Article 18 (Government Service)

Paragraph 1

Subparagraphs (a) and (b) of paragraph 1 deal with the taxation of government compensation (other than a pension addressed in paragraph 2). Subparagraph (a) provides that remuneration paid from the public funds of one of the Contracting States or its political subdivisions or local authorities to any individual who is rendering services to that Contracting State, political subdivision or local authority is exempt from tax by the other Contracting State (the “host Contracting State”). Under subparagraph (b), such payments are, however, taxable exclusively in the other Contracting State ( i.e., the host Contracting State) if the services are rendered in that other Contracting State and the individual is a resident of that Contracting State who is either a national of that Contracting State or a person who did not become resident of that Contracting State solely for purposes of rendering the services.

This paragraph follows the OECD Model, but differs from the U.S. Model in applying only to government employees and not to independent contractors engaged by governments to perform services for them.

The remuneration described in paragraph 1 is subject to the provisions of this paragraph and not to those of Articles 14 (Income from Employment), 15 (Directors' Fees) or 16 (Artistes and Sportsmen). If, however, the recipient of the income is employed by a business conducted by a local government, paragraph 3 provides that those other Articles will apply.

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Paragraph 2

Paragraph 2 deals with the taxation of pensions paid by, or out of funds to which contributions are made by, one of the Contracting States, or a political subdivision or a local authority thereof, to an individual in respect of services rendered to that Contracting State or subdivision or authority other than payments made by the United States under provisions of the social security or similar legislation. Subparagraph (a) provides that such pensions are taxable only in that Contracting State. Subparagraph (b) provides an exception under which such pensions are taxable only in the other Contracting State if the individual is a resident of, and a national of, that other Contracting State.

Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When payments made by the United States are under provisions of social security or similar legislation, however, those payments are covered by paragraph 1 of Article 17 (Pensions, Social Security, Annuities, and Support Payments). The phrase “similar legislation” is intended to refer to United States Tier 1 Railroad Retirement benefits. Paragraph 1 of Article 17 generally provides that social security benefits are taxable exclusively by the residence country

Paragraph 3

Paragraph 3 specifies that paragraphs 1 and 2 do not apply to remuneration and pensions paid for services performed in connection with a business carried on by a Contracting State or a political subdivision or local authority thereof. In such cases, the remuneration and pensions are subject instead to the provisions of Articles 14 (Income from Employment), 15 (Directors' Fees), 16 (Artistes and Sportsmen) and 17 (Pensions, Social Security, Annuities, and Support Payments). This provision conforms to the OECD Model.

Relation to other Articles