Article 13 provides rules — U.S. Income Tax Treaty

taxation of gains from the alienation of property.
   Paragraph 1 preserves the source country right to tax gains

derived from the alienation of real .property situated in the

source (ie., situs) state. Thus, paragraph 1 permits gains derived by a resident of one Contracting State from the alien ation of real property, referred to in Article 6 (Income from

Real Property) and situated in the other Contracting State to be
taxed by such other Contracting State.

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   For purposes of paragraph 1, paragraph 2 defines "real
property situated in the other Contracting State" to include real

property referred to in Article 6 (i._, interests in the real property itself) and certain indirect interests in real property. The term is defined separately for the United States and Austria,

to allow use of the U.S. statutory term "United States real
property interest." Indirect interests include shares or
comparable interests in a company the assets of which consist or
consisted wholly or principally of real property situated in the
source state. In addition, for United States, but not Austrian,
purposes, interests in a partnership, trust, or estate, to the
extent that the assets of such entity consist of real property
situated in the source state, are included in this definition of

real property situated in the other Contracting State. It is clear that in all events the term "real property situated in the other Contracting State" includes a United States real property

interest, and the specified partnership, trust or estate inter
ests, when the United States is the other Contracting State.
Thus, the United States preserves its right to collect the tax
imposed under the ForeignInvestment in Real Property Tax Act
(section 897 of the Code) on gains derived by foreign persons
from the disposition of United States real property interests.
For this purpose, the source rules of section 861(a)(5) of the
Code shall determine whether a United States real property.
interest is situated in the United States.

   Because the definition of "real property situated in the
other Contracting State" contained in paragraph 2 is specifically
limited to the interpretation of.paragraph 1, such definition has
no effect on the right to tax income covered in other articles.
For example, the inclusion of interests in certain corporations
in the definition of real property situated in the other Con
tracting state for purposes of permitting source country taxation
of gains derived from dispositions of such interests under this
Article does not affect the treatment of dividends paid by such
corporations. Such dividends remain subject to the limitations
on source country taxation contained in Article 10 (Dividends)
and are not governed by the unlimited source country taxation
right contained in Article 6 with respect to immovable property.
   Paragraph 3 preserves the source country's right to tax
gains from the alienation of personal property in certain circum
stances. It provides that the other Contracting State (the
source state) may tax gains from the alienation of personal
property forming part of the business property of a permanent
establishment that an enterprise of a Contracting State has in
the other State or of personal property pertaining to a fixed
base available to a resident of a Contracting State in the other
State for the purpose of performing independent personal servic
es, including such gains from the alienation of such a permanent
establishment (alone or with the whole enterprise) or of such

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fixed base. The rule in paragraph 9 of Article 7 (Business Profits) applies to paragraph 3 as well, so that the Contracting

State in which the permanent establishment existed may tax gains

from the alