Article 11 (Interest), paragraph (4)

of Article 12 (Royalties) and para graph (1) (a) ^{of Article 13 (Capital} Gains) .

Paragraph (7) ^{contains criteria for} determining whether property or rights are eff'ectively connected with a permanent establishment. Factors to be taken into account include whether the rights or property are used in or

held for use in carrying on an activity

giving ^rise to ^industrial or commercial profits through a permanent establishment and whether the activities ^car- ried on through such permanent ^estab- lishment were a material factor in the realization of the income derived from such property or rights. For this purpose, due regard ^shall be given ^to whether or not such property or rights or such income were accounted for through such permanent establishment. The eff'ectively connected concept in this paragraph is substantially similar to the effectively connected concept in section 864(c) (2) of the Code.

Under paragraph (8), ^where industrial or commercial profits include items of income which are dealt with separately in other articles of the Convention, the provisions of those articles will, except as otherwise provided therein, supersede the provisions of this article. Thus, for example, taxation of income from copyrights of motion picture films or films or tapes used for radio or television broadcasting will be controlled by ^Article 12 (Royalties) and not by this article

unless the copyright is effectively con

nected with a permanent establishment.

ART. 8. SHIPPING AND AIR

TRANSPORT

Paragraph (1) ^provides that, ^not- withstanding Article 7 (Business Profits) and Article 13 (Capital Gains), income ^derived by a ^resident of one Contracting State from the operation in international traffic of

ships or aircraft registered ^{in that Con-} tracting State, and gains derived ^from the sale, exchange or other disposition of such ships or aircraft, shall be exempt from tax by the ^{other Con-} tracting State.

This article also applies to income derived from the rental of ships or aircraft under a full or bareboat ^char- ter if the lessor is engaged in the operation of ships or aircraft in international traffic and the rental income is incidental to such operations. For ^ex- ample, if an airline ^which is a ^resident of one Contracting State has excess equipment in the winter months and leases several of its aircraft which are not required by it during that period to an airline which is a resident of the other Contracting State, that rental income of the lessor is not subject to tax by that other Contracting State, whether or not the lessee uses the aircraft in international traffic.

Paragraph (2) ^{makes clear that the} article also applies to income derived

by ^{a resident} of one Contracting State from the use, maintenance, and lease of containers and other related equipment in connection with the operation in international traffic by the resident of ships or aircraft registered in such Contracting State, An example of such other related equipment is a trailer for the inland transportation of containers in connection with such operations.

This article is subject to the saving clause of paragraph (3) ^{of Article 4} (General Rules of Taxation). Therefore, the other Contracting State may tax the resident without regard to this article if such resident is a citizen of that other Contracting State.

Where a person subject to the ^tax-

ing ^{jurisdiction of a Contracting State}

(whether or not a resident thereof) and any other related person make arrangements or impose conditions ^be- tween themselves which are different from those which would be made ^be- tween independent persons, under paragraph (1) any ^{income, deductions,} credits or allowances which would, but for those arrangements or conditions, have been taken into account in ^com- puting the income or loss of, or the tax payable by, ^{one of such persons,} may be ^{taken into account in comput-} ing the amount of ^{the income} subject to tax and the taxes payable by such person in that Contracting State.

Paragraph (2) ^{sets forth an explicit} formulation of the consequence of an adjustment made in accordance with paragraph (1) by a Contracting ^State to the income of one of its residents. In such event, the other Contracting State must, if it agrees with such ^redetermi- nation, make a corresponding adjustment to the income of a person in such other Contracting State related to such resident. If the other Contracting State disagrees with the redetermination, the two Contracting States must endeavor to reach agreement in accordance with the mutual agreement procedure in paragraph (2) (b) ^{of Article} 23

( ^Mutual Agreement Procedure) . Paragraph (3) ^provides that for purposes of the Convention a person is related to another person if either person owns or controls directly or indirectly the other, or if a third person or persons own or control directly or indirectly both. "Control" includes any kind of control, whether or not legally enforceable, and however exercised or exercisable.

ART. 10. DIVIDENDS

Paragraph (1) ^provides that dividends paid by a corporation of one Contracting State to a resident of the other Contracting State may be taxed

by ^both Contracting States. However, paragraph (2) ^{limits the rate of tax} in the former Contracting State to a

50a

rate not in excess of 10 percent ^{of the}

gross amount of the dividend. This limitation does not affect the taxation of profits of the corporation which

pays ^{the dividend.}

The ten percent limitation does not

u liere a resident of a Contracting State receives interest income with respect to indebtedness, i. e., debt obligations, guaranteed, insured, or indirectly financed by ^{that Contracting} State or an instrumentality thereof. An example of indirect financing is where an instrumentality of a Contracting State provides funds in the form of an export credit or import credit to a resident thereof for purpose of permitting that resident to extend credit to a resident of the other Contracting State. This concept of indirect financing is also found in the exchange of notes accompanying our recent Japanese Convention.

Paragraph (4) ^provides that the rate limitation in paragraph (2) ^does not apply if the recipient of the interest, being a resident of one Contracting State, has a permanent establishment in the other Contracting State and the indebtedness giving rise to the interest is effectively connected with such permanent establishment. In such a case, under paragraph (6) ^of Article 7 (Business Profits) the interest will be treated as industrial or commercial profits of the recipient.

