ARTICLE 4

Residence

This Article sets forth rules for determining whether a person is a resident of a Contracting State for purposes of the Convention. Determination of residence is important

because, as noted in the explanation to Article 1 (General Scope), as a general matter only residents of the Contracting States may claim the benefits of the Convention. The treaty definition of residence is to be used only for purposes of the Convention. The 1954 Convention contains 110 comprehensive definition of residence. Article II of that Convention does provide that residence in Germany includes a customary place of abode in Germany.

The determination of residence for treaty purposes looks first to a person's liability to tax as a resident under the respective taxation laws of the Contracting States. A person who, under those laws, is a resident of one Contracting State and not of the other need look no further. That person is a resident for purposes of the Convention of the State in which he is resident under internal law. If, however, a person is resident in both Contracting States under their respective taxation laws, the Article proceeds, where possible, to assign one State of residence to such a person for purposes of the Convention through the use of tie-breaker rules.

Paragraph 1 defines a "resident of a Contracting State". In general, this definition incorporates the definitions of residence in U.S. and German law, by referring to a resident as a person who, under the laws of a Contracting State, is subject to tax there by reason of his domicile, place of management, place of incorporation or any other similar criterion. Except as provided in Paragraph 2 of the Protocol, residents of the United States include aliens who are considered U.S. residents under Code section 7701(b). Unlike the U.S. Model, "citizenship" is not included among the criteria of residence. Thus, a U.S. citizen must have some tie to the United States in addition to citizenship to be treated as a U.S. resident for purposes of the Convention. (See discussion, below, of Paragraph 2 of the Protocol for the application of these rules to nonresident U.S. citizens and aliens lawfully admitted for permanent residence (i.e., "green card" holders).)

If, under subparagraph 1(a), a person is liable to tax in a Contracting State only in respect of income from sources within that State, or, in the case of Germany, only in respect of capital situated in Germany, the person will not be treated as a resident of that Contracting State for purposes of the Convention. Thus, for example, a German consular official in the United States, who may be subject to U.S. tax on U.S. source investment income, but is not taxable in the United States on non-U.S. income, would not be considered a resident of the United States for purposes of the Convention. Similarly, a German enterprise with a permanent establishment in the United States is not, by virtue of that permanent establishment, a resident of the United States. The enterprise is subject to U.S. tax only with respect to its income which is attributable to the U.S. permanent establishment, not with respect to its worldwide income, as is a U.S. resident.

Under subparagraph 1(b), a partnership, estate or trust will be treated as a resident of a Contracting State for purposes of the Convention to the extent that the income derived by such person is subject to tax in that State as the income of a resident, either in the hands of the person deriving the income or in the hands of its partners or beneficiaries. Under U.S. law, a partnership is never, and an estate or trust is often not, a taxable entity. Thus, for U.S. tax purposes, the question of whether income received by a partnership is received by a resident will be determined by the residence of its partners (looking through any partnerships which are themselves partners) rather than by the residence of the partnership itself. Similarly, the

treatment under the Convention of income received by a trust or estate will be determined by the residence for taxation purposes of the person subject to tax on such income, which may be the grantor, the beneficiaries or the estate or trust itself, depending on the particular circumstances. This rule regarding the residence of partnerships, estates or trusts is applied to determine the extent to which that person is entitled to treaty benefits with respect to income which it receives from the other Contracting State.

If, under the laws of the two Contracting States, and, thus, under paragraph 1, an individual is deemed to be a resident of both Contracting States, a series of tie-breaker rules are provided in paragraph 2 to determine a single State of residence for that individual. The first test is where the individual has a permanent home. If that test is inconclusive because the individual has a permanent home available to him in both States, he will be considered to be a resident of the Contracting State where his personal and economic relations are closest, i.e., the location of his "center of vital interests". If that test is also inconclusive, or if he does not have a permanent home available to him in either State, he will be treated as a resident of the Contracting State where he maintains an habitual abode. If he has an habitual abode in both States or in neither of them, he will be treated as a resident of his Contracting State of citizenship. If he is a citizen of both States or of neither, the matter will be considered by the competent authorities, who will attempt by mutual agreement to assign a single State of residence.

Paragraph 2 of the Protocol elaborates on the rules to be used for determining whether a U.S. citizen or a green card holder is to be treated as a U.S. resident for purposes of the Convention. If such a person is a resident both of the United States and Germany, whether or not he is to be treated as a resident of the United States for purposes of the Convention is determined by the tie-breaker rules of paragraph 2 of the Article. If, however, he is resident in the United States and not Germany but has ties to a third State, in the absence of Protocol Paragraph 2 he would always be a resident of the United States, no matter how tenuous his relationship with the United States relative to that with the third State. Paragraph 2 of the Protocol provides that a U.S. citizen or green card holder will be treated as a resident of the United States for purposes of the Convention, and, thereby, entitled to treaty benefits, only if he has a substantial presence, permanent home or habitual abode in the United States. Thus, for example, an individual resident of Mexico who is a U.S. citizen by birth, or who is a Mexican citizen and holds a U.S. green card, but who, in either case, has never lived in the United States, would not be entitled to German benefits under the treaty. On the other hand, a U.S. citizen employed by a U.S. corporation who is transferred to Mexico for two years but who maintains a permanent home or habitual abode in the United States would be entitled to treaty benefits.

Paragraph 3 seeks to settle dual-residence issues for persons other than individuals. A corporation is treated as resident in the United States if it is created or organized under the laws of the United States or a political subdivision. Under German law a corporation is treated as a resident of Germany if it is either incorporated or managed and controlled there. Dual residence, therefore, can arise if a U.S. corporation is managed in Germany. Since neither party was prepared to give up its test of corporate residence under a tie-breaker, the paragraph provides that if a corporation or other person, other than an individual, is resident in both the United States and Germany under paragraph 1, the competent authorities shall seek to determine a single State of residence for that person for purposes of the Convention. If, however, they are unable to reach

agreement, that person shall not be considered to be a resident of either the United States or Germany for purposes of deriving any benefits of the Convention. Since it is only for the purposes of deriving treaty benefits that such dual residents are excluded from the Convention, they may be treated as resident for other purposes. For example, if a dual resident corporation pays a dividend to a resident of Germany, the U.S. paying agent would withhold on that dividend at the appropriate treaty rate, since reduced withholding is a benefit enjoyed by the resident of Germany, not by the dual resident. The dual resident corporation which is the payor of the dividend would, for this purpose, be treated as a resident of the United States under the Convention.