DEPARTMENT OF THE TREASURY 

TECHNICAL EXPLANATION OF 

\THE CONVENTION BETWEEN 

THE UNITED STATES OF AMERICA AND 

THE REPUBLIC OF BULGARIA 

FOR THE AVOIDANCE OF DOUBLE TAXATION AND 

THE PREVENTION OF FISCAL EVASION 

WITH RESPECT TO TAXES ON INCOME, 

SIGNED AT WASHINGTON ON FEBRUARY 23, 2007 

This is a technical explanation of the Convention between the United States and Bulgaria

for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to 

Taxes on Income, signed on February 23, 2007, and the Protocol between the United States and 

Bulgaria signed on the same date (the “Protocol”), as amended by the Protocol between the 

United States and Bulgaria signed on February 26, 2008 (collectively, the “Convention”). The 

Protocol is discussed below in connection with the relevant articles of 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, updated as of November 15, 

2006. Negotiations also took into account the Model Tax Convention on Income and on Capital, 

published by the Organisation for Economic Cooperation and Development (the “OECD 

Model”), and recent tax treaties concluded by both countries. 

The Technical Explanation is an official guide to the Convention. It reflects the policies

behind particular Convention provisions, as well as understandings reached during the

negotiations with respect to the application and interpretation of the Convention. References in 

the Technical Explanation to “he” or “his” should be read to mean “he or she” or “his and her.” 

ARTICLE 1 (GENERAL SCOPE) 

Paragraph 1 

Paragraph 1 of Article 1 provides that the Convention applies only to residents of the

United States or Bulgaria except where the terms of the Convention provide otherwise. Under 

Article 4 (Resident) a person is generally treated as a resident of a Contracting State if that

person is, under the laws of that State, liable to tax therein by reason of his domicile, citizenship, 

residence, or other similar criteria. However, if a person is considered a resident of both

Contracting States, Article 4 provides rules for determining a State of residence (or no State of 

residence). This determination governs for all purposes of the Convention. 

Certain provisions are applicable to persons who may not be residents of either 

Contracting State. For example, paragraph 1 of Article 23 (Non-Discrimination) applies to 

nationals of the Contracting States. Under Article 25 (Exchange of Information and Administrative Assistance), information may be exchanged with respect to residents of third states. 
Paragraph 2 

Paragraph 2 states the generally accepted relationship both between the Convention and

domestic law and between the Convention and other agreements between the Contracting States. 

 That is, no provision in the Convention may restrict any exclusion, exemption, deduction, credit 

or other benefit accorded by the tax laws of the Contracting States, or by any other agreement 

between the Contracting States. The relationship between the non-discrimination provisions of 

the Convention and other agreements is addressed not in paragraph 2 but in paragraph 3. 

Under paragraph 2, for example, if a deduction would be allowed under the U.S. Internal 

Revenue Code (the "Code") in computing the U.S. taxable income of a resident of Bulgaria, 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 internal law. 

It follows that, under the principle of paragraph 2, a taxpayer's U.S. tax liability need not 

be determined under the Convention if the Code would produce a more favorable result. A 

taxpayer may not, however, choose among the provisions of the Code and the Convention in an 

inconsistent manner in order to minimize tax. A taxpayer may use the treaty to reduce its taxable 

income, but may not use both treaty and Code rules where doing so would thwart the intent of 

either set of rules. For example, assume that a resident of Bulgaria has three separate businesses 

in the United States. One is a profitable permanent establishment and the other two are trades or 

businesses that would earn taxable income under the Code but that do not meet the permanent 

establishment threshold tests of the Convention. One is profitable and the other incurs a loss.

Under the Convention, the income of the permanent establishment is taxable in the United 

States, and both the profit and loss of the other two businesses are ignored. Under the Code, all 

three would be subject to tax, but the loss would offset the profits of the two profitable ventures. 

 The taxpayer may not invoke the Convention to exclude the profits of the profitable trade or 

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

the permanent establishment. See Rev. Rul. 84-17, 1984-1 C.B. 308. If, however, the taxpayer

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

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

United States that is not effectively connected with any of his business activities in the United 

States. 

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

other agreement between the United States and Bulgaria. For example, if certain benefits are 

provided for military personnel or military contractors under a Status of Forces Agreement 

between the United States and Bulgaria, those benefits or protections will be available to 

residents of the Contracting States regardless of any provisions to the contrary (or silence) in the 

Convention. 

Paragraph 3 

Paragraph 3 specifically relates to non-discrimination obligations of the Contracting 

States under the General Agreement on Trade in Services (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 

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interpretation of the Convention, including in particular whether a measure is within the scope of 

the Convention shall be considered only by the competent authorities of the Contracting States, 

and the procedures under the Convention exclusively shall apply to the dispute. Thus, paragraph

3 of Article XXII (Consultation) of the GATS may not be used to bring a dispute before the 

World Trade Organization unless the competent authorities of both Contracting States have 

determined that the relevant taxation measure is not within the scope of Article 23 (NonDiscrimination) of the Convention. 

The term "taxation measure" for these purposes is defined broadly in subparagraph 3(b). 

It would include, for example, a law, regulation, rule, procedure, decision, administrative action 

or guidance, or any other form of measure relating to taxation. 

Paragraph 4 

Paragraph 4 contains the traditional saving clause found in all U.S. treaties. The 

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

and citizens as provided in their internal laws, notwithstanding any provisions of the Convention 

to the contrary. For example, if a resident of Bulgaria 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 Bulgaria is also a citizen of the United 

States, the saving clause permits the United States to include the remuneration in the worldwide 

income of the citizen and subject it to tax under the normal Code rules (i.e., without regard to

Code section 894(a)). However, subparagraph 5(a) of Article 1 preserves the benefits of special 

foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its citizens 

resident in Bulgaria. See paragraph 4 of Article 22 (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 Bulgaria under the tie-breaker rules of Article 4 would 

be subject to U.S. tax only to the extent permitted by the Convention. The United States would 

not be permitted to apply its statutory rules to that person to the extent the rules are inconsistent 

with the treaty. 

However, the person would be treated as a U.S. resident for U.S. tax purposes other than

determining the individual’s U.S. tax liability. For example, in determining under Code section 

957 whether a foreign corporation is a controlled foreign corporation, shares in that corporation 

held by the individual would be considered to be held by a U.S. resident. As a result, other U.S. 

citizens or residents might be deemed to be United States shareholders of a controlled foreign 

corporation subject to current inclusion of Subpart F income recognized by the corporation. See 

Treas. Reg. section 301.7701(b)-7(a)(3). 

Under paragraph 4, the United States also reserves its right to tax former citizens and 

former long-term residents for a period of ten years following the loss of such status with respect 

to income from sources within the United States (including income deemed under the domestic 

law of the United States to arise from such sources). Thus, paragraph 4 allows the United States

to tax former U.S. citizens and former U.S. long-term residents in accordance with section 877 of 

the Code. Section 877 generally applies to a former citizen or long-term resident of the United 

States who relinquishes citizenship or terminates long-term residency before June 17, 2008 if 

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. Paragraph 1 of

the Protocol provides that the term “long-term resident” means any individual who is a lawful 

permanent resident of the United States in eight or more taxable years during the preceding 15 

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taxable years. In determining whether the eight-year threshold is met, one does not count any 

year in which the individual is treated as a resident of Bulgaria under the 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 such treaty applicable to residents of the 

other country. This understanding is consistent with how this provision is generally interpreted

in U.S. tax treaties.. 

Paragraph 5 

Paragraph 5 sets forth certain exceptions to the saving clause. The referenced provisions

are intended to provide benefits to citizens and residents even if such benefits do not exist under

internal law. Paragraph 5 thus preserves these benefits for citizens and residents of the

Contracting States. 

Subparagraph (a) lists certain provisions of the Convention that are applicable to all

citizens and residents of a Contracting State, despite the general saving clause rule of paragraph 

4: 

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative

adjustment with respect to income tax due on profits reallocated under Article 9. 

(2) Paragraphs 2 and 5 of Article 17 (Pensions, Social Security Payments, Annuities, 

Alimony, and Child Support) provide exemptions from source or residence State 

taxation for certain pension distributions and social security payments. 

(3) Article 22 (Relief from Double Taxation) confirms to citizens and residents of one 

Contracting State the benefit of a credit for income taxes paid to the other or an 

exemption for income earned in the other State. 

(4) Article 23 (Non-Discrimination) protects residents and nationals of one Contracting 

State against the adoption of certain discriminatory practices in the other Contracting 

State. 

(5) Article 24 (Mutual Agreement Procedure) confers certain benefits on citizens and 

residents of the Contracting States in order to reach and implement solutions to 

disputes between the two Contracting States. For example, the competent authorities 

are permitted to use a definition of a term that differs from an internal law definition. 

The statute of limitations may be waived for refunds, so that the benefits of an 

agreement may be implemented. 

Subparagraph 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 of the Contracting States to the other, and remain in the other 

long enough to become residents under its internal law, but do not acquire permanent residence 

status (i.e., in the U.S. context, they do not become "green card" holders) and are not citizens of 

that State, the host State will continue to grant these benefits even if they conflict with the 

statutory rules. The benefits preserved by this paragraph are: (1) the host country exemptions for 

government service salaries and pensions under Article 18 (Government Service), certain income

of visiting students, trainees, teachers, and researchers under Article 19 (Students, Trainees, 

Teachers and Researchers), and the income of diplomatic agents and consular officers under 

Article 26 (Members of Diplomatic Missions and Consular Posts). 

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Paragraph 6 

 Paragraph 6 addresses special issues presented by fiscally transparent entities such as 

partnerships and certain estates and trusts. Because different countries frequently take different 

views as to when an entity is fiscally transparent, the risk of both double taxation and double

non-taxation are relatively high. The intention of paragraph 6 is to eliminate a number of 

technical problems that arguably would have prevented investors using such entities from

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

derived through such entities. The provision also prevents the use of such entities to claim treaty 

benefits in circumstances where the person investing through such an entity is not subject to tax 

on the income in its State of residence. The provision, and the corresponding requirements of 

the substantive rules of Articles 6 through 20, should be read with those two goals in mind. 

In general, paragraph 6 relates to entities that are not subject to tax at the entity level, as

distinct from entities that are subject to tax, but with respect to which tax may be relieved under 

an integrated system. This paragraph applies to any resident of a Contracting State who is 

entitled to income derived through an entity that is treated as fiscally transparent under the laws 

of either Contracting State. Entities falling under this description in the United States include

partnerships, common investment trusts under section 584 and grantor trusts. This paragraph

also applies to U.S. limited liability companies (“LLCs”) that are treated as partnerships or as 

disregarded entities for U.S. tax purposes. 

Under paragraph 6, an item of income derived by such a fiscally transparent entity will be 

considered to be derived by a resident of a Contracting State if a resident is treated under the 

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

resident of Bulgaria pays interest to an entity that is treated as fiscally transparent for U.S. tax 

purposes, the interest will be considered derived by a resident of the United States only to the 

extent that the taxation laws of the United States treats one or more U.S. residents (whose status 

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

U.S. tax purposes. In the case of a partnership, the persons who are, under U.S. tax laws, treated

as partners of the entity would normally be the persons whom the U.S. tax laws would treat as 

deriving the interest income through the partnership. Also, it follows that persons whom the 

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

claim a benefit for the interest paid to the entity under the Convention, because they are not 

residents of the United States for purposes of claiming this treaty benefit. (If, however, the

country in which they are treated as resident for tax purposes, as determined under the laws of 

that country, has an income tax convention with Bulgaria, they may be entitled to claim a benefit 

under that convention.) In contrast, if, for example, an entity is organized under U.S. laws and is 

classified as a corporation for U.S. tax purposes, interest paid by a company that is a resident of 

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

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

deriving the income. 

The same result obtains even if the entity were viewed differently under the tax laws of 

Bulgaria (e.g., as not fiscally transparent in the first example above where the entity is treated as 

a partnership for U.S. tax purposes). Similarly, the characterization of the entity in a third 

country is also irrelevant, even if the entity is organized in that third country. The results follow 

regardless of whether the entity is disregarded as a separate entity under the laws of one

jurisdiction but not the other, such as a single owner entity that is viewed as a branch for U.S. tax 

purposes and as a corporation for tax purposes under the laws of Bulgaria. These results also 

obtain regardless of where the entity is organized (i.e., in the United States, in Bulgaria or, as

noted above, in a third country). 

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For example, income from U.S. sources received by an entity organized under the laws of 

the United States, which is treated for tax purposes under the laws of Bulgaria as a corporation

and is owned by a shareholder who is a resident of Bulgaria for its tax purposes, is not

considered derived by the shareholder of that corporation even if, under the tax laws of the

United States, the entity is treated as fiscally transparent. Rather, for purposes of the treaty, the 

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

These principles also apply to trusts to the extent that they are fiscally transparent in

either Contracting State. For example, if X, a resident of Bulgaria, creates a revocable trust in 

the United States and names persons resident in a third country as the beneficiaries of the trust, 

the trust’s income would be regarded as being derived by a resident of Bulgaria only to the 

extent that the laws of Bulgaria treat X as deriving the income for its tax purposes, perhaps 

through application of rules similar to the U.S. “grantor trust” rules. 

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

paragraph 6 does not prevent a Contracting State from taxing an entity that is treated as a 

resident of that State under its tax law. For example, if a U.S. LLC with members who are 

residents of Bulgaria elects to be taxed as a corporation for U.S. tax purposes, the United States 

will tax that LLC on its worldwide income on a net basis, without regard to whether Bulgaria 

views the LLC as fiscally transparent. 

ARTICLE 2 (TAXES COVERED) 

This Article specifies the U.S. taxes and the taxes of Bulgaria to which the Convention

applies. With two exceptions, the taxes specified in Article 2 are the covered taxes for all 

purposes of the Convention. A broader coverage applies, however, for purposes of Articles 23

(Non-Discrimination) and 25 (Exchange of Information and Administrative Assistance). Article 

23 (Non-Discrimination) applies with respect to all taxes, including those imposed by state and 

local governments. Article 25 (Exchange of Information and Administrative Assistance) applies 

with respect to all taxes imposed at the national level. 

Paragraph 1 

Paragraph 1 identifies the category of taxes to which the Convention applies. Paragraph

1 is based on the U.S. and OECD Models and defines the scope of application of the Convention.

 The Convention applies to taxes on income, including gains, imposed on behalf of a Contracting 

State, irrespective of the manner in which they are levied. Except with respect to Article 23

(Non-Discrimination), state and local taxes are not covered by the Convention. 

Paragraph 2 

Paragraph 2 also is based on the U.S. and OECD Models and provides a definition of

taxes on income and on capital gains. The Convention covers taxes on total income or any part 

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

does not apply, however, to social security charges, or any other charges where there is a direct 

connection between the levy and individual benefits. Nor does it apply to property taxes, except

with respect to Article 23 (Non-Discrimination). 

Paragraph 3 

Paragraph 3 lists the taxes in force at the time of signature of the Convention to which the 

Convention applies. 

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The existing covered taxes of Bulgaria are identified in subparagraph 3(a), as the

personal income tax and the corporate income tax. Paragraph 2 of the Protocol clarifies that

these taxes include the patent tax, which is a tax imposed on certain small business operations in 

lieu of a net basis income tax. 

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

Convention are the Federal income taxes imposed by the Code, together with the excise taxes 

imposed with respect to the investment income of foreign private foundations (Code section 

4940). Social security and unemployment taxes (Code sections 1401, 3101, 3111 and 3301) are 

excluded from coverage. 

Paragraph 4 

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 23, 2007, the date of signature of the Convention. 

 The paragraph also provides that the competent authorities of the Contracting States will notify 

each other of any changes that have been made in their laws, whether tax laws or non-tax laws, 

that significantly affect their obligations under the Convention. Non-tax laws that may affect a 

Contracting State's obligations under the Convention may include, for example, laws affecting 

bank secrecy. 

ARTICLE 3 (GENERAL DEFINITIONS) 

Article 3 provides general definitions and rules of interpretation applicable throughout

the Convention. Certain other terms are defined in other articles of the Convention. For 

example, the term "resident of a Contracting State" is defined in Article 4 (Resident). The term 

"permanent establishment" is defined in Article 5 (Permanent Establishment). These definitions 

are used consistently throughout the Convention. Other terms, such as "dividends," "interest" 

and "royalties" are defined in specific articles for purposes only of those articles. 

Paragraph 1 

Paragraph 1 defines a number of basic terms used in the Convention. The introduction to 

paragraph 1 makes clear that these definitions apply for all purposes of the Convention, unless 

the context requires otherwise. This latter condition allows flexibility in the interpretation of the 

Convention in order to avoid results not intended by the Convention's negotiators. 

The geographical scope of the Convention with respect to Bulgaria is set out in

subparagraph 1(a). The term “Bulgaria” encompasses the Republic of Bulgaria, including the 

territory and the territorial sea over which it exercises its State sovereignty, as well as the

continental shelf and the exclusive economic zone over which it exercises sovereign rights and 

jurisdiction in conformity with international law. 

The geographical scope of the Convention with respect to the United States is set out in

subparagraph 1(b). It encompasses the United States of America, including the states, the 

District of Columbia and the territorial sea of the United States. The term does not include 

Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or territory. For certain 

purposes, the term "United States" includes the sea bed and subsoil of undersea areas adjacent to 

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

exercises sovereignty in accordance with international law for the purpose of natural resource

exploration and exploitation of such areas. This extension of the definition applies, however, 

only if the person, property or activity to which the Convention is being applied is connected

with such natural resource exploration or exploitation. Thus, it would not include any activity 

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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. 

Subparagraph 1(c) provides that the terms “a Contracting State” and “the other 

Contracting State” shall mean Bulgaria or the United States, as the context requires. 

Subparagraph 1(d) defines the term "person" to include an individual, a company and any 

other body of persons. Paragraph 3 of the Protocol clarifies that the term “any other body of 

persons” includes partnerships, trusts, and estates. 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 Convention. Also, all "persons" are eligible to claim relief under 

Article 24 (Mutual Agreement Procedure). 

The term "company" is defined in subparagraph 1(e) 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 21 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(f) 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 Bulgaria 

would still be a U.S. enterprise). 

These terms also encompass an enterprise conducted through an entity (such as a 

partnership) that is treated as fiscally transparent in the Contracting State where the entity’s 

owner is resident. In accordance with Article 4 (Resident), entities that are fiscally transparent in 

the Contracting State in which their owners are resident are not considered to be residents of that 

Contracting State (although income derived by such entities may be taxed as the income of a 

resident, if taxed in the hands of resident partners or other owners). An enterprise conducted by

such an entity will be treated as carried on by a resident of a Contracting State to the extent its 

partners or other owners are residents. This approach is consistent with the Code, which under

section 875 attributes a trade or business conducted by a partnership to its partners and a trade or

business conducted by an estate or trust to its beneficiaries. 

Subparagraph (g) 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 

(h) provides that it includes the performance of professional services and other activities of an 

independent character. Both subparagraphs are identical to definitions recently added to the

OECD Model in connection with the deletion of Article 14 (Independent Personal Services)

from the OECD Model. The inclusion of the two definitions is intended to clarify that income

from the performance of professional services or other activities of an independent character is 

dealt with under Article 7 (Business Profits) and not Article 20 (Other Income). Subparagraph

(i) further clarifies, at the request of Bulgaria, that “business profits” also include income from

the performance of professional services and other activities of an independent character. 

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Subparagraph 1(j) 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. 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 (International Traffic), therefore, would not apply to income

from such carriage. Thus, if the carrier engaged in internal U.S. traffic were a resident of 

Bulgaria (assuming that were possible under U.S. law), the United States would not be required 

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

treated as business profits under Article 7 (Business Profits), and therefore would be taxable in 

the United States only if attributable to a U.S. permanent establishment of the foreign carrier, 

and then only on a net basis. The gross basis U.S. tax imposed by section 887 would never apply 

under the circumstances described. If, however, goods or passengers are carried by a carrier

resident in Bulgaria 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 internation- al carrier, so long as both parts of the trip were reflected in original bills of lading. For this 

reason, the Convention, following the U.S. Model refers, in the definition of "international

traffic," to "such transport" being solely between places in the other Contracting State, while the 

OECD Model refers to the ship or aircraft being operated solely between such places. The 

formulation in the Convention is intended to make clear that, as in the above example, even if the 

goods are carried on a different aircraft for the internal portion of the international voyage than is

used for the overseas portion of the trip, the definition applies to that internal portion as well as

the external portion. 

Finally, a "cruise to nowhere," i.e., a cruise beginning and ending in a port in the same

Contracting State with no stops in a foreign port, would not constitute international traffic. 

Subparagraph 1(k) designates the "competent authorities" for Bulgaria and the United 

States. The Bulgarian competent authority is the Minister of Finance or an authorized 

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

The Secretary of the Treasury has delegated the competent authority function to the 

Commissioner of Internal Revenue, who in turn has delegated the authority to the Deputy 

Commissioner (International) LMSB. With respect to interpretative issues, the Deputy 

Commissioner (International) LMSB acts with the concurrence of the Associate Chief Counsel 

(International) of the Internal Revenue Service. 

The term "national," as it relates to the United States and to Bulgaria, is defined in 

subparagraph 1(l). This term is relevant for purposes of Articles 18 (Government Service) and 

23 (Non-Discrimination). A national of one of the Contracting States is (1) an individual who is 

a citizen of that State, and (2) any legal person, partnership or association deriving its status, as

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

Subparagraph 1(m) defines the term "pension fund" to include any person established in a 

Contracting State that is generally exempt from income taxation in that State and that is operated 

principally to administer or provide pension or retirement benefits or to earn income for the 

benefit of one or more such arrangements. In the case of the United States, the term “pension 

fund” includes the following: a trust providing pension or retirement benefits under a Code 

section 401(a) qualified pension plan, profit sharing or stock bonus plan, a trust providing 

pension or retirement benefits under 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 

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section 408A, or a simple retirement account under Code section 408(p), a trust providing 

pension or retirement benefits under a simplified employee pension plan under Code section 

408(k), a trust described in section 457(g) providing pension or retirement benefits under a Code 

section 457(b) plan, and the Thrift Savings Fund (section 7701(j)). Section 401(k) plans and

group trusts described in Rev. Rul. 81-100, 1981-1 C.B. 326, and meeting the conditions of Rev. 

Rul. 2004-67, 2204-2 C.B. 28, qualify as pension funds because they are covered by Code

section 401(a). 

Paragraph 2 

Terms that are not defined in the Convention are dealt with in paragraph 2. 

Paragraph 2 provides that in the application of the Convention, any term used but not 

defined in the Convention will have the meaning that it has under the law of the Contracting 

State whose tax is being applied, unless the context requires otherwise, or the competent 

authorities have agreed on a different meaning pursuant to Article 24 (Mutual Agreement 

Procedure). If the term is defined under both the tax and non-tax laws of a Contracting State, the 

definition in the tax law will take precedence over the definition in the non-tax laws. Finally,

there also may be cases where the tax laws of a State contain multiple definitions of the same 

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

should be used. 

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

State, or if there is a conflict in meaning under the laws of the two States that creates difficulties 

in the application of the Convention, the competent authorities, as indicated in paragraph 3(f) of 

Article 24 (Mutual Agreement Procedure), may establish a common meaning in order to prevent 

double taxation or to further any other purpose of the Convention. This common meaning need 

not conform to the meaning of the term under the laws of either Contracting State. 

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

effect at the time the Convention is being applied, not the law as in effect at the time the 

Convention was signed. The use of "ambulatory" definitions, however, may lead to results that 

are at variance with the intentions of the negotiators and of the Contracting States when the 

Convention was negotiated and ratified. The reference in both paragraphs 1 and 2 to the

"context otherwise requir[ing]" a definition different from the Convention definition, in 

paragraph 1, or from the internal law definition of the Contracting State whose tax is being 

imposed, under paragraph 2, refers to a circumstance where the result intended by the 

Contracting States is different from the result that would obtain under either the paragraph 1 

definition or the statutory definition. Thus, flexibility in defining terms is necessary and 

permitted. 

ARTICLE 4 (RESIDENT) 

This Article sets forth rules for determining whether a person is a resident of a 

Contracting State for purposes of the Convention. As a general matter only residents of the 

Contracting States may claim the benefits of the Convention. The treaty definition of residence

is to be used only for purposes of the Convention. The fact that a person is determined to be a 

resident of a Contracting State under Article 4 does not necessarily entitle that person to the

benefits of the Convention. In addition to being a resident, a person also must qualify for 

benefits under Article 21 (Limitation on Benefits) in order to receive benefits conferred on 

residents of a Contracting State. 

The determination of residence for treaty purposes looks first to a person's liability to tax 

as a resident under the respective taxation laws of the Contracting States. As a general matter, a 

10 
 

person who, under those laws, is a resident of one Contracting State and not of the other need 

look no further. For purposes of the Convention, that person is a resident of the State in which

he is resident under internal law. If, however, a person is resident in both Contracting States 

under their respective taxation laws, the Article proceeds, where possible, to use tie-breaker rules

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

Paragraph 1 

The term "resident of a Contracting State" is defined in paragraph 1. In general, this

definition incorporates the definitions of residence in U.S. law and that of Bulgaria by referring 

to a resident as a person who, under the laws of a Contracting State, is subject to tax there by

reason of his domicile, residence, citizenship, place of management, place of incorporation or 

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

considered U.S. residents under Code section 7701(b). Paragraph 1 also specifically includes the

two Contracting States, and political subdivisions and local authorities of the two States, as 

residents for purposes of the Convention. 

Certain entities that are nominally subject to tax but that in practice are rarely required to 

pay tax also would generally be treated as residents and therefore accorded treaty benefits. For 

example, a U.S. Regulated Investment Company (RIC) and a U.S. Real Estate Investment Trust 

(REIT) are residents of the United States for purposes of the treaty. Although the income earned 

by these entities normally is not subject to U.S. tax in the hands of the entity, they are taxable to 

the extent that they do not currently distribute their profits, and therefore may be regarded as 

"liable to tax." They also must satisfy a number of requirements under the Code in order to be 

entitled to special tax treatment. 

Under paragraph 1 of the Convention and paragraph 4 of the Protocol, 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 Bulgaria 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 Bulgaria with a permanent establishment in the United 

States is not, by virtue of that permanent establishment, a resident of the United States. The 

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

the U.S. permanent establishment, not with respect to its worldwide income, as it would be if it 

were a U.S. resident. 

Paragraph 4 of the Protocol also clarifies that if a company is a resident of one of the 

Contracting States under the domestic law of that State, but is treated as a resident of a third state 

under a treaty between that State and the third state, then it will not be treated as a resident of the

Contracting State for purposes of the Convention. For example, if a company that is organized 

in Bulgaria is managed and controlled in the United Kingdom, both countries would treat the 

company as being a resident under its domestic laws. However, if a treaty between Bulgaria and

the United Kingdom assigned residence in such a case to the country in which the company's 

place of effective management is located, and the place of effective management is the United 

Kingdom, the company would not qualify for benefits under the U.S.-Bulgaria treaty because it 

is not subject to tax in Bulgaria as a resident of Bulgaria. This rule is consistent with the holding

of Rev. Rul. 2004-76, 2004-2 C.B. 111. 

11 
Paragraph 2 

Paragraph 2 provides that certain tax-exempt entities such as pension funds and 

charitable organizations will be regarded as residents of a Contracting State regardless of

whether they are generally liable to income tax in the State where they are established. The 

paragraph applies to legal persons organized under the laws of a Contracting State and

established and maintained in that State to provide pensions or other similar benefits pursuant to 

a plan, or exclusively for religious, charitable, scientific, artistic, cultural, or educational 

purposes. Thus, a section 501(c) organization organized in the United States (such as a U.S.

charity) that is generally exempt from tax under U.S. law is a resident of the United States for all 

purposes of the Convention. 

Paragraph 3 

If, under the laws of the two Contracting States, and, thus, under paragraph 1, an

individual is deemed to be a resident of both Contracting States, a series of tie-breaker rules are 

provided in paragraph 3 to determine a single State of residence for that individual. These tests 

are to be applied in the order in which they are stated. The first test is based on where the 

individual has a permanent home. If that test is inconclusive because the individual has a 

permanent home available to him in both States, he will be considered to be a resident of the 

Contracting State where his personal and economic relations are closest (i.e., the location of his 

"center of vital interests"). If that test is also inconclusive, or if he does not have a permanent 

home available to him in either State, he will be treated as a resident of the Contracting State 

where he maintains a habitual abode. If he has a habitual abode in both States or in neither of 

them, he will be treated as a resident of the Contracting State of which he is a national. If he is a 

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

who will assign a single State of residence. 

Paragraph 4 

Dual residents other than individuals (such as companies, trusts, or estates) are addressed 

by paragraph 4. If such a person is, under the rules of paragraph 1 or 2, resident in both

Contracting States, the competent authorities shall seek to determine a single State of residence 

for that person for purposes of the Convention. If the competent authorities do not reach an 

agreement on a single State of residence, that dual resident may not claim any benefit accorded 

to residents of a Contracting State by the Convention. The dual resident may, however, claim

any benefits that are not limited to residents, such as those provided by paragraph 1 of Article 23 

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

company. 

Dual residents also may be treated as a resident of a Contracting State for purposes other 

than that of obtaining benefits under the Convention. For example, if a dual resident company 

pays a dividend to a resident of Bulgaria, the U.S. paying agent would withhold on that dividend 

at the appropriate treaty rate because reduced withholding is a benefit enjoyed by the resident of

Bulgaria, not by the dual resident company. The dual resident company that paid the dividend 

would, for this purpose, be treated as a resident of the United States under the Convention. In 

addition, information relating to dual residents can be exchanged under the Convention because, 

by its terms, Article 26 (Exchange of Information and Administrative Assistance) 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 

12 
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, 11 and 12 (dealing with

dividends, interest, and royalties, respectively) provide for reduced rates of tax at source on 

payments of these items of income to a resident of the other State only when the income is not 

attributable to a permanent establishment that the recipient has in the source State. The concept

is also relevant in determining which Contracting State may tax certain gains under Article 13 

(Capital Gains) and certain "other income" under Article 20 (Other Income). 

Paragraph 1 

The basic definition of the term "permanent establishment" is contained in paragraph 1. 

As used in the Convention, the term means a fixed place of business through which the business 

of an enterprise is wholly or partly carried on. As indicated in the OECD Commentary to Article 

5 (see paragraphs 4 through 8), a general 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. 

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 six 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 only three months, but if

production begins in the following month the well becomes a permanent establishment as of that 

date. 

The six-month test applies separately to each site or project. The six-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 six-month threshold test. For example, the construction of a housing development would be 

considered as a single project even if each house were constructed for a different purchaser. 

In applying this paragraph, time spent by a sub-contractor on a building site is counted as 

time spent by the general contractor at the site for purposes of determining whether the general 

contractor has a permanent establishment. However, for the sub-contractor itself to be treated as 

having a permanent establishment, the sub-contractor's activities at the site must last for more 

than six months. If a sub-contractor is on a site intermittently, then, for purposes of applying the 

six-month rule, time is measured from the first day the sub-contractor is on the site until the last 

day (i.e., intervening days that the sub-contractor is not on the site are counted). 

13 
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 six-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. For example, 

under subparagraph 5(a), a person is deemed to create a permanent establishment of the 

enterprise if that person has and habitually exercises an authority to conclude contracts in the

name of that 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 Convention adopts the OECD Model language "in the name of that enterprise" rather 

than the US Model language "binding on the enterprise." This difference in language is not

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

Commentaries on Article 5, paragraph 5 of the Article is intended to encompass persons who 

have "sufficient authority to bind the enterprise’s participation in the business activity in the 

State concerned." 

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

operations of the enterprise, rather than ancillary activities. For example, if the person has no 

authority to conclude contracts in the name of the enterprise with its customers for, say, the sale 

of the goods produced by the enterprise, but it can enter into service contracts in the name of the 

enterprise for the enterprise's business equipment, this contracting authority would not fall within 

the scope of the paragraph, even if exercised regularly. 

Under subparagraph 5(b), a person is also deemed to create a permanent establishment of 

the enterprise if that person has no authority to conclude contracts, but habitually maintains in 

that State a stock of goods or merchandise belonging to the enterprise from which the person 

regularly fills orders or makes deliveries on behalf of the enterprise, and additional activities 

14 
conducted in that State on behalf of the enterprise have contributed to the conclusion of the sale

of such goods or merchandise. 

Paragraph 6 

Under paragraph 6, an enterprise is not deemed to have a permanent establishment in a 

Contracting State merely because it carries on business in that State through an independent 

agent, including a broker or general commission agent, if the agent is acting in the ordinary 

course of his business as an independent agent. Thus, there are two conditions that must be 

satisfied: the agent must be both legally and economically independent of the enterprise, and the 

agent must be acting in the ordinary course of its business in carrying out activities on behalf of

the enterprise. 

Whether the agent and the enterprise are independent is a factual determination. Among 

the questions to be considered 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 comprehensive control by the enterprise is not legally independent. 

In determining whether the agent is economically independent, a relevant factor is the 

extent to which the agent bears business risk. Business risk refers primarily to risk of loss. An 

independent agent typically bears risk of loss from its own activities. In the absence of other 

factors that would establish dependence, an agent that shares business risk with the enterprise, or 

has its own business risk, is economically independent because its business activities are not 

integrated with those of the principal. Conversely, an agent that bears little or no risk from the 

activities it performs is not economically independent and therefore is not described in paragraph 

6. 

Another relevant factor in determining whether an agent is economically independent is 

whether the agent acts exclusively or nearly exclusively for the principal. Such a relationship

may indicate that the principal has economic control over the agent. A number of principals 

acting in concert also may have economic control over an agent. The limited scope of the agent's 

activities and the agent's dependence on a single source of income may indicate that the agent 

lacks economic independence. It should be borne in mind, however, that exclusivity is not in 

itself a conclusive test; an agent may be economically independent notwithstanding an exclusive 

relationship with the principal if it has the capacity to diversify and acquire other clients without 

substantial modifications to its current business and without substantial harm to its business 

profits. Thus, exclusivity should be viewed merely as a pointer to further investigation of the 

relationship between the principal and the agent. Each case must be addressed on the basis of its 

own facts and circumstances. 

Paragraph 7 

This paragraph clarifies that a company that is a resident of a Contracting State is not 

deemed to have a permanent establishment in the other Contracting State merely because it controls, or is controlled by, a company that is a resident of that other Contracting State, or that 

carries on business in that other Contracting State. The determination whether a permanent 

establishment exists is made solely on the basis of the factors described in paragraphs 1 through 

6 of the Article. Whether a company is a permanent establishment of a related company, 

therefore, is based solely on those factors and not on the ownership or control relationship 

between the companies. 

15 
Paragraph 8 

Paragraph 8 provides a special rule (subject to the provisions of paragraph 4) for an 

enterprise of a Contracting State that provides services in the other Contracting State, but that 

does not have a permanent establishment by virtue of the preceding paragraphs of the Article. If 

(and only if) such an enterprise meets either of two tests as provided in subparagraphs 8(a) and 

8(b), the enterprise will be deemed to provide those services through a permanent establishment 

in the other State. 

The first test as provided in subparagraph 8(a) has two parts. First, the services must be 

performed in the other State by an individual who is present in that other State for a period or 

periods aggregating 183 days or more in any twelve-month period. Second, during that period or

periods, more than 50 percent of the gross active business revenues of the enterprise (including 

revenue from active business activities unrelated to the provision of services) must consist of

income derived from the services performed in that State by that individual. If the enterprise

meets both of these tests, the enterprise will be deemed to provide the services through a 

permanent establishment. This test in subparagraph 8(a) is employed to determine whether an 

enterprise is deemed to have a permanent establishment by virtue of the presence of a single 

individual (i.e. a natural person). 

For the purposes of subparagraph 8(a), the term “gross active business revenues” shall 

mean the gross revenues attributable to active business activities that the enterprise has charged 

or should charge for its active business activities, regardless of when the actual billing will occur

or of domestic law rules concerning when such revenues should be taken into account for tax 

purposes. Such active business activities are not restricted to the activities related to the 

provision of services. However, the term does not include income from passive investment 

activities. 

The second test as provided in subparagraph 8(b) provides that an enterprise will have a

permanent establishment if the services are provided in the other State for an aggregate of 183 

days or more in any twelve-month period with respect to the same or connected projects for 

customers who either are residents of the other State or maintain a permanent establishment in 

the other State with respect to which the services are provided. The various conditions that have 

to be satisfied in order for subparagraph 8(b) to have application are described in detail below. 

In addition to meeting the 183-day threshold, the services must be provided for customers 

who either are residents of the other State or maintain a permanent establishment in that State. 

The intent of this requirement is to reinforce the concept that unless there is a customer in the 

other State, such enterprise will not be deemed as participating sufficiently in the economic life 

of that other State to warrant being deemed to have a permanent establishment. 

Paragraph 8 applies only to the provision of services, and only to services provided by an

enterprise to third parties. Thus, the provision does not have the effect of deeming an enterprise 

to have a permanent establishment merely because services are provided to that enterprise. 

Further, paragraph 8 only applies to services that are performed or provided by an 

enterprise of a Contracting State within the other Contracting State. It is therefore not sufficient 

that the relevant services be merely furnished to a resident of the other Contracting State. 

Where, for example, an enterprise provides customer support or other services by telephone or 

computer to customers located in the other State, those would not be covered by paragraph 8 

because they are not performed or provided by that enterprise within the other State. Another 

example would be that of an architect who is hired to design blueprints for the construction of a 

building in the other State. As part of completing the project, the architect must make site visits 

to that other State, and his days of presence there would be counted for purposes of determining 

16 
whether the 183-day threshold is satisfied. However, the days that the architect spends working

on the blueprint in his home office shall not count for purposes of the 183-day threshold, because 

the architect is not performing or providing those services within the other State. 

For purposes of determining whether the time threshold has been met, subparagraph 8(b) 

permits the aggregation of services that are provided with respect to connected projects. For 

purposes of this test, projects shall be considered to be connected if they constitute a coherent 

whole, commercially and geographically. The determination of whether projects are connected 

should be determined from the point of view of the enterprise (not that of the customer), and will 

depend on the facts and circumstances of each case. In determining the existence of commercial 

coherence, factors that would be relevant include: 1) whether the projects would, in the absence 

of tax planning considerations, have been concluded pursuant to a single contract; 2) whether the

nature of the work involved under different projects is the same; and 3) whether the same

individuals are providing the services under the different projects. Whether the work provided is 

covered by one or multiple contracts may be relevant, but is not determinative, in finding that 

projects are commercially coherent. 

The aggregation rule addresses, for example, potentially abusive situations in which work 

has been artificially divided into separate components in order to avoid meeting the 183-day 

threshold. Assume for example, that a technology consultant has been hired to install a new 

computer system for a company in the other country. The work will take ten months to 

complete. However, the consultant purports to divide the work into two five-month projects 

with the intention of circumventing the rule in paragraph 8. In such case, even if the two 

projects were considered separate, they will be considered to be commercially coherent. 

Accordingly, subject to the additional requirement of geographic coherence, the two projects 

could be considered to be connected, and could therefore be aggregated for purposes of

subparagraph 8(b). In contrast, assume that the technology consultant is contracted to install a 

particular computer system for a company, and is also hired by that same company, pursuant to a 

separate contract, to train its employees on the use of another computer software that is unrelated 

to the first system. In this second case, even though the contracts are both concluded between

the same two parties, there is no commercial coherence to the two projects, and the time spent 

fulfilling the two contracts may not be aggregated for purposes of subparagraph 8(b). Another 

example of projects that do not have commercial coherence would be the case of a law firm

which, as one project provides tax advice to a customer from one portion of its staff, and as 

another project provides trade advice from another portion of its staff, both to the same customer. 

Additionally, projects, in order to be considered connected, must also constitute a 

geographic whole. An example of projects that lack geographic coherence would be a case in 

which a consultant is hired to execute separate auditing projects at different branches of a bank 

located in different cities pursuant to a single contract. In such an example, while the 

consultant’s projects are commercially coherent, they are not geographically coherent and 

accordingly the services provided in the various branches shall not be aggregated for purposes of

applying subparagraph 8(b). The services provided in each branch should be considered

separately for purposes of subparagraph 8(b). 

The method of counting days for purposes of subparagraph 8(a) differs slightly from the 

method for subparagraph 8(b). Subparagraph 8(a) refers to days in which an individual is 

present in the other country. Accordingly, physical presence during a day is sufficient. In 

contrast, subparagraph 8(b) refers to days during which services are provided by the enterprise in 

the other country. Accordingly, non-working days such as weekends or holidays would not 

count for purposes of subparagraph 8(b), as long as no services are actually being provided while 

in the other country on those days. For the purposes of both subparagraphs, even if the

enterprise sends many individuals simultaneously to the other country to provide services, their 

collective presence during one calendar day will count for only one day of the enterprise’s 

17 
 

 

presence in the other country. For instance, if an enterprise sends 20 employees to the other 

country to provide services to a client in the other country for 10 days, the enterprise will be

considered present in the other country only for 10 days, not 200 days (20 employees x 10 days). 

By deeming the enterprise to provide services through a permanent establishment in the 

other Contracting State, paragraph 8 allows the application of Article 7 (Business Profits), and 

accordingly, the taxation of the services shall be on a net-basis. Such taxation is also limited to 

the profits attributable to the activities carried on in performing the relevant services. It will be 

important to ensure that only the profits properly attributable to the functions performed and 

risks assumed by provision of the services will be attributed to the deemed permanent 

establishment. 

Paragraph 8 applies subject to the provisions of paragraph 4. In no case will paragraph 8

apply to deem services to be provided through a permanent establishment if the services are 

limited to those mentioned in paragraph 4 which, if performed through a fixed place of business, 

would not make the fixed place of business a permanent establishment under the provisions of 

that paragraph. Further, days spent on preparatory or auxiliary activities shall not be taken into

account for purposes of applying subparagraph 8(b). 

ARTICLE 6 (INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY)) 

This Article deals with the taxation of income from immovable property (real property) 

situated in a Contracting State (the "situs State"). The Article does not grant an exclusive taxing

right to the situs State; the situs State is merely given the primary right to tax. However, until 

such time as Bulgaria provides, with respect to income taxable under this Article, for an election 

to be subject to tax on a net basis as though such income were business profits attributable to a 

permanent establishment, the Bulgarian rate of tax may not exceed 10 percent of the gross 

amount of income derived by a U.S. resident from real property situated in Bulgaria. 

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. 

Paragraph 2 

The term "real property" is defined in paragraph 2 by reference to the internal law 

definition in the situs State. In the case of the United States, the term has the meaning given to it 

by Treas. Reg. section 1.897-1(b). In addition to the statutory definitions in the two Contracting 

States, the paragraph specifies certain additional classes of property that, regardless of internal

law definitions, are within the scope of the term for purposes of the Convention. This expanded

definition conforms to that in the OECD Model. The definition of “real property” for purposes

of Article 6 is more limited than the expansive definition of “real property” in paragraph 1 of 

Article 13 (Capital Gains). The Article 13 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 

18 
the owner (in which case income may be imputed to the owner for tax purposes) and rental 

income from the letting of real 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 is not considered "derived" from real property; taxation of that income is 

addressed in Article 13 (Capital Gains). Interest paid on a mortgage on real property would be 

covered by Article 11 (Interest). Distributions by a U.S. Real Estate Investment Trust or certain 

regulated investment companies would fall under Article 13 (Capital Gains) in the case 

of distributions of U.S. real property gain or Article 10 (Dividends) in the case of distributions 

treated as dividends. Finally, distributions from a United States Real Property Holding 

Corporation are not considered to be income from the exploitation of real property; such 

payments would fall under Article 10 or 13. 

Paragraph 4 

This paragraph specifies that the basic rule of paragraph 1 (as elaborated in paragraph 3)

applies to income from real 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 Article 7 (Business Profits) that income must be 

attributable to a permanent establishment in order to be taxable in the situs state. However, if a 

resident of a Contracting State carries on a business in the other Contracting State through a 

permanent establishment situated therein and the real property is effectively connected with such 

permanent establishment, the provisions of Article 7 apply to the real property income. This rule 

is important in view of the lack of an election to be subject to tax on a net basis with respect to 

income taxable under this Article under Bulgarian law and the Convention. Accordingly, if a

U.S. resident has a permanent establishment in Bulgaria through which the real property income

is earned, that income will be taxed on a net basis using the rates and rules of taxation generally 

applicable to residents of Bulgaria, as such rules may be modified by the Convention. 

Paragraph 5 

This paragraph contains a special rule limiting the rate of Bulgarian taxation to 10 

percent of the gross amount of income derived by a U.S. resident from real property situated in 

Bulgaria. This special rule applies for as long as U.S. residents are not entitled under Bulgarian

law to make an election to compute the tax on income from real property situated in Bulgaria on 

a net basis as if such income were business profits attributable to a permanent establishment in 

Bulgaria. 

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. 

19 
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 20 (Other Income). 

The term "business profits" also includes income derived by an enterprise from the rental 

of tangible personal property (unless such tangible personal property consists of aircraft, ships or 

containers, income from which is addressed by Article 8 (International Traffic)). The inclusion 

of income derived by an enterprise from the rental of tangible personal property in business 

profits means that such income earned by a resident of a Contracting State can be taxed by the 

other Contracting State only if the income is attributable to a permanent establishment 

maintained by the resident in that other State, and, if the income is taxable, it can be taxed only 

on a net basis. Income from the rental of tangible personal property that is not derived in 

connection with a trade or business is dealt with in Article 20 (Other Income). 

In addition, as a result of the definitions of "enterprise" and "business" in Article 3

(General Definitions), the term includes income derived from the furnishing of personal services. 

Thus, a consulting firm resident in one State whose employees or partners perform services in 

the other State through a permanent establishment may be taxed in that other State on a net basis 

under Article 7, and not under Article 14 (Income from Employment), which applies only to 

income of employees. With respect to the enterprise’s employees themselves, however, their 

salary remains subject to Article 14. 

Because this Article applies to income earned by an enterprise from the furnishing of 

personal services, the Article also applies to income derived by a partner resident in a 

Contracting State that is attributable to personal services performed in the other Contracting 

State through a partnership with a permanent establishment in that other State. Income that 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 has five partners (who agree to split profits equally), four of whom are 

resident and perform personal services only in Bulgaria at Office A, and one of whom performs

personal services at Office B, a permanent establishment in the United States. In this case, the 

four partners of the partnership resident in Bulgaria 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

used Office B while performing services in the United States. 

Paragraph 2 

Paragraph 2 provides rules for the attribution of business profits to a permanent 

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

20 
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. 

