39–119 

113TH CONGRESS EXEC. REPT. " ! SENATE 2d Session 113–11 

TAX CONVENTION WITH POLAND 

JULY 17, 2014.—Ordered to be printed 

Mr. MENENDEZ, from the Committee on Foreign Relations, 

submitted the following 

R E P O R T 

[To accompany Treaty Doc. 113–5] 

The Committee on Foreign Relations, to which was referred the 

Convention between the United States of America and the Republic 

of Poland For the Avoidance of Double Taxation and the Prevention 

of Fiscal Evasion with Respect to Taxes on Income (the ‘‘Convention’’) (Treaty Doc. 113–5), 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 Comments ................................................................................... 3 

VIII. Text of Resolution of Advice and Consent to Ratification .......................... 5 

IX. Annex 1.—Technical Explanation ................................................................ 6 

I. PURPOSE

The purpose of the Convention is to promote and facilitate trade 

and investment between the United States and Poland. The proposed Convention replaces the existing convention, signed in 1974, 

and would bring United States-Poland tax treaty relations into 

closer conformity with current U.S. tax treaty policies. The Convention contains rigorous protections designed to protect against ‘‘treaty shopping,’’ which is the inappropriate use of a tax treaty by 

third-country residents, that are not contained in the existing treaty. While the proposed Convention generally follows the 2006 U.S. 


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

U.S. Model in certain respects discussed below. 

II. BACKGROUND

The United States has a tax treaty with Poland that is currently 

in force, which was concluded in 1974 (Convention between the 

Government of the United States of America and the Government 

of the Polish People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Income, 

and a related exchange of notes, signed at Washington on October 

8, 1974.). The new Convention was negotiated to bring United 

States-Poland tax treaty relations into closer conformity with current United States tax treaty policies. For example, the proposed 

Convention contains comprehensive provisions designed to address 

‘‘treaty-shopping.’’ The existing Convention with Poland signed in 

1974 does not contain treaty shopping protections and, as a result, 

is susceptible to abuse by third-country investors. 

III. MAJOR PROVISIONS

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

found in the Technical Explanation Published by the Department 

of the Treasury on June 19, 2014, which is included at Annex 1 to 

this report. In addition, the staff of the Joint Committee on Taxation prepared an analysis of the Convention, JCX-68-14 (June 17, 

2014), which was of great assistance to the committee in reviewing 

the Convention. A summary of the key provisions of the Convention 

is set forth below. 

LIMITATION ON BENEFITS

Consistent with current U.S. tax treaty policy, the proposed Convention includes a ‘‘Limitation on Benefits’’ provision, which is designed to avoid treaty-shopping by limiting the indirect use of a 

treaty’s benefits by persons who were not intended to take advantage of those benefits. The limitation of benefits provision states 

that a corporation or similar entity resident in a contracting state 

(i.e., the United States or Poland) is not entitled to the benefits of 

the treaty unless that entity meets certain tests, such as carrying 

on an active trade or business, or being a publicly-traded company 

on certain specified stock exchanges. The provision is designed to 

identify entities that have established residency for tax-abuse purposes. 

DIVIDENDS

Although the treatment of dividends in the proposed Convention 

is generally consistent with the U.S. and OECD Model treaties, the 

proposed Convention does not provide for the complete exemption 

from withholding tax for certain direct dividends as is found in several recent U.S. tax treaties. Article 10 of the Convention includes 

a five percent withholding rate on direct dividends (where a 10 percent ownership threshold is met) and 15 percent on all other dividends. The proposed Convention allows for a zero percent withholding rate on certain dividends received by pension funds. 


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EXCHANGE OF INFORMATION

The proposed Convention provides the authority for the two 

countries to exchange tax information that is foreseeably relevant 

to carrying out the provisions of the proposed Convention or the domestic tax laws of either country. The proposed Convention allows 

the United States to obtain information (including from financial 

institutions) from Poland regardless of whether Poland needs the 

information for its own tax purposes. 

IV. ENTRY INTO FORCE

Article 28 states that the proposed Convention shall enter into 

force when both the United States and Poland have notified each 

other that they have completed all required internal procedures for 

entry into force. For withholding taxes, the proposed Convention 

will have effect for amounts paid or credited on or after the first 

day of the second month following the date on which the proposed 

treaty enters into force. For other taxes, the proposed Convention 

has effect for taxable years beginning on or after January 1 of the 

calendar year immediately following the date on which the Convention enters into force. 

V. IMPLEMENTING LEGISLATION

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

is self-executing and does not require implementing legislation for 

the United States. 

VI. COMMITTEE ACTION

The committee held a public hearing on the Convention on June 

19, 2014. Testimony was received from Robert Stack, Deputy Assistant Secretary (International Tax Affairs) at the U.S. Department of the Treasury; Thomas Barthold, Chief of Staff of the Joint 

Committee on Taxation; Mary Jean Riley, Vice President of North 

American Stainless; and Catherine Schultz, Vice President for Tax 

Policy of the National Foreign Trade Council. A transcript of the 

hearing is included in Annex 2 of Exec. Rept. 113–10, Protocol 

Amending the Tax Convention with Spain. 

On July 16, 2014, the committee considered the Convention 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 Convention will stimulate increased trade and investment, reduce treaty 

shopping incentives, and promote closer co-operation between the 

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

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

A. LIMITATION ON BENEFITS

The committee applauds the Treasury Department’s significant 

efforts to address treaty shopping both in this Convention and in 

other bilateral tax treaties. After careful examination of this ConVerDate Mar 15 2010 03:07 Jul 18, 2014 Jkt 039119 PO 00000 Frm 00003 Fmt 6659 Sfmt 6602 E:\HR\OC\ER011.XXX ER011

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vention, as well as testimony and responses to questions for the 

record from the Treasury Department, the committee is of the view 

that the Convention’s protections against treaty-shopping are robust and will substantially deny treaty shoppers the benefit of the 

Convention. The committee believes that it is critical for the Treasury Department to closely monitor and keep the committee informed on the effectiveness of the above-mentioned provisions in 

discouraging and eliminating treaty-shopping under the Convention. 

B. INFORMATION EXCHANGE

The Convention would replace the existing Convention’s tax information exchange provisions with updated rules that are consistent with current U.S. tax treaty practice. The Convention 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 Poland whether or not Poland needs the information for its 

own tax purposes. 

After careful examination of this Convention, as well as witness 

testimony and responses to questions for the record, the committee 

believes that the exchange of information provisions in the Convention will substantially aid in the full and fair enforcement of 

United States tax laws. According to witness testimony, the 

‘‘foreseeably relevant’’ standard used in the Convention does not 

represent a lower threshold than the standard found in earlier U.S. 

tax treaties. Witnesses also testified that the ‘‘foreseeably relevant’’ 

standard has been extensively defined in internationally agreed 

guidance to which no country has expressed a dissenting opinion 

to date. The committee is also of the view that the Convention provides adequate provisions to ensure that any information exchanged pursuant to the Convention is treated confidentially. In 

sum, the committee believes these provisions on information exchange are important to the administration of U.S. tax laws and 

the Convention provides adequate protection against the misuse of 

information exchanged pursuant to the Convention. 

C. DECLARATION ON THE SELF-EXECUTING NATURE OF THE

CONVENTION

The committee has included one declaration in the recommended 

resolution of advice and consent. The declaration states that the 

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

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

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

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

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

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

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


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VIII. TEXT OF RESOLUTION OF ADVICE AND CONSENT TO

RATIFICATION

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

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION 

The Senate advises and consents to the ratification of the Convention between the United States of America and the Republic of 

Poland for the Avoidance of Double Taxation and the Prevention of 

Fiscal Evasion with Respect to Taxes on Income, signed on February 13, 2013, at Warsaw (the ‘‘Convention’’) (Treaty Doc. 113–5), 

subject to the declaration of section 2. 

SECTION 2. DECLARATION 

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

to the following declaration: 

The Convention is self-executing. 


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X. ANNEX 1.—TECHNICAL EXPLANTION

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE UNITED 

STATES OF AMERICA AND THE REPUBLIC OF POLAND 

FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE 

PREVENTION OF FISCAL EVASION WITH RESPECT TO 

TAXES ON INCOME 

This is a Technical Explanation of the Convention between the 

United States and the Republic of Poland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to 

Taxes on Income, signed at Warsaw on February 13, 2013 (the 

‘‘Convention’’). 

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

current tax treaty policy, and the Treasury Department’s Model Income Tax Convention, published on November 15, 2006 (the ‘‘U.S. 

Model.’’ Negotiations also took into account the Model Tax Convention on Income and on Capital, published by the Organisation for 

Economic Cooperation and Development (the ‘‘OECD Model’’), and 

recent tax treaties concluded by the United States and Poland. 

The Technical Explanation is an official guide to the Convention. 

It reflects the policies behind particular Convention provisions, as 

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

read to mean ‘‘he or she’’ or ‘‘his or her,’’ respectively. References 

to the ‘‘Code’’ are to the Internal Revenue Code of 1986, as amended. References to a ‘‘Treas. Reg.’’ are to regulations issued under 

the Code by the Internal Revenue Service and the Treasury Department. 

ARTICLE 1 (GENERAL SCOPE)

Paragraph 1 

Paragraph 1 of Article 1 provides that the Convention applies 

only to residents of one or both Contracting States except where 

the terms of the Convention provide otherwise. Under Article 4 

(Resident) a person is generally treated as a resident of a Contracting State if that person is, under the laws of that State, liable 

to tax therein by reason of domicile, citizenship, residence, or any 

other criterion of a similar nature. However, if a person is considered a resident of both Contracting States, Article 4 provides rules 

for determining a single Contracting State of residence (or no Contracting State of residence). This determination governs for all purposes of the Convention. 

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

third states. 


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Paragraph 2 

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

no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other benefit accorded by the laws of either Contracting State, or by any other agreement to which both 

Contracting States are parties. The relationship between the nondiscrimination provisions of the Convention and the General Agreement on Trade in Services (the ‘‘GATS’’) is addressed in paragraph 

3. 

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

under the Code in computing the U.S. taxable income of a resident 

of Poland, the deduction also is allowed to that person in computing taxable income under the Convention. Paragraph 2 also 

means that the Convention may not increase the tax burden on a 

resident of a Contracting State beyond the burden determined 

under domestic law. Thus, a right to tax given by the Convention 

cannot be exercised unless that right also exists under domestic 

law. 

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

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

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

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

Convention in an inconsistent manner in order to minimize tax. 

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

so would be inconsistent with the intent of either set of rules. For 

example, assume that a resident of Poland has three separate businesses in the United States. One activity is a profitable permanent 

establishment and the other two are trades or businesses that 

would earn taxable income under the Code but do not meet the 

permanent establishment threshold tests of the Convention. One is 

profitable and the other incurs a loss. Under the Convention, the 

income of the permanent establishment is taxable in the United 

States, and both the profit and loss of the other two businesses are 

ignored. Under the Code, all three would be subject to tax, but the 

loss would offset the profits of the two profitable ventures. The taxpayer may not invoke the Convention to exclude the profits of the 

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

of the loss trade or business against the profit of the permanent establishment. (See Rev. Rul. 84-17, 1984-1 C.B. 308.) If, however, 

the taxpayer invokes the Code for the taxation of all three ventures, he would not be precluded from invoking the Convention 

with respect, for example, to any dividend income he may receive 

from the United States that is not effectively connected with any 

of his business activities in the United States. 

Similarly, except as provided in paragraph 3, nothing in the Convention can be used to deny any benefit granted by any other 

agreement to which both Contracting State are parties. For example, if certain benefits are provided for military personnel or military contractors under a Status of Forces Agreement between the 

United States and Poland, those benefits or protections will be 


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available to residents of the Contracting States regardless of any 

provisions to the contrary (or silence) in the Convention. 

Paragraph 3 

Paragraph 3 relates to non-discrimination obligations of the Contracting States under the GATS. The provisions of paragraph 3 are 

an exception to the rule provided in paragraph 2 of this Article 

under which the Convention shall not restrict in any manner any 

benefit now or hereafter accorded by any other agreement between 

the Contracting States. 

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

the Convention, the national treatment obligations of the GATS 

shall not apply with respect to that measure. Further, any question 

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

Convention, shall be considered only by the competent authorities 

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

dispute before the World Trade Organization unless the competent 

authorities of both Contracting States have determined that the 

relevant taxation measure is not within the scope of Article 24 

(Non-Discrimination) of the Convention. 

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

decision, administrative action or any other similar provision or action. 

Paragraph 4 

Paragraph 4 contains the traditional saving clause found in all 

U.S. income tax treaties. The Contracting States reserve their 

rights, except as provided in paragraph 5, to tax their residents 

and citizens as provided under their domestic laws, notwithstanding any provisions of the Convention to the contrary. For example, if a resident of Poland performs professional services in the 

United States and the income from the services is not attributable 

to a permanent establishment in the United States, Article 7 (Business Profits) would by its terms prevent the United States from 

taxing the income. If, however, the resident of Poland is also a citizen of the United States, the saving clause permits the United 

States to include the remuneration in the worldwide income of the 

citizen and subject it to tax under the normal Code rules (i.e., without regard to Code section 894(a)). Subparagraph 5(a) of Article 1 

also preserves the benefits of special foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident in the other Contracting State. See paragraph 4 of Article 23 

(Relief from Double Taxation). 

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

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

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

who is determined to be a resident of the Poland under the tiebreaker rules of Article 4 would be subject to U.S. tax only to the 

extent permitted by the Convention. The United States would not 


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be permitted to apply its domestic law to that person to the extent 

that its law is inconsistent with the Convention. 

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

U.S. tax purposes other than determining the individual’s U.S. tax 

liability. For example, in determining under Code section 957 

whether a foreign corporation is a controlled foreign corporation, 

shares in that corporation held by the individual would be considered to be held by a U.S. resident. As a result, other U.S. citizens 

or residents might be deemed to be United States shareholders of 

a controlled foreign corporation subject to current inclusion of subpart F income recognized by the corporation. See Treas. Reg. section 301.7701(b)-7(a)(3). 

Under paragraph 4, each Contracting State also reserves its 

right to tax former citizens and former long-term residents in accordance with domestic law for a period of ten years following the 

loss of such status. Thus, paragraph 4 allows the United States to 

tax former U.S. citizens and former U.S. long-term residents in accordance with Code section 877. Section 877 generally applies to a 

former citizen or long-term resident of the United States who relinquishes citizenship or terminates long-term residency before June 

17, 2008 if he fails to certify that he has complied with U.S. tax 

laws during the 5 preceding years, or if either of the following criteria exceed established thresholds: (a) the average annual net income tax of such individual for the period of 5 taxable years ending 

before the date of the loss of status; or (b) the net worth of such 

individual as of the date of the loss of status. 

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

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

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

individual is not treated as a lawful permanent resident of the 

United States for any taxable year in which the individual is treated as a resident of Poland under this Convention, or as a resident 

of any country other than the United States under the provisions 

of any other U.S. tax treaty, and the individual does not waive the 

benefits of the relevant tax treaty. 

Paragraph 5 

Paragraph 5 sets forth certain exceptions to the saving clause. 

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

Subparagraph 5(a) lists certain provisions of the Convention that 

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

despite the general saving clause rule of paragraph 4: 

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

the right to a correlative adjustment with respect to income tax 

due on profits reallocated under Article 9. 

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

support. 

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


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

income earned in the other State. In addition, paragraph 5 of 

Article 23 coordinates the tax systems of the Contracting 

States to avoid double taxation that could result from the imposition of an exit tax or similar regime on an individual who 

ceases to be treated as a resident (as determined under paragraph 1 of Article 4 (Resident)) of one Contracting State and 

becomes a resident of the other Contracting State. 

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

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

State. 

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

benefits on citizens and residents of the Contracting States in 

order to reach and implement solutions to disputes between 

the two Contracting States. 

Subparagraph 5(b) provides a different set of exceptions to the 

saving clause. The benefits referred to are all intended to be granted to temporary residents of a Contracting State (for example, in 

the case of the United States, holders of non-immigrant visas), but 

not to citizens or to persons who have acquired permanent residence in that State. If beneficiaries of these provisions travel from 

one Contracting State to the other, and remain in the other long 

enough to become residents under its internal law, but do not acquire permanent residence status (i.e., in the U.S. context, they do 

not become ‘‘green card’’ holders) and are not citizens of that State, 

the host State will continue to grant these benefits even if they 

conflict with the statutory rules. The benefits preserved by this 

paragraph are: the host country exemptions for government service 

salaries and pensions under Article 19 (Government Service), certain income of visiting students and trainees under Article 20 (Students and Trainees) and the income of diplomatic agents and consular officers and under Article 27 (Members of Diplomatic Missions and Consular Posts). 

Paragraph 6 

Paragraph 6 addresses special issues presented by the payment 

of items of income, profit or gain to entities that are fiscally transparent, such as partnerships, estates and trusts. Because countries 

may take different views as to when an entity is fiscally transparent, the risk of both double taxation and double non-taxation is 

relatively high. The provision, and the corresponding requirements 

of the substantive rules of the other Articles of the Convention, 

should be read with two goals in mind. First, the intention of paragraph 6 is to eliminate a number of technical problems that could 

prevent investors using such entities from claiming treaty benefits, 

even though such investors would be subject to tax on the income 

derived through such entities. Second, the provision prevents a 

resident of a Contracting State from claiming treaty benefits in circumstances where the resident investing in the entity does not 

take into account the item of income paid to the entity because the 

entity is not fiscally transparent in its State of residence. 

In general, the principles incorporated in this paragraph reflect 

the regulations under Treas. Reg. section 1.894-1(d). Treas. Reg. 


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1.894-1(d)(3)(iii) provides that an entity will be fiscally transparent 

under the laws of an interest holder’s jurisdiction with respect to 

an item of income to the extent that the laws of that jurisdiction 

require the interest holder resident in that jurisdiction to separately take into account on a current basis the interest holder’s respective share of the item of income paid to the entity, whether or 

not distributed to the interest holder, and the character and source 

of the item in the hands of the interest holder are determined as 

if such item were realized directly by the interest holder. Entities 

falling under this description in the United States include partnerships, corporations that have made a valid election to be taxed 

under Subchapter S of Chapter 1 of the Code (‘‘S corporations’’), 

common investment trusts under section 584, simple trusts and 

grantor trusts. This paragraph also applies to payments made to 

other entities, such as U.S. limited liability companies (‘‘LLCs’’), 

that may be treated as either partnerships or as disregarded as a 

separate entity for U.S. tax purposes. 

Except as otherwise provided under subparagraph 6(b), under 

subparagraph 6(a), an item of income, profit or gain derived by or 

through such a fiscally transparent entity will be considered to be 

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

under the taxation laws of that State as deriving the item of income. For example, if a company that is a resident of Poland pays 

interest to an entity that is treated as fiscally transparent for U.S. 

tax purposes, the interest will be considered derived by a resident 

of the United States, but only to the extent that the taxation laws 

of the United States treats one or more U.S. residents (whose status as U.S. residents is determined, for this purpose, under U.S. 

tax law) as deriving the interest for U.S. tax purposes. Where the 

entity is a partnership, the persons who are, under U.S. tax laws, 

treated as partners of the entity would normally be the persons 

whom the U.S. tax laws would treat as deriving the interest income 

through the partnership. Also, it follows that persons whom the 

United States treats as partners but who are not U.S. residents for 

U.S. tax purposes may not claim a benefit under the Convention 

for the interest paid to the partnership, because such third-country 

partners are not residents of the United States for purposes of 

claiming this benefit. If, however, the country in which the thirdcountry partners are treated as resident for tax purposes, as determined under the laws of that country, has an income tax convention with Poland, they may be entitled to claim a benefit under 

that convention (these results would also follow in the case of an 

entity that is disregarded as a separate entity under the laws of 

one jurisdiction but not the other, such as a single-owner entity 

that is viewed as a branch for U.S. tax purposes and as a corporation for tax purposes under the laws of Poland). In contrast, where 

the entity is organized under U.S. laws and is classified as a corporation for U.S. tax purposes, interest paid by a company that is 

a resident of Poland to the U.S. corporation will be considered derived by a resident of the United States since the U.S. corporation 

is treated under U.S. taxation laws as a resident of the United 

States and as deriving the income. 

Under subparagraph 6(a), the same result would be reached even 

if the tax laws of Poland would treat the entity differently (e.g., if 


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the entity were not treated as fiscally transparent in Poland in the 

first example above where the entity is treated as a partnership for 

U.S. tax purposes). Similarly, the characterization of the entity in 

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

that third country, although subparagraph 6(b) imposes an additional requirement in the case of entities organized in a third country. 

Subparagraph 6(b) imposes an additional requirement in cases of 

payments through an entity that is organized in a third country. 

In such cases, if the entity is not treated as fiscally transparent 

under the laws of the State in which the income, profit or gains 

arises, and if the entity is eligible in its own right for benefits 

under a convention for the avoidance of double taxation between 

the third state and the State in which the income, profit or gain 

arises with respect to the particular item of income, profit or gain 

that are more favorable than the benefits provided under the Convention with respect to that item, subparagraph 6(a) shall not have 

application. For example, assume that USCo, a corporation resident in the United States, is the sole shareholder of FCo, an entity 

established in Country F. Under the laws of the United States, FCo 

is treated as fiscally transparent, but under the laws of Poland, 

FCo is treated as a corporation. FCo receives Poland-source interest which, under the provisions of Article 11 (Interest) of the Convention, would be subject to tax in Poland at a rate of 5 percent. 

Pursuant to subparagraph 6(a), USCo would be considered as deriving the Poland-source interest. However, subparagraph 6(b) provides that if the tax treaty between Poland and Country F provides 

a limitation on the rate of interest withholding that is lower than 

5 percent, and if FCo would be eligible for such lower rate in its 

own right on the payment of interest, USCo shall not be deemed 

as deriving the interest payment. Nevertheless, FCo may claim the 

more favorable treaty benefits from Poland in its own right under 

the tax treaty between Poland and Country F. 

The principles of paragraph 6 apply to trusts to the extent that 

they are fiscally transparent in either Contracting State. For example, suppose that X, a resident of Poland, creates a revocable trust 

in the United States and names persons resident in a third country 

as the beneficiaries of the trust. If, under the laws of Poland, X is 

treated as taking the trust’s income into account for tax purposes, 

the trust’s income would be regarded as being derived by a resident 

of Poland. In contrast, since the determination of deriving an item 

of income, profit or gain is made on an item by item basis, it is possible that, in the case of a U.S. non-grantor trust, the trust itself 

may be able to claim benefits with respect to certain items of income, such as capital gains, so long as it is a resident liable to tax 

on such gains, but not with respect to other items of income that 

are treated as income of the trust’s interest holders. 

As noted above, paragraph 6 is not an exception to the saving 

clause of paragraph 4. Accordingly, paragraph 6 does not prevent 

a Contracting State from taxing an entity that is treated as a resident of that State under its tax law. For example, if a U.S. LLC 

with members who are residents of Poland elects to be taxed as a 

corporation for U.S. tax purposes, the United States will tax that 


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LLC on its worldwide income on a net basis, without regard to 

whether Poland views the LLC as fiscally transparent. 

ARTICLE 2 (TAXES COVERED)

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

which the Convention applies. With two exceptions, the taxes specified in Article 2 are the covered taxes for all purposes of the Convention. A broader coverage applies for purposes of Articles 24 

(Non-Discrimination) and 26 (Exchange of Information). Article 24 

applies with respect to all taxes, including those imposed by state 

and local governments. Article 26 applies with respect to all taxes 

imposed at the national level. 

Paragraph 1 

Paragraph 1 identifies the category of taxes to which the Convention applies. Paragraph 1 is based on the OECD Model and defines 

the scope of application of the Convention. The Convention applies 

to taxes on income, including gains, imposed on behalf of a Contracting State, irrespective of the manner in which they are levied. 

Except with respect to Article 24 (Non-Discrimination), state and 

local taxes are not covered by the Convention. 

Paragraph 2 

Paragraph 2 also is based on the OECD Model and provides a 

definition of taxes on income and on capital gains. The Convention 

covers taxes on total income or any part of income and includes tax 

on gains derived from the alienation of property. The Convention 

does not apply, however, to social security or unemployment taxes, 

or any other charges where there is a direct connection between 

the levy and individual benefits. The Convention also does not 

apply to property taxes, except with respect to Article 24 (Non-Discrimination) or to Article 26 (Exchange of Information) to the extent that such property taxes are imposed at the national level. 

Paragraph 3 

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

the Convention to which the Convention applies. 

The existing covered taxes of Poland are identified in subparagraph 3(a) as the personal income tax and the corporate income 

tax, hereinafter referred to as ‘‘Polish tax’’. 

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

to the rules of the Convention are the Federal income taxes imposed by the Code, together with the Federal taxes imposed on the 

investment income of foreign private foundations (Code sections 

4940 through 4948) hereinafter referred to as ‘‘United States tax.’’ 

Social security and unemployment taxes (Code sections 1401, 3101, 

3111 and 3301) are specifically excluded from coverage. 

Paragraph 4 

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

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

existing taxes after February 13, 2013, the date of signature of the 

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thorities of the Contracting States will notify each other of any significant changes to their taxation laws. 

ARTICLE 3 (GENERAL DEFINITIONS)

Article 3 provides general definitions and rules of interpretation 

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

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

The term ‘‘permanent establishment’’ is defined in Article 5 (Permanent Establishment). These definitions apply for all purposes of 

the Convention. Other terms, such as ‘‘dividends,’’ ‘‘interest’’ and 

‘‘royalties’’ are defined in specific Articles for purposes of those Articles. 

Paragraph 1 

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

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

the interpretation of the Convention in order to avoid results not 

intended by the Convention’s negotiators. 

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

body of persons. The definition is significant for a variety of reasons. For example, under Article 4, only a ‘‘person’’ can be a ‘‘resident’’ and therefore eligible for most benefits under the treaty. 

Also, all ‘‘persons’’ are eligible to claim relief under Article 25 (Mutual Agreement Procedure). 

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

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

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

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

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

residence will not get inappropriate benefits, such as the reduced 

withholding rate provided by subparagraph 2(b) of Article 10 (Dividends). It also ensures that the Limitation on Benefits provisions 

of Article 22 will be applied at the appropriate level. 

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

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

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

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

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

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

third state (e.g., a U.S. corporation doing all of its business in Poland would still be a U.S. enterprise). 

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

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

this point explicitly to ensure that the purpose of the Convention 

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

partnerships and similar entities. In accordance with Article 4 

(Resident), an entity that is fiscally transparent in the Contracting 


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State in which it is organized is not considered to be a resident of 

that Contracting State (although income derived through such an 

entity may be taxed as the income of a resident of a Contracting 

State to the extent that it is taxed in the hands of resident partners or other resident owners). The definition makes clear that as 

provided in Article 1 (General Scope) paragraph 6, an enterprise 

conducted by such an entity will be treated as carried on by a resident of a Contracting State to the extent its partners or other owners are residents. This approach is consistent with Code section 

875, which attributes a trade or business conducted by a partnership to its partners and a trade or business conducted by an estate 

or trust to its beneficiaries. 

Subparagraph 1(d) defines the term ‘‘enterprise’’ as any activity 

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

The term ‘‘business’’ is not defined, but subparagraph 1(e) provides 

that it includes the performance of professional services and other 

activities of an independent character. Both subparagraphs are 

identical to definitions added to the OECD Model in connection 

with the deletion of Article 14 (Independent Personal Services) 

from the OECD Model in 2000. The inclusion of the two definitions 

is intended to clarify that income from the performance of professional services or other activities of an independent character is 

dealt with under Article 7 (Business Profits) and not Article 21 

(Other Income). 

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

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

transport is solely between places within a Contracting State. This 

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

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

from the rental of ships or aircraft on a full (time or voyage) basis; 

profits from the rental on a bareboat basis of ships or aircraft if 

the rental income is incidental to profits from the operation of 

ships or aircraft in international traffic; profits from the rental on 

a bareboat basis of ships or aircraft if such ships or aircraft are operated in international traffic by the lessee; and profits of an enterprise of a Contracting State from the use, maintenance, or rental 

of containers (including trailers, barges, and related equipment for 

the transport of containers), where such use, maintenance or rental, as the case may be, is incidental to the operation of ships or aircraft in international traffic. 

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

carriage of goods or passengers solely between New York and Chicago would not be treated as international traffic, whether carried 

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

Convention relating to the taxation of income from transport, principally Article 8, therefore, would not apply to income from such 

carriage. Thus, if the carrier engaged in internal U.S. traffic were 

a resident of Poland (assuming that were possible under U.S. law), 

the United States would not be required to exempt the income from 

that transport under Article 8. The income would, however, be 

treated as business profits under Article 7 (Business Profits), and 

therefore would be taxable in the United States only if attributable 


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to a U.S. permanent establishment of the foreign carrier, and then 

only on a net basis. The gross basis U.S. tax imposed by section 

887 would not apply under the circumstances described. If, however, goods or passengers are carried by a carrier resident in Poland from a non-U.S. port to, for example, New York, and some of 

the goods or passengers continue on to Chicago, the entire transport would be international traffic. This would be true if the international carrier transferred the goods at the U.S. port of entry from 

a ship to a land vehicle, from a ship to a lighter, or even if the 

overland portion of the trip in the United States was handled by 

an independent carrier under contract with the original international carrier, so long as both parts of the trip were reflected in 

original bills of lading. For this reason, the U.S. Model refers, in 

the definition of ‘‘international traffic,’’ to ‘‘such transport’’ being 

solely between places in the other Contracting State, while the 

OECD Model refers to the ship or aircraft being operated solely between such places. The U.S. Model language is intended to make 

clear that, as in the above example, even if the goods are carried 

on a different aircraft for the internal portion of the international 

voyage than is used for the overseas portion of the trip, the definition applies to that internal portion as well as the external portion. 

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

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

port, would not constitute international traffic. 

Subparagraph 1(g) defines the term ‘‘competent authorities’’ for 

Poland and the United States. The U.S. competent authority is the 

Secretary of the Treasury or his delegate. The Secretary of the 

Treasury has delegated the competent authority function to the 

Commissioner of Internal Revenue, who in turn has delegated the 

authority to the Deputy Commissioner (International) LB&I. With 

respect to interpretative issues, the Deputy Commissioner (International) LB&I acts with the concurrence of the Associate Chief 

Counsel (International) of the Internal Revenue Service. The competent authority in the case of Poland is the Minister of Finance 

or his authorized representative. 

The geographical scope of the Convention with respect to Poland 

is set out in subparagraph 1(h). The term ‘‘Poland’’ means the Republic of Poland, including the territorial sea thereof and any area 

outside the territorial sea of the Republic of Poland designated 

under its laws and in accordance with international law as an area 

within which the sovereign rights of the Republic of Poland with 

respect to the sea bed and sub-soil and their natural resources may 

be exercised. 

