ARTICLE 19

Government Service

Paragraph 1 of Article 19 deals with the taxation of remuneration for services rendered to the Government of a Contracting State, including political subdivisions and local authorities of those States, in connection with Governmental activities. The paragraph applies both to government employees and to independent contractors engaged by governments to perform services for them. Paragraph 2 deals with the taxation of pensions in respect of the services referred to in paragraph 1.

Paragraph 1

Subparagraph (a) provides that remuneration paid by, or out of funds created by one of the States or its political subdivisions or local authorities to an individual who is rendering services to that State, political subdivision or local authority is exempt from tax by the other State. Paragraph 3 makes clear that the services dealt with in paragraph 1 must be rendered in the discharge of governmental functions.

Subparagraph (b) provides an exception to the rule in subparagraph (a). Under this subparagraph, such payments are taxable exclusively in the other State (i.e., the host State) if the services are rendered in that other State and the individual is a resident of that State who is either a national of that State or a person who did not become resident of that State solely for purposes of rendering the services. For example, if the U.S. Embassy in Pretoria hires a South African citizen, or a South African resident who was already resident there before applying for the position in the Embassy, the salary that the person receives from the U.S. Embassy will be subject to tax only in South Africa.

The use of the phrase "paid by, or out of funds created by, a Contracting State" is intended to clarify that remuneration and pensions paid by such entities as government-owned corporations are covered by the Article, as long as the other conditions of the Article are satisfied.

Paragraph 2

Paragraph 2 deals with the taxation of a pension paid by, or out of funds created by, one of the States or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority (i.e., the services dealt with in paragraph 1). Subparagraph (a) provides that such a pension is taxable only in that State. Subparagraph (b) provides an exception under which such a pension is taxable only in the other State if the individual is a resident of, and a national of, that other State. Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When benefits paid by a State in respect of services rendered to that State or a subdivision or authority are in the form of social security benefits, however, those payments are covered by paragraph 2 of Article 18 (Pensions and Annuities). The result will usually be the same whether Article 18 or 19 applies, since social security benefits are taxable exclusively by the source country and so, as a general matter, are government pensions. The result will differ only when the payment is made to a citizen and resident of the other Contracting State, who is not also a citizen of the paying State. In such a case, social security benefits continue to be taxable at source while government pensions become taxable only in the residence country.

Paragraph 3

Paragraph 3 provides that payments in respect of services rendered in connection with a trade or business carried on by a Contracting State, or a political subdivision or local authority of that State are not covered by Article 19. This applies both to remuneration for services and to pensions. This is analogous to the language in the U.S. Model that limits the application of