Convention. 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 3 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 22 (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 16 
(Limitation on Benefits).

                               ARTICLE IX

    Article IX of the Protocol amends Article 13 (Alienation of 
Property) of the existing Convention by deleting old paragraph 
6 and inserting new paragraphs 6 and 7, and renumbering 
paragraph 7 of the existing Convention as new paragraph 8.
Paragraph 1
    Paragraph 1 of Article IX of the Protocol amends paragraph 
6 of Article 13 of the existing Convention.
    Paragraph 6 is in all material aspects the same as 
paragraph 6 of Article 13 of the existing Convention. The only 
changes are deletions of references to ``fixed base,'' and 
associated language referring to ``performing independent 
personal services.'' New paragraph 6 of Article 13 deals with 
the taxation of certain income or gains from the alienation of 
personal property forming part of the business property of a 
permanent establishment that an enterprise of a Contracting 
State has in the other 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 New Zealand 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 1 of the Protocol, 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 6 of Article 13, as amended 
by the Protocol, 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 2
    Paragraph 2 of Article 9 of the Protocol amends Article 13 
(Alienation of Property) of the existing Convention by adding 
new paragraph 7.
    The purpose of paragraph 2 is to provide a rule to address 
the mark-to-market exit tax regime for ``covered expatriates'' 
under Code section 877A. This rule is intended to coordinate 
United States and New Zealand taxation of gains in the case of 
a timing mismatch. Such a mismatch may occur, for example, 
where a U.S. resident recognizes, for U.S. tax purposes, gain 
on a deemed sale of all property on the day before the 
individual expatriates to New Zealand.
    To avoid double taxation, new paragraph 7 of Article 13 
provides that where an individual who, upon ceasing to be a 
resident of one Contracting State, is treated for purposes of 
taxation by that State as having alienated a property and is 
taxed by that State by reason thereof, the individual may elect 
to be treated for the purposes of taxation by the other 
Contracting State as having sold and repurchased the property 
for its fair market value on the day before the expatriation 
date. The election in new paragraph 7 therefore will be 
available to any individual who expatriates from the United 
States to New Zealand. The effect of the election will be to 
give the individual an adjusted basis for New Zealand tax 
purposes equal to the fair market value of the property as of 
the date of the deemed alienation in the United States, with 
the result that only post-emigration gain will be subject to 
New Zealand tax when there is an actual alienation of the 
property while the individual is a resident of New Zealand.
    If an individual recognizes in one Contracting State losses 
and gains from the deemed alienation of multiple properties, 
then the individual must apply new paragraph 7 consistently 
with respect to all such properties. An individual who is 
deemed to have alienated multiple properties may only make the 
election under paragraph 7 if the deemed alienation of all such 
properties results in a net gain.
    Taxpayers may make the election provided by new paragraph 7 
only with respect to property that is treated as sold for its 
fair market value under a Contracting State's deemed 
disposition rules. At the time the Protocol was signed, the 
following were the types of property that were excluded from 
the deemed disposition rules in the case of individuals who 
cease to be citizens or long term residents of the United 
States: (1) a deferred compensation item as defined under Code 
Section 877A(d)(4), (2) a specified tax deferred account as 
defined under Code Section 877A(e)(2), and 3) an interest in a 
non-grantor trust as defined under Code Section 877A(f)(3).
Paragraph 3
    Paragraph 3 of the Protocol amends Article 13 (Alienation 
of Property) of the existing Convention by renumbering 
paragraph 7 as new paragraph 8.

                               ARTICLE X

    To conform to the current U.S. and OECD Model Conventions, 
Article X of the Protocol deletes Article 14 (Independent 
Personal Services) of the existing Convention. The subsequent 
articles of the Convention are not renumbered. Under the 
provisions of Article 14 prior to its deletion by the Protocol, 
income from independent personal services could be taxed by the 
State in which the services were performed if the individual 
providing the services was present in that State for a period 
or periods aggregating more than 183 days in any consecutive 
twelve month period. The effect of the deletion of Article 14 
is that income from independent personal services will be 
governed by the provisions of Articles 5 (Permanent 
Establishment) and 7 (Business Profits).
    Article X of the Protocol also makes corresponding 
adjustments to remove references to Article 14 and the term 
``fixed base'' from paragraph 4 of Article 6 (Income from Real 
Property), paragraph 2(c) of Article 15 (Dependent Personal 
Services), paragraphs 1 and 2 of Article 17 (Artistes and 
Athletes), and paragraph 3 of Article 19 (Government Service).

                               ARTICLE XI

    Article XI of the Protocol replaces Article 16 (Limitation 
on Benefits) of the existing Convention. Article 16 contains 
anti-treaty-shopping provisions that are intended to prevent 
residents of third countries from benefiting from what is 
intended to be a reciprocal agreement between two countries. In 
general, the provision does not rely on a determination of 
purpose or intention but instead sets forth a series of 
objective tests. A resident of a Contracting State that 
satisfies one of the tests will receive benefits regardless of 
its motivations in choosing its particular business structure.
    The structure of the Article is as follows: Paragraph 1 
states the general rule that residents are entitled to benefits 
otherwise accorded to residents only to the extent provided in 
the Article. Paragraph 2 lists a series of attributes of a 
resident of a Contracting State, the presence of any one of 
which will entitle that person to all the benefits of the 
Convention. Paragraph 3 provides 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 4 
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 5 provides special rules for so-called 
``triangular cases'' notwithstanding paragraphs 1 through 4 of 
the Article. Paragraph 6 defines certain terms used in the 
Article.
Paragraph 1 of Article 16
    Paragraph 1 provides that a resident of a Contracting State 
will be entitled to the benefits otherwise accorded to 
residents of a Contracting State under the Convention only to 
the extent provided in the Article. The benefits otherwise 
accorded to residents under the Convention include all 
limitations on source-based taxation under Articles 6 (Income 
from Real Property) through 15 (Dependent Personal Services) 
and 17 (Artistes and Athletes) through 21 (Other Income), the 
treaty-based relief from double taxation provided by Article 22 
(Relief from Double Taxation), and the protection against 
discrimination afforded to residents of a Contracting State 
under Article 23 (Non-Discrimination). Some provisions do not 
require that a person be a resident in order to enjoy the 
benefits of those provisions. Article 24 (Mutual Agreement 
Procedure) is not limited to residents of the Contracting 
States, and Article 26 (Diplomatic Agents and Consular 
Officers) applies to diplomatic agents or consular officials 
regardless of residence. Article 16 accordingly does not limit 
the availability of treaty benefits under these provisions.
    Article 16 and the anti-abuse provisions of domestic law 
complement each other, as Article 16 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 16 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 of Article 16
    Paragraph 2 has five 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 4, discussed 
below, claiming benefits under paragraph 2 does not require an 
advance competent authority ruling or approval. The tax 
authorities may, of course, on review, determine that the 
taxpayer has improperly interpreted the paragraph and is not 
entitled to the benefits claimed.
            Individuals--Subparagraph 2(a)
    Subparagraph (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 (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 (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 clause (i) 
of subparagraph (c) if the principal class of its shares, and 
any disproportionate class of shares, is regularly traded on 
one or more recognized stock exchanges and the company 
satisfies at least one of the following additional 
requirements: first, the company's principal class of shares is 
primarily traded on one or more recognized stock exchanges 
located in the Contracting State of which the company is a 
resident; or, second, the company's primary place of management 
and control is in its State of residence.
    The term ``recognized stock exchange'' is defined in 
subparagraph 6(a). 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 New Zealand Stock 
Market; 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 6(b) to mean the ordinary or common 
shares of the company representing the majority of the 
aggregate voting power and value of the company. If the company 
does not have a class of ordinary or common shares representing 
the majority of the aggregate voting power and value of the 
company, then the ``principal class of shares'' is that class 
or any combination of classes of shares that represents, in the 
aggregate, a majority of the voting power and value of the 
company. Although in a particular case involving a company with 
several classes of shares it is conceivable that more than one 
group of classes could be identified that account for more than 
50% of the shares, it is only necessary for one such group to 
satisfy the requirements of this subparagraph in order for the 
company to be entitled to benefits. Benefits would not be 
denied to the company even if a second, non-qualifying, group 
of shares with more than half of the company's voting power and 
value could be identified.
    A company whose principal class of shares is regularly 
traded on a recognized stock exchange will nevertheless not 
qualify for benefits under subparagraph 2(c) if it has a 
disproportionate class of shares that is not regularly traded 
on a recognized stock exchange. The term ``disproportionate 
class of shares'' is defined in subparagraph 6(c). A company 
has a disproportionate class of shares if it has outstanding a 
class of shares that 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 New Zealand has a disproportionate class of shares 
if it has outstanding a class of ``tracking stock'' that pays 
dividends based upon a formula that approximates the company's 