The geographical scope of the Convention with respect to the 

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

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

not include Puerto Rico, the United States Virgin Islands, Guam or 

any other U.S. possession or territory. For certain purposes, the 

term ‘‘United States’’ includes the sea bed and subsoil of undersea 

areas adjacent to the territorial sea of the United States. This extension applies to the extent that the United States may exercise 

sovereignty in accordance with international law for the purpose of 

natural resource exploration and exploitation of such areas. This 


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extension of the definition applies, however, only if the person, 

property or activity to which the Convention is being applied is 

connected with such natural resource exploration or exploitation. 

Thus, it would not include any activity involving the sea floor of 

an area over which the United States exercised sovereignty for natural resource purposes if that activity was unrelated to the exploration and exploitation of natural resources. This result is consistent with the result that would be obtained under Code section 

638, which treats the continental shelf as part of the United States 

for purposes of natural resource exploration and exploitation. 

The term ‘‘national,’’ as it relates to the United States and to Poland, is defined in subparagraph 1(j). This term is relevant for purposes of Article 4 (Resident), Article 19 (Government Service) and 

Article 24 (Non-Discrimination). A national of one of the Contracting States is either an individual who is a citizen or national 

of that State, or any legal person, partnership or association deriving its status, as such, from the law in force in the State where 

it is established. 

Subparagraph 1(k) defines the term ‘‘pension fund.’’ The term 

means any person that is established in a Contracting State and 

satisfies two criteria. First, as provided in clause 1(k)(i), the person 

must be generally exempt from income taxation in the Contracting 

State in which it is established. Second, as provided in clause 

1(k)(ii), the person must be operated principally either to administer or provide pension or retirement benefits, or to earn income 

for the benefit of one or more persons established in the same Contracting State that are generally exempt from income taxation in 

that Contracting State and are operated principally to administer 

or provide pension or retirement benefits. 

The definition recognizes that pension funds sometimes administer or provide benefits other than pension or retirement benefits, 

such as death benefits. However, in order for the fund to be considered a pension fund for purposes of the Convention, the provision 

of any other such benefits must be merely incidental to the fund’s 

principal activity of administering or providing pension or retirement benefits. The definition also ensures that if a fund is a collective fund that earns income for the benefit of other funds, then 

substantially all of the funds that participate in the collective fund 

must be residents of the same Contracting State as the collective 

fund and must be entitled to benefits under the Convention in their 

own right. 

In the case of the United States, the term ‘‘pension fund’’ includes the following: a trust providing pension or retirement benefits under a Code section 401(a) qualified pension plan (which includes a Code section 401(k) plan); a profit sharing or stock bonus 

plan; a Code section 403(a) qualified annuity plan; a Code section 

403(b) plan; a trust that is an individual retirement account under 

Code section 408; a Roth individual retirement account under Code 

section 408A or a simple retirement account under Code section 

408(p); a trust providing pension or retirement benefits under a 

simplified employee pension plan under Code section 408(k); a 

trust described in section 457(g) providing pension or retirement 

benefits under a Code section 457(b) plan; and the Thrift Savings 

Fund (section 7701(j)). A group trust described in Rev. Rul. 81-100, 


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as amended by Rev. Rul. 2004-67 and Rev. Rul. 2011-1, qualifies 

as a pension fund only if substantially all of its activity is to earn 

income for the benefit of pension funds that are themselves entitled 

to benefits under the Convention as a resident of the United 

States. 

Paragraph 2 

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

paragraph 2. 

Paragraph 2 provides that in the application of the Convention, 

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

meaning that it has under the domestic law of the Contracting 

State whose tax is being applied, unless the context requires otherwise. If the term is defined under both the tax and non-tax laws 

of a Contracting State, the definition in the tax law will take precedence over the definition in the non-tax laws. Finally, there also 

may be cases where the tax laws of a State contain multiple definitions of the same term. In such a case, the definition used for purposes of the particular provision at issue, if any, should be used. 

The reference in paragraph 2 to the domestic law of a Contracting State means the law in effect at the time the treaty is 

being applied, not the law as in effect at the time the treaty was 

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

results that are at variance with the intentions of the negotiators 

and of the Contracting States when the treaty was negotiated and 

ratified. The inclusion in both paragraphs 1 and 2 of an exception 

to the generally applicable definitions where the ‘‘context otherwise 

requires’’ is intended to address this circumstance. Where reflecting 

the intent of the Contracting States requires the use of a definition 

that is different from a definition under paragraph 1 or the law of 

the Contracting State applying the Convention, that definition will 

apply. Thus, flexibility in defining terms is necessary and permitted. 

ARTICLE 4 (RESIDENT)

This Article sets forth rules for determining whether a person is 

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

As a general matter, only residents of the Contracting States may 

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

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

under Article 4 does not automatically entitle that person to the 

benefits of the Convention. In order to obtain the benefits of the 

Convention, such person must satisfy all applicable requirements 

specified in the Convention, including other applicable requirements of Article 1 (General Scope), beneficial ownership and Article 

22 (Limitation on Benefits). 

The determination of residence for treaty purposes looks first to 

a person’s liability to tax as a resident under the respective taxation laws of the Contracting States. As a general matter, a person 

is liable to tax as a resident under the domestic laws of one Contracting State and not of the other need look no further. For purposes of the Convention, that person is a resident of the State in 

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ever, a person is liable to tax as a resident under the domestic laws 

of both Contracting States, the Article uses tie-breaker rules to assign a single State of residence (or no State of residence) to such 

a person for purposes of the Convention. 

Paragraph 1 

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

residence in U.S. and Polish law by referring to a resident as a person who, under the laws of a Contracting State, is liable to tax 

therein by reason of his domicile, residence, citizenship, place of 

management, place of incorporation or any other similar criterion. 

Thus, residents of the United States include aliens who are considered U.S. residents under Code section 7701(b), entities organized 

in the United States and that have elected under Treas. Reg. 

301.7701-2 to be taxed by the United States as a corporation, and 

companies that are treated as domestic corporations under Code 

section 7874(b). Paragraph 1 also specifically includes the two Contracting States, and political subdivisions and local authorities of 

the two States, as residents for purposes of the Convention. 

The fact that a particular entity does not pay tax in practice will 

not necessarily mean that the entity is not a resident. An entity 

that is not fiscally transparent in its Contracting State of residence 

for purposes of paragraph 6 of Article 1 (General Scope), and is not 

unconditionally exempt from tax, will generally be treated as a 

resident for purposes of the Convention. This is generally true even 

for an entity that, in practice, is not required to pay tax if it meets 

certain requirements with respect to its activities, types of income, 

or distribution practices. For example, a U.S. Regulated Investment 

Company (RIC) and a U.S. Real Estate Investment Trust (REIT) 

are residents of the United States for purposes of the treaty. These 

entities are taxable to the extent that they do not currently distribute their profits, and therefore may be regarded as liable to tax, 

even though these entities do not generally have taxable income in 

practice. They also must satisfy a number of requirements under 

the Code in order to be entitled to their particular tax treatment. 

A person who is liable to tax in a Contracting State only in respect of income from sources within that State or of profits attributable to a permanent establishment in that State will not be 

treated as a resident of that Contracting State for purposes of the 

Convention. Thus, a consular official of the other Contracting State 

who is posted in the United States, who may be subject to U.S. tax 

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

States on non-U.S. source income (see Code section 7701(b)(5)(B)), 

would not be considered a resident of the United States for purposes of the Convention. Similarly, an enterprise of Poland with a 

permanent establishment in the United States is not, by virtue of 

that permanent establishment, a resident of the United States. The 

enterprise generally is subject to U.S. tax only with respect to its 

income that is attributable to the U.S. permanent establishment, 

not with respect to its worldwide income, as it would be if it were 

a U.S. resident. 


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Paragraph 2 

Paragraph 2 provides that entities such as pension funds as defined in Article 3 (General Definitions) and legal persons organized 

under the laws of a Contracting State and established exclusively 

for religious, charitable, scientific, artistic, cultural, or educational 

purposes are residents of the Contracting State in which they are 

established or organized. Such persons are liable to tax, notwithstanding that all or part of its income or gains may be exempt from 

tax under the domestic laws of that State. Thus, a section 501(c) 

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

Paragraph 3 

If, under the domestic law of both Contracting States, and, thus, 

under paragraph 1, an individual is a resident of both Contracting 

States, a series of tie-breaker rules are provided in paragraph 3 to 

determine a single State of residence for that individual. These 

tests are to be applied in the order in which they are stated. The 

first test is based on where the individual has a permanent home. 

If that test is inconclusive because the individual has a permanent 

home available to him in both States, he will be considered to be 

a resident of the Contracting State where his personal and economic relations are closest (i.e., the location of his ‘‘center of vital 

interests.’’ If that test is also inconclusive, or if he does not have 

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

treated as a resident of the Contracting State where he maintains 

a habitual abode. If he has a habitual abode in both States or in 

neither of them, he will be treated as a resident of the Contracting 

State of which he is a national. If he is a national of both States 

or of neither, the competent authorities shall endeavor to settle the 

question by mutual agreement. 

Paragraph 4 

Paragraph 4 addresses dual residence issues for companies. A 

company is treated as resident in the United States if it is created 

or organized under the laws of the United States or a political subdivision. If, as is frequently the case, a company is treated as a 

resident of Poland if it is either incorporated or managed and controlled there, dual residence can arise in the case of a U.S. company that is managed and controlled in Poland. In other cases, a 

company may be a dual resident because it was originally incorporated in one Contracting State but has ‘‘continued’’ into the other 

Contracting State. Paragraph 4 thus attempts to deal with each of 

these situations. 

Under paragraph 4, the residence of a dual resident company 

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

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

resident of the United States because it is incorporated under the 

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

place of effective management is in Poland, then it will be a resident only of the United States. However, if the incorporation test 


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does not resolve the question because, for example, the company 

was incorporated in one Contracting State and continued into the 

other Contracting State, but the first-mentioned Contracting State 

does not recognize the migration and continues to treat the company as a resident, the case would then be addressed by paragraph 

5. 

Paragraph 5 

Paragraph 5 addresses situations when by reason of the provisions of paragraph 1, 2 or 4, a person other than an individual is 

a resident of both Contracting States. In such cases, the competent 

authorities of the Contracting States may, but are not required to, 

use the mutual agreement procedure to endeavor to determine the 

mode of application to the dual resident person. If the competent 

authorities do not reach a mutual agreement regarding a single 

State of residence, such dual resident person cannot claim any benefit accorded to residents of a Contracting State by the Convention. 

The person may, however, claim any benefits that are not limited 

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

(Non-Discrimination). Thus, for example, a State cannot impose 

discriminatory taxation on a dual resident person. 

Regardless of the outcome under this paragraph, dual resident 

companies may be treated as a resident of a Contracting State for 

purposes other than that of obtaining benefits under the Convention. For example, if a dual resident company pays a dividend to 

a resident of Poland, the U.S. paying agent would withhold on that 

dividend at the appropriate treaty rate (assuming the payee is entitled to treaty benefits), because reduced withholding is a benefit 

enjoyed by the resident of Poland, not by the dual resident company. The dual resident company that paid the dividend would, for 

this purpose, be treated as a resident of the United States under 

the Convention. In addition, information relating to dual resident 

companies can be exchanged under the Convention because, by its 

terms, Article 26 (Exchange of Information) is not limited to residents of the Contracting States. 

ARTICLE 5 (PERMANENT ESTABLISHMENT)

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

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

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

State. Articles 10 (Dividends), 11 (Interest) and 13 (Royalties) provide for reduced rates of tax at source on payments of these items 

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

not attributable to a permanent establishment that the recipient 

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

which Contracting State may tax certain gains under Article 14 

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

Income). 

Paragraph 1 

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

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


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

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

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

principle to be observed in determining whether a permanent establishment exists is that the place of business must be ‘‘fixed’’ in 

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

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

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

on a business through a sub-contractor, a permanent establishment 

may also exist for the enterprise if all the requirements of Article 

5 are met. For example, under paragraph 1, a permanent establishment may exist where an enterprise carries on its business through 

sub-contractors at a fixed place of business of the enterprise. Factors that indicate that a location is a fixed place of business of the 

enterprise, (i.e., a general contractor) include legal possession of 

the site, controlling access to and use of the site, and overall responsibility for what happens at the location. 

Paragraph 2 

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

that constitute a permanent establishment. This list is illustrative 

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

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

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

place of extraction of natural resources. 

Paragraph 3 

This paragraph provides rules to determine whether a building 

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

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

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

Thus, a drilling rig does not constitute a permanent establishment 

if a well is drilled in twelve months or less. However, the well becomes a permanent establishment as of the date that production 

begins. 

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

The twelve-month period begins when work (including preparatory 

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

are interdependent both commercially and geographically are to be 

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

development would be considered as a single project even if each 

house were constructed for a different purchaser. 

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

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

the site for purposes of determining whether the general contractor 


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

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

months. For purposes of applying the twelve-month rule, time is 

measured from the first day the sub-contractor is on the site until 

the last day. Thus, if a sub-contractor is on a site intermittently, 

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

counted. 

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

paragraph 3 of Article 5 of the Convention. 

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

Paragraph 4 

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

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

display or deliver merchandise belonging to an enterprise does not 

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

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

processing by another enterprise does not give rise to a permanent 

establishment of the first-mentioned enterprise. The maintenance 

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

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

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

information, do not constitute a permanent establishment of the 

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

auxiliary character. 

Paragraph 5 

Paragraphs 5 and 6 specify when activities carried on by an 

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

permanent establishment of that enterprise. Under paragraph 5, a 

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

conclude contracts on behalf of the enterprise. If, however, his activities are limited to those activities specified in paragraph 4 

which would not constitute a permanent establishment if carried 

on by the enterprise through a fixed place of business, the person 

does not create a permanent establishment of the enterprise. 

The reference to the ability to habitually exercising an authority 

to conclude contracts ‘‘on behalf of’’ an enterprise should be interpreted consistently with the analogous terms found in the OECD 

Model ‘‘in the name of that enterprise’’ and the U.S. Model ‘‘binding 


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on the enterprise.’’ As indicated in paragraph 32 to the OECD 

Commentaries on Article 5, paragraph 5 of the Article is intended 

to encompass persons who have ‘‘sufficient authority to bind the enterprise’s participation in the business activity in the State concerned.’’ 

Paragraph 6 

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

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

in the ordinary course of his business. Thus, there are two conditions that must be satisfied: the agent must be both legally and 

economically independent of the enterprise; and the agent must be 

acting in the ordinary course of its business in carrying out activities on behalf of the enterprise. 

Whether the agent and the enterprise are independent is a factual determination. Among the questions to be considered is the extent to which the agent operates on the basis of instructions from 

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

by the enterprise is not legally independent. 

In determining whether the agent is economically independent, 

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

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

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

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

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

not economically independent and therefore is not described in 

paragraph 6. 

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

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

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

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

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

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

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

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

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

investigation of the relationship between the principal and the 

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

and circumstances. 

Paragraph 7 

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

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ment in the other Contracting State merely because it controls, or 

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

State. The determination of whether a permanent establishment 

exists is made solely on the basis of the factors described in paragraphs 1 through 6 of the Article. Whether a company is a permanent establishment of a related company, therefore, is based solely 

on those factors and not on the ownership or control relationship 

between the companies. 

ARTICLE 6 (INCOME FROM REAL PROPERTY)

Paragraph 1 

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

Contracting State in which the property is situated. The paragraph 

specifies that income from real property includes income from agriculture and forestry. 

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

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

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

tax on the situs State. 

Paragraph 2 

The term ‘‘real property’’ is defined in paragraph 2 by reference 

to the domestic law definition in the situs State. In the case of the 

United States, the term has the meaning given to it by Treas. Reg. 

1.897-1(b). In addition to the statutory definitions in the two Contracting States, the paragraph specifies certain additional classes of 

property that, regardless of domestic law definitions are within the 

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

definition conforms to that in the OECD Model. With respect to the 

United States, the definition of ‘‘real property’’ for purposes of Article 6 is more limited than the reference to a ‘‘United States real 

property interest’’ in paragraph 2 of Article 14 (Capital Gains). The 

Article 14 term includes not only real property as defined in Article 

6 but certain other interests in real property. 

Paragraph 3 

Paragraph 3 makes clear that all forms of income derived from 

the exploitation of real property are taxable in the Contracting 

State in which the property is situated. This includes income from 

any use of real property, including, but not limited to, income from 

direct use by the owner (in which case income may be imputed to 

the owner for tax purposes) and rental income from the letting of 

real property. In the case of a net lease of real property, if a net 

election has not been made, the gross rental payment (before deductible expenses incurred by the lessee) is treated as income from 

the property. 

Other income closely associated with real property is covered by 

other Articles of the Convention, however, and not Article 6. For 

example, income from the disposition of an interest in real property 

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come is addressed in Article 14. Interest paid on a mortgage on 

real property would be covered by Article 11 (Interest). Distributions by a U.S. REITor certain regulated investment companies 

would fall under Article 14 in the case of distributions of U.S. real 

property gain or Article 10 (Dividends) in the case of distributions 

treated as dividends. Finally, distributions from a United States 

Real Property Holding Corporation as defined under Code section 

897(c)(2) are not considered to be income from the exploitation of 

real property; such payments would fall under Article 10 or Article 

14. 

Paragraph 4 

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

elaborated in paragraph 3) applies to income from real property of 

an enterprise. This clarifies that the situs country may tax the real 

property income (including rental income) of a resident of the other 

Contracting State in the absence of attribution to a permanent establishment in the situs State. This provision represents an exception to the general rule under Articles 7 (Business Profits) that income must be attributable to a permanent establishment in order 

to be taxable in the situs state. 

ARTICLE 7 (BUSINESS PROFITS)

This Article provides rules for the taxation by a Contracting 

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

Paragraph 1 

Paragraph 1 states the general rule that business profits of an 

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

Contracting State unless the enterprise carries on business in that 

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

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

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

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

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

principal contracts and other financial instruments to the extent 

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

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

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

specifically covered in another article, dealt with under Article 21 

(Other Income). 

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

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


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7, and not under Article 15 (Income from Employment), which applies only to income of employees. With respect to the enterprise’s 

employees themselves, however, their salary remains subject to Article 15. 

Because this Article applies to income earned by an enterprise 

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

income derived by a partner resident in a Contracting State that 

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

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

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

and any income from activities ancillary to the performance of 

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

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

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

are resident and perform personal services only in Poland at Office 

A, and one of whom is a resident and performs personal services 

at Office B, a permanent establishment in the United States. In 

this case, the four partners of the partnership resident in Poland 

may be taxed in the United States in respect of their share of the 

income attributable to the permanent establishment, Office B. The 

services giving rise to income which may be attributed to the permanent establishment would include not only the services performed by the one resident partner, but also, for example, if one 

of the four other partners came to the United States and worked 

on an Office B matter there, the income in respect of those services. 

Income from the services performed by the visiting partner would 

be subject to tax in the United States regardless of whether the 

visiting partner actually visited or made use of Office B while performing services in the United States. 

Paragraph 2 

Paragraph 2 provides rules for the attribution of business profits 

to a permanent establishment under which the attributed business 

profits are determined as if the permanent establishment were a 

separate enterprise that is independent from the rest of the enterprise of which it is a part, as well as from any other person. The 

Contracting States will attribute to a permanent establishment the 

profits that it would have earned had it been a distinct and separate enterprise engaged in the same or similar activities under the 

same or similar conditions and dealing wholly independently with 

the enterprise of which it is a permanent establishment. However, 

the business profits attributable to a permanent establishment are 

limited to those profits derived from the functions performed, assets used and risks assumed by the permanent establishment. 

Whereas paragraph 2 of Article 7 of the OECD Model provides 

that the paragraph applies ‘‘[F]or the purposes of this Article and 

Article [23A][23B],’’ paragraph 2 Article 7 applies only for purposes 

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cumstances as provided in paragraph 3 of this Article (described 

below). 

The ‘‘attributable to’’ concept of paragraph 2 employs the arm’s 

length principle reflected in the report of the OECD ‘‘2010 Report 

on the Attribution of Profits to Permanent Establishments’’ (the 

‘‘2010 Report’’) for determining the amount of business profits that 

shall be taxable to a permanent establishment, in place of the analogous principles in Code section 864(c). In effect, paragraph 2 allows the United States to tax only the lesser of two amounts of income: the amount determined by applying U.S. rules regarding the 

calculation of effectively connected income and the amount determined under Article 7 of the Convention. That is, a taxpayer may 

choose the set of rules that results in the lowest amount of taxable 

income, but may not combine both treaty and Code rules in a way 

that would be inconsistent with the intent of either set of rules. 

Because the purpose of paragraph 2 is to determine the profits 

that are attributable to a permanent establishment, paragraph 2 

applies in place only of Code section 864(c), which has an analogous function. The amount of income ‘‘attributable to’’ a permanent 

establishment under Article 7 may be greater or lesser than the 

amount of income that would be treated as ‘‘effectively connected’’ 

to a U.S. trade or business under section 864. Moreover, the profits 

attributable to a permanent establishment may be from sources 

within or without a Contracting State. However, as stated in paragraph 2, the business profits attributable to a permanent establishment include only those profits derived from the functions performed, assets used and risks assumed by the permanent establishment. For example, a foreign corporation that has a significant 

amount of third party foreign source royalty income attributable to 

a U.S. permanent establishment may find that it will pay less tax 

in the United States by applying section 864(c) of the Code, rather 

than Article 7, if the royalty income is not derived in the active 

conduct of a trade or business in the United States under Code section 864(c)(4)(B)(i). But, as described in the Technical Explanation 

to paragraph 2 of Article 1 (General Scope), if the foreign corporation chooses to apply Code Section 864(c) to determine its effectively connected income, it may not also use Article 7 principles to 

reduce its third party royalty income by interbranch royalty expense, since doing so would be inconsistent with either the principles of the Code or the Convention. (See Rev. Rul. 84-17, 1984- 

1 C.B. 308.). Conversely, if the taxpayer opts to use Article 7 to calculate the amount of business profits attributable to its U.S. permanent establishment, it must include all foreign-source income, 

from third parties and interbranch income in its business profits 

whether or not such income would be effectively connected income 

under the Code, if attributable to functions performed, assets used 

or risks assumed by the permanent establishment. Then, as stated 

above, the foreign corporation may elect to be taxed on the lower 

of the two amounts. Article 7 can only be used to reduce the 

amount of tax that would have otherwise been calculated using 

Code section 864(c) principles. 

Paragraph 2 refers specifically to the dealings between the permanent establishment and other parts of the enterprise of which 

the permanent establishment is a part in order to emphasize that 


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the separate and independent enterprise fiction of the paragraph 

requires that these dealings be treated the same way as similar 

transactions taking place between independent enterprises. That 

specific reference to dealings between the permanent establishment 

and other parts of the enterprise does not, however, restrict the 

scope of the paragraph. Where a transaction that takes place between the enterprise and an associated enterprise affects directly 

the determination of the profits attributable to the permanent establishment (e.g. the acquisition by the permanent establishment 

from an associated enterprise of goods that will be sold through the 

permanent establishment), paragraph 2 also requires that, for the 

purpose of computing the profits attributable to the permanent establishment, the conditions of the transaction be adjusted, if necessary, to reflect the conditions of a similar transaction between 

independent enterprises. Assume, for instance, that the permanent 

establishment situated in State S of an enterprise of State R acquires property from an associated enterprise of State T. If the 

price provided for in the contract between the two associated enterprises exceeds what would have been agreed to between independent enterprises, paragraph 2 of Article 7 of the treaty between 

State R and State S will authorize State S to adjust the profits attributable to the permanent establishment to reflect what a separate and independent enterprise would have paid for the property. 

In such case, Sate R will also be able to adjust the profits of the 

enterprise of State R under paragraph 1 of Article 9 of the treaty 

between State R and State T, which will trigger the application of 

the corresponding adjustment mechanism of paragraph 2 of Article 

9 of that treaty. 

Computation of the profits attributable to a permanent establishment under paragraph 2 takes into account the profits from all its 

activities, transactions with both associated and independent enterprises, and dealings with other parts of the enterprise. This analysis involves two steps. The first step requires a functional factual 

analysis to determine: 

• the attribution to the permanent establishment of the rights 

and obligations arising out of transactions between the enterprise of which the permanent establishment is a part and separate enterprises; • the identification of significant people functions relevant to 

the attribution of economic ownership of assets, and the attribution of economic ownership of assets to the permanent establishment; 

• the identification of significant people functions relevant to 

the assumption of risks, and the attribution of risks to the permanent establishment; 

• the identification of other functions of the permanent establishment; 

• the recognition of dealings between the permanent establishment and other parts of the enterprise; and • the attribution of capital based on the assets and risks attributed to the permanent establishment. 

The second step is to price any such dealings that are attributed 

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cluding profits methods, may be used as appropriate and in accordance with the principles of the OECD’s Transfer Pricing Guidelines. However, the attribution methods apply only for purposes of 

attributing profits within the legal entity. It does not create legal 

obligations or other tax consequences that would result from transactions having independent legal significance. In order to facilitate 

the administration of the two step process, taxpayers are encouraged to provide documentation supporting the conclusions reached 

in the first step, and demonstrating the appropriateness of the 

dealings and the associated prices. 

An entity that operates through branches rather than separate 

subsidiaries will typically have lower capital requirements because 

the capital of the entity is available to support all of the entity’s 

liabilities (with some exceptions attributable to local regulatory restrictions). This is the reason most commercial banks and some insurance companies operate through branches rather than through 

subsidiaries. The benefit that comes from such lower capital costs 

must be allocated among the branches in an appropriate manner. 

This issue does not arise in the case of an enterprise that operates 

through separate entities, since each entity will have to be separately capitalized or will have to compensate another entity for providing capital (usually through a guarantee). 

Under U.S. domestic regulations, internal ‘‘transactions’’ generally are not recognized because they do not have legal significance. In contrast, paragraph 2 provides that such internal dealings may be used to allocate income in cases where the dealings 

accurately reflect the allocation of risk within the enterprise. One 

example is global trading in securities. In many cases, banks use 

internal swap transactions to transfer risk from one branch to a 

central location where traders have the expertise to manage that 

particular type of risk. Under the Convention, such a bank may 

also use such swap transactions as a means of allocating income 

between the branches, if use of that method is the ‘‘best method’’ 

within the meaning of regulation section 1.482-1(c). The books of 

a branch will not be respected, however, when the results are inconsistent with a functional analysis. So, for example, income from 

a transaction that is booked in a particular branch (or home office) 

will not be treated as attributable to that location if the sales and 

risk management functions that generate the income are performed 

in another location. 

In the case of financial institutions, the use of internal dealings 

to allocate income within an enterprise may produce results under 

Article 7 that are significantly different than the results under the 

effectively connected income rules of Code section 864(c). For example, income from interbranch notional principal contracts may be 

taken into account under Article 7, notwithstanding that such 

transactions may be ignored for purposes of U.S. domestic law. 

Under the consistency rule described above, a financial institution 

that conducts different lines of business through its U.S. permanent establishment may not choose to apply the rules of the Code 

with respect to some lines of business and Article 7 of the Convention with respect to others. If it chooses to use the rules of Article 

7 to allocate its income from its trading book, it may not then use 

U.S. domestic rules to allocate income from its loan portfolio. 


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Paragraph 2 provides that deductions shall be allowed for expenses incurred for purposes of a permanent establishment, ensuring that business profits will be taxed on a net basis. These deductions may include compensation to other parts of the enterprise for 

functions performed for the branch’s benefit, if they are functions 

that would be compensated at arm’s length. Thus, deductions 

against business profits may be allowed when an accounting unit 

of the enterprise books third-party expenses for purposes of the 

permanent establishment. However, the amount deducted to determine net business profits is not the actual amount of third-party 

expense booked, but rather the amount of compensation that would 

be paid at arm’s length by the branch for the function performed. 

For example, when the home office of an enterprise books interest expense that is used in part to fund the permanent establishment, the permanent establishment may deduct an arm’s length 

amount of interest paid to the home office to compensate it for an 

appropriate amount of debt-funding. The permanent establishment 

may also take into account arm’s length fees to an enterprise’s 

treasury center for functions performed for its benefit. In each case, 

the amount of expense allowed as a deduction is determined by applying the arm’s length principle. Similarly, where the branch and 

other parts of the enterprise share benefits of centralized functions, 

such as research and development or headquarters services, the deduction allowed to the permanent establishment would be its appropriate share of the arm’s length compensation for such shared 

functions. The method to be used in calculating that compensation, 

and the permanent establishment’s appropriate share thereof, will 

depend on the facts and circumstances, including the terms of the 

arrangements between the branches and head office. The amount 

of deduction could be computed as a share of either the total costs, 

or other value indicator, of the centralized function, depending on 

which provides the most reliable measure of the arm’s length 

charge for sharing in the centralized functions in the facts and circumstances. The permanent establishment’s appropriate share of 

such compensation for these functions will depend on the benefits 

it reasonably expects to receive from the arrangement as a proportion of the total reasonably expected benefits of all parts of the enterprise. 

A permanent establishment cannot be funded entirely with debt, 

and must have sufficient capital to carry on its activities as if it 

were a distinct and separate enterprise. To the extent that the permanent establishment has not booked adequate capital, a Contracting State may attribute such capital to the permanent establishment and deny an interest deduction to the extent necessary to 

reflect that capital attribution. The method prescribed by U.S. domestic law for making this attribution is found in Treas. Reg. 

1.882-5. Both Treas. Reg. 1.882-5 and the method prescribed in this 

paragraph start from the premise that all of the capital of the enterprise supports all of the assets and risks of the enterprise, and 

therefore the entire capital of the enterprise must be allocated to 

its various businesses and offices. 

However, Treas. Reg. 1.882-5 does not take into account the fact 

that there is more risk associated with some assets than others. 

For instance, an independent enterprise would need less capital to 


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support a floating rate U.S. Treasury security than it would need 

to support an equity security or other asset with significant market 

and/or credit risk. Accordingly, in some cases Treas. Reg. 1.882-5 

would require a taxpayer to allocate more capital to the United 

States, and therefore would reduce the taxpayer’s interest deduction more, than is appropriate. To address these cases, the Convention allows a taxpayer to apply a more flexible approach that takes 

into account the relative risk of its assets in the various jurisdictions in which it does business. In particular, in the case of financial institutions other than insurance companies, the amount of 

capital attributable to a permanent establishment is determined by 

allocating the institution’s total capital between its offices on the 

basis of the proportion of the financial institution’s risk-weighted 

assets attributable to each office. This recognizes the fact that financial institutions are in many cases required to risk-weight their 

assets for regulatory purposes and, in other cases, will do so for 

business reasons even if not required to do so by regulators. However, risk-weighting is more complicated than the method prescribed by Treas. Reg. 1.882-5. Accordingly, to ease this administrative burden, taxpayers may choose to apply the principles of 

Treas. Reg. 1.882-5(c) to determine the amount of capital allocable 

to its U.S. permanent establishment, in lieu of determining its allocable capital under the risk-weighted capital allocation method provided by the Convention, even if it has otherwise chosen to apply 

the principles of Article 7 rather than the effectively connected income rules of U.S. domestic law. 

Paragraph 3 

Paragraph 3 provides that where, in accordance with paragraph 

2, a Contracting State adjusts the profits that are attributable to 

a permanent establishment of an enterprise of one of the Contracting States and taxes accordingly profits of the enterprise that 

have been charged to tax in the other State, the other Contracting 

State shall, to the extent necessary to eliminate double taxation, 

make an appropriate adjustment if it agrees with the adjustment 

made by the first-mentioned State. If the other Contracting state 

does not so agree, the Contracting States shall eliminate any double taxation resulting therefrom by mutual agreement. 

Paragraph 4 

Paragraph 4 coordinates the provisions of Article 7 and other 

provisions of the Convention. Under this paragraph, when business 

profits include items of income that are dealt with separately under 

other articles of the Convention, the provisions of those articles 

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

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

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

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

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

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

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


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

on a gross basis under Article 10. 

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

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

residence of the enterprise regardless of whether it is attributable 

to a permanent establishment situated in the source State. 

Paragraph 5 

Paragraph 5 incorporates into the Convention the principles of 

Code section 864(c)(6), but not section 864(c)(7). Like the Code section on which it is based, paragraph 5 provides that any income or 

gain attributable to a permanent establishment during its existence, following the rules of paragraph 2 and 3, is taxable in the 

Contracting State where the permanent establishment is situated, 

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

the permanent establishment ceases to exist. This rule applies with 

respect to paragraphs 1 and 2 of Article 7(Business Profits), paragraph 6 of Article 10 (Dividends), paragraph 6 of Article 11 (Interest), paragraph 4 of Articles 13 (Royalties) and 14 (Gains) and 

paragraph 2 of Article 21 (Other Income). 

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

State and that maintains a permanent establishment in the United 

States winds up the permanent establishment’s business and sells 

the permanent establishment’s inventory to a U.S. buyer prior to 

winding up in exchange for an interest-bearing installment obligation payable in full at the end of year 3. Despite the fact that Article 14’s threshold requirement for U.S. taxation is not met in year 

3 because the company has no permanent establishment in the 

United States, the United States may tax the deferred income recognized by the company in year 3. 

Relationship to Other Articles 

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

States who is a resident of the other Contracting State under the 

treaty derives business profits from the United States that are not 

attributable to a permanent establishment in the United States, 

the United States may, subject to the special foreign tax credit 

rules of paragraph 4 of Article 23 (Relief from Double Taxation), 

tax those profits, notwithstanding the provision of paragraph 1 of 

this Article which would exempt the income from U.S. tax. 

The benefits of this Article are also subject to Article 22 (Limitation on Benefits). Thus, an enterprise of the other Contracting 

State and that derives income effectively connected with a U.S. 

trade or business may not claim the benefits of Article 7 unless the 

resident carrying on the enterprise qualifies for such benefits under 

Article 22. 


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ARTICLE 8 (SHIPPING AND AIR TRANSPORT)

This Article governs the taxation of profits from the operation of 

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

traffic’’ is defined in subparagraph 1(f) of Article 3 (General Definitions). 

Paragraph 1 

Paragraph 1 provides that profits derived by an enterprise of a 

Contracting State from the operation in international traffic of 

ships or aircraft are taxable only in that Contracting State. Because paragraph 4 of Article 7 (Business Profits) defers to Article 

8 with respect to taxation of shipping income, such income derived 

by a resident of one of the Contracting States may not be taxed in 

the other State even if the enterprise has a permanent establishment in that other State. Thus, if a U.S. airline has a ticket office 

in Poland, Poland may not tax the airline’s profits attributable to 

that office under Article 7. Since entities engaged in international 

transportation activities normally will have many permanent establishments in a number of countries, the rule avoids difficulties 

that would be encountered in attributing income to multiple permanent establishments if the income were covered by Article 7. 

Paragraph 2 

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

In addition to income derived directly from the operation of ships 

and aircraft in international traffic, this definition also includes 

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

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

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

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

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

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

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

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

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

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

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

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

Paragraph 2 also clarifies, consistent with the Commentary to 

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

from the inland transport of property or passengers within either 

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

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

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


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

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

apply to all of the income derived from a contract for the international transport of goods, even if the goods were transported to 

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

international waters. 

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

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

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

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

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

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

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

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

the provision of such goods and services to other enterprises will 

fall under this paragraph. 

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

for the purposes of reducing the costs of maintaining facilities 

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

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

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

traffic by the enterprise. 

Also, advertising that the enterprise may do for other enterprises 

in magazines offered aboard ships or aircraft that it operates in 

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

generated by such advertising fall within this paragraph. Income 

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

These interpretations of paragraph 1 also are consistent with the 

Commentary to Article 8 of the OECD Model. 

Paragraph 3 

Under this paragraph, profits of an enterprise of a Contracting 

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

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

Contracting State if such use, maintenance or rental, as the case 

may be, is incidental to the operation of ships or aircraft in international traffic. This treatment is consistent with the Commentary 

to Article 8 of the OECD Model, although it is narrower than the 

treatment under the U.S. Model, which provides for exclusive residence tax of such profits regardless of whether the recipient of the 

income is engaged in the operation of ships or aircraft in international traffic, and regardless of whether the enterprise has a permanent establishment in the other Contracting State. 


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Paragraph 4 

This paragraph clarifies that the provisions of paragraphs 1 and 

3 also apply to profits derived by an enterprise of a Contracting 

State from participation in a pool, joint business or international 

operating agency. This refers to various arrangements for international cooperation by carriers in shipping and air transport. For 

example, airlines from two countries may agree to share the transport of passengers between the two countries. They each will fly 

the same number of flights per week and share the revenues from 

that route equally, regardless of the number of passengers that 

each airline actually transports. Paragraph 4 makes clear that with 

respect to each carrier the income dealt with in the Article corresponds to that carrier’s share of the total transport, not the income derived from the passengers actually carried by the airline. 

This paragraph corresponds to paragraph 4 of Article 8 of the 

OECD Model. 

Relationship to Other Articles 

The taxation of gains from the alienation of ships, aircraft or containers is not dealt with in this Article but in paragraph 5 of Article 14 (Capital Gains). 

As with other benefits of the Convention, the benefit of exclusive 

residence country taxation under Article 8 is available to an enterprise only if it is entitled to benefits under Article 22 (Limitation 

on Benefits). 

This Article also is subject to the saving clause of paragraph 4 

of Article 1 (General Scope) of the Model. Thus, if a citizen of the 

United States who is a resident of Poland derives profits from the 

operation of ships or aircraft in international traffic, notwithstanding the exclusive residence country taxation in paragraph 1 

of Article 8, the United States may, subject to the special foreign 

tax credit rules of paragraph 4 of Article 23 (Relief from Double 

Taxation), tax those profits as part of the worldwide income of the 

citizen. (This is an unlikely situation, however, because non-tax 

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

ARTICLE 9 (ASSOCIATED ENTERPRISES)

This Article incorporates into the Convention the arm’s-length 

principle reflected in the U.S. domestic transfer pricing provisions, 

particularly Code section 482. It provides that when related enterprises engage in a transaction on terms that are not arm’s-length, 

the Contracting States may make appropriate adjustments to the 

taxable income and tax liability of such related enterprises to reflect what the income and tax of these enterprises with respect to 

the transaction would have been had there been an arm’s-length 

relationship between them. 

Paragraph 1 

This paragraph is essentially the same as its counterpart in the 

OECD Model. It addresses the situation where an enterprise of a 

Contracting State is related to an enterprise of the other Contracting State, and there are arrangements or conditions imposed 


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between the enterprises in their commercial or financial relations 

that are different from those that would have existed in the absence of the relationship. Under these circumstances, the Contracting States may adjust the income (or loss) of the enterprise to 

reflect what it would have been in the absence of such a relationship. 

The paragraph identifies the relationships between enterprises 

that serve as a prerequisite to application of the Article. As the 

Commentary to the OECD Model makes clear, the necessary element in these relationships is effective control, which is also the 

standard for purposes of Code section 482. Thus, the Article applies 

if an enterprise of one State participates directly or indirectly in 

the management, control, or capital of the enterprise of the other 

State. Also, the Article applies if any third person or persons participate directly or indirectly in the management, control or capital 

of enterprises of different States. For this purpose, all types of control are included, i.e., whether or not legally enforceable and however exercised or exercisable. 

The fact that a transaction is entered into between such related 

enterprises does not, in and of itself, mean that a Contracting State 

may adjust the income (or loss) of one or both of the enterprises 

under the provisions of this Article. If the conditions of the transaction are consistent with those that would be made between independent persons, the income arising from that transaction should 

not be subject to adjustment under this Article. 

Similarly, the fact that associated enterprises may have concluded arrangements, such as cost sharing arrangements or general services agreements, is not in itself an indication that the two 

enterprises have entered into a non-arm’s-length transaction that 

should give rise to an adjustment under paragraph 1. Both related 

and unrelated parties enter into such arrangements (e.g., joint venturers may share some development costs). As with any other kind 

of transaction, when related parties enter into an arrangement, the 

specific arrangement must be examined to see whether or not it 

meets the arm’s-length standard. In the event that it does not, an 

appropriate adjustment may be made, which may include modifying the terms of the agreement or re-characterizing the transaction to reflect its substance. 

It is understood that the Code section 482 ‘‘commensurate with 

income’’ standard for determining appropriate transfer prices for 

intangibles operates consistently with the arm’s-length standard. 

The implementation of this standard in the regulations under Code 

section 482 is in accordance with the general principles of paragraph 1 of Article 9 of the Convention, as interpreted by the OECD 

Transfer Pricing Guidelines. 

This Article also permits tax authorities to deal with thin capitalization issues. They may, in the context of Article 9, scrutinize 

more than the rate of interest charged on a loan between related 

persons. They also may examine the capital structure of an enterprise, whether a payment in respect of that loan should be treated 

as interest, and, if it is treated as interest, under what circumstances interest deductions should be allowed to the payor. 

Paragraph 2 of the Commentary to Article 9 of the OECD Model, 

together with the U.S. observation set forth in paragraph 15, sets 


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forth a similar understanding of the scope of Article 9 in the context of thin capitalization. 

Paragraph 2 

When a Contracting State has made an adjustment that is consistent with the provisions of paragraph 1, and the other Contracting State agrees that the adjustment was appropriate to reflect arm’s-length conditions, that other Contracting State is obligated to make a correlative adjustment (sometimes referred to as 

a ‘‘corresponding adjustment’’) to the tax liability of the related person in that other Contracting State. Although the OECD Model 

does not specify that the other Contracting State must agree with 

the initial adjustment before it is obligated to make the correlative 

adjustment, the Commentary makes clear that the paragraph is to 

be read as such. 

As explained in the Commentary to Article 9 of the OECD Model, 

Article 9 leaves the treatment of ‘‘secondary adjustments’’ to the 

laws of the Contracting States. When an adjustment under Article 

9 has been made, one of the parties will have in its possession 

funds that it would not have had at arm’s length. The question 

arises as to how to treat these funds. In the United States the general practice is to treat such funds as a dividend or contribution to 

capital, depending on the relationship between the parties. Under 

certain circumstances, the parties may be permitted to restore the 

funds to the party that would have the funds had the transactions 

been entered into on arm’s length terms, and to establish an account payable pending restoration of the funds. See Rev. Proc. 99- 

32, 1999-2 C.B. 296. 

The Contracting State making a secondary adjustment will take 

the other provisions of the Convention, where relevant, into account. For example, if the effect of a secondary adjustment is to 

treat a U.S. corporation as having made a distribution of profits to 

its parent corporation in the other Contracting State, the provisions of Article 10 (Dividends) will apply, and the United States 

may impose a 5 percent withholding tax on the dividend. Also, if 

under Article 23 (Elimination of Double Taxation), Poland generally gives a credit for taxes paid with respect to such dividends, 

it would also be required to do so in this case. 

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

made by a Contracting State under paragraph 1 was appropriate. 

If a correlative adjustment is made under paragraph 2, it is to 

be implemented, pursuant to paragraph 2 of Article 25 (Mutual 

Agreement Procedure), notwithstanding any time limits or other 

procedural limitations in the law of the Contracting State making 

the adjustment. Thus, even if a statute of limitations has expired, 

a refund of tax can be made in order to implement a correlative 

adjustment (statutory or procedural limitations, however, cannot be 

overridden to impose additional tax, pursuant to paragraph 2 of Article 1 (General Scope)). If a taxpayer has entered a closing agreement (or other written settlement) with the United States prior to 

bringing a case to the competent authorities, the U.S. competent 


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authority will endeavor only to obtain a correlative adjustment 

from the other Contracting State. See Rev Proc. 2006-54, 2006-2 

C.B. 1035, δ 7.05 (or any applicable successor procedures). 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 does not apply to 

paragraph 2 of Article 9 by virtue of an exception to the saving 

clause in subparagraph 5(a) of Article 1. This permits the competent authorities of the Contracting States to make any adjustments necessary to relieve double taxation pursuant to the mutual 

agreement procedure. 

ARTICLE 10 (DIVIDENDS)

Article 10 provides rules for the taxation of dividends paid by a 

company that is a resident of one Contracting State to a beneficial 

owner that is a resident of the other Contracting State. The Article 

provides for full residence-State taxation of such dividends and a 

limited source-State right to tax. Article 10 also provides rules for 

the imposition of a tax on branch profits by the State of source. Finally, the Article prohibits a State from imposing taxes on a company resident in the other Contracting State, other than a branch 

profits tax as provided in Article 12 (Branch Profits), on undistributed earnings. 

Paragraph 1 

Paragraph 1 permits a Contracting State to tax its residents on 

dividends paid to them by a company that is a resident of the other 

Contracting State. For dividends from any other source paid to a 

resident, Article 21 (Other Income) grants the residence country exclusive taxing jurisdiction (other than for dividends attributable to 

a permanent establishment in the other State). 

Paragraph 2 

The State of source also may tax dividends beneficially owned by 

a resident of the other State, subject to the limitations of paragraphs 2 and 3. Paragraph 2 generally limits the rate of withholding tax in the State of source on dividends paid by a company 

resident in that State to 15 percent of the gross amount of the dividend. If, however, the beneficial owner of the dividend is a company resident in the other State and owns directly shares representing at least 10 percent of the voting power of the company 

paying the dividend, then the rate of withholding tax in the State 

of source is limited to 5 percent of the gross amount of the dividend. For application of this paragraph by the United States, 

shares are considered voting stock if they provide the power to 

elect, appoint or replace any person vested with the powers ordinarily exercised by the board of directors of a U.S. corporation. 

The determination of whether the ownership threshold for subparagraph 2(a) is met for purposes of the 5 percent maximum rate 

of withholding tax is made on the date on which entitlement to the 

dividend is determined. Thus, in the case of a dividend from a U.S. 

company, the determination of whether the ownership threshold is 

met generally would be made on the dividend record date. 


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Paragraph 2 does not affect the taxation of the profits out of 

which the dividends are paid. The taxation by a Contracting State 

of the income of its resident companies is governed by the domestic 

law of the Contracting State, subject to the provisions of paragraph 

4 of Article 24 (Non-Discrimination). 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, generally defined under the domestic law of the 

country imposing tax (i.e., the source country). The beneficial 

owner of the dividend for purposes of Article 10 is the person to 

which the income is attributable under the laws of the source 

State. Thus, if a dividend paid by a corporation that is a resident 

of one of the States (as determined under Article 4 (Residence)) is 

received by a nominee or agent that is a resident of the other State 

on behalf of a person that is not a resident of that other State, the 

dividend is not entitled to the benefits of this Article. However, a 

dividend received by a nominee on behalf of a resident of that other 

State would be entitled to benefits. These limitations are confirmed 

by paragraphs 12-12.2 of the Commentary to Article 10 of the 

OECD Model. 

Special rules apply to shares held through fiscally transparent 

entities both for purposes of determining whether the ownership 

threshold has been met and for purposes of determining the beneficial owner of the dividend. A company that is a resident of a Contracting State shall be considered to own directly the voting stock 

owned by an entity that is considered fiscally transparent under 

the laws of that State and that is not a resident of the other Contracting State of which the company paying the dividends is a resident, in proportion to the company’s ownership interest in that entity. This is consistent with the rules of paragraph 6 of Article 1 

(General Scope), which provides that residence State principles 

shall be used to determine who derives the dividends, to assure 

that the dividends for which the source State grants benefits of the 

Convention will be taken into account for tax purposes by a resident of the residence State. For example, assume that FCo, a company that is a resident of Poland, owns a 50 percent interest in FP, 

a partnership that is organized in Poland. FP owns 100 percent of 

the sole class of stock of USCo, a company resident in the United 

States. Poland views FP as fiscally transparent under its domestic 

law, and taxes FCo currently on its distributive share of the income 

of FP and determines the character and source of the income received through FP in the hands of FCo as if such income were realized directly by FCo. In this case, FCo is treated as deriving 50 

percent of the dividends paid by USCo under paragraph 6 of Article 

1. Moreover, FCo is treated as owning 50 percent of the stock of 

USCo directly. The same result would be reached even if the tax 

laws of the United States would treat FP differently (e.g., if FP 

were not treated as fiscally transparent in the United States). If FP 

were organized in a third state, is not viewed as fiscally transparent under U.S. law, and would be eligible for benefits with respect to the dividend under a tax treaty between the United States 

and the third state, paragraph 6 of Article 1 provides that FCo is 

treated as deriving 50 percent of the dividends paid by USCo only 

if the applicable dividend withholding rate provided under the Convention (5 percent) is more favorable than the applicable dividend 


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withholding rate that FP could claim with respect to the dividend 

in its own right under the tax treaty between the United States 

and the third country. While residence State principles control who 

is treated as owning voting stock of the company paying dividends 

through a fiscally transparent entity and, consequently, who derives the dividends, source State principles of beneficial ownership 

apply to determine whether the person who derives the dividends, 

or another resident of the other Contracting State, is the beneficial 

owner of the dividends. If the person who derives the dividends 

under paragraph 6 of Article 1 would not be treated as a nominee, 

agent, custodian, conduit, etc. under the source State’s principles 

for determining beneficial ownership, that person will be treated as 

the beneficial owner of the dividends for purposes of the Convention. In the example above, FCo is required to satisfy the beneficial 

ownership principles of the United States with respect to the dividends it derives. If under the beneficial ownership principles of the 

United States, FCo is found not to be the beneficial owner of the 

dividends, FCo will not be entitled to the benefits of Article 10 with 

respect to such dividends. If FCo is found to be a nominee, agent, 

custodian, or conduit for a person who is a resident of Poland, that 

person may be entitled to benefits with respect to the dividends. 

Paragraph 3 

Paragraph 3 provides that dividends beneficially owned by a pension fund may not be taxed in the Contracting State of which the 

company paying the tax is a resident, unless such dividends are derived from the carrying on of a business, directly or indirectly, by 

the pension fund or through an associated enterprise. For purposes 

of application of this paragraph by the United States, the term 

‘‘trade or business’’ shall be defined in accordance with Code section 513(c). The term ‘‘pension fund’’ is defined in subparagraph 

1(k) of Article 3 (General Definitions). Paragraph 4 Paragraph 4 

imposes limitations on the rate reductions provided by paragraphs 

2 and 3 in the case of dividends paid by a RIC or a REIT. The first 

sentence of subparagraph 4(a) provides that dividends paid by a 

RIC or REIT are not eligible for the 5 percent rate of withholding 

tax of subparagraph 2(a). The second sentence of subparagraph 

4(a) provides that the 15 percent maximum rate of withholding tax 

of subparagraph 2(b) applies to dividends paid by RICs and that 

the elimination of source-country withholding tax of paragraph 3 

applies to dividends paid by RICs and beneficially owned by a pension fund. The third sentence of subparagraph 4(a) provides that 

the 15 percent rate of withholding tax also applies to dividends 

paid by a REIT and that the elimination of source-country withholding tax of paragraph 3 applies to dividends paid by REITs and 

beneficially owned by a pension fund, provided that one of the 

three following conditions is met. First, the beneficial owner of the 

dividend is an individual or a pension fund, in either case holding 

an interest of not more than 10 percent in the REIT. Second, the 

dividend is paid with respect to a class of stock that is publicly 

traded and the beneficial owner of the dividend is a person holding 

an interest of not more than 5 percent of any class of the REIT’s 

shares. Third, the beneficial owner of the dividend holds an interest in the REIT of not more than 10 percent and the REIT is ‘‘diversified.’’ Subparagraph 4(b) provides a definition of the term ‘‘diVerDate Mar 15 2010 03:07 Jul 18, 2014 Jkt 039119 PO 00000 Frm 00041 Fmt 6602 Sfmt 6602 E:\HR\OC\ER011.XXX ER011

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versified.’’ A REIT is diversified if the gross value of no single interest in real property held by the REIT exceeds 10 percent of the 

gross value of the REIT’s total interest in real property. Section 

856(e) foreclosure property is not considered an interest in real 

property, and a REIT holding a partnership interest is treated as 

owning its proportionate share of any interest in real property held 

by the partnership. Subparagraph 4(c) provides that the rules of 

paragraph 4 shall apply to dividends paid by companies resident in 

Poland that the competent authorities have determined by mutual 

agreement are similar to a RIC or a REIT. Paragraph 5 

Paragraph 5 defines the term dividends broadly and flexibly. The 

definition is intended to cover all arrangements that yield a return 

on an equity investment in a corporation as determined under the 

tax law of the state of source, as well as arrangements that might 

be developed in the future. 

The term includes income from shares, or other corporate rights 

that are not treated as debt under the law of the source State, that 

participate in the profits of the company. The term also includes 

income that is subjected to the same tax treatment as income from 

shares by the law of the State of source. Thus, a constructive dividend that results from a non-arm’s length transaction between a 

corporation and a related party is a dividend. In the case of the 

United States the term dividend includes amounts treated as a dividend under U.S. law upon the sale or redemption of shares or 

upon a transfer of shares in a reorganization. See Rev. Rul. 92-85, 

1992-2 C.B. 69 (sale of foreign subsidiary’s stock to U.S. sister company is a deemed dividend to extent of the subsidiary’s and sister 

company’s earnings and profits). Further, a distribution from a 

U.S. publicly traded limited partnership, which is taxed as a corporation under U.S. law, is a dividend for purposes of Article 10. 

However, a distribution by a limited liability company is not taxable by the United States under Article 10, provided the limited liability company is not characterized as an association taxable as a 

corporation under U.S. law. 

Finally, a payment denominated as interest that is made by a 

thinly capitalized corporation may be treated as a dividend to the 

extent that the debt is recharacterized as equity under the laws of 

the source State. 

Paragraph 6 

Paragraph 6 provides a rule for taxing dividends paid with respect to holdings that form part of the business property of a permanent establishment. In such case, the rules of Article 7 (Business Profits) shall apply. Accordingly, the dividends will be taxed 

on a net basis using the rates and rules of taxation generally applicable to residents of the State in which the permanent establishment is located, as such rules may be modified by the Convention. 

An example of dividends paid with respect to the business property 

of a permanent establishment would be dividends derived by a 

dealer in stock or securities from stock or securities that the dealer 

held for sale to customers. 


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Paragraph 7 

The right of a Contracting State to tax dividends paid by a company that is a resident of the other Contracting State is restricted 

by paragraph 7 to cases in which the dividends are paid to a resident of that Contracting State or are attributable to a permanent 

establishment in that Contracting State. Thus, a Contracting State 

may not impose a ‘‘secondary’’ withholding tax on dividends paid by 

a nonresident company out of earnings and profits from that Contracting State. The paragraph also restricts the right of a Contracting State to impose corporate level taxes on undistributed 

profits, other than a branch profits tax. The paragraph does not restrict a State’s right to tax its resident shareholders on undistributed earnings of a corporation resident in the other State. Thus, 

the authority of the United States to impose taxes on subpart F income and on earnings deemed invested in U.S. property, and its 

tax on income of a passive foreign investment company that is a 

qualified electing fund is in no way restricted by this provision. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 4 of Article 1 

permits the United States to tax its residents and citizens, subject 

to the special foreign tax credit rules of paragraph 4 of Article 23 

(Elimination of Double Taxation), as if the Convention had not 

come into effect. 

Rules regarding the application of branch profits taxes are found 

in Article 12 (Branch Profits). 

The benefits of this Article are also subject to the provisions of 

Article 22 (Limitation on Benefits). Thus, if a resident of Poland is 

the beneficial owner of dividends paid by a U.S. corporation, that 

shareholder must qualify for treaty benefits under at least one of 

the tests of Article 22 in order to receive the benefits of this Article. 

ARTICLE 11 (INTEREST)

Article 11 specifies the taxing jurisdictions over interest income 

of the States of source and residence and defines the terms necessary to apply the Article. 

Paragraph 1 

Paragraph 1 grants the Contracting State of residence the nonexclusive right to tax interest beneficially owned by its residence 

and arising in the other Contracting State. 

Paragraph 2 

Paragraph 2 provides that the State of source may also tax interest beneficially owned by a resident of the other Contracting State, 

but limits the rate of tax to 5 percent of the gross amount of the 

interest. 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined under the domestic law of the State of 

source. The beneficial owner of the interest for purposes of Article 

11 is the person to which the income is attributable under the laws 

of the source State. Thus, if interest arising in a Contracting State 


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is received by a nominee or agent that is a resident of the other 

State on behalf of a person that is not a resident of that other 

State, the interest is not entitled to the benefits of Article 11. However, interest received by a nominee on behalf of a resident of that 

other State would be entitled to benefits. These limitations are confirmed by paragraph 9 of the OECD Commentary to Article 11. 

Special rules apply to interest derived through fiscally transparent entities for purposes of determining the beneficial owner of 

the interest. In such cases, residence State principles shall be used 

to determine who derives the interest, to assure that the interest 

for which the source State grants benefits of the Convention will 

be taken into account for tax purposes by a resident of the residence State. For example, assume that FCo, a company that is a 

resident of Poland, owns a 50 percent interest in FP, a partnership 

that is organized in Poland. FP receives interest arising in the 

United States. Poland views FP as fiscally transparent under its 

domestic law, and taxes FCo currently on its distributive share of 

the income of FP and determines the character and source of the 

income received through FP in the hands of FCo as if such income 

were realized directly by FCo. In this case, FCo is treated as deriving 50 percent of the interest received by FP that arises in the 

United States under paragraph 6 of Article 1. The same result 

would be reached even if the tax laws of the United States would 

treat FP differently (e.g., if FP were not treated as fiscally transparent in the United States). If FP were organized in a third state, 

were not viewed as fiscally transparent under U.S. law, and would 

be eligible for benefits with respect to the interest under a tax treaty between the United States and the third state, paragraph 6 of 

Article 1 provides that FCo is treated as deriving 50 percent of the 

interest paid by USCo only if the applicable interest withholding 

rate provided under the Convention is more favorable than the applicable interest withholding rate that FP could claim with respect 

to the interest in its own right under the tax treaty between the 

United States and the third country. While residence State principles control who is treated as deriving the interest, source State 

principles of beneficial ownership apply to determine whether the 

person who derives the interest, or another resident of the other 

Contracting State, is the beneficial owner of the interest. If the person who derives the interest under paragraph 6 of Article 1 would 

not be treated as a nominee, agent, custodian, conduit, etc. under 

the source State’s principles for determining beneficial ownership, 

that person will be treated as the beneficial owner of the interest 

for purposes of the Convention. In the example above, FCo is required to satisfy the beneficial ownership principles of the United 

States with respect to the interest it derives. If under the beneficial 

ownership principles of the United States, FCo is found not to be 

the beneficial owner of the interest, FCo will not be entitled to the 

benefits of Article 11 with respect to such interest. If FCo is found 

to be a nominee, agent, custodian, or conduit for a person who is 

a resident of Poland, that person may be entitled to benefits with 

respect to the interest. 


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Paragraph 3 

Paragraph 3 provides that notwithstanding the provisions of 

paragraph 2, interest described in paragraph 1 shall be taxable 

only in the Contracting State in which the recipient is a resident 

if the beneficial owner of the interest is a resident of that State and 

either: (1) is that Contracting State or the central bank, a political 

subdivision, local authority or statutory body thereof; (2) the interest is paid by the Contracting State in which the interest arises or 

by the central bank, a political subdivision, local authority or statutory body thereof; (3) the interest is paid in respect of a loan, debtclaim or credit that is owed to, or made, provided, guaranteed or 

insured by that Contracting State or a political subdivision, local 

authority, statutory body or export financing agency thereof; (4) is 

a pension fund, but only if the pension fund does not derive the interest from the carrying on of a business, directly or indirectly, or 

is (5) either: (a) a bank; (b) an insurance company; (c) an enterprise 

(other than a bank) that is unrelated to the payer of the interest 

and that substantially derives its gross income from the active and 

regular conduct of a lending or finance business. Clause (iii) of subparagraph 3(e) provides the following non-exhaustive list of activities that for purposes of subparagraph 3(e) are considered a lending 

or finance business: (1) making loans; (2) purchasing or discounting 

accounts receivable, notes or installment obligations; (3) engaging 

in finance leasing (including purchasing, servicing, and disposing of 

finance leases and related leased assets); (4) issuing letters of credit or providing guarantees; or (5) providing charge and credit card 

services. 

Paragraph 4 

Paragraph 4 provides anti-abuse exceptions to paragraphs 2 and 

3 for two classes of interest payments. 

The first class of interest, dealt with in subparagraph 4(a), is socalled contingent interest. Under this provision, interest arising in 

one of the Contracting States that is determined with reference to 

receipts, sales, income, profits or other cash flows of the debtor or 

a related person, to any change in the value of any property of the 

debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor or a related person 

also may be taxed in the State in which it arises, and according 

to the laws of that State. If the beneficial owner is a resident of 

the other Contracting State, however, the gross amount of the interest may be taxed at a rate not exceeding 15 percent of the gross 

amount of the payment. With respect to such interest arising in the 

United States, subparagraph 4(a) refers to contingent interest of a 

type described in Code section 871(h)(4)(C), including the exceptions of that section where applicable. 

