ARTICLE 14

Capital Gains

Paragraph 1 addresses the taxation of gain on dispositions of real property. It States the basic rule that gain on the disposition of real property situated in one of the Contracting States may be taxed by that State. In the case of the United States the tax levied includes the branch taxes imposed by section 884, where applicable. Real property situated in the United States is defined to include a United States real property interest: thus, the United States retains its right to tax in accordance with section 897 of the Internal Revenue Code.

Paragraph 2 provides that gain derived by a resident of a Contracting State from the disposition of capital assets, other than those covered in paragraph 1, is taxable only in that State, with two exceptions. The exceptions allow the other Contracting State to tax

(1) gain on property effectively connected with a permanent establishment or fixed base which the recipient has in that other State, in which case Article 8 (Business Profits) or Article 15 (Independent Personal Services) applies, and (2) gain derived by an individual who is present in that other State for a total of 120 days or more during the taxable year, in which case the gain is taxed in accordance with domestic law.

Gain on the sale of securities, for example, could be included in the second category. Where one of the two exceptions applies, the State of residence (or citizenship) may also tax the gain, and will provide relief from double taxation in accordance with Article 23 (Relief from Double Taxation).

Paragraph 3 clarifies that gain derived by a resident of a Contracting State from the deemed alienation of assets described in paragraph (2)(i) of Article 5 (Permanent Establishment) which are used in exploring for or exploiting oil and gas resources is taxable only in the State of residence. The United States gives up its tax on the gain on deferred dispositions, imposed by section 864(c)(7) of the Internal Revenue Code under paragraph 2 of this Article; under paragraph 3, neither Contracting State will treat the withdrawal of a drilling rig from its territory as a deemed disposition subject to an "exit tax" or "balancing charge" on the deemed gain.

Gain on the disposition of ships. Aircraft and containers used in international traffic is covered under Article 9 (Shipping and Air Transport) rather than under this Article.