ARTICLE 5. SOUB0E OF INCOME

This Article sets forth in a single provision all of the various rules which are to be applied to determine the source of the different kinds of income covered by the treaty: dividends, interest, royalties, income from real property, including gains derived from the sale of such property, and compensation for

personal services. These rules affect the application of Article 3 (General Rules of Taxation) and Article 4 (Relief from Double Taxation).

The source of any kind of income not covered by the treaty shall be determined under the internal law of the two States. In the case of different source rules

applicable to an item of income the competent authorities of the two States under the mutual agreement procedure may establish a common source for the item of income.

Dividends paid by a corporation of one State are treated as from sources within that State and dividends paid by any other corporation are treated as

from sources outside that State. However, dividends paid by a Trinidad and Tobago corporation shall be treated as income from sources within the United States if, for the 3-year period ending with the close of Its taxable year preced­ ing the declaration of such dividend (or for such portion of that period as the corporation has been in existence), such corporation (a) had a permanent establishment in the United States, and (b) derived 50 percent or more of its gross Income from the induistrial or commercial profits effectively connected vith

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the industrial or commercial activity engaged in through such permanent estab­ lishment. The provision was included to offset a provision in Trinidad and Tobago law which imposed a withholding tax on remitted profits of a United States permanent establishment in Trinidad and Tobago. However, the amount of the dividend to be treated as from United States sources under this pro­ vision is not to exceed an amount which bears the same ratio to the entire divi­ dend as the gross income of the corporation for such period which is effectively connected with the commercial or industrial activity engaged in through such permanent establishment within the United States bears to its gross income from all sources. A further limitation is that in no case shall the amount of such dividend which is treated as income from sources within the United States exceed the net amount of money or money's worth transferred from such per­ manent establishment during such period. This rule as applied to dividends paid by a Trinidad and Tobago corporation conforms to United States statutory law except that, under section 861 (a) (2) (B) of the Internal Revenue Code, there is no limitation regarding the net amount of money or money's worth transferred. This limitation which is similar to a provision in the laws of Trinidad and Tobago is intended to insure that the United States will not treat

dividends paid by a Trinidad and Tobago corporation as income from United States sources to the extent the profits of a permanent establishment which such corporation maintains in the United States are retained and reinvested.

Interest paid by that State, including any local government within such State, or by a resident of such State is treated as from sources within that State. Interest paid by any other person will be treated as from sources outside that

State. However, interest paid by a resident of any State with a permanent establishment in any other State, directly or indirectly, out of the funds of such permanent establishment will be treated as income from sources within the State where such permanent establishment is located. The rules set forth above in the first two sentences correspond generally to the Internal Revenue Code provision dealing with interest (other than interest on deposit with per­ sons carrying on the banking business). The exception to this general rule, set forth above in the third sentence, is not contained In the Internal Revenue Code but is substantially similar to the same rule in the United States-Belgian Income Tax Convention signed July 9,1970.

Boyalties paid for the use of, or the right to use, property described In para­ graph (4) of Article 14 (Royalties) in a State are treated as income from sources within that State.

Income from real property and royalty income from the operation of mines, quarries, or other natural resources are to be treated as income from sources

within the State in which such property is located.

Income from the rental of tangible personal property is to be treated as in­ come from sources within the State in which such property is located when

rented. Notwithstanding some minor differences in terms compared with Uke provisions in recent treaties, this language is intended to reflect the rule of .the Internal Revenue Code and recent treaties that the source of such rental income is the State in which the property is located during the period of the lease..

Compensation received by an individual for his performance of personal serv­ ices and income received by a person from the furnishing of personal services of

another are to be treated as income from sources within the State In which such services are performed. If services are performed partly within and patly out­ side any State, Income from the performance or furnishing of such services shall be treated as income from sources partly within and partly outside that State. Compensation for personal services, and private pensions and annuities paid in respect .of such services, performed aboard ships or aircraft operated in international traffic by a resident of a State and, in the case of the United

States, registered in the United States, provided the services are performed by a member of the regular complement of the ship or aircraft, are to be treated as income from sources within that State.

Income from the purchase and sale of personal movable property is to be treated as income from sources within the State In which such property Is sold. This rule conforms to the rule set forth in section 861 (a) (6) of the Internal Revenue Code.

Notwithstanding the rules contained in paragraphs (1) through (7), indus­ trial and commercial profits attributable to a permanent establishment which the recipient, being a resident of one State has in the other State, including

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income dealt with in the articles pertaining to dividends, interest, royalties, and income from real property if from rights or property which are effectively con­ nected with such permanent establishment, shall be treated solely as income from sources within that other State. The factors taken into account in determining

whether such effective connection exists will include whether the income is derived from property used, or held for use, in the conduct of the commercial or

industrial activities carried on through such permanent establishment or whether the commercial or industrial activities carried on through such perma­ nent establishment were a material factor in the realization of the income. As previously noted under Article 3 (General Rules of Taxation), this source rule conforms to United States policy governing the taxation of business profits and investment income as expressed in the Foreign Investors Tax Act of 1966. Such policy is also reflected in the recent French Convention as well as the protocols

to the German, Netherlands, and United Kingdom Conventions.

Several of the source rules set out in this Article differ to some degree from those existing in the Internal Revenue Code. Since Article 3 (General Rules of Taxation) provides that the Convention will not increase a person's United

States tax, a taxpayer is entitled to use the more beneficial of the Code or Convention rules 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.

The rule on interest in this Article permits Trinidad and Tobago, under the proper circumstances, to impose a tax on any interest paid by a permanent

establishment in Trinidad and Tobago of a United States corporation. 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 derives 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 resident 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 two States.

Generally, the rules are only applicable for taxing residents of either State and, therefore, are not applicable in determining source of income of residents of other States. although the income of such other residents is of a type referred to in this Article.