Article 22 generally assigns taxing jurisdiction over income not dealt with in the other

articles (Articles 6 through 21) of the Convention to the State of residence of the beneficial owner of the income and defines the terms necessary to apply the article. An item of income is "dealt with" in another article if it is the type of income described in the article and it has its source in a Contracting State. For example, all royalty income that arises in a Contracting State and that is beneficially owned by a resident of the other Contracting State is "dealt with" in Article 12 (Royalties).

Examples of items of income covered by Article 22 include income from gambling, punitive (but not compensatory) damages, covenants not to compete, and income from certain financial instruments to the extent derived by persons not engaged in the trade or business of dealing in such instruments (unless the transaction giving rise to the income is related to a trade or business, in which case it is dealt with under Article 7 (Business Profits)). The article also

applies to items of income that are not dealt with in the other articles because of their source or some other characteristic. For example, Article 11 (Interest) addresses only the taxation of interest arising in a Contracting State. Interest arising in a third State that is not attributable to a permanent establishment, therefore, is subject to Article 22.

Distributions from partnerships and distributions from trusts are not generally dealt with under Article 22 because partnership and trust distributions generally do not constitute income. Under the Code, partners include in income their distributive share of partnership income annually, and partnership distributions themselves generally do not give rise to income. Also, under the Code, trust income and distributions have the character of the associated distributable net income and therefore would generally be covered by another article of the Convention. See Code section 641 et seq.

Paragraph 1

The general rule of Article 22 is contained in paragraph 1. Items of income of a resident of a Contracting State not dealt with in other articles will be taxable only in the State of residence. This exclusive right of taxation applies whether or not the residence State exercises its right to tax the income covered by the Article.

Although this paragraph, like the OECD Model, refers to “items of income of a resident of a Contracting State” rather than, like the U.S. Model, "items of income beneficially owned by a resident of a Contracting State," this is not a substantive difference. It is understood that the exclusive residence taxation provided by paragraph 1 applies only when a resident of a Contracting State is the beneficial owner of the income. Thus, source taxation of income not dealt with in other articles of the Convention is not limited by paragraph 1 if it is nominally paid to a resident of the other Contracting State, but is beneficially owned by a resident of a third State.

Paragraph 2

This paragraph provides an exception to the general rule of paragraph 1 for income, other than income from real property, when the right or property giving rise to the income is effectively connected with a permanent establishment or fixed base maintained in a Contracting State by a resident of the other Contracting State. In such case the State in which the permanent establishment or fixed base exists will retain the right to impose tax on such income. Paragraph 10 of Article 1 of the Protocol clarifies that the provisions of Articles 7 (Business Profits) or 14 (Independent Personal Services), as the case may be, apply to such income. Therefore, income arising outside the United States that is attributable to a permanent establishment maintained in the United States by a resident of Italy generally would be taxable by the United States under the provisions of Article 7. This would be true even if the income is sourced in a third State.

There is an exception to this general rule with respect to income a resident of a Contracting State derives from real property located outside the other Contracting State (whether in the first-mentioned Contracting State or in a third State) that is attributable to the resident's permanent establishment or fixed base in the other Contracting State. In such a case, only the

first-mentioned Contracting State (i.e., the State of residence of the person deriving the income) and not the host State of the permanent establishment or fixed base may tax that income. This special rule for foreign-situs property is consistent with the general rule, also reflected in Article 6 (Income from Immovable Property), that only the situs and residence States may tax real property and real property income. Even if such property is part of the property of a permanent establishment or fixed base in a Contracting State, that State may not tax the income if neither the situs of the property nor the residence of the owner is in that State.

Paragraph 3

Paragraph 3 provides that the benefits of this Article will be denied in cases in which the main purpose, or one of the main purposes, for the creation or assignment of the rights in respect of which the income is paid is to take advantage of this Article. This provision is analogous to paragraph 10 of Article 10 (Dividends), discussed above

Relation to Other Articles

This Article is subject to the saving clause of paragraph 2 of Article 1 (Personal Scope). Thus, the United States may tax the income of a resident of Italy that is not dealt with elsewhere in the Convention, if that resident is a citizen of the United States. The Article is also subject to the provisions of Article 2 of the Protocol, regarding limitation on benefits. Thus, if a resident of Italy earns income that falls within the scope of paragraph 1 of Article 22, but that is taxable by the United States under U.S. law, the income would be exempt from U.S. tax under the provisions of Article 22 only if the resident satisfies one of the tests of Article 2 of the Protocol for entitlement to benefits.