ARTICLE 7

Income from Real Property

Under paragraph (1), income from real property, including royalties and other payments in respect of the exploitation of natural resources (e.g., oil wells) and gains from the sale, exchange or other disposition of such property or of the right giving rise to such royalties or other payments, may be taxed by the Contracting State in which the real property or natural resources are situated. Thus, natural resource royalties are covered under this Article and not under Article 14 (Royalties). However, income from real property does not include interest on indebtedness secured by real property (e.g., mortgages) or secured by a right giving rise to

royalties or other payments in respect of the exploitation of natural resources. Such interest income is covered by Article 13 (Interest). The rule of this paragraph, however, does not confer an exclusive right of taxation on the State where the property is located.

Under paragraph (2), paragraph (1) applies to income derived from the usufruct, direct use, letting, or use in any other form of real property.

Paragraph (3) provides, consistent with U.S. law, that gains from the alienation of shares of a company the property of which consists, directly or indirectly, principally of real property situated in a Contracting State may be taxed by that State. Paragraph (4) of Article 4 (Source of Income) provides that these gains will be considered from sources within a Contracting State if the real property owned by the company is situated in that State.

This Article does not contain a provision allowing for the taxation of real property income on a net basis. This is because such treatment is already provided for under the laws of both Contracting States.