If excessive interest is paid to a related person, paragraph (5) ^pro- vides that the rate limitations of the article do not apply to the excessive portion of the payment. The excessive portion may ^{be taxed} by ^each Contracting State according to its own laws, including the Convention where applicable. In the case of the United States, the excessive portion may, ^for example, ^{be taxed as} a ^divi- dend, in which case the provisions of Article 10 (Dividends) may apply. Paragraph (6) ^{defines interest for} purposes of the Convention as income from bonds, Government securities, notes or other evidences of indebtedness, whether or not secured and whether or not carrying a right to participate in profits, and ^{debt-claims of}

every kind, as well as all ^{other income} which, under the taxation law of ^the Contracting State in which the income has its source, is assimilated to income from money lent.

Paragraph (7) ^{sets forth} the source rules for interest. With two exceptions, interest will be treated as income from sources within a Contracting State only if paid by that Contracting State, or a political subdivision or local authority thereof, of resident of that Contracting State. Under the first exception, if the person paying the interest (whether or not such person is a resident of one of the Contracting States) has a permanent establishment in one of the Contracting States in connection with which the indebtedness on which the interest is paid was incurred and such interest is borne by the permanent establishment, the interest will be deemed to be from sources within the Contracting State in which the permanent establishment is situated. This exception permits a Contracting State, under the proper circumstances, to impose a tax on interest paid by a permanent establishment therein including a permanent establishment in Romania which borrows money from a resident of the United States and bears the interest, the interest will be deemed to be from Romanian sources. Thus, Romania may tax such income, ^sub- ject to the limitations of this article. As provided in paragraph (8) ^of Article 5 (Permanent Establishment), the rules of Article 5 will be applied to determine whether the resident of France has a permanent establishment in Romania. The United ^States

will not, because of section 861(a) (1) of the Code, impose a tax on ^interest received by nonresident alien individu als or foreign corporations from a Romanian corporation having a ^per- manent establishment in the ^United States unless 50 percent or ^{more of}

the gross income of such ^corporation from all sources for the three-year period ending with the close ^{of its}

taxable year preceding the payment of the interest was effectively con nected with conduct of a ^{trade or}

business within the United ^States.

apply ^{if the recipient,} being a ^resi- dent of the other Contracting State has a permanent esablishment in the former Contracting State and the shares with respect to which the ^divi- dends are paid are effectively connected with such permanent establishment. In such a case, under paragraph (6) ^{of Article} 7 (Business Profits) the dividends are treated as industrial or commercial profits. If the recipient is a citizen of the ^Con- tracting State of which the corporation paying the dividend is a resident, that Contracting State may tax the recipient without regard to this aricle because of the saving clause of paragraph (3) ^{of Article 4} (General ^Rules of Taxation) . It is intended that, for purposes of Article 21 (Relief from Double Taxation), dividends paid by a corporation of a Contracting State are from sources within that Contracting State.

ART. 11. INTEREST

Paragraph (1) ^{provides that inter-} est derived by a resident of one Contracting State from sources within the other Contracting State may be taxed

by ^{both Contracting} States. However, paragraph (2) ^{limits the rate of tax} in that other Contracting State to a rate not in excess of ten percent of the gross amount of the interest.

Paragraph (3) ^{provides that inter-} est beneficially derived by one of the Contracting States, or by an instrumentality of that Contracting State not

subject to tax by that Contracting State on its income, will be exempt from tax by the other Contracting State. Under this rule, interest income derived by ^{the Export-Import} Bank of the United States and the Overseas Private Investment Corporation (OPIC) ^{on loans made to} Romanian residents will be exempt from tax in Romania. The exemption also applies

510

Under the second exception the person paying the ^interest is a

resident of one of the ^Contracting

ties will be treated as income from sources within a Contracting State only

to the extent they are payments made as consideration for the use of, or the right to use, property or rights described in paragraph (3) ^{within that} Contracting State or gains from the sale, exchange, or other disposition of such property or rights. This source rule is similar to the source rule in section 861(a) (4) of the Code.

This article is subject to the saving clause of paragraph (3) ^{of Article 4} (General Rules of Taxation). Therefore, royalties derived by a citizen of the source Contracting State may be taxed by that Contracting State without regard to this article.