return on its assets employed in the United States.
    The following example illustrates this result.
    Example. NZCo is a corporation resident in New Zealand. 
NZCo has two classes of shares: Common and Preferred. The 
Common shares are listed and regularly traded on the New 
Zealand Stock Market. The Preferred shares have no voting 
rights and are entitled to receive dividends equal in amount to 
interest payments that NZCo 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 NZCo 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 NZCo, the 
Preferred shares are a disproportionate class of shares. 
Because the Preferred shares are not regularly traded on a 
recognized stock exchange, NZCo will not qualify for benefits 
under subparagraph 2(c).
    The term ``regularly traded'' is not defined in the 
Convention. In accordance with paragraph 2 of Article 3 
(General Definitions), this term will be defined by reference 
to the domestic tax laws of the State from which treaty 
benefits are sought, generally the source State. In the case of 
the United States, this term is understood to have the meaning 
it has under Treas. Reg. section 1.884-5(d)(4)(i)(B), relating 
to the branch tax provisions of the Code. Under these 
regulations, a class of shares is considered to be ``regularly 
traded'' if two requirements are met: trades in the class of 
shares are made in more than de minimis quantities on at least 
60 days during the taxable year, and the aggregate number of 
shares in the class traded during the year is at least 10 
percent of the average number of shares outstanding during the 
year. Sections 1.884-5(d)(4)(i)(A), (ii) and (iii) will not be 
taken into account for purposes of defining the term 
``regularly traded'' under the Convention.
    The regular trading requirement can be met by trading on 
any recognized exchange or exchanges located in either State. 
Trading on one or more recognized stock exchanges may be 
aggregated for purposes of this requirement. Thus, a U.S. 
company could satisfy the regularly traded requirement through 
trading, in whole or in part, on a recognized stock exchange 
located in New Zealand. 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 
(General Definitions) , 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.
    A company whose principal class of shares is regularly 
traded on a recognized exchange but cannot meet the primarily 
traded test may claim treaty benefits if its primary place of 
management and control is in its country of residence. This 
test should be distinguished from the ``place of effective 
management'' test which is used in the OECD Model and by many 
other countries to establish residence. In some cases, the 
place of effective management test has been interpreted to mean 
the place where the board of directors meets. By contrast, the 
primary place of management and control test looks to where 
day-to-day responsibility for the management of the company 
(and its subsidiaries) is exercised. The company's primary 
place of management and control will be located in the State in 
which the company is a resident only if the executive officers 
and senior management employees exercise day-to-day 
responsibility for more of the strategic, financial and 
operational policy decision making for the company (including 
direct and indirect subsidiaries) in that State than in the 
other State or any third state, and the staff that support the 
management in making those decisions are also based in that 
State. Thus, the test looks to the overall activities of the 
relevant persons to see where those activities are conducted. 
In most cases, it will be a necessary, but not a sufficient, 
condition that the headquarters of the company (that is, the 
place at which the Chief Executive Officer and other top 
executives normally are based) be located in the Contracting 
State of which the company is a resident.
    To apply the test, it will be necessary to determine which 
persons are to be considered ``executive officers and senior 
management employees.'' In most cases, it will not be necessary 
to look beyond the executives who are members of the board of 
directors (the ``inside directors'') in the case of a U.S. 
company. That will not always be the case, however; in fact, 
the relevant persons may be employees of subsidiaries if those 
persons make the strategic, financial and operational policy 
decisions. Moreover, it would be necessary to take into account 
any special voting arrangements that result in certain board 
members making certain decisions without the participation of 
other board members.
            Subsidiaries of Publicly-Traded Corporations--Subparagraph 
                    2(c)(ii)
    A company resident in a Contracting State is entitled to 
all the benefits of the Convention under clause (ii) of 
subparagraph 2(c) if five or fewer publicly traded companies 
described in clause (i) are the direct or indirect owners of at 
least 50 percent of the aggregate vote and value of the 
company's shares (and at least 50 percent of any 
disproportionate class of shares). If the publicly-traded 
companies are indirect owners, however, each of the 
intermediate companies must be a resident of one of the 
Contracting States.
    Thus, for example, a company that is a resident of New 
Zealand, all the shares of which are owned by another company 
that is a resident of New Zealand, would qualify for benefits 
under the Convention if the principal class of shares (and any 
disproportionate classes of shares) of the parent company are 
regularly and primarily traded on a recognized stock exchange 
in New Zealand. However, such a subsidiary would not qualify 
for benefits under clause (ii) if the publicly traded parent 
