ARTICLE 1. TAxES COVERED

Paragraph (1) ^designates the taxes of the Contracting States which are the subject of the Convention. With respect to the United States, the ^sub- ject taxes are the ^{Federal income taxes} imposed by the Internal Revenue Code

(" Code" ), including the taxes im posed under ^section 531 (accumulated earnings tax) and section 541 (personal holding company tax). ^How-

premiums, the Convention also applies to taxes other than income ^taxes . imposed at the national level of a Contracting State on such premiums paid to a resident of the other ^Con- tracting State. The efFect of this provision is discussed under Article 7 (Business Profits) .

Pursuant to paragraph (3), for purposes of Article 22 (Nondiscrimination), the Convention applies to taxes of every kind which are imposed at the national, state, or local level.

Paragraph (4) ^provides that the competent authority of each Contracting State will notify the competent authority of the other Contracting State of any amendment of the tax laiis referred to in paragraph (1), or of the adoption of substantially similar taxes imposed in addition to, or in place of, those taxes. The texts of such amendments or new statutes are to be transmitted between the competent authorities at least once a year,

ART. 2. GENERAL DEFINITIONS

Paragraph (1) ^{sets out definitions} of certain basic terms used in the Convention. A number of important terms, however, are defined elsewhere in the Convention.

The term "Romania" means the Socialist Republic of Romania. The term "United States" means the United States of America. When used in a geographical sense, the term "United States" means the states of the United States and the District of Columbia. Thus, the Convention does not apply to the possessions of the United States or the Commonwealth of Puerto Rico. When used in a geographical sense Romania and the United States also include their respective territorial seas and continental shelves, generally in accordance with the principles of section 638 of the Code.

The term "Contracting State" is defined to mean the United States or Romania as the context requires. Although not specifically defined in the Convention, the term "State" means

the United States, Romania, or any other national State. The term ^"person" is defined as ^in- cluding an individual, a partnership, a corporation, an estate or a trust.

The term ^"United States corporation" is defined as a corporation, or any entity (whether or not incorporated) treated as a corporation for United States tax purposes, which is created or organized under the laws of the United States, any state thereof, or the District of Colombia. A "Romanian corporation" is defined as any juridical person, including a mixed corporation, which is incorporated and organized under Romanian law or any other legal entity which is created under Romanian law and which is treated under its tax laws as a juridical person.

With respect to the United States, the term "competent authority" means the Secretary of the Treasury or his delegate. With respect to Romania, it means the Minister of Finance or his delegate. The term "tax" means those taxes imposed by ^{the United} States or Romania to which the Convention applies by virtue of Article 1 (Taxes Covered) .

The term "international traffic" is defined as any voyage of a ship or aircraft operated by a resident of one of the Contracting States except where such voyage is confined solely to places iiithin a Contracting State. Thus, for example, coastal shipping along the Atlantic coast of the United States is not a voyage in international traffic. However, if a ship operated by a resident of Romania transports goods from Canada to the United States, leaving some of the goods in New York and the remainder in Norfolk, the portion of the voyage between New York and Norfolk is international traffic.

Paragraph (2) ^provides that any term used in the Convention which is not defined therein shall, unless the context otherwise requires, have the meaning which it has under the laws of the Contracting State whose tax is being determined. However, where a

505

(" Code" ), including the taxes im

ever, the Convention does not apply to the taxes imposed by chapters 2 (tax on self-employment income) and 21 (federal insurance contributions act) of the Code. These taxes are ^de- scribed as social insurance taxes to facilitate translation into Romanian. In the case of Romania, paragraph (1) ^{provides that the Convention} applies to income taxes imposed under Romanian law, and in particular to the income taxes imposed on wages, salaries, fees, copyrights, and income from any other source received by individuals, on the profits of mixed companies, on enterprises other than mixed companies or state enterprises, on agricultural activities, on rentals, and on nonresidents.

Pursuant to paragraph (2), ^the Convention will also apply to taxes substantially similar to those covered

by paragraph (1) ^{which are imposed} in addition to, or in place of, existing taxes, after the date of signature of the Convention (December 4, 1973) . For purposes of paragraph (5) ^of Article 7 (Business Profits) which deals with insurance and reinsurance

submitted by the President to the Senate on March 11, 1974. On November 7, 1975, the Senate Committee on Foreign Relations held hearings and this Technical Explanation was presented. The Senate voted its advice and consent on November 18, 1975, and instruments of ratification were exchanged on January 26, 1976, the conven uon thereby entering into force on February 26, 1976.

