Article 24. NON-DISCRIMINATION

Paragraph 1 prohibits either Contracting State from imposing

other or more burdensome taxes or related requirements on resi­
dents who are nationals of the other Contracting State than on

resident nationals of the first State in the same circumstances.

Unlike the corresponding provision of the **U.S.** Model, this pro­
vision is limited to persons resident in a Contracting State,

because Tunisia considers such an approach to be more consistent with the bilateral scope of the Convention. It does not imply on

the part of either State an intent to discriminate on the basis
of nationality among nonresidents who are otherwise in the same
circumstances. (However, because the United States taxes its
nonresident citizens on their worldwide income, **U.S.** nationals

and Tunisian nationals resident outside the United States are not in the same circumstances.)

Paragraph 2 defines the term "nationals" to mean all individuals possessing the nationality of a Contracting State and

all legal persons, partnerships, and associations deriving their

status as such from the laws in force in a Contracting State. Paragraph 3 ensures nondiscriminatory taxation by each Contracting State of permanent establishments of residents of the

other Contracting State relative to the taxation of enterprises

carried on by residents of that State. The branch taxes author­

ized **by** paragraph **7** of Article **10** (Dividends) are explicitly

excepted from this provision.

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It is understood, however, that the requirement of Code

section 1446 that any partnership with income that is effectively

connected with a **U.S.** trade or business withhold tax on amounts
allocable to a foreign partner is not a form of discrimination
within the meaning of paragraph 2 of this Article, notwith­

standing the fact that the withholding obligation does not apply

to amounts allocable to **U.S.** partners. No distinction is made

between U.S. and Tunisian partnerships; the law requires in both

cases that tax be withheld in respect of the partnership shares

of non-U.S. partners. The requirement to withhold on the

Tunisian but not the **U.S.** partner's share is, like other with­

holding on nonresidents aliens, a reasonable method for the col­

lection of tax from persons who are not continually present in

the United States. If tax has been overwithheld, the partner may file for a refund.

Paragraph 4 provides that, except where the payments are
considered excessive in accordance with the provisions of para­
graph **1** of Article **9** (Associated Enterprises), paragraph **7** of

Article 11 (Interest), or paragraph 5 of Article 12 (Royalties),

interest, royalties, and other disbursements made **by** a resident

of a Contracting State to a resident of the other Contracting State shall be allowed as a deduction in computing taxable income in the first State to the same extent as if the payment were made to a resident of that State.

Paragraph 5 prohibits discriminatory taxation of resident

corporations based on their ownership; i.e. corporations owned by

residents of the other Contracting State may not be subject to

more burdensome taxes or connected requirements than corporations

owned or controlled **by** residents of the taxing State which are

engaged in the same activities.

Certain provisions of **U.S.** law relating to the taxation of
gain on the liquidation of a subsidiary and to the taxation of
small business (subchapter **S)** corporations distinguish between

U.S.-owned and foreign-owned corporations, but are not considered discriminatory in the context of paragraph 5.

Under the Code, an **80%** or more controlled corporation that
distributes appreciated property to its parent corporation in

complete liquidation of the subsidiary, is not taxed on the dis­

tribution as a general rule. However, tax is imposed on dis­
tributions to parent corporations that are tax-exempt organiza­
tions or, except to the extent provided in regulations, foreign

corporations. Eligibility for tax-free treatment on liquidating

distributions is not based on the nationality of the owners of

the distributing corporation, but rather on whether such owners would be subject to corporate tax if they later sold or

distributed the same property. The policy of the provision
(section 367(e)(2)) is to collect the **U.S.** corporate tax on the
liquidating distribution of appreciated property; the provision
defers tax on such a distribution only if that tax can be

**TUNISIA 119**
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collected on a subsequent sale or distribution. Similarly, the
ineligibility of a corporation with nonresident alien share­
holders to make the election to be an **"S"** corporation (taxed at

the shareholder level) is not due to the nationality or residence of its shareholders, but to the fact that they are not subject to U.S. tax on a net basis as are U.S. shareholders. The purpose of

the election, to permit individuals to carry on business in
corporate form subject to the individual income tax rates, would
not be achieved **by** extending the election to corporations owned

by non-resident aliens. The provisions also exclude corporations with other types of shareholders, such as corporate shareholders, where the purpose of the provisions cannot be fulfilled or their mechanics implemented.