company were a resident of a third state, for example, and not 
a resident of the United States or New Zealand. Furthermore, if 
a parent company in New Zealand indirectly owned the bottom-
tier company through a chain of subsidiaries, each such 
subsidiary in the chain, as an intermediate owner, must be a 
resident of the United States or New Zealand 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 subparagraphs 1(a) and (b) of 
Article 4 (Resident) will be entitled to all the benefits of 
the Convention. A pension fund, as defined in subparagraph 1(1) 
of Article 3 (General Definitions), will qualify for benefits 
if more than fifty percent of the beneficiaries, members or 
participants of the organization are individuals resident in 
either Contracting State. For purposes of this provision, the 
term ``beneficiaries'' should be understood to refer to the 
persons receiving benefits from the organization. On the other 
hand, a tax-exempt organization other than a pension fund 
automatically qualifies for benefits, without regard to the 
residence of its beneficiaries or members. Entities qualifying 
under this rule are those that are generally exempt from tax in 
their State of residence and that are organized and operated 
exclusively to fulfill religious, charitable, scientific, 
artistic, cultural, or educational purposes.
            Ownership/Base Erosion--Subparagraph 2(e)
    Subparagraph 2(e) provides an additional method to qualify 
for treaty benefits that applies to any form of legal entity 
that is a resident of a Contracting State. The test provided in 
subparagraph (e), the so-called ownership and base erosion 
test, is a two-part test. Both prongs of the test must be 
satisfied for the resident to be entitled to treaty benefits 
under subparagraph 2(e).
    The ownership prong of the test, under clause (i), requires 
that at least 50 percent of the aggregate voting power and 
value (and at least 50 percent of any disproportionate class of 
shares) 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), (b), (c)(i), or (d). In the case of indirect owners, each 
of the intermediate owners must be a resident of that 
Contracting State.
    Trusts may be entitled to benefits under this provision if 
they are treated as residents under Article 4 (Resident) and 
they otherwise satisfy the requirements of this subparagraph. 
For purposes of this subparagraph, the beneficial interests in 
a trust will be considered to be owned by its beneficiaries in 
proportion to each beneficiary's actuarial interest in the 
trust. The interest of a remainder beneficiary will be equal to 
100 percent less the aggregate percentages held by income 
beneficiaries. A beneficiary's interest in a trust will not be 
considered to be owned by a person entitled to benefits under 
the other provisions of paragraph 2 if it is not possible to 
determine the beneficiary's actuarial interest. Consequently, 
if it is not possible to determine the actuarial interest of 
the beneficiaries in a trust, the ownership test under clause 
i) cannot be satisfied, unless all possible beneficiaries are 
persons entitled to benefits under subparagraphs 2(a), (b), 
(c)(i), or (d).
    The base erosion prong of clause (ii) of subparagraph (e) 
is satisfied with respect to a person if less than 50 percent 
of the person's gross income for the taxable year, as 
determined under the tax law in the person's State of 
residence, is paid or accrued, directly or indirectly, to 
persons who are not residents of either Contracting State 
entitled to benefits under subparagraphs (a), (b), (c)(i), or 
(d), in the form of payments deductible for tax purposes in the 
payor's State of residence. These amounts do not include arm's-
length payments in the ordinary course of business for services 
or tangible property, or payments in respect of financial 
obligations to a bank, provided that such bank is not related 
to the payor. To the extent they are deductible from the 
taxable base, trust distributions are deductible payments. 
However, depreciation and amortization deductions, which do not 
represent payments or accruals to other persons, are 
disregarded for this purpose.
Paragraph 3 of Article 16
    Paragraph 3 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 3 whether or not it also qualifies 
under paragraph 2.
    Subparagraph 3(a) sets forth the general rule that a 
resident of a Contracting State engaged in the active conduct 
of a trade or business in that State may obtain the benefits of 
the Convention with respect to an item of income derived in the 
other Contracting State. The item of income, however, must be 
derived in connection with or incidental to that trade or 
business.
    The term ``trade or business'' is not defined in the 
Convention. Pursuant to paragraph 3 of Article 3, when 
determining whether a resident of New Zealand is entitled to 
the benefits of the Convention under paragraph 3 of this 
Article with respect to an item of income derived from sources 
within the United States, the United States will ascribe to 
this term the meaning that it has under the law of the United 
States. Accordingly, the U.S. competent authority will refer to 
the regulations issued under Code section 367(a) for the 
definition of the term ``trade or business.'' In general, 
therefore, a trade or business will be considered to be a 
specific unified group of activities that 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, insurance or securities 
activities conducted by a bank, an insurance company, or a 
registered securities dealer. Such activities conducted by a 
person other than a bank, insurance company or registered 
securities dealer will not be considered to be the conduct of 
