ARTICLE 16

Dependent Personal Services

This Article deals with the taxation of remuneration derived by a resident of a Contracting State as an employee.

Under paragraph 1, remuneration derived by an individual who is a resident of a Contracting State as an employee may be taxed by his State of residence. To the extent his remuneration is derived from an employment exercised in the other Contracting State, the remuneration may also be taxed by that other Contracting State, subject to the conditions specified in paragraph 2. Consistent with the general rule of construction that the more specific rule takes precedence over the more general, income dealt within Articles 17 (Directors' Fees), 18 (Income earned by Entertainers and Athletes), 19 (Remuneration and Pensions in Respect of Government Service), 20 (Private Pensions, Annuities, Alimony and Child Support), 21 (Payments received by Students and Apprentices) and 22 (Payments Received by Professors, Teachers and Research Scholars) is governed by the provisions of those Articles rather than this Article.

Under paragraph 2, even where the remuneration of a resident of a Contracting State (described in paragraph 1) is derived from sources within the other Contracting State (i.e., the services are performed there), that other State may not tax the remuneration if three conditions are satisfied:

(1) the individual is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the relevant taxable year;

(2) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other Contracting State; and

(3) the remuneration is not borne by a permanent establishment or fixed base that the employer has in that other State.

If a foreign employer pays the salary of an employee, but a host country corporation or permanent establishment reimburses the foreign employer in a deductible payment which can be identified as a reimbursement, neither condition (2) nor (3), as the case may be, will be considered to have been fulfilled. Conditions (2) and (3) are intended to ensure that a Contracting State will not be required both to allow a deduction to the payer for the amount paid and to exempt the employee on the amount received. In order for the remuneration to be exempt from tax in the source State, all three conditions must be satisfied.

Paragraph 3 contains a special rule applicable to remuneration for services performed by an individual who is a resident of a Contracting State as an employee aboard a ship or aircraft operated in international traffic. Such remuneration may be taxed only in the Contracting State of residence of the person carrying on the enterprise. This paragraph does not apply to the performance of services by an employee of an enterprise other than the enterprise operating the ship or aircraft in international traffic, such as an insurance salesman who is employed by an insurance company to sell insurance aboard a ship or aircraft.

This paragraph does not grant an exclusive taxing right. In this respect, it differs from the comparable provision in the U.S. Model and is like the comparable provision in the OECD Model. The comparable paragraph in the OECD Model provides a different rule in one respect, however. Under paragraph 3 in the OECD Model such income may be taxed on a non-exclusive basis in the Contracting State in which the place of effective management of the employing enterprise is situated. The United States does not use this rule in its Model, because under U.S. law, a taxing right over an employee of an enterprise managed in the United States (or an employee of a U.S. resident) cannot be exercised with respect to non-U.S. source income unless the employee is also a U.S. citizen or resident.

If a U.S. citizen who is resident in India performs dependent services in the United States and meets the conditions of paragraph 2, and would, therefore, be exempt from U.S. tax were he not a U.S. citizen, he is, nevertheless, subject to U.S. tax on his remuneration by virtue of the saving clause of paragraph 3 of Article 1 (General Scope) of the Convention.