Article IV of the Protocol modifies Article 11 (Interest) of the Convention by

adding a new paragraph 6, providing anti-abuse exceptions to the source-country exemption in paragraph 1 for two classes of interest payments.

The first class of interest, dealt with in subparagraph (a) of paragraph 6, is socalled “contingent interest.” Such interest is defined in subparagraph (a) as any interest paid by a resident of a Contracting State 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 and paid to a resident of the other Contracting State. Any such interest may be taxed in the Contracting State in which it arises according to the laws of that State. If the beneficial owner is a resident of the other Contracting State, however, the gross amount of the interest may be taxed at a rate not exceeding 15 percent.

The second class of interest is dealt with in subparagraph (b) of paragraph 6. 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.