The "attributable to" concept of paragraph 2 provides an alternative to the analogous but

somewhat different "effectively connected" concept in Code section 864(c). Depending upon the

circumstances, the amount of income "attributable to" a permanent establishment under Article 7 

may be greater or less than the amount of income that would be treated as "effectively 

connected" to a U.S. trade or business under Code section 864. In particular, 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. 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. 

The profits attributable to a permanent establishment may be from sources within or 

without a Contracting State. However, as stated in paragraph 5 of the Protocol, the business 

profits attributable to a permanent establishment include only those profits derived from the 

assets used, risks assumed, and activities performed by, the permanent establishment. 

Paragraph 5 of the Protocol confirms that the arm's length method of paragraphs 2 and 3 

consists of applying the OECD Transfer Pricing Guidelines, but taking into account the different 

economic and legal circumstances of a single legal entity (as opposed to separate but associated 

enterprises). Thus, any of the methods used in the Transfer Pricing Guidelines, including profits 

methods, may be used as appropriate and in accordance with the Transfer Pricing Guidelines. 

However, the use of the Transfer Pricing Guidelines applies 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. 

For example, an entity that operates through branches rather than separate subsidiaries 

generally will have lower capital requirements because all of the assets of the entity are available 

to support all of the entity’s liabilities (with some exceptions attributable to local regulatory 

restrictions). This is the reason that most commercial banks and some insurance companies 

operate through branches rather than 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, the rule provided by the Convention is

that such internal dealings may be used to attribute income to a permanent establishment in cases 

where the dealings accurately reflect the allocation of risk within the enterprise. One example is 

that of 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 attributing income between the branches, if use of that method is the 

“best method” within the meaning of Treas. Reg. 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. 

21 
Because the use of profits methods is permissible under paragraph 2, it is not necessary 

for the Convention to include a provision corresponding to paragraph 4 of Article 7 of the OECD

Model. 

Paragraph 3

 Paragraph 3 provides that in determining the business profits of a permanent 

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

permanent establishment, ensuring that business profits will be taxed on a net basis. This rule is 

not limited to expenses incurred exclusively for the purposes of the permanent establishment, but 

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

enterprise that includes the permanent establishment. Deductions are to be allowed regardless of

which accounting unit of the enterprise books the expenses, so long as they are incurred for the

purposes of the permanent establishment. For example, a portion of the interest expense 

recorded on the books of the home office in one State may be deducted by a permanent 

establishment in the other if properly allocable thereto. The amount of expense that must be 

allowed as a deduction is determined by applying the arm's length principle. As noted above 

with respect to paragraph 2 of Article 1 (General Scope), if a deduction would be allowed under

the Code in computing the U.S. taxable income, the deduction also is allowed in computing 

taxable income under the Convention. However, except where the Convention provides for

more favorable treatment, a taxpayer cannot take deductions for expenses in computing taxable 

income under the Convention to a greater extent than would be allowed under the Code where 

doing so would be inconsistent with the intent of the Code. For example, assume that a 

Bulgarian taxpayer with a permanent establishment in the United States borrows $100 to 

purchase U.S. tax exempt bonds, and that the $100 of tax-exempt bonds and the $100 of related 

debt would be treated as assets and liabilities of the permanent establishment. For purposes of

computing the profits attributable to the permanent establishment under the Convention, both the 

tax exempt interest from the bonds and the interest expense from the related debt would be 

excluded. 

As noted above, paragraph 5 of the Protocol provides that the OECD Transfer Pricing 

Guidelines apply, by analogy, in determining the profits attributable to a permanent 

establishment. Accordingly, a permanent establishment may deduct payments made to its head 

office or another branch in compensation for services performed for the benefit of the branch. 

The method to be used in calculating that amount will depend on the terms of the arrangements 

between the branches and head office. For example, the enterprise could have a policy, 

expressed in writing, under which each business unit could use the services of lawyers employed 

by the head office. At the end of each year, the costs of employing the lawyers would be 

charged to each business unit according to the amount of services used by that business unit 

during the year. Since this appears to be a kind of cost-sharing arrangement and the allocation of 

costs is based on the benefits received by each business unit, such a cost allocation would be an

acceptable means of determining a permanent establishment’s deduction for legal expenses. 

Alternatively, the head office could agree to employ lawyers at its own risk, and to charge an 

arm’s length price for legal services performed for a particular business unit. If the lawyers were

under-utilized, and the “fees” received from the business units were less than the cost of 

employing the lawyers, then the head office would bear the excess cost. If the “fees” exceeded 

the cost of employing the lawyers, then the head office would keep the excess to compensate it 

for assuming the risk of employing the lawyers. If the enterprise acted in accordance with this 

agreement, this method would be an acceptable alternative method for calculating a permanent 

establishment’s deduction for legal expenses. 

Paragraph 5 of the Protocol also makes clear that a permanent establishment cannot be 

funded entirely with debt, but 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 does not have 

22 
 

such capital, a Contracting State may, for profit attribution purposes, attribute such capital to the 

permanent establishment in accordance with the arm’s length principle 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. section 1.882-5. Both 

section 1.882-5 and the method prescribed in the Convention 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, section 1.882-5 does not take into account the fact that some assets create 

more risk for the enterprise than do other assets. An independent enterprise would need less

capital to support a perfectly-hedged 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 section 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, paragraph 5 of the Protocol 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 equity between its various offices on the basis of the proportion of the financial

institution’s risk-weighted assets attributable to each of them. 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 section 

1.882-5. Accordingly, to ease this administrative burden, taxpayers may choose to apply the 

principles of Treas. Reg. section 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 the 

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

Paragraph 4 

Paragraph 4 provides that no business profits can be attributed to a permanent 

establishment merely because it purchases goods or merchandise for the enterprise of which it is 

a part. This paragraph is essentially identical to paragraph 5 of Article 7 of the OECD Model.

This rule applies only to an office that performs functions for the enterprise in addition to 

purchasing. The income attribution issue does not arise if the sole activity of the office is the 

purchase of goods or merchandise because such activity does not give rise to a permanent 

establishment under Article 5 (Permanent Establishment). A common situation in which 

paragraph 4 is relevant is one in which a permanent establishment purchases raw materials for 

the enterprise's manufacturing operation conducted outside the United States and sells the manufactured product. While business profits may be attributable to the permanent establishment 

with respect to its sales activities, no profits are attributable to it with respect to its purchasing 

activities. 

Paragraph 5 

Paragraph 5 provides that profits shall be determined by the same method each year, 

unless there is good reason to change the method used. This rule assures consistent tax treatment 

over time for permanent establishments. It limits the ability of both the Contracting State and 

the enterprise to change accounting methods to be applied to the permanent establishment. It 

does not, however, restrict a Contracting State from imposing additional requirements, such as 

the rules under Code section 481, to prevent amounts from being duplicated or omitted following 

a change in accounting method. Such adjustments may be necessary, for example, if the 

taxpayer switches from using the domestic rules under section 864 in one year to using the rules 

23 
of Article 7 in the next. Also, if the taxpayer switches from Convention-based rules to U.S. 

domestic rules, it may need to meet certain deadlines for making elections that are not necessary 

when applying the rules of the Convention. 

Paragraph 6 

Paragraph 6 coordinates the provisions of Article 7 and other provisions of the 

Convention. Under this paragraph, when business profits include items of income that are dealt 

with separately under other articles of the Convention, the provisions of those articles will, 

except when they specifically provide to the contrary, take precedence over the provisions of

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

(Dividends), and not by Article 7, except where, as provided in paragraph 6 of Article 10, the

dividend is attributable to a permanent establishment. In the latter case the provisions of Article

7 apply. Thus, an enterprise of one State deriving dividends from the other State may not rely on 

Article 7 to exempt those dividends from tax at source if they are not attributable to a permanent 

establishment of the enterprise in the other State. By the same token, if the dividends are 

attributable to a permanent establishment in the other State, the dividends may be taxed on a net 

income basis at the source State full corporate tax rate, rather than on a gross basis under Article 

10 (Dividends). 

As provided in Article 8 (International Traffic), 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. 

The Convention incorporates the rule of Code section 864(c)(6). Like the Code section 

on which it is based, paragraph 5 of the Protocol provides that any income or gain attributable to 

a permanent establishment during its existence is taxable in the Contracting State where the 

permanent establishment is situated, even if the payment of that income or gain is deferred until 

after the permanent establishment ceases to exist. This rule applies with respect to Article 7

(Business Profits), paragraph 4 of Article 6 (Income from Immovable Property (Real Property)), 

paragraph 6 of Article 10 (Dividends), paragraph 5 of Article 11 (Interest), paragraph 4 of

Article 12 (Royalties), paragraph 3 of Article 13 (Capital Gains) and paragraph 2 of Article 20 

(Other Income). 

The effect of this rule can be illustrated by the following example. Assume a company 

that is a resident of Bulgaria and that maintains a permanent establishment in the United States 

winds up the permanent establishment's business and sells the permanent establishment's 

inventory and assets to a U.S. buyer at the end of year 1 in exchange for an interest-bearing

installment obligation payable in full at the end of year 3. Despite the fact that Article 13's 

threshold requirement for U.S. taxation is not met in year 3 because the company has no 

permanent establishment in the United States, the United States may tax the deferred income

payment recognized by the company in year 3. 

Relationship to Other Articles 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope).

Thus, if a citizen of the United States who is a resident of Bulgaria 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 22 (Relief from Double Taxation), tax those profits, notwithstanding 

paragraph 1 of this Article, which would exempt the income from U.S. tax. 

24 
The benefits of this Article are also subject to Article 21 (Limitation on Benefits). Thus, 

an enterprise of Bulgaria 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 21. 

ARTICLE 8 (INTERNATIONAL TRAFFIC) 

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(j) 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 6 of Article 7 (Business Profits) defers to Article 8 with respect to shipping

income, such income derived by a resident of one of the Contracting States may not be taxed in 

the other State even if the enterprise has a permanent establishment in that other State. Thus, if a 

U.S. airline has a ticket office in Bulgaria, Bulgaria 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 establish- ments if the income were covered by Article 7 (Business Profits). 

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)

when the income is incidental to other income of the lessor from the operation of ships or aircraft 

in international traffic. If the income is not incidental to other income of the lessor from the 

operation of ships or aircraft in international traffic, income from bareboat rentals would 

constitute business profits. 

Paragraph 6 of the Protocol clarifies, consistent with the U.S. Model and the Commentary 

to Article 8 of the OECD Model, that profits derived by an enterprise from the inland transport 

of tangible property or passengers within either Contracting State is treated as profits from the 

operation of ships or aircraft in international traffic if such transport is undertaken as part of

international traffic. Thus, if a U.S. shipping company contracts to carry property from Bulgaria 

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 Bulgaria (or it contracts with a trucking company to carry the property to 

the airport) the income earned by the U.S. shipping company from the overland leg of the 

journey would be taxable only in the United States. Similarly, Article 8 also would apply to all 

of the income derived from a contract for the 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. 

25 
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 Commen- tary 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) used for the 

transport of goods or merchandise are exempt from tax in the other Contracting State, unless 

those containers are used for transport solely in the other Contracting State. This result obtains 

under paragraph 3 regardless of whether the recipient of the income is engaged in the operation 

of ships or aircraft in international traffic, and regardless of whether the enterprise has a

permanent establishment in the other Contracting State. Only income from the use, maintenance 

or rental of containers that is incidental to other income from international traffic is covered by 

Article 8 of the OECD Model. 

Paragraph 4 

This paragraph clarifies that the provisions of paragraphs 1 and 3 also apply to profits 

derived by an enterprise of a Contracting State from participation in a pool, joint business or 

international operating agency. This refers to various arrangements for international cooperation 

by carriers in shipping and air transport. For example, airlines from two countries may agree to 

share the transport of passengers between the two countries. They each will fly the same number 

of flights per week and share the revenues from that route equally, regardless of the number of 

passengers that each airline actually transports. Paragraph 4 makes clear that with respect to 

each carrier the income dealt with in the Article is that carrier's share of the total transport, not 

the income derived from the passengers actually carried by the airline. This paragraph

corresponds to paragraph 4 of Article 8 of the OECD Model. 

26 
 

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 paragraphs 4 and 5 of Article 13 (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

21 (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 Bulgaria 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 22 (Relief from Double Taxation), 

tax those profits as part of the worldwide income of the citizen. (This is an unlikely situation,

however, because non-tax considerations (e.g., insurance) generally result in shipping activities

being carried on in corporate form.) 

ARTICLE 9 (ASSOCIATED ENTERPRISES) 

This Article incorporates in the Convention the arm's-length principle reflected in the

U.S. domestic transfer pricing provisions, particularly Code section 482. It provides that when

related enterprises engage in a transaction on terms that are not arm's-length, the Contracting

States may make appropriate adjustments to the taxable income and tax liability of such related 

enterprises to reflect what the income and tax of these enterprises with respect to the transaction 

would have been had there been an arm's-length relationship between them. 

Paragraph 1 

This paragraph is essentially the same as its counterpart in the U.S. and OECD Models. 

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 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 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 trans- action should not be subject to adjustment under this Article. 

27 
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 recharacterizing the transaction to reflect its substance. 

It is understood that the "commensurate with income" standard for determining 

appropriate transfer prices for intangibles, added to Code section 482 by the Tax Reform Act of 

1986, was designed to operate consistently with the arm's-length standard. The implementation 

of this standard in the section 482 regulations is in accordance with the general principles of

paragraph 1 of Article 9 of the Convention, as interpreted by the OECD Transfer Pricing

Guidelines. 

This Article also permits tax authorities to deal with thin capitalization issues. They may, 

in the context of Article 9, scrutinize more than the rate of interest charged on a loan between 

related persons. They also may examine the capital structure of an enterprise, whether a 

payment in respect of that loan should be treated as interest, and, if it is treated as interest, under 

what circumstances interest deductions should be allowed to the payor. Paragraph 3 of the

Commentary to Article 9 of the OECD Model, together with the U.S. observation set forth in 

paragraph 15, sets forth a similar understanding of the scope of Article 9 in the context of thin 

capitalization. 

Paragraph 2 

When a Contracting State has made an adjustment that is consistent with the provisions 

of paragraph 1, and the other Contracting State agrees that the adjustment was appropriate to 

reflect arm's-length conditions, that other Contracting State is obligated to make a correlative 

adjustment (sometimes referred to as a "corresponding adjustment") to the tax liability of the 

related person in that other Contracting State. Although the OECD Model does not specify that

the other Contracting State must agree with the initial adjustment before it is obligated to make 

the correlative adjustment, the Commentary makes clear that the paragraph is to be read that 

way. 

As explained in the Commentary to Article 9 of the OECD Model, Article 9 leaves the 

treatment of "secondary adjustments" to the laws of the Contracting States. When an adjustment 

under Article 9 has been made, one of the parties will have in its possession funds that it would 

not have had at arm's length. The question arises as to how to treat these funds. In the United 

States the general practice is to treat such funds as a dividend or contribution to capital,

depending on the relationship between the parties. Under certain circumstances, the parties may 

be permitted to restore the funds to the party that would have the funds had the transactions been 

entered into on arm's length terms, and to establish an account payable pending restoration of the 

funds. See Rev. Proc. 99-32, 1999-2 C.B. 296. 

The Contracting State making a secondary adjustment will take the other provisions of 

the Convention, where relevant, into account. For example, if the effect of a secondary 

adjustment is to treat a U.S. corporation as having made a distribution of profits to its parent 

corporation in Bulgaria, 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 22 (Relief

from Double Taxation) Bulgaria generally gives a credit for taxes paid with respect to such 

dividends, it would also be required to do so in this case. 

28 
 

The competent authorities are authorized by paragraph 3 of Article 24 (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 24 (Mutual Agreement Procedure), notwithstanding any time limits or 

other procedural limitations in the law of the Contracting State making the adjustment. If a 

taxpayer has entered into a closing agreement (or other written settlement) with the United States 

prior to bringing a case to the competent authorities, the U.S. competent authority will endeavor 

only to obtain a correlative adjustment from Bulgaria. See, Rev. Proc. 2006-54, 2006-2 C.B. 

1035, Section 7.05. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to

paragraph 2 of Article 9 by virtue of an exception to the saving clause in subparagraph 5(a) of 

Article 1. Thus, even if the statute of limitations has run, a refund of tax can be made in order to 

implement a correlative adjustment. Statutory or procedural limitations, however, cannot be 

overridden to impose additional tax, because paragraph 2 of Article 1 provides that the 

Convention cannot restrict any statutory benefit. 

ARTICLE 10 (DIVIDENDS) 

Article 10 provides rules for the taxation of dividends paid by a company that is a 

resident of one Contracting State to a beneficial owner that is a resident of the other Contracting 

State. The Article provides for full residence country taxation of such dividends and a limited 

source-State right to tax. Article 10 also provides rules for the imposition of a tax on branch 

profits by the State of source. Finally, the Article prohibits a State from imposing taxes on a 

company resident in the other Contracting State, other than a branch profits tax, on undistributed 

earnings. 

Paragraph 1 

The right of a shareholder's country of residence to tax dividends arising in the source 

country is preserved by paragraph 1, which permits a Contracting State to tax its residents on 

dividends paid to them by a company that is a resident of the other Contracting State. For 

dividends from any other source paid to a resident, Article 20 (Other Income) grants the State of 

residence exclusive taxing jurisdiction (other than for dividends attributable to a permanent 

establishment in the other State). 

Paragraph 2 

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 4. 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 10 

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. Shares are considered 

voting shares if they provide the power to elect, appoint or replace any person vested with the 

powers ordinarily exercised by the board of directors of a U.S. corporation. 

29 
The benefits of paragraph 2 may be granted at the time of payment by means of reduced 

rate of withholding tax at source. It also is consistent with the paragraph for tax to be withheld 

at the time of payment at full statutory rates, and the treaty benefit to be granted by means of a 

subsequent refund so long as such procedures are applied in a reasonable manner. 

The determination of whether the ownership threshold for subparagraph 2(a) is met for 

purposes of the 5 percent maximum rate of withholding tax is made on the date on which 

entitlement to the dividend is determined. Thus, in the case of a dividend from a U.S. company, 

the determination of whether the ownership threshold is met generally would be made on the 

dividend record date. 

Paragraph 2 does not affect the taxation of the profits out of which the dividends are paid. 

The taxation by a Contracting State of the income of its resident companies is governed by the 

internal law of the Contracting State, subject to the provisions of paragraph 4 of Article 23 (NonDiscrimination). 

The term "beneficial owner" 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 beneficial 

owner of the dividend for purposes of Article 10 is the person to which the dividend income is 

attributable for tax purposes under the laws of the source State. Thus, if a dividend paid by a

corporation that is a resident of one of the States (as determined under Article 4 (Resident)) is 

received by a nominee or agent that is a resident of the other State on behalf of a person that is 

not a resident of that other State, the dividend is not entitled to the benefits of this Article. 

However, a dividend received by a nominee on behalf of a resident of that other State would be 

entitled to benefits. These limitations are confirmed by paragraph 12 of the Commentary to 

Article 10 of the OECD Model. 

Special rules, however, apply to shares that are held through fiscally transparent entities.

In that case, the rules of paragraph 6 of Article 1 (General Scope) will apply to determine 

whether the dividends should be treated as having been derived by a resident of a Contracting 

State. Residence State principles shall be used to determine who derives the dividend, to assure 

that the dividends for which the source State grants benefits of the Convention will be taken into

account for tax purposes by a resident of the residence State. Source state principles of

beneficial ownership shall then apply to determine whether the person who derives the 

dividends, or another resident of the other Contracting State, is the beneficial owner of the 

dividend. The source State may conclude that the person who derives the dividend in the 

residence State is a mere nominee, agent, conduit, etc., for a third country resident and deny 

benefits of the Convention. If the person who derives the dividend under paragraph 6 of Article 

1 would not be treated under the source State’s principles for determining beneficial ownership 

as a nominee, agent, custodian, conduit, etc., that person will be treated as the beneficial owner 

of the income, profits or gains for purposes of the Convention. 

Assume, for instance, that a company resident in Bulgaria pays a dividend to LLC, an 

entity which is treated as fiscally transparent for U.S. tax purposes but is treated as a company 

for Bulgarian tax purposes. USCo, a company incorporated in the United States, is the sole 

interest holder in LLC. Paragraph 6 of Article 1 provides that USCo derives the dividend. 

Bulgaria’s principles of beneficial ownership shall then be applied to USCo. If under the laws of 

Bulgaria USCo is found not to be the beneficial owner of the dividend, USCo will not be entitled

to the benefits of Article 10 with respect to such dividend. The payment may be entitled to 

benefits, however, if USCo is found to be a nominee, agent, custodian or conduit for a person 

who is a resident of the United States. 

30 
 

Beyond identifying the person to whom the principles of beneficial ownership shall be 

applied, the principles of paragraph 6 of Article 1 will also apply when determining whether 

other requirements, such as the ownership threshold of subparagraph 2(a) have been satisfied. 

For example, assume that BulCo, a company that is a resident of Bulgaria, owns all of the 

outstanding shares in ThirdDE, an entity that is disregarded for U.S. tax purposes that is resident 

in a third country. ThirdDE owns 100% of the stock of USCo. Bulgaria views ThirdDE as

fiscally transparent under its domestic law, and taxes BulCo currently on the income derived by 

ThirdDE. In this case, BulCo is treated as deriving the dividends paid by USCo under paragraph

6 of Article 1. Moreover, BulCo is treated as owning the shares of USCo directly. The 

Convention does not address what constitutes direct ownership for purposes of Article 10. As a 

result, whether ownership is direct is determined under the internal law of the country imposing 

tax (i.e., the source country) unless the context otherwise requires. Accordingly, a company that 

holds stock through such an entity will generally be considered to directly own such stock for

purposes of Article 10. 

This result may change, however, if ThirdDE is regarded as non-fiscally transparent 

under the laws of Bulgaria. Assuming that ThirdDE is treated as non-fiscally transparent by 

Bulgaria, the income will not be treated as derived by a resident of Bulgaria for purposes of the 

Convention. However, ThirdDE may still be entitled to the benefits of the U.S. tax treaty, if any, 

with its country of residence. 

The same principles would apply in determining whether companies holding shares 

through fiscally transparent entities such as partnerships, trusts, and estates would qualify for

benefits. As a result, companies holding shares through such entities may be able to claim the 

benefits of subparagraph (a) under certain circumstances. The lower rate applies when the

company’s proportionate share of the shares held by the intermediate entity meets the 10 percent 

threshold, and the company meets the requirements of Article 1(6) (i.e., the company’s country 

of residence treats the intermediate entity as fiscally transparent) with respect to the dividend. 

Whether this ownership threshold is satisfied may be difficult to determine and often will require 

an analysis of the partnership or trust agreement. 

Paragraph 3 

Paragraph 3 imposes limitations on the rate reductions provided by paragraphs 2 and 4 

in the case of dividends paid by a RIC or a REIT. 

The first sentence of subparagraph 3(a) provides that dividends paid by a RIC or a REIT 

are not eligible for the 5 percent rate of withholding tax of subparagraph 2(a). 

The second sentence of subparagraph 3(a) provides that the 10 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 4 applies to dividends paid by RICs and 

beneficially owned by a pension fund. 

The third sentence of subparagraph 3(a) provides that the 10 percent rate of withholding 

tax also applies to dividends paid by a REIT, and that the elimination of source-country 

withholding tax of paragraph 4 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.” 

31 
 A REIT is diversified if the gross value of no single interest in real property held by the REIT 

exceeds 10 percent of the gross value of the REIT’s total interest in real property. Foreclosure 

property is not considered an interest in real property, and a REIT holding a partnership interest 

is treated as owning its proportionate share of any interest in real property held by the

partnership. 

Subparagraph (b) provides that the rules of subparagraph (a) shall also apply to dividends

paid by companies resident in Bulgaria that are similar to a RIC or a REIT. Whether companies 

that are residents of Bulgaria are similar to RICs or REITs will be determined by mutual 

agreement of the competent authorities. 

The restrictions set out above are intended to prevent the use of these entities to gain

inappropriate tax benefits. For example, a company resident in Bulgaria that wishes to hold a 

diversified portfolio of U.S. corporate shares could hold the portfolio directly and would bear a 

U.S. withholding tax of 10 percent on all of the dividends that it receives. Alternatively, it

could hold the same diversified portfolio by purchasing 10 percent or more of the interests in a 

RIC. If the RIC is a pure conduit, there may be no U.S. tax cost to interposing the RIC in the 

chain of ownership. Absent the special rule in paragraph 3, such use of the RIC could transform

portfolio dividends, taxable in the United States under the Convention at a 10 percent maximum

rate of withholding tax, into direct investment dividends taxable at a 5 percent maximum rate of 

withholding tax. 

Similarly, a resident of Bulgaria directly holding U.S. real property would pay U.S. tax 

upon the sale of the property either at a 30 percent rate of withholding tax on the gross income or 

at graduated rates on the net income. As in the preceding example, by placing the real property 

in a REIT, the investor could, absent a special rule, transform income from the sale of real estate 

into dividend income from the REIT, taxable at the rates provided in Article 10, significantly 

reducing the U.S. tax that otherwise would be imposed. Paragraph 3 prevents this result and

thereby avoids a disparity between the taxation of direct real estate investments and real estate 

investments made through REIT conduits. In the cases in which paragraph 3 allows a dividend

from a REIT to be eligible for the 10 percent rate of withholding tax, the holding in the REIT is 

not considered the equivalent of a direct holding in the underlying real property. 

Paragraph 4 

Paragraph 4 provides that, notwithstanding paragraph 2, the State of source will not tax 

dividends beneficially owned by a pension fund resident in the other Contracting State, unless 

such dividends are derived from the carrying on of a business by the pension fund or from an 

associated enterprise that is not itself a pension fund resident in the other Contracting State. For 

these purposes, the term "pension fund" is defined in subparagraph 1(m) of Article 3 (General 

Definitions). 

The exemption is provided because pension funds normally do not pay tax (either 

through a general exemption or because reserves for future pension liabilities effectively offset 

all of the fund's income), and therefore cannot benefit from a foreign tax credit. Moreover, 

distributions from a pension fund generally do not maintain the character of the underlying 

income, so the beneficiaries of the pension are not in a position to claim a foreign tax credit 

when they finally receive the pension, in many cases years after the withholding tax has been 

paid. Accordingly, in the absence of this rule, the dividends would almost certainly be subject 

to unrelieved double taxation. 

32 
Paragraph 5 

Paragraph 5 defines the term dividends broadly and flexibly. The definition is intended 

to cover all arrangements that yield a return on an equity investment in a corporation as 

determined under the tax law of the state of source, as well as arrangements that might be 

developed in the future. 

The term includes income from shares, or other corporate rights that are not treated as 

debt under the law of the source State, that participate in the profits of the company. The term 

also includes income that is subjected to the same tax treatment as income from shares by the 

law of the State of source. Thus, a constructive dividend that results from a non-arm's length

transaction between a corporation and a related party is a dividend. In the case of the United 

States the term dividend includes amounts treated as a dividend under U.S. law upon the sale or 

redemption of shares or upon a transfer of shares in a reorganization. See, e.g., Rev. Rul. 92-85, 

1992-2 C.B. 69 (sale of foreign subsidiary’s stock to U.S. sister company is a deemed dividend 

to extent of the subsidiary's and sister company's earnings and profits). Further, a distribution 

from a U.S. publicly traded limited partnership, which is taxed as a corporation under U.S. law, 

is a dividend for purposes of Article 10. However, a distribution by a limited liability company 

is not taxable by the United States under Article 10, provided the limited liability company is not 

characterized as an association taxable as a corporation under U.S. law. 

Finally, a payment denominated as interest that is made by a thinly capitalized 

corporation may be treated as a dividend to the extent that the debt is recharacterized as equity 

under the laws of the source State. 

Paragraph 6 

Paragraph 6 provides a rule for taxing dividends paid with respect to holdings that form

part of the business property of a permanent establishment. In such case, the rules of Article 7 

(Business Profits) shall apply. Accordingly, the dividends will be taxed on a net basis using the

rates and rules of taxation generally applicable to residents of the State in which the permanent 

establishment is located, as such rules may be modified by the Convention. An example of 

dividends paid with respect to the business property of a permanent establishment would be 

dividends derived by a dealer in stock or securities from stock or securities that the dealer held 

for sale to customers. 

Paragraph 7 

The right of a Contracting State to tax dividends paid by a company that is a resident of 

the other Contracting State is restricted by paragraph 7 to cases in which the dividends are paid

to a resident of that Contracting State or are attributable to a permanent establishment 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. 

33 
 

Paragraph 8 

Paragraph 8 permits a Contracting State to impose a branch profits tax on a company 

resident in the other Contracting State. The tax is in addition to other taxes permitted by the 

Convention. The term “company” is defined in subparagraph 1(e) 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

Immovable Property (Real Property)), or realizes gains taxable in that State under paragraph 1 of 

Article 13 (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 Article 6, 

Article 7, or Article 13, reduced for any increase in the branch's U.S. net equity during the year 

or increased for any reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets

less U.S. liabilities. See Treas. Reg. section 1.884-1. 

The dividend equivalent amount for any year approximates the dividend that a U.S. 

branch office would have paid during the year if the branch had been operated as a separate U.S.

subsidiary company. If Bulgaria also imposes a branch profits tax, the base of its tax must be 

limited to an amount that is analogous to the dividend equivalent amount. 

As discussed in the Technical Explanation to paragraph 2 of Article 1, consistency

principles require that a taxpayer may not use both treaty and Code rules where doing so would 

thwart the intent of either set of rules. In the context of the branch profits tax, the consistency 

requirement means that an enterprise that uses the principles of Article 7 to determine its net 

taxable income also must use those principles in determining the dividend equivalent amount. 

Similarly, an enterprise that uses U.S. domestic law to determine its net taxable income must 

also use U.S. domestic law in complying with the branch profits tax. As in the case of Article 7, 

if an enterprise switches between domestic law and treaty principles from year to year, it will 

need to make appropriate adjustments or recapture amounts that otherwise might go untaxed. 

Subparagraph b) provides that the branch profits tax shall not be imposed at a rate 

exceeding the direct investment dividend withholding rate of five percent. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of dividends, the 

saving clause of paragraph 4 of Article 1 permits the United States to tax dividends received by 

its residents and citizens, subject to the special foreign tax credit rules of paragraph 4 of Article

22 (Relief from Double Taxation), as if the Convention had not come into effect. 

The benefits of this Article are also subject to the provisions of Article 21 (Limitation on 

Benefits). Thus, if a resident of the other Contracting State is the beneficial owner of dividends 

paid by a U.S. corporation, the shareholder must qualify for treaty benefits under at least one of 

the tests of Article 21 in order to receive the benefits of this Article. 

34 
ARTICLE 11 (INTEREST) 

Article 11 specifies the taxing jurisdictions over interest arising in one Contracting State

and paid to a resident of the other Contracting State. 

Paragraph 1 

Paragraph 1 generally grants to the State of residence the non-exclusive right to tax

interest arising in the other Contracting State and paid to its residents. 

Paragraph 2 

Paragraph 2 provides that the State of source also may tax the interest, but if the interest 

is beneficially owned by a resident of the other Contracting State, the rate of tax will be limited 

to 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 internal 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 is received by a nominee or agent that is a resident 

of the other State on behalf of a person that is not a resident of that other State, the interest is not 

entitled to the benefits of Article 11. However, interest received by a nominee on behalf of a 

resident of that other State would be entitled to benefits. These limitations are confirmed by 

paragraph 9 of the OECD Commentary to Article 11. 

Paragraph 3 

Paragraph (3) provides for exclusive residence-based taxation in certain cases. 

Under subparagraph (a), interest beneficially owned by a Contracting State, a political

subdivision, or a local authority thereof (i.e., in the United States, a State or local government), 

the central bank of that Contracting State or any institution wholly owned by that Contracting 

State is subject to exclusive residence-based taxation. 

Under subparagraph (b), interest beneficially owned by a resident of a Contracting State 

with respect to debt-claims guaranteed, insured or indirectly financed by the Contracting State, a 

political subdivision or a local authority thereof, the central bank of that Contracting State or any 

institution wholly owned by that Contracting State is subject to exclusive residence-based

taxation. 

Under subparagraph (c), interest beneficially owned by any financial institution,

including, for example, a bank or an insurance company, is subject to exclusive residence-based 

taxation, unless the interest is paid as a part of a back-to-back loan or an arrangement that is 

economically similar to and has the effect of a back-to-back loan. Paragraph 8 of the Protocol

clarifies that the term "back-to-back loan" as used in subparagraph c) means a loan structured to 

obtain the benefits of subparagraph c) in which the loan is made to a financial institution that in 

turn lends the funds directly to the intended borrower. By referencing arrangements that are 

economically similar to, and that have the effect of, a back-to-back loan, paragraph (3)(c) 

reaches transactions that would not meet the legal requirements of a loan, but would nevertheless 

serve that purpose economically. For example, the term would encompass securities issued at a 

discount, or certain swap arrangements intended to operate as the economic equivalent of a back35 
to-back loan. In addition, nothing in Article 11 is intended to limit the ability of the Contracting 

States to enforce their domestic anti-avoidance provisions. 

Subparagraph (d) provides for exclusive residence-based taxation of interest beneficially

owned by a pension fund resident in the other Contracting State, provided that the interest is not 

derived from the carrying on of a business, directly or indirectly, by the pension fund. 

Paragraph 4 

The term "interest" as used in Article 11 is defined in paragraph 4 to include, inter alia, 

income from debt claims of every kind, whether or not secured by a mortgage. Penalty charges

for late payment are excluded from the definition of interest. Interest that is paid or accrued

subject to a contingency is within the ambit of Article 11. This includes income from a debt 

obligation carrying the right to participate in profits. The term does not, however, include 

amounts that are treated as dividends under Article 10 (Dividends). 

The term interest also includes amounts subject to the same tax treatment as income from

money lent under the law of the State in which the income arises. Thus, for purposes of the

Convention, amounts that the United States will treat as interest include (i) the difference 

between the issue price and the stated redemption price at maturity of a debt instrument (i.e., 

original issue discount ("OID")), which may be wholly or partially realized on the disposition of 

a debt instrument (section 1273), (ii) amounts that are imputed interest on a deferred sales 

contract (section 483), (iii) amounts treated as interest or OID under the stripped bond rules 

(section 1286), (iv) amounts treated as original issue discount under the below-market interest 

rate rules (section 7872), (v) a partner's distributive share of a partnership's interest income

(section 702), (vi) the interest portion of periodic payments made under a "finance lease" or 

similar contractual arrangement that in substance is a borrowing by the nominal lessee to finance 

the acquisition of property, (vii) amounts included in the income of a holder of a residual interest 

in a REMIC (section 860E), because these amounts generally are subject to the same taxation 

treatment as interest under U.S. tax law, and (viii) interest with respect to notional principal 

contracts that are re-characterized as loans because of a “substantial non-periodic payment.” 

Paragraph 5 

Paragraph 5 provides an exception to the rules of paragraphs 1, 2 and 3 in cases where

the beneficial owner of the interest carries on business through a permanent establishment in the 

State of source and the interest is attributable to that permanent establishment. In such cases the 

provisions of Article 7 (Business Profits) will apply and the State of source will retain the right 

to impose tax on such interest income. 

In the case of a permanent establishment that once existed in the State but that no longer 

exists, the provisions of paragraph 5 also apply to interest that would be attributable to such a

permanent establishment if it did exist in the year of payment or accrual. See the Technical 

Explanation to Article 7. 

Paragraph 6 

Paragraph 6 provides a source rule for determining the source of interest that is identical 

in substance to the interest source rule of the OECD Model. Interest is considered to arise in a 

Contracting State if paid by a resident of that State. As an exception, interest on a debt incurred

in connection with a permanent establishment in one of the States and borne by the permanent 

establishment is considered to arise in that State. For this purpose, interest is considered to be 

36 
 

borne by a permanent establishment if it is allocable to taxable income of that permanent 

establishment. 

Paragraph 7 

Paragraph 7 provides that in cases involving special relationships between the payor and

the beneficial owner of interest income, Article 11 applies only to that portion of the total 

interest payments that would have been made absent such special relationships (i.e., an arm'slength interest payment). Any excess amount of interest paid remains taxable according to the 

laws of the United States and Bulgaria, 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. 

The term "special relationship" is not defined in the Convention. In applying this

paragraph the United States considers the term to include the relationships described in Article 9, 

which in turn corresponds to the definition of "control" for purposes of section 482 of the Code. 

This paragraph does not address cases where, owing to a special relationship between the

payor and the beneficial owner or between both of them and some other person, the amount of 

the interest is less than an arm's-length amount. In those cases a transaction may be 

characterized to reflect its substance and interest may be imputed consistent with the definition 

of interest in paragraph 4. The United States would apply section 482 or 7872 of the Code to 

determine the amount of imputed interest in those cases. 

Paragraph 8 

Paragraph 8 provides anti-abuse exceptions to the rules of paragraphs 2 and 3 for two

classes of interest payments. 

The first class of interest, dealt with in subparagraphs (a) and (b) is so-called “contingent

interest.” With respect to interest arising in the United States, subparagraph (a) refers to 

contingent interest of a type that does not qualify as portfolio interest under U.S. domestic law. 

The cross-reference to the U.S. definition of contingent interest, which is found in section

871(h)(4) of the Code, is intended to ensure that the exceptions of section 871(h)(4)(c) will be 

applicable. With respect to Bulgaria, such interest is defined in subparagraph (b) as any interest 

arising in Bulgaria that is determined by reference to the receipts, sales, income, profits or other 

cash flow of the debtor or a related person, to any change in the value of any property of the

debtor or a related person or to any dividend, partnership distribution or similar payment made 

by the debtor or a related person. Any interest dealt with in subparagraphs (a) and (b) may be 

taxed in the source State at a rate not exceeding 10 percent of the gross amount of the interest. 

The second class of interest is dealt with in subparagraph 8(c). This exception is

consistent with the policy of Code sections 860E(e) and 860G(b) that excess inclusions with 

respect to a real estate mortgage investment conduit (REMIC) should bear full U.S. tax in all 

cases. Without a full tax at source foreign purchasers of residual interests would have a 

competitive advantage over U.S. purchasers at the time these interests are initially offered. Also, 

absent this rule, the U.S. fisc would suffer a revenue loss with respect to mortgages held in a 

REMIC because of opportunities for tax avoidance created by differences in the timing of 

taxable and economic income produced by these interests. 

37 
Paragraph 9 

Paragraph 9 permits a Contracting State to impose its branch level interest tax on a 

corporation resident in the other Contracting State. The base of this tax is the excess, if any, of

the interest deductible in the first-mentioned Contracting State in computing the profits of the 

corporation that are subject to tax in the first-mentioned Contracting State and either attributable 

to a permanent establishment in the first-mentioned Contracting State or subject to tax in the 

first-mentioned Contracting State under Article 6 or Article 13 of the Convention over the 

interest paid by the permanent establishment or trade or business in the first-mentioned 

Contracting State. Such excess interest may be taxed as if it were interest arising in the firstmentioned Contracting State and beneficially owned by the corporation resident in the other 

Contracting State. Thus, such excess interest may be taxed by the Contracting State of source at 

a rate not to exceed the 5 percent rate provided for in paragraph 2, and shall be exempt from tax 

by the Contracting State of source if the recipient is described in paragraph 3. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of interest, 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 22

(Relief from Double Taxation), as if the Convention had not come into force. 

As with other benefits of the Convention, the benefits of this Article are available to a 

resident of the other State only if that resident is entitled to those benefits under the provisions of 

Article 21 (Limitation on Benefits). 

Agreement to Reconsider Withholding Rates 

The Convention permits positive rates of taxation on interest and royalties. Paragraph 7

of the Protocol evidences the agreement of the Contracting States to reconsider the provisions of 

Article 11 and Article 12 with respect to interest and royalties arising in Bulgaria where the

beneficial owner of the income is a U.S. resident. Such reconsideration is permitted to occur at 

an appropriate time, consistent with the December 31, 2014 conclusion of the transition period 

applicable to interest and royalties deemed to arise in Bulgaria that are beneficially owned by a 

resident of the European Union pursuant to Council Directive 2003/49/EC of 3 June 2003, on a

common system of taxation applicable to interest and royalty payments made between associated 

companies of different Member States. 

ARTICLE 12 (ROYALTIES) 

Article 12 provides rules for the taxation of royalties arising in one Contracting State and 

paid to a resident of the other Contracting State. 

Paragraph 1 

Paragraph 1 grants the State of residence the non-exclusive right to tax a royalty arising

in the other Contracting State and paid to its residents. 

Paragraph 2 

Paragraph 2 allows the State of source to tax royalties arising in that State. If, however, 

the beneficial owner of the royalty is a resident of the other Contracting State, the tax may not 

exceed 5 percent of the gross amount of the royalties. 

38 
 

The term “beneficial owner” is not defined in the Convention, and is, therefore, defined 

under the internal law of the State of source. The beneficial owner of the royalty for purposes of 

Article 12 is the person to which the income is attributable under the laws of the source State. 

Thus, if a royalty arising in a Contracting State is received by a nominee or agent that is a 

resident of the other State on behalf of a person that is not a resident of that other State, the 

royalty is not entitled to the benefits of Article 12. However, a royalty received by a nominee on 

behalf of a resident of that other State would be entitled to benefits. These limitations are 

confirmed by paragraph 4 of the OECD Commentary to Article 12. 

Paragraph 3 

The term "royalties" as used in this Article means: 

Paragraph 3 defines the term “royalties,” as used in Article 12, to include any 

consideration for the use of, or the right to use, any copyright of literary, artistic, scientific or

other work (including cinematographic films and films, tapes or other means of image or sound 

reproduction for radio or television broadcasting), any patent, trademark, design or model, plan, 

secret formula or process, or for information concerning industrial, commercial, or scientific 

experience. The term “royalties” also includes gain derived from the alienation of any right or 

property that would give rise to royalties, to the extent the gain is contingent on the productivity,

use, or further alienation thereof. Gains that are not so contingent are dealt with under Article 13

(Capital Gains). The term “royalties,” however, does not include income from leasing personal 

property. 

The term royalties is defined in the Convention and therefore is generally independent of 

domestic law. Certain terms used in the definition are not defined in the Convention, but these 

may be defined under domestic tax law. For example, the term "secret process or formulas" is 

found in the Code, and its meaning has been elaborated in the context of sections 351 and 367. 

See Rev. Rul. 55- 17, 1955-1 C.B. 388; Rev. Rul. 64-56, 1964-1 C.B. 133; Rev. Proc. 69- 19, 

1969-2 C.B. 301. 

Consideration for the use or right to use cinematographic films, or works on film, tape, or 

other means of reproduction in radio or television broadcasting is specifically included in the 

definition of royalties. It is intended that, with respect to any subsequent technological advances

in the field of radio or television broadcasting, consideration received for the use of such 

technology will also be included in the definition of royalties. 

If an artist who is resident in one Contracting State records a performance in the other 

Contracting State, retains a copyrighted interest in a recording, and receives payments for the 

right to use the recording based on the sale or public playing of the recording, then the right of

such other Contracting State to tax those payments is governed by Article 12. See Boulez v. 

Commissioner, 83 T.C. 584 (1984), 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 16 (Entertainers and 

Sportsmen), for example, endorsement income from the artist’s attendance at a film screening, 

and if such income also is attributable to one of the rights described in Article 12 (e.g., the use of 

the artist’s photograph in promoting the screening), Article 16 and not Article 12 is applicable to 

such income. 

Computer software generally is protected by copyright laws around the world. Under the 

Convention, consideration received for the use, or the right to use, computer software is treated 

either as royalties or as business profits, depending on the facts and circumstances of the 

transaction giving rise to the payment. 

39 
 

 

The primary factor in determining whether consideration received for the use, or the right 

to use, computer software is treated as royalties or as business profits is the nature of the rights 

transferred. See Treas. Reg. section 1.861-18. The fact that the transaction is characterized as a 

license for copyright law purposes is not dispositive. For example, a typical retail sale of "shrink 

wrap" software generally will not be considered to give rise to royalty income, even though for 

copyright law purposes it may be characterized as a license. 

The means by which the computer software is transferred are not relevant for purposes of 

the analysis. Consequently, if software is electronically transferred but the rights obtained by the 

transferee are substantially equivalent to rights in a program copy, the payment will be 

considered business profits. 

The term "industrial, commercial, or scientific experience" (sometimes referred to as 

"know-how") has the meaning ascribed to it in paragraph 11 et seq. of the Commentary to 

Article 12 of the OECD Model. Consistent with that meaning, the term may include information 

that is ancillary to a right otherwise giving rise to royalties, such as a patent or secret process. 

Know-how also may include, in limited cases, technical information that is conveyed 

through technical or consultancy services. It does not include general educational training of the 

user's employees, nor does it include information developed especially for the user, such as a 

technical plan or design developed according to the user's specifications. Thus, as provided in

paragraph 11.4 of the Commentary to Article 12 of the OECD Model, the term "royalties" does 

not include payments received as consideration for after-sales service, for services rendered by a 

seller to a purchaser under a warranty, or for pure technical assistance. 

The term "royalties" also does not include payments for professional services (such as 

architectural, engineering, legal, managerial, medical, software development services). For 

example, income from the design of a refinery by an engineer (even if the engineer employed 

know-how in the process of rendering the design) or the production of a legal brief by a lawyer is 

not income from the transfer of know-how taxable under Article 12, but is income from services 

taxable under either Article 7 (Business Profits) or Article 14 (Income from Employment). 

Professional services may be embodied in property that gives rise to royalties, however. Thus, if 

a professional contracts to develop patentable property and retains rights in the resulting property 

under the development contract, subsequent license payments made for those rights would be 

royalties. 

Paragraph 4 

This paragraph provides an exception to the manner of allocating taxing rights specified 

in 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 royalties are attributable to that 

permanent establishment. In such cases the provisions of Article 7 (Business Profits) will apply. 

The provisions of paragraph 5 of the Protocol, regarding Article 7 (Business Profits), 

apply to this paragraph. For example, royalty income that is attributable to a permanent 

establishment and that accrues during the existence of the permanent establishment, but is re- ceived after the permanent establishment no longer exists, remains taxable under the provisions 

of Article 7 (Business Profits), and not under this Article. 

Paragraph 5 

Paragraph 5 contains a source rule for determining the source of royalties. Under 

paragraph 5, royalties are treated as arising in a Contracting State if paid by a resident of that 

40 
State. As an exception, royalties that are attributable to a permanent establishment in a 

Contracting State and borne by the permanent establishment are considered to arise in that State.