ART. 13. CAPITAL GAINS

Under paragraph (1), a resident of one Contracting State will be exempt from tax by the other Contracting State on gains from the sale, exchange, or other disposition of capital assets, e. g., stock or securities, whether such capital assets were acquired by inheritance, gift or any other manner. However, the exemption does not apply if (1) ^the recipient of the gain, being a resident of one Contracting State, has a permanent establishment in the other Contracting State and the property giving rise to the gain is effective ly ^connected with the permanent establishment, or (2) the recipient of the gain, being an individual resident of one Contracting State, is present in the other Contracting State for a period or periods aggregating 183 days or more during the taxable year. If the recipient of the gain is a citizen of the other Contracting State, that Contracting State may tax the recipient without regard to this article because of the saving clause of paragraph

(3) ^{of Article} 4 (General Rules of Taxation). The term "day" for purposes of this article and the other physical presence tests contained in the Convention with regard to an individual means a calendar day during any portion of which the individual is physically present in the relevant Contracting State. Where Articles 6 (In

511

States and has a permanent establishment in a State other than a Contracting State in connection with which the indebtedness on which the interest is paid was incurred and such interest is paid to a resident of the other Contracting State, and such interest is borne by ^such permanent establishment, the interest will be deemed to be from sources within the State in which the permanent establishment is situated. Interest described in the second exception will be exempt from tax in the Contracting State where the payor is a resident because, under Article 4 (General Rules of Taxation), a resident of one Contracting State not a citizen of the other Contracting State may be taxed

by ^{that other} Contracting State only on income from sources within that other Contracting State. For example, if a resident of the United States has a permanent establishment in France which borrows money from a resident of Romania and bears the inter est, the interest will be deemed to be from French sources. Thus, the United States may not tax such income if the recipient resident of Romania is not a citizens of the United States. As provided in paragraph (8) ^{of Article 5} (Permanent Establishment), the rules of Article 5 will be applied to determine whether the resident of the United States has a permanent establishment in France.

This article is subject to the saving clause of paragraph (3) ^{of Article 4} (General Rules of Taxation). Therefore, interest derived by ^{a citizen of} the source Contracting State may be taxed by that Contracting State without regard to this article.

ART. 12. RoYALTIES

Paragraph (1) ^{provides that royal-} ties derived by a resident of one Contracting State from sources within the other Contracting State may be taxed by ^both Contracting States. However, paragraph (2) limits the tax in that other Contracting State to a rate not to exceed 10 percent of the gross amount of cultural royalties or

15 percent of the gross amount of ^in- dustrial royalties. The term "cultural royalties" is ^de- fined as payments of any kind made as consideration for the use of, or the right to use, copyrights of literary, artistic, or scientific works, including copyrights of motion picture films or films or tapes used for radio or television broadcasting. The term "industrial royalties" is defined as payments of any kind made as consideration for the use of, or the right to use, patents, designs, models, plans, secret processes or formulae, trademarks, or other like property or rights, or for knowledge, experience or skill (knowhow) . Cultural royalties and industrial royalties include gains derived from the sale, exchange, or other disposition of such property or rights to the extent the amounts realized on such sale, exchange or other disposition for consideration are contingent on the productivity, use, or disposition of the property or rights. If the amounts realized are not so contingent, the provisions of Article 13 (Capital Gains) may apply.

Paragraph (4) ^provides that tax rate limitations of paragraph (2) shall not apply if the recipient of the royalty, being a resident of one Contracting State, has a permanent establishment in the other Contracting State and the property or right giving rise to the royalty is effectively connected with the permanent establishment. In such a case, under paragraph

(6) ^{of Article} 7 (Business Profits), the royalties will be treated as industrial or commercial profits.

If excessive royalties are paid to a related person, paragraph (5) ^pro- vides that the provisions of the article do not apply to the excessive portion of the royalty. The excessive portion may be taxed by ^each Contracting State according to its own laws, including the Convention where applicable. Thus, the excessive portion may be treated as a dividend or interest, or in whatever other manner is appropriate.

Paragraph (6) provides that royal

coine froni linniovable Propertl ^{), 8} (Shipping and Air Transport) or 12 (Royalties) apply to gains derived from the sale, exchange, or other ^dis- position of rights or property which are covered by those articles, this article does not apply to such gains.

Paragraph (2) ^provides that gains which are effectively connected with a permanent establishment which the recipient has in the other Contracting State will be treated as industrial or commercial profits under paragraph (6) ^{of Article 7 (Business Profits).}

ART. 14. INDEPENDENT PERSONAL

SERVICES

In dealing with the taxation of income from personal services the Convention distinguishes between "independent" and "dependent" personal services. The Convention also provides special treatment for individuals who

Independent personal services are services performed by ^{an individual} in an independent capacity (for his own account) where he receives the income and bears the losses arising from such services. If an individual is an independent contractor he is considered as rendering independent personal services. Generally, services rendered by physicians, lawyers, engineers, architects, dentists and accountants performing personal services as sole proprietors or partners are independent personal services.

Under paragraph (1), ^{income de-} rived by an individual resident of one Contracting State from the performance of personal services in an independent capacity may be taxed by that Contracting State. However, under paragraph (2) ^{such income} derived from services performed in the other Contracting State may also be subject to tax in that other Contracting State if: (a) the individual is present therein for a period or periods aggregating

183 days or more in the taxable year; (b) ^{the individual} maintains a perinanent establishment therein with which the income is effectively connected; or

(c) ^{the individual} is an entertainer,

512

such as a theater, motion picture, radio or television artist, a inusician, or an athlete, who is present therein for a period or periods aggregating more than 90 days in the taxable year or the gross income derived from his personal services as an entertainer in an independent capacity therein exceeds in the aggregate $3, ^{000 or its} equivalent in Romanian lei during the taxable year. Under the saving clause of paragraph (3) ^{of Article 4 (Gen-} eral Rules of Taxation), the other Contracting State may also tax any individual who is a citizen of that Contracting State without regard to this article.

