ARTICLE 7

Income from Real Property

Under paragraph (1), income from real property, including royalties and other payments in respect of the exploitation of natural resources (e.g., oil wells), gains from the sale, exchange or other disposition of such property or the right giving rise to such royalties or other payments, and interest on indebtedness secured by real property (e.g., mortgages) or secured by a right giving rise to royalties or other payments in respect of the exploitation of natural resources, may be taxed by the Contracting State in which the real property or natural resources are situated. Thus, natural resource royalties are covered under this Article and not under Article 13 (Royalties).

Under paragraph (2), paragraph (1) applies to income derived from the usufruct, direct use, letting, or use in any other form of real property.

Paragraph (3) provides, consistent with U.S. law, that gains from the alienation of shares of a corporation or of an interest in a partnership, estate, or trust, the property of which consists, directly or indirectly, principally of real property situated in a Contracting State, shall be regarded as income from real property. Thus, under paragraph (1) of the Article, such gains may be taxed in the Contracting State in which the real property is situated, and under paragraph (4) of Article 4 (Source of Income), the gain is treated as having its source in that State.

Paragraph (4) emphasizes what is clearly implied in paragraph (1), that income from real property (including that referred to in paragraph (3)) may be taxed by both the State of residence and the State in which the real property is situated.

This Article does not contain a provision allowing for the taxation of real property income on a net basis. This is because such treatment is already provided for under the laws of both Contracting States.