'Page 49'2; pertinent excerpts from Senate Executive Report No. 94-15, page 502; Senate Executive B is not published.

ter»| has a different Ineaning under the laws of Romania and the United States or where the meaning under the laws of one of the Contracting States is not readily determinable, the competent authorities may for ^pur- poses of the Convention establish a common definition in order to prevent double taxation or to further any other purpose of the Convention.

ART. 3. FISCAL RESIDENCE

This article sets forth rules for ^de- termining the residence of individuals, corporations, and other persons for purposes of the ^{Convention. Residence}

is important because, in general, only a resident of one of the Contracting States may qualify for the ^benefits of the Convention.

Under paragraph (1), ^the term "resident of Romania" means a Romanian corporation as defined in Article 2 (General Definitions) or any other person who is resident in Romania for purposes of its tax. ^Simi-

larly, ^"resident of ^{the United States"} means a United States corporation as defined in Article 2 (General ^Defini- tions) and any other person resident in the United States for purposes of its tax. Thus, a resident of the United States includes a resident alien individual and a resident citizen but not a foreign corporaiton. A citizen of the United States or Romania is not automatically a resident of the United States or Romania for purposes of this Convention. Similarly, even if a foreign corporation, or other foreign entity treated as a foreign corporation, is treated as a resident (see, e. g., 26 CFR $ ^{301. 7701-5 of the U. S.} Treasury Regulations) or a domestic corporation for certain purposes of a Contracting State's income tax law, such corporation or entity will not be treated as a resident of that Contracting State for purposes of the Convention. Thus, for example, even though a foreign corporation is taxed

by ^{the United States on its trade or} business income from sources within the United States, or a foreign corporation is referred to as a resident of

506

t'le United States in the source rules in section 861 of the Code, such corporation is not a resident of the United States for purposes of the Convention.

The Convention provides that a partnership, estate, or trust is a resident of a Contracting State only to the extent that the income derived by such person is subject to tax in such Contracting State. For example, under United States law, a partnership is never, and an estate or trust is often not, taxed as such. Under the Convention, income received by ^{a part-} nership, estate, or trust will not be treated for purposes of the Convention as income received by ^{a resident} of the United States unless such income is subject to tax by the United States as the income of a resident. Thus, the treatment of income received by a partnership will be determined by ^the residence and taxation of its partners with respect to that income. To the extent the partners are subject to United States tax as residents of the United States, the partnership will be treated as a resident of the United States. Similarly, the treatment of income received by ^{a trust} or ^estate will be determined by ^{the residence} and taxation of the persons subject to tax on such income, which may ^be the grantor, the beneficiaries or the trust or estate itself, as the case may be.

Under paragraph (2), an individual who is a resident of both Contracting States under their domestic laws will, for purposes of the Convention, be deemed to be a resident of the Contracting State in which he has his permanent home, his center of vital Interests (closest economic and personal relations), a habitual abode, or his citizenship, in the order listed. If the issue is not settled by these tests, the competent authorities will decide

by ^mutual agreement the one Contracting State of which he will be considered to be a resident.

ART. 4. GENERAL RULES OF

TAXATION

Under paragraph (1), ^{a resident}

of one Contracting State may be taxed by ^the other Contracting State only on income from sources within that other Contracting State, subject to the limitations set forth in the Convention. For this purpose, the source rules contained in various articles articles throughout the Convention are to be applied. However, if the resident is a citizen of the other Contracting State, that Contracting State may ^tax the resident without regard to this paragraph because of the saving clause of paragraph (3) ^{of this} article.

Paragraph (2) ^contains the customary rule that the Convention will not restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded by the laws of a Contracting State in the determination of a tax imposed by it, or by any other agreement between the Contracting States. This rule reflects the principle that a convention should not increase the tax burden on residents of the Contracting States.

Paragraph (3) ^contains the traditional saving clause under which the United States reserves the right to tax its citizens and residents as if the ^Con- vention had not come into effect. ^How-

ever, the saving clause does not ap ply ^{in several cases in which its ap-} plication would contravene policies reflected in the Convention. Thus, ^the

saving clause does not affect ^{the pro-} visions with respect to social ^security

payments, rehef from double ^taxatton, nondiscrimination, or the mutual agreement procedure. Moreover, the

saving clause does not ^{affect the bene-}

fits of the Convention to ^individuals

performing governmental functions, teachers, students, trainees, ^{and mem-}

bers of diplomatic missions and ^con-

sular offices who become ^resident in

one of the Contracting States ^unless

such individuals are citizens ^{of or have}

immigrant status in the ^Contracting State imposing the ^{tax. In the case of}

the United States, ^"immigrant status"

means the individual has been ^ad-

mitted to the United ^{States for perm&.}

gent residence. The saving clause is reciprocal.

