ARTICLE 19

Government Service; Social Security

Subparagraphs (a) and (b) of paragraph 1 deal with the taxation of government compensation and pensions (other than social security pensions, which are dealt within paragraph 2). Subparagraph (a) provides that wages, salaries, and similar compensation and pensions paid by the United States or by its states or political subdivisions to any individual are exempt from German tax unless the payee is a German national. Under subparagraph (b), such payments by Germany, or by its Laender (i.e., states) or by municipalities or by a public pension fund of such governments to any individual are exempt from U.S. tax unless the payee is a U.S. citizen or a green card holder. Subparagraph (d) of paragraph 1 specifies that the term "pensions"

includes annuities paid to retired civilian government employees.

These provisions differ in several respects from those in the U.S. and OECD Models. Most significantly, unlike the provisions in those Models, Article 19 of the Convention does not exclude payments in respect of services rendered in connection with a business carried on by the governmental entity paying the compensation or pension. It is not the policy of the German Government for governmental entities to engage in business activities. The provisions of Article 19 are identical to those in the 1954 Convention. Under that Convention there have been no cases of benefits being claimed under the government services provisions for services of a business nature.

Subparagraph (c) of paragraph 1 contains a provision proposed by Germany. It is identical to a provision in the 1954 Convention. The subparagraph provides that amounts paid by a Contracting State or by a juridical person organized under the public laws of that State which are compensation for injury or damage sustained as a result of hostilities or political persecution are exempt from tax in the other Contracting State. Although the subparagraph is drafted reciprocally, it is intended to provide U.S. exemption for German war reparation payments.

Paragraph 2 deals with the taxation of social security benefits and similar public pensions. This includes the benefits paid under the social security legislation of both Contracting States and certain U.S. Railroad Retirement benefits. It does not include pensions for government service, which are dealt within paragraph 1. Under paragraph 2, such benefits paid by a Contracting State to a resident of the other Contracting State are taxable only in the State of residence of the recipient. In applying its tax, the State of residence will treat the benefit as though it were a benefit paid to a resident under its own social security system. Thus, for example, if a U.S. resident receives a German social security benefit, he would include only one half of the benefit or such other portion as he would if the benefit had been a U.S. social security or railroad retirement benefit. The treatment of social security benefits in the Convention differs from that in the U.S. Model, under which the source State retains a taxing right.

Subparagraph 1(c) and paragraph 2 of this Article are exceptions to the saving clause of subparagraph (a) of Paragraph 1 of the Protocol (as indicated in sub-subparagraph (b)(aa) of that Paragraph). Thus, a U.S. citizen or resident who receives German reparations payments would not be subject to any U.S. tax on that payment, regardless of whether he would be taxable under the Code. Similarly, a U.S. citizen who is resident in Germany and receives U.S. social security benefits would be exempt from U.S. tax on those benefits. The saving clause does not apply to the benefits conferred by subparagraphs (a) and (b) of paragraph 1 of the Article (as provided in sub-subparagraph (b)(bb)) of Paragraph 1 of the Protocol) with respect to a resident of the United States who is neither a U.S. citizen nor a green card holder. Thus, for example, if a German Government employee is temporarily present in the United States for his employment, and is present in the United States for a sufficient time under an appropriate visa to become a resident of the United States under the Code, but does not acquire immigrant status in the United States, he would not be subject to U.S. tax on his German Government salary. If, however, he acquires immigrant status, he would be subject to U.S. tax, notwithstanding the provisions of Article 19.