Article 2 provides that the Convention applies to national

taxes on income imposed by the Contracting States at the time of
signature of the Convention and identifies the existing U.S. and
Tunisian taxes to which the Convention applies. It also provides

that the Convention applies to any identical or substantially

similar taxes imposed subsequent to that time.

Paragraph 2 identifies the existing taxes to which the

Convention applies. It was amended by Article I of the Protocol
to clarify that the U.S. income taxes covered include the changes

to the Internal Revenue Code made by the Tax Reform of 1986 and the technical corrections thereto, and to update *the list of Tunisian income taxes by substituting the tax on industrial and

commercial profits and the tax on corporations for the former reference to the business profits tax. The Convention does not

apply to the United States accumulated earnings tax, the personal

holding company tax, or social security taxes. The Convention does not apply to Federal taxes other than income taxes or, except as provided in Article 24 (Non-Discrimination), to any State or local taxes. For purposes of Article 24, the scope of

the Convention is expanded to apply to taxes of all kinds imposed
at all levels of government in the United States and Tunisia.

Paragraph 3 provides that taxes imposed after the date of

signature of the Convention also are covered if they are

substantially similar to the taxes referred to in paragraph 2. The competent authorities agree to advise each other of major

changes in their respective income tax laws.
Article 3. GENERAL DEFINITIONS
   Paragraph 1 defines the meaning of certain terms as they are

used in the Convention. Unless the context otherwise requires,

the defined terms have the same meaning throughout the

Convention. A number of other important terms are defined in other articles. For example, see Article 4 (Fiscal Domicile), Article 5 (Permanent Establishment), and the definitions of dividends, interest, and royalties in Articles 10, 11, and 12,

respectively.

The terms "person", "company", and "enterprise of a

Contracting State" or "enterprise of the other Contracting State"

are consistent with the definitions in the U.S. model draft

income tax treaty published in June, 1981 (the "U.S. Model"). A

partnership is included in the definition of a person as a body

of persons.

   The competent authority for the United States is the
Secretary of the Treasury or his delegate. The Secretary of the

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Treasury has delegated the competent authority function to the Commissioner of Internal Revenue, who has, in turn, redelegated the authority to the Assistant Commissioner (International). With respect to interpretive issues, the Assistant Commissioner

acts with the concurrence of the Associate Chief Counsel

(International) of the Internal Revenue Service. The competent

authority for Tunisia is the Minister of Finance or his
 representative.

Subparagraphs e) and f) of paragraph 1 define the

geographical scope of the two countries to include the adjacent

 seas to the extent that, under international law, the respective
 country may exercise rights with respect to natural resources of
*the seabed and marine subsoil of such areas. Though not
 specified, the term "United States" is understood not to apply to
 Puerto Rico or to other U.S. possessions or territories.
   The definition of international traffic is the same as in the

U.S. Model. It includes any transport by a ship or aircraft

 except to the extent that the transport is solely between places
 in a Contracting State. Thus, for example, a trip which begins

in Tunis, stops in New York, and continues to Chicago is inter­ national traffic except to the extent that passengers or cargo board at New York. To the extent that passengers or cargo are carried only on the New York-Chicago portion of the trip, the transport is not considered international traffic, and the sub­

stantive taxing rules of Article 8 (Shipping and Air Transport),

therefore, do not apply. In such a case, the income would be taxed as business profits under Article 7, and if derived by an

enterprise of Tunisia would be taxable in the United States only

if attributable to a U.S. permanent establishment and then, only on a net basis. The gross basis U.S. tax (Code section 887)

would not apply under these circumstances.