Paragraph (5) ^authorizes the competent ^authorities of the Contracting States to prescribe regulations neces sary ^to carry ^{out the provisions of the} Convention. On the United States

of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (5) applies, will be deemed to give rise to a permanent establishment if such person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of the resident, unless the exercise of the authority is limited to the purchase of goods or merchandise for the resident. On the other hand, paragraph (5) provides that a resident of one Contracting State will not be deemed to have a permanent establishment in the other Contracting State merely because such resident engages in industrial or commercial activity in such other Contracting State through a broker, general commission agent, or any other agent of an independent status, if such agent is acting in the ordinary course of its business. Paragraph (6) ^provides that a ^resi- dent of one Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident sells at the termination of a trade fair or convention in the other Contracting State goods or merchandise which were displayed by ^such resident at the trade fair or convention. This exception does not appear in existing United States conventions, but a similar exception is contained in the pending conventions with the Soviet Union and Poland.

Under paragraph (7), ^{the deter-} mination of whether a resident of one Contracting State has a permanent establishment in the other Contracting State is to be made without regard to the fact that such resident may be related to a resident of the other Contracting State or to a person who engages in business in that other Contracting State (whether through a permanent establishment or otherwise). As defined in Article 9 (Related Persons), a person is related to another person if either person owns or controls directly or indirectly the either, or if a third person or persons

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side, this authority is also provided

by ^{section 7805 of the Code.}

ART. 5. PERMANENT ESTABLISHMENT

This article defines the term "per##### manent establishment. " The existence

of a permanent establishment is relevant under Article 7 (Business Profits) to the taxation of industrial or commercial profits and in determining the applicability of other provisions of the Convention, such as Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 13 (Capital Gains).

that a permanent establishment does not include a fixed place of business if it is used only for one or more of the following:

"(a) The use of facilities for the purpose of storage, display, or delivery pursuant to a sales contract, of goods or merchandise belonging to the resident;

"(b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;

"(c) The maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information, for the resident;

"(d) The maintenance of a fixed place of business for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a prepara tory or auxiliary character, for the resident; or

"(e) The maintenance of a construction or installation project which does not exist for more than 12

These exceptions are cumulative and a fixed place of business used solely for one or more of these purposes will not be considered a permanent establishment under the Convention. Subparagraph (a) ^{states that} delivery must be pursuant to a sales contract to emphasize the implicit restriction that a facility used for delivering another person's goods would not be included within the exception. Since the subparagraph excludes the use of facilities for storage, display or delivery, by implication it also excludes the stock of goods or merchandise itself from being deemed a permanent establishment. The construction or installation project exception in subparagraph (e) ^{is the converse} of the rule of paragraph (2) ^{that such} a project which exists for more than 12 months will be a permanent establishment.

Under paragraph (4) a person ^act- ing in one Contracting State on behalf

Under paragraph (1), ^the term "permanent establishment" means a fixed place of business through which the business of a resident of one of the Contracting States is wholly or partly carried on. Illustrations in paragraph (2) ^{of a} permanent establishment include a branch, an office, a factory; a workshop; a warehouse; a mine, quarry or other place of extraction of natural resources; and a construction or installation project which exists for more than 12 months. As a general rule, any fixed facility or premises through which a resident conducts industrial or commercial activity for an indefinite or substantial period of time will be treated as a permanent establishment unless it is used for one or more of the activities described in paragraph (3). The term "construction or installation project" includes a building site. Under the construction or installation project rule the twelve month period begins only when work physically commences in the other Contracting State. A series of contracts or projects which are interdependent both commercially and geographically is to be treated as a single project for the purpose of applying the twelve ^months' test.

Paragraph (3) ^{specifically provides}

owIi or control directly or indirectly both such persons.