The second class of interest that is dealt with in subparagraph 

4(b), in the case of the United States, is excess inclusions from U.S. 

real estate mortgage investment conduits (‘‘REMICs’’). Subparagraph 4(b) serves as a backstop to Code section 860G(b). That section generally requires that a foreign person holding a residual interest in a REMIC take into account for U.S. tax purposes ‘‘any excess inclusion’’ and ‘‘amounts includible.’’ . . . [under the REMIC 


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provisions] when paid or distributed (or when the interest is disposed of) . . . .’’ 

Without a full tax at source, non-U.S. transferees of residual interests would have a competitive advantage over U.S. transferees 

at the time these interests are initially offered. Absent this rule, 

the United States would suffer a revenue loss with respect to mortgages held in a REMIC because of opportunities for tax avoidance 

created by differences in the timing of taxable and economic income 

produced by such interests. In many cases, the transfer to the foreign person is simply disregarded under Treas. Reg. 1.860G-3. Subparagraph 4(b) also provides that excess inclusions from REMICs 

are not considered ‘‘other income’’ subject to Article 21 (Other Income) of the Convention. Paragraph 5 

The term ‘‘interest’’ as used in Article 11 is defined in paragraph 

5 to include, inter alia, income from debt claims of every kind, 

whether or not secured by a mortgage. Penalty charges for late 

payment are excluded from the definition of interest. Interest that 

is paid or accrued subject to a contingency is within the ambit of 

Article 11. This definition includes income from a debt obligation 

carrying the right to participate in profits. The term does not, however, include amounts treated as dividends under Article 10 (Dividends). 

The term interest also includes amounts which under the taxation law of the Contracting State in which the income arises are 

assimilated to income from money lent. This wording is to be interpreted consistently with the U.S. Model reference to ‘‘amounts subject to the same tax treatment as income from money lent under 

the law of the State in which the income arises.’’ Thus, for purposes of the Convention, amounts that the United States will treat 

as interest include (i) the difference between the issue price and 

the stated redemption price at maturity of a debt instrument (i.e., 

original issue discount (.’’ID.’’), which may be wholly or partially realized on the disposition of a debt instrument (section 1273), (ii) 

amounts that are imputed interest on a deferred sales contract 

(section 483), (iii) amounts treated as interest or OID under the 

stripped bond rules (section 1286), (iv) amounts treated as original 

issue discount under the below-market interest rate rules (section 

7872), (v) a partner’s distributive share of a partnership’s interest 

income (section 702), (vi) the interest portion of periodic payments 

made under a ‘‘finance lease’’ or similar contractual arrangement 

that in substance is a borrowing by the nominal lessee to finance 

the acquisition of property, (vii) amounts included in the income of 

a holder of a residual interest in a REMIC (section 860E), because 

these amounts generally are subject to the same taxation treatment as interest under U.S. tax law, and (viii) interest with respect 

to notional principal contracts that are recharacterized as loans because of a ‘‘substantial non-periodic payment.’’ 

Paragraph 6 

Paragraph 6 provides an exception to paragraphs 1, 2 and 3 in 

cases where the beneficial owner of the interest carries on business 

through a permanent establishment situated in that State and the 

debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such cases the proVerDate Mar 15 2010 03:07 Jul 18, 2014 Jkt 039119 PO 00000 Frm 00046 Fmt 6602 Sfmt 6602 E:\HR\OC\ER011.XXX ER011

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visions of Article 7 (Business Profits) will apply and the State of 

source will retain the right to impose tax on such interest income. 

In the case of a permanent establishment that once existed in a 

Contracting State but no longer exists, the provisions of this paragraph apply, by virtue of paragraph 5 of Article 7 (Business Profits), to interest paid with respect to a debt-claim that would be effectively connected to such a permanent establishment if it did 

exist in the year of payment or accrual. See the Technical Explanation of paragraph 5 of Article 7. Accordingly, such interest would 

remain taxable under the provisions of Article 7, and not under 

this Article. 

Paragraph 7 

Paragraph 7 provides a general source rule for interest. Interest 

is considered to arise in a Contracting State if paid by a resident 

of that State (including that State itself or one of its political subdivisions or local authorities). Interest that is borne by a permanent establishment in one of the Contracting States is considered 

to arise in that State. For this purpose, interest is considered to be 

borne by a permanent establishment if it is allocable to taxable income of that permanent establishment or fixed base. If the actual 

amount of interest on the books of a U.S. branch of a resident of 

Poland exceeds the amount of interest allocated to the branch 

under Treas. Reg. 1.882-5, the amount of such excess will not be 

considered U.S. source interest for purposes of this Article. 

Paragraph 8 

Paragraph 8 provides that in cases involving special relationships between the payer and the beneficial owner of interest income, Article 11 applies only to that portion of the total interest 

payments that would have been made absent such special relationships (i.e., an arm’s-length interest payment). Any excess amount 

of interest paid remains taxable according to the laws of the United 

States and the other Contracting State, respectively, with due regard to the other provisions of the Convention. Thus, if the excess 

amount would be treated under the source country’s law as a distribution of profits by a corporation, such amount could be taxed 

as a dividend rather than as interest, but the tax would be subject, 

if appropriate, to the rate limitations of paragraph 2 of Article 10 

(Dividends). 

The term ‘‘special relationship’’ is not defined in the Convention. 

In applying this paragraph the United States considers the term to 

include the relationships described in Article 9, which in turn corresponds to the definition of ‘‘control’’ for purposes of Code section 

482. 

This paragraph does not address cases where, owing to a special 

relationship between the payer and the beneficial owner or between 

both of them and some other person, the amount of the interest is 

less than an arm’s-length amount. In those cases a transaction may 

be characterized to reflect its substance and interest may be imputed consistent with the definition of ‘‘interest’’ in paragraph 3. 

The United States would apply Code section 482 or 7872 to determine the amount of imputed interest in those cases. 


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Relationship to Other Articles 

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

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

force. 

Rules regarding the application of branch-level interest taxes are 

found in Article 12 (Branch Profits). 

As with other benefits of the Convention, the benefits of Article 

11 are available to a resident of the other State only if that resident is entitled to those benefits under the provisions of Article 22 

(Limitation on Benefits). 

ARTICLE 12 (BRANCH PROFITS)

Paragraph 1 

Paragraph 1 permits a Contracting State to impose a branch 

profits tax on a company resident in the other Contracting State. 

The tax is in addition to other taxes permitted by the Convention. 

The term ‘‘company’’ is defined in subparagraph 1(b) of Article 3 

(General Definitions). A Contracting State may impose a branch 

profits tax on a company if the company has income attributable 

to a permanent establishment in that Contracting State, derives income from real property in that Contracting State that is taxed on 

a net basis under Article 6 (Income from Real Property), or realizes 

gains taxable in that State under paragraph 1 of Article 14 (Capital Gains). In the case of the United States, the imposition of such 

tax is limited, however, to the portion of the aforementioned items 

of income that represents the amount of such income that is the 

‘‘dividend equivalent amount.’’ This is consistent with the relevant 

rules under the U.S. branch profits tax, and the term dividend 

equivalent amount is defined under U.S. law. Section 884 defines 

the dividend equivalent amount as an amount for a particular year 

that is equivalent to the income described above that is included 

in the corporation’s effectively connected earnings and profits for 

that year, after payment of the corporate tax under Articles 6, 7 

(Business Profits) or 14, reduced for any increase in the branch’s 

U.S. net equity during the year or increased for any reduction in 

its U.S. net equity during the year. U.S. net equity is U.S. assets 

less U.S. liabilities. See Treas. Reg. 1.884-1. The dividend equivalent amount for any year approximates the dividend that a U.S. 

branch office would have paid during the year if the branch had 

been operated as a separate U.S. subsidiary company. In the case 

that Poland also imposes a branch profits tax, the base of its tax 

must be limited to an amount that is analogous to the dividend 

equivalent amount, and the applicable rate would be subject to the 

limitations of clause (ii) of subparagraph 1(b). 

As discussed in the Technical Explanations to Articles 1(2) and 

7(2), consistency principles prohibit a taxpayer from applying provisions of the Code and this Convention in an inconsistent manner 

in order to minimize tax. In the context of the branch profits tax, 

this consistency requirement means that if a company resident in 

Poland uses the principles of Article 7 to determine its U.S. taxable 


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income, it must then also use those principles to determine its dividend equivalent amount. Similarly, if the company instead uses the 

Code to determine its U.S. taxable income it must also use the 

Code to determine its dividend equivalent amount. As in the case 

of Article 7, if a company of Poland, for example, does not from 

year to year consistently apply the Code or the Convention to determine its dividend equivalent amount, then the company must 

make appropriate adjustments or recapture amounts that would 

otherwise be subject to U.S. branch profits tax if it had consistently 

applied the Code or the Convention to determine its dividend 

equivalent amount from year to year. 

Clause (ii) of subparagraph 1(b) provides that the branch profits 

tax shall not be imposed at a rate exceeding five percent, as provided in subparagraph 2(a) of Article 10 (Dividends). Subparagraph 

1(b) applies equally if a taxpayer determines its taxable income 

under the laws of a Contracting State or under the provisions of 

Article 7. For example, as discussed above, consistency principles 

require a company resident in Poland that determines its U.S. taxable income under the Code to also determine its dividend equivalent amount under the Code. In that case, the withholding rate reduction provided in subparagraph 2(a) of Article 10 would apply 

even though the company did not determine its dividend equivalent 

amount using the principles of Article 7. 

Paragraph 2 

Paragraph 2 permits a Contracting State to impose its branch 

level interest tax on a company resident in the other Contracting 

State. The base of this tax is the excess, if any, of the interest allocable to the profits of the company that are either attributable to 

a permanent establishment in the first-mentioned State (including 

gains under paragraph 4 of Article 14 (Capital Gains)) or subject 

to tax in the first-mentioned State under Article 6 (Income from 

Real Property) or paragraph 1 of Article 14, over the interest paid 

on indebtedness related to that permanent establishment, or in the 

case of profits subject to tax under Article 6 or paragraph 1 of Article 14, over the interest paid by that trade or business in the firstmentioned State. Such excess interest may be taxed as if it were 

interest arising in the first-mentioned State and beneficially owned 

by the resident of the other State. Thus, such excess interest may 

be taxed by the first-mentioned State at a rate not to exceed the 

applicable rates provided in paragraph 2 of Article 11 (Interest). 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation, the saving clause of paragraph 4 of Article 1 permits the 

United States to tax its residents and citizens, subject to the special foreign tax credit rules of paragraph 4 of Article 23 (Relief 

from Double Taxation), as if the Convention had not come into effect. 

The benefits of this Article are also subject to the provisions of 

Article 22 (Limitation on Benefits). 


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ARTICLE 13 (ROYALTIES)

Article 13 provides rules for the taxation of royalties arising in 

one Contracting State and paid to a beneficial owner that is a resident of the other Contracting State. 

Paragraph 1 

Paragraph 1 grants to the State of residence the non-exclusive 

right to tax royalties beneficially owned by its residents and arising 

in the other Contracting State. 

Paragraph 2 

Paragraph 2 provides that the State of source may also tax royalties, but if the beneficial owner of the royalties is a resident of the 

other Contracting State, the rate of tax shall be limited to 5 percent of the gross amount of the royalties. 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined under the domestic law of the State of 

source. The beneficial owner of the royalties for purposes of Article 

13 is the person to which the income is attributable under the laws 

of the source State. Thus, if royalties arising in a Contracting State 

are received by a nominee or agent that is a resident of the other 

State on behalf of a person that is not a resident of that other 

State, the royalties are not entitled to the benefits of Article 13. 

However, the royalties received by a nominee on behalf of a resident of that other State would be entitled to benefits. These limitations are confirmed by paragraph 4 of the OECD Commentary to 

Article 12 of the OECD Model. 

Special rules apply to royalties derived through fiscally transparent entities for purposes of determining the beneficial owner of 

the royalties. In such cases, residence State principles shall be used 

to determine who derives the royalties, to assure that the royalties 

for which the source State grants benefits of the Convention will 

be taken into account for tax purposes by a resident of the residence State. For example, assume that FCo, a company that is a 

resident of Poland, owns a 50 percent interest in FP, a partnership 

that is organized in Poland. FP receives royalties arising in the 

United States. Poland views FP as fiscally transparent under its 

domestic law, and taxes FCo currently on its distributive share of 

the income of FP and determines the character and source of the 

income received through FP in the hands of FCo as if such income 

were realized directly by FCo. In this case, FCo is treated as deriving 50 percent of the royalties received by FP that arise in the 

United States under paragraph 6 of Article 1. The same result 

would be reached even if the tax laws of the United States would 

treat FP differently (e.g., if FP were not treated as fiscally transparent in the United States). If FP were organized in a third state, 

were not viewed as fiscally transparent under U.S. law, and would 

be eligible for benefits with respect to the royalty under a tax treaty between the United States and the third state, paragraph 6 of 

Article 1 provides that FCo is treated as deriving 50 percent of the 

U.S.-source royalty only if the applicable royalty withholding rate 

provided under the Convention is more favorable than the applicable royalty withholding rate that FP could claim with respect to the 


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royalty in its own right under the tax treaty between the United 

States and the third country. While residence State principles control who is treated as deriving the royalties, source State principles 

of beneficial ownership apply to determine whether the person who 

derives the royalties, or another resident of the other Contracting 

State, is the beneficial owner of the royalties. If the person who derives the royalties under paragraph 6 of Article 1 would not be 

treated as a nominee, agent, custodian, conduit, etc. under the 

source State’s principles for determining beneficial ownership, that 

person will be treated as the beneficial owner of the royalties for 

purposes of the Convention. In the example above, FCo is required 

to satisfy the beneficial ownership principles of the United States 

with respect to the royalties it derives. If under the beneficial ownership principles of the United States, FCo is found not to be the 

beneficial owner of the royalties, FCo will not be entitled to the 

benefits of Article 13 with respect to such royalties. If FCo is found 

to be a nominee, agent, custodian, or conduit for a person who is 

a resident of Poland, that person may be entitled to benefits with 

respect to the royalties. Paragraph 3 

Paragraph 3 defines the term ‘‘royalties,’’ as used in Article 13 

with an exhaustive list of examples. Subparagraph 3(a) first defines royalties to mean payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, 

artistic scientific or other work (including cinematographic films or 

radio or television broadcasting tapes), any patent, trademark, design or model, plan, secret formula or process, or for information 

concerning industrial, commercial, or scientific experience. Subparagraph 3(b) also provides that ‘‘royalties’’ also include gain derived from the alienation of any right or property that would give 

rise to royalties, to the extent the gain is contingent on the productivity, use, or further alienation thereof. Gains that are not so contingent are dealt with under Article 14 (Capital Gains). Lastly, 

subparagraph 3(c) provides that ‘‘royalties’’ also include payments 

of any kind received as a consideration for the use of, or the right 

to use any industrial, commercial, or scientific equipment. 

The term royalties is defined in the Convention and therefore is 

generally independent of domestic law. Certain terms used in the 

definition are not defined in the Convention, but these may be defined under domestic tax law. For example, the term ‘‘secret process or formula’’ is found in the Code, and its meaning has been 

elaborated in the context of sections 351 and 367. See Rev. Rul. 55- 

17, 1955-1 C.B. 388; Rev. Rul. 64-56, 1964-1 C.B. 133; Rev. Proc. 

69-19, 1969-2 C.B. 301. 

Consideration for the use or right to use cinematographic films, 

or works on film, tape, or other means of reproduction in radio or 

television broadcasting is specifically included in the definition of 

royalties. It is intended that, with respect to any subsequent technological advances in the field of radio or television broadcasting, 

consideration received for the use of such technology will also be 

included in the definition of royalties. 

If an artist who is resident in one Contracting State records a 

performance in the other Contracting State, retains a copyrighted 

interest in a recording, and receives payments for the right to use 

the recording based on the sale or public playing of the recording, 


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then the right of such other Contracting State to tax those payments is governed by Article 13. See Boulez v. Commissioner, 83 

T.C. 584 (1984), aff’d, 810 F.2d 209 (D.C. Cir. 1986). By contrast, 

if the artist earns in the other Contracting State income covered 

by Article 17 (Entertainers and Sportsmen), for example, endorsement income from the artist’s attendance at a film screening, and 

if such income also is attributable to one of the rights described in 

Article 13 (e.g., the use of the artist’s photograph in promoting the 

screening), Article 17 and not Article 13 is applicable to such income. 

Computer software generally is protected by copyright laws 

around the world. Under the Convention, consideration received for 

the use, or the right to use, computer software is treated either as 

royalties or as business profits, depending on the facts and circumstances of the transaction giving rise to the payment. 

The primary factor in determining whether consideration received for the use, or the right to use, computer software is treated 

as royalties or as business profits is the nature of the rights transferred. See Treas. Reg. 1.861-18. The fact that the transaction is 

characterized as a license for copyright law purposes is not dispositive. For example, a typical retail sale of ‘‘shrink wrap’’ software 

generally will not be considered to give rise to royalty income, even 

though for copyright law purposes it may be characterized as a license. 

The means by which the computer software is transferred are not 

relevant for purposes of the analysis. Consequently, if software is 

electronically transferred but the rights obtained by the transferee 

are substantially equivalent to rights in a program copy, the payment will be considered business profits. 

The term ‘‘industrial, commercial, or scientific experience’’ (sometimes referred to as ‘‘know-how.’’ has the meaning ascribed to it in 

paragraph 11 et seq. of the Commentary to Article 12 of the OECD 

Model. Consistent with that meaning, the term may include information that is ancillary to a right otherwise giving rise to royalties, 

such as a patent or secret process. 

Know-how also may include, in limited cases, technical information that is conveyed through technical or consultancy services. It 

does not include general educational training of the user’s employees, nor does it include information developed especially for the 

user, such as a technical plan or design developed according to the 

user’s specifications. Thus, as provided in paragraph 11.3 of the 

Commentary to Article 12 of the OECD Model, the term ‘‘royalties’’ 

does not include payments received as consideration for after-sales 

service, for services rendered by a seller to a purchaser under a 

warranty, or for pure technical assistance. 

The term ‘‘royalties’’ also does not include payments for professional services (such as architectural, engineering, legal, managerial, medical or software development services). For example, income from the design of a refinery by an engineer (even if the engineer employed know-how in the process of rendering the design) or 

the production of a legal brief by a lawyer is not income from the 

transfer of know-how taxable under Article 13, but is income from 

services taxable under either Article 7 (Business Profits) or Article 

15 (Income from Employment) as applicable. Professional services 


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may be embodied in property that gives rise to royalties, however. 

Thus, if a professional contracts to develop patentable property and 

retains rights in the resulting property under the development contract, subsequent license payments made for those rights would be 

royalties. 

Paragraph 4 

This paragraph provides an exception to paragraphs 1 and 2 in 

cases where the beneficial owner of the royalties carries on business through a permanent establishment in the state of source and 

the right or property in respect of which the royalties are paid is 

effectively connected with such permanent establishment. In such 

cases the provisions of Article 7 (Business Profits) will apply. 

In the case of a permanent establishment that once existed in a 

Contracting State but that no longer exists, the provisions of this 

paragraph also apply, by virtue of paragraph 5 of Article 7 (Business Profits) to royalties paid with respect to rights or property 

that would be effectively connected to such permanent establishment if it did exist in the year of payment or accrual. Accordingly, 

such royalties would remain taxable under the provisions of Article 

7, and not under this Article. 

Paragraph 5 

Paragraph 5 contains the source rule for royalties. Under paragraph 5, royalties are treated as arising in a Contracting State only 

to the extent that they are in consideration for the use of, or the 

right to use, property, information or experience in that State. This 

source rule parallels the source rule in Code section 861(a)(4). 

Paragraph 6 

Paragraph 6 provides that in cases involving special relationships between the payer and beneficial owner of royalties, Article 

13 applies only to the extent the royalties would have been paid 

absent such special relationships (i.e., an arm’s-length royalty). 

Any excess amount of royalties paid remains taxable according to 

the laws of the two Contracting States, with due regard to the 

other provisions of the Convention. If, for example, the excess 

amount is treated as a distribution of corporate profits under domestic law, such excess amount will be taxed as a dividend rather 

than as royalties, but the tax imposed on the dividend payment 

will be subject to the rate limitations of paragraph 2 of Article 10 

(Dividends). 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of royalties, the saving clause of paragraph 4 of Article 1 

(General Scope) permits the United States to tax its residents and 

citizens, subject to the special foreign tax credit rules of paragraph 

4 of Article 23 (Relief from Double Taxation), as if the Convention 

had not come into force. 

As with other benefits of the Convention, the benefits of exclusive residence State taxation of royalties under paragraph 1 of Article 13 are available to a resident of the other State only if that 


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resident is entitled to those benefits under Article 22 (Limitation 

on Benefits). 

ARTICLE 14 (CAPITAL GAINS)

Article 14 assigns either primary or exclusive taxing jurisdiction 

over gains from the alienation of property to the State of residence 

or the State of source. 

Paragraph 1 

Paragraph 1 of Article 14 preserves the non-exclusive right of the 

State of source to tax gains from the alienation of real property situated in that State. 

Paragraph 2 

Paragraph 2 allows the United States to tax in accordance with 

Code section 897 gains derived by a resident of Poland that are attributable to the alienation of a United States real property interest. Under Code section 897(c) the term ‘‘United States real property interest’’ includes shares in a U.S. corporation that owns sufficient U.S. real property interests to satisfy an asset-ratio test on 

certain testing dates. The term also includes certain foreign corporations that have elected to be treated as U.S. corporations for 

this purpose. See Code section 897(i). In addition, any distribution 

made by a REIT or certain RICs is taxable under paragraph 1 of 

Article 14 (rather than under Article 10 (Dividends)) to the extent 

that it is attributable to gains derived from the alienation of U.S. 

real property interests. See Code section 897(h). 

Paragraph 3 

Paragraph 3 permits Poland to tax gains derived by a resident 

of the United States from the alienation of two categories of property. The first category is described in subparagraph 3(a) as shares, 

including rights to acquire shares, deriving more than 50 percent 

of their value directly or indirectly from real property situated in 

Poland. The second category is described in subparagraph 3(b) as 

an interest in a partnership or trust to the extent that the assets 

of the partnership or trust consist in aggregate more than 50 percent of real property situated in Poland or of shares referred to in 

subparagraph 3(a). 

Paragraph 4 

Paragraph 4 deals with the taxation of certain gains from the 

alienation of movable property forming part of the business property of a permanent establishment that an enterprise of a Contracting State has in the other Contracting State. This also includes gains from the 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 Poland that is a partner in a partnership doing 

business in the United States generally will have a permanent establishment in the United States as a result of the activities of the 

partnership, assuming that the activities of the partnership rise to 

the level of a permanent establishment. See Rev. Rul. 91-32, 1991- 

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erally may tax a partner’s distributive share of income realized by 

a partnership on the disposition of movable property forming part 

of the business property of the partnership in the United States. 

Paragraph 5 of Article 7 (Business Profits) provides that gains 

subject to paragraph 4 may be taxed in the State in which the permanent establishment is located, regardless of whether the permanent establishment exists at the time of the alienation. This rule 

incorporates the rule of Code section 864(c)(6). Accordingly, income 

that is attributable to a permanent establishment, but that is deferred and received after the permanent establishment no longer 

exists, may nevertheless be taxed by the State in which the permanent establishment was located. 

Paragraph 5 

This paragraph limits the taxing jurisdiction of the State of 

source with respect to gains from the alienation of ships or aircraft 

operated in international traffic by the enterprise alienating the 

ship or aircraft and from property (other than real property) pertaining to the operation or use of such ships or aircraft. 

Under paragraph 5, such gains are taxable only in the Contracting State in which the alienator is resident. Notwithstanding 

paragraph 4, the rules of this paragraph apply even if the income 

is attributable to a permanent establishment maintained by the enterprise in the other Contracting State. This result is consistent 

with the allocation of taxing rights under Article 8 (Shipping and 

Air Transport). 

Paragraph 6 

Paragraph 6 provides a rule similar to paragraph 5 with respect 

to gains from the alienation of containers and related personal 

property. Such gains derived by a enterprise of a Contracting State 

shall be taxable only in that Contracting State unless the containers were used for the transport of goods or merchandise solely 

within the other Contracting State. The other Contracting State 

may not tax even if the gain is attributable to a permanent establishment maintained by the enterprise in that other Contracting 

State. 

Paragraph 7 

Paragraph 6 grants to the State of residence of the alienator the 

exclusive right to tax gains from the alienation of property other 

than property referred to in paragraphs 1 through 6. For example, 

gain derived from the alienation of shares, other than shares described in paragraphs 2 or 3, debt instruments and various financial instruments, may be taxed only in the State of residence, to 

the extent such income is not otherwise characterized as income 

taxable under another article (e.g., Article 10 (Dividends) or Article 

11 (Interest)). Similarly gain derived from the alienation of tangible 

personal property, other than tangible personal property described 

in paragraph 3, may be taxed only in the State of residence of the 

alienator. 

Gain derived from the alienation of any property, such as a patent or copyright, that produces income covered by Article 13 (Royalties) is governed by the rules of Article 13 and not by this article, 


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provided that such gain is of the type described in paragraph 3(b) 

of Article 13 (i.e., it is contingent on the productivity, use, or disposition of the property). 

Gains derived by a resident of a Contracting State from real 

property located in a third state are not taxable in the other Contracting State, even if the sale is attributable to a permanent establishment located in the other Contracting State. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on taxation of certain 

gains by the State of source, the saving clause of paragraph 4 of 

Article 1 (General Scope) permits the United States to tax its citizens and residents as if the Convention had not come into effect. 

Thus, any limitation in this Article on the right of the United 

States to tax gains does not apply to gains of a U.S. citizen or resident. 

The benefits of this Article are also subject to the provisions of 

Article 22 (Limitation on Benefits). Thus, only a resident of a Contracting State that satisfies one of the conditions in Article 22 is 

entitled to the benefits of this Article. 

Paragraph 5 of Article 23 (Relief from Double Taxation) coordinates the tax systems of the Contracting States to avoid double 

taxation that could result from the imposition of exit tax regimes 

on individuals who relinquish citizenship or long-term residence 

status. 

ARTICLE 15 (INCOME FROM EMPLOYMENT)

Article 15 apportions taxing jurisdiction over remuneration derived by a resident of a Contracting State as an employee between 

the States of source and residence. 

Paragraph 1 

The general rule of Article 15 is contained in paragraph 1. Article 15 applies to any form of compensation for employment, including payments in kind. Remuneration derived by a resident of a 

Contracting State as an employee may be taxed by the State of residence, and the remuneration also may be taxed by the other Contracting State to the extent derived from employment exercised 

(i.e., services performed) in that other Contracting State. Paragraph 1 also provides that the more specific rules of Articles 16 (Directors’ Fees), 18 (Pensions, Social Security, Annuities, Alimony 

and Child Support), and 19 (Government Service) apply in the case 

of employment income described in one of those Articles. Thus, 

even though the State of source has a right to tax employment income under Article 15, it may not have the right to tax that income 

under the Convention if the income is described, for example, in 

Article 18 (Pensions, Social Security, Annuities, Alimony and Child 

Support) and is not taxable in the State of source under the provisions of that Article. 

Article 15 applies regardless of the timing of actual payment for 

services. Consequently, a person who receives the right to a future 

payment in consideration for services rendered in a Contracting 

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tracting State. Thus, a bonus paid to a resident of a Contracting 

State with respect to services performed in the other Contracting 

State with respect to a particular taxable year would be subject to 

Article 15 for that year even if it was paid after the close of the 

year. An annuity received for services performed in a taxable year 

could be subject to Article 15 despite the fact that it was paid in 

subsequent years. In that case, it would be necessary to determine 

whether the payment constitutes deferred compensation, taxable 

under Article 15, or a qualified pension subject to the rules of Article 18. Article 15 also applies to income derived from the exercise 

of stock options granted with respect to services performed in the 

host State, even if those stock options are exercised after the employee has left the host State. If Article 15 is found to apply, 

whether such payments were taxable in the State where the employment was exercised would depend on whether the tests of paragraph 2 were satisfied in the year in which the services to which 

the payment relates were performed. 

Paragraph 2 

Paragraph 2 sets forth an exception to the general rule that employment income may be taxed in the State where it is exercised. 

Under paragraph 2, the State where the employment is exercised 

may not tax the income from the employment if three conditions 

are satisfied: (a) the individual is present in the other Contracting 

State for a period or periods not exceeding 183 days in any 12- 

month period that begins or ends during the relevant taxable year 

(i.e., in the United States, the calendar year in which the services 

are performed); (b) the remuneration is paid by, or on behalf of, an 

employer who is not a resident of that other Contracting State; and 

(c) the remuneration is not borne as a deductible expense by a permanent establishment that the employer has in that other State. 

In order for the remuneration to be exempt from tax in the source 

State, all three conditions must be satisfied. This exception is identical to that set forth in the OECD Model. 

The 183-day period in subparagraph 2(a) is to be measured using 

the ‘‘days of physical presence’’ method. Under this method, the 

days that are counted include any day in which a part of the day 

is spent in the host country. (See Rev. Rul. 56-24, 1956-1 C.B. 851.) 

Thus, days that are counted include the days of arrival and departure; weekends and holidays on which the employee does not work 

but is present within the country; vacation days spent in the country before, during or after the employment period, unless the individual’s presence before or after the employment can be shown to 

be independent of his presence there for employment purposes; and 

time during periods of sickness, training periods, strikes, etc., when 

the individual is present but not working. If illness prevented the 

individual from leaving the country in sufficient time to qualify for 

the benefit, those days will not count. Also, any part of a day spent 

in the host country while in transit between two points outside the 

host country is not counted. If the individual is a resident of the 

host country for part of the taxable year concerned and a non- resident for the remainder of the year, the individual’s days of presence as a resident do not count for purposes of determining whether the 183-day period is exceeded. 


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Subparagraphs 2(b) and 2(c) are intended to ensure that a Contracting State will not be required to allow a deduction to the payor 

for compensation paid and at the same time to exempt the employee on the amount received. Accordingly, if a foreign person 

pays the salary of an employee who is employed in the host State, 

but a host State corporation or permanent establishment reimburses the payor with a payment that can be identified as a reimbursement, neither subparagraph 2(b) nor 2(c), as the case may be, 

will be considered to have been fulfilled. 

The reference to remuneration ‘‘borne by’’ a permanent establishment is understood to encompass all expenses that economically 

are incurred and not merely expenses that are currently deductible 

for tax purposes. Accordingly, the expenses referred to include expenses that are capitalizable as well as those that are currently deductible. Further, salaries paid by residents that are exempt from 

income taxation may be considered to be borne by a permanent establishment notwithstanding the fact that the expenses will be neither deductible nor capitalizable since the payor is exempt from 

tax. 