Under paragraph (3), ^{the exemp-} tion of an entertainer is determined without reference to the 90 day or $3, 000 ^test of paragraph 2(c) ^{if the} entertainer is a resident of one Contracting State and is present in the other Contracting State pursuant to a specific arrangement agreed to by the Contracting States. It is contemplated that such a specific arrangement would be agreed to by the Contracting States under the Cultural Relations Agreement between the United States and Romania signed on December 15, 1972 (23 U. S. T. 3741, T. I. A. S. No. 7524) . It is not contemplated that an exchange of artists that was merely encouraged by ^{both Governments,} or a visit by a Romanian performer to the United States that was merely encouraged by an agency of the United States Government, would qualify as such a specific arrangement. However, a specific arrangement need not name the individual performer if he is a member of a group that is clearly identified by the arrangement, such as, for example, a city orchestra.

ART. 15. DEPENDENT PERSONAL SERVICES

Under paragraph (1), ^{wages, sal-} aries, and similar remuneration derived by an individual who is a resident of one Contracting State from labor or personal services performed as an employee, including income from services performed by ^{an officer of a}

corporation or company, may be taxed by ^that Contracting State except as provided in Articles 18 (Governmental Functions), 19 (Teachers), and 20 (Students and Trainees) .

Such income derived from labor or personal services performed in the other Contracting State may also be taxed in that other Contracting State unless: (a) ^the individual is present in that other Contracting State for a period or periods aggregating less than 183 days during the taxable year; (b) the individual is an employee of a resident of the first-mentioned Contracting State or of a permanent establishment maintained in the firstmentioned Contracting State by a resident of the other Contracting State; (c) ^{the remuneration} is not borne as such by ^a permanent establishment which the employer has in the other Contracting State; and (d) in the case of an entertainer, such as a theater, motion picture, radio or television artist, a musician, or an athlete, he is present in the other Contracting State for a period or periods aggregating less than 90 days in the taxable year and the gross income he derives as an employee in the other Contracting State aggregates less than $3, ^{000 or its} equivalent in Romanian lei during the taxable year. Such income may also be taxed by that other Contracting

State without regard to this article if the individual is a citizen of that Contracting State, because of the saving clause of paragraph (3) ^{of Article 4} (General Rules of Taxation),

Under paragraph (3), ^{the exemp-} tion of an entertainer is determined without reference to the 90 day ^and $3, ^{000 test of} paragraph 2(d) ^{if the} entertainer is a resident of ^{one Con-}

tracting State and is present in the other Contracting State pursuant to a specific arrangement agreed ^to by the Contracting States. See ^{the dis-}

cussion under Article 14 ^(Independent Personal Services) for the ^require

ments of a specific ^arrangement.

Under paragraph (4), ^remunera-

tion derived by an ^individual from ^the

performance of labor or ^{personal serv-}

ART. 18. GOVERNMENTAL FUNCTIONS

Under this article, wages, salaries, and similar remuneration, including annuities or similar benefits, paid ^from public funds of ^{one Contracting} State to a citizen of that Contracting State for labor or personal services performed as an employee of the ^national government of that Contracting State, or any agency thereof, in the discharge of functions of a governmental nature will be exempt from tax by the other Contracting State.

In order to avoid a potential conflict as to what constitutes governmental functions, the second sentence of this article provides that labor or personal services performed by ^{a citizen} of one Contracting State shall be treated by the other Contracting State as performed in the discharge of governmental functions if such labor or personal services would be treated under the internal laws of both Contracting State as so performed. Thus, compensation paid in connection with industrial or commercial activity is treated the same as compensation received from a private employer. This article does not include remuneration paid by a political subdivision or a local authority thereof within the exemption.

If the citizen becomes a citizen of, or acquires immigrant status in, the other Contracting State, that other Contracting State may tax the individual without regard to this article. See paragraphs (3) ^and (4) (b) ^{of Article} 4 (General Rules of Taxation).

ART. 19. TEACHERS

Paragraph (1) ^provides that, if a resident of one Contracting State is invited by the other Contracting State, a political subdivision or local authority thereof, or by a university or other recognized educational institution in that other Contracting State to come to that other Contracting State for a period not expected to exceed two years for the purpose of teaching or engaging in research, or both, at a university or other recognized educational insti

513

ices performed as an employee aboard ships ^{or aircraft operated} by a ^resident of one ^Contracting State in international traffic will, notwithstanding paragraph (2), ^{be exempt from tax}

by ^{the other Contracting State if such} individual (even if a ^resident of a State other than ^{a Contracting} State)

is a member of the regular comple ment of the ship or ^aircraft.

ART. 16. PRIVATE PENSIONS AND

ANNUITIES

Except ^as provided in Article 18 (Governmental Functions), pensions

and other similar ^remuneration paid to an individual in consideration of past employment will be taxable under paragraph (1) only ^{in the Contracting} State of which he is a resident. Thus, private pensions and ^{similar remunera-} tion derived from sources ^{within one} Contracting State by an individual resident of the other Contracting State in consideration of past employment are exempt from tax in the first ^Con- tracting State. The term ^{"pensions and} other similar remuneration" is defined in paragraph (4) ^{as periodic payments} (other than social security payments in Article 17 ( Social Security Payments) ) made by reason of retirement or death in consideration for services rendered, or by way of compensation for injuries received in connection with past employment.

