Article 13 provides rules for source and residence country taxation of gains from the

alienation of property.

Paragraph 1 of Article 13 preserves the source country right to tax gains derived from the alienation of immovable property situated in the source (i.e., situs) State. Thus, paragraph 1 permits gains derived by a resident of one Contracting State from the alienation of immovable property referred to in Article 6 (Income from Immovable (Real) Property) and situated in the other Contracting State to be taxed by such other Contracting State.

For purposes of Article 13 only, paragraph 2 defines "immovable property situated in the other Contracting State" to include immovable property referred to in Article 6 (i.e., interests in the immovable property itself) and certain indirect interests in immovable property. Such indirect interests include shares or comparable interests in a company that is (or is treated as) a resident of the source state, the assets of which company consist or consisted wholly or principally of immovable property situated in the source state. The reference to companies "treated as" residents of the source state makes clear that interests in non-U.S. corporations that have elected under section 897(i) of the Code to be treated as U.S. corporations are included in this definition of indirect interest. In addition, interests in a partnership, trust, or estate, to the extent that the assets of such entity consist of immovable property situated in the source state, are included in this definition of indirect interest. Paragraph 13 of the Protocol makes clear that in all events the term "immovable property situated in the other Contracting State" includes a United States real

property interest when the United States is the other Contracting State. Thus, the United States preserves its right to collect the tax imposed by section 897 of the Code on gains derived by foreign persons from the disposition of United States real property interests. For this purpose, the source rules of section 861(a)(5) of the cede shall determine whether a United States real property interest is situated in the United States.

Because the definition of "immovable property situated in the other Contracting State" contained in paragraph 2 of Article 13 is specifically limited to Article 13, such definition has no effect on the right to tax income covered in other articles. For example, the inclusion of interests in certain corporations in the definition of immovable property situated in the other Contracting State for purposes of permitting source country taxation of gains derived from dispositions of such interests under Article 13 does not affect the treatment of dividends paid by such corporations. Such dividends remain subject to the limitations on source country taxation contained in Article 10 (Dividends) and are not governed by the unlimited source country taxation right contained in Article 6 with respect to immovable property.

In the case of gains from the alienation of movable property, paragraph 3 of Article 13 preserves the source country right to tax in certain circumstances. It provides that 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 or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State. Paragraph 14 of the Protocol makes clear that nothing in Article 13 is intended to prevent gains from the alienation by a resident of a Contracting State of an interest in a partnership, trust, or estate that has a permanent establishment situated in the other Contracting State from being taxed as gains attributable to such permanent establishment under paragraph 3 of Article 13. Thus, for example, the United States may tax gains derived from the disposition of an interest in a partnership that has a permanent establishment in the United States, regardless of whether the assets of such partnership consist of immovable property as defined in Article 13.

Paragraph 4 provides that gains from the alienation of ships, aircraft, or containers operated in international traffic or movable property pertaining to the operation of such ships, aircraft, or containers shall be taxable only in the Contracting State in which the profits of the enterprise deriving such income are taxable according to Article 8 (Shipping and Air Transport). Generally, Article 8 exempts such income from source country taxation.

Subject to the special rule of paragraph 6, paragraph 5 grants to the residence State the exclusive right to tax gains from the alienation of other than property referred to in paragraphs 1 through 4.

Paragraph 6 provides an exception to the general exemption from source country tax contained in paragraph 5 for gains derived by certain individuals from its alienation of shares forming part of a 25 percent interest in a company resident in the source state. Under this rule, if an individual was a resident of a Contracting State and, after giving up residency in that State,

becomes a resident of the other Contracting State under the rules of Article 4 (Residency), and such individual derives gains from the disposition of a 25 percent interest in a company that is a resident in the first-mentioned Contracting State, the first-mentioned State may tax such gain under its national law, provided the alienation giving rise to the gain occurs within ten years of the date on which the individual gave up residence in the first-mentioned State. Gains subject to source country taxation under this special rule are limited to gains accrued during the period the individual was a resident of the first-mentioned State. For purposes of imposing its own tax on such gains, the residence state will calculate gain by reference to the value of the shares on the date the individual ceased to be a resident of the first-mentioned State. In the case of a person giving up German residence and becoming a resident of the United States, this will be accomplished by stepping up the basis of the individual in the shares to the value of such shares on the date such individual ceased to be a resident of Germany. Such a basis step-up is only required to the extent any gain is actually subject to tax in the Federal Republic of Germany.

For example, if an individual resident of Germany acquires a 25 percent interest in a German company for $ 100 while a resident of Germany, ceases to be a resident of Germany when the stock is worth $150, and sells the stock for $200 after becoming a resident of the United States and within 10 years of the date he ceased to be a German resident, Germany retains the right to tax the $50 gain that accrued while the individual was a resident of Germany. For purposes of calculating U.S. tax on the gain, the United States will step up the individual’s cost basis in the stock to $150 (the value on the date the individual ceased to be a resident of Germany) and impose its tax only on the $50 gain that accrued after the individual ceased to be a resident of Germany. If the alienation occurs more than 10 years after the individual gave up German residency, Germany will waive its statutory right to tax the full gain. The special rule of paragraph 6 also affects the taxation of former residents of the United States who dispose of stock in U.S. companies while resident in Germany.

Notwithstanding the foregoing limitations on source country taxation of certain gains, subparagraph (a) of Paragraph 1 of the Protocol permits the United States to tax its citizens and residents as if the Convention had not come into effect. The rules of paragraph 6 of this Article, however, continue to apply to U.S. citizens and residents by virtue of the exceptions to the saving clause in subparagraph (b)(aa) of Paragraph 1 of the Protocol.