ARTICLE 18

Pensions, Annuities, Alimony and Child Support

This Article deals with the taxation of private (i.e., non-government) pensions and annuities, alimony payments and child support payments.

Paragraph 1 provides that private pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment are taxable only in the State of residence of the recipient. This rule applies to both periodic and lump-sum payments. Treatment of such pensions under the 1954 Convention is essentially the same as under this Convention. The rules of this Article do not apply to items of income which are dealt within Article 19 (Government Service; Social Security), including pensions in respect of government service, or as compensation for injury or damage sustained in hostilities, and social security benefits.

Under paragraph 2, annuities (other than those annuities which are dealt within Article 19 (Government Service; Social Security)) which 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). Annuities are similarly treated under the 1954 Convention.

Paragraphs 1 and 2 of Article 18 are subject to the saving clause of subparagraph (a) of Paragraph 1 of the Protocol.

Paragraphs 3 and 4 deal with alimony and child support payments. The provisions of the two paragraphs differ, in some respects, from the comparable provisions in the U.S. Model, in order to be able to mesh more completely the provisions of U.S. and German law regarding the treatment of such payments. Paragraph 3 deals only with those alimony payments which are deductible to the payor. Under the paragraph, alimony paid by a resident of a Contracting State, to the extent it is deductible by that resident, to a resident of the other Contracting State is taxable only in the State of residence of the recipient. Paragraph 4 deals with nondeductible

alimony and periodic payments for the support of a minor child. These types of payments by a resident of a Contracting State to a resident of the other Contracting State are taxable only in the State of residence of the payor.

Both alimony, under paragraph 3, and nondeductible alimony and child support payments, under paragraph 4, are defined as periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support. In addition, for a payment to be treated as "alimony" for purposes of this Article, it must be taxable to the recipient under the laws or his State of residence.

Under U.S. law, alimony is generally deductible to the payor and taxable in the hands of the recipient. Such payments made by U.S. residents, therefore, fall within the terms of paragraph 3, and are taxable only in Germany. German law provides for deductibility of the first DM 18,000 of alimony payments annually, if the payment is to a person subject to unlimited tax liability in Germany. To the extent alimony is deducted by the payor, it is taxable under German law to the recipient. German alimony payments, to the extent they exceed DM 18,000, are not deductible to the payor and the recipient is not subject to German tax. Thus, some alimony paid by German residents fall under paragraph 3 and some falls under paragraph 4.

Since, under German law, the first DM 18,000 of alimony is deductible to the payor only if the payee is subject to unlimited German tax liability, no alimony payments to a U.S. resident are deductible under German law. Paragraph 16 of the Protocol provides that for purposes of paragraph 3 of the Article, if a German resident pays alimony to a U.S. resident, the payor shall be allowed a deduction for German tax purposes to the same extent that a deduction would be allowed if the payment were made to a person who is subject to unlimited tax liability in Germany.

The saving clause of subparagraph (a) of Paragraph 1 of the Protocol does not apply to paragraphs 3 and 4. The benefits of these paragraphs, therefore, are not overridden by any contrary provisions of the Code. Thus, if, for example, a U.S. citizen who is a resident in Germany receives an alimony payment from a U.S. resident, that payment is exempt from U.S. tax under paragraph 3 of the Article, notwithstanding the existence of a tax liability under the Code.