an active trade or business, nor would they be considered to be 
the conduct of an active trade or business if conducted by a 
bank, insurance company or registered securities dealer but not 
as part of the company's banking, insurance or dealer business. 
Because a headquarters operation is in the business of managing 
investments, a company that functions solely as a headquarters 
company will not be considered to be engaged in an active trade 
or business for purposes of paragraph 3.
    An item of income is derived in connection with a trade or 
business if the income-producing activity in the State of 
source is a line of business that ``forms a part of'' or is 
''complementary'' to the trade or business conducted in the 
State of residence by the income recipient.
    A business activity generally will be considered to form 
part of a business activity conducted in the State of source if 
the two activities involve the design, manufacture or sale of 
the same products or type of products, or the provision of 
similar services. The line of business in the State of 
residence may be upstream, downstream, or parallel to the 
activity conducted in the State of source. Thus, the line of 
business may provide inputs for a manufacturing process that 
occurs in the State of source, may sell the output of that 
manufacturing process, or simply may sell the same sorts of 
products that are being sold by the trade or business carried 
on in the State of source.
    Example 1. USCo is a corporation resident in the United 
States. USCo is engaged in an active manufacturing business in 
the United States. USCo owns 100 percent of the shares of NZCo, 
a corporation resident in New Zealand. NZCo distributes USCo 
products in New Zealand. Since the business activities 
conducted by the two corporations involve the same products, 
NZCo'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 NZCo. NZCo and other USCo affiliates then manufacture 
and market the USCo-designed products in their respective 
markets. Since the activities conducted by NZCo 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. NZSub is 
a wholly-owned subsidiary of Americair resident in New Zealand. 
NZSub operates a chain of hotels in New Zealand that are 
located near airports served by Americair flights. Americair 
frequently sells tour packages that include air travel to New 
Zealand and lodging at NZSub 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 NZSub's 
business does not form a part of Americair's business. However, 
NZSub'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 NZSub owns an office building in New Zealand instead of a 
hotel chain. No part of Americair's business is conducted 
through the office building. NZSub'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 
NZHolding, a corporation resident in New Zealand. NZHolding is 
a holding company that is not engaged in a trade or business. 
NZHolding owns all the shares of three corporations that are 
resident in New Zealand: NZFlower, NZLawn, and NZFish. NZFlower 
distributes USFlower flowers under the USFlower trademark in 
New Zealand. NZLawn markets a line of lawn care products in New 
Zealand under the USFlower trademark. In addition to being sold 
under the same trademark, NZLawn and NZFlower products are sold 
in the same stores and sales of each company's products tend to 
generate increased sales of the other's products. NZFish 
imports fish from the United States and distributes it to fish 
wholesalers in New Zealand. For purposes of paragraph 3, the 
business of NZFlower forms a part of the business of USFlower, 
the business of NZLawn is complementary to the business of 
USFlower, and the business of NZFish 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 3(b) states a further condition to the general 
rule in subparagraph (a) in cases where the trade or business 
generating the item of income in question is carried on either 
by the person deriving the income or by any associated 
enterprises. Subparagraph (b) states that the trade or business 
carried on in the State of residence, under these 
circumstances, must be substantial in relation to the activity 
in the State of source. The substantiality requirement is 
intended to prevent a narrow case of treaty-shopping abuses in 
which a company attempts to qualify for benefits by engaging in 
de minimis connected business activities in the treaty country 
in which it is resident (i.e., activities that have little 
economic cost or effect with respect to the company business as 
a whole).
    The determination of substantiality is made based upon all 
the facts and circumstances and takes into account the 
comparative sizes of the trades or businesses in each 
Contracting State, the nature of the activities performed in 
each Contracting State, and the relative contributions made to 
that trade or business in each Contracting State.
    The determination in subparagraph 3(b) also is made 
separately for each item of income derived from the State of 
source. It therefore is possible that a person would be 
entitled to the benefits of the Convention with respect to one 
item of income but not with respect to another. If a resident 
of a Contracting State is entitled to treaty benefits with 
respect to a particular item of income under paragraph 3, 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 New Zealand, 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 New 
Zealand would not have to pass a substantiality test to receive 
treaty benefits under paragraph 3.
    Subparagraph 3(c) provides special attribution rules for 
purposes of applying the substantive rules of subparagraphs (a) 
and (b). These rules apply for purposes of determining whether 
a person meets the requirement in subparagraph (a) that it be 
engaged in the active conduct of a trade or business and that 
the item of income is derived in connection with that active 
trade or business, and for making the comparison required by 
the ``substantiality'' requirement in subparagraph (b). 
Subparagraph (c) attributes to a person activities conducted by 
persons ``connected'' to such person. A person (``X'') is 
connected to another person (``Y'') if X possesses 50 percent 
or more of the beneficial interest in Y (or if Y possesses 50 
percent or more of the beneficial interest in X). For this 
purpose, X is connected to a company if X owns shares 
representing fifty percent or more of the aggregate voting 
power and value of the company or fifty percent or more of the 
beneficial equity interest in the company. X also is connected 
to Y if a third person possesses, directly or indirectly, 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 4 of Article 16
    Paragraph 4 provides that a resident of one of the States 
that is not entitled to the benefits of the Convention as a 
result of paragraphs 2 through 3 still may be granted benefits 
under the Convention at the discretion of the competent 
authority of the State from which benefits are claimed. Under 
paragraph 4, that competent authority will determine whether 
the establishment, acquisition, or maintenance of the person 
seeking benefits under the Convention, or the conduct of such 
person's operations, has or had as one of its principal 
purposes the obtaining of benefits under the Convention. 
Benefits will not be granted, however, solely because a company 
was established prior to the effective date of a treaty or 
protocol. In that case a company would still be required to 
establish to the satisfaction of the competent authority clear 
non-tax business reasons for its formation in a Contracting 
State, or that the allowance of benefits would not otherwise be 
contrary to the purposes of the treaty. Thus, persons that 
establish operations in one of the States with a principal 
purpose of obtaining the benefits of the Convention ordinarily 
will not be granted relief under paragraph 4.
    The competent authority's discretion is quite broad. It may 
grant all of the benefits of the Convention to the taxpayer 
making the request, or it may grant only certain benefits. For 
instance, it may grant benefits only with respect to a 
particular item of income in a manner similar to paragraph 3. 
Further, the competent authority may establish conditions, such 
as setting time limits on the duration of any relief granted.
    For purposes of implementing paragraph 4, a taxpayer will 
be permitted to present his case to the relevant competent 
authority for an advance determination based on the facts. In 
these circumstances, it is also expected that, if the competent 
authority determines that benefits are to be allowed, they will 
be allowed retroactively to the time of entry into force of the 
relevant treaty provision or the establishment of the structure 
in question, whichever is later.
    Finally, there may be cases in which a resident of a 
Contracting State may apply for discretionary relief to the 
competent authority of his State of residence. This would 
arise, for example, if the benefit the resident is claiming is 
provided by the residence country, and not by the source 
country. So, for example, if a company that is a resident of 
the United States would like to claim the benefit of the re-
sourcing rule of paragraph 4 of Article 22, but it does not 
meet any of the objective tests of this Article, it may apply 
to the U.S. competent authority for discretionary relief.
Paragraph 5 of Article 16
    Paragraph 5 deals with the treatment of income in the 
context of a so-called ``triangular case.''
    An example of a triangular case would be a structure under 
which a resident of New Zealand earns interest income from the 
United States. The resident of New Zealand, who is assumed to 
qualify for benefits under one or more of the provisions of 
Article 16, 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 New Zealand 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 New Zealand 
resident. Therefore the income that it earns on those loans, 
absent the provisions of paragraph 5, is entitled to exemption 
from U.S. withholding tax under the Convention. Under a current 
New Zealand income tax treaty with the host jurisdiction of the 
permanent establishment, the income of the permanent 
establishment is exempt from New Zealand tax (alternatively, 
New Zealand may choose to exempt the income of the permanent 
establishment from New Zealand 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 New Zealand 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.
    Notwithstanding the level of tax on interest and royalty 
income of the permanent establishment, paragraph 5 will not 
apply under certain circumstances. In the case of royalties, 
paragraph 5 will not apply if the royalties are received as 
compensation for the use of, or the right to use, intangible 
property produced or developed by the permanent establishment 
itself. In the case of any other income, paragraph 5 will not 
apply if that income is derived in connection with, or is 
incidental to, the active conduct of a trade or business 
carried on by the permanent establishment in the third state. 
The business of making, managing or simply holding investments 
is not considered to be an active trade or business, unless 
these are banking or securities activities carried on by a bank 
or registered securities dealer.
Paragraph 6 of Article 16
    Paragraph 6 defines several key terms for purposes of 
Article 16. Each of the defined terms is discussed above in the 
context in which it is used.