 Where, however, the payor of the royalties is not a resident of either Contracting State, and the 

royalties are not borne by a permanent establishment in either Contracting State, but the royalties 

relate to the use of, or the right to use, in one of the Contracting States, any property or right 

described in paragraph 3, the royalties are deemed to arise in that State. 

Paragraph 6 

Paragraph 6 provides that in cases involving special relationships between the payor and

beneficial owner of royalties, Article 12 applies only to the extent the royalties would have been 

paid absent such special relationships (i.e., an arm's-length royalty). Any excess amount of 

royalties paid remains taxable according to the laws of the two Contracting States, with due 

regard to the other provisions of the Convention. If, for example, the excess amount is treated as 

a distribution of corporate profits under domestic law, such excess amount will be taxed as a 

dividend rather than as royalties, but the tax imposed on the dividend payment will be subject to 

the rate limitations of paragraph 2 of Article 10 (Dividends). 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of royalties, the 

saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its 

residents and citizens, subject to the special foreign tax credit rules of paragraph 4 of Article 22

(Relief from Double Taxation), as if the Convention had not come into force. 

As with other benefits of the Convention, the benefits of Article 12 are available to a 

resident of the other State only if that resident is entitled to those benefits under Article 21

(Limitation on Benefits). 

Agreement to Reconsider Withholding Rates 

The Convention permits positive rates of taxation on interest and royalties. Paragraph 7

of the Protocol evidences the agreement of the Contracting States to reconsider the provisions of 

Article 11 and Article 12 with respect to interest and royalties arising in Bulgaria where the

beneficial owner of the income is a U.S. resident. Such reconsideration is permitted to occur at 

an appropriate time, consistent with the December 31, 2014 conclusion of the transition period 

applicable to interest and royalties deemed to arise in Bulgaria that are beneficially owned by a 

resident of the European Union pursuant to Council Directive 2003/49/EC of 3 June 2003, on a

common system of taxation applicable to interest and royalty payments made between associated 

companies of different Member States. 

ARTICLE 13 (CAPITAL GAINS) 

Article 13 assigns either primary or exclusive taxing jurisdiction over gains from the 

alienation of property to the State of residence or the State of source. 

Paragraph 1 

Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source to tax

gains attributable to the alienation of real property situated in that State. The paragraph therefore

permits the United States to apply section 897 of the Code to tax gains derived by a resident of 

Bulgaria that are attributable to the alienation of real property situated in the United States (as 

41 
 

defined in paragraph 2). Gains attributable to the alienation of real property include gains from

any other property that is treated as a real property interest within the meaning of paragraph 2. 

Paragraph 1 refers to gains "attributable to the alienation of immovable property (real 

property)" rather than the OECD Model phrase "gains from the alienation" to clarify that the 

United States will look through distributions made by a REIT and certain RICs. Accordingly,

distributions made by a REIT or certain RICs are taxable under paragraph 1 of Article 13 (not 

under Article 10 (Dividends)) when they are attributable to gains derived from the alienation of 

real property. 

Paragraph 2 

This paragraph defines the term "immovable property (real property) situated in the other 

Contracting State." The term includes real property referred to in Article 6 (i.e., an interest in the 

real property itself), a "United States real property interest" (when the United States is the other 

Contracting State under paragraph 1), and, as specified in paragraph 2(c), an equivalent interest in 

immovable property (real property) situated in Bulgaria. 

Under section 897(c) of the Code the term "United States real property interest" includes 

shares in a U.S. corporation that owns sufficient U.S. real property interests to satisfy an assetratio test on certain testing dates. The term also includes certain foreign corporations that have 

elected to be treated as U.S. corporations for this purpose. Section 897(i). 

Section 897(c)(3) provides that, in certain situations stock regularly traded on an

established securities market will not be treated as a U.S. real property interest, even if the stock 

derives its value primarily from U.S. real property. With respect to Bulgaria, subparagraph 

2(c)(i) of Article 13, provides an analogous carve-out in the case of stock regularly traded on an

established securities market. The term “established securities market” is defined in paragraph 9 

of the Protocol to mean a national securities exchange which is officially recognized, sanctioned, 

or supervised by a governmental authority as well as an over the counter market. An over the 

counter market is any market reflected by the existence of an interdealer quotation system. An 

interdealer quotation system is any system of general circulation to brokers and dealers which 

regularly disseminates quotations of stocks and securities by identified brokers or dealers, other 

than by quotation sheets which are prepared and distributed by a broker or dealer in the regular 

course of business and which contain only quotations of such broker or dealer. This definition is 

consistent with the regulations under section 897. 

Paragraph 3 

Paragraph 3 of Article 13 deals with the taxation of certain gains from the alienation of 

movable property forming part of the business property of a permanent establishment that an 

enterprise of a Contracting State has in the other Contracting State. This also includes gains

from the alienation of such a permanent establishment (alone or with the whole enterprise). 

Such gains may be taxed in the State in which the permanent establishment is located. 

A resident of Bulgaria that is a partner in a partnership doing business in the United

States generally will have a permanent establishment in the United States as a result of the 

activities of the partnership, assuming that the activities of the partnership rise to the level of a 

permanent establishment. Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under paragraph 3, the

United States generally may tax a partner's distributive share of income realized by a partnership 

on the disposition of movable property forming part of the business property of the partnership 

in the United States. 

42 
 

The gains subject to paragraph 3 may be taxed in the State in which the permanent 

establishment is located, regardless of whether the permanent establishment exists at the time of

the alienation. This rule incorporates the rule of section 864(c)(6) of the Code. Accordingly,

income that is attributable to a permanent establishment, but that is deferred and received after 

the permanent establishment no longer exists, may nevertheless be taxed by the State in which 

the permanent establishment was located. 

Paragraph 4 

This paragraph limits the taxing jurisdiction of the State of source with respect to gains 

from the alienation of ships or aircraft operated in international traffic by the enterprise 

alienating the ship or aircraft and from property (other than real property) pertaining to the 

operation or use of such ships or aircraft. 

Under paragraph 4, such income is taxable only in the Contracting State in which the 

alienator is resident. Notwithstanding paragraph 3, the rules of this paragraph apply even if the

income is attributable to a permanent establishment maintained by the enterprise in the other 

Contracting State. This result is consistent with the allocation of taxing rights under Article 8

(International Traffic). 

Paragraph 5 

Paragraph 5 provides a rule similar to paragraph 4 with respect to gains from the 

alienation of containers and related personal property. Such gains derived by an enterprise of a

Contracting State shall be taxable only in that Contracting State unless the containers were used 

for the transport of goods or merchandise solely within the other Contracting State. The other 

Contracting State may not tax such gain even if it is attributable to a permanent establishment 

maintained by the enterprise in that other Contracting State. 

Paragraph 6 

Paragraph 6 provides that, if certain conditions are met, a Contracting State can tax gains 

from the alienation of shares of a resident company that are derived by a resident of the other 

Contracting State. This provision permits Bulgaria to continue to impose its tax on the gain 

derived by U.S. residents on the alienation of shares in Bulgarian companies in a narrow set of 

cases. The first requirement is that the alienation occurs within 12 months of the date that the 

shares are acquired. The second requirement is that the recipient of the gain must have owned, 

directly or indirectly, at least 25 percent of the capital of the company at some time within the 

12-month period preceding the alienation. Finally, the provision provides that a Contracting 

State may not in any case tax gains derived by a resident of the other Contracting State from the 

alienation of shares of stock of public companies traded on an established securities market. 

As described above, the term “established securities market” is a national securities 

exchange which is officially recognized, sanctioned, or supervised by a governmental authority 

as well as an over the counter market. An over the counter market is any market reflected by the 

existence of an interdealer quotation system, and an interdealer quotation system is any system

of general circulation to brokers and dealers which regularly disseminates quotations of stocks 

and securities by identified brokers or dealers, other than by quotation sheets which are prepared

and distributed by a broker or dealer in the regular course of business and which contain only 

quotations of such broker or dealer. 

The United States will treat gain taxed by Bulgaria under this paragraph as of Bulgarian

source to the extent necessary to permit a credit for the Bulgarian tax, subject to the limitations 

of U.S. law. 

43 
Paragraph 6 is reciprocal. If the United States were to introduce such a tax, it could be 

imposed in accordance with the rules of this paragraph. 

Paragraph 7 

Paragraph 7 clarifies the interrelationship between Articles 12 (Royalties) and 13 with 

respect to certain gains treated as royalties. Under subparagraph 3(b) of Article 12, the term

royalties includes gain derived from the alienation of property that would give rise to royalties, 

to the extent the gain is contingent on the productivity, use, or further alienation thereof.

Therefore, such royalties are governed by the provisions of Article 12 and not by this Article. 

Paragraph 8 

Paragraph 8 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 7. 

For example, gain derived from shares, other than shares described in paragraphs 2, 3, or 6, 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. 

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 21 (Limitation on 

Benefits). Thus, only a resident of a Contracting State that satisfies one of the conditions in 

Article 21 is entitled to the benefits of this Article. 

ARTICLE 14 (INCOME FROM EMPLOYMENT) 

Article 14 apportions taxing jurisdiction over remuneration derived by a resident of a 

Contracting State as an employee between the States of source and residence. 

Paragraph 1 

The general rule of Article 14 is contained in paragraph 1. Remuneration derived by a 

resident of a Contracting State as an employee may be taxed by the State of residence, and the 

remuneration also may be taxed by the other Contracting State to the extent derived from

employment exercised (i.e., services performed) in that other Contracting State. Paragraph 1

also provides that the more specific rules of Articles 15 (Directors' Fees), 17 (Pensions, Social 

Security Payments, Annuities, Alimony, and Child Support), and 18 (Government Service) apply 

in the case of employment income described in one of those articles. Thus, even though the

State of source has a right to tax employment income under Article 14, it may not have the right 

44 
to tax that income under the Convention if the income is described, for example, in Article 17 

(Pensions, Social Security Payments, Annuities, Alimony, and Child Support) and is not taxable 

in the State of source under the provisions of that article. 

Article 14 applies to any form of compensation for employment, including payments in 

kind. Paragraph 1.1 of the Commentary to Article 16 of the OECD Model now confirms that 

interpretation. 

Consistent with section 864(c)(6) of the Code, Article 14 also applies regardless of the 

timing of actual payment for services. Consequently, a person who receives the right to a future

payment in consideration for services rendered in a Contracting State would be taxable in that 

State even if the payment is received at a time when the recipient is a resident of the other 

Contracting State. Thus, a bonus paid to a resident of a Contracting State with respect to 

services performed in the other Contracting State with respect to a particular taxable year would 

be subject to Article 14 even if it was paid after the close of the year. An annuity received for

services performed in a taxable year could be subject to Article 14 despite the fact that it was 

paid in subsequent years. In that case, it would be necessary to determine whether the payment 

constitutes deferred compensation, taxable under Article 14, or a qualified pension subject to the 

rules of Article 17 (Pensions, Social Security Payments, Annuities, Alimony, and Child 

Support). Article 14 also applies to income derived from the exercise of stock options granted 

with respect to services performed in the host State, even if those stock options are exercised 

after the employee has left the source country. If Article 14 is found to apply, whether such

payments were taxable in the State where the employment was exercised would depend on 

whether the tests of paragraph 2 were satisfied in the year in which the services to which the

payment relates were performed. 

Paragraph 2 

Paragraph 2 sets forth an exception to the general rule that employment income may be 

taxed in the State where it is exercised. Under paragraph 2, the State where the employment is 

exercised may not tax the income from the employment if three conditions are satisfied: (a) the 

individual is present in the other Contracting State for a period or periods not exceeding 183 

days in any 12-month period that begins or ends during the relevant taxable year (i.e., in the 

United States, the calendar year in which the services are performed); (b) the remuneration is 

paid by, or on behalf of, an employer who is not a resident of that other Contracting State; and 

(c) the remuneration is not borne as a deductible expense by a permanent establishment that the 

employer has in that other State. In order for the remuneration to be exempt from tax in the 

source State, all three conditions must be satisfied. This exception is identical to that set forth in

the OECD Model. 

The 183-day period in condition (a) is to be measured using the "days of physical 

presence" method. Under this method, the days that are counted include any day in which a part 

of the day is spent in the host country. (Rev. Rul. 56-24, 1956-1 C.B. 851.) Thus, days that are

counted include the days of arrival and departure; weekends and holidays on which the employee 

does not work but is present within the country; vacation days spent in the country before, during

or after the employment period, unless the individual's presence before or after the employment 

can be shown to be independent of his presence there for employment purposes; and time during 

periods of sickness, training periods, strikes, etc., when the individual is present but not working. 

If illness prevented the individual from leaving the country in sufficient time to qualify for the 

benefit, those days will not count. Also, any part of a day spent in the host country while in

transit between two points outside the host country is not counted. If the individual is a resident 

of the host country for part of the taxable year concerned and a 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. 

45 
Conditions (b) and (c) are intended to ensure that a Contracting State will not be required

to allow a deduction to the payor for compensation paid and at the same time to exempt the 

employee on the amount received. Accordingly, if a foreign person pays the salary of an

employee who is employed in the host State, but a host State corporation or permanent 

establishment reimburses the payor with a payment that can be identified as a reimbursement, 

neither condition (b) nor (c), as the case may be, will be considered to have been fulfilled. 

The reference to remuneration "borne by" a permanent establishment is understood to 

encompass all expenses that economically are incurred and not merely expenses that are 

currently deductible for tax purposes. Accordingly, the expenses referred to include expenses

that are capitalizable as well as those that are currently deductible. Further, salaries paid by

residents that are exempt from income taxation may be considered to be borne by a permanent 

establishment notwithstanding the fact that the expenses will be neither deductible nor 

capitalizable since the payor is exempt from tax. 

Paragraph 3 

Paragraph 3 contains a special rule applicable to remuneration for services performed by 

a resident of a Contracting State as an employee aboard a ship or aircraft operated in 

international traffic. Such remuneration may be taxed only in the State of residence of the 

employee if the services are performed as a member of the crew of the ship or aircraft or as other 

personnel regularly employed to serve aboard the ship or aircraft. In the case of a cruise ship, for

example, paragraph 3 applies to the crew and others, such as entertainers, lecturers, etc., 

employed by the shipping company to serve on the ship throughout its voyage. The use of the 

phrase "regularly employed to serve" 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. 

Relationship to Other Articles 

If a U.S. citizen who is resident in Bulgaria performs services as an employee in the 

United States and meets the conditions of paragraph 2 for source country exemption, he 

nevertheless is taxable in the United States by virtue of the saving clause of paragraph 4 of

Article 1 (General Scope), subject to the special foreign tax credit rule of paragraph 4 of Article

22 (Relief from Double Taxation). 

ARTICLE 15 (DIRECTORS' FEES) 

This Article provides that a Contracting State may tax the fees and other compensation 

paid by a company that is a resident of that State for services performed by a resident of the 

other Contracting State in his capacity as a member of the board of directors or a functionally 

similar body. This rule is an exception to the more general rules of Articles 7 (Business Profits) 

and 14 (Income from Employment). Thus, for example, in determining whether a director's fee 

paid to a non-employee director is subject to tax in the country of residence of the corporation, it 

is not relevant to establish whether the fee is attributable to a permanent establishment in that 

State. 

Under this Article, a resident of one Contracting State who is a director of a corporation 

that is resident in the other Contracting State is subject to tax in that other State in respect of his 

directors’ fees regardless of where the services are performed. This provision of the Convention

is identical in substance to the analogous provision in the OECD Model. 

46 
ARTICLE 16 (ENTERTAINERS AND SPORTSMEN) 

This Article deals with the taxation in a Contracting State of entertainers and sportsmen 

resident in the other Contracting State from the performance of their services as such. The 

Article applies both to the income of an entertainer or sportsman who performs services on his 

own behalf and one who performs services on behalf of another person, either as an employee of 

that person, or pursuant to any other arrangement. The rules of this Article take precedence, in

some circumstances, over those of Articles 7 (Business Profits) and 14 (Income from

Employment). 

This Article applies only with respect to the income of entertainers and sportsmen. 

Others involved in a performance or athletic event, such as producers, directors, technicians, 

managers, coaches, etc., remain subject to the provisions of Articles 7 and 14. In addition, 

except as provided in paragraph 2, income earned by juridical persons is not covered by Article 

16. 

Paragraph 1 

Paragraph 1 describes the circumstances in which a Contracting State may tax the 

performance income of an entertainer or sportsman who is a resident of the other Contracting 

State. Under the paragraph, income derived by an individual resident of a Contracting State 

from activities as an entertainer or sportsman exercised in the other Contracting State may be 

taxed in that other State if the amount of the gross receipts derived by the performer exceeds 

$15,000 (or its equivalent in Bulgarian currency) for the taxable year. The $15,000 includes 

expenses reimbursed to the individual or borne on his behalf. If the gross receipts exceed

$15,000, the full amount, not just the excess, may be taxed in the State of performance. 

This Convention introduces a monetary threshold to distinguish between two groups of 

entertainers and athletes -- those who are paid relatively large sums of money for very short 

periods of service, and who would, therefore, normally be exempt from host country tax under 

the standard personal services income rules, and those who earn relatively modest amounts and 

are, therefore, not easily distinguishable from those who earn other types of personal service 

income. 

Tax may be imposed under paragraph 1 even if the performer would have been exempt 

from tax under Article 7 (Business Profits) or 14 (Income from Employment). On the other 

hand, if the performer would be exempt from host-country tax under Article 16, but would be 

taxable under either Article 7 or 14, tax may be imposed under either of those Articles. Thus, for 

example, if a performer derives remuneration from his activities in an independent capacity, and 

the performer does not have a permanent establishment in the host State, he may be taxed by the 

host State in accordance with Article 16 if his remuneration exceeds $15,000 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 $15,000 threshold amount and therefore is not taxable 

under Article 16 nevertheless may be subject to tax in the host country under Article 7 or 14 if 

the tests for host-country taxability under the relevant Article are met. For example, if an 

entertainer who is an independent contractor earns $14,000 of income in a State for the calendar 

year, but the income is attributable to his permanent establishment in the State of performance, 

that State may tax his income under Article 7. 

Since it frequently is not possible to know until year-end whether the income an 

entertainer or sportsman derived from performances in a Contracting State will exceed $15,000, 

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. 

47 
As explained in paragraph 9 of the Commentary to Article 17 of the OECD Model, 

Article 16 of the Convention applies to all income connected with a performance by the 

entertainer, such as appearance fees, award or prize money, and a share of the gate receipts. 

Income derived from a Contracting State by a performer who is a resident of the other 

Contracting State from other than actual performance, such as royalties from record sales and 

payments for product endorsements, is not covered by this Article, but by other articles of the 

Convention, such as Article 12 (Royalties) or Article 7 (Business Profits). For example, if an 

entertainer receives royalty income from the sale of live recordings, the royalty income would be 

subject to the provisions of Article 12, even if the performance was conducted in the source 

country, although the entertainer could be taxed in the source country with respect to income

from the performance itself under Article 16 if the dollar threshold is exceeded. 

In determining whether income falls under Article 16 or another article, the controlling 

factor will be whether the income in question is predominantly attributable to the performance 

itself or to other activities or property rights. For instance, a fee paid to a performer for 

endorsement of a performance in which the performer will participate would be considered to be 

so closely associated with the performance itself that it normally would fall within Article 16. 

Similarly, a sponsorship fee paid by a business in return for the right to attach its name to the 

performance would be so closely associated with the performance that it would fall under Article 

16 as well. As indicated in paragraph 9 of the Commentary to Article 17 of the OECD Model, 

however, a cancellation fee would not be considered to fall within Article 16 but would be dealt 

with under Article 7 (Business Profits) or 14 (Income from Employment). 

As indicated in paragraph 4 of the Commentary to Article 17 of the OECD Model, where 

an individual fulfills a dual role as performer and non-performer (such as a player-coach or an 

actor-director), but his role in one of the two capacities is negligible, the predominant character 

of the individual's activities should control the characterization of those activities. In other cases 

there should be an apportionment between the performance-related compensation and other 

compensation. 

Consistent with Article 14 (Income from Employment), Article 16 also applies regardless 

of the timing of actual payment for services. Thus, a bonus paid to a resident of a Contracting

State with respect to a performance in the other Contracting State during a particular taxable year 

would be subject to Article 16 even if it was paid after the close of the year. The determination 

as to whether the $15,000 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 $15,000. 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 

48 
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 hostcountry tax because the company earns business profits but has no permanent establishment in 

that country. The performer may largely or entirely escape host-country tax by receiving only a 

small salary, perhaps small enough to place him below the dollar threshold in paragraph 1. The 

performer might arrange to receive further payments in a later year, when he is not subject to 

host-country tax, perhaps as dividends or liquidating distributions. 

Paragraph 2 seeks to prevent this type of abuse while at the same time protecting the 

taxpayers' rights to the benefits of the Convention when there is a legitimate employee-employer 

relationship between the performer and the person providing his services. Under paragraph 2,

when the income accrues to a person other than the performer, the income may be taxed in the 

Contracting State where the performer's services are exercised, without regard to the provisions 

of the Convention concerning business profits (Article 7) or income from employment (Article 

14), but only if one of two conditions is met. The first condition is that the contract pursuant to

which the personal activities are performed designates the entertainer or sportsman (by name or 

description). The second condition is that the contract allows the other party to the contract (or a

person other than the entertainer, sportsman or the person to whom the income accrues) to 

designate the individual who is to perform the personal activities. This rule is consistent with the 

U.S. domestic law provision characterizing income from certain personal service contracts as 

foreign personal holding company income. 

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 (i.e., the contract mentioned the performer by name or description or else 

allowed the recipient of the services to designate who is to perform the services). If instead the 

person to whom the income accrues is allowed to designate the individual who is to perform the 

services, then likely that 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 Bulgaria, 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 mentions by name the conductor and the flutist, 

the portion of the $200,000 that is attributable to the personal services of the conductor and the

flutist may be taxed by the United States pursuant to paragraph 2. However, because Company 

A is not allowed to designate the other performers the remaining portion of the $200,000, 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. 

49 
 

Pursuant to Article 1 (General Scope) the Convention only applies to persons who are

residents of one of the Contracting States. Thus, income of a star company that is not a resident 

of one of the Contracting States would not be eligible for the benefits of the Convention. 

Relationship to other Articles 

This Article is subject to the provisions of the saving clause of paragraph 4 of Article 1 

(General Scope). Thus, if an entertainer or a sportsman who is resident in Bulgaria 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 22 (Relief from Double Taxation). In addition, 

benefits of this Article are subject to the provisions of Article 21 (Limitation on Benefits). 

ARTICLE 17 (PENSIONS, SOCIAL SECURITY, ANNUITIES, ALIMONY, AND CHILD 

SUPPORT) 

This Article deals with the taxation of private (i.e., non-government service) pensions 

and annuities, social security benefits, alimony and child support payments. 

Paragraph 1 

Paragraph 1 provides that distributions from pensions and other similar remuneration 

beneficially owned by a resident of a Contracting State in consideration of past employment are 

taxable only in the State of residence of the beneficiary. The term "pensions and other similar 

remuneration" includes both periodic and single sum payments. 

The phrase “pensions and other similar remuneration” is intended to encompass 

payments made by qualified private retirement plans. In the United States, the plans

encompassed by paragraph 1 include: qualified plans under section 401(a), individual retirement 

plans (including individual retirement plans that are part of a simplified employee pension plan 

that satisfies section 408(k), individual retirement accounts and section 408(p) accounts), section 

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 18. 