Paragraph (2) ^provides that ali

laws of the Contracting ^{State of which}

he is a resident. ^{Thus, the term "ali-}

mony" would not include a payment which would not be ^{taxable to the re-} cipient under ^{the laws of the Contract-}

ing State ^{in which} he is a resident even though such payment is made pursuant to a decree of divorce or of separate maintenance. The explicit ^ref- erence to a decree of compulsory support does not appear ⁱⁿ prior ^United States conventions, but is consistent with section 71 of the Code.

Paragraph (3) provides ^that a ^resi- dent of one Contracting State who ^re- ceives child support payments from a resident of the other Contracting ^State will be exempt from tax on such payments in both Contracting States. The term ^"child support payments" is defined in paragraph (7) ^{as periodic} payments for the support of a minor child made pursuant to a decree of divorce, separate ^maintenance agreement, or support or separation agreement.

The exemptions provided by ^this article for pensions and other similar remuneration, alimony, annuities and child support payments are subject to the saving clause of paragraph (3) ^of Article 4 (General Rules of Taxation) . Therefore, individuals who are citizens or residents of a Contracting State may be taxed by ^that Contracting State without regard to this article.

ART. 17. SOCIAL SECURITY PAYMENTS

This article provides that social ^se- curity payments and other public pensions, e. g., railroad retirement benefits, paid by one Contracting State to an individual who is a resident of the other Contracting State will be exempt from ^{tax in both Contracting} States. Payments described in Article 18 (Governmental Functions) are not covered by this article.

Under paragraph (2) ^{of Article 28} (Termination), this article may be terminated by ^{either Contracting State} at any time after the Convention enters into force.

mony and annuities paid to an ^individ- ual resident of a Contracting State will be taxable only in that Contracting State. The term "annuities" is defined in paragraph (5) as a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than for services rendered) .

The term "alimony" is defined in paragraph (6) ^{as periodic payments} made pursuant to a decree of divorce or compulsory support, separate maintenance agreement, or support or separation agreement which are taxable to the recipient under the internal

paragraph (1) ^and the benefits provided under Article 19 (Teachers), when taken together, may extend only for such period of time, not to exceed five taxable years from the date of the individual's arrival, as may reasonably or customarily be required to effectuate the purpose of the visit. The second sentence of paragraph (4) makes it clear that the benefits provided by Article 19 (Teachers) will not be available to an individual if, during the immediately preceding period, the individual enjoyed the benefits provided by paragraph (1) .

If an individual qualifies for the benefits of more than one of the provisions of Articles 19 (Teachers) and 20 (Students and Trainees), such individual may choose the most favorable provision but may not claim the benefits of more than one provision in any taxable year as a means of avoiding the limitations provided. Thus, for example, an individual who comes to the other Contracting State for the primary purpose of studying may be able to qualify under either paragraph (2) or (3) . However, he cannot combine the maximum exclusion limits in those two paragraphs to exclude $15, 000 during the taxable year. If the individual becomes a citizen of, or acquires immigrant status in, the other Contracting State, that other Contracting State may tax the individual without regard to this article. See paragraphs (3) and (4) (b) ^{of Article 4}

(General Rules of Taxation).

ART. 21. RELIEF FRQM DoUBLE ^TAx-

ATION

In order to avoid double ^taxation each Contracting State agrees in ^this article to provide to its citizens ^{or resi-}

dents a credit against its taxes ^for taxes paid by such persons to ^{the other} Contracting State. The United ^States

agrees to allow a ^{United States citizen} or resident as a credit against ^United States tax an appropriate amount of

Romanian tax in accordance ^{with the}

provisions and subject ^{to the limita-}

tions of the law of ^{the United States}

(as it ^{mav be amended} from time ^to

tution, and if such resident comes to that other Contracting State primarily for such purpose, his income from personal services for teaching or research at the university or educational institution will be exempt from tax by that other Contracting State for a period not exceeding two years from the date of his arrival in that other Contracting State.

Since a temporary visit may be of such a duration that an individual may lose his status as a resident of the ^Con- tracting State of which ^{he was} a ^resi- dent at the time he became eligible for the benefits of this article, the ^individ- ual need only be a resident of such Contracting State at the beginning of his visit. However, if the individual ^be- comes a citizen of, or acquires immigrant status in, the other Contracting State, that other Contracting State may tax the individual without regard to this article. See paragraphs (3) ^and (4) (b) ^{of Article 4 (General Rules of} Taxation) . If the individual's visit exceeds a period of two years from the date of his arrival, the exemption applies only to the income received by the individual before the expiration of such two year period.

The article does not apply to income from research undertaken not in the public interest but primarily for the private benefit of a specific person or persons.

