ARTICLE 2

Taxes Covered

This Article identifies the U.S. and German taxes to which the Convention applies. These are referred to in the Convention as "United States tax" and "German tax" respectively.

In the case of the United States, as indicated in subparagraph 1(a), the covered taxes are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371). With respect to the tax on insurance premiums, the Convention applies only to the extent that the risks covered by such premiums are not reinsured, directly or indirectly, with a person not entitled, under this or any other Convention, to exemption from the tax. The Article specifies that the Convention does not apply to the accumulated earnings tax (Code section 531), the personal holding company tax (Code section 541) or the social security taxes (Code sections 1401, 3101 and 3111). U.S. and German social security taxes are dealt within the bilateral Social Security Totalization Agreement, which entered into force on December 1, 1979, and was amended by a supplementary agreement signed on October 2, 1986. Except with respect to Article 24 (Nondiscrimination), state and local taxes in the United States are not covered by the Convention. Article 24 prohibits discriminatory taxation with respect to all taxes, whether or not they are covered taxes under Article 2, and whether they are imposed by the Contracting States,

their political subdivisions or local authorities.

Providing Convention coverage for the U.S. insurance excise tax effectively exempts German companies which insure U.S. risks from the tax, subject to the anti-conduit rule for reinsurance, described above. Under the Code, the tax is applicable to a German company only if it earns premiums which are not attributable to a permanent establishment in the United States. Under Article 7 (Business Profits), the United States does not subject the business profits of a German enterprise to tax (i.e., a covered tax) if the income of the enterprise is not attributable to a permanent establishment which the enterprise has in the United States. In contrast with this Convention, the 1954 Convention did not cover the insurance excise tax, thus allowing it to be imposed on premiums paid to German insurers which were not attributable to a permanent establishment of the German insurer in the United States. The 1954 Convention also did not exclude the accumulated earnings tax, personal holding company tax and social security taxes. The 1954 Convention had the same broad coverage for purposes of the nondiscrimination provisions as this Convention.

Subparagraph 1(b) specifics the existing German taxes which are covered by the Convention. They are the income tax (Einkommensteuer), the corporation tax (Koerperschaftsteuer), the trade tax (Gewerbesteuer) and the capital tax (Vermoegensteuer). These are the same as the German taxes covered by the 1954 Convention.

Under paragraph 2, the Convention will apply to any taxes which are identical, or substantially similar, to those enumerated in paragraph 1, and which are imposed in addition to, or in place of, the existing taxes after August 29, 1989 (the date of signature of the Convention). The paragraph also provides that the U.S. and German competent authorities will notify each other of significant changes in their taxation laws. This refers to changes which are of significance to the operation of the Convention.