ARTICLE 3

General Definitions

Paragraph 1 defines a number of basic terms used in the Convention. Some terms are not defined in the Convention. These are dealt within paragraph 2. Certain others are defined in other articles of the Convention. For example, the term "resident of a Contracting State" is defined in Article 4 (Residence). The term "permanent establishment" is defined in Article 5 (Permanent Establishment). The terms "dividends", "interest" and "royalties" are defined in Articles 10, 11 and 12, respectively, which deal with the taxation of those classes of income.

The terms "a Contracting State" and "the other Contracting State" are defined in subparagraph 1(a) to mean the United States or Germany, depending on the context in which the term is used.

The terms "United States" and "Federal Republic of Germany" are defined, for use in a geographical sense, in subparagraphs 1(b) and (c), respectively. The term "United States" is defined to mean the United States of America. The term does not include Puerto Rico, the Virgin

Islands, Guam or any other U.S. possession or territory. Although the Convention does not explicitly include the U.S. continental shelf within the definition of the United States, by virtue of section 638 of the Code the continental shelf is considered to be part of the United States for purposes of the Convention. The term "Federal Republic of Germany" means the area in which German tax law is in force. This includes the German continental shelf (with respect to the exploration or exploitation of natural resources), and, as provided in Article 31 (Berlin Clause), Land Berlin.

Subparagraph 1(d) defines the term "person" to include an individual or company. Because the term includes, but is not limited to, these two categories of person, this definition should not be interpreted as being substantively different from the definition of "person" in subparagraph l(a) of Article 3 of the U.S. Model, which also includes any other body of persons" within the definition.

The term "company" is defined in subparagraph l(e) as a body corporate or an entity treated as a body corporate for tax purposes. Since the term "body corporate" is not defined in the Convention, in accordance with paragraph 2 of this Article, it has the meaning which it has under the law of the Contracting State whose tax is being applied. Thus, for U.S. tax purposes, the principles of Code section 7701 will be applied to determine whether an entity is a body corporate. It is the understanding of the negotiators that generally a GmbH (Gesellschaft mit beschraenkter Haftung) will meet the requirements of section 7701, and be treated as a body corporate for U.S. tax purposes.

The terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" are defined in subparagraph 1(f) as an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State. The term "enterprise" is not defined in the Convention.

Subparagraph 1(g) defines the term "international traffic''. The term means any transport by a ship or aircraft except when the vessel is operating solely between places within a Contracting State. The exclusion from international traffic of transport solely between places within a Contracting State means, for example, that a carriage of goods or passengers between New York and Chicago by either a U.S. or a German carrier would not be treated as international traffic. The substantive taxing rules of the Convention relating to the taxation of income from transport, principally Article 8 (Shipping and Air Transport), therefore, would not apply to income from such carriage. If the carrier is a German resident (if that were possible under U.S. law) the United States would not be required to exempt the income under Article 8. The income would, however, be treated as business profits under Article 7 (Business Profits), and would, therefore, be taxable in the United States only if attributable to a U.S. permanent establishment, and then only on a net basis. The gross basis U.S. tax would never apply under the circumstances described. If, however, goods or passengers are carried by a German carrier from Hamburg to New York, some of the goods or passengers are carried only to New York, and the rest are taken to Chicago, the entire transport would be international traffic.

The term "national", as it relates to both the United States and Germany, is defined in sub-subparagraphs 1(h)(aa) and (bb), respectively. A national of the United States is

(1) a U.S. citizen, and (2) any legal person, partnership or association deriving its status, as such, from the law in force in the United States.

A national of Germany is defined, correspondingly, as (1) a German within the meaning of paragraph 1 of Article 116 of the Basic Law of the Federal Republic of Germany, and

(2) any legal person, partnership or association deriving its status as such from the law in force in Germany.

These definitions are comparable to that found in the OECD Model, except that in that Model the definition is in Article 24 (Nondiscrimination). Since the term has application in other articles as well (e.g., Article 19 (Government Service; Social Security)), in this Convention it has been placed among the General Definitions. A U.S. national is defined in the U.S. Model as a citizen of the United States, and does not include juridical persons. The addition of juridical persons to the definition may have significance in relation to paragraph 1 of Article 24 (Nondiscrimination), which provides that nationals of one Contracting State not be subject in the other to any taxes or connected requirements that are other or more burdensome than those applicable to nationals of that other State who are in the same circumstances.

Sub-subparagraphs 1(i)(aa) and (bb) define the term "competent authority" for the United States and Germany respectively. The U.S. competent authority is the Secretary of the Treasury or his delegate. The Secretary of the Treasury has delegated the competent authority function to the Commissioner of Internal Revenue, who has, in turn, redelegated the authority to the Assistant Commissioner (International). With respect to interpretative issues, the Assistant Commissioner acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue Service. In Germany, the competent authority is the Minister of Finance or his delegate. The competent authority functions in Germany are carried out by the Office for International Tax Relations with Industrial Countries in the Ministry of Finance.

Paragraph 2 provides that, in the application of the Convention, any term used but not defined in the Convention, unless the context requires otherwise, will have the meaning which it has under the law of the Contracting State whose tax is being applied. If, however, the meaning of a term cannot be readily determined under the law of a Contracting State, or if there is a conflict in meaning under the laws of the two States which creates problems in the application of the Convention, the competent authorities may, pursuant to the provisions of paragraph 3(d) of Article 25 (Mutual Agreement Procedure), establish a common meaning in order to prevent double taxation or further any other purpose of the Convention. This common meaning need not conform to the meaning of the term under the laws of either Contracting State.