ART. 20. STUDENTS AND TRAINEES

Paragraph (1) provides that an ^in- dividual who is a resident of one Contracting State at the time he becomes temporarily present in the other Contracting State and who is temporarily present therein for the primary purpose of studying at a university or other recognized educational institution, securing training required to qualify him to practice a profession or professional specialty, or studying or doing research as a recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization, will be exempt from tax by that other Contracting State for a period

not exceeding five taxable years from the date of his arrival in that other Contracting State on:

(1) ^{Gifts from abroad for the pur-} pose of his maintenance, education, study, research, or training;

(2) ^The grant, allowance, or award; and

(3) ^{Income from personal} services performed in the other Contracting State not in excess of $2, 000 or its equivalent in Romanian lei for any taxable year.

Under paragraph (2), an individual who is a resident of one Contracting State at the time he becomes temporarily present in the other Contracting State and who is temporarily present therein as an employee of, or under contract with, a resident of the firstmentioned Contracting State, for the primary purpose of acquiring technical, professional, or business experience from a person other than that resident of the first-mentioned Contracting State or other than a person related to such resident, or studying at a university or other recognized educational institution in that other Contracting State, will be exempt from tax

by ^{that other Contracting State on in-} come from personal services not in excess of $5, 000 or its equivalent in Romanian lei for a period not exceeding one year.

Under paragraph (3), ^{an individ-} ual who is a resident of one Contracting State at the time he becomes ^tem- porarily present in the other Contracting State and who is temporarily present therein for a period not exceeding one year, as a participant in a program sponsored by ^{the other Contracting} State, for the primary purpose of training, research, ^or study, ^will be exempt from tax by the other Contracting State with respect to his income from personal services in respect of such training, research, or study performed in that other Contracting State in an aggregate amount not in excess of $10, 000 or its equivalent in Romanian lei.

The first sentence of paragraph (4) provides that the benefits provided in

time without changing the principles of paragraph (1) ). The credit will not exceed the portion of United States

tax which such ^citizen's or ^resident's net income (i. e., ^taxable income) ^from sources within ^{Romania or} on his ^in- come from sources outside of the United States bears ^{to his entire net} income for the ^{same taxable year. This}

provision does not require ^{the United} States to maintain a per-country and overall limitation in the ^{future so} long

as the general principle of a foreign tax credit ^{remains in effect.}

In computing the credit for U. S.

purposes, ^{the Romanian taxes referred}

to in paragraph (1) (a) ^{of Article} 1 (Taxes Covered) ^{will be considered to}

be income taxes. Thus, for example, among the creditable ^Romanian taxes

is the tax on enterprises other than mixed companies or state enterprises, including the tax on foreign commer### cial representatives — even though the

tax applies to income imputed to the representative under a schedule based on the number of employees in the representative's office, and thus might not be creditable under section 901 of the Code. It is intended that any ^in- come of a resident of the United States which has been subject to such a tax

by ^Romania in accordance with the Convention will be treated as income from Romanian sources.

This article also provides that Romania will allow its citizens and residents a credit, under its law, as it may be amended from time to time, against their Romanian tax for taxes paid to the United States. The language as to the tax credit to be allowed by ^Ro- mania is generally parallel to the language with respect to the United States.

ART. 22. NONDISCRIMINATION

Paragraph (1) ^{provides that a citi-} zen of one Contracting State who is a resident of the other Contracting State

shall not be subjected in that other Contracting State to more ^burdensome taxes than a citizen of that other ^Con- tracting State who is a ^{resident there-} of. The determination whether there

is more burdensome taxation is to be

made by comparing the treatment of

individuals who are in comparable ^po- sitions. Thus, for example, ^{a citizen of} Romania who is a resident of the United States and who otherwise meets the requirements specified in section 911 of the Code would under this article be eligible for the benefits of section 911 even though not a ^citi- zen of the United States. On the other hand, just as a United ^{States citizen} who becomes a nonresident alien at any ^time during a taxable year or whose spouse is a nonresident alien at any ^time during a ^taxable year ^cannot file a joint return for that year, a ^Ro- 'manian citizen would not be entitled to

joint return with his spouse if ^either

is a nonresident alien at any time durthe taxable year.

Paragraph (2) ^provides that one Contracting State may not impose more burdensome taxes on residents who are citizens of the other Contracting State or on permanent establishments of residents of the other ^Con- tracting State than it generally imposes on citizens or permanent establishments of residents of third States car

Paragraph (3) ^prohibits one Contracting State from subjecting a corporation of such Contracting State the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State to any taxation or any requirement connected with taxation which is other or more burdensome than those applicable to corporations of the first-mentioned Contracting State carrying on the same activities, the capital of which is wholly or partly owned or controlled

by ^{one or more residents} of a third State.

The criterion in paragraphs (2) ^and (3) ^{is in terms of residents} of third States, or permanent establishments of and corporations owned or controlled by, ^residents of third States, rather than to citizens or residents of that Contracting State, because the Romanian taxation of other foreign busi

rying on ^{the same activities.}

nesses is a more ^relevant comparison than Romanian taxation of domestic businesses which are frequently state enterprises. However, paragraphs (2) and (3) do not require a Contracting State to grant to citizens or permanent establishments of residents of the other Contracting State, or to corporations owned or controlled by such residents, tax benefits granted by ^{special agree-} ments, e. g., ^bilateral income tax conventions, to citizens or residents of a third State or corporations owned or controlled by such residents.

