Article 11. INCOME FROM REAL

PROPERTY

This article provides that a resident of one State may be subject to tax in the other State on income from real property and royalties in respect of natural resources if the property or natural resource is located in such other State. The existing Convention provides that a resident of one State may be subject to tax on such income or royalties by the other State only if such resident has a permanent estab­ lishment in the other State or if such income or royalties constitute in­ dustrial or commercial profits. This

resident of the Contracting State (and in the case of dividends paid by a Norwegian corporation, to a person other than a citizen of the United States) from tax in that other Con­ tracting State. This rule does not apply if the recipient of the dividends has a permanent establishment in that other Contracting State and the shares with respect to which the divi­ dends are paid are effectively con­ nected with such permanent establish­ ment.

The dividend article of the pro­ posed Convention is patterned gener­ ally after the OECD Model Conven­ tion except as follows: With respect to the qualification for the 10-percent in­ tercorporate dividend rate, a 10-percent ownership requirement is substi­ tuted for the 25-percent ownership re­ quirement of the OECD draft. The

10-percent rule conforms to the United States concept of direct investment especially as expressed in section 902 of the Internal Revenue Code. The proposed Convention also limits to 25 percent the amount of passive income which may be derived by a corporation paying dividends which qualify for the intercorporate dividend rate. This provision, which is included in most conventions to which the United States is a party but which is not found in the OECD draft, reflects the policy that the reduced rate should not be made available to dividends paid by certain holding companies. Dividends and interest received by the payer corporation from 50 percent or more owned subsidiaries are not con­ sidered passive income.