Paragraph 2 provides that undefined terms shall be defined

according to the law of the Contracting State whose tax is being
determined. However, if the meaning differs from that under the

law of the other Contracting State, or if it is not readily determinable, the competent authorities may establish a common

meaning for the purposes of the Convention. This common meaning

need not conform to the meaning of the term under the laws of

either Contracting State.
Article 4. FISCAL DOMICILE

This Article defines those persons who are residents of the

United States or Tunisia for purposes of the Convention.
Paragraph 1, as amended by the Protocol, begins by stating that a

resident of a Contracting State means the State itself or a political subdivision or local authority thereof and any person

 liable to tax in that State by reason of such person's domicile,

residence, place of management, place of incorporation or any

other similar criterion. A U.S. citizen or an alien admitted as
a permanent resident (a "green card" holder) who resides outside

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the United States will be considered a U.S. resident for Tunisian

tax purposes only if the individual has a substantial presence,

permanent home, or habitual abode in the United States. For this

purpose, "substantial presence" is defined as in Code section

7701 (b). The reference to "liable to taxation" in this

paragraph does not cause a tax-exempt organization to lose its

status as a resident.

Although the explicit reference in the U.S. Model to
partnerships was deleted in the interests of conformity with the

OECD Model, it is understood that a partnership is considered a resident of a Contracting State only to the extent that the income it derives is taxed as the income of a resident of that State. This understanding applies for purposes of determining the extent to which the partnership is entitled to treaty benefits with respect to the income which it receives from the

other Contracting State and the extent to which a resident of the

other Contracting State is entitled to treaty benefits with

respect to income paid by such person.

A person who is a resident of only one of the Contracting

States under their respective taxation laws need look no further

than paragraph 1. Paragraphs 2 and 3 address cases of dual

residence.

If an individual is considered a resident of both States under their respective domestic laws, paragraph 2 provides a series of "tie breakers" to assign a single residence for

purposes of the Convention. The first test is where the

individual has a permanent home, i.e. where he resides with his family. If the individual has a permanent home in both States, he is deemed to be a resident of the State with which his personal and economic relations are closer. If that test is inconclusive, or if he does not have a permanent home in either

State, the deciding factor is where he has a habitual abode. If
the individual has a habitual abode in both States or in neither

of them, he is deemed to be a resident of the State of which he

is a national. If nationality fails to assign 3 single

residence, the competent authorities are charged with settling

the question.

Once an individual is determined to be a resident of a Contracting State under paragraph 1 or 2, that definition of

residence prevails for all purposes of the Convention, including
the "saving clause" of Article 22 (General Rules).

Paragraph 3 provides that, where a person other than an

individual is a resident of both Contracting States, the
competent authorities will attempt to agree on a single

residence. Tunisia's standard of residence for companies is

based on the place of effective management.

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Article 5. PERMANENT ESTABLISHMENT

The rules governing the taxation by a Contracting State of

business income derived by a resident of the other State utilize
the concept of a "permanent establishment". Paragraph 1 of this
Article defines that concept in general terms, and the following
paragraphs give some specific illustrations.

Paragraph 2 identifies a place of management, a branch, an

office, a factory, a workshop, and a place of extraction, such as
a well or quarry, as examples of a permanent establishment.

Paragraph 3 provides that certain activities constitute a permanent establishment if they are carried on for more than a specified period of time. A building site, a construction

project, an assembly or installation project, or an installation,

rig or ship used in exploration or development of natural resources will be considered a permanent establishment if the site, project, or activity continues for more than 183 days in

any 365 day period. Supervisory activities connected with such a

site, project, or activity are taken into account in measuring the 183 day period. These time thresholds are meant to be

applied as explained in the commentaries to the OECD and UN model

draft income tax Conventions. In each case the 183 day period

begins when the enterprise first begins work at the construction

or drilling site or assembly or installation project, or when a supervisor begins work at such a site or project. Temporary interruptions of work, for example, due to weather or supply

shortages, do not stop the running of the time period. Each site
or project is considered separately. Paragraph 3 is similar, in

its scope and time threshold, to paragraph 3(a) of Article 5 of

the U.N. model.