Under paragraph (3) ^{of Article} 1 (Taxes Covered), the provisions of this article extend to all taxes of every kind whether imposed at the national, state, or local level.

ART. 23. MUTUAL AGREEMENT PRO CEDURE

When a resident of one Contracting State considers that action of one or both Contracting States results or will result for him in taxation not in accordance with the Convention, such resident may, notwithstanding the remedies provided by the national laws of the Contracting States, present his case to the competent authority of the Contracting State of which he is a resident or citizen. A resident of a Contracting State need not, although it is anticipated that in the normal situation he will, exhaust his other administrative or judicial remedies prior to resorting to the use of the mutual agreement procedure. If the claim is considered to have merit by the competent authority, that competent authority must endeavor to come to an agreement with the competent authority of the other Contracting State with a view to the avoidance of taxation not in accordance with the Convention.

Paragraph (2) ^{requires the compe-} tent authorities of the two Contracting States to endeavor to resolve by mutual agreement any difficulties or doubts arising as to the application of the Convention. In particular, the competent authorities may agree to the same attribution of industrial or com

515

mercial profits to a resident of on= Contracting State and its permanent establishment situated in the other Contracting State; the same allocation of income, deductions, credits, or allowances between a resident of one Contracting State and a related person and to the readjustment of taxes imposed by each Contracting State to reflect such allocation; the same determination of the source of particular items of income; and the same characterization of particular items of income.

Under paragraph (3), ^{in imple-} menting the provisions of this article, the competent authorities may ^com- municate with each other directly and, when advisable, meet together for an exchange of opinions.

Under paragraph (4), ^{in cases in} which the competent authorities reach an agreement, taxes will be imposed on such income, and refund or credit of taxes allowed, by ^{the Contracting} States in accordance with such agreement. This permits the issuance of a refund or credit notwithstanding procedural barriers otherwise existing under a Contracting State's law, such as the statute of limitations.

ART. 24. ExcHANGE OF INFORMA

TION

Paragraph (1) ^{provides for a sys-} tem of administrative cooperation between the competent authorities of the two Contracting States by requiring an exchange of information necessary for carrying out the provisions of the Convention or for the prevention of fraud or for the administration of statutory provisions concerning taxes to which the Convention applies. The competent authorities may exchange information in connection with tax compliance generally, not merely illegal ^{acts or crimes.}

Under paragraph (2) ^information exchanged must be treated as secret except that it may be disclosed to any person charged with, or made part of a public record with respect to, the assessment, collection, enforcement of, or litigation with respect to, the taxes

516

to which the Convention applies. Thus, disclosure is not prohibited as a part of a public proceeding before a court or administrative body. The article provides two limitations on what kind of information can be exchanget. ^'. Under paragraph (1), the information must be of a class that can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes. Thus, a Contracting State requested to furnish information will use the standard it uses in the enforcement of its own laws by its administrative and judicial authorities, treating the tax of the Contracting State with respect to which the request relates as if it were a tax of the Contracting State requested to furnish the information and were being imposed by such Contracting State. Under paragraph (3), no information will be exchanged which would be contrary to public policy.

Under paragraph (4), ^depositions of witnesses and copies of unedited original documents (including books, papers, statements, records, accounts, or writings) shall be provided by ^the competent authority of a Contracting State if specifically requested by ^the competent authority of the other Contracting State to the same extent that such depositions and documents can be obtained under the laws and administrative practices of each Contracting State with respect to its own taxes. The standard to be used by a Contracting State, when requested to provide such depositions and documents, is the same standard as described above under paragraph (1) .

Although implicit in any tax convention providing for exchange of information, paragraph (5) ^{provides that} any depositions and evidence which may be furnished in accordance with this article shall not be withheld by reason of any doctrine of law under which international judicial assistance is not accorded in tax matters.

Paragraph (6) ^{provides for the ex-} change of information on either a routine basis or on request with reference

to particular cases. The competent authorities may agree on the list of information to be furnished on a routine basis.

ART. 25. %EMBERS OF DIPLOMATIC MISSIONS AND CONSULAR OFFICES

This article provides that nothing in the Convention will affect the fiscal privileges of members of diplomatic missions and consular offices under the general rules and norms of international law or under the provisions of special agreements. This is merely a special case of the general rule provided in paragraph (2) ^{of Article} 4 (General Rules of Taxation) .

ART. 26. As sIsTANGE IN CQLLEGTION

This article provides for mutual assistance in the collection of taxes where required to insure that the benefits of the Convention will only be extended to persons entitled to such benefits. It does not in any way affect rights of residents of the Contracting States under the Convention.

Paragraph (1) ^provides that each Contracting State will endeavor to collect on behalf of the other Contracting State such taxes imposed by that other Contracting State as will ensure that any exemption or reduced rate of tax granted under the Convention will not be enjoyed by persons not entitled to those benefits. However, paragraph (2) ^{makes clear that this does not im-}

pose on a Contracting State the ^obli- gation to carry out measures at ^vari- ance with the laws or administrative practices of either Contracting State with respect to collection of its ^own taxes.