                              ARTICLE XII

Paragraph 1
    Paragraph 1 of Article XII of the Protocol deletes and 
replaces the last sentence of paragraph 1 of Article 22 (Relief 
from Double Taxation) of the existing Convention, so that for 
purposes of this paragraph, the taxes set out in subparagraph 
3(a) and paragraph 4 of Article 2 (Taxes Covered) shall be 
considered income taxes.
Paragraph 2
    Paragraph 2 of Article XII of the Protocol deletes the 
final sentence from paragraph 2 of Article 22 (Relief from 
Double Taxation) of the existing Convention to account for 
changes to New Zealand's domestic law.
Paragraph 3
    Paragraph 3 of Article 12 of the Protocol replaces 
paragraph 5 of Article 22 of the existing Convention to conform 
with changes to Article 2 (Taxes Covered) made in Article II of 
the Protocol.

                              ARTICLE XIII

    Article XIII of the Protocol replaces Article 23 (Non-
discrimination) of the existing Convention. This Article 
ensures that nationals of a Contracting State, in the case of 
paragraph 1, and residents of a Contracting State, in the case 
of paragraphs 2 through 5, will not be subject, directly or 
indirectly, to discriminatory taxation in the other Contracting 
State. Not all differences in tax treatment, either as between 
nationals of the two States, or between residents of the two 
States, are violations of the prohibition against 
discrimination. Rather, the non-discrimination obligations of 
this Article apply only if the nationals or residents of the 
two States are comparably situated.
    Each of the relevant paragraphs of the Article provides 
that two persons that are comparably situated must be treated 
similarly. Although the actual words differ from paragraph to 
paragraph (e.g., paragraph 1 refers to two nationals ``in the 
same circumstances,'' paragraph 2 refers to two enterprises 
``carrying on the same activities'' and paragraph 4 refers to 
two enterprises that are ``similar''), the common underlying 
premise is that if the difference in treatment is directly 
related to a tax-relevant difference in the situations of the 
domestic and foreign persons being compared, that difference is 
not to be treated as discriminatory (i.e., if one person is 
taxable in a Contracting State on worldwide income and the 
other is not, or tax may be collectible from one person at a 
later stage, but not from the other, distinctions in treatment 
would be justified under paragraph 1). Other examples of such 
factors that can lead to nondiscriminatory differences in 
treatment are noted in the discussions of each paragraph.
    The operative paragraphs of the Article also use different 
language to identify the kinds of differences in taxation 
treatment that will be considered discriminatory. For example, 
paragraphs 1 and 4 speak of ``any taxation or any requirement 
connected therewith that is more burdensome,'' while paragraph 
2 specifies that a tax ``shall not be less favorably levied.'' 
Regardless of these differences in language, only differences 
in tax treatment that materially disadvantage the foreign 
person relative to the domestic person are properly the subject 
of the Article.
Paragraph 1 of Article 23
    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 
language would prohibit 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(k) 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 New Zealand as a national 
of New Zealand 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 I specifically states 
that the United States is not obligated to apply the same 
taxing regime to a national of New Zealand 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 New Zealand who are not United 
States residents. Thus, for example, Article 23 would not 
entitle a national of New Zealand 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 of Article 23
    Paragraph 2 provides that a Contracting State may not tax a 
permanent establishment of an enterprise of the other 
Contracting State less favorably than an enterprise of that 
first-mentioned State that is carrying on the same activities.
    The fact that a U.S. permanent establishment of an 
enterprise of New Zealand 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., Code 
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 New Zealand, 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 of Article 23
    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 New Zealand 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 New Zealand the personal allowances for himself 
and his family that he would be permitted to take if the 
permanent establishment were a sole proprietorship owned and 
operated by a U.S. resident, despite the fact that the 
individual income tax rates would apply.
Paragraph 4 of Article 23
    Paragraph 4 is identical to paragraph 3 of Article 23 of 
the existing Convention. 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 non-residents more favorable 
treatment than it gives to its own residents. Consequently, a 
Contracting State does not have to allow non-residents a 
deduction for items that are not deductible under its domestic 
law (for example, expenses of a capital nature).
    The term ``other disbursements'' is understood to include a 
reasonable allocation of executive and general administrative 
expenses, research and development expenses and other expenses 
incurred for the benefit of a group of related persons that 
includes the person incurring the expense.
    An exception to the rule of paragraph 4 is provided for 
cases where the provisions of paragraph 1 of Article 9 
(Associated Enterprises), paragraph 6 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 6 of Article 11 would include the denial 
or deferral of certain interest deductions under Code section 
163(j).
Paragraph 5 of Article 23
    Paragraph 5 requires that a Contracting State not impose 
more burdensome taxation or connected requirements on an 
enterprise of that State that is wholly or partly owned or 
controlled, directly or indirectly, by one or more residents of 
the other Contracting State than the taxation or connected 
requirements that it imposes on other similar enterprises of 
that first-mentioned Contracting State. For this purpose it is 
understood that ``similar'' refers to similar activities or 
ownership of the enterprise.
    This rule, like all non-discrimination provisions, does not 
prohibit differing treatment of entities that are in differing 
circumstances. Rather, a protected enterprise is only required 
to be treated in the same manner as other enterprises that, 
from the point of view of the application of the tax law, are 
in substantially similar circumstances both in law and in fact. 
The taxation of a distributing corporation under Code section 
367(e) on an applicable distribution to foreign shareholders 
does not violate paragraph 5 of the Article because a foreign-
owned corporation is not similar to a domestically-owned 
corporation that is accorded non-recognition treatment under 
Code 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 Code section 1446 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 of Article 23
    Paragraph 6 of the Article confirms that no provision of 
the Article will prevent either Contracting State from imposing 
either the branch profits tax described in paragraph 8 of 
Article 10 (Dividends).
Paragraph 7 of Article 23
    Paragraph 7 of the Article states that the Article shall 
not apply to any provision of the taxation laws of the 
Contracting State which is reasonably designed to prevent or 
defeat the avoidance or evasion of taxes.
Relationship to Other Articles
    The saving clause of paragraph 3 of Article 1 (General 
Scope) does not apply to this Article by virtue of the 
exceptions in paragraph 4(a) of Article 1. Thus, for example, a 
U.S. citizen who is a resident of New Zealand 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 16 (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 16.