  Paragraph 4 enumerates certain activities which may be

undertaken in a Contracting State by a resident of the other Contracting State without creating a permanent establishment. Those activities, (described in subparagraphs (a) through (e)), include using facilities or maintaining a stock of goods solely for the purposes of storage, display, or delivery of goods belonging to the enterprise; maintaining goods belonging to the

resident solely for the purposes of processing by another person;

maintaining a fixed place of business solely for the purpose of

purchasing goods or collecting information for the resident; and

maintaining a fixed place of business solely for preparatory or

auxiliary activities of the resident, such as advertising,
supplying information, or scientific research. Under sub­
paragraph (f), these activities may be carried on in combination
as long as the overall activity remains preparatory or auxiliary

to the principal activities of the enterprise. The limitation

contained in subparagraph (f) relating to the preparatory or aux­

iliary character of a combination of activities is a departure from the U.S. Model, but it is consistent with the OECD and

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U.N. models and has been included in some other U.S. treaties,

especially with developing countries.

Paragraphs 5 and 6 describe the permanent establishment implications of employees and agents. An independent agent, as explained in paragraph 6, does not constitute a permanent es­

tablishment of the enterprise(s) using his services. Paragraph 5

provides that a person other than an independent agent who acts in one of the Contracting States on behalf of a resident of the other State is considered a permanent establishment of that re­ sident if he habitually concludes contracts for the resident,

unless his activities are limited to those described in paragraph
4 as not constituting a permanent establishment.

Paragraph 7 states that control of one company by another does not of itself cause either company to be a permanent

establishment of the other.
   Paragraph 8 provides a special rule for insurance companies.

It comes from the UN model and was included at the request of

Tunisia. An insurance company which is a resident of one of the

Contracting States and which receives premiums from or insures risks in the other State through a person other than an inde­ pendent agent described in paragraph 5 is considered to have a permanent establishment in the other State; thus, such a person constitutes a permanent establishment of the insurance company even though he does not have the authority to conclude contracts

on its behalf.
Article 6. INCOME FROM REAL PROPERTY

   This Article provides that income of a resident of a

Contracting State derived from real property situated in the other Contracting State may be taxed in the Contracting State where such property is situated. This rule applies to income from the leasing or use in any form of real property, including income from agriculture or forestry. It applies to income from

immovable property of an enterprise or income from such property
which is used for the performance of independent personal
services.

The term "real property" is defined under the law of the

Contracting State in which the property is situated. However, it
includes livestock and equipment used in agriculture or forestry

and rights with respect to the extraction of minerals and other natural resources. Income on indebtedness secured by immovable

property or by a right giving rise to income from the extraction

of natural resources is not considered income from immovable property. Such income is treated as interest subject to the

provisions of Article 11 (Interest).

This Article does not prescribe the manner in which real property income is to be taxed by the State of source. United States law permits taxation on a net basis. Tunisia taxes on a

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net basis where the accounts permit determination of the net income; in other cases the tax may be imposed on a calculated

basis of gross receipts less specified expenses.

Income from immovable property may also be taxed in the

Contracting State of which the beneficial owner is a resident or

citizen in accordance with paragraph 2 of Article 22 (General

Rules), subject to relief from double taxation in accordance with
Article 23 (Relief from Double Taxation).
Article 7. BUSINESS PROFITS
   This Article provides rules for the taxation by a Contracting

State of income from business activity carried on by a resident

of the other State.

Paragraph 1 provides that the business profits of a resident

of a Contracting State shall be taxable only by that State unless

the resident carries on or has carried on business through a

permanent establishment in the other Contracting State.
   Article III of the Protocol contains an understanding of the

Contracting States regarding the implementation of this Article

and related provisions of Articles 10 (Dividends), 11 (Interest),

12 (Royalties), 13 (Capital Gains), 14 (Independent Personal

Services), and 21 (Other Income). The Protocol incorporates the

principle of Code section 864(c)(6) into the Convention. Any

income or gain attributable to a permanent establishment (or, in

the context of Articles 10, 11, 12, 13, 14 and 21, a fixed base

as well) during its existence is taxable in the Contracting State

where the permanent establishment (or fixed base) is situated even if the payments are deferred until after the permanent

establishment (or fixed base) no longer exists.

   Paragraph 2 provides that the profits to be attributed to the

permanent establishment are those which it might be expected to make if it were an independent entity engaged in the same or similar activities under the same or similar conditions and dealing on an arm's length basis with its home office and with any other associated enterprises. The term "attributable to"

means that the limited "force-of-attraction" rule of Code section
864(c)(3) does not apply for U.S. tax purposes under the Conven­
tion. Profits may, however, be from sources within or without a
Contracting State and be "attributable to" a permanent establish­

ment. Thus, for example, items of income described in section 864(c)(4)(B) of the Code which are attributable to a permanent establishment in the United States are subject to tax by the

United States.

Paragraph 3 provides that deductions shall be allowed of expenses incurred for the purposes of the permanent establish­

ment, whether incurred in the State where the permanent

establishment is located or elsewhere. Deductible expenses

include a reasonable allocation to the permanent establishment of

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general overhead expenses, including administrative and executive
expenses. This provision was taken from the OECD Model. It is

understood that this rule overrides Tunisia's statutory limita­

tion of such overhead expense deductions. The paragraph adds the
provision of the U.N. model that payments of interest, royalties,

fees and commissions by a permanent establishment to its home

office are not deducted in determining the profits of the perma­

nent establishment except to the extent that they represent

reimbursement of costs incurred.

Paragraph 4 provides that the mere purchase by a permanent establishment of goods or merchandise for the resident of which

it is a permanent establishment shall not result in profits being
attributed to the permanent establishment.

Paragraph 5 provides that the method of determining profits attributable to a permanent establishment shall not be changed

from year to year unless there is good and sufficient reason for
such a change.

Paragraph 6 provides that, where business profits include items of income dealt with separately in other articles of the Convention, the provisions of those separate articles override

the provisions of this Article. Thus, for example, the taxation
of income from international shipping and air transport is dealt
with in Article 8 (Shipping and Air Transport). The taxation of

dividends, interest, and royalties is controlled by Articles 10 (Dividends), 11 (Interest), and 12 (Royalties); however, those

Articles provide that where the assets giving rise to dividends,

interest, or royalties derived by a resident of a Contracting

State are effectively connected with a permanent establishment or

fixed base of that resident in the other Contracting state, the resulting income is taxable on a net basis in accordance with

this Article or Article 14 (Independent Personal Services).

Paragraph 7 is a special rule, inserted at the request of Tunisia, to make it clear that Tunisia may tax the participants

in a Tunisian joint venture on their shares in the profits of the
joint venture.
   Paragraph 8 was inserted at the request of Tunisia to permit

the tax authorities of a Contracting State to apply the provis­

ions of internal law in determining tax liability in cases where

the information available to the competent authority is not

adequate to measure accurately the profits of a permanent estab­

lishment. The Internal Revenue Service would have this power

even in the absence of such a specific provision. The determina­

tion of profits in such cases, based on the available informa­ tion, must be done consistently with the principles of this Article, i.e., it must seek to reflect arm's length pricing and

appropriaE- Jeductions of expenses.

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Article 8. SHIPPING AND AIR TRANSPORT

Paragraph 1 limits the right of a Contracting State to tax income derived by an enterprise from the operation of ships or aircraft in international traffic. Tunisia may tax only if the

effective management of the enterprise is in Tunisia (or, if the
effective management is on board a ship which either has its home

harbor in Tunisia or, if the home harbor is not known, is operated by a resident of Tunisia); these rules come from the OECD model. The United States may tax only if the enterprise is created under U.S. law. In effect, a Contracting State may tax such income only if the enterprise is a resident of that State for tax purposes under domestic law. A dual resident company may be taxed by both States, subject to relief from

double taxation in accordance with Article 23 (Relief from Double

Taxation). "International traffic" is defined in Article 3

(General Definitions). This Article takes precedence over

Article 7 (Business Profits). Thus, each State must exempt a

resident of the other State even if the income is attributable to
a permanent establishment in the first State.