ART. 27. ENTRY INTo FoRGE

This article provides that the ^Con-

vention is subject to ratification and for the exchange of instruments of ratification. The Convention will enter

into force one month after ^{the date of}

exchange of such ^instruments of ^ratifi-

cation, The provisions of ^{the Conven-}

tion shall first have effect ^{with respect} to income of calendar years ^{or taxable}

years beginning (or in ^{the case of}

taxes payable at source, payments made) on ^or after January 1, 1974. It

is intended ^for purposes of this article and Article 28 (Termination) that the reference to calendar years applies only ^{to cases where the taxable} year ^is the calendar year.

ART. 28. TERMINATION

Paragraph (1) ^provides that the Convention will continue in effect ^in-

definitely, but that it may be terminated by either Contracting State at

any ^{time after five years from the date} it enters into force. A Contracting State seeking to terminate the ^Conven-

tion must give notice at least six months before the end of the calendar

year through diplomatic channels. If the Convention is terminated, such termination will be effective with ^re-

spect to income of ^calendar years ^or taxable years beginning (or, in the case of taxes payable at source, payments made) on or after January 1 next fol lowing the expiration of ^{the six month} period.

Under paragraph (2), ^{the provi-} sions of Article 17 (Social Security Payments) may be terminated by either Contracting State at any time after the Convention enters into force

by prior ^notice given through diplomatic channels.

in accordance ^{with the procedure} established in the convention.

The Treasury also announced that the income tax convention between the United States and the United Kingdom as extended in 1959 to the Peoples Democratic Republic of Yemen (then part of Aden) has been inapplicable to the People's Democratic Republic of Yemen since that country became independent on November 30, 1967. The government of Yemen did not take the necessary steps to affirm that it was assuming the obligation of the income tax convention. The convention is therefore considered inapplicable to the People' s Democratic Republic of Yemen by the United States.

Public Law 94-273 94th Congress, S. 2445' April 21, 1976

An Act to provide permanent changes in laws necessary because of the October-September fiscal year.

Be it enacted by ^{the Senate and} House of Representatives of the United States of America in Congress assembled, that this Act may be cited

SEc. 2. The following provisions of law are amended by deleting

serting "September" in lieu thereof:

(7) ^section 2 of the Land and Water Conservation Fund Act, as amended (16 U. S. C. 4601-5) [Pub. L. 88-578, 1964-2 C. B. 654];

(17) section 402 of the Act of November 13, 1966 (31 U. S. C. 757f)

t This publication oi the tsw is restricted to excerpts involving t'ax tnatters; Senate Report No. 94-469 and House Report No. 94-1000 are not published.

(Filed by the Office of the Federal Register

on July 28, 1976, 8:45 a. m., and published in the issue of the Federal Register for July 29, 1976, 41 F. R. 31578)

Subpart B. — Legislation and Related Committee Reports

[Pub. L. 89-809, 1966-2 C. B, 656], ^ex- cept for the reference to June 30, 1967;

SEc. 3. The following provisions of law are amended by deleting

(4) ^sections 5(b) ^and 201(b) ^{of the} Land and Water Conservation Fund Act (16 U. S. C. 4601-7(b) and 4601 11(b)) [Pub. L. 88-578, ^1964-2 C. B. 654];

SEc. 5. The following provisions of law are amended by deleting "Decem##### ber, " wherever it appears, and inserting ^"March" in lieu thereof—

(4) ^section 103(a) ^of the Act of June 6, 1972 (31 U. S. C. 1203(a) )

[Pub. L. 92-310, 1972-2 C. B. 670];

SEc. 12. The following provisions of law are amended by deleting "March" and inserting "June" in lieu thereof—

(2) ^section 105(a) (2) ^{of the Act} of October 20, 1972 (31 U. S. C. 1224

(a) (2) ) [Pub. L. 92-512, ^1972-2 C. B. 684]; and

SEc. 18. Section 209(e) (1) of the Highway Revenue Act of 1956 (23 U. S. C. 120 note) [Pub. L. 627, 1956-2 C. B. 1150], is amended by ^deleting "March" and "June 30" and inserting

tively, in lieu thereof.

SEc. 38. Sections 6(a) (1) (D) and (E) ^{of the Alaska} Native Claims Settlement Act (43 U. S. C. 1605) [Pub. L. 92-203, 1972-1 C. B. 490] are amended to read as follows:

"(D) $40, 000, 000 during the period beginning July 1, 1976, and ending September 30, 1976; and

"(E) $30, 000, 000 during each of the

517

United States — United Kingdom Income Tax Convention Not Applicable to Southern Rhodesia or to Yemen

In response to inquiries the Treasury Department announced that the income tax convention between the United States and the United Kingdom, as extended in 1959 to Southern Rhodesia (then part of the Federation of Rhodesia and Nyasaland) [1960-2 C. B. 653] has not applied to Southern Rhodesia since January 1, ^{1974. The} extension of the U. S. -U. K. tax treaty to Southern Rhodesia was terminated

by the United States, effective January 1, 1974, by diplomatic note to the Government of the United Kingdom