                              ARTICLE XIV

    Article XIV of the Protocol replaces Article 25 (Exchange 
of Information and Administrative Assistance) of the existing 
Convention. This Article provides for the exchange of 
information and administrative assistance between the competent 
authorities of the Contracting States.
Paragraph 1 of Article 25
    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 New Zealand 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 the OECD 
Commentary: a company resident in the United States and a 
company resident in New Zealand transact business between 
themselves through a third-country resident company. Neither 
Contracting State has a treaty with the third State. To enforce 
their internal laws with respect to transactions of their 
residents with the third-country company (since there is no 
relevant treaty in force), the Contracting States may exchange 
information regarding the prices that their residents paid in 
their transactions with the third-country resident.
    Paragraph 1 clarifies that information may be exchanged 
that relates to the assessment or collection of, the 
enforcement or prosecution in respect of, or the determination 
of appeals in relation to, 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 New 
Zealand, 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-country resident has a permanent 
establishment in New Zealand, 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 New Zealand, 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 New Zealand 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 25. 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 of Article 25
    Paragraph 2 also 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 3 of Article 25
    Paragraph 3 is in all material respects the same as 
paragraph 3 of Article 25 of the existing Convention. Paragraph 
3 provides that the obligations undertaken in paragraphs 1 and 
2 to exchange information do not require a Contracting State to 
carry out administrative measures that are at variance with the 
laws or administrative practice of either State. Nor is a 
Contracting State required to supply information not obtainable 
under the laws or administrative practice of either State, or 
to disclose trade secrets or other information, the disclosure 
of which would be contrary to public policy.
    Thus, a requesting State may be denied information from the 
other State if the information would be obtained pursuant to 
procedures or measures that are broader than those available in 
the requesting State. However, the statute of limitations of 
the Contracting State making the request for information should 
govern a request for information. Thus, the Contracting State 
of which the request is made should attempt to obtain the 
information even if its own statute of limitations has passed. 
In many cases, relevant information will still exist in the 
business records of the taxpayer or a third party, even though 
it is no longer required to be kept for domestic tax purposes.
    While paragraph 3 states conditions under which a 
Contracting State is not obligated to comply with a request 
from the other Contracting State for information, the requested 
State is not precluded from providing such information, and 
may, at its discretion, do so subject to the limitations of its 
internal law.
Paragraph 4 of Article 25
    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 of Article 25
    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 of Article 25
    Paragraph 6 provides that the requesting State may specify 
the form in which information is to be provided (e.g., 
depositions of witnesses and authenticated copies of original 
documents). The intention is to ensure that the information may 
be introduced as evidence in the judicial proceedings of the 
requesting State. The requested State should, if possible, 
provide the information in the form requested to the same 
extent that it can obtain information in that form under its 
own laws and administrative practices with respect to its own 
taxes.
Paragraph 7 of Article 25
    Paragraph 7 provides for assistance in collection of taxes 
to the extent necessary to ensure that treaty benefits are 
enjoyed only by persons entitled to those benefits under the 
terms of the Convention. Under paragraph 7, a Contracting State 
will endeavor to collect on behalf of the other State only 
those amounts necessary to ensure that any exemption or reduced 
rate of tax at source granted under the Convention by that 
other State is not enjoyed by persons not entitled to those 
benefits. For example, if the payer of a U.S.-source portfolio 
dividend receives a Form W-8BEN or other appropriate 
documentation from the payee, the withholding agent is 
permitted to withhold at the portfolio dividend rate of 15 
percent. If, however, the addressee is merely acting as a 
nominee on behalf of a third-country resident, paragraph 7 
would obligate the other Contracting State to withhold and 
remit to the United States the additional tax that should have 
been collected by the U.S. withholding agent.
    This paragraph also makes clear that the Contracting State 
asked to collect the tax is not obligated, in the process of 
providing collection assistance, to carry out administrative 
measures that are different from those used in the collection 
of its own taxes, or that would be contrary to its sovereignty, 
security or public policy.
Paragraph 8 of Article 25
    Paragraph 8 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.
Treaty effective dates and termination in relation to exchange of 
        information
    Once the Protocol 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 Protocol. 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 Protocol 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 XV

    Article XV of the Protocol deletes and replaces Paragraph 1 
of the Protocol to the existing Convention, signed in 1982.
Paragraph 1
    With reference to Articles 11 (Interest) and 12 (Royalties) 
if in any future double taxation convention with any other 
country New Zealand agrees to limit its taxation at source on 
any interest or royalties to rates lower than the ones provided 
in this Convention, then New Zealand shall notify the United 
States, and the Contracting States shall, at the request of the 
United States, and without undue delay, consult each other with 
a view to concluding an additional protocol to incorporate such 
lower rates into this Convention.

                              ARTICLE XVI

    Article XVI of the Protocol contains the rules for bringing 
the Protocol into force and giving effect to its provisions.
Paragraph 1
    Paragraph 1 provides that the Protocol is subject to 
ratification in accordance with the applicable procedures of 
the United States and New Zealand. Further, the Contracting 
States shall notify each other by written notification, through 
diplomatic channels, when their respective applicable 
procedures have been satisfied.
    In the United States, the process leading to ratification 
and entry into force is as follows: Once a treaty has been 
signed by authorized representatives of the two Contracting 
States, the Department of State sends the treaty to the 
President who formally transmits it to the Senate for its 
advice and consent to ratification, which requires approval by 
two-thirds of the Senators present and voting. Prior to this 
vote, however, it generally has been the practice for the 
Senate Committee on Foreign Relations to hold hearings on the 
treaty and make a recommendation regarding its approval to the 
full Senate. Both Government and private sector witnesses may 
testify at these hearings. After the Senate gives its advice 
and consent to ratification of the 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 Protocol will enter into 
force on the date of the later of the notifications referred to 
in paragraph 1. The relevant date is the date on the second of 
these notification documents, and not the date on which the 
second notification is provided to the other Contracting State. 
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 Protocol will have effect.
    Under subparagraph 2(a), the Convention will have effect 
with respect to taxes withheld at source (principally 
dividends, interest and royalties) for income derived on or 
after the first day of the second month in the first calendar 
year following the date on which the Protocol enters into 
force.
    In the United States, for all other taxes, subparagraph 
2(b) specifies that the Protocol will have effect for taxes 
chargeable for any tax year beginning on or after January 1 of 
the year following entry into force of the Protocol.
    In New Zealand, for all other taxes, subparagraph 2(c) 
specifies that the Protocol will have effect for taxes 
chargeable for any tax year beginning on or after April 1 of 
the year following entry into force of the Protocol.
Paragraph 3
    The powers afforded under Article 25 (Exchange of 
Information and Administrative Assistance) apply retroactively 
to taxable periods preceding entry into force.

                                  
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