For the purpose of determining the profits attributable to a permanent establishment pursuant to paragraph 2 of Article 7 (Business Profits), the remuneration paid to an employee of an enterprise of a Contracting State for employment services rendered in 

the other State for the benefit of the permanent establishment of 

the enterprise situated in that other State may, given the circumstances, either give rise to a direct deduction or give rise to the 

deduction of a notional charge, e.g., for services rendered to the 

permanent establishment by another part of the enterprise. In the 

latter case, since the notional charge required by the legal fiction 

of the separate and independent enterprise that is applicable under 

paragraph 2 of Article 7 is merely a mechanism provided for by 

that paragraph for the sole purpose of determining the profits attributable to the permanent establishment, this fiction does not affect the determination of whether or not the remuneration is borne 

by the permanent establishment. 

Paragraph 3 

Paragraph 3 contains a special rule applicable to remuneration 

for services performed by a resident of a Contracting State as an 

employee aboard a ship or aircraft operated in international traffic. 

Such remuneration may be taxed only in the State of residence of 

the employee if the services are performed as a member of the regular complement of the ship or aircraft. The ‘‘regular complement’’ 

includes the crew. In the case of a cruise ship, for example, it may 

also include others, such as entertainers, lecturers, etc., employed 

by the shipping company to serve on the ship throughout its voyage. The use of the term ‘‘regular complement’’ is intended to clarify that a person who exercises his employment as, for example, an 

insurance salesman while aboard a ship or aircraft is not covered 

by this paragraph. 

If a U.S. citizen who is resident in Poland performs services as 

an employee in the United States and meets the conditions of paragraph 2 for source country exemption, he nevertheless is taxable in 

the United States by virtue of the saving clause of paragraph 4 of 


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Article 1 (General Scope), subject to the special foreign tax credit 

rule of paragraph 4 of Article 23 (Relief from Double Taxation). 

ARTICLE 16 (DIRECTORS’ FEES)

This Article provides that a Contracting State may tax the fees 

and other compensation paid by a company that is a resident of 

that State to an individual resident of the other Contracting State 

in his capacity as a director of the company. This rule is an exception to the more general rules of Articles 7 (Business Profits) and 

15 (Income from Employment). Thus, for example, in determining 

whether a director’s fee paid to a non-employee director is subject 

to tax in the country of residence of the corporation, it is not relevant to establish whether the fee is attributable to a permanent 

establishment in that State. 

Relationship with other Articles 

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

ARTICLE 17 (ENTERTAINERS AND SPORTSMEN)

This Article deals with the taxation in a Contracting State of entertainers and sportsmen resident in the other Contracting State 

from the performance of their services as such. The Article applies 

both to the income of an entertainer or sportsman who performs 

services on his own behalf and one who performs services on behalf 

of another person, either as an employee of that person, or pursuant to any other arrangement. The rules of this Article take precedence, in some circumstances, over those of Articles 7 (Business 

Profits) and 15 (Income from Employment). 

This Article applies only with respect to the income of entertainers and sportsmen. Others involved in a performance or athletic event, such as producers, directors, technicians, managers, 

coaches, etc., remain subject to the provisions of Articles 7 and 15. 

In addition, except as provided in paragraph 2, income earned by 

juridical persons is not covered by Article 17. 

Paragraph 1 

Paragraph 1 describes the circumstances in which a Contracting 

State may tax the performance income of an entertainer or sportsman who is a resident of the other Contracting State. Under the 

paragraph, income derived by an individual resident of a Contracting State from activities as an entertainer or sportsman exercised in the other Contracting State may be taxed in that other 

State if the amount of the gross receipts derived by the performer 

exceeds $20,000 (or its equivalent in Polish legal tender) for the 

taxable year. The $20,000 includes expenses reimbursed to the individual or borne on his behalf. If the gross receipts exceed 

$20,000, the full amount, not just the excess, may be taxed in the 

State of performance. 

The OECD Model provides for taxation by the country of performance of the remuneration of entertainers or sportsmen with no 

dollar or time threshold. This Convention introduces the monetary 

threshold to distinguish between two groups of entertainers and 

athletes—those who are paid relatively large sums of money for 


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very short periods of service, and who would, therefore, normally 

be exempt from host country tax under the standard personal services income rules, and those who earn relatively modest amounts 

and are, therefore, not easily distinguishable from those who earn 

other types of personal service income. The United States has entered a reservation to the OECD Model on this point. 

Tax may be imposed under paragraph 1 even if the performer 

would have been exempt from tax under Article 7 (Business Profits) or Article 15 (Income from Employment). On the other hand if 

the performer would be exempt from host-country tax under Article 

17, but would be taxable under either Article 7 or Article 15, tax 

may be imposed under either of those Articles. Thus, for example, 

if a performer derives remuneration from his activities in an independent capacity, and the performer does not have a permanent establishment in the host State, he may be taxed by the host State 

in accordance with Article 17 if his remuneration exceeds $20,000 

annually, despite the fact that he generally would be exempt from 

host State taxation under Article 7. However, a performer who receives less than the $20,000 threshold amount and therefore is not 

taxable under Article 17 nevertheless may be subject to tax in the 

host country under Article 7 or Article 15 if the tests for host-country taxability under the relevant Article are met. For example, if 

an entertainer who is an independent contractor earns $14,000 of 

income in a State for the calendar year, but the income is attributable to his permanent establishment in the State of performance, 

that State may tax his income under Article 7. 

Since it frequently is not possible to know until year-end whether 

the income an entertainer or sportsman derived from performances 

in a Contracting State will exceed $20,000, nothing in the Convention precludes that Contracting State from withholding tax during 

the year and refunding it after the close of the year if the taxability 

threshold has not been met. 

As explained in paragraph 9 of the Commentary to Article 17 of 

the OECD Model, Article 17 of the Convention applies to all income 

connected with a performance by the entertainer, such as appearance fees, award or prize money, and a share of the gate receipts. 

Income derived from a Contracting State by a performer who is a 

resident of the other Contracting State from other than actual performance, such as royalties from record sales and payments for 

product endorsements, is not covered by this Article, but by other 

articles of the Convention, such as Article 13 (Royalties) or Article 

7. For example, if an entertainer receives royalty income from the 

sale of live recordings, the royalty income would be exempt from 

source State tax under Article 12, even if the performance was conducted in the source country, although the entertainer could be 

taxed in the source country with respect to income from the performance itself under Article 17 if the dollar threshold is exceeded. 

In determining whether income falls under Article 17 or another 

Article, the controlling factor will be whether the income in question is predominantly attributable to the performance itself or to 

other activities or property rights. For instance, a fee paid to a performer for endorsement of a performance in which the performer 

will participate would be considered to be so closely associated with 

the performance itself that it normally would fall within Article 17. 


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Similarly, a sponsorship fee paid by a business in return for the 

right to attach its name to the performance would be so closely associated with the performance that it would fall under Article 17 

as well. As indicated in paragraph 9 of the Commentary to Article 

17 of the OECD Model, however, a cancellation fee would not be 

considered to fall within Article 16 but would be dealt with under 

Article 7 or15. 

As indicated in paragraph 4 of the Commentary to Article 17 of 

the OECD Model, where an individual fulfills a dual role as performer and non-performer (such as a player-coach or an actor-director), but his role in one of the two capacities is negligible, the predominant character of the individual’s activities should control the 

characterization of those activities. In other cases there should be 

an apportionment between the performance-related compensation 

and other compensation. 

Consistent with Article 15, Article 17 also applies regardless of 

the timing of actual payment for services. Thus, a bonus paid to 

a resident of a Contracting State with respect to a performance in 

the other Contracting State during a particular taxable year would 

be subject to Article 17 for that year even if it was paid after the 

close of the year. The determination as to whether the $20,000 

threshold has been exceeded is determined separately with respect 

to each year of payment. Accordingly, if an actor who is a resident 

of one Contracting State receives residual payments over time with 

respect to a movie that was filmed in the other Contracting State, 

the payments do not have to be aggregated from one year to another to determine whether the total payments have finally exceeded $20,000. Otherwise, residual payments received many years 

later could retroactively subject all earlier payments to tax by the 

other Contracting State. 

Paragraph 2 

Paragraph 2 is intended to address the potential for circumvention of the rule in paragraph 1 when a performer’s income does not 

accrue directly to the performer himself, but to another person. 

Foreign performers frequently perform in the United States as employees of, or under contract with, a company or other person. 

The relationship may truly be one of employee and employer, 

with no circumvention of paragraph 1 either intended or realized. 

On the other hand, the ‘‘employer’’ may, for example, be a company 

established and owned by the performer, which is merely acting as 

the nominal income recipient in respect of the remuneration for the 

performance (a ‘‘star company’’). The performer may act as an ‘‘employee,’’ receive a modest salary, and arrange to receive the remainder of the income from his performance from the company in 

another form or at a later time. In such case, absent the provisions 

of paragraph 2, the income arguably could escape host-country tax 

because the company earns business profits but has no permanent 

establishment in that country. The performer may largely or entirely escape host-country tax by receiving only a small salary, perhaps small enough to place him below the dollar threshold in paragraph 1. The performer might arrange to receive further payments 

in a later year, when he is not subject to host-country tax, perhaps 

as dividends or liquidating distributions. 


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Paragraph 2 seeks to prevent this type of abuse while at the 

same time protecting the taxpayers’ rights to the benefits of the 

Convention when there is a legitimate employee-employer relationship between the performer and the person providing his services. 

Under paragraph 2, when the income accrues to a person other 

than the performer, the income may be taxed in the Contracting 

State where the performer’s services are exercised, without regard 

to the provisions of Article 7 or Article 15, unless the contract pursuant to which the personal activities are performed allows such 

other person other than the performer to designate the individual 

who is to perform the personal activities. This rule is based on the 

U.S. domestic law provision characterizing income from certain personal service contracts as foreign personal holding company income 

in the context of the foreign personal holding company provisions. 

See Code section 954(c)(1)(I). The premise of this rule is that, in 

a case where a performer is using another person in an attempt to 

circumvent the provisions of paragraph 1, the recipient of the services of the performer would contract with a person other than that 

performer (i.e., a company employing the performer) only if the recipient of the services were certain that the performer himself 

would perform the services. If instead the person is allowed to designate the individual who is to perform the services, then likely the 

person is a service company not formed to circumvent the provisions of paragraph 1. The following example illustrates the operation of this rule. 

Example. Company O, a resident of Poland, is engaged in the 

business of operating an orchestra. Company O enters into a contract with Company A pursuant to which Company O agrees to 

carry out two performances in the United States in consideration 

of which Company A will pay Company O $200,000. The contract 

designates two individuals, a conductor and a flutist, that must 

perform as part of the orchestra, and allows Company O to designate the other members of the orchestra. Because the contract 

does not give Company O any discretion to determine whether the 

conductor or the flutist perform personal services under the contract, the portion of the $200,000 which is attributable to the personal services of the conductor and the flutist may be taxed by the 

United States pursuant to paragraph 2. The remaining portion of 

the $200,000, which is attributable to the personal services of performers that Company O may designate, is not subject to tax by 

the United States pursuant to paragraph 2. 

In cases where paragraph 2 is applicable, the income of the ‘‘employer’’ may be subject to tax in the host Contracting State even 

if it has no permanent establishment in the host country. Taxation 

under paragraph 2 is on the person providing the services of the 

performer. This paragraph does not affect the rules of paragraph 

1, which apply to the performer himself. The income taxable by virtue of paragraph 2 is reduced to the extent of salary payments to 

the performer, which fall under paragraph 1. 

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

gross income in respect of the services of the performer. 


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Since pursuant to Article 1 (General Scope) the Convention only 

applies to persons who are residents of one of the Contracting 

States, income of the star company would not be eligible for benefits of the Convention if the company is not a resident of one of the 

Contracting States. 

Relationship to Other Articles 

This Article is subject to the provisions of the saving clause of 

paragraph 4 of Article 1(General Scope). Thus, if an entertainer or 

a sportsman who is resident in Poland is a citizen of the United 

States, the United States may tax all of his income from performances in the United States without regard to the provisions of this 

Article, subject, however, to the special foreign tax credit provisions 

of paragraph 4 of Article 23 (Relief from Double Taxation). In addition, benefits of this Article are subject to the provisions of Article 

22 (Limitation on Benefits). 

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

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

Paragraph 1 

Paragraph 1 provides that distributions from pensions, annuities 

and other similar payments beneficially owned by a resident of a 

Contracting State in consideration of past employment are taxable 

only in the State of residence of the beneficiary. The terms ‘‘pensions’’ and ‘‘other similar payments’’ include both periodic and single sum payments. 

The terms ‘‘pensions’’ and ‘‘other similar payments’’ are intended 

to encompass payments made by qualified private retirement 

plans. In the United States, the plans encompassed by paragraph 

1 include: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of 

a simplified employee pension plan that satisfies section 408(k), individual retirement accounts and section 408(p) accounts), section 

403(a) qualified annuity plans, and section 403(b) plans. Distributions from section 457 plans may also fall under paragraph 1 if 

they are not paid with respect to government services covered by 

Article 19 (Government Service). 

Pensions in respect of government services covered by Article 19 

are not covered by this paragraph. They are covered either by paragraph 2 of this Article if they are in the form of social security benefits, or by paragraph 2 of Article 19. Thus, Article 19 generally 

covers section 457(g), 401(a), 403(a) and 403(b) plans established 

for government employees, including the Thrift Savings Plan (section 7701(j)). 

Paragraph 2 

Paragraph 2 contains an exception to the residence State’s right 

to tax pensions and other similar remuneration under paragraph 

1. Under paragraph 2, the State of residence must exempt from tax 

any amount of such pensions or other similar remuneration that 


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would be exempt from tax in the Contracting State in which the 

pension fund is established if the recipient were a resident of that 

State. Thus, for example, a distribution from a U.S. ‘‘Roth IRA’’ to 

a resident of Poland would be exempt from tax in Poland to the 

same extent the distribution would be exempt from tax in the 

United States if it were distributed to a U.S. resident. The same 

is true with respect to distributions from a traditional IRA to the 

extent that the distribution represents a return of non-deductible 

contributions. Similarly, if the distribution were not subject to tax 

when it was ‘‘rolled over’’ into another U.S. IRA (but not, for example, to a pension fund in the other Contracting State), then the distribution would be exempt from tax in Poland. 

Paragraph 3 

The treatment of social security benefits is dealt with in paragraph 3. This paragraph provides that, notwithstanding the provision of paragraph 1 under which private pensions are taxable exclusively in the State of residence of the beneficial owner, payments made by one of the Contracting States under the provisions 

of its social security or similar legislation to a resi-dent of the other 

Contracting State or to a citizen of the United States will be taxable only in the Contracting State making the payment. The reference to U.S. citizens is necessary to ensure that a social security 

payment by Poland to a U.S. citizen who is not resident in the 

United States will not be taxable by the United States. 

This paragraph applies to social security beneficiaries whether 

they have contributed to the system as private sector or Government employees. The phrase ‘‘similar legislation’’ is intended to 

refer to United States tier 1 Railroad Retirement benefits. 

Paragraph 4 

Paragraph 4 provides that, if a resident of a Contracting State 

participates in a pension fund established in the other Contracting 

State, the State of residence will not tax the income of the pension 

fund with respect to that resident until a distribution is made from 

the pension fund. Thus, for example, if a U.S. citizen contributes 

to a U.S. qualified plan while working in the United States and 

then establishes residence in Poland, paragraph 1 prevents Poland 

from taxing currently the plan’s earnings and accretions with respect to that individual. When the resident receives a distribution 

from the pension fund, that distribution may be subject to tax in 

Poland, the State of residence, under paragraph 1 of Article 18. 

Paragraph 4 also provides that a transfer from a pension fund located in a Contracting State to another pension fund located in 

that same State shall not be taxed by either Contracting State. 

Paragraph 5 

Paragraph 5 provides that alimony and periodic payments for the 

support of a child made pursuant to a written agreement or a decree of divorce, separate maintenance, or compulsory support paid 

by a resident of a Contracting State to a resident of the other Contracting State shall be exempt from tax in both Contracting States. 

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cree of divorce, separate maintenance or compulsory support which 

are taxable to the recipient under the laws of the State of which 

he is a resident. 

Relationship to Other Articles 

Paragraphs 1 and 4 of Article 18 are subject to the saving clause 

of paragraph 4 of Article 1 (General Scope). Thus, a U.S. citizen 

who is resident in Poland, and receives a pension distribution from 

the United States, may be subject to U.S. tax on the payment, notwithstanding the rules in the paragraphs that give the State of residence of the recipient the exclusive taxing right. Paragraphs 2, 3 

and 5 are excepted from the saving clause by virtue of subparagraph 5(a) of Article 1. Thus, the United States will not tax U.S. 

citizens and residents on the income described in those paragraphs 

even if such amounts otherwise would be subject to tax under U.S. 

law. 

ARTICLE 19 (GOVERNMENT SERVICE)

Paragraph 1 

Subparagraphs 1(a) and 1(b) deal with the taxation of government compensation (other than a pension addressed in paragraph 

2). Subparagraph 1(a) provides that remuneration paid to any individual who is rendering services to that State, political subdivision 

or local authority is exempt from tax by the other State. Under 

subparagraph 1(b), such payments are, however, taxable exclusively in the other State (i.e., the host State) if the services are rendered in that other State and the individual is a resident of that 

State who is either a national of that State or a person who did 

not become resident of that State solely for purposes of rendering 

the services. The paragraph applies to anyone performing services 

for a government, whether as a government employee, an independent contractor, or an employee of an independent contractor. 

Paragraph 2 

Paragraph 2 deals with the taxation of pensions paid by, or out 

of funds created by, one of the States, or a political subdivision or 

a local authority thereof, to an individual in respect of services rendered to that State or subdivision or authority. Subparagraph 2(a) 

provides that such pensions are taxable only in that State. Subparagraph 2(b) provides an exception under which such pensions 

are taxable only in the other State if the individual is a resident 

of, and a national of, that other State. 

Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When benefits paid by a State in respect of services rendered to that State or a subdivision or authority are in the form 

of social security benefits, however, those payments are covered by 

paragraph 3 of Article 18 (Pensions, Social Security, Annuities, Alimony, and Child Support). As a general matter, the result will be 

the same whether Article 18 or Article 19 applies, since social security benefits are taxable exclusively by the source country and so 

are government pensions. The result will differ only when the payment is made to a citizen and resident of the other Contracting 


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State, who is not also a citizen of the paying State. In such a case, 

social security benefits continue to be taxable at source while government pensions become taxable only in the residence country. 

Paragraph 3 

Paragraph 3 provides that the remuneration described in paragraph 1 will be subject to the rules of Articles 15 (Income from Employment), 16 (Directors’ Fees), 17 (Entertainers and Sportsmen) or 

18 (Pensions, Social Security, Annuities, Alimony, and Child Support) if the recipient of the income is employed by a business conducted by a government. 

Relationship to Other Articles 

Under paragraph 5(b) of Article 1 (General Scope), the saving 

clause (paragraph 4 of Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the recipient of the 

benefits is neither a citizen of that State, nor a person who has 

been admitted for permanent residence there (i.e., in the United 

States, a ‘‘green card’’ holder). Thus, a resident of a Contracting 

State who in the course of performing functions of a governmental 

nature becomes a resident of the other State (but not a permanent 

resident), would be entitled to the benefits of this Article. However, 

an individual who receives a pension paid by the Government of 

Poland in respect of services rendered to the Government of Poland 

shall be taxable on this pension only in Poland unless the individual is a U.S. citizen or acquires a U.S. green card. 

ARTICLE 20 (STUDENTS AND TRAINEES)

This Article provides rules for host-country taxation of visiting 

students (including pupils) and business trainees. Persons who 

meet the tests of the Article will be exempt from tax in the State 

that they are visiting with respect to designated classes of income. 

Several conditions must be satisfied in order for an individual to 

be entitled to the benefits of this Article. 

First, the visitor must have been, either at the time of his arrival 

in the host State or immediately before, a resident of the other 

Contracting State. 

Second, the primary purpose of the visit must be the education 

or training of the visitor. Thus, if the visitor comes principally to 

work in the host State but also is a part-time student, he would 

not be entitled to the benefits of this Article, even with respect to 

any payments he may receive from abroad for his maintenance or 

education, and regardless of whether or not he is in a degree program. If the student is engaged in full time study, the primary purpose of his visit to the host State will be deemed to have as its primary purpose education. Whether a student is to be considered 

full-time will be determined by the rules of the educational institution at which he is studying. 

Paragraph 1 

The host-country exemption in paragraph 1 applies to payments 

received by the student (including a pupil) or business trainee for 

the purpose of his maintenance, education or training that arise 

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side the host State if the payer is located outside the host State. 

Thus, if an employer from one of the Contracting States sends an 

employee to the other Contracting State for training, the payments 

the trainee receives from abroad from his employer for his maintenance or training while he is present in the host State will be exempt from tax in the host State. Where appropriate, substance prevails over form in determining the identity of the payer. Thus, for 

example, payments made directly or indirectly by a U.S. person 

with whom the visitor is training, but which have been routed 

through a source outside the United States (e.g., a foreign subsidiary), are not treated as arising outside the United States for 

this purpose. 

In the case of a business trainee, the benefits of paragraph 1 will 

extend only for a period of one year from the time that the visitor 

first arrives in the host country. If, however, a trainee remains in 

the host country for a second year, thus losing the benefits of paragraph 1, he would not retroactively lose the benefits of the paragraph for the first year. 

Paragraph 2 

Paragraph 2 provides a limited exemption for remuneration from personal services rendered in the host State up to $9,000 United 

States dollars (or its equivalent in Polish legal tender) per taxable 

year. The specified amount is intended to equalize the position of 

a U.S. resident who is entitled to the standard deduction and the 

personal exemption with that of a student who files as a non-resident alien and therefore is not entitled to such statutory benefits. 

Paragraph 3 

The term ‘‘business trainee’’ is defined as a person who is in the 

host State temporarily for the purpose of securing training that is 

necessary to qualify to pursue a profession or professional specialty. Moreover, the person must be employed or under contract 

with a resident of the other Contracting State and must be receiving the training from someone who is not related to its employer. 

Thus, a business trainee might include a lawyer employed by a law 

firm in one Contracting State who works for one year as a stagiaire 

in an unrelated law firm in the other Contracting State. However, 

the term would not include a manager who normally is employed 

by a parent company in one Contracting State who is sent to the 

other Contracting State to run a factory owned by a subsidiary of 

the parent company. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) 

does not apply to this Article with respect to an individual who is 

neither a citizen of the host State nor has been admitted for permanent residence there. The saving clause, however, does apply 

with respect to citizens and permanent residents of the host State. 

Thus, a U.S. citizen who is a resident of Poland and who visits the 

United States as a full-time student at an accredited university 

will not be exempt from U.S. tax on remittances from abroad that 

otherwise constitute U.S. taxable income. A person, however, who 

is not a U.S. citizen, and who visits the United States as a student 


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and remains long enough to become a resident under U.S. law, but 

does not become a permanent resident (i.e., does not acquire a 

green card), will be entitled to the full benefits of the Article. 

ARTICLE 21 (OTHER INCOME)

Article 21 generally assigns taxing jurisdiction over income not 

dealt with in the other Articles (Articles 6 (Income from Real Property) through Article 20 (Students and Trainees)) of the Convention 

to the State of residence of the beneficial owner of the income. In 

order for an item of income to be ‘‘dealt with’’ in another article it 

must be the type of income described in the article and, in most 

cases, it must have its source in a Contracting State. For example, 

all royalty income that arises in a Contracting State and that is 

beneficially owned by a resident of the other Contracting State is 

‘‘dealt with’’ in Article 13 (Royalties). However, profits derived in 

the conduct of a business are ‘‘dealt with’’ in Article 7 (Business 

Profits) whether or not they have their source in one of the Contracting States. 

Examples of items of income covered by Article 21 include income 

from gambling, punitive (but not compensatory) damages and covenants not to compete. Article 21 would also apply to income from 

a variety of financial transactions, where such income does not 

arise in the course of the conduct of a trade or business. For example, income from notional principal contracts and other derivatives 

would fall within Article 21 if derived by persons not engaged in 

the trade or business of dealing in such instruments, unless such 

instruments were being used to hedge risks arising in a trade or 

business. It would also apply to securities lending fees derived by 

an institutional investor. Further, in most cases guarantee fees 

paid within an intercompany group would be covered by Article 21, 

unless the guarantor were engaged in the business of providing 

such guarantees to unrelated parties. 

Article 21 also applies to items of income that are not ‘‘dealt 

with’’ in the other articles because of their source or some other 

characteristic. For example, Article 11 (Interest) addresses only the 

taxation of interest arising in a Contracting State. Interest arising 

in a third State that is not attributable to a permanent establishment, therefore, is subject to Article 21. 

Distributions from partnerships are not generally ‘‘dealt with’’ 

under Article 21 because partnership distributions generally do not 

constitute income. Under the Code, partners include in income 

their distributive share of partnership income annually, and partnership distributions themselves generally do not give rise to income. This would also be the case under U.S. law with respect to 

distributions from trusts. Trust income and distributions that, 

under the Code, have the character of the associated distributable 

net income would generally be covered by another article of the 

Convention. See Code section 641 et seq. 

Paragraph 1 

The general rule of Article 21 is contained in paragraph 1. Items 

of income not dealt with in other articles and beneficially owned by 

a resident of a Contracting State will be taxable only in the State 

of residence. This exclusive right of taxation applies whether or not 


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the residence State exercises its right to tax the income covered by 

the Article. 

The reference in this paragraph to ‘‘items of income beneficially 

owned by a resident of a Contracting State’’ rather than simply 

‘‘items of income of a resident of a Contracting State,’’ as in the 

OECD Model, is intended merely to make explicit the understanding in other treaties that the exclusive residence taxation provided by paragraph 1 applies only when a resident of a Contracting 

State is the beneficial owner of the income. Thus, source taxation 

of income not dealt with in other articles of the Convention is not 

limited by paragraph 1 if it is nominally paid to a resident of the 

other Contracting State, but is beneficially owned by a resident of 

a third State. However, income received by a nominee on behalf of 

a resident of that other State would be entitled to benefits. 

The term ‘‘beneficially owned’’ is not defined in the Convention, 

and is, therefore, defined as under the internal law of the country 

imposing tax (i.e., the source country). The person who beneficially 

owns the income for purposes of Article 21 is the person to which 

the income is attributable for tax purposes under the laws of the 

source State. 

Paragraph 2 

This paragraph provides an exception to the general rule of paragraph 1 for income from a right or property that is effectively connected to a permanent establishment maintained in a Contracting 

State by a resident of the other Contracting State. The taxation of 

such income is governed by the provisions of Article 7 (Business 

Profits). Therefore, income arising outside the United States from 

a right or property that is effectively connected to a permanent establishment maintained in the United States by a resident of the 

other Contracting State generally would be taxable by the United 

States under the provisions of Article 7. This would be true even 

if the income is sourced in a third State. 

Relationship to Other Articles 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States may tax the income 

of a resident of Poland that is not dealt with elsewhere in the Convention, if that resident is a citizen of the United States. The Article is also subject to the provisions of Article 22 (Limitation on 

Benefits). Thus, if a resident of Poland earns income that falls 

within the scope of paragraph 1 of Article 21, but that is taxable 

by the United States under U.S. law, the income would be exempt 

from U.S. tax under the provisions of Article 21 only if the resident 

satisfies one of the tests of Article 22 for entitlement to benefits. 

ARTICLE 22 (LIMITATION ON BENEFITS)

Article 22 contains anti-treaty-shopping provisions that are intended to prevent residents of third countries from benefiting from 

what is intended to be a reciprocal agreement between two countries. In general, the provision does not rely on a determination of 

purpose or intention but instead sets forth a series of objective 

tests. A resident of a Contracting State that satisfies one of the 


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tests will receive benefits regardless of its motivations in choosing 

its particular business structure. 

The structure of the revised Article is as follows: Paragraph 1 

states the general rule that residents are entitled to benefits otherwise accorded to residents only to the extent provided in the Article. Paragraph 2 lists a series of attributes of a resident of a Contracting State, the presence of any one of which will entitle that 

person to all the benefits of the Convention. Paragraph 3 provides 

a derivative benefits rule. Paragraph 4 provides that, regardless of 

whether a person qualifies for benefits under paragraph 2, benefits 

may be granted to that person with regard to certain income 

earned in the conduct of an active trade or business. Paragraph 5 

provides a test for headquarters companies. Paragraph 6 provides 

a special rule for so-called ‘‘triangular cases’’ notwithstanding the 

other provisions of the Article. Paragraph 7 provides that benefits 

also may be granted if the competent authority of the State from 

which benefits are claimed determines that it is appropriate to provide benefits in that case. Paragraph 8 defines certain terms used 

in the Article. 

Paragraph 1 

Paragraph 1 provides that a resident of a Contracting State will 

be entitled to the benefits otherwise accorded to residents of a Contracting State under the Convention only to the extent provided in 

the Article. The benefits otherwise accorded to residents under the 

Convention include all limitations on source-based taxation under 

Articles 6 (Income from Real Property) through Article 21 (Other 

Income), the treaty-based relief from double taxation provided by 

Article 23 (Relief from Double Taxation), and the protection afforded to residents of a Contracting State under Article 24 (NonDiscrimination). Some provisions do not require that a person be 

a resident in order to enjoy the benefits of those provisions. For example, Article 25 (Mutual Agreement Procedure) is not limited to 

residents of the Contracting States, and Article 27 (Members of 

Diplomatic Missions and Consular Posts) applies to diplomatic 

agents or consular officials regardless of residence. Article 22 accordingly does not limit the availability of treaty benefits under 

these provisions. 

Article 22 and the anti-abuse provisions of domestic law complement each other, as Article 22 effectively determines whether an 

entity has a sufficient nexus to the Contracting State to be treated 

as a resident for treaty purposes, while domestic anti-abuse provisions (e.g., business purpose, substance-over-form, step transaction 

or conduit principles) determine whether a particular transaction 

should be recast in accordance with its substance. Thus, domestic 

law principles of the source Contracting State may be applied to 

identify the beneficial owner of an item of income, and Article 22 

then will be applied to the beneficial owner to determine if that 

person is entitled to the benefits of the Convention with respect to 

such income. 

Paragraph 2 

Paragraph 2 has five subparagraphs, each of which describes a 

category of residents that will be considered qualified persons. 


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It is intended that the provisions of paragraph 2 will be self-executing. Unlike the provisions of paragraph 7, discussed below, 

claiming benefits under paragraph 2 does not require advance competent authority ruling or approval. The tax authorities may, of 

course, on review, determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the benefits claimed. 

Individuals—Subparagraph 2(a) 

Subparagraph 2(a) provides that individual residents of a Contracting State will be considered qualified persons. If such an individual receives income as a nominee on behalf of a third country 

resident, benefits may be denied under the respective articles of 

the Convention by the requirement that the beneficial owner of the 

income be a resident of a Contracting State. 