Pensions in respect of government services covered by Article 18 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 18 (Government Service). Thus, Article 18 

generally covers section 457, 401(a), 403(b) plans established for government employees, and 

the Thrift Savings Plan (section 7701(j)). 

Paragraph 2 

The treatment of social security benefits is dealt with in paragraph 2. This paragraph

provides that, notwithstanding the provision of paragraph 1 under which private pensions are 

taxable exclusively in the State of residence of the beneficial owner, payments made by one of 

the Contracting States under the provisions of its social security or similar legislation to a resi- dent of Bulgaria 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 Bulgaria to a U.S. citizen who is not resident in the United States will not be taxable 

by the United States. 

50 
 

This paragraph applies to social security beneficiaries whether they have contributed to

the system as private sector or Government employees. The phrase "similar legislation" is 

intended to refer to United States tier 1 Railroad Retirement benefits. 

Paragraph 3 

Under paragraph 3, annuities that are derived and beneficially owned by a resident of a 

Contracting State are taxable only in that State. An annuity, as the term is used in this 

paragraph, means a stated sum paid periodically at stated times during a specified number of 

years, under an obligation to make the payment in return for adequate and full consideration 

(other than for services rendered). An annuity received in consideration for services rendered

would be treated as either deferred compensation that is taxable in accordance with Article 14 

(Income from Employment) or a pension that is subject to the rules of paragraph 1. 

Paragraph 4 

Paragraph 4 deals with alimony and child support payments. Under paragraph 4, alimony 

and child support payments paid by a resident of a Contracting State to a resident of the other 

Contracting State are not taxable in the recipient’s State of residence. In addition, such 

payments are not taxable in the payor’s State of residence unless he is entitled to a deduction for 

such payments in computing taxable income in his State of residence. The term alimony is 

defined as periodic payments made pursuant to a written separation agreement or a decree of

divorce, separate maintenance, or compulsory support. 

Paragraph 5 

Paragraph 5 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 Bulgaria, paragraph 5 prevents Bulgaria 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 

the State of residence under paragraph 1. 

Relationship to other Articles 

Paragraphs 1, 3, and 4 of Article 17 are subject to the saving clause of paragraph 4 of 

Article 1 (General Scope). Thus, a U.S. citizen who is resident in Bulgaria, and receives a

pension, annuity or alimony payment from the United States, may be subject to U.S. tax on the 

payment, notwithstanding the rules in paragraphs 1, 3 and 4. Paragraphs 2 and 5 are excepted 

from the saving clause by virtue of subparagraph 5(a) of Article 1. Thus, the United States will 

not tax U.S. citizens and residents on the income described in paragraph 2, even if such amounts 

otherwise would be subject to tax under U.S. law, and the United States will allow U.S. citizens

and residents the benefits of paragraph 5. 

ARTICLE 18 (GOVERNMENT SERVICE) 

Paragraph 1 

Paragraph 1 deals with the taxation of government compensation (other than a pension 

addressed in paragraph 2). Subparagraph (a) provides that remuneration paid to any individual 

who is rendering services to that State, political subdivision or local authority is exempt from tax 

by the other State. Under subparagraph (b), such payments are, however, taxable exclusively in 

51 
the other State (i.e., the host State) if the services are rendered in that other State and the

individual is a resident of that State who is either a national of that State or a person who did not 

become resident of that State solely for purposes of rendering the services. The paragraph

applies to anyone performing services for a government, whether as a government employee, an 

independent contractor, or an employee of an independent contractor. 

Paragraph 2 

Paragraph 2 deals with the taxation of pensions paid by, or out of funds created by, one of 

the States, or a political subdivision or a local authority thereof, to an individual in respect of 

services rendered to that State or subdivision or authority. Subparagraph (a) provides that such

pensions are taxable only in that State. Subparagraph (b) provides an exception under which

such pensions are taxable only in the other State if the individual is a resident of, and a national

of, that other State. 

Pensions paid to retired civilian and military employees of a Government of either State 

are intended to be covered under paragraph 2. When benefits paid by a State in respect of 

services rendered to that State or a subdivision or authority are in the form of social security 

benefits, however, those payments are covered by paragraph 2 of Article 17 (Pensions, Social 

Security Payments, Annuities, Alimony, and Child Support). As a general matter, the result will 

be the same whether Article 17 or 18 applies, since social security benefits are taxable 

exclusively by the source country and so are government pensions. The result will differ only

when the payment is made to a citizen and resident of the other Contracting State, who is not 

also a citizen of the paying State. In such a case, social security benefits continue to be taxable

at source while government pensions become taxable only in the residence country. 

Paragraph 3 

Paragraph 3 provides that the remuneration described in paragraph 1 will be subject to 

the rules of Articles 14 (Income from Employment), 15 (Directors' Fees), 16 (Entertainers and 

Sportsmen) or 17 (Pensions, Social Security Payments, 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 18 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. An individual who receives a pension paid by the Government of Bulgaria in respect of 

services rendered to the Government of Bulgaria shall be taxable on this pension only in 

Bulgaria unless the individual is a U.S. citizen or acquires a U.S. green card. 

ARTICLE 19 (STUDENTS, TRAINEES, TEACHERS AND RESEARCHERS) 

This Article provides rules for host-country taxation of visiting students, business

trainees, teachers and researchers. 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. Paragraph 1

addresses payments received by a student or business trainee, while paragraph 2 addresses 

teachers and researchers temporarily present in the host country. 

52 
 

Paragraph 1 

Subparagraph (a) addresses the situation where a student or business trainee that is a

resident of a Contracting State receives designated classes of payments while present in the host 

State. Several conditions must be satisfied for such an individual to be entitled to the benefits of 

paragraph 1. 

First, the student or business trainee must have been, either at the time of his arrival in 

the host State or immediately before, a resident of the other Contracting State. 

Second, the purpose of the visit must be the full-time education (at a college, university, 

or other recognized educational institution of a similar nature) or full-time 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 paragraph 1, even with respect to any payments he may 

receive from abroad for his maintenance or education, and regardless of whether or not he is in a 

degree program. Whether a student is to be considered full-time will be determined by the rules 

of the educational institution at which he is studying. 

The host-country exemption in paragraph 1 applies to payments received by the student 

or business trainee for the purpose of his maintenance, education or training that arise outside the 

host State. A payment will be considered to arise outside the host State if the payor 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 payor. 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. 

Paragraph 1 also provides a limited exemption for remuneration from personal services 

rendered in the host State with a view to supplementing the resources available to him for such 

purposes to the extent of $9,000 United States dollars (or its equivalent in the currency of

Bulgaria) per taxable year. The competent authorities are instructed to adjust this amount every 

five years, if appropriate. 

In the case of a business trainee, the benefits of paragraph 1 will extend only for a period 

of two years from the time that the visitor first arrives in the host country for the purpose of 

training. If, however, a trainee remains in the host country for a third year, thus losing the 

benefits of paragraph 1, he would not retroactively lose the benefits of the paragraph 1 for the 

first two years. The term "business trainee" is defined as a person who is in the country 

temporarily either for the purpose of securing training that is necessary to qualify to pursue a 

profession or professional specialty, or as an employee of, or under contract with, a resident of 

the other Contracting State, for the primary purpose of acquiring technical, professional, or 

business experience, from someone who is not his employer or related to his 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 stagiare 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. 

53 
Paragraph 2 

Paragraph 2 provides a limited exemption from host State taxation for certain teachers 

and researchers temporarily present in the host State for the purpose of teaching or carrying on 

research at a school, college, university or other recognized educational or research institution.

The teacher or researcher must be a resident of the other Contracting State at the beginning of his 

visit to the host State. The income eligible for exemption is the person’s remuneration received 

in consideration of teaching or carrying on research. The host-country exemption will extend to 

payments received by a teacher or researcher only for a period of two years from the time that 

the visitor first arrives in the host country. A teacher or researcher remaining in the host country 

for more than 2 years becomes subject to tax on remuneration with respect to teaching and 

researching, but does not retroactively lose the benefits of paragraph 2 for the first two years.

Paragraph 2 does not apply to exempt income in consideration of carrying on research if the 

research is primarily for the private benefit of a specific person or persons rather than in the 

public interest. 

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, for example, a U.S. citizen who is a 

resident of Bulgaria and who visits the United States as a full-time student at an accredited 

university will not be exempt from U.S. tax on remittances from abroad that otherwise constitute 

U.S. taxable income. A person, however, who is not a U.S. citizen, and who visits the United

States as a student and remains long enough to become a resident under U.S. law, but does not 

become a permanent resident (i.e., does not acquire a green card), will be entitled to the full 

benefits of the Article. 

ARTICLE 20 (OTHER INCOME) 

Article 20 generally assigns taxing jurisdiction over income not dealt with in the other 

articles (Articles 6 through 19) 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 12

(Royalties). However, profits derived in the conduct of a business are "dealt with" in Article 7

(Business Profits) whether or not they have their source in one of the Contracting States. 

Examples of items of income covered by Article 20 include income from gambling, 

punitive (but not compensatory) damages and covenants not to compete. The Article would also 

apply to income from a variety of financial transactions, where such income does not 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 20 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 20, unless the guarantor were engaged in the business of

providing such guarantees to unrelated parties. 

Article 20 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 

54 
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 20. 

Distributions from partnerships are not generally dealt with under Article 20 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 20 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 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 implicit 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 20 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 that is 

attributable to a permanent establishment maintained in a Contracting State by a resident of the 

other Contracting State. The taxation of such income is governed by the provisions of Article 7 

(Business Profits). Therefore, income arising outside the United States that is attributable to a 

permanent establishment maintained in the United States by a resident of Bulgaria 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 Bulgaria 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 21 (Limitation on Benefits). Thus, if a resident of Bulgaria

earns income that falls within the scope of paragraph 1 of Article 20, 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 20 only if the resident satisfies one of the tests of Article 21 for entitlement to benefits. 

55 
 

ARTICLE 21 (LIMITATION ON BENEFITS) 

Article 21 contains anti-treaty-shopping provisions that are intended to prevent residents 

of third countries from benefiting from what is intended to be a reciprocal agreement between 

two countries. In general, the provision does not rely on a determination of purpose or intention 

but instead sets forth a series of objective tests. A resident of a Contracting State that satisfies

one of the tests will receive benefits regardless of its motivations in choosing its particular 

business structure. 

The structure of the Article is as follows: Paragraph 1 states the general rule that

residents are entitled to benefits otherwise accorded to residents only to the extent

provided in the Article. Paragraph 2 lists a series of attributes of a resident of a

Contracting State, the presence of any one of which will entitle that person to all the 

benefits of the Convention. Paragraph 3 provides a so-called "derivative benefits" test

under which certain categories of income may qualify for benefits. Paragraph 4 provides 

that, regardless of whether a person qualifies for benefits under paragraph 2 or 3, benefits

may be granted to that person with regard to certain income earned in the conduct of an 

active trade or business. Paragraph 5 provides special rules for so-called “triangular

cases” notwithstanding paragraphs 1 through 4 of Article 21. Paragraph 6 provides that

benefits also may be granted if the competent authority of the State from which benefits 

are claimed determines that it is appropriate to provide benefits in that case. Paragraph 7

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 through 20, the treaty-based 

relief from double taxation provided by Article 22 (Relief from Double Taxation), and the 

protection against discrimination afforded to residents of a Contracting State under Article 23 

(Non-Discrimination). Some provisions do not require that a person be a resident in order to 

enjoy the benefits of those provisions. Article 24 (Mutual Agreement Procedure) is not limited 

to residents of the Contracting States, and Article 26 applies to diplomatic agents or consular 

officials regardless of residence. Article 21 accordingly does not limit the availability of treaty 

benefits under these provisions. 

Article 21 and the anti-abuse provisions of domestic law complement each other, as 

Article 21 effectively determines whether an entity has a sufficient nexus to the Contracting 

State to be treated as a resident for treaty purposes, while domestic anti-abuse provisions (e.g., 

business purpose, substance-over-form, step transaction or conduit principles) determine whether 

a particular transaction should be recast in accordance with its substance. Thus, internal law 

principles of the source Contracting State may be applied to identify the beneficial owner of an 

item of income, and Article 21 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 

are entitled to all benefits of the Convention. 

It is intended that the provisions of paragraph 2 will be self executing. Unlike the 

provisions of paragraph 6, discussed below, claiming benefits under paragraph 2 does not require 

56 
 

 

 

an advance competent authority ruling or approval. The tax authorities may, of course, on 

review, determine that the taxpayer has improperly interpreted the paragraph and is not entitled 

to the benefits claimed. 

Individuals -- Subparagraph 2(a) 

Subparagraph (a) provides that individual residents of a Contracting State will be entitled 

to all treaty benefits. If such an individual receives income as a nominee on behalf of a third 

country resident, benefits may be denied under the respective articles of the Convention by the 

requirement that the beneficial owner of the income be a resident of a Contracting State. 

Governments -- Subparagraph 2(b) 

Subparagraph (b) provides that the Contracting States and any political subdivision or 

local authority thereof will be entitled to all benefits of the Convention. 

Publicly-Traded Corporations -- Subparagraph 2(c)(i) 

Subparagraph (c) applies to two categories of companies: publicly traded companies and 

subsidiaries of publicly traded companies. A company resident in a Contracting State is entitled 

to all the benefits of the Convention under clause (i) of subparagraph (c) if the principal class of 

its shares, and any disproportionate class of shares, is regularly traded on one or more recognized 

stock exchanges and the company satisfies at least one of the following additional requirements: 

first, the company’s principal class of shares is primarily traded on one or more recognized stock 

exchanges located in the Contracting State of which the company is a resident; or, second, the 

company’s primary place of management and control is in its State of residence. 

The term “recognized stock exchange” is defined in subparagraph 7(a). It includes (i) the

NASDAQ System and any stock exchange registered with the Securities and Exchange 

Commission as a national securities exchange for purposes of the Securities Exchange Act of

1934; (ii) the Bulgarian Stock Exchange – Sofia, and any other stock exchange licensed to trade

securities and financial instruments under the Bulgarian law; and (iii) any other stock exchange 

agreed upon by the competent authorities of the Contracting States. 

If a company has only one class of shares, it is only necessary to consider whether the 

shares of that class meet the relevant trading requirements. If the company has more than one 

class of shares, it is necessary as an initial matter to determine which class or classes constitute 

the "principal class of shares". The term “principal class of shares” is defined in subparagraph 

7(b) to mean the ordinary or common shares of the company representing the majority of the 

aggregate voting power and value of the company. If the company does not have a class of 

ordinary or common shares representing the majority of the aggregate voting power and value of 

the company, then the “principal class of shares” is that class or any combination of classes of 

shares that represents, in the aggregate, a majority of the voting power and value of the 

company. Although in a particular case involving a company with several classes of shares it is 

conceivable that more than one group of classes could be identified that account for more than 

50% of the shares, it is only necessary for one such group to satisfy the requirements of this 

subparagraph in order for the company to be entitled to benefits. Benefits would not be denied 

to the company even if a second, non-qualifying, group of shares with more than half of the 

company's voting power and value could be identified. 

A company whose principal class of shares is regularly traded on a recognized stock 

exchange will nevertheless not qualify for benefits under subparagraph 2(c) if it has a

disproportionate class of shares that is not regularly traded on a recognized stock exchange. The 

term “disproportionate class of shares” is defined in subparagraph 7(c). A company has a 

57 
disproportionate class of shares if it has outstanding a class of shares that is subject to terms or 

other arrangements that entitle the holder to a larger portion of the company’s income, profit, or 

gain in the other Contracting State than that to which the holder would be entitled in the absence

of such terms or arrangements. Thus, for example, a company resident in Bulgaria 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. BulCo is a corporation resident in Bulgaria. BulCo has two classes of shares: 

Common and Preferred. The Common shares are listed and regularly traded on the principal 

stock exchange of Bulgaria. The Preferred shares have no voting rights and are entitled to 

receive dividends equal in amount to interest payments that BulCo 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 BulCo 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 BulCo, the Preferred shares are a disproportionate 

class of shares. Because the Preferred shares are not regularly traded on a recognized stock 

exchange, BulCo will not qualify for benefits under subparagraph 2(c). 

A class of shares will be “regularly traded” on one or more recognized stock exchanges 

in a taxable year, under subparagraph 7(g), if the aggregate number of shares of that class traded 

on one or more recognized exchanges during the twelve months ending on the day before the 

beginning of that taxable year is at least six percent of the average number of shares outstanding 

in that class during that twelve-month period. The regular trading requirement can be met by 

trading on any recognized exchange or exchanges located in either State. Trading on one or

more recognized stock exchanges may be aggregated for purposes of this requirement. Thus, a 

U.S. company could satisfy the regularly traded requirement through trading, in whole or in part, 

on a recognized stock exchange located in Bulgaria. 

The term “primarily traded” is not defined in the Convention. In accordance with 

paragraph 2 of Article 3 (General Definitions), this term will have the meaning it has under the 

laws of the State concerning the taxes to which the Convention applies, generally the source

State. In the case of the United States, this term is understood to have the meaning it has under 

Treas. Reg. section 1.884-5(d)(3), relating to the branch tax provisions of the Code.

Accordingly, stock of a corporation is “primarily traded” if the number of shares in the 

company’s principal class of shares that are traded during the taxable year on all recognized 

stock exchanges in the Contracting State of which the company is a resident exceeds the number 

of shares in the company’s principal class of shares that are traded during that year on 

established securities markets in any other single foreign country. 

A company whose principal class of shares is regularly traded on a recognized exchange 

but cannot meet the primarily traded test may claim treaty benefits if its primary place of 

management and control is in its country of residence. This test should be distinguished from

the “place of effective management” test which is used in the OECD Model and by many other 

countries to establish residence. In some cases, the place of effective management test has been 

interpreted to mean the place where the board of directors meets. By contrast, the primary place 

of management and control test looks to where day-to-day responsibility for the management of 

the company (and its subsidiaries) is exercised. The company’s primary place of management 

and control will be located in the State in which the company is a resident only if the executive 

officers and senior management employees exercise day-to-day responsibility for more of the 

strategic, financial and operational policy decision making for the company (including direct and 

58 
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 and other top executives normally are based) be 

located in the Contracting State of which the company is a resident. 

To apply the test, it will be necessary to determine which persons are to be considered 

“executive officers and senior management employees”. In most cases, it will not be necessary 

to look beyond the executives who are members of the Board of Directors (the “inside 

directors”) in the case of a U.S. company. That will not always be the case, however; in fact, the 

relevant persons may be employees of subsidiaries if those persons make the strategic, financial 

and operational policy decisions. Moreover, it would be necessary to take into account any

special voting arrangements that result in certain board members making certain decisions 

without the participation of other board members. 

Subsidiaries of Publicly-Traded Corporations -- Subparagraph 2(c)(ii) 

A company resident in a Contracting State is entitled to all the benefits of the 

Convention under clause (ii) of subparagraph 2(c) if five or fewer publicly traded companies 

described in clause (i) are the direct or indirect owners of at least 50 percent of the aggregate 

vote and value of the company’s shares (and at least 50 percent of any disproportionate class of 

shares). If the publicly-traded companies are indirect owners, however, each of the 

intermediate companies must be a resident of one of the Contracting States. 

Thus, for example, a company that is a resident of Bulgaria, all the shares of which are 

owned by another company that is a resident of Bulgaria, 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 Bulgaria. 

 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 Bulgaria. Furthermore, if a parent company in Bulgaria 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 Bulgaria 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 entitled to all the benefits of the Convention. 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 are those that are generally exempt 

from tax in their State of residence and that are organized and operated exclusively to fulfill 

religious, charitable, scientific, artistic, cultural, or educational purposes. 

59 
Ownership/Base Erosion -- Subparagraph 2(e) 

Subparagraph 2(e) provides an additional method to qualify for treaty benefits that 

applies to any form of legal entity that is a resident of a Contracting State. The test provided in

subparagraph (e), the so-called ownership and base erosion test, is a two-part test. Both prongs

of the test must be satisfied for the resident to be entitled to treaty benefits under subparagraph 

2(e). 

The ownership prong of the test, under clause (i), requires that at least 50 percent of the

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

shares) of shares or other beneficial interests in the person is owned, directly or indirectly, on at 

least half the days of the person’s taxable year by persons who are residents of the Contracting

State of which that person is a resident and that are themselves entitled to treaty benefits under 

subparagraphs 2(a), (b), (c)(i), or (d). In the case of indirect owners, each of the intermediate 

owners must be a resident of that Contracting State. 

Trusts may be entitled to benefits under this provision if they are treated as residents 

under Article 4 (Resident) and they otherwise satisfy the requirements of this subparagraph. For 

purposes of this subparagraph, the beneficial interests in a trust will be considered to be owned

by its beneficiaries in proportion to each beneficiary's actuarial interest in the trust. The interest 

of a remainder beneficiary will be equal to 100 percent less the aggregate percentages held by 

income beneficiaries. A beneficiary's interest in a trust will not be considered to be owned by a 

person entitled to benefits under the other provisions of paragraph 2 if it is not possible to

determine the beneficiary's actuarial interest. Consequently, if it is not possible to determine the 

actuarial interest of the beneficiaries in a trust, the ownership test under clause i) cannot be

satisfied, unless all possible beneficiaries are persons entitled to benefits under subparagraphs

2(a), (b), (c)(i), or (d). 

The base erosion prong of clause (ii) of subparagraph (e) is satisfied with respect to a

person if less than 50 percent of the person’s gross income for the taxable year, as determined 

under the tax law in the person’s State of residence, is paid or accrued, directly or indirectly, to 

persons who are not residents of either Contracting State entitled to benefits under subparagraphs

(a), (b), (c)(i), or (d), in the form of payments deductible for tax purposes in the payor’s State of 

residence. These amounts do not include arm’s-length payments in the ordinary course of 

business for services or tangible property. 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 the resident of a Contracting State to treaty benefits if the owner of the 

resident would have been entitled to the same benefit had the income in question flowed 

directly to that owner. To qualify under this paragraph, the company must meet an ownership 

test and a base erosion test. 

Subparagraph (a) sets forth the ownership test. Under this test, seven or fewer equivalent

beneficiaries must own shares representing at 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 (e) of 

60 
paragraph 7. This definition may be met in two alternative ways, the first of which has two 

requirements. 

Under the first alternative, a person may be an equivalent beneficiary because it is 

entitled to equivalent benefits under a treaty between the country of source and the country in

which the person is a resident. This alternative has two requirements. 

The first requirement is that the person must be a resident of a member state of the 

European Union, or of a European Economic Area state, or of a party to the North American 

Free Trade Agreement (collectively, “qualifying States”). 

The second requirement of the definition of “equivalent beneficiary” is that the person 

must be entitled to equivalent benefits under an applicable treaty. To satisfy the second

requirement, the person must be entitled to all the benefits of a comprehensive treaty between the 

Contracting State from which benefits of the Convention are claimed and a qualifying State 

under provisions that are analogous to the rules in paragraph 2 (a), (b), (c)(i), and (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), (b), (c)(i), and (d) of this Article if the person were a resident of one of the

Contracting States. 

In order to satisfy the second requirement necessary to qualify as an “equivalent 

beneficiary” under subparagraph 7(e)(i)(B) with respect to dividends, interest, royalties or

branch tax, the person must be entitled to a rate of tax that is at least as low as the tax rate that 

would apply under the Convention to such income. Thus, the rates to be compared are: (1) the 

rate of tax that the source State would have imposed if a qualified resident of the other 

Contracting State was the beneficial owner of the income; and (2) the rate of tax that the 

source State would have imposed if the third State resident received the income directly from

the source State. 

