Article 25. NONDISCRIMI­

NATION

The proposed Convention bans dis­ crimination by one State against the citizens of the other State or perma­ nent establishments of residents or corporations of the other State. Thus, for example, a citizen of Norway who is a resident of the United States and who meets the requirements specified in section 911 of the Internal Revenue Code would, under this article of the proposed Convention, be eligible for the benefits of section 911 although he is not a citizen of the United States.

This article provides, however, that a State may accord special treatment to its own residents on the basis of civil status or family responsibility.

Under paragraph (3) of Article 1 (Taxes Covered), the ban on discrim­ ination contained in this article ex­ tends to all taxes without regard to subject matter and whether imposed at the national, state, or local level.

This article also deals with the fact that Norwegian domestic law in effect provides for a lower rate of tax on distributed earnings of a Norwegian corporation than on retained earnings of a Norwegian corporation because Norwegian corporations may deduct dividends declared out of the taxable year’s profits before computing their national income tax liability. Branches of foreign corporations, however, are taxed under Norwegian law at the full rate imposed on undistributed profits irrespective of actual distributions of those profits to shareholders. There­ fore a Norwegian permanent estab­ lishment of a United States corpora­ tion, if taxed on its entire Norwegian income, would suffer discriminatory taxation vis-a-vis Norwegian corpora­

ated by a resident of a State in inter­ national traffic or in fishing on the high seas will be treated as income from sources within that State, pro­ vided that the labor or services are performed by a member of the regular complement of the ship or aircraft. Notwithstanding the preceding provi­ sions of this paragraph, remuneration described in Article 17 (Governmen­ tal Functions) and Article 19 (Social Security Payments) is to be treated as income from sources within a State only if paid by, or out of the fund to which contributions are made by, that State or a political subdivision or local authority thereof.

Income from the purchase and sale of personal property (other than gains defined as royalties in paragraph

(2) (b) of Article 10 (Royalties)) is to be treated as income from sources within a State only if such property is sold in that State. This rule conforms to the rule set forth in section 861(a)(6) of the Internal Revenue Code.

Notwithstanding the above rules, paragraph (9) of Article 24 (Source of Income) provides that industrial and commercial profits attributable to a permanent establishment which the recipient, being a resident of one State, has in the other State, including income dealt with in the articles per­ taining to income derived from real property and natural resources and dividends, interest, royalties, or capital gains if from rights or property which are effectively connected with such permanent establishment, will be treated as income from sources within that other State. This source rule is consistent with the policy underlying the Foreign Investors Tax Act of and is also reflected in our recent Conventions with France, Finland and Trinidad and Tobago, and in the Protocols to the German, Netherlands, and United Kingdom Conventions. In general the factors which under the proposed Convention determine whether the property giving rise to in­

vestment-type income is effectively connected with a permanent establish­ ment are the same as the factors which under section 864(c) of the In­ ternal Revenue Code determine whether fixed or determinable annual or periodical income is effectively con­ nected with the conduct of a trade or business in the United States.

Several of the source rules set out in this article differ to some degree from those existing in the Internal Revenue Code. Since Article 22 (General Rules of Taxation) provides that the pro­ posed Convention will not increase a person’s United States tax, a taxpayer is entitled to use the more beneficial of the Code rule or the proposed Con­ vention rule in calculating his income for United States tax purposes, or in the case of a citizen or resident of the United States, his foreign tax credit. Thus, for example, if income is effec­ tively connected with a permanent es­ tablishment of a Norwegian corpora­ tion in the United States under this Convention but is not effectively con­ nected under section 864(c) of the Code, and a lesser tax is due under the Internal Revenue Code if the in­ come is not effectively connected, the taxpayer is subject only to the lesser tax. The rule on interest in this article permits Norway, under the proper cir­ cumstances, to impose a tax on any interest paid by a permanent estab­ lishment in Norway of a United States resident. While the rule appears to be fully reciprocal, the United States will not, because of section 861(a) (1) (b) of the Code, impose on nonresident aliens and foreign corporations a tax on interest paid by a resident of the United States unless such resident de­ rives 20 percent or more of its gross income from United States sources for the 3-year period ending with the close of the taxable year of such resi­ dent preceding the payment of such interest.

It should also be noted that the source rules do not serve to extend the benefits of this proposed Convention to persons other than residents of the