Article 8. BUSINESS PROFITS

Paragraph (1) sets forth the general rule that business profits of a resident of one Contracting State are exempt from tax by the ·other Con­ tracting State unless the resident has a permanent establishment in the

other Contracting State, Where there is a permanent establishment. only the business profits attributable to the permanent establishment can be taxed by that other Contracting State. unless the resident is a citizen of that other Contracting State, (See the saving clause in para graph (3) of Article 6 (General Rules of Taxation),) Under paragraph

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(6) of Article 4 (Source of Income). business profits whether from sources within or without a Contracting State attributable to a permanent establish­ ment which a resident of one Contracting State has in the other Contracting State will be considered to be from sources within that other Contracting State. Thus. items of income described in section 864(c)(4)(B) o! the

State. Thus. items of income described in section 864(c)(4)(B) o! the

Code attributable to a permanent establishment situated in the United States will be subject to tax by the United States,

In determining the proper attribution of business profits under the Convention, paragraph (2) provides that both Contracting States wil attribute to the permanent establishment such profits as it would reasonably be expected to derive if it were an independent entity engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident of which it is a perma­ nent establishment. Paragraph (3) embellishes on that rule by providing that business profits derived from the sale o! goods or merchandise o! the same or similar kind as those sold, or from other business activities of the same or similar kind as those effected. through that permanent establishment, may be attributed to that permanent establishment if the sale or activities had been resorted to in order to avoid taxation.

Under paragraph (4). expenses. wherever incurred. which are reasonably allocable to business profits attributable to the permanent establishment, including executive and general administrative expenses, will be allowed as deductions in determining the business profits o! the permanent establishment, However. in determining the amount of the deduction under paragraph (4) for expenses incurred by the head office. the deduction may be limited to the expense incurred without including the profit element for the head office, Moreover, no deductions will be allowed in respect of amounts paid or payable (other than reimbursement

of actual expenses) :.:1 f. -� ..,ermanent ei;tablishment to any office of the resident by way of roy.: . :s, fees, or other similar payments in return for the use of patents or other rights; commissions for specific services performed or for management; and, except for banking institutions, interest on money lent to the permanent establishment,

·Paragraph (5) provides that no profits shall be attributed to a perma­ nent establishment merely because of the purchase of goods or merchan­ dise by that permanent establishment for the account of such resident of which it is a permanent establishment. Paragraph (2) does not override paragraph (5), Thus, where a permanent establishment purchases goods for its head office, the business profits .attributed under paragraph (2) to the permanent establishment with respect to its other activities will not be increased by adding a notional fig\lre for profits from purchasing.

Under paragraph (6), the term "business profits" means income de­ rived from any trade or business whether carried on by an individual, corporation, or any other person, or group of persons, including the rental of tangible personal (movable) property. The term "business profits" also includes income from dividends, interest, and royalties, but only if the income is effectively connected with a permanent estab­ lishment, See paragraph (4) of Article 11 (Dividends), paragraph (5) of Article 12 (Interest) and paragraph (4) of Article 13 (Royalties),

The Convention contains no criteria for determining whether income is effectively connected with a permanent establishment. However, the "effectively connected" concept in the Convention is substantially similar to the "effectively connected" ·concept in section 864(c) of the Code. It is intended that the !actors which apply under that Code section will apply with respect to this Convention.­

Under paragraph (7), where business profits include items of income which are dealt with separately in other articles of the Convention, the provisions of those articles will not be affected by the provisions of this Article, Thus, for example, taxation of interest income wil be controlled by Article 12 (Interest) and not by this Article, If the interest is effectively connected with a permanent establishment, paragraph (5) of Article 12 provides that this Article wil apply,