Paragraph (8) ^provides that the principles set forth in this article are to be applied in determining whether there is a permanent establishment in a State other than one of the Contracting States or ^whether a person ^other than a resident of one of the Contracting States has a permanent establishment in one of the Contracting States. This is necessary for the proper application of paragraph (7) ^{of Article} 11 (Interest). This paragraph is not intended to extend the benefits of the Convention to persons other than residents of the two Contracting States.

ART. 6. INcoME FRoM IMMovABLE PROPERTY

Under paragraph (1), income from immovable property, including royalties and other payments in respect of the exploitation of natural resources, e. g., oil wells, and gains from the sale, exchange or other disposition of such property or of the right giving ^{rise to} such royalties or other payments, may be taxed by the Contracting State in which the immovable property or ^na- tural resources are situated. However, income from immovable property does not include interest on indebtedness secured by immovable property (e. g., mortgages) or by a right giving rise to royalties or other payments in respect of the exploitation of natural ^re- sources. Such interest income is covered by Article 11 (Interest).

Paragraph (1) applies to income ^de- rived from the usufruct, direct use, letting, or use in any other form of immovable property. For United States purposes, the term "immovable property" is intended to have the same

ART. 7, BUSINESS PROFITS

Paragraph (1) sets forth the general rule that industrial or commercial profits of a resident of one Contracting State are exempt from tax by the other Contracting State unless the resident has a permanent establishment in the other Contracting State. Where there

508

is a lii »i|ann»t establishment, only the industrial or cominercial profits attributable to the permanent establishment can be taxed by that other Contracting State, unless the resident is a citizen of the other Contracting State.

(See the saving clause in paragraph (3) ^{of Article} 4 (General Rules of Taxation) . ) It is intended that, for purposes of the Convention, including paragraph (1) ^{of Article 4 (General} Rules of Taxation) and Article 21 (Relief from Double Taxation), industrial or commercial profits whether from sources within or without a Contracting State attributable to a permanent establishment 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) of 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 industrial or commercial profits under the Convention, paragraph (2) provides that both Contracting States will 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 at ^arm's length with the resident of which it is a permanent establishment. Under paragraph (3), ^ex- penses, wherever incurred, which are reasonably connected with profits attributable to the permanent establishment, including executive and general administrative expenses, will be allowed as deductions in determining the industrial or commercial profits of the permanent establishment. However, in determining the amount of the deduction under paragraph (3) for expenses incurred by ^{the head} office, the deduction may ^{be limited} to the expense incurred without including a profit element for the head office.

Paragraph (4) ^provides that no

~nofits shall be attributed to a perUranent establishment merely because of the purchase of goods or merchandise by that permanent establishment, or by the resident of which it is a permanent establishment, for the account of such resident. Paragraph (2) of the article does not override paragraph (4). Thus, where a permanent establishment purchases goods for its head office, the industrial and commercial profits attributed under paragraph (2) to the permanent establishment with respect to its other activities will not be increased by adding a notional figure for profits from purchasing.

Under paragraph (5), ^{insurance or} reinsurance premiums derived by ^a resident of one Contracting State from sources within the other Contracting State cannot be subjected to an income tax or to any other tax in the other Contracting State unless the premiums are effectively connected with a permanent establishment in the other Contracting State. In the case of the United States, this includes the stamp tax imposed by ^{section 4371 of the} Code on foreign insurance policies covering risks in the United States. Except for the extension of the exemption to include non-income taxes, which has no counterpart in existing United States conventions, this paragraph reaches the same ^{result as would} be reached under paragraphs (1) ^and (6) ^{of the article, since premiums} are industrial or commercial profits to ^an insurance company.

Under paragraph (6), the ^{term "in-}

dustrial or commercial profits" in cludes income derived from manufacturing, mercantile, banking, insurance, agricultural, fishing or ^mining activities, the operation of ships ^or aircraft, the furnishing of ^{services, and} the rental of tangible personal (movable) property. The term does ^not

include income from the perfortn. ance of personal services ^{derived by an}

individual either as an employee ^{or iii}

an independent capacity (althoug"

such income may be ^effectively con

nected with a permanent establis" ment and therefore taxable under paragraph (2) (b) ^{of Article 14 (In-} dependent Personal Services) ) . The term also includes income derived

from real property and natural re sources, ^dividends, interest, investment income on required reserves from in surance activities, ^{cultural and indus-}

trial royalties and capital gains, but

only ^{if the} property or rights giving

rise to such income are effectively connected with a permanent establishment. See paragraph (3) ^{of Article} 10 (Dividends), paragraph (4) ^of