Governments—Subparagraph 2(b) 

Subparagraph 2(b) provides that the Contracting States and any 

political subdivision or local authority or instrumentality thereof 

will be considered qualified persons. 

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

Subparagraph 2(c) applies to two categories of companies: publicly traded companies and subsidiaries of publicly traded companies. A company resident in a Contracting State will be considered 

a qualified person under clause (i) of subparagraph (c) if the principal class of its shares, and any disproportionate class of shares, 

is regularly traded on one or more recognized stock exchanges and 

the company satisfies at least one of the following additional requirements. First, under clause (A) in the case of a company resident in Poland, the company’s principal class of shares must be primarily traded on one or more recognized stock exchanges located 

either in Poland or within the European Union, and in the case of 

a company resident in the United States, the company’s principal 

class or shares must be primarily traded on a recognized stock exchange located either in the United States or in another state that 

is a party to the North American Free Trade Agreement. If the 

company’s principal class of shares does not satisfy the trading requirement set forth in clause (A), clause (B) provides that the regularly-traded company can nevertheless satisfy the requirements of 

clause (i) if the company’s primary place of management and control is in its State of residence. The term ‘‘recognized stock exchange’’ is defined in subparagraph 8(a). It includes (i) any stock 

exchange registered with the Securities and Exchange Commission 

as a national securities exchange for purposes of the Securities Exchange Act of 1934; (ii) the Warsaw Stock Exchange; (iii) the stock 

exchanges of Amsterdam, Brussels, Budapest, Frankfurt, London, 

Mexico City, Montreal, Paris, Toronto, Vienna and Zurich, and (iv) 

any other stock exchange agreed upon by the competent authorities 

of the Contracting States. 

If a company has only one class of shares, it is only necessary 

to consider whether the shares of that class meet the relevant trading requirements. If the company has more than one class of 

shares, it is necessary as an initial matter to determine which class 

or classes constitute the ‘‘principal class of shares.’’ The term ‘‘prinVerDate Mar 15 2010 03:07 Jul 18, 2014 Jkt 039119 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 E:\HR\OC\ER011.XXX ER011

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cipal class of shares’’ is defined in subparagraph 8(b) to mean the 

ordinary or common shares of the company representing the majority of the aggregate voting power and value of the company. If the 

company does not have a class of ordinary or common shares representing the majority of the aggregate voting power and value of 

the company, then the ‘‘principal class of shares’’ is that class or 

any combination of classes of shares that represents, in the aggregate, a majority of the voting power and value of the company. Although in a particular case involving a company with several classes of shares it is conceivable that more than one group of classes 

could be identified that account for more than 50% of the shares, 

it is only necessary for one such group to satisfy the requirements 

of this subparagraph in order for the company to be entitled to benefits. Benefits would not be denied to the company even if a second, 

non-qualifying, group of shares with more than half of the company’s voting power and value could be identified. A company 

whose principal class of shares is regularly traded on a recognized 

stock exchange will nevertheless not be considered a qualified person under subparagraph 2(c) if it has a disproportionate class of 

shares that is not regularly traded on a recognized stock exchange. 

The term ‘‘disproportionate class of shares’’ is defined in subparagraph 8(c). A company has a disproportionate class of shares if it 

has outstanding a class of shares which is subject to terms or other 

arrangements that entitle the holder to a larger portion of the company’s income, profit, or gain in the other Contracting State than 

that to which the holder would be entitled in the absence of such 

terms or arrangements. Thus, for example, a company resident in 

Poland has a disproportionate class of shares if it has outstanding 

a class of ‘‘tracking stock’’ that pays dividends based upon a formula that approximates the company’s return on its assets employed in the United States. The following example illustrates this 

result. Example. OCo is a corporation resident in Poland. OCo has 

two classes of shares: Common and Preferred. The Common shares 

are listed and regularly traded on the Warsaw Stock Exchange. 

The Preferred shares have no voting rights and are entitled to receive dividends equal in amount to interest payments that OCo receives from unrelated borrowers in the United States. The Preferred shares are owned entirely by a single investor that is a resident of a country with which the United States does not have a tax 

treaty. The Common shares account for more than 50 percent of 

the value of OCo and for 100 percent of the voting power. Because 

the owner of the Preferred shares is entitled to receive payments 

corresponding to the U.S. source interest income earned by OCo, 

the Preferred shares are a disproportionate class of shares. Because 

the Preferred shares are not regularly traded on a recognized stock 

exchange, OCo will not qualify for benefits under subparagraph (c) 

of paragraph 2. The term ‘‘regularly traded’’ is not defined in the 

Convention. In accordance with paragraph 2 of Article 3 (General 

Definitions), this term will be defined by reference to the domestic 

tax laws of the State from which treaty benefits are sought, generally the source State. In the case of the United States, this term 

is understood to have the meaning it has under Treas. Reg. section 

1.884-5(d)(4)(i)(B), relating to the branch tax provisions of the 

Code. Under these regulations, a class of shares is considered to be 


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‘‘regularly traded’’ if two requirements are met: trades in the class 

of shares are made in more than de minimis quantities on at least 

60 days during the taxable year, and the aggregate number of 

shares in the class traded during the year is at least 10 percent 

of the average number of shares outstanding during the year. Sections 1.884-5(d)(4)(i)(A), (ii) and (iii) will not be taken into account 

for purposes of defining the term ‘‘regularly traded’’ under the Convention. 

The regular trading requirement can be met by trading on any 

recognized exchange or exchanges located in either State. Trading 

on one or more recognized stock exchanges may be aggregated for 

purposes of this requirement. Thus, a U.S. company could satisfy 

the regularly traded requirement through trading, in whole or in 

part, on any recognized stock exchange. Authorized but unissued 

shares are not considered for purposes of this test. 

The term ‘‘primarily traded’’ is defined in subparagraph 8(d). The 

shares of a company shall be considered ‘‘primarily traded’’ on a 

recognized stock exchange if the number of shares in the company’s 

principal class of shares that are traded during the taxable year on 

all recognized stock exchanges in the Contracting State of which 

the company is a resident (or in the case of a company resident in 

Poland, on a recognized stock exchange located within the European Union or in any other European Free Trade Association 

(EFTA) state, or in the case of a company resident in the United 

States, on a recognized stock exchange located in another state 

that is a party to the North American Free Trade Agreement 

(NAFTA)) exceeds the number of shares in the company’s principal 

class of shares that are traded during that year on established securities markets in any other single foreign country. This treatybased definition is consistent with meaning of the term under 

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

A company whose principal class of shares is regularly traded on 

a recognized exchange but cannot meet the primarily traded test 

may claim treaty benefits if its primary place of management and 

control is in its country of residence. This test is distinct from the 

‘‘place of effective management’’ test which is used in the OECD 

Model and by many other countries to establish residence. In some 

cases, the place of effective management test has been interpreted 

to mean the place where the board of directors meets. By contrast, 

the primary place of management and control test looks to where 

day-to-day responsibility for the management of the company (and 

its subsidiaries) is exercised. The company’s primary place of management and control will be located in the State in which the company is a resident only if the executive officers and senior management employees exercise day-to-day responsibility for more of the 

strategic, financial and operational policy decision making for the 

company (including direct and indirect subsidiaries) in that State 

than in the other State or any third state, and the staff that support the management in making those decisions are also based in 

that State. Thus, the test looks to the overall activities of the relevant persons to see where those activities are conducted. In most 

cases, it will be a necessary, but not a sufficient, condition that the 

headquarters of the company (that is, the place at which the CEO 


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and other top executives normally are based) be located in the Contracting State of which the company is a resident. To apply the 

test, it will be necessary to determine which persons are to be considered ‘‘executive officers and senior management employees.’’ In 

most cases, it will not be necessary to look beyond the executives 

who are members of the Board of Directors (the ‘‘inside directors’’) 

in the case of a U.S. company. That will not always be the case, 

however; in fact, the relevant persons may be employees of subsidiaries if those persons make the strategic, financial and operational 

policy decisions. Moreover, it would be necessary to take into account any special voting arrangements that result in certain board 

members making certain decisions without the participation of 

other board members. 

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

A company resident in a Contracting State is entitled to all the 

benefits of the Convention under clause (ii) of subparagraph (c) of 

paragraph 2 if five or fewer publicly traded companies described in 

clause (i) are the direct or indirect owners of at least 50 percent 

of the aggregate vote and value of the company’s shares (and at 

least 50 percent of any disproportionate class of shares). If the publicly-traded companies are indirect owners, however, each of the intermediate companies must be a resident of one of the Contracting 

States. Thus, for example, a company that is a resident of Poland, 

all the shares of which are owned by another company that is a 

resident of Poland, would qualify for benefits under the Convention 

if the principal class of shares (and any disproportionate classes of 

shares) of the parent company are regularly and primarily traded 

on a recognized stock exchange in Poland (or within the European 

Union or EFTA). However, such a subsidiary would not qualify for 

benefits under clause (ii) if the publicly traded parent company 

were a resident of a third state, for example, and not a resident 

of the United States or Poland. Furthermore, if a parent company 

in Poland indirectly owned the bottom-tier company through a 

chain of subsidiaries, each such subsidiary in the chain, as an intermediate owner, must be a resident of the United States or Poland in order for the subsidiary to meet the test in clause (ii). 

Tax Exempt Organizations—Subparagraph 2(d) 

Subparagraph 2(d) provides rules by which the tax exempt organizations described in paragraph 2 of Article 4 (Resident) will be 

considered qualified persons. A pension fund will qualify for benefits if more than fifty percent of the beneficiaries, members or participants of the organization are individuals resident in either Contracting State. For purposes of this provision, the term ‘‘beneficiaries’’ should be understood to refer to the persons receiving 

benefits from the organization. On the other hand, a tax-exempt organization other than a pension fund automatically qualifies for 

benefits, without regard to the residence of its beneficiaries or 

members. Entities qualifying under this rule generally are those 

that are exempt from tax in their State of residence and that are 

organized and operated exclusively to fulfill religious, charitable, 

scientific, artistic, cultural, or educational purposes. 


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Ownership/Base Erosion—Subparagraph 2(e) 

Subparagraph 2(e) provides an additional method to qualify for 

treaty benefits that applies to any form of legal entity that is a 

resident of a Contracting State. The test provided in subparagraph 

(e), the so-called ownership and base erosion test, is a two-part 

test. Both prongs of the test must be satisfied for the resident to 

be entitled to treaty benefits under subparagraph 2(e). The ownership prong of the test, under clause (i), requires that 50 percent or 

more of each class of shares or other beneficial interests in the person is owned, directly or indirectly, on at least half the days of the 

person’s taxable year by persons who are residents of the Contracting State of which that person is a resident and that are themselves entitled to treaty benefits under subparagraphs (a), (b), (d) 

or clause (i) of subparagraph (c) of paragraph 2. In the case of indirect owners, however, each of the intermediate owners must be a 

resident of that Contracting State. Trusts may be entitled to benefits under this provision if they are treated as residents under Article 4 (Residence) and they otherwise satisfy the requirements of 

this subparagraph. For purposes of this subparagraph, the beneficial interests in a trust will be considered to be owned by its beneficiaries in proportion to each beneficiary’s actuarial interest in the 

trust. The interest of a remainder beneficiary will be equal to 100 

percent less the aggregate percentages held by income beneficiaries. A beneficiary’s interest in a trust will not be considered 

to be owned by a person entitled to benefits under the other provisions of paragraph 2 if it is not possible to determine the beneficiary’s actuarial interest. Consequently, if it is not possible to determine the actuarial interest of the beneficiaries in a trust, the 

ownership test under clause (i) cannot be satisfied, unless all possible beneficiaries are persons entitled to benefits under the other 

subparagraphs of paragraph 2. The base erosion prong of clause (ii) 

of subparagraph (e) is satisfied with respect to a person if less than 

50 percent of the person’s gross income for the taxable year, as determined under the tax law in the person’s State of residence, is 

paid or accrued to persons who are not residents of either Contracting State entitled to benefits under subparagraphs (a), (b), (d) 

or clause (i) of subparagraph (c) of paragraph 2, in the form of payments deductible for tax purposes in the payer’s State of residence. 

These amounts do not include arm’s-length payments in the ordinary course of business for services or tangible property. To the extent they are deductible from the taxable base, trust distributions 

are deductible payments. However, depreciation and amortization 

deductions, which do not represent payments or accruals to other 

persons, are disregarded for this purpose. Paragraph 3 

Paragraph 3 sets forth a ‘‘derivative benefits’’ test that is potentially applicable to all treaty benefits, although the test is applied 

to individual items of income. In general, a derivative benefits test 

entitles certain companies that are residents of a Contracting State 

to treaty benefits if the owner of the company would have been entitled to the same benefit had the income in question flowed directly to that owner. To qualify under this paragraph, the company 

must meet an ownership test and a base erosion test. Subparagraph 3(a) sets forth the ownership test. Under this test, seven or 

fewer equivalent beneficiaries must own shares representing at 


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least 95 percent of the aggregate voting power and value of the 

company and at least 50 percent of any disproportionate class of 

shares. Ownership may be direct or indirect. The term ‘‘equivalent 

beneficiary’’ is defined in subparagraph 8(f). This definition may be 

met in two alternative ways. Under the first alternative, a person 

may be an equivalent beneficiary because it is entitled to equivalent benefits under a tax treaty between the country of source and 

the country in which the person is a resident. This alternative has 

two requirements. The first requirement as set forth in clause (i) 

of subparagraph 8(f) is that the person must be a resident of a 

member state of the European Union or any other European Free 

Trade Association (EFTA) state or of a party to the North American Free Trade Agreement (collectively, ‘‘qualifying States’’). In addition, the person must be entitled to all the benefits of a comprehensive tax treaty between the Contracting State from which 

benefits of the Convention are claimed and a qualifying state under 

provisions that are analogous to the rules in subparagraphs 2(a), 

2(b), 2(c)(i), or 2(d) of this Article. If the treaty in question does not 

have a comprehensive limitation on benefits article, this requirement is met only if the person would be entitled to treaty benefits 

under the tests in subparagraphs 2(a), 2(b), 2(c)(i), or 2(d) of this 

Article if the person were a resident of one of the Contracting 

States. Clause (i)(B) of subparagraph 8(f) requires that with respect 

to, dividends, interest, and royalties, the person must be entitled 

to a rate of tax that is at least as low as the tax rate that would 

apply under the Convention to such income. Thus, the rates to be 

compared are: (1) the rate of tax that the source State would have 

imposed if a qualified resident of the other Contracting State was 

the beneficial owner of the income; and (2) the rate of tax that the 

source State would have imposed if the third state resident had received the income directly from the source State. Subparagraph 

8(g) provides a special rule to take account of the fact that withholding taxes on many inter-company dividends, interest and royalties are exempt within the European Union by reason of various 

EU directives, rather than by tax treaty. If a U.S. company receives such payments from a Polish company, and that U.S. company is owned by a company resident in a member state of the European Union that would have qualified for an exemption from 

withholding tax if it had received the income directly, the parent 

company will be treated as an equivalent beneficiary. This rule is 

necessary because many European Union member countries have 

not re-negotiated their tax treaties to reflect the exemptions available under the directives. The requirement that a person be entitled to ‘‘all the benefits’’ of a comprehensive tax treaty eliminates 

those persons that qualify for benefits with respect to only certain 

types of income. Accordingly, the fact that a French parent of a Polish company is engaged in the active conduct of a trade or business 

in France and therefore would be entitled to the benefits of the 

U.S.-France treaty if it received dividends directly from a U.S. subsidiary of the Polish company will not qualify such French company 

as an equivalent beneficiary. Further, the French company cannot 

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pany is a resident of a qualifying state, it would be possible to look 

through the French company to its parent company to determine 

whether the parent company is an equivalent beneficiary. The second alternative for satisfying the ‘‘equivalent beneficiary’’ test is 

available only to residents of one of the two Contracting States. 

U.S. or Polish residents who are eligible for treaty benefits by reason of subparagraphs 2(a), 2(b), 2(c)(i), or 2(d) are equivalent beneficiaries for purposes of the relevant tests in this Article. Thus, a 

Polish individual will be an equivalent beneficiary without regard 

to whether the individual would have been entitled to receive the 

same benefits if it received the income directly. A resident of a 

third country cannot qualify for treaty benefits under these provisions by reason of those paragraphs or any other rule of the treaty, 

and therefore does not qualify as an equivalent beneficiary under 

this alternative. Thus, a resident of a third country can be an 

equivalent beneficiary only if it would have been entitled to equivalent benefits had it received the income directly. The second alternative was included in order to clarify that ownership by certain 

residents of a Contracting State would not disqualify a U.S. or Polish company under this paragraph. Thus, for example, if 90 percent 

of a Polish company is owned by five companies that are resident 

in member states of the European Union who satisfy the requirements of subparagraph 8(g)(i), and 10 percent of the Polish company is owned by a U.S. or Polish individual, then the Polish company still can satisfy the requirements of subparagraph 3(a). Subparagraph 3(b) sets forth the base erosion test. A company meets 

this base erosion test if less than 50 percent of its gross income (as 

determined in the company’s State of residence) for the taxable period is paid or accrued, directly or indirectly, to a person or persons 

who are not equivalent beneficiaries in the form of payments deductible for tax purposes in company’s State of residence. These 

amounts do not include arm’s-length payments in the ordinary 

course of business for services or tangible property. This test is 

qualitatively the same as the base erosion test in subparagraph 

2(e)(ii), except that the test in paragraph 3(b) focuses on base-eroding payments to persons who are not equivalent beneficiaries. 

Paragraph 4 

Paragraph 4 sets forth an alternative test under which a resident 

of a Contracting State may receive treaty benefits with respect to 

certain items of income that are connected to an active trade or 

business conducted in its State of residence. A resident of a Contracting State may qualify for benefits under paragraph 4 whether 

or not it also qualifies under paragraph 2 or 3. Subparagraph 4(a) 

sets forth the general rule that a resident of a Contracting State 

engaged in the active conduct of a trade or business in that State 

may obtain the benefits of the Convention with respect to an item 

of income derived in the other Contracting State. The item of income, however, must be derived in connection with or incidental to 

that trade or business. The term ‘‘trade or business’’ is not defined 

in the Convention. Pursuant to paragraph 2 of Article 3 (General 

Definitions), when determining whether a resident of Poland is entitled to the benefits of the Convention under paragraph 3 of this 

Article with respect to an item of income derived from sources 


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within the United States, the United States will ascribe to this 

term the meaning that it has under the law of the United States. 

Accordingly, the U.S. competent authority will refer to the regulations issued under Code section 367(a) for the definition of the term 

‘‘trade or business.’’ In general, therefore, a trade or business will 

be considered to be a specific unified group of activities that constitutes or could constitute an independent economic enterprise carried on for profit. Furthermore, a corporation generally will be considered to carry on a trade or business only if the officers and employees of the corporation conduct substantial managerial and operational activities. The business of making or managing investments 

for the resident’s own account will be considered to be a trade or 

business only when part of banking, insurance or securities activities conducted by a bank, an insurance company, or a registered securities dealer respectively. Such activities conducted by a person 

other than a bank, insurance company or registered securities dealer will not be considered to be the conduct of an active trade or 

business, nor would they be considered to be the conduct of an active trade or business if conducted by a bank, insurance company 

or registered securities dealer but not as part of the company’s 

banking, insurance or dealer business. Because a headquarters operation is in the business of managing investments, a company that 

functions solely as a headquarters company will not be considered 

to be engaged in an active trade or business for purposes of paragraph 4. 

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

of business that ‘‘forms a part of’’ or is ‘‘complementary’’ to the 

trade or business conducted in the State of residence by the income 

recipient. A business activity generally will be considered to form 

part of a business activity conducted in the State of source if the 

two activities involve the design, manufacture or sale of the same 

products or type of products, or the provision of similar services. 

The line of business in the State of residence may be upstream, 

downstream, or parallel to the activity conducted in the State of 

source. Thus, the line of business may provide inputs for a manufacturing process that occurs in the State of source, may sell the 

output of that manufacturing process, or simply may sell the same 

sorts of products that are being sold by the trade or business carried on in the State of source. Example 1. USCo is a corporation 

resident in the United States. USCo is engaged in an active manufacturing business in the United States. USCo owns 100 percent of 

the shares of FCo, a corporation resident in Poland. FCo distributes 

USCo products in Poland. Since the business activities conducted 

by the two corporations involve the same products, FCo’s distribution business is considered to form a part of USCo’s manufacturing 

business. 

Example 2. The facts are the same as in Example 1, except that 

USCo does not manufacture. Rather, USCo operates a large research and development facility in the United States that licenses 

intellectual property to affiliates worldwide, including FCo. FCo 

and other USCo affiliates then manufacture and market the USCodesigned products in their respective markets. Since the activities 

conducted by FCo and USCo involve the same product lines, these 


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activities are considered to form a part of the same trade or business. 

For two activities to be considered to be ‘‘complementary,’’ the activities need not relate to the same types of products or services, 

but they should be part of the same overall industry and be related 

in the sense that the success or failure of one activity will tend to 

result in success or failure for the other. Where more than one 

trade or business is conducted in the State of source and only one 

of the trades or businesses forms a part of or is complementary to 

a trade or business conducted in the State of residence, it is necessary to identify the trade or business to which an item of income 

is attributable. Royalties generally will be considered to be derived 

in connection with the trade or business to which the underlying 

intangible property is attributable. Dividends will be deemed to be 

derived first out of earnings and profits of the treaty-benefited 

trade or business, and then out of other earnings and profits. Interest income may be allocated under any reasonable method consistently applied. A method that conforms to U.S. principles for expense allocation will be considered a reasonable method. 

Example 3. Americair is a corporation resident in the United 

States that operates an international airline. FSub is a whollyowned subsidiary of Americair resident in Poland. FSub operates 

a chain of hotels in Poland that are located near airports served 

by Americair flights. Americair frequently sells tour packages that 

include air travel to Polnd and lodging at FSub hotels. Although 

both companies are engaged in the active conduct of a trade or 

business, the businesses of operating a chain of hotels and operating an airline are distinct trades or businesses. Therefore FSub’s 

business does not form a part of Americair’s business. However, 

FSub’s business is considered to be complementary to Americair’s 

business because they are part of the same overall industry (travel) 

and the links between their operations tend to make them interdependent. 

Example 4. The facts are the same as in Example 3, except that 

FSub owns an office building in Poland instead of a hotel chain. No 

part of Americair’s business is conducted through the office building. FSub’s business is not considered to form a part of or to be 

complementary to Americair’s business. They are engaged in distinct trades or businesses in separate industries, and there is no 

economic dependence between the two operations. 

Example 5. USFlower is a corporation resident in the United 

States. USFlower produces and sells flowers in the United States 

and other countries. USFlower owns all the shares of ForHolding, 

a corporation resident in Poland. ForHolding is a holding company 

that is not engaged in a trade or business. ForHolding owns all the 

shares of three corporations that are resident in Poland: ForFlower, 

ForLawn, and ForFish. ForFlower distributes USFlower flowers 

under the USFlower trademark in Poland. ForLawn markets a line 

of lawn care products in Poland under the USFlower trademark. In 

addition to being sold under the same trademark, ForLawn and 

ForFlower products are sold in the same stores and sales of each 

company’s products tend to generate increased sales of the other’s 

products. ForFish imports fish from the United States and distributes it to fish wholesalers in Poland. For purposes of paragraph 3, 


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the business of ForFlower forms a part of the business of 

USFlower, the business of ForLawn is complementary to the business of USFlower, and the business of ForFish is neither part of 

nor complementary to that of USFlower. 

An item of income derived from the State of source is ‘‘incidental 

to’’ the trade or business carried on in the State of residence if production of the item facilitates the conduct of the trade or business 

in the State of residence. An example of incidental income is the 

temporary investment of working capital of a person in the State 

of residence in securities issued by persons in the State of source. 

Subparagraph (b) of paragraph 4 states a further condition to the 

general rule in subparagraph (a) in cases where the trade or business generating the item of income in question is carried on either 

by the person deriving the income or by any associated enterprises. 

Subparagraph (b) states that the trade or business carried on in 

the State of residence, under these circumstances, must be substantial in relation to the activity in the State of source. The substantiality requirement is intended to prevent a narrow case of 

treaty-shopping abuses in which a company attempts to qualify for 

benefits by engaging in de minimis connected business activities in 

the treaty country in which it is resident (i.e., activities that have 

little economic cost or effect with respect to the company business 

as a whole). 

The determination of substantiality is made based upon all the 

facts and circumstances and takes into account the comparative 

sizes of the trades or businesses in each Contracting State, the nature of the activities performed in each Contracting State and the 

relative contributions made to that trade or business in each Contracting State. In any case, in making each determination or comparison, due regard will be given to the relative sizes of the economies in the two Contracting States. 

The determination in subparagraph (b) also is made separately 

for each item of income derived from the State of source. It therefore is possible that a person would be entitled to the benefits of 

the Convention with respect to one item of income but not with respect to another. If a resident of a Contracting State is entitled to 

treaty benefits with respect to a particular item of income under 

paragraph 4, the resident is entitled to all benefits of the Convention insofar as they affect the taxation of that item of income in 

the State of source. 

The application of the substantiality requirement only to income 

from related parties focuses only on potential abuse cases, and does 

not hamper certain other kinds of non-abusive activities, even 

though the income recipient resident in a Contracting State may be 

very small in relation to the entity generating income in the other 

Contracting State. For example, if a small U.S. research firm develops a process that it licenses to a very large, unrelated, pharmaceutical manufacturer in Poland, the size of the U.S. research firm 

would not have to be tested against the size of the manufacturer. 

Similarly, a small U.S. bank that makes a loan to a very large unrelated company operating a business in Poland would not have to 

pass a substantiality test to receive treaty benefits under paragraph 4. 


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Subparagraph (c) of paragraph 3 provides special attribution 

rules for purposes of applying the substantive rules of subparagraphs (a) and (b). Thus, these rules apply for purposes of determining whether a person meets the requirement in subparagraph 

(a) that it be engaged in the active conduct of a trade or business 

and that the item of income is derived in connection with that active trade or business, and for making the comparison required by 

the ‘‘substantiality’’ requirement in subparagraph (b). Subparagraph (c) attributes to a person activities conducted by persons 

‘‘connected’’ to such person. A person (‘‘X’’) is connected to another 

person (‘‘Y’’) if X possesses 50 percent or more of the beneficial interest in Y (or if Y possesses 50 percent or more of the beneficial 

interest in X). For this purpose, X is connected to a company if X 

owns shares representing fifty percent or more of the aggregate 

voting power and value of the company or fifty percent or more of 

the beneficial equity interest in the company. X also is connected 

to Y if a third person possesses fifty percent or more of the beneficial interest in both X and Y. For this purpose, if X or Y is a company, the threshold relationship with respect to such company or 

companies is fifty percent or more of the aggregate voting power 

and value or fifty percent or more of the beneficial equity interest. 

Finally, X is connected to Y if, based upon all the facts and circumstances, X controls Y, Y controls X, or X and Y are controlled 

by the same person or persons. 

Paragraph 5 

Paragraph 5 provides that a resident of one of the Contracting 

States is entitled to all the benefits of the Convention if that person functions as a recognized headquarters company for a multinational corporate group. The provisions of this paragraph are consistent with the other U.S. tax treaties where this provision has 

been adopted. For this purpose, the multinational corporate group 

includes all corporations that the headquarters company supervises, and excludes affiliated corporations not supervised by the 

headquarters company. The headquarters company does not have 

to own shares in the companies that it supervises. In order to be 

considered a headquarters company, the person must meet several 

requirements that are enumerated in paragraph 5. These requirements are discussed below. 

Overall Supervision and Administration 

Subparagraph 5(a) provides that the person must provide a substantial portion of the overall supervision and administration of the 

group. This activity may include group financing, but group financing may not be the principal activity of the person functioning as 

the headquarters company. A person only will be considered to engage in supervision and administration if it engages in a number 

of the following activities: group financing, pricing, marketing, internal auditing, internal communications, and management. Other 

activities also could be part of the function of supervision and administration. 

In determining whether a ‘‘substantial portion’’ of the overall supervision and administration of the group is provided by the headquarters company, its headquarters-related activities must be subVerDate Mar 15 2010 03:07 Jul 18, 2014 Jkt 039119 PO 00000 Frm 00081 Fmt 6602 Sfmt 6602 E:\HR\OC\ER011.XXX ER011

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stantial in relation to the same activities for the same group performed by other entities. Subparagraph 5(a) does not require that 

the group that is supervised include persons in the other State. 

However, it is anticipated that in most cases the group will include 

such persons, due to the requirement in subparagraph 5(g), discussed below, that the income derived in the other Contracting 

State by the headquarters company be derived in connection with 

or be incidental to an active trade or business supervised by the 

headquarters company. 

Active Trade or Business 

Subparagraph 5(b) is the first of several requirements intended 

to ensure that the relevant group is truly ‘‘multinational.’’ This 

subparagraph provides that the corporate group supervised by the 

headquarters company must consist of corporations resident in, 

and engaged in active trades or businesses in, at least five countries. Furthermore, at least five countries must each contribute 

substantially to the income generated by the group, as the rule requires that the business activities carried on in each of the five 

countries (or groupings of countries) generate at least 10 percent 

of the gross income of the group. For purposes of the 10 percent 

gross income requirement, the income from multiple countries may 

be aggregated into non-overlapping groupings, as long as there are 

at least five individual countries or groupings that each satisfies 

the 10 percent requirement. If the gross income requirement under 

this subparagraph is not met for a taxable year, the taxpayer may 

satisfy this requirement by applying the 10 percent gross income 

test to the average of the gross incomes for the four years preceding the taxable year. 

Example. PHQ is a corporation resident in Poland. PHQ functions as a headquarters company for a group of companies. These 

companies are resident in the United States, Canada, New Zealand, the United Kingdom, Malaysia, the Philippines, Singapore, 

and Indonesia. The gross income generated by each of these companies for 2012 and 2013 is as follows: 

Country 2012 2013 

United States $40 $45 

Canada 25 15 

New Zealand 10 20 

United Kingdom 30 35 

Malaysia 10 12 

Philippines 7 10 

Singapore 10 8 

Indonesia 5 10 

Total 137 155 

For 2012, 10 percent of the gross income of this group is equal 

to $13.70. Only the United States, Canada, and the United Kingdom satisfy this requirement for that year. The other countries 

may be aggregated to meet this requirement. Because New Zealand 


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and Malaysia have a total gross income of $20, and the Philippines, 

Singapore, and Indonesia have a total gross income of $22, these 

two groupings of countries may be treated as the fourth and fifth 

members of the group for purposes of subparagraph 5(b). 

In the following year, 10 percent of the gross income is $15.50. 