Subparagraph 7(f) 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 Bulgarian 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 Bulgarian 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 Bulgarian 

company is not sufficient for purposes of this paragraph. Further, the French company cannot 

be an equivalent beneficiary if it qualifies for benefits only with respect to certain income as a 

result of a "derivative benefits" provision in the U.S.-France treaty. However, it would be 

possible to look through the French company to its parent company to determine whether the 

parent company is an equivalent beneficiary. 

61 
The second alternative for satisfying the "equivalent beneficiary" test is available only to

residents of one of the two Contracting States. U.S. or Bulgarian residents who are eligible for 

treaty benefits by reason of subparagraphs 2(a), (b), (c)(i), or (d) are equivalent beneficiaries for 

purposes of the relevant tests in Article 21. Thus, a Bulgarian 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 Bulgarian company under this 

paragraph. Thus, for example, if 90 percent of a Bulgarian company is owned by five companies 

that are resident in member states of the European Union who satisfy the requirements of 

subparagraph7(e)(i), and 10 percent of the Bulgarian company is owned by a U.S. or Bulgarian 

individual, then the Bulgarian 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 the same as the base 

erosion test in subparagraph 2(e)(ii), except that the test in paragraph 3(b) focuses on baseeroding 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 (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 Bulgaria is entitled 

to the benefits of the Convention under paragraph 4 of this Article with respect to an item of 

income derived from sources within the United States, the United States will ascribe to this 

term the meaning that it has under the law of the United States. Accordingly, the U.S.

competent authority will refer to the regulations issued under section 367(a) for the definition 

of the term “trade or business.” In general, therefore, a trade or business will be considered to 

be a specific unified group of activities that constitute or could constitute an independent

economic enterprise carried on for profit. Furthermore, a corporation generally will be 

considered to carry on a trade or business only if the officers and employees of the corporation 

conduct substantial managerial and operational activities. 

62 
The business of making or managing investments for the resident’s own account will be 

considered to be a trade or business only when part of banking, insurance or securities activities

conducted by a bank, an insurance company, or a registered securities dealer. Such activities 

conducted by a person other than a bank, insurance company or registered securities dealer will 

not be considered to be the conduct of an active trade or business, nor would they be considered

to be the conduct of an active trade or business if conducted by a bank, insurance company or 

registered securities dealer but not as part of the company’s banking, insurance or dealer 

business. Because a headquarters operation is in the business of managing investments, a 

company that functions solely as a headquarters company will not be considered to be engaged 

in an active trade or business for purposes of paragraph 4. 

An item of income is derived in connection with a trade or business if the incomeproducing 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

BulCo, a corporation resident in Bulgaria. BulCo distributes USCo products in Bulgaria. Since 

the business activities conducted by the two corporations involve the same products, BulCo'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 BulCo. BulCo and 

other USCo affiliates then manufacture and market the USCo-designed products in their 

respective markets. Since the activities conducted by BulCo and USCo involve the same

product lines, these activities are considered to form a part of the same trade or business. 

For two activities to be considered to be “complementary,” the activities need not relate 

to the same types of products or services, but they should be part of the same overall industry 

and be related in the sense that the success or failure of one activity will tend to result in success 

or failure for the other. Where more than one trade or business is conducted in the State of 

source and only one of the trades or businesses forms a part of or is complementary to a trade or 

business conducted in the State of residence, it is necessary to identify the trade or business to

which an item of income is attributable. Royalties generally will be considered to be derived in

connection with the trade or business to which the underlying intangible property is attributable.

Dividends will be deemed to be derived first out of earnings and profits of the treaty-benefited 

trade or business, and then out of other earnings and profits. Interest income may be allocated 

under any reasonable method consistently applied. A method that conforms to U.S. principles 

for expense allocation will be considered a reasonable method. 

Example 3. Americair is a corporation resident in the United States that operates an 

international airline. BulSub is a wholly-owned subsidiary of Americair resident in Bulgaria. 

BulSub operates a chain of hotels in Bulgaria that are located near airports served by Americair 

63 
flights. Americair frequently sells tour packages that include air travel to Bulgaria and lodging 

at BulSub 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 BulSub's business does not form a part of Americair's business. 

However, BulSub'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 BulSub owns an office 

building in Bulgaria instead of a hotel chain. No part of Americair's business is conducted 

through the office building. BulSub'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 

BulHolding, a corporation resident in Bulgaria. BulHolding is a holding company that is not 

engaged in a trade or business. BulHolding owns all the shares of three corporations that are

resident in Bulgaria: BulFlower, BulLawn, and BulFish. BulFlower distributes USFlower 

flowers under the USFlower trademark in Bulgaria. BulLawn markets a line of lawn care 

products in Bulgaria under the USFlower trademark. In addition to being sold under the same

trademark, BulLawn and BulFlower products are sold in the same stores and sales of each 

company's products tend to generate increased sales of the other's products. BulFish imports fish 

from the United States and distributes it to fish wholesalers in Bulgaria. For purposes of

paragraph 4, the business of BulFlower forms a part of the business of USFlower, the business of 

BulLawn is complementary to the business of USFlower, and the business of BulFish is neither 

part of nor complementary to that of USFlower. 

An item of income derived from the State of source is “incidental to” the trade or 

business carried on in the State of residence if production of the item facilitates the conduct of 

the trade or business in the State of residence. An example of incidental income is the 

temporary investment of working capital of a person in the State of residence in securities 

issued by persons in the State of source. 

Subparagraph 4(b) states a further condition to the general rule in subparagraph (a) in

cases where the trade or business generating the item of income in question is carried on either 

by the person deriving the income or by any associated enterprises. Subparagraph (b) states that

the trade or business carried on in the State of residence, under these circumstances, must be 

substantial in relation to the activity in the State of source. The substantiality requirement is 

intended to prevent a narrow case of treaty-shopping abuses in which a company attempts to 

qualify for benefits by engaging in de minimis connected business activities in the treaty 

country in which it is resident (i.e., activities that have little economic cost or effect with respect 

to the company business as a whole). 

The determination of substantiality is made based upon all the facts and circumstances 

and takes into account the comparative sizes of the trades or businesses in each Contracting 

State, the nature of the activities performed in each Contracting State, and the relative 

contributions made to that trade or business in each Contracting State. 

The determination in subparagraph (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 

64 
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 Bulgaria, 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 Bulgaria would not have to pass a substantiality test 

to receive treaty benefits under paragraph 4. 

Subparagraph 4(c) provides special attribution rules for purposes of applying the

substantive rules of subparagraphs (a) and (b). These rules apply for purposes of determining 

whether a person meets the requirement in subparagraph (a) that it be engaged in the active 

conduct of a trade or business and that the item of income is derived in connection with that 

active trade or business, and for making the comparison required by the "substantiality" 

requirement in subparagraph (b). Subparagraph (c) attributes to a person activities conducted by

persons “connected” to such person. A person (“X”) is connected to another person (“Y”) if X

possesses 50 percent or more of the beneficial interest in Y (or if Y possesses 50 percent or more 

of the beneficial interest in X). For this purpose, X is connected to a company if X owns shares 

representing fifty percent or more of the aggregate voting power and value of the company or 

fifty percent or more of the beneficial equity interest in the company. X also is connected to Y if 

a third person possesses, directly or indirectly, fifty percent or more of the beneficial interest in 

both X and Y. For this purpose, if X or Y is a company, the threshold relationship with respect 

to such company or companies is fifty percent or more of the aggregate voting power and value 

or fifty percent or more of the beneficial equity interest. Finally, X is connected to Y if, based

upon all the facts and circumstances, X controls Y, Y controls X, or X and Y are controlled by 

the same person or persons. 

Paragraph 5 

Paragraph 5 deals with the treatment of interest or royalty income in the context of a socalled "triangular case." The paragraph provides special rules applicable to U.S. source interest

or royalties that are attributable to a permanent establishment that a Bulgarian company has in a 

third state, and that are otherwise exempt from taxation in Bulgaria. 

The term "triangular case" refers to the use of the following structure by a resident of 

Bulgaria to earn, in this case, interest income from the United States. The resident of Bulgaria,

who is assumed to qualify for benefits under one or more of the provisions of Article 21 

(Limitation on Benefits), sets up a permanent establishment in a third jurisdiction that imposes 

only a low rate of tax on the income of the permanent establishment. The Bulgarian resident

lends funds into the United States through the permanent establishment. The permanent 

establishment, despite its third-jurisdiction location, is an integral part of a Bulgarian resident. 

Therefore, the income earned on those loans, absent the provisions of paragraph 5, may be 

entitled to a reduced rate of U.S. withholding tax under the Convention. Under a current 

Bulgarian income tax treaty with the host jurisdiction of the permanent establishment, the 

income of the permanent establishment is exempt from Bulgarian tax. Alternatively, Bulgaria

may choose to exempt the income of the permanent establishment from Bulgarian income tax. 

Thus, the interest income is subject to a reduced rate of U.S. tax, is subject to little tax in the host 

jurisdiction of the permanent establishment, and is exempt from Bulgarian tax. 

65 
Because 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, the paragraph 

only applies with respect to U.S. source interest or royalties that are attributable to a thirdjurisdiction permanent establishment of a Bulgarian resident. 

Paragraph 5 replaces the otherwise applicable rules in the Convention for interest and

royalties with a 15 percent withholding tax for interest and royalties if the actual tax paid on the

income in the third state is less than 60 percent of the tax that would have been payable in 

Bulgaria if the income were earned in Bulgaria by the enterprise and were not attributable to the 

permanent establishment in the third state. 

In general, the principles employed under Code section 954(b)(4) will be employed to 

determine whether the profits are subject to an effective rate of taxation that is above the 

specified threshold. 

Notwithstanding the level of tax on interest and royalty income of the permanent 

establishment, paragraph 5 will not apply under certain circumstances. In the case of interest 

(as defined in Article 11 (Interest)), paragraph 5 will not apply if the interest is derived in 

connection with, or is incidental to, the active conduct of a trade or business carried on by the

permanent establishment in the third state. The business of making, managing or simply 

holding investments is not considered to be an active trade or business, unless these are 

banking or securities activities carried on by a bank or registered securities dealer. In the case 

of royalties (as defined in Article 12 (Royalties)), paragraph 5 will not apply if the royalties are 

received as compensation for the use of, or the right to use, intangible property produced or 

developed by the permanent establishment itself. 

Paragraph 6 

Paragraph 6 provides that a resident of one of the States that is not entitled to the benefits 

of the Convention as a result of paragraphs 2 through 4 still may be granted benefits under the 

Convention at the discretion of the competent authority of the State from which benefits are 

claimed. Under paragraph 6, that competent authority will determine whether the establishment, 

acquisition, or maintenance of the person seeking benefits under the Convention, or the conduct 

of such person’s operations, has or had as one of its principal purposes the obtaining of benefits 

under the Convention. Benefits will not be granted, however, solely because a company was 

established prior to the effective date of a treaty or protocol. In that case a company would still 

be required to establish to the satisfaction of the Competent Authority clear non-tax business 

reasons for its formation in a Contracting State, or that the allowance of benefits would not 

otherwise be contrary to the purposes of the treaty. Thus, persons that establish operations in

one of the States with a principal purpose of obtaining the benefits of the Convention ordinarily 

will not be granted relief under paragraph 6. 

The competent authority's discretion is quite broad. It may grant all of the benefits of the 

Convention to the taxpayer making the request, or it may grant only certain benefits. For 

instance, it may grant benefits only with respect to a particular item of income in a manner 

similar to paragraph 4. Further, the competent authority may establish conditions, such as 

setting time limits on the duration of any relief granted. 

For purposes of implementing paragraph 6, a taxpayer will be permitted to present his 

case to the relevant competent authority 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. 

66 
 

Finally, there may be cases in which a resident of a Contracting State may apply for 

discretionary relief to the competent authority of his State of residence. This would arise, for 

example, if the benefit the resident is claiming is provided by the residence country, and not by 

the source country. So, for example, if a company that is a resident of the United States would 

like to claim the benefit of the re-sourcing rule of paragraph 3 of Article 22, but it does not meet 

any of the objective tests of this Article, it may apply to the U.S. competent authority for 

discretionary relief. 

Paragraph 7 

Paragraph 7 defines several key terms for purposes of Article 21. Each of the 

defined terms is discussed above in the context in which it is used. 

ARTICLE 22 (RELIEF FROM DOUBLE TAXATION) 

This Article describes the manner in which each Contracting State undertakes to relieve 

double taxation. The United States uses the foreign tax credit method under its internal law, and 

by treaty. 

Paragraph 1 

Paragraph 1 provides that Bulgaria will provide relief from double taxation through a 

mixture of the credit and exemption methods. 

Subparagraph 1(a) states the general rule that Bulgaria will exempt income derived by a 

resident if the income may be taxed in the United States in accordance with the Convention. 

Subparagraph 1(c), permits Bulgaria to include the income corresponding to the U.S. tax in the 

resident’s tax base in calculating the Bulgarian tax on the remaining income of the resident. This 

rule provides for “exemption with progression.” Under subparagraph 1(b), Bulgaria provides for

a tax credit rather than an exemption with respect to limited classes of income. If the income 

may be taxed by the United States under the provisions of Article 10 (Dividends), Article 11 

(Interest), or Article 12 (Royalties), Bulgaria will relieve double taxation by allowing a credit

against Bulgarian tax in an amount equal to the tax paid in the United States on such income, but 

limited to the amount of Bulgarian tax attributable to such dividends, interest, and royalty 

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 Bulgaria. Paragraph 2 also provides that

Bulgaria’s covered taxes are income taxes for U.S. purposes. This provision is based on the

Treasury Department’s review of Bulgaria’s laws. 

Subparagraph (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 

Bulgaria 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 Bulgaria on the profits out of which the dividends are

considered paid. 

The credits allowed under paragraph 2 are allowed in accordance with the provisions and

subject to the limitations of U.S. law, as that law may be amended over time, so long as the 

general principle of the Article, that is, the allowance of a credit, is retained. Thus, although the

Convention provides for a foreign tax credit, the terms of the credit are determined by the 

provisions, at the time a credit is given, of the U.S. statutory credit. 

67 
Therefore, the U.S. credit under the Convention is subject to the various limitations of 

U.S. law (see, e.g., Code sections 901-908). For example, the credit against U.S. tax generally is 

limited to the amount of U.S. tax due with respect to net foreign source income within the 

relevant foreign tax credit limitation category (see Code section 904(a) and (d)), and the dollar 

amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g., Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits 

and other inter-year adjustments. 

Paragraph 3 

Paragraph 3 provides a re-sourcing rule for gross income covered by 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 Bulgaria when the Convention assigns to Bulgaria 

primary taxing rights over an item of gross income. 

Accordingly, if the Convention allows Bulgaria 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 Bulgaria 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. Furthermore, the paragraph 3 re-sourcing rule applies to gross 

income, not net income. Accordingly, U.S. expense allocation and apportionment rules, see, 

e.g., Treas. Reg. section 1.861-9, continue to apply to income resourced under paragraph 3. 

Paragraph 4 

Paragraph 4 provides special rules for the tax treatment in both States of certain types of 

income derived from U.S. sources by U.S. citizens who are residents of Bulgaria. 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 

Bulgaria 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 Bulgaria who is not a U.S. citizen. The provisions of

paragraph 4 ensure that Bulgaria does not bear the cost of U.S. taxation of its citizens who are

residents of Bulgaria. 

Subparagraph (a) provides, with respect to items of income from sources within the 

United States, special credit rules for Bulgaria. 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 Bulgaria who is not a 

U.S. citizen. The tax credit allowed by Bulgaria 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 Bulgaria receives portfolio dividends from

sources within the United States, the foreign tax credit granted by Bulgaria would be limited to 

10 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 Bulgaria need not provide full relief for the U.S. tax imposed on 

its citizens resident in Bulgaria. The subparagraph provides that the United States will credit the 

68 
 

income tax paid or accrued to Bulgaria, 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 Bulgaria 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 Bulgaria in order for the United 

States to be able to credit the tax paid to Bulgaria. 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 subparagraph 4(b).

Subparagraph 3(e) of Article 24 (Mutual Agreement Procedure) provides a mechanism by which 

the competent authorities can resolve any disputes regarding whether income is from sources 

within the United States. 

The following two examples illustrate the application of paragraph 4 in the case of a 

U.S.-source portfolio dividend received by a U.S. citizen resident in Bulgaria. In both examples, 

the U.S. rate of tax on residents of Bulgaria, under subparagraph 2(b) of Article 10 (Dividends)

of the Convention, is 10 percent. In both examples, the U.S. income tax rate on the U.S. citizen 

is 35 percent. In example 1, the rate of income tax imposed in Bulgaria on its resident (the U.S. 

citizen) is 25 percent (below the U.S. rate), and in example 2, the rate imposed on its resident is 

40 percent (above the U.S. rate). 

 Subparagraph (a) 

Example 1 Example 2

U.S. dividend declared $100.00 $100.00 

Notional U.S. withholding tax (Article 10(2)(b))

Taxable income in Bulgaria 

Bulgaria tax before credit

Less: tax credit for notional U.S. withholding tax

Net post-credit tax paid to Bulgaria 

10.00 

100.00 

25.00 

10.00 

15.00 

10.00 

100.00 

40.00 

10.00 

30.00 

Subparagraphs (b) and (c) 

U.S. pre-tax income $100.00 

U.S. pre-credit citizenship tax 35.00 

Notional U.S. withholding tax 10.00 

U.S. tax eligible to be offset by credit 25.00 

Tax paid to Bulgaria 15.00 

Income re-sourced from U.S. to foreign source (see below) 42.86 

U.S. pre-credit tax on re-sourced income 15.00 

U.S. credit for tax paid to Bulgaria 15.00 

Net post-credit U.S. tax 10.00 

Total U.S. tax 20.00 

$100.00 

35.00 

10.00 

25.00 

30.00 

71.43 

25.00 

25.00 

0.00 

10.00 

In both examples, in the application of subparagraph (a), Bulgaria credits a 10 percent 

U.S. tax against its residence tax on the U.S. citizen. In the first example, the net tax paid to 

Bulgaria after the foreign tax credit is $15.00; in the second example, it is $30.00. In the 

application of subparagraphs (b) and (c), from the U.S. tax due before credit of $35.00, the 

United States subtracts the amount of the U.S. source tax of $10.00, against which no U.S. 

foreign tax credit is allowed. This subtraction ensures that the United States collects the tax that 

it is due under the Convention as the State of source. 

In both examples, given the 35 percent U.S. tax rate, the maximum amount of U.S. tax 

against which credit for the tax paid to Bulgaria may be claimed is $25 ($35 U.S. tax minus $10 

69 
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 

Bulgaria, an appropriate amount of the income must be re-sourced to Bulgaria under 

subparagraph (c). 

The amount that must be re-sourced depends on the amount of tax for which the U.S. 

citizen is claiming a U.S. foreign tax credit. In example 1, the tax paid to Bulgaria was $15. For 

this amount to be creditable against U.S. tax, $42.86 ($15 tax divided by 35 percent U.S. tax 

rate) must be resourced to Bulgaria. There is a net U.S. tax of $10 due after credit ($25 U.S. tax

eligible to be offset by credit, minus $15 tax paid to Bulgaria). Thus, in example 1, there is a 

total of $20 in U.S. tax ($10 U.S. withholding tax plus $10 residual U.S. tax). 

In example 2, the tax paid to Bulgaria was $30, but, because the United States subtracts 

the U.S. withholding tax of $10 from the total U.S. tax of $35, only $25 of U.S. taxes may be 

offset by taxes paid to Bulgaria. Accordingly, the amount that must be resourced to Bulgaria is 

limited to the amount necessary to ensure a U.S. foreign tax credit for $25 of tax paid to 

Bulgaria, or $71.43 ($25 tax paid to Bulgaria divided by 35 percent U.S. tax rate). When the tax 

paid to Bulgaria is credited against the U.S. tax on this re-sourced income, there is no residual 

U.S. tax ($25 U.S. tax minus $30 tax paid to Bulgaria, subject to the U.S. limit of $25). Thus, in 

example 2, there is a total of $10 in U.S. tax ($10 U.S. withholding tax plus $0 residual U.S. 

tax). Because the tax paid to Bulgaria was $30 and the U.S. tax eligible to be offset by credit was

$25, there is $5 of excess foreign tax credit available for carryover. 

Relationship to other Articles 

By virtue of subparagraph 5(a) of Article 1 (General Scope), Article 22 is not subject to 

the saving clause of paragraph 4 of Article 1. Thus, the United States will allow a credit to its 

citizens and residents in accordance with the Article, even if such credit were to provide a

benefit not available under the Code (such as the re-sourcing provided by paragraph 3 and

subparagraph 4(c)). 

ARTICLE 23 (NON-DISCRIMINATION)

 This Article ensures that nationals of a Contracting State, in the case of paragraph 1, and

residents of a Contracting State, in the case of paragraphs 2 through 5, will not be subject, 

directly or indirectly, to discriminatory taxation in the other Contracting State. Not all 

differences in tax treatment, either as between nationals of the two States, or between residents 

of the two States, are violations of the prohibition against discrimination. Rather, the nondiscrimination obligations of this Article apply only if the nationals or residents of the two States 

are comparably situated. 

Each of the relevant paragraphs of the Article provides that two persons that are

comparably situated must be treated similarly. Although the actual words differ from paragraph 

to paragraph (e.g., paragraph 1 refers to two nationals "in the same circumstances," paragraph 2 

refers to two enterprises "carrying on the same activities" and paragraph 4 refers to two 

enterprises that are "similar"), the common underlying premise is that if the difference in 

treatment is directly related to a tax-relevant difference in the situations of the domestic and 

foreign persons being compared, that difference is not to be treated as discriminatory (i.e., if one 

person is taxable in a Contracting State on worldwide income and the other is not, or tax may be 

collectible from one person at a later stage, but not from the other, distinctions in treatment 

would be justified under paragraph 1). Other examples of such factors that can lead to non- discriminatory differences in treatment are noted in the discussions of each paragraph. 

70 
 

The operative paragraphs of the Article also use different language to identify the kinds

of differences in taxation treatment that will be considered discriminatory. For example, 

paragraphs 1 and 4 speak of "any taxation or any requirement connected therewith that is more 

burdensome," while paragraph 2 specifies that a tax "shall not be less favorably levied." 

Regardless of these differences in language, only differences in tax treatment that materially 

disadvantage the foreign person relative to the domestic person are properly the subject of the 

Article. 

Paragraph 1 

Paragraph 1 provides that a national of one Contracting State may not be subject to 

taxation or connected requirements in the other Contracting State that are more burdensome than 

the taxes and connected requirements imposed upon a national of that other State in the same

circumstances. The OECD Model language would prohibit taxation that is "other than or more 

burdensome" than that imposed on U.S. persons. This Convention omits the reference to 

taxation that is "other than" that imposed on U.S. persons because the only relevant question 

under this provision should be whether the requirement imposed on a national of the other 

Contracting State is more burdensome. A requirement may be different from the requirements 

imposed on U.S. nationals without being more burdensome. 