Paragraph 2 defines the scope of income eligible for the exemption. Income from the operation of ships or aircraft in international traffic is defined to include income from the rental on a full or bareboat basis of ships or aircraft used in

international traffic, if either the ship or aircraft is used in

international traffic by the lessee or the rental income is occasional and accessory to operating income. Income derived from the use, maintenance, or leasing of containers and related equipment used in international traffic is covered by this Article if the income is occasional and accessory to income described in paragraph 1, i.e., if the resident deriving the income is engaged in interiETonal shipping or aircraft opera­ tions and the container leasing activity is relatively minor in relation to those operations. Income from the leasing of containers by leasing companies not engaged in international shipping or air transport is covered by Articles 7 (Business

Profits) or 14 (Independent Personal Services), which provide for

taxation at source only to the extent that the income is

attributable to a permanent establishment or fixed base.
   Paragraph 3 provides that the provisions of paragraph 1 also

apply to profits from participation in a pool or other joint business engaging in international shipping or air transport.

Thus, for example, if a Tunisian and an Algerian airline
participate in a joint venture which flies to the United States,

the share of profits derived by the Tunisian airline would be exempt from U.S. tax under this provision. As with any benefit of the Convention, the enterprise claiming the benefit must be entitled to it under the provisions of paragraphs 5, 6 and 7 of

Article 25 (Mutual Agreement Procedure) as added by the Protocol.

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Article 9. ASSOCIATED ENTERPRISES

   This Article complements section 482 of the Code and confirms

the right of the Contracting States to reallocate income in

certain cases. Under paragraph 1, if conditions between associ­

ated enterprises in their commercial or financial relations differ from those that would be made between independent enter­ prises, any profits that would, but for those conditions, have

accrued to one of the enterprises, but by reason of those condi­
tions have not so accrued, may be included in the profits of that

enterprise and taxed accordingly. This rule applies in cases

where an enterprise of a Contracting State participates directly
or indirectly in the management, control, or capital of an enter­
prise of the other Contracting State or the same persons partic­

ipate directly or indirectly in the management, control, or

capital of both.

   Paragraph 2 describes the consequences of an adjustment made
by a Contracting State in accordance with paragraph 1. Where a
Contracting State makes such an adjustment, the other Contracting

State shall make an appropriate adjustment to the amount of tax which it charged the associated enterprise, in order to avoid

double taxation. It is implicit in the language of the paragraph

that the other Contracting State agrees that the adjustment reflects the result which would occur under arm's length condi­

tions. In determining the amount of such adjustments, other pro­
visions of the Convention are to be taken into account. Thus if,

as a result of the adjustment, one enterprise is determined to

have made a distribution of profits to the other, the provisions

of Article 10 (Dividends) may apply to the deemed distribution.

If necessary, the competent authorities shall consult to resolve

any differences in the application of these provisions.

If an adjustment is made under paragraph 2 of this Article

the correlative adjustment made by the other Contracting State is

to be implemented pursuant to paragraph 2 of Article 25 (Mutual Agreement Procedure), notwithstanding any time limits in the domestic law of the Contracting States. The saving clause of paragraph 2 of Article 22 (General Rules) does not apply to

paragraph 2 of Article 9. Thus, even if the statute of limita­

tions has run, or there is a closing agreement between the

Internal Revenue Service and the taxpayer, a refund of tax can be

made in order to implement a correlative adjustment. Statutory or procedural limitations, however, cannot be overridden to impose additional tax, because, under subparagraph 1 of Article

22, the Convention cannot restrict any statutory benefit.

It is understood that this Article does not limit the

application of any internal law provisions in either Contracting

State designed to place transactions between related enterprises

on an arm's-length basis. Thus, it does not limit the right of
the United States to apply section 482 of the Code.

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Article 10. DIVIDENDS

This Article governs the taxation by a Contracting State of

dividends paid by a company which is a resident of that State to

a resident of the other Contracting State. It also governs the application of branch taxes imposed in addition to the tax on profits.

Dividends may be taxed in both Contracting States, in the

country of source and the country of residence. Under paragraph
2 of this Article, the tax imposed by the State of source may not

exceed 14 percent of the gross amount of the dividends when the beneficial owner is a company which owns, directly, at least 25 percent of the share capital of the distributing company. The tax at source in other cases may not exceed 20 percent of the

gross amount of the dividends. These limitations are subject to

the exceptions in paragraph 3. (Further, under paragraph 2 of

Article 22 (General Rules) these limitations do not apply to the

U.S. taxation of U.S. citizens and persons who, under Article 4

(Fiscal Domicile) are U.S. residents.)
   Paragraph 3, as added by the Protocol, addresses the taxation
of dividends paid by certain U.S. "pass-through" entities. Divi­
dends paid by a U.S. Regulated Investment Company are taxable at

source at not more than 20 percent of the gross amount, in

accordance with subparagraph (b) of paragraph 2. Dividends paid

by a U.S. Real Estate Investment Trust are taxable at source at not more than 20 percent of the gross amount if the beneficial

owner is an individual resident of Tunisia owning an interest of

less than 25 percent in the Real Estate Investment Trust; in

other cases dividends paid by such entities are subject to tax in
accordance with domestic law.

Paragraph 4 (as renumbered by the Protocol) adopts the definition of "dividends" found in the OECD Model. It adds a provision which permits either Contracting State to treat as dividends other claims, including debt obligations, which carry

the right to participate in profits, to the extent consistent

with domestic law.

  Paragraph 5, as renumbered and amended by Articles III and IV
of the Protocol, provides that this Article does not apply if the

shareholding giving rise to the dividends is effectively con­ nected with a permanent establishment or fixed base which the owner of the dividends has or had in the Contracting State of

which the distributing corporation is a resident. In such a case
the dividends are taxable to the permanent establishment or fixed

base in accordance with Article 7 (Business Profits) or Article

14 (Independent Personal Services), as appropriate.

Paragraph 6, as renumbered by the Protocol, provides that a Contracting State may not tax dividends paid by a company which

is a resident of the other Contracting State except to the extent

that the dividends are paid to a resident of the first State or

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that the shareholding is effectively connected with a permanent

establishment or fixed base in the first State. The right to tax

in those two cases derives from paragraph 2 of Article 22

(General Rules) and paragraph 5 of this Article, respectively.

Paragraph 7, added by the Protocol, replaces prior paragraph 6, which authorized the imposition of a branch profits tax by Tunisia, to also permit the imposition of the U.S. branch taxes enacted by the Tax Reform Act of 1986. Under paragraph 7, each contracting State may impose on a resident of the other State a

tax in addition to the corporate level tax on the profits of a permanent establishment in the first-mentioned State and on income or gains derived with respect to real property situated in the first-nentioned State. The tax base is defined in accordance with domestic laws, but must be net of the corporate

level tax. In the United States, the branch profits tax base is

the "dividend equivalent amount" as defined in Code section 884(b), which is roughly the amount that would be distributed as

a dividend if the U.S. permanent establishment were operating as

a locally incorporated subsidiary. Under the Convention, the

dividend equivalent amount is determined taking into account not
only effectively connected profits (or profits that are deemed to

be effectively connected) that are attributable to a permanent establishment in the United States but also profits from the disposition or operation of real estate that are subject to net basis taxation in the United States under Article 6 (Income from

Real Property) or Article 13 (Capital Gains).

The Contracting States may also impose a tax on excess interest. Under section 884(f)(1)(B), excess interest is the excess of the total amount allowable as a deduction in computing the U.S. effectively connected income of a foreign corporation over the total interest paid by the foreign corporation's U.S.

trade or business. Under the Convention, the U.S. tax on excess
interest applies only to the excess of interest which is deducti­

ble in computing net U.S. tax on (1) profits that are attribut­ able to a U.S. permanent establishment of a resident of Tunisia or (2) income or gains derived by a resident of Tunisia with respect to real property situated in the United States, over the interest paid with respect to these amounts. The reference to excess interest "allocable" to the permanent establishment means

any excess of interest deductible over interest paid as
determined under U.S. law.

