Article 18. GOVERNMENT SERVICE

This Article follows the corresponding provisions of the OECD Model.

Paragraph 1 provides that payments from the public funds of a Contracting State or political subdivision or local authority to compensate an individual for performing governmental services generally may be taxed only by that State. However, if the individual is either a citizen of the other State, or did not become a resident of the other State solely for the purpose of taking the job, the compensation may be taxed only by that other State. It is understood that a governmental worker's spouse who takes a governmental job subsequent to becoming a resident of the host state, nevertheless will be considered to have become a resident of the host State solely for the purpose of taking a governmental job.

Paragraph 2 provides rules for the taxation of pensions paid from public funds in respect of governmental services. Such pensions may be taxed only by the paying State unless the individual is a resident and citizen of the other State, in which case the other (residence) State also may tax the pension (and must grant a foreign tax credit for any taxes paid to the paying State).

This rule does not apply to social security benefits and other public pensions that are not in respect of services rendered to the paying government or a political subdivision or local authority thereof; such amounts are taxed under Article 19 (Pensions). However, this rule does apply to social security payments to U.S. Government employees for whom the social security system is the retirement plan related to their government service; i.e., in the unusual case where a Ukrainian citizen and resident derives a pension for U.S. Government employment that is paid under the social security system, Ukraine

may tax that pension. This could happen, for example, if a locally hired driver for the U.S. Embassy in Kiev were to retire and receive a U.S. pension under social security.

The rules of paragraphs 1 and 2 are an exception to the saving clause of paragraph 3 of Article 1 (General Scope) for individuals who are neither citizens nor permanent residents of the State where the services are performed. Thus, for example, payments by Ukraine to its employees at the Ukrainian Embassy in Washington are exempt from U.S. tax if the employees are not U.S. citizens or green card holders and were not residents of the United States at the time they became employed by Ukraine, even if they would otherwise be considered U.S. residents for tax purposes. (Under the 1984 modification to the definition of a U.S. resident in Code section 7701, this exception to the saving clause is of less relevance, since time spent in the United States as a foreign government employee does not count in applying the physical presence test of residence.)

This article applies only to remuneration and pensions paid in respect of services of a governmental nature. Paragraph 3 provides that remuneration and pensions paid in respect of services for a government-conducted business (for example, a government-operated airline) are covered by Articles 14 (Independent Personal Services), 15 (Dependent Personal Services) or 19 (Pensions), as appropriate.