Article 20. INVESTMENT OR

HOLDING COMPANIES

This article denies the benefits of the dividends, interest, royalties, and capital gains articles to a corporation of one of the States deriving such in­ come from sources within the other State if (1) such corporation is enti­ tled to special tax benefits which re­ sult in the tax imposed on such in­ come being substantially less than the tax generally imposed on corporate profits in such State, and (2) 25 per­ cent or more of the capital of the cor­ poration is owned directly or indi­ rectly by one or more persons who are not individual residents of such State, or in the case of a Norwegian corpo­ ration, are citizens of the United States.

The purpose of this article is to deal with potential abuse which could occur if one of the States provided preferential rates of tax for investment or holding companies. In such a case, residents of third countries could or­ ganize a corporation in the State ex­ tending the preferential rates for the purpose of making investments in the other State. The combination of low

dence principle of taxation. Another general rule of taxation is that Nor­ way may impose its national tax on its diplomatic and consular officers as if the proposed Convention had not come into effect. Thus, it is clear that for purposes of applying the Nor­ wegian national tax, Norwegian diplo­ mats in the United States are not United States residents.

The United States also reserves the right to impose its personal holding company tax in any taxable year ex­ cept in cases in which a Norwegian corporation is wholly owned, directly or indirectly, by one or more individu­ als who are residents of Norway, and not citizens of the United States, for that entire taxable year. The United States may not impose its accumu­ lated earnings tax in any taxable year on a Norwegian corporation unless such corporation is engaged in trade or business in the United States through a permanent establishment at some time during that taxable year. The limitations on the right of the United States to tax in these cases are not substantially greater than those found in the Internal Revenue Code.