The additional taxes are limited to a rate of not more than

14 percent, reciprocally. In the absence of the Convention, the

U.S. tax would be imposed at 30 percent in both cases. The

Tunisian tax would be the corporate tax rate times the portion of
distributions by the home office deemed to be paid out of profits
of the Tunisian permanent establishment (comparable to the
"dividend equivalent amount" of U.S. law); there is not currently
a Tunisian tax on excess interest.

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Article 11. INTEREST

This Article governs the taxation by a Contracting State of

interest derived from sources within that State by a resident of

the other Contracting State. The taxation of certain excess interest of a permanent establishment or trade or business is

covered by paragraph 7 of Article 10 (Dividends).

Such interest may be taxed by both Contracting States, the country of source and the country of residence. However, para­

graph 2 limits the tax at source to not more than 15 percent of
the gross interest when the beneficial owner of the interest is
a resident of the other State. Notwithstanding this limitation,
however, the saving clause of paragraph 2 of Article 22 (General
Rules) permits the United States to tax its citizens and persons

who under Article 4 (Fiscal Domicile) are U.S. residents as if

the Convention had not come into force.

Paragraph 3 provides an exemption from tax at source in

certain cases. Neither Contracting State may tax interest
beneficially owned by the other Contracting State or its politi­
cal subdivisions or local authorities or by any agency or instru­

mentality thereof which is exempt from income tax in that other State. In addition, interest beneficially owned by a financial

institution of the other State with respect to loans of at least
7 years duration, and interest paid by the Government of Tunisia

or a political authority thereof on loans to it by a U.S. resi­ dent are exempt from tax at source. In the absence of the Con­ vention, there would generally be no U.S. tax on portfolio interest or on interest derived by the Government of Tunisia which is exempt under section 892 of the Internal Revenue Code, and a 30 percent tax would be withheld on other interest. The Tunisian statutory rate of tax on interest paid to nonresidents

is generally 15 percent (reduced from 20 percent by 1990 tax

reforms.)

   The definition of "interest" in paragraph 4 is substantially
the same As that in the U.S. Model. It is amended to provide, by
cross-reference to Article 10 (Dividends), that in certain cases

obligations designated as debt may be treated as giving use to

dividends if domestic law so provides. Thus, for example, income

from a debt obligation carrying the right to participate in

profits is not covered by Article 11 to the extent characterized

as a dividend under the laws of the Contracting State in which

the income arises.

Paragraph 5 provides that this Article does not apply if the

indebtedness giving rise to the interest is effectively connected

with a permanent establishment or fixed base which the owner of

the interest has or had (See Article III of the Protocol) in the

State where the interest has its source. In such a case the

interest is taxable to the permanent establishment or fixed base
in accordance with the provisions of Article 7 (Business Profits)
or 14 (Independent Personal Services), as appropriate.

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Paragraph 6 defines the source of interest payments for purposes of this Article. Interest is deemed to arise in a

Contracting State if paid by a resident of that State. However,

interest which is borne by a permanent establishment or fixed base in a Contracting State, whether of a resident of the other

Contracting State or of a third State, is deemed to arise in the

State where the permanent establishment or fixed base is situ­

ated. This rule applies where the interest paid was incurred in

connection with the permanent establishment or fixed base. The reference to the indebtedness being "connected" with such perma­ nent establishment or fixed base does not imply any requirement

that the interest be traced to specific debt.

Paragraph 7 provides that, where interest paid to a related person exceeds the amount which would be paid to an unrelated person, the excess amount is not affected by this Article, but may be taxed by each Contracting State in accordance with its law, including other provisions of the Convention which may be

applicable. For example, if the excess payment is characterized
as a dividend, the provisions of Article 10 (Dividends) would be
applicable.