Paragraph **5** does not require granting the same relief for
family circumstances to nonresident individuals as may be

available to rdsident individuals.

The provisions of this Article apply not only to the income
taxes specified in Article 2 (Taxes Covered), but to all taxes
imposed at the national level or **by** a political subdivision or

local authority.

***** The saving clause of paragraph 2 of Article 22 (General

Rules) does not apply to this Article, by virtue of the exception

in subparagraph **3** **b)** of Article 22. Thus, for example, a **U.S.**
citizen who is resident in Tunisia may claim benefits in the

example,
benefits

a
in

**U.S.**

22.
isia

Thus,
may cl

for
aim

citizen who is resident in Tunisia may claim benefits in the

United States under this Article.

Article 25. MUTUAL AGREEMENT PROCEDURE

This Article provides for cooperation between the competent
authorities of the Contracting States, as defined in Article **3**

(General Definitions), to resolve cases of double taxation.

Paragraph **1** provides that, if a resident of one of the
Contracting States considers that the action of either or both
States will result in taxation not in accordance with the Con­
vention, he may present his case to the Contracting State of

which he is a resident. If the case concerns a complaint of dis­

crimination **by** the State of residence on the basis **of** citizen­
ship, he may present the case to the State of which he is a
citizen. In any case, a person requesting assistance from the

competent authority may also avail himself of any remedies under domestic laws.

The competent authority to which the case is presented is to

review the case and, if the claim is justified, seek a solution

either independently or in conjunction with the competent

authority of the other State. Any agreement reached **by** the
competent authorities will be implemented without regard to any
time or procedural limitations of domestic law. Thus, for

example, the competent authorities will waive the domestic

statute of limitations to make a refund under a competent

**TUNISIA** 120

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authority agreement. However, no additional tax will be imposed if the statute of limitations has expired.

Paragraph **3** authorizes the competent authorities to seek a
mutual agreement on any difficulty arising in applying the Con­
vention and on cases of double taxation arising from situations

not directly dealt with in the Convention. For example, the

competent authorities may agree to a common definition of a term

used in the Convention, to the characterization of a particular

item of income, or to the appropriate allocation of deductions.
They may also endeavor to coordinate the provisions of domestic

law with respect to penalties and interest.

Paragraph 4 of the Convention is deleted by the Protocol and

replaced **by** paragraphs **5,** **6,** and **7.** Former paragraph **5** is re­
numbered 4. It simply confirms that the competent authorities
may communicate directly, including meeting together, for the

purpose of implementing this Article. Paragraphs 5 and 6 provide rules to prevent "treaty shopping"

**by** persons not intended to benefit from the provisions of the
Convention. Paragraph **5** provides that a resident of a Con­

tracting State, other than an individual, may not claim benefits

under the Convention unless it meets any of three alternative
tests. The first test has two parts: **1)** more than **50** percent of

the beneficial interest in such person, (or more than 50 percent of the number of shares of each class of shares in the case of a

company) must be owned **by** any combination of individual **U.S.**

residents and citizens, individual residents of Tunisia, and the

Governments of the United States and Tunisia; and 2) the income
_of_ _such_ _person_ _may_ not be _used_ _in_ _substantial part,_ _directly_ _or_
indirectly, to meet liabilities to persons other than those
identified above. The 'term "substantial" is not defined. De­

ductible payments which are less than 50 percent of the relevant

income, however, will generally not be considered substantial,

although in appropriate circumstances a lower percentage of

income may be considered substantial. The term "income" in

subparagraph (a)(ii) is to be interpreted as "gross income" under

**U.S.** law, as determined without regard to the residence of the
income recipient. Thus, in general, the term should be in­

terpreted to mean gross receipts less cost of goods sold.

The purpose of the second condition is to prevent residents
of third countries from setting up a company in a Contracting

State which meets the ownership requirements but which passes on a large share of its income through deductible expenses, such as

interest and royalties, paid to third country residents. This
rule is not meant to deny benefits to companies which, for
business reasons, purchase supplies from third countries. The

focus is on liabilities for interest, royalties and certain com­

pensation, not on the cost of goods sold. This intent is con­
firmed in subparagraphs **b)** and c), which authorize benefits to

persons deriving income in connection with an active business in

the country of residence and to companies that are publicly

traded, respectively.