The term "national" in relation to a Contracting State is defined in subparagraph 1(l) of 

Article 3 (General Definitions). The term includes both individuals and juridical persons. A 

national of a Contracting State is afforded protection under this paragraph even if the national is

not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a third country 

is entitled, under this paragraph, to the same treatment in Bulgaria as a national of Bulgaria who 

is in similar circumstances (i.e., presumably one who is resident in a third State). 

As noted above, whether or not the two persons are both taxable on worldwide income is 

a significant circumstance for this purpose. For this reason, paragraph 1 specifically states that

the United States is not obligated to apply the same taxing regime to a national of Bulgaria who 

is not resident in the United States as it applies to a U.S. national who is not resident in the

United States. United States citizens who are not residents of the United States but who are, 

nevertheless, subject to United States tax on their worldwide income are not in the same

circumstances with respect to United States taxation as citizens of Bulgaria who are not United 

States residents. Thus, for example, Article 23 would not entitle a national of Bulgaria 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 Bulgaria 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 

71 
2 to impose penalties on persons who fail to comply with such a requirement (see, e.g., sections 

874(a) and 882(c)(2)). Further, a determination that income and expenses have been attributed 

or allocated to a permanent establishment in conformity with the principles of Article 7 

(Business Profits) implies that the attribution or allocation was not discriminatory. 

Section 1446 of the Code imposes on any partnership with income that is effectively 

connected with a U.S. trade or business the obligation to withhold tax on amounts allocable to a 

foreign partner. In the context of the Convention, this obligation applies with respect to a share 

of the partnership income of a partner resident in Bulgaria, 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 nonU.S. partnerships, since the law requires that partnerships of both U.S. and non-U.S. domicile 

withhold tax in respect of the partnership shares of non-U.S. partners. Furthermore, in 

distinguishing between U.S. and non-U.S. partners, the requirement to withhold on the non-U.S. 

but not the U.S. partner's share is not discriminatory taxation, but, like other withholding on 

nonresident aliens, is merely a reasonable method for the collection of tax from persons who are 

not continually present in the United States, and as to whom it otherwise may be difficult for the 

United States to enforce its tax jurisdiction. If tax has been over-withheld, the partner can, as in

other cases of over-withholding, file for a refund. 

Paragraph 3 

Paragraph 3 makes clear that the provisions of paragraphs 1 and 2 do not obligate a 

Contracting State to grant to a resident of the other Contracting State any tax allowances, reliefs, 

etc., that it grants to its own residents on account of their civil status or family responsibilities. 

Thus, if a sole proprietor who is a resident of Bulgaria 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 Bulgaria 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 4, however, does not require a Contracting State to give non-residents more favorable 

treatment than it gives to its own residents. Consequently, a Contracting State does not have to 

allow non-residents a deduction for items that are not deductible under its domestic law (for 

example, expenses of a capital nature). 

The term "other disbursements" is understood to include a reasonable allocation of 

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

expenses incurred for the benefit of a group of related persons that includes the person incurring

the expense. 

An exception to the rule of paragraph 4 is provided for cases where the provisions of

paragraph 1 of Article 9 (Associated Enterprises), paragraph 7 of Article 11 (Interest) or para- graph 6 of Article 12 (Royalties) apply. All of these provisions permit the denial of deductions 

in certain circumstances in respect of transactions between related persons. Neither State is 

72 
forced to apply the non-discrimination principle in such cases. The exception with respect to

paragraph 7 of Article 11 would include the denial or deferral of certain interest deductions 

under Code section 163(j). 

Paragraph 4 also provides that any debts of an enterprise of a Contracting State to a 

resident of the other Contracting State are deductible in the first-mentioned Contracting State for 

purposes of computing the capital tax of the enterprise under the same conditions as if the debt 

had been contracted to a resident of the first-mentioned Contracting State. Even though, for

general purposes, the Convention covers only income taxes, under paragraph 7 of this Article, 

the nondiscrimination provisions apply to all taxes levied in both Contracting States, at all levels 

of government. Thus, this provision may be relevant for both States. Bulgaria 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 firstmentioned 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 domestically-owned corporation that is accorded non-recognition treatment 

under sections 337 and 355. 

For the reasons given above in connection with the discussion of paragraph 2 of the

Article, it is also understood that the provision in section 1446 of the Code for withholding of tax 

on non-U.S. partners does not violate paragraph 5 of the Article. 

It is further understood that the ineligibility of a U.S. corporation with nonresident alien

shareholders to make an election to be an "S" corporation does not violate paragraph 5 of the 

Article. If a corporation elects to be an S corporation, it is generally not subject to income tax 

and the shareholders take into account their pro rata shares of the corporation's items of income, 

loss, deduction or credit. (The purpose of the provision is to allow an individual or small group 

of individuals the protections of conducting business in corporate form while paying taxes at 

individual rates as if the business were conducted directly.) A nonresident alien does not pay

U.S. tax on a net basis, and, thus, does not generally take into account items of loss, deduction or 

credit. Thus, the S corporation provisions do not exclude corporations with nonresident alien 

shareholders because such shareholders are foreign, but only because they are not net-basis 

taxpayers. Similarly, the provisions exclude corporations with other types of shareholders where 

the purpose of the provisions cannot be fulfilled or their mechanics implemented. For example, 

corporations with corporate shareholders are excluded because the purpose of the provision to

permit individuals to conduct a business in corporate form at individual tax rates would not be 

furthered by their inclusion. 

Finally, it is understood that paragraph 5 does not require a Contracting State to allow 

foreign corporations to join in filing a consolidated return with a domestic corporation or to 

allow similar benefits between domestic and foreign enterprises. 

73 
Paragraph 6 

Paragraph 6 of the Article confirms that no provision of the Article will prevent either 

Contracting State from imposing either the branch profits tax described in paragraph 8 of Article 

10 (Dividends) or the branch-level interest tax described in paragraph 9 of Article 11 (Interest). 

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 paragraph 5(a) of Article 1. Thus, for example, a U.S. 

citizen who is a resident of Bulgaria 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 21 (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 21. 

ARTICLE 24 (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(k) of Article 3 (General Definitions). 

Paragraph 1 

This paragraph provides that where a resident of a Contracting State considers that the 

actions of one or both Contracting States will result in taxation that is not in accordance with the 

Convention he may present his case to the competent authority of either Contracting State. This 

rule is more generous than in most treaties, which generally allow taxpayers to bring competent 

authority cases only to the competent authority of their country of residence, or citizenship/nationality. Under this more generous rule, a U.S. permanent establishment of a 

corporation resident in the treaty partner that faces inconsistent treatment in the two countries 

would be able to bring its request for assistance to the U.S. competent authority. If the U.S. 

competent authority can resolve the issue on its own, then the taxpayer need never involve the 

Bulgarian competent authority. Thus, the rule provides flexibility that might result in greater 

efficiency. 

Although the typical cases brought under this paragraph will involve economic double 

taxation arising from transfer pricing adjustments, the scope of this paragraph is not limited to 

such cases. For example, a taxpayer could request assistance from the competent authority if one 

Contracting State determines that the taxpayer has received deferred compensation taxable at 

source under Article 14 (Income from Employment), while the taxpayer believes that such 

74 
 

 

 

income should be treated as a pension that is taxable only in his country of residence pursuant to 

Article 17 (Pensions, Social Security Payments, Annuities, Alimony, and Child Support). 

It is not necessary for a person requesting assistance first to have exhausted the remedies 

provided under the national laws of the Contracting States before presenting a case to the

competent authorities, nor does the fact that the statute of limitations may have passed for 

seeking a refund preclude bringing a case to the competent authority. Unlike the OECD Model, 

no time limit is provided within which a case must be brought. 

Paragraph 2 

Paragraph 2 sets out the framework within which the competent authorities will deal with 

cases brought by taxpayers under paragraph 1. It provides that, if the competent authority of the 

Contracting State to which the case is presented judges the case to have merit, and cannot reach a 

unilateral solution, it shall seek an agreement with the competent authority of the other 

Contracting State pursuant to which taxation not in accordance with the Convention will be 

avoided. 

Any agreement is to be implemented even if such implementation otherwise would be 

barred by the statute of limitations or by some other procedural limitation, such as a closing 

agreement. Paragraph 2, however, does not prevent the application of domestic-law procedural 

limitations that give effect to the agreement (e.g., a domestic-law requirement that the taxpayer 

file a return reflecting the agreement within one year of the date of the agreement). Where the 

taxpayer has entered a closing agreement (or other written settlement) with the United States 

before bringing a case to the competent authorities, the U.S. competent authority will endeavor 

only to obtain a correlative adjustment from Bulgaria. See Rev. Proc. 2006-54, 2006-2 C.B. 

1035, Section 7.05. 

Because, as specified in paragraph 2 of Article 1 (General Scope), the Convention cannot

operate to increase a taxpayer’s liability, temporal or other procedural limitations can be 

overridden only for the purpose of making refunds and not to impose additional tax. Under 

Bulgarian law, a taxpayer may secure payment of any tax due (for example, using a letter of 

credit) and need not pay the entire amount of tax due until the competent authorities resolve the 

case, while under U.S. law with respect to U.S. initiated adjustments the United States generally 

will postpone further administrative action with respect to the issues under competent authority 

consideration. See Rev. Proc. 2006-54, 2006-2 C.B. 1035, Section 7.01. 

Paragraph 10 of the Protocol to the Convention sets forth two additional clarifications to 

the application of paragraph 2 of Article 24. First, the Protocol notes that an agreement reached 

would not affect any court proceedings or any final court decisions or final tax assessment acts. 

This provision of the paragraph is intended to address certain aspects of the relationship of

mutual agreement procedures and judicial or assessment proceedings in Bulgaria. 

Under Bulgarian law, a taxpayer may begin court proceedings either before or after it has 

made a request for assistance under this Article. The Protocol confirms that Bulgarian judicial 

proceedings involving mutual agreement procedure issues in question will not be inhibited 

merely by the initiation of a request for competent authority assistance. Moreover, any final 

judicial determination involving mutual agreement procedure issues may be set aside only if the 

requirements under Bulgarian law for revision or repeal of final acts are fulfilled. Similarly, if 

the Bulgarian revenue authority has finalized its tax assessment, irrespective of any judicial 

activity, a mutual agreement procedure cannot change that assessment unless the requirements 

under Bulgarian law for revision or repeal of final acts are fulfilled. 

75 
Under the Bulgarian law for revision or repeal of final acts, an assessment may be 

changed based on new information. The Treasury Department understands that Bulgaria will 

interpret broadly what constitutes “new information.” For example, if an examination in 

Bulgaria is completed and closed, the Bulgarian competent authority may nonetheless accept a 

request for assistance based on new information, such as an adjustment in the United States. 

Second, paragraph 10 of the Protocol notes that if an examination is completed and 

closed (and the subject of the mutual agreement procedure request is not a matter pending before 

a court or for which a settlement or court decision has been reached) in a Contracting State, that 

Contracting State’s competent authority may nonetheless accept a request for assistance if an 

adjustment causing double taxation is made in the other Contracting State. This provision of the

Protocol confirms that the Bulgarian competent authority can accept a mutual agreement 

procedure request based upon a US-initiated adjustment and can subsequently implement any 

resulting competent authority agreement, so long as the issue that is the subject of the mutual 

agreement procedure request is neither an issue presented to and pending before a Bulgarian 

court, nor one for which a Bulgarian judicial decision or litigation settlement has been 

concluded. 

Paragraph 3 

Paragraph 3 authorizes the competent authorities to resolve difficulties or doubts that 

may arise as to the application or interpretation of the Convention. The paragraph includes a

non- exhaustive list of examples of the kinds of matters about which the competent authorities 

may reach agreement. This list is purely illustrative; it does not grant any authority that is not

implicitly present as a result of the introductory sentence of paragraph 3. 

The competent authorities may, for example, agree to the same allocation of income, 

deductions, credits or allowances between an enterprise in one Contracting State and its

permanent establishment in the other or between related persons. These allocations are to be 

made in accordance with the arm's length principle underlying Article 7 (Business Profits) and

Article 9 (Associated Enterprises). Agreements reached under these subparagraphs may include 

agreement on a methodology for determining an appropriate transfer price, on an acceptable 

range of results under that methodology, or on a common treatment of a taxpayer's cost sharing 

arrangement. 

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, or the meaning of a term. They also may agree as to advance pricing 

arrangements. 

Since the list under paragraph 3 is not exhaustive, the competent authorities may reach 

agreement on issues not enumerated in paragraph 3 if necessary to avoid double taxation. For 

example, the competent authorities may seek agreement on a uniform set of standards for the use 

of exchange rates. Agreements reached by the competent authorities under paragraph 3 need not 

conform to the internal law provisions of either Contracting State. 

Finally, paragraph 3 authorizes the competent authorities to consult for the purpose of

eliminating double taxation in cases not provided for in the Convention and to resolve any 

difficulties or doubts arising as to the interpretation or application of the Convention. This 

provision is intended to permit the competent authorities to implement the treaty in particular 

cases in a manner that is consistent with its expressed general purposes. It permits the competent 

authorities to deal with cases that are within the spirit of the provisions but that are not 

specifically covered. An example of such a case might be double taxation arising from a transfer 

76 
pricing adjustment between two permanent establishments of a third-country resident, one in the 

United States and one in Bulgaria. Since no resident of a Contracting State is involved in the 

case, the Convention does not apply, but the competent authorities nevertheless may use the 

authority of this Article to prevent the double taxation of income. 

Paragraph 4 

Paragraph 4 authorizes the competent authorities to increase any dollar amounts referred 

to in the Convention to reflect economic and monetary developments. Under the Convention, 

this refers only to Article 16 (Entertainers and Sportsmen); Article 19 (Students, Trainees, 

Teachers and Researchers) separately instructs the competent authorities to adjust the exemption 

amount for students and trainees in accordance with specified guidelines. The rule under 

paragraph 4 is intended to operate as follows: if, for example, after the Convention has been in 

force for some time, inflation rates have been such as to make the $15,000 exemption threshold 

for entertainers unrealistically low in terms of the original objectives intended in setting the 

threshold, the competent authorities may agree to a higher threshold without the need for formal 

amendment to the treaty and ratification by the Contracting States. This authority can be

exercised, however, only to the extent necessary to restore those original objectives. This 

provision can be applied only to the benefit of taxpayers (i.e., only to increase thresholds, not to

reduce them). 

Paragraph 5 

Paragraph 5 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 face-to-face 

meetings of representatives of the competent authorities. 

Treaty termination in relation to competent authority dispute resolution 

A case may be raised by a taxpayer after the Convention has been terminated with respect 

to a year for which the Convention was in force. In such a case the ability of the competent 

authorities to act is limited. They may not exchange confidential information, nor may they 

reach a solution that varies from that specified in its law. 

Triangular competent authority solutions 

International tax cases may involve more than two taxing jurisdictions (e.g., transactions 

among a parent corporation resident in country A and its subsidiaries resident in countries B and 

C). As long as there is a complete network of treaties among the three countries, it should be 

possible, under the full combination of bilateral authorities, for the competent authorities of the 

three States to work together on a three-sided solution. Although country A may not be able to 

give information received under Article 25 (Exchange of Information and Administrative 

Assistance) from country B to the authorities of country C, if the competent authorities of the 

three countries are working together, it should not be a problem for them to arrange for the 

authorities of country B to give the necessary information directly to the tax authorities of 

country C, as well as to those of country A. Each bilateral part of the trilateral solution must, of 

course, not exceed the scope of the authority of the competent authorities under the relevant 

bilateral treaty. 

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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 Article 24 regardless of whether he is generally entitled to benefits under Article 21

(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 25 (EXCHANGE OF INFORMATION AND ADMINISTRATIVE

ASSISTANCE) 

This Article provides for the exchange of information and administrative assistance 

between the competent authorities of the Contracting States. 

Paragraph 1 

The obligation to obtain and provide information to the other Contracting State is set out 

in paragraph 1. The information to be exchanged is that which may be relevant for carrying out 

the provisions of the Convention or the domestic laws of the United States or of Bulgaria 

concerning taxes of every kind applied at the national level. This language incorporates the

standard in 26 U.S.C. section 7602 which authorizes the IRS to examine “any books, papers, 

records, or other data which may be relevant or material.” (Emphasis added.) In United States 

v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the Supreme Court stated that the language 

“may be” reflects Congress’s express intention to allow the IRS to obtain “items of even 

potential relevance to an ongoing investigation, without reference to its admissibility.” 

(Emphasis in original.) However, the language “may be” would not support a request in which a 

Contracting State simply asked for information regarding all bank accounts maintained by 

residents of that Contracting State in the other Contracting State, or even all accounts maintained 

by its residents with respect to a particular bank. 

Exchange of information with respect to each State’s domestic law is authorized to the 

extent that taxation under domestic law is not contrary to the Convention. Thus, for example, 

information may be exchanged with respect to a covered tax, even if the transaction to which the 

information relates is a purely domestic transaction in the requesting State and, therefore, the 

exchange is not made to carry out the Convention. An example of such a case is provided in the 

OECD Commentary: a company resident in the United States and a company resident in 

Bulgaria transact business between themselves through a third-country resident company. 

Neither Contracting State has a treaty with the third State. To enforce their internal laws with 

respect to transactions of their residents with the third-country company (since there is no 

relevant treaty in force), the Contracting States may exchange information regarding the prices 

that their residents paid in their transactions with the third-country resident. 

Paragraph 1 clarifies that information may be exchanged that relates to the assessment or 

collection of, the enforcement or prosecution in respect of, or the determination of appeals in 

relation to, the taxes covered by the Convention. Thus, the competent authorities may request 

and provide information for cases under examination or criminal investigation, in collection, on 

appeals, or under prosecution. 

The taxes covered by the Convention for purposes of this Article constitute a broader

category of taxes than those referred to in Article 2 (Taxes Covered). Exchange of information 

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is authorized with respect to taxes of every kind imposed by a Contracting State at the national 

level. Accordingly, information may be exchanged with respect to U.S. estate and gift taxes, 

excise taxes or, with respect to Bulgaria, value added taxes. 

Information exchange is not restricted by paragraph 1 of Article 1 (General Scope). 

Accordingly, information may be requested and provided under this Article with respect to 

persons who are not residents of either Contracting State. For example, if a third-country 

resident has a permanent establishment in Bulgaria, 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 Bulgaria, 

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 Bulgaria with respect to that person’s account, even though that person is not the taxpayer 

under examination. 

Although the term "United States" does not encompass U.S. possessions for most 

purposes of the Convention, section 7651 of the Code authorizes the Internal Revenue Service to

utilize the provisions of the Internal Revenue Code to obtain information from the U.S. 

possessions pursuant to a proper request made under Article 25. If necessary to obtain requested

information, the Internal Revenue Service could issue and enforce an administrative summons to 

the taxpayer, a tax authority (or a government agency in a U.S. possession), or a third party 

located in a U.S. possession. 

Paragraph 2 

Paragraph 2 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 3 

Paragraph 3 also provides assurances that any information exchanged will be treated as 

secret, subject to the same disclosure constraints as information obtained under the laws of the 

requesting State. Information received may be disclosed only to persons, including courts and 

administrative bodies, involved in the assessment, collection, or administration of, the 

enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes 

covered by the Convention. The information must be used by these persons in connection with 

the specified functions. Information may also be disclosed to legislative bodies, such as the taxwriting committees of Congress and the Government Accountability Office, engaged in the 

oversight of the preceding activities. Information received by these bodies must be for use in the 

performance of their role in overseeing the administration of U.S. tax laws. Information received 

may be disclosed in public court proceedings or in judicial decisions. 

Paragraph 4 

Paragraph 4 provides that the obligations undertaken in paragraphs 1, 2, and 3 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 

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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 4 states conditions under which a Contracting State is not obligated to 

comply with a request from the other Contracting State for information, the requested State is not 

precluded from providing such information, and may, at its discretion, do so subject to the 

limitations of its internal law. 

Paragraph 5 

Paragraph 5 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 subparagraph 4(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 4 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 6 

Paragraph 6 provides that a Contracting State may not decline to provide information 

because that information is held by financial institutions, nominees or persons acting in an 

agency or fiduciary capacity. Thus, paragraph 6 would effectively prevent a Contracting State 

from relying on paragraph 4 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. 

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 though

no Convention was in effect during the years in which the transaction at issue occurred, the

exchange of information provisions of the Convention shall have effect from the date of entry 

into force of the Convention without regard to the taxable period to which the matter relates. In 

that case, the competent authorities have available to them the full range of information 

exchange provisions afforded under this Article. Paragraph 11 of the Protocol, regarding Article

27 (Entry into Force), confirms this understanding with respect to the effective date of the 

Article. 

A tax administration may also seek information with respect to a year for which a treaty 

was in force after the treaty has been terminated. In such a case the ability of the other tax 

80 
administration to act is limited. The treaty no longer provides authority for the tax

administrations to exchange confidential information. They may only exchange information 

pursuant to domestic law or other international agreement or arrangement. 

ARTICLE 26 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS) 

This Article confirms that any fiscal privileges to which diplomatic or consular officials 

are entitled under general provisions of international law or under special agreements will apply 

notwithstanding any provisions to the contrary in the Convention. The agreements referred to 

include any bilateral agreements, such as consular conventions, that affect the taxation of 

diplomats and consular officials and any multilateral agreements dealing with these 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 18 (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 27 (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 that the Contracting States shall notify each other, through

diplomatic channels, when their respective requirements for the entry into force of the 

Convention have been satisfied. The Convention shall enter into force on the date of receipt of

the later of these notifications. 

In the United States, the process leading to ratification and entry into force is as follows: 

Once a treaty has been signed by authorized representatives of the two Contracting States, the

Department of State sends the treaty to the President who formally transmits it to the Senate for 

its advice and consent to ratification, which requires approval by two-thirds of the Senators

present and voting. Prior to this vote, however, it generally has been the practice for the Senate

Committee on Foreign Relations to hold hearings on the treaty and make a recommendation 

regarding its approval to the full Senate. Both Government and private sector witnesses may 

testify at these hearings. After the Senate gives its advice and consent to ratification of the

treaty, an instrument of ratification is drafted for the President's signature. The 

President's signature completes the process in the United States. 

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Paragraph 2 

The date on which a Convention enters into force is not necessarily the date on which its

provisions take effect. Paragraph 2 contains rules that determine when the provisions of the 

Convention will have effect. 

Under paragraph 2(a), the Convention will have effect with respect to taxes withheld at 

source (principally dividends, interest and royalties) for amounts paid or credited on or after the 

first day of January in the calendar year following the date on which the Convention enters into

force. For example, if instruments of ratification are exchanged on April 25th of year 1, the

withholding rates specified in paragraph 2 of Article 10 (Dividends) would be applicable to any 

dividends paid or credited on or after January 1 of year 2. 

For all other taxes, paragraph 2(b) specifies that the Convention will have effect for any

taxable period beginning on or after January 1 of the year following entry into force. 

As discussed under Article 25 (Exchange of Information), the powers afforded under that 

article apply retroactively to taxable periods preceding entry into force. 

ARTICLE 28 (TERMINATION) 

The Convention is to remain in effect indefinitely, unless terminated by one of the 

Contracting States in accordance with the provisions of Article 28. For example, if written 

notice of termination is given through the diplomatic channel not later than June 30th of calendar 

year 1, the provisions of the Convention will cease to have effect with respect to taxes withheld 

at source on income paid or credited on or after January 1st of calendar year 2. For other taxes, 

the Convention will cease to have effect for any taxable period beginning on or after January 1st 

of calendar year 2. 

Article 28 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 provi- sions of the Convention without the 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. 

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