Only the United States, New Zealand, and the United Kingdom 

satisfy this requirement. Because Canada and Malaysia have a 

total gross income of $27, and the Philippines, Singapore, and Indonesia have a total gross income of $28, these two groupings of 

countries may be treated as the fourth and fifth members of the 

group for purposes of subparagraph 5(b). The fact that Canada replaced New Zealand in a group is not relevant for this purpose. The 

composition of the grouping may change from year to year. 

Single Country Limitation 

Subparagraph 5(c) provides that the business activities carried 

on in any one country other than the headquarters company’s State 

of residence must generate less than 50 percent of the gross income 

of the group. If the gross income requirement under this subparagraph is not met for a taxable year, the taxpayer may satisfy this 

requirement by applying the 50 percent gross income test to the average of the gross incomes for the four years preceding the taxable 

year. The following example illustrates the application of this 

clause. 

Example. PHQ is a corporation resident in Poland. PHQ functions as a headquarters company for a group of companies. PHQ 

derives dividend income from a United States subsidiary in the 

2008 taxable year. The state of residence of each of these companies, the situs of their activities and the amounts of gross income 

attributable to each for the years 2008 through 2012 are set forth 

below. 

Country Situs 2012 2011 2010 2009 2008 

United States U.S. $100 $100 $95 $90 $85 

Mexico U.S. 10 8 5 0 0 

Canada U.S. 20 18 16 15 12 

United Kingdom U.K 30 32 30 28 27 

New Zealand N.Z. 35 42 38 36 35 

Japan Japan 35 32 30 30 28 

Singapore Singapore 30 25 24 22 20 

Total $260 $257 $238 $221 $207 

Because the United States’ total gross income of $130 in 2012 is 

not less than 50 percent of the gross income of the group, subparagraph 5(c) is not satisfied with respect to dividends derived in 

2012. However, the United States’ average gross income for the 

preceding four years may be used in lieu of the preceding year’s average. The United States’ average gross income for the years 2008- 

11 is $111.00 ($444/4). The group’s total average gross income for 

these years is $230.75 ($923/4). Because $111 represents 48.1 perVerDate Mar 15 2010 03:07 Jul 18, 2014 Jkt 039119 PO 00000 Frm 00083 Fmt 6602 Sfmt 6602 E:\HR\OC\ER011.XXX ER011

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cent of the group’s average gross income for the years 2008 through 

2011, the requirement under subparagraph 5(c) is satisfied. 

Other State Gross Income Limitation 

Subparagraph 5(d) provides that no more than 25 percent of the 

headquarters company’s gross income may be derived from the 

other Contracting State. Thus, if the headquarters company’s gross 

income for the taxable year is $200, no more than $50 of this 

amount may be derived from the other Contracting State. If the 

gross income requirement under this subparagraph is not met for 

a taxable year, the taxpayer may satisfy this requirement by applying the 25 percent gross income test to the average of the gross incomes for the four years preceding the taxable year. 

Independent Discretionary Authority 

Subparagraph 5(e) requires that the headquarters company have 

and exercise independent discretionary authority to carry out the 

functions referred to in subparagraph 5(a). Thus, if the headquarters company was nominally responsible for group financing, 

pricing, marketing and other management functions, but merely 

implemented instructions received from another entity, the headquarters company would not be considered to have and exercise 

independent discretionary authority with respect to these functions. This determination is made individually for each function. 

For instance, a headquarters company could be nominally responsible for group financing, pricing, marketing and internal auditing 

functions, but another entity could be actually directing the headquarters company as to the group financing function. In such a 

case, the headquarters company would not be deemed to have independent discretionary authority for group financing, but it might 

have such authority for the other functions. Functions for which 

the headquarters company does not have and exercise independent 

discretionary authority are considered to be conducted by an entity 

other than the headquarters company for purposes of subparagraph 

5(a). 

Income Taxation Rules 

Subparagraph 2(f) requires that the headquarters company be 

subject to the generally applicable income taxation rules in its 

country of residence. This reference should be understood to mean 

that the company must be subject to the income taxation rules to 

which a company engaged in the active conduct of a trade or business would be subject. Thus, if one of the Contracting States has 

or introduces special taxation legislation that imposes a lower rate 

of income tax on headquarters companies than is imposed on companies engaged in the active conduct of a trade or business, or provides for an artificially low taxable base for such companies, a 

headquarters company subject to these rules is not entitled to the 

benefits of the Convention under paragraph 5. 

In Connection With or Incidental to Trade or Business 

Subparagraph 5(g) requires that the income derived in the other 

Contracting State be derived in connection with or be incidental to 

the active business activities referred to subparagraph 5(b). This 


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determination is made under the principles set forth in paragraph 

3. For instance, assume that a Polish company satisfies the other 

requirements in paragraph 5 and acts as a headquarters company 

for a group that includes a U.S. corporation. If the group is engaged in the design and manufacture of computer software, but the 

U.S. corporation is also engaged in the design and manufacture of 

photocopying machines, the income that the Polish company derives from the United States would have to be derived in connection with or be incidental to the income generated by the computer 

business in order to be entitled to the benefits of the Convention 

under paragraph 5. Interest income received from the U.S. corporation also would be entitled to the benefits of the Convention under 

this subparagraph as long as the interest was attributable to the 

computer business supervised by the headquarters company. Interest income derived from an unrelated party would normally not, 

however, satisfy the requirements of this clause. 

Paragraph 6 

Paragraph 6 deals with the treatment of income in the context 

of a so-called ‘‘triangular case.’’ The term ‘‘triangular case’’ refers 

to the use of a structure like the one described in the following 

paragraph by a resident of Poland to earn income from the United 

States: 

A resident of Poland, who would, absent paragraph 6, 

qualify for benefits under one or more of the provisions of 

this Article, sets up a permanent establishment in a third 

state that imposes a low or zero rate of tax on the income 

of the permanent establishment. The resident of Poland 

lends funds into the United States through the permanent 

establishment. The permanent establishment, despite its 

third-jurisdiction location, is an integral part of the resident of Poland. Therefore, the income that it earns on 

those loans, absent the provisions of paragraph 6, is entitled to exemption from U.S. withholding tax under the 

Convention. Under a current income tax treaty between 

Poland and the host jurisdiction of the permanent establishment, the income of the permanent establishment is 

exempt from tax by Poland (alternatively, Poland may 

choose to exempt the income of the permanent establishment from income tax). Thus, the interest income, absent 

paragraph 6, would be exempt from U.S. tax, subject to little or no tax in the host jurisdiction of the permanent establishment, and exempt from tax in Poland. 

Paragraph 6 provides that the tax benefits that would otherwise 

apply under the Convention will not apply to any item of income 

if the combined aggregate effective tax rate in the residence State 

and the third state is less than 60 percent of the general rate of 

company tax applicable in the residence State. In the case of dividends, interest and royalties to which this paragraph applies, the 

withholding tax rates under the Convention are replaced with a 15 

percent withholding tax. Any other income to which the provisions 

of paragraph 6 apply is subject to tax under the domestic law of 

the source State, notwithstanding any other provisions of the Convention. 


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In general, the principles employed under Code section 954(b)(4) 

will be employed to determine whether the profits are subject to an 

effective rate of taxation that is above the specified threshold. 

Notwithstanding the level of tax on interest and royalty income 

of the permanent establishment, paragraph 6 will not apply under 

certain circumstances. In the case of royalties, paragraph 6 will not 

apply if the royalties are received as compensation for the use of, 

or the right to use, intangible property produced or developed by 

the permanent establishment itself. In the case of any other income, paragraph 6 will not apply if that income is derived in connection with, or is incidental to, the active conduct of a trade or 

business carried on by the permanent establishment in the third 

state. The business of making, managing or simply holding investments is not considered to be an active trade or business, unless 

these are securities activities carried on by a registered securities 

dealer. 

Paragraph 6 applies reciprocally. However, the United States 

does not exempt the profits of a third-jurisdiction permanent establishment of a U.S. resident from U.S. tax, either by statute or by 

treaty. 

Paragraph 7 

Paragraph 7 provides that a resident of one of the States that is 

not entitled to the benefits of the Convention as a result of paragraphs 1 through 3 still may be granted benefits under the Convention at the discretion of the competent authority of the State from 

which benefits are claimed if the resident demonstrates that neither its establishment, acquisition, or maintenance, nor the conduct 

of its operations, has or had as one of its principal purposes the obtaining of benefits under the Convention. Thus, persons that establish operations in one of the Contracting States with a principal 

purpose of obtaining the benefits of the Convention will not be 

granted benefits of the Convention under paragraph 7. In order to 

be granted benefits under paragraph 7, a company must establish 

to the satisfaction of the competent authority of the State from 

which benefits are being claimed clear non-tax business reasons for 

its formation, acquisition, or maintenance in the other Contracting 

State, which demonstrate a sufficient nexus or relationship to the 

other Contracting State, taking into account considerations other 

than those addressed through the objective tests in paragraphs 1 

through 3, and that the allowance of benefits would not otherwise 

be contrary to the purposes of the Convention. For example, in the 

case of a resident subsidiary company with a parent in a third 

state, the fact that the relevant withholding rate provided in the 

Convention is at least as low as the corresponding withholding rate 

in the tax treaty between the State of source and the third state 

is not by itself evidence of a nexus or relationship to the other Contracting State. Similarly, where a foreign corporation is engaged in 

a portable business such as financing, or where the domestic law 

of a Contracting State provides a special tax treatment for certain 

activities conducted offshore (e.g., licensing intangibles) or in special zones, those factors will not be evidence of a non-tax business 

reason for locating in that State. In such cases, additional favorable 

business factors must be present to establish a nexus to that State. 


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The competent authority’s discretion is quite broad. It may grant 

all of the benefits of the Convention to the taxpayer making the request, or it may grant only certain benefits. For instance, it may 

grant benefits only with respect to a particular item of income in 

a manner similar to paragraph 3. Further, the competent authority 

may establish conditions, such as setting time limits on the duration of any relief granted. 

For purposes of implementing paragraph 7, a taxpayer will be 

permitted to present his case to the relevant competent authority 

for an advance determination based on the facts. In these circumstances, it is also expected that, if the competent authority determines that benefits are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty provision or the establishment of the structure in question, whichever 

is later. 

Finally, there may be cases in which a resident of a Contracting 

State may apply for discretionary relief to the competent authority 

of his State of residence. This would arise, for example, if the benefit it is claiming is provided by the residence country, and not by 

the source country. So, for example, if a company that is a resident 

of the United States would like to claim the benefit of the resourcing rule of paragraph 3 of Article 23, but it does not meet any 

of the objective tests of paragraphs 2 and 3, it may apply to the 

U.S. competent authority for discretionary relief. 

Paragraph 8 

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

which it is used. 

ARTICLE 23 (RELIEF FROM DOUBLE TAXATION)

This Article describes the manner in which each Contracting 

State undertakes to relieve double taxation. The United States 

uses the foreign tax credit method under its domestic law and by 

treaty. 

Paragraph 1 

Paragraph 1 provides that Poland will apply two rules to avoid 

double taxation. First, under subparagraph 1(a), where a resident 

of Poland derives income which, in accordance with the provisions 

of this Convention may be taxed in the United States, Poland shall, 

subject to the provisions of subparagraph 1(b), exempt such income 

from tax. Second, under subparagraph 1(b), where a resident of Poland derives income or capital gains which, in accordance with the 

provisions of Articles 10 (Dividends), 11 (Interest), 13 (Royalties), 

14 (Capital Gains) or 21 (Other Income) may be taxed in the 

United States, Poland shall allow as a deduction from the tax on 

the income or capital gains of that resident an amount equal to the 

tax paid to the United States. Such deduction shall not, however, 

exceed that part of the tax, as computed before the deduction is 

given, which is attributable to such income or capital gains derived 

from the United States. Subparagraph 1(c) provides a so-called ‘‘exemption with progression’’ rule. Where in accordance with any provision of this Convention, income derived by a resident of Poland 


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is exempt from tax in Poland, Poland may nevertheless, in calculating the amount of tax on the remaining income of such resident, 

take into account the exempted income. 

Paragraph 2 

The United States agrees, in paragraph 2, to allow to its citizens 

and residents a credit against U.S. tax for income taxes paid or accrued to Poland. Paragraph 2 also provides that the other Contracting State’s covered taxes are income taxes for U.S. purposes. 

Subparagraph 2(b) provides for a deemed-paid credit, consistent 

with section 902 of the Code, to a U.S. corporation in respect of 

dividends received from a corporation resident in Poland of which 

the U.S. corporation owns at least 10 percent of the voting stock. 

This credit is for the tax paid by the corporation to the other Contracting State on the profits out of which the dividends are considered paid. 

The credits allowed under paragraph 2 are in accordance with 

the provisions and subject to the limitations of U.S. law, as that 

law may be amended over time, so long as the general principle of 

the Article, that is, the relief of double taxation, is retained. Thus, 

although the Convention provides for a foreign tax credit, the 

terms of the credit are generally determined by the U.S. domestic 

law in effect for the taxable year for which the credit is allowed. 

See, e.g., Code sections 901-909 and the regulations thereunder. 

For example, the credit against U.S. tax generally is limited to the 

amount of U.S. tax due with respect to net foreign source income 

within the relevant foreign tax credit limitation category (see, Code 

section 904(a) and (d)), and the dollar amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g., 

Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits and other inter-year adjustments. 

Paragraph 3 

Paragraph 3 provides that certain items of gross income that 

would be otherwise treated as from sources within the United 

States will be treated as from sources within Poland for purposes 

of paragraph 2. Paragraph 3 is intended to ensure that a U.S. resident can obtain an appropriate amount of U.S. foreign tax credit 

for income taxes paid to Poland when the Convention assigns to 

Poland primary taxing rights over an item of gross income. 

Accordingly, if the Convention allows Poland to tax an item of 

gross income (as defined under U.S. law) derived by a resident of 

the United States, the United States will treat that item of gross 

income as gross income from sources within Poland for U.S. foreign 

tax credit purposes. In the case of a U.S.-owned foreign corporation, however, section 904(h)(10) may apply for purposes of determining the U.S. foreign tax credit with respect to income subject 

to this re-sourcing rule. Section 904(h)(10) generally applies the 

foreign tax credit limitation separately to re-sourced income. See 

also, Code sections 865(h) and 904(d)(6). Because paragraph 3 applies to items of gross income, not net income, U.S. expense allocation and apportionment rules (see, e.g., Treas. Reg. 1.861-9 and 

-9T) continue to apply to income resourced under paragraph 3. 


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Paragraph 4 

Paragraph 4 provides special rules for the tax treatment in both 

States of certain types of income derived from U.S. sources by U.S. 

citizens who are residents of Poland. Since U.S. citizens, regardless 

of residence, are subject to United States tax at ordinary progressive rates on their worldwide income, the U.S. tax on the U.S.- 

source income of a U.S. citizen resident in Poland may exceed the 

U.S. tax that may be imposed under the Convention on an item of 

U.S.-source income derived by a resident of Poland who is not a 

U.S. citizen. The provisions of paragraph 4 ensure that Poland does 

not bear the cost of U.S. taxation of its citizens who are residents 

of Poland. 

Subparagraph 4(a) provides, with respect to items of income from 

sources within the United States, special credit rules for the other 

Contracting State. These rules apply to items of U.S.-source income 

that would be either exempt from U.S. tax or subject to reduced 

rates of U.S. tax under the provisions of the Convention if they had 

been received by a resident of Poland who is not a U.S. citizen. The 

tax credit allowed under paragraph 4 with respect to such items 

need not exceed the U.S. tax that may be imposed under the Convention, other than tax imposed solely by reason of the U.S. citizenship of the taxpayer under the provisions of the saving clause of 

paragraph 4 of Article 1 (General Scope). 

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

tax credit granted by Poland would be limited to 15 percent of the 

dividend—the U.S. tax that may be imposed under subparagraph 

2(b) of Article 10 (Dividends)—even if the shareholder is subject to 

U.S. net income tax because of his U.S. citizenship. 

Subparagraph 4(b) eliminates the potential for double taxation 

that can arise because subparagraph 4(a) provides that Poland 

need not provide full relief for the U.S. tax imposed on its citizens 

resident in the other Contracting State. The subparagraph provides 

that the United States will credit the income tax paid or accrued 

to Poland, after the application of subparagraph 4(a). It further 

provides that in allowing the credit, the United States will not reduce its tax below the amount that is taken into account in Poland 

in applying subparagraph 4(a). 

Since the income described in paragraph 4(a) generally will be 

U.S. source income, special rules are required to re-source some of 

the income to Poland in order for the United States to be able to 

credit the tax paid to the other Contracting State. This re-sourcing 

is provided for in subparagraph 4(c), which deems the items of income referred to in subparagraph 4(a) to be from foreign sources 

to the extent necessary to avoid double taxation under paragraph 

4(b). 

The following two examples illustrate the application of paragraph 4 in the case of a U.S.-source portfolio dividend received by 

a U.S. citizen resident in Poland. In both examples, the U.S. rate 

of tax on residents of the Poland, under subparagraph 2(b) of Article 10 (Dividends) of the Convention, is 15 percent. In both examples, the U.S. income tax rate on the U.S. citizen is 35 percent. In 

example 1, the rate of income tax imposed in Poland on its resident 

(the U.S. citizen) is 25 percent (below the U.S. rate), and in examVerDate Mar 15 2010 03:07 Jul 18, 2014 Jkt 039119 PO 00000 Frm 00089 Fmt 6602 Sfmt 6602 E:\HR\OC\ER011.XXX ER011

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ple 2, the rate imposed on its resident is 40 percent (above the U.S. 

rate). 

Example 1 Example 2 

Subparagraph (a) 

U.S. dividend declared ................................................... $100.00 $100.00 

Notional U.S. withholding tax (Article 10(2)(b)) ............ 15.00 15.00 

Taxable income in Poland .............................................. 100.00 100.00 

Polish tax before credit .................................................. 25.00 40.00 

Less: tax credit for notional U.S. withholding tax ........ 15.00 15.00 

Net post-credit tax paid to Poland ................................ 10.00 25.00 

Subparagraphs (b) and (c) 

U.S. pre-tax income $100.00 $100.00.

U.S. pre-credit citizenship tax ....................................... 35.00 35.00 

Notional U.S. withholding tax ........................................ 15.00 15.00 

U.S. tax eligible to be offset by credit .......................... 20.00 20.00 

Tax paid to Poland ......................................................... 10.00 25.00 

Income re-sourced from U.S. to foreign source (see 

below) ........................................................................ 28.57 57.14 

U.S. pre-credit tax on re-sourced income ..................... 10.00 20.00 

U.S. credit for tax paid to Poland ................................. 10.00 20.00 

Net post-credit U.S. tax ................................................. 10.00 0.00 

Total U.S. tax ............................................................ $25.00 $15.00 

In both examples, in the application of subparagraph 4(a), Poland credits a 15 percent U.S. tax against its residence tax on the 

U.S. citizen. In the first example, the net tax paid to Poland after 

the foreign tax credit is $10.00; in the second example, it is $25.00. 

In the application of subparagraphs 4(b) and 4(c), from the U.S. tax 

due before credit of $35.00, the United States subtracts the amount 

of the U.S. source tax of $15.00, against which no U.S. foreign tax 

credit is allowed. This subtraction ensures that the United States 

collects the tax that it is due under the Convention as the State 

of source. 

In both examples, given the 35 percent U.S. tax rate, the maximum amount of U.S. tax against which credit for the tax paid to 

Poland may be claimed is $20 ($35 U.S. tax minus $15 U.S. withholding tax). Initially, all of the income in both examples was from 

sources within the United States. For a U.S. foreign tax credit to 

be allowed for the full amount of the tax paid to Poland, an appropriate amount of the income must be re-sourced to Poland under 

subparagraph 4(c). 

The amount that must be re-sourced depends on the amount of 

tax for which the U.S. citizen is claiming a U.S. foreign tax credit. 

In example 1, the tax paid to Poland was $10. For this amount to 

be creditable against U.S. tax, $28.57 ($10 tax divided by 35 percent U.S. tax rate) must be resourced to Poland. When the tax is 

credited against the $10 of U.S. tax on this resourced income, there 

is a net U.S. tax of $10 due after credit ($20 U.S. tax eligible to 

be offset by credit, minus $10 tax paid to the other Contracting 


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State). Thus, in example 1, there is a total of $25 in U.S. tax ($15 

U.S. withholding tax plus $10 residual U.S. tax). In example 2, the tax paid to Poland was $25, but, because the United States subtracts the U.S. withholding tax of $15 from the 

total U.S. tax of $35, only $20 of U.S. taxes may be offset by taxes 

paid to Poland. Accordingly, the amount that must be resourced to 

Poland is limited to the amount necessary to ensure a U.S. foreign 

tax credit for $20 of tax paid to Poland, or $57.14 ($20 tax paid to 

Poland divided by 35 percent U.S. tax rate). When the tax paid to 

Poland is credited against the U.S. tax on this re-sourced income, 

there is no residual U.S. tax ($20 U.S. tax minus $25 tax paid to 

the other Contracting State, subject to the U.S. limit of $20). Thus, 

in example 2, there is a total of $15 in U.S. tax ($15 U.S. withholding tax plus $0 residual U.S. tax). Because the tax paid to Poland was $25 and the U.S. tax eligible to be offset by credit was 

$20, there is $5 of excess foreign tax credit available for carryover. 

The above examples illustrate the application of paragraph 4 to 

a single item of gross income. However, taxpayers may encounter 

situations in which they may have to calculate the foreign tax credit on net income, in which case other methodologies could be applied to achieve the intent of paragraph 4. 

Paragraph 5 

Paragraph 5 coordinates the tax systems of the Contracting 

States to avoid double taxation that could result from the imposition of exit tax regimes on individuals who relinquish citizenship 

or long-term residence status. In the case of the United States, 

paragraph 5 addresses the mark-to-market exit tax regime applicable to ‘‘covered expatriates’’ within the meaning of Code section 

877A(g)(1). Paragraph 5 would also address any analogous taxes 

imposed by Poland. This rule is intended to coordinate taxation by 

the United States and Poland of taxable gains in the case of a timing mismatch. Such a mismatch may occur, for example, where a 

U.S. citizen or long-term resident (within the meaning of Code section 877(e)(2)) recognizes, for U.S. tax purposes, taxable gain on a 

deemed sale of all property on the day before the individual expatriates to Poland. 

To avoid double taxation, paragraph 5 provides that where an individual who, upon ceasing to be a resident (as determined under 

paragraph 1 of Article 4 (Resident)) of one Contracting State, is 

treated for purposes of taxation by that State as having alienated 

property and is taxed by that State by reason thereof, the individual may elect to be treated for the purposes of taxation by the 

other Contracting State as having sold and repurchased the property for its fair market value on the day before the expatriation 

date. The election in paragraph 5 therefore may be available to any 

U.S. citizen or long-term resident who expatriates from the United 

States to Poland. The effect of the election will be to give the individual an adjusted basis in Poland for tax purposes equal to the 

fair market value of the property as of the date of the deemed 

alienation in the United States, with the result that only post-emigration gain will be subject to tax in Poland when there is an actual alienation of the property while the individual is a resident of 

Poland. 


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Individuals may make the election provided by paragraph 5 only 

with respect to property that is subject to a Contracting State’s 

deemed disposition rules and only with respect to which gain on a 

deemed alienation is recognized for that Contracting State’s tax 

purposes in the taxable year of the deemed alienation. In the 

United States, the following types of property are excluded from 

the deemed disposition rules in the case of individuals who cease 

to be citizens or long term residents of the United States: (1) an 

eligible deferred compensation item as defined under Code section 

877A(d)(3), and (2) an interest in a non-grantor trust as defined 

under Code section 877A(f)(3) (unless the individual elects to take 

the value of the interest in the trust into account pursuant to procedures prescribed by the IRS pursuant to Code section 

877A(f)(4)(B)). 

If an individual recognizes in one Contracting State losses and 

gains from the deemed alienation of multiple properties, then the 

individual must apply this paragraph consistently with respect to 

all such properties in both Contracting States. An individual who 

is deemed to have alienated multiple properties may only make the 

election under this paragraph if the deemed alienation of all such 

properties results in a net taxable gain. If the deemed alienation 

of the multiple properties results in a net loss, then an election 

under this paragraph may not be made with respect to any such 

properties. 

The other Contracting State is only required to provide a basis 

adjustment to the extent that tax is actually paid in the first-mentioned Contracting State. Thus, to the extent that the deemed 

alienation of properties results in a net gain, but no tax is actually 

paid on such gain due to an exclusion provision or other mechanism provided under the domestic law of the first-mentioned Contracting State, the other Contracting State is not required to provide a basis adjustment. Under the domestic law of the United 

States, Code section 877A(a)(3) provides an exclusion for certain 

gain up to $600,000 (as indexed for inflation). Poland also is not 

required to provide a basis adjustment with respect to tax that is 

deferred pursuant to Code section 877A(b). 

Relationship to Other Articles 

By virtue of subparagraph 5(a) of Article 1 (General Scope), Article 23 is not subject to the saving clause of paragraph 4 of Article 

1. Thus, the United States will allow a credit to its citizens and 

residents in accordance with the Article, even if such credit were 

to provide a benefit not available under the Code (such as the resourcing provided by paragraph 3 and subparagraph 4(c)). In addition, even though the United States is explicitly granting U.S. citizens and residents a benefit under paragraph 5, the exception to 

the saving clause clarifies that under paragraph 5, the United 

States will not tax individuals that become U.S. citizens or residents on certain pre-emigration gain that it couldn’t otherwise tax 

under the Convention at the time of the deemed disposition pursuant to a paragraph 5 election. 


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ARTICLE 24 (NON-DISCRIMINATION)

This Article ensures that nationals of a Contracting State, in the 

case of paragraph 1, and residents of a Contracting State, in the 

case of paragraphs 2 through 5, will not be subject, directly or indirectly, to discriminatory taxation in the other Contracting State. 

Not all differences in tax treatment, either as between nationals of 

the two States, or between residents of the two States, are violations of the prohibition against discrimination. Rather, the non-discrimination obligations of this Article apply only if the nationals or 

residents of the two States are comparably situated. 

Each of the relevant paragraphs of the Article provides that two 

persons that are comparably situated must be treated similarly. Although the actual words differ from paragraph to paragraph (e.g., 

paragraph 1 refers to two nationals ‘‘in the same circumstances,’’ 

paragraph 2 refers to two enterprises ‘‘carrying on the same activities,’’ and paragraph 4 refers to two enterprises that are ‘‘similar,’’ 

the common underlying premise is that if the difference in treatment is directly related to a tax-relevant difference in the situations of the domestic and foreign persons being compared, that difference is not to be treated as discriminatory (i.e., if one person is 

taxable in a Contracting State on worldwide income and the other 

is not, or tax may be collectible from one person at a later stage, 

but not from the other, distinctions in treatment would be justified 

under paragraph 1). Other examples of such factors that can lead 

to non-discriminatory differences in treatment are noted in the discussions of each paragraph. 

The operative paragraphs of the Article also use different language to identify the kinds of differences in taxation treatment that 

will be considered discriminatory. For example, paragraphs 1 and 

4 speak of ‘‘any taxation or any requirement connected therewith 

that is more burdensome,’’ while paragraph 2 specifies that a tax 

‘‘shall not be less favorably levied.’’ Regardless of these differences 

in language, only differences in tax treatment that materially disadvantage the foreign person relative to the domestic person are 

properly the subject of the Article. 

Paragraph 1 

Paragraph 1 provides that a national of one Contracting State 

may not be subject to taxation or connected requirements in the 

other Contracting State that are more burdensome than the taxes 

and connected requirements imposed upon a national of that other 

State in the same circumstances. Since paragraph 1 prevents different treatment based on nationality, but only with respect to persons ‘‘in the same circumstances, in particular with respect to residence,’’ it is important to distinguish, for purposes of the paragraph, a different treatment that is solely based on nationality 

from a different treatment that relates to other circumstances and, 

in particular, taxation on worldwide income. 

The term ‘‘national’’ in relation to a Contracting State is defined 

in subparagraph 1(j) of Article 3 (General Definitions). The term includes both individuals and juridical persons. A national of a Contracting State is afforded protection under this paragraph even if 

the national is not a resident of either Contracting State. Thus, a 


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U.S. citizen who is resident in a third country is entitled, under 

this paragraph, to the same treatment in Poland as a national of 

Poland who is in similar circumstances (i.e., presumably one who 

is resident in a third State). 

As noted above, whether or not the two persons are both taxable 

on worldwide income is a significant circumstance for this purpose. 

Accordingly, the United States is not obligated to apply the same 

taxing regime to a national of Poland who is not resident in the 

United States as it applies to a U.S. national who is not resident 

in the United States. U. S. citizens who are not residents of the 

United States but who are nevertheless subject to U. S. tax on 

their worldwide income are not in the same circumstances with respect to U. S. taxation as citizens of Poland who are not U. S. residents. Thus, for example, Article 24 would not entitle a national of 

Poland resident in a third country to taxation at graduated rates 

on U.S. source dividends or other investment income that applies 

to a U.S. citizen resident in the same third country. 

Paragraph 2 

Paragraph 2 of the Article, provides that a Contracting State 

may not tax a permanent establishment of an enterprise of the 

other Contracting State less favorably than an enterprise of that 

first-mentioned State that is carrying on the same activities. 

The fact that a U.S. permanent establishment of an enterprise 

of Poland is subject to U.S. tax only on income that is attributable 

to the permanent establishment, while a U.S. corporation engaged 

in the same activities is taxable on its worldwide income is not, in 

itself, a sufficient difference to provide different treatment for the 

permanent establishment. There are cases, however, where the two 

enterprises would not be similarly situated and differences in treatment may be warranted. For instance, it would not be a violation 

of the non-discrimination protection of paragraph 2 to require the 

foreign enterprise to provide information in a reasonable manner 

that may be different from the information requirements imposed 

on a resident enterprise, because information may not be as readily 

available to the Internal Revenue Service from a foreign as from 

a domestic enterprise. Similarly, it would not be a violation of paragraph 2 to impose penalties on persons who fail to comply with 

such a requirement (see, e.g., sections 874(a) and 882(c)(2)). Further, a determination that income and expenses have been attributed or allocated to a permanent establishment in conformity with 

the principles of Article 7 (Business Profits) implies that the attribution or allocation was not discriminatory. 

Section 1446 of the Code imposes the obligation to withhold tax 

on amounts allocable to a foreign partner on any partnership with 

income that is effectively connected with a U.S. trade or business. 