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Subparagraphs **b)** and c) recognize that a company which is a
resident of a Contracting State may be primarily owned **by** re­

sidents of third countries and/or may make substantial deductible

payments to residents of third countries in the ordinary course
of business. Subparagraph **b)** authorizes treaty benefits to

persons that carry on an active business in the Contracting State

of which they are residents and derive income from the other
State in connection with that active business. Making or
managing investments does not constitute an active business for

this purpose unless it is a banking or insurance activity carried on by a bank or insurance company.

Companies whose principal class of shares is regularly traded in substantial volume on a recognized stock exchange are presumed to be owned by residents of the country in which it is so traded

and thus to qualify for treaty benefits under subparagraph c).

The recognized exchanges for this purpose are defined. The com­ petent authorities may agree on additional exchanges in future as appropriate. Although the Convention does not preclude agreement

on an exchange in a third country, it is expected that any ad­
ditional exchanges agreed upon would be in either the United

States or Tunisia.

**If** any one of the three tests provided in paragraph **5** is
satisfied, all items of income derived **by** the beneficial owners

from the other Contracting State are entitled to treaty benefits.

Claiming treaty benefits under paragraph **5** does not require

advance competent authority ruling or approval. The tax author­ ities may, of course, on review, determine that the taxpayer has

improperly interpreted the paragraph and is not entitled to the

benefits claimed.

Paragraph **6** provides that in any case where treaty benefits
are to be denied the competent authorities will consult. This
does not imply an obligation that there be agreement, but the

competent authority of the State denying benefits under paragraph

**5** will first notify the other Contracting State of its decision

and the reason for it.

Paragraph **7** provides authority to the competent authorities
to grant treaty benefits to residents of the other Contracting
State in certain cases even though such persons do not satisfy

any of the preceding tests. This discretionary provision is not

addressed to any particular situation, but is intended to allow
some flexibility if a case should arise where the enumerated

tests cause an unintended denial of benefits. The taxing State must decide when that is the case.

This Article is not subject to the saving clause of paragraph

2 of Article 22 (General Rules). Thus, for example, rules, de­
finitions, procedures, etc., which are agreed upon **by** the com­
petent authorities under this Article may be applied **by** the

United States with respect to its citizens and residents even if

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they differ from the comparable Code provisions. Similarly, as

indicated above, U.S. law may be overridden to provide refunds of tax to a U.S. citizen or resident under this Article. Article 26. EXCHANGE OF INFORMATION

This Article provides that the competent authorities shall
exchange information with respect to the taxes enumerated in
Article 2 (Taxes Covered) for the purpose of applying the Con­

vention or the domestic laws of the Contracting States concerning taxes covered by the Convention, provided that the taxation under

the domestic laws is not contrary to the Convention. The in­
formation exchanged may relate to nonresidents as well as to re­

sidents of a Contracting State. The State receiving information

under this Article must keep it secret in the same manner as
information obtained under its domestic laws. The information

may be made available only to persons involved in the assessment,

collection, administration, or enforcement of the taxes covered
**by** the Convention, or in the prosecution or determination of
appeals in relation to such taxes; and the information may be

used only for such purposes. It may be disclosed in public court

proceedings or in judicial decisions. The General Accounting

Office and the tax-writing committees of Congress may have access to the information exchanged, in their capacity of overseeing the administration of the U.S. income tax law, subject to the secrecy requirements applicable to domestic tax information.

Paragraph 2 provides that the obligation to exchange

information under this Article does not require a Contracting
State to carry out administrative measures contrary to the laws
and practice of either State, or to supply information not ob­
tainable in that or the other State under its laws or tax ad­
ministration, or to supply information which would disclose any

trade secret or which it is contrary to the public policy of that

State to disclose. For example, if one of the States requests

the other to furnish information which the first State could not obtain under its own laws and practice, the second State need not comply with that request even though its laws and practice permit

it to collect such information with respect to domestic tax

claims.

Paragraph **3** provides that, subject to the conditions of
paragraphs **1** and 2, a Contracting State will obtain information

requested **by** the other Contracting State in the same manner and
to the same extent as if the tax in question were its own tax,

even though it may have no tax interest in the particular case to which the request relates. It is contemplated that the information exchanged under this

Article may be on a routine basis, such as reporting on income
payments made and tax withheld, or in response to specific re­

quests. The competent authorities may agree on the items of in­

formation to be furnished routinely. They may also agree to

furnish information spontaneously which they believe to be

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relevant in applying the Convention or the domestic laws covered by the Convention and to develop and implement other programs of information exchange within the conditions of this Article.