ARTICLE 8

Shipping and Air Transport

This Article provides the rules which govern the taxation of profits from the operation of ships and aircraft in international traffic. The term "international traffic" is defined in

subparagraph 1(g) of Article 3 (General Definitions). Paragraph 1 provides that profits derived by an enterprise of a Contracting State from the operation in international traffic of ships or aircraft shall be taxable only in that Contracting State. By virtue of paragraph 6 of Article 7 (Business Profits), profits of an enterprise of a Contracting State that are exempt in the other Contracting State under this paragraph remain exempt even if the enterprise has a permanent establishment in that other Contracting State.

Income of an enterprise of a Contracting State from the rental of ships or aircraft on a full basis (i.e., with crew) is considered to be income from the operation of ships and aircraft and is, therefore, exempt from tax in the other Contracting State under paragraph 1. Unlike the U.S. Model, income from bareboat rentals of ships or aircraft is not included within the definition of profits from the operation of ships or aircraft in international traffic in the Convention. Such income is treated, consistent with paragraph 7 of Article 7 (Business Profits), as business profits. Only the rental income that is attributable to a permanent establishment which the lessor, a resident of one Contracting State, has in the other Contracting State can be taxed in that other State. It is understood that if, for example, a bank is a resident of one Contracting State and has a permanent establishment in the other Contracting State, and that bank leases an aircraft to an airline in the other Contracting State, if the permanent establishment was not involved in negotiating or concluding the lease agreement, the rental income will not be attributable to the permanent establishment and, therefore, will not be subject to tax by that other State.

Paragraph 2 provides that the profits of an enterprise of a Contracting State from the use or rental of containers (including equipment for their transport) which are used for the transport of goods in international traffic will be exempt from tax in the other Contracting State. This result obtains regardless of whether the recipient of the income is engaged in the operation of ships or aircraft in international traffic, and regardless of whether the enterprise has a permanent establishment in the other Contracting State. The comparable provision in the U.S. Model (Article 8, paragraph 3) speaks of profits from the "use, maintenance, or rental of containers". The absence of the word "maintenance" in the Convention is not intended to lead to a different result. The word was deleted at the request of the German delegation to avoid giving the mistaken impression that income derived from a business of providing maintenance services for containers owned and used by other enterprises would be exempt from tax. It is understood, however, that if a shipping company or container leasing company which is a resident of one Contracting State operates a facility for maintaining its own containers in the other Contracting State, the company will be exempt from tax in that other Contracting State even if the facility constitutes a permanent establishment. The shipping and air transport provisions of the 1954 Convention do not deal with income from the use or rental of containers. Such income, therefore, is treated under that Convention as royalty income or business profits, depending upon the circumstances.

Paragraph 3 clarifies that the provisions of the preceding paragraphs apply equally to profits derived by an enterprise of a Contracting State from participation in a pool, joint business or international operating agency. As with any benefit of the Convention, the enterprise claiming the benefit must be entitled to the benefit under the provisions of Article 28 (Limitation on Benefits).

The taxation of gains from the alienation of ships, aircraft or containers is not dealt within this Article, but in paragraph 4 of Article 13 (Gains).

This Article is subject to the saving clause of subparagraph (a) of Paragraph 1 of the Protocol. The United States, therefore, may, subject to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief from Double Taxation), tax the shipping or air transport profits of a resident of Germany if that German resident is a citizen of the United States.