In the context of the Convention, this obligation applies with respect to a share of the partnership income of a partner resident in 

Poland, and attributable to a U.S. permanent establishment. There 

is no similar obligation with respect to the distributive shares of 

U.S. resident partners. It is understood, however, that this distinction is not a form of discrimination within the meaning of paragraph 2 of the Article. No distinction is made between U.S. and 

non-U.S. partnerships, since the law requires that partnerships of 


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both U.S. and non-U.S. domicile withhold tax in respect of the partnership shares of non-U.S. partners. Furthermore, in distinguishing between U.S. and non-U.S. partners, the requirement to 

withhold on the non-U.S. but not the U.S. partner’s share is not 

discriminatory taxation, but, like other withholding on nonresident 

aliens, is merely a reasonable method for the collection of tax from 

persons who are not continually present in the United States, and 

as to whom it otherwise may be difficult for the United States to 

enforce its tax jurisdiction. If tax has been over-withheld, the partner can, as in other cases of over-withholding, file for a refund. 

Paragraph 3 

Paragraph 3 makes clear that the provisions of paragraphs 1 and 

2 do not obligate a Contracting State to grant to a resident of the 

other Contracting State any tax allowances, reliefs, etc., that it 

grants to its own residents on account of their civil status or family 

responsibilities. Thus, if a sole proprietor who is a resident of Poland has a permanent establishment in the United States, in assessing income tax on the profits attributable to the permanent establishment, the United States is not obligated to allow to the resident of Poland the personal allowances for himself and his family 

that he would be permitted to take if the permanent establishment 

were a sole proprietorship owned and operated by a U.S. resident, 

despite the fact that the individual income tax rates would apply. 

Paragraph 4 

Paragraph 4 prohibits discrimination in the allowance of deductions. When a resident or an enterprise of a Contracting State pays 

interest, royalties or other disbursements to a resident of the other 

Contracting State, the first-mentioned Contracting State must 

allow a deduction for those payments in computing the taxable 

profits of the resident or enterprise as if the payment had been 

made under the same conditions to a resident of the first-mentioned Contracting State. Paragraph 3, however, does not require 

a Contracting State to give non-residents more favorable treatment 

than it gives to its own residents. Consequently, a Contracting 

State does not have to allow non-residents a deduction for items 

that are not deductible under its domestic law (for example, expenses of a capital nature). 

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

the person incurring the expense. 

An exception to the rule of paragraph 4 is provided for cases 

where the provisions of paragraph 1 of Article 9 (Associated Enterprises), paragraph 8 of Article 11 (Interest) or paragraph 6 of Article 13 (Royalties) apply. All of these provisions permit the denial 

of deductions in certain circumstances in respect of transactions between related persons. Neither State is forced to apply the non-discrimination principle in such cases. The exception with respect to 

paragraph 8 of Article 11 would include the denial or deferral of 

certain interest deductions under Code section 163(j). 


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Paragraph 4 also provides that any debts of an enterprise of a 

Contracting State to a resident of the other Contracting State are 

deductible in the first-mentioned Contracting State for purposes of 

computing the capital tax of the enterprise under the same conditions as if the debt had been contracted to a resident of the firstmentioned Contracting State. Even though, for general purposes, 

the Convention covers only income taxes, under paragraph 7 of this 

Article, the non-discrimination provisions apply to all taxes levied 

in both Contracting States, at all levels of government. Thus, this 

provision may be relevant for both States. The other Contracting 

State may have capital taxes and in the United States such taxes 

frequently are imposed by local governments. 

Paragraph 5 

Paragraph 5 requires that a Contracting State not impose more 

burdensome taxation or connected requirements on an enterprise of 

that State that is wholly or partly owned or controlled, directly or 

indirectly, by one or more residents of the other Contracting State 

than the taxation or connected requirements that it imposes on 

other similar enterprises of that first-mentioned Contracting State. 

For this purpose it is understood that ‘‘similar’’ refers to similar activities or ownership of the enterprise. 

This rule, like all non-discrimination provisions, does not prohibit 

differing treatment of entities that are in differing circumstances. 

Rather, a protected enterprise is only required to be treated in the 

same manner as other enterprises that, from the point of view of 

the application of the tax law, are in substantially similar circumstances both in law and in fact. The taxation of a distributing 

corporation under section 367(e) on an applicable distribution to 

foreign shareholders does not violate paragraph 5 of the Article because a foreign-owned corporation is not similar to a domesticallyowned corporation that is accorded non-recognition treatment 

under sections 337 and 355. 

For the reasons given above in connection with the discussion of 

paragraph 2 of the Article, it is also understood that the provision 

in section 1446 of the Code for withholding of tax on non-U.S. partners does not violate paragraph 5 of the Article. 

It is further understood that the ineligibility of a U.S. corporation with nonresident alien shareholders to make an election to be 

an ‘‘S’’ corporation does not violate paragraph 5 of the Article. If 

a corporation elects to be an S corporation, it is generally not subject to income tax and the shareholders take into account their pro 

rata shares of the corporation’s items of income, loss, deduction or 

credit. A nonresident alien does not pay U.S. tax on a net basis, 

and, thus, does not generally take into account items of loss, deduction or credit. Therefore, the S corporation provisions do not exclude corporations with nonresident alien shareholders because 

such shareholders are foreign, but only because they are not netbasis 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 


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in corporate form at individual tax rates would not be furthered by 

their inclusion. 

Finally, it is understood that paragraph 5 does not require a 

Contracting State to allow foreign corporations to join in filing a 

consolidated return with a domestic corporation or to allow similar 

benefits between domestic and foreign enterprises. 

Paragraph 6 

Paragraph 6 of the Article confirms that no provision of the Article will prevent either Contracting State from imposing the branch 

profits tax described in paragraph 1 of Article 12 (Branch Profits). 

Paragraph 7 

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

purposes, for purposes of providing nondiscrimination protection 

this Article applies to taxes of every kind and description imposed 

by a Contracting State or a political subdivision or local authority 

thereof. Customs duties are not considered to be taxes for this purpose. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) 

does not apply to this Article by virtue of the exceptions in subparagraph 5(a) of Article 1. Thus, for example, a U.S. citizen who 

is a resident of the other Contracting State may claim benefits in 

the United States under this Article. 

Nationals of a Contracting State may claim the benefits of paragraph 1 regardless of whether they are entitled to benefits under 

Article 22 (Limitation on Benefits), because that paragraph applies 

to nationals and not residents. They may not claim the benefits of 

the other paragraphs of this Article with respect to an item of income unless they are generally entitled to treaty benefits with respect to that income under a provision of Article 22. 

ARTICLE 25 (MUTUAL AGREEMENT PROCEDURE)

This Article provides the mechanism for taxpayers to bring to the 

attention of competent authorities issues and problems that may 

arise under the Convention. It also provides the authority for cooperation between the competent authorities of the Contracting 

States to resolve disputes and clarify issues that may arise under 

the Convention and to resolve cases of double taxation not provided 

for in the Convention. The competent authorities of the two Contracting States are identified in paragraph 1(g) of Article 3 (General Definitions). 

Paragraph 1 

This paragraph provides that, where a resident of a Contracting 

State considers that the actions of one or both Contracting States 

will result in taxation that is not in accordance with the Convention, he may, irrespective of the remedies provided by the domestic 

laws of the two Contracting States including any prescribed times 

limits for presenting claims for refund, present his case to the competent authority of the Contracting State of which he is a resident, 


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or if his case comes under paragraph 1 of Article 24 (Non-Discrimination), to that of the Contracting State of which he is a national. 

Paragraph 1 requires that the case must be presented within three 

years from the first notification of the action resulting in taxation 

not in accordance with the provisions of the Convention. 

Although the typical cases brought under this paragraph will involve economic double taxation arising from transfer pricing adjustments, the scope of this paragraph is not limited to such cases. For 

example, a taxpayer could request assistance from the competent 

authority if one Contracting State determines that the taxpayer 

has received deferred compensation taxable at source under Article 

14 (Income from Employment), while the taxpayer believes that 

such income should be treated as a pension that is taxable only in 

his country of residence pursuant to Article 18 (Pensions, Social Security, Annuities, Alimony, and Child Support). 

Paragraph 2 

Paragraph 2 sets out the framework within which the competent 

authorities will deal with cases brought by taxpayers under paragraph 1. It provides that, if the competent authority of the Contracting State to which the case is presented judges the case to 

have merit, and cannot reach a unilateral solution, it shall seek an 

agreement with the competent authority of the other Contracting 

State pursuant to which taxation not in accordance with the Convention will be avoided. 

Any agreement is to be implemented even if such implementation otherwise would be barred by the statute of limitations or by 

some other procedural limitation, such as a closing agreement. 

Paragraph 2, however, does not prevent the application of domestic-law procedural limitations that give effect to the agreement 

(e.g., a domestic-law requirement that the taxpayer file a return reflecting the agreement within one year of the date of the agreement). 

Where the taxpayer has entered a closing agreement (or other 

written settlement) with the United States before bringing a case 

to the competent authorities, the U.S. competent authority will endeavor only to obtain a correlative adjustment from the other Contracting State. See Rev. Proc. 2002-52, 2002-31 I.R.B. 242, δ 7.04 

(or any similarly applicable or successor procedures). Because, as 

specified in paragraph 2 of Article 1 (General Scope), the Convention cannot operate to increase a taxpayer’s liability, temporal or 

other procedural limitations can be overridden only for the purpose 

of making refunds and not to impose additional tax. Thus, even if 

the statute of limitations has expired, a refund of tax can be made 

in order to implement a correlative adjustment. 

Paragraph 3 

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

The competent authorities may, for example, agree to the same 

allocation of income, deductions, credits or allowances between an 

enterprise in one Contracting State and its permanent establishment in the other or between related persons. These allocations are 


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to be made in accordance with the arm’s length principle underlying Article 7 (Business Profits) and Article 9 (Associated Enterprises). Agreements reached under these subparagraphs may include agreement on a methodology for determining an appropriate 

transfer price, on an acceptable range of results under that methodology, or on a common treatment of a taxpayer’s cost sharing arrangement. 

The competent authorities also may agree to settle a variety of 

conflicting applications of the Convention. They may agree to settle 

conflicts regarding the characterization of particular items of income, the characterization of persons, the application of source 

rules to particular items of income, the meaning of a term, or the 

timing of an item of income. 

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

manner consistent with the purposes of the Convention. 

The competent authorities may seek agreement on a uniform set 

of standards for the use of exchange rates. Agreements reached by 

the competent authorities under paragraph 3 need not conform to 

the internal law provisions of either Contracting State. 

Paragraph 3 authorizes the competent authorities to consult for 

the purpose of eliminating double taxation in cases not provided for 

in the Convention and to resolve any difficulties or doubts arising 

as to the interpretation or application of the Convention. This provision is intended to permit the competent authorities to implement the treaty in particular cases in a manner that is consistent 

with its expressed general purposes. It permits the competent authorities to deal with cases that are within the spirit of the provisions but that are not specifically covered. An example of such a 

case might be double taxation arising from a transfer pricing adjustment between two permanent establishments of a third-country 

resident, one in the United States and one in Poland. Since no resident of a Contracting State is involved in the case, the Convention 

does not apply, but the competent authorities nevertheless may use 

the authority of this Article to prevent the double taxation of income. 

Paragraph 4 

Paragraph 4 provides that the competent authorities may communicate with each other for the purpose of reaching an agreement. This makes clear that the competent authorities of the two 

Contracting States may communicate without going through diplomatic channels. Such communication may be in various forms, including, where appropriate, through a joint commission consisting 

of themselves or their representatives. 

Treaty Termination in Relation to Competent Authority Dispute Resolution 

A case may be raised by a taxpayer under a treaty with respect 

to a year for which a treaty was in force after the treaty has been 

terminated. In such a case the ability of the competent authorities 

to act is limited. They may not exchange confidential information, 


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nor may they reach a solution that varies from that specified in its 

law. 

Triangular Competent Authority Solutions 

International tax cases may involve more than two taxing jurisdictions (e.g., transactions among a parent corporation resident in 

country A and its subsidiaries resident in countries B and C). As 

long as there is a complete network of treaties among the three 

countries, it should be possible, under the full combination of bilateral authorities, for the competent authorities of the three States 

to work together on a three-sided solution. Although country A may 

not be able to give information received under Article 26 (Exchange 

of Information) from country B to the authorities of country C, if 

the competent authorities of the three countries are working together, it should not be a problem for them to arrange for the authorities of country B to give the necessary information directly to 

the tax authorities of country C, as well as to those of country A. 

Each bilateral part of the trilateral solution must, of course, not exceed the scope of the authority of the competent authorities under 

the relevant bilateral treaty. 

Relationship to Other Articles 

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

Article 1 (General Scope) by virtue of the exceptions in paragraph 

5(a) of that Article. Thus, rules, definitions, procedures, etc. that 

are agreed upon by the competent authorities under this Article 

may be applied by the United States with respect to its citizens 

and residents even if they differ from the comparable Code provisions. Similarly, as indicated above, U.S. law may be overridden to 

provide refunds of tax to a U.S. citizen or resident under this Article. A person may seek relief under this Article regardless of 

whether he is generally entitled to benefits under Article 22 (Limitation on Benefits). As in all other cases, the competent authority 

is vested with the discretion to decide whether the claim for relief 

is justified. 

ARTICLE 26 (EXCHANGE OF INFORMATION)

This Article provides for the exchange of information and administrative assistance between the competent authorities of the Contracting States. While mutual agreement procedures are addressed 

in Article 25 (Mutual Agreement Procedure), exchanges of information for purposes of the mutual agreement procedures are governed 

by this Article. 

Paragraph 1 

The obligation to obtain and provide information to the other 

Contracting State is set out in Paragraph 1. The information to be 

exchanged is that which is foreseeably relevant for carrying out the 

provisions of the Convention or the domestic laws of the United 

States or Poland concerning taxes of every kind applied at the national level. This language incorporates the standard of the OECD 

Model. The Contracting States intend for the phrase ‘‘is foreseeably 

relevant’’ to be interpreted to permit the exchange of information 

that ‘‘may be relevant’’ for purposes of Section 7602 of the Code, 


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which authorizes the IRS to examine ‘‘any books, papers, records, 

or other data which may be relevant or material’’ (emphasis 

added). In United States v. Arthur Young & Co., 465 U.S. 805, 814 

(1984), the Supreme Court stated that the language ‘‘may be’’ reflects Congress’s express intention to allow the IRS to obtain ‘‘items 

of even potential relevance to an ongoing investigation, without reference to its admissibility’’ (emphasis in original.) However, the 

language ‘‘may be’’ would not support a request in which a Contracting State simply asked for information regarding all bank accounts maintained by residents of that Contracting State in the 

other Contracting State. Thus, the language of paragraph 1 is intended to provide for exchange of information in tax matters to the 

widest extent possible, while clarifying that Contracting States are 

not at liberty to engage in ‘‘fishing expeditions’’ or otherwise to request information that is unlikely to be relevant to the tax affairs 

of a given taxpayer. 

Consistent with the OECD Model, a request for information does 

not constitute a ‘‘fishing expedition’’ solely because it does not provide the name or address (or both) of the taxpayer under examination or investigation. In cases where the requesting State does not 

provide the name or address (or both) of the taxpayer under examination or investigation, the requesting State must provide other 

information sufficient to identify the taxpayer. Similarly, paragraph 1 does not necessarily require the request to include the 

name and/or address of the person believed to be in possession of 

the information. 

The standard of ‘‘foreseeable relevance’’ can be met in cases dealing with both one taxpayer (whether identified by name or otherwise) or several taxpayers (whether identified by name or otherwise). Where a Contracting State undertakes an investigation into 

an ascertainable group or category of persons in accordance with 

its laws, any request related to the investigation will typically 

serve the objective of carrying out the domestic tax laws of the requesting State and thus will comply with the requirements of paragraph 1, provided it meets the standard of ‘‘foreseeable relevance.’’ 

In such cases, the requesting State should provide, supported by a 

clear factual basis, a detailed description of the group or category 

of persons and of the specific facts and circumstances that have led 

to the request, as well as an explanation of the applicable law and 

why there is reason to believe that the taxpayers in the group or 

category of persons for whom information is requested have been 

non-compliant with that law. The requesting State should further 

show that the requested information would assist in determining 

compliance by the taxpayers in the group or category of persons. 

Exchange of information with respect to each State’s domestic 

law is authorized to the extent that taxation under domestic law 

is not contrary to the Convention. Thus, for example, information 

may be exchanged under this Article even if the transaction to 

which the information relates is a purely domestic transaction in 

the requesting State and, therefore, the exchange is not made to 

carry out the Convention. An example of such a case is provided 

in subparagraph 8(b) of the OECD Commentary: a company resident in one Contracting State and a company resident in the other 

Contracting State transact business between themselves through a 


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third-country resident company. Neither Contracting State has a 

treaty with the third state. To enforce their internal laws with respect to transactions of their residents with the third-country company (since there is no relevant treaty in force), the Contracting 

States may exchange information regarding the prices that their 

residents paid in their transactions with the third-country resident. 

Paragraph 1 clarifies that information may be exchanged that relates to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, 

taxes of every kind imposed by a Contracting State at the national 

level. Accordingly, the competent authorities may request and provide information for cases under examination or criminal investigation, in collection, on appeals, or under prosecution, and information may be exchanged with respect to U.S. estate and gift taxes. 

Information exchange is not restricted by paragraph 1 of Article 

1 (General Scope). Accordingly, information may be requested and 

provided under this Article with respect to persons who are not 

residents of either Contracting State. For example, if a third-country resident has a permanent establishment in the other Contracting State, and that permanent establishment engages in 

transactions with a U.S. enterprise, the United States could request information with respect to that permanent establishment, 

even though the third-country resident is not a resident of either 

Contracting State. Similarly, if a third-country resident maintains 

a bank account in the other Contracting State, and the Internal 

Revenue Service has reason to believe that funds in that account 

should have been reported for U.S. tax purposes but have not been 

so reported, information can be requested from the other Contracting State with respect to that person’s account, even though 

that person is not the taxpayer under examination. 

Although the term ‘‘United States’’ does not encompass U.S. possessions or territories for most purposes of the Convention, section 

7651 of the Code authorizes the Internal Revenue Service to utilize 

the administrative and enforcement provisions of the Code in the 

U.S. possessions or territories, including to obtain information pursuant to a proper request made under Article 26. If necessary to 

obtain requested information, the Internal Revenue Service could 

issue and enforce an administrative summons to the taxpayer, a 

tax authority (or other U.S. possession or territory government 

agency), or a third party located in a U.S. possession or territory. 

Paragraph 2 

Paragraph 2 provides assurances that any information exchanged will be treated as secret, subject to the same disclosure 

constraints as information obtained under the laws of the requesting State. The confidentiality rules cover communications between 

the competent authorities (including the letter requesting information) as well as references to exchanged information that may occur 

in other documents, such as advice by government attorneys to 

their respective competent authorities. At the same time, it is understood that the requested State can disclose the minimum information contained in a competent authority letter (but not the letter 

itself) necessary for the requested State to be able to obtain or provide the requested information to the requesting State, without 


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frustrating the efforts of the requesting State. If, however, court 

proceedings or the like under the domestic laws of the requested 

State necessitate the disclosure of the competent authority letter 

itself, the competent authority of the requested State may disclose 

such a letter unless the requesting State otherwise specifies. 

Information received may be disclosed only to persons or authorities, including courts and administrative bodies, involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, 

the taxes referred to in paragraph 1. Under this standard, information may be communicated to the taxpayer or his proxy. The information must be used by these persons only for the purposes mentioned in paragraph 2. Information may also be disclosed to legislative bodies, such as the tax-writing committees of the U.S. Congress and the U.S. Government Accountability Office, engaged in 

the oversight of the preceding activities. Information received by 

these bodies must be for use in the performance of their role in 

overseeing the administration of U.S. tax laws. Information received may be disclosed in public court proceedings or in judicial 

decisions. 

In situations in which the requested State determines that the 

requesting State does not comply with its duties regarding the confidentiality of the information exchanged under this Article, the requested State may suspend assistance under this Article until such 

time as proper assurance is given by the requesting State that 

those duties will indeed be respected. If necessary, the competent 

authorities may enter into specific arrangements or memoranda of 

understanding regarding the confidentiality of the information exchanged under this Article. 

Paragraph 3 

Paragraph 3 provides that the obligations undertaken in paragraphs 1 and 2 to exchange information do not require a Contracting State to carry out administrative measures that are at 

variance with the laws or administrative practice of either State. 

Nor is a Contracting State required to supply information not obtainable under the laws or administrative practice of either State, 

or to disclose trade secrets or other information, the disclosure of 

which would be contrary to public policy. 

Thus, a requesting State may be denied information from the 

other State if the information would be obtained pursuant to procedures or measures that are broader than those available in the requesting State. However, the statute of limitations of the Contracting State making the request for information should govern a 

request for information. Thus, the Contracting State of which the 

request is made should attempt to obtain the information even if 

its own statute of limitations has passed. In many cases, relevant 

information will still exist in the business records of the taxpayer 

or a third party, even though it is no longer required to be kept 

for domestic tax purposes. 

While paragraph 3 states conditions under which a Contracting 

State is not obligated to comply with a request from the other Contracting State for information, the requested State is not precluded 


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from providing such information, and may, at its discretion, do so 

subject to the limitations of its internal law. 

Paragraph 4 

Paragraph 4 provides that when information is requested by a 

Contracting State in accordance with this Article, the other Contracting State is obligated to obtain the requested information as 

if the tax in question were the tax of the requested State, even if 

that State has no direct tax interest in the case to which the request relates. In the absence of such a paragraph, some taxpayers 

have argued that paragraph 3(a) prevents a Contracting State from 

requesting information from a bank or fiduciary that the Contracting State does not need for its own tax purposes. This paragraph clarifies that paragraph 3 does not impose such a restriction 

and that a Contracting State is not limited to providing only the 

information that it already has in its own files. 

Paragraph 5 

Paragraph 5 provides that a Contracting State may not decline 

to provide information because that information is held by banks, 

other financial institutions, nominees or persons acting in an agency or fiduciary capacity or because it relates to ownership interests 

in a person. Thus, paragraph 5 would effectively prevent a Contracting State from relying on paragraph 3 to argue that its domestic bank secrecy laws (or similar legislation relating to disclosure 

of financial information by financial institutions or intermediaries) 

override its obligation to provide information under paragraph 1. 

This paragraph also requires the disclosure of information regarding the beneficial owner of an interest in a person, such as the 

identity of a beneficial owner of bearer shares. 

Subparagraphs (3)(a) and (b) do not permit the requested State 

to decline a request where paragraph 4 or 5 applies. Paragraph 5 

would apply, for instance, in situations in which the requested 

State’s inability to obtain the information was specifically related 

to the fact that the requested information was believed to be held 

by a bank or other financial institution. Thus, the application of 

paragraph 5 includes situations in which the tax authorities’ information gathering powers with respect to information held by banks 

and other financial institutions are subject to different requirements than those that are generally applicable with respect to information held by persons other than banks or other financial institutions. This would, for example, be the case where the tax authorities can only exercise their information gathering powers with 

respect to information held by banks and other financial institutions in instances where specific information on the taxpayer under 

examination or investigation is available. This would also be the 

case where, for example, the use of information gathering measures 

with respect to information held by banks and other financial institutions requires a higher probability that the information requested is held by the person believed to be in possession of the 

requested information than the degree of probability required for 

the use of information gathering measures with respect to information believed to be held by persons other than banks or financial 

institutions. 


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Paragraph 6 

Paragraph 6 provides that the requesting State may specify the 

form in which information is to be provided (e.g., depositions of witnesses and authenticated copies of original documents). The intention is to ensure that the information may be introduced as evidence in the judicial proceedings of the requesting State. The requested State should, if possible, provide the information in the 

form requested to the same extent that it can obtain information 

in that form under its own laws and administrative practices with 

respect to its own taxes. 

Paragraph 7 

Paragraph 7 states that the competent authorities of the Contracting States may develop an agreement upon the mode of application of the Article. The Article authorizes the competent authorities to exchange information on an automatic basis, on request in 

relation to a specific case, or spontaneously. It is contemplated that 

the Contracting States will utilize this authority to engage in all 

of these forms of information exchange, as appropriate. 

The competent authorities may also agree on specific procedures 

and timetables for the exchange of information. In particular, the 

competent authorities may agree on minimum thresholds regarding 

tax at stake or take other measures aimed at ensuring some measure of reciprocity with respect to the overall exchange of information between the Contracting States. 

Treaty Effective Dates and Termination in Relation to Exchange of Information 

Once the Convention is in force, the competent authority may 

seek information under the Convention with respect to a year prior 

to the entry into force of the Convention. Even if an earlier Convention with more restrictive provisions, or even no Convention, 

was in effect during the years in which the transaction at issue occurred, the exchange of information provisions of the Convention 

apply. In that case, the competent authorities have available to 

them the full range of information exchange provisions afforded 

under this Article. 

In contrast, if the Convention is terminated in accordance with 

the provisions of Article 29 (Termination), it would cease to authorize, as of the date of termination, any exchange of information, 

even with respect to a year for which the Convention was in force. 

In such case, the tax administrations of the two countries would 

only be able to exchange information to the extent allowed under 

either domestic law or another international agreement or arrangement. 

ARTICLE 27 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR

POSTS)

This Article confirms that any fiscal privileges to which diplomatic or consular officials are entitled under general provisions of 

international law or under special agreements will apply notwithstanding any provisions to the contrary in the Convention. The 

agreements referred to include any bilateral agreements, such as 


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consular conventions, that affect the taxation of diplomats and consular officials and any multilateral agreements dealing with these 

issues, such as the Vienna Convention on Diplomatic Relations and 

the Vienna Convention on Consular Relations. The U.S. generally 

adheres to the latter because its terms are consistent with customary international law. 

The Article does not independently provide any benefits to diplomatic agents and consular officers. Article 19 (Government Service) 

does so, as do Code section 893 and a number of bilateral and multilateral agreements. In the event that there is a conflict between 

the Convention and international law or such other treaties, under 

which the diplomatic agent or consular official is entitled to greater 

benefits under the latter, the latter laws or agreements shall have 

precedence. Conversely, if the Convention confers a greater benefit 

than another agreement, the affected person could claim the benefit of the tax treaty. 

Pursuant to subparagraph 5(b) of Article 1, the saving clause of 

paragraph 4 of Article 1 (General Scope) does not apply to override 

any benefits of this Article available to an individual who is neither 

a citizen of the United States nor has immigrant status in the 

United States. 

ARTICLE 28 (ENTRY INTO FORCE)

This Article contains the rules for bringing the Convention into 

force and giving effect to its provisions. 

Paragraph 1 

Paragraph 1 provides for the ratification of the Convention by 

both Contracting States according to their constitutional and statutory requirements. This paragraph requires the Contracting States 

to notify each other in writing, through diplomatic channel, when 

their respective applicable procedures have been satisfied. 

In the United States, the process leading to ratification and entry 

into force is as follows: Once a treaty has been signed by authorized representatives of the two Contracting States, the Department 

of State sends the treaty to the President who formally transmits 

it to the Senate for its advice and consent to ratification, which requires approval by two-thirds of the Senators present and voting. 

Prior to this vote, however, it generally has been the practice for 

the Senate Committee on Foreign Relations to hold hearings on the 

treaty and make a recommendation regarding its approval to the 

full Senate. Both Government and private sector witnesses may 

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

Paragraph 2 

Paragraph 2 provides that the Convention will enter into force on 

the date of the later of the diplomatic notes referred to in paragraph 1. The date on which a treaty enters into force is not necessarily the date on which its provisions take effect. Paragraph 2, 

therefore, also contains rules that determine when the provisions 

of the treaty will have effect. 


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Under subparagraph 2(a), the Convention will have effect with 

respect to taxes withheld at source (principally dividends, interest 

and royalties) for amounts paid or credited on or after the first day 

of the second month following the date on which the Convention 

enters into force. For example, if instruments of ratification are exchanged on April 25 of a given year, the withholding rates specified 

in paragraph 2 of Article 10 (Dividends) would be applicable to any 

dividends paid or credited on or after June 1 of that year. This rule 

allows the benefits of the withholding reductions to be put into effect as soon as possible, without waiting until the following year. 

The delay of one to two months is required to allow sufficient time 

for withholding agents to be informed about the change in withholding rates. If for some reason a withholding agent withholds at 

a higher rate than that provided by the Convention (perhaps because it was not able to re-program its computers before the payment is made), a beneficial owner of the income that is a resident 

of the other Contracting State may make a claim for refund pursuant to section 1464 of the Code. 

For all other taxes, subparagraph 2(b) specifies that the Convention will have effect for any taxable period beginning on or after 

January 1 of the year following entry into force. 

Paragraph 3 

Paragraph 3 provides that the Convention between the Government of the United States of America and the Government of the 

Polish People’s Republic for the Avoidance of Double Taxation and 

the Prevention of Fiscal Evasion with Respect to Taxes on Income 

signed at Washington on October 8, 1974 (hereinafter referred to 

as ‘‘the 1974 convention’’) shall cease to have effect in relation to 

any tax from the date upon which this Convention has effect in respect of such tax in accordance with the provisions of paragraph 2 

of this Article. The 1974 convention shall terminate on the last 

date on which it has effect in relation to any tax in accordance with 

the foregoing provisions of this paragraph. 

Paragraph 4 

Paragraph 4 provides that notwithstanding the entry into force 

of this Convention, an individual who was entitled to benefits of 

Article 17 (Teachers), Article 18 (Students and Trainees) or Article 

19 (Government Functions) of the 1974 convention at the time of 

the entry into force of this Convention shall continue to be entitled 

to such benefits until such time as the individual would cease to 

be entitled to such benefits if the 1974 convention remained in 

force. 

ARTICLE 29 (TERMINATION)

The Convention is to remain in effect indefinitely, unless terminated by one of the Contracting States in accordance with the provisions of Article 29. The Convention may be terminated at any 

time after the year in which the Convention enters into force. The 

Article requires that any notices of termination must be given 

through diplomatic channels, and must be delivered on or before 

June 30 in any calendar beginning after the year in which the Convention enters into force. If such notice of termination is given, the 


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provisions of the Convention with respect to withholding at source 

will cease to have effect on or after the first day of January of the 

calendar year next following the date on which the notice has been 

given. For other taxes, the Convention will cease to have effect as 

of taxable periods beginning on or after the first day of January of 

the calendar year next following the date on which the notice is 

given. 

Article 29 relates only to unilateral termination of the Convention by a Contracting State. Nothing in that Article should be construed as preventing the Contracting States from concluding a new 

bilateral agreement, subject to ratification, that supersedes, 

amends or terminates provisions of the Convention without the sixmonth notification period. 

Customary international law observed by the United States and 

other countries, as reflected in the Vienna Convention on Treaties, 

allows termination by one Contracting State at any time in the 

event of a ‘‘material breach’’ of the agreement by the other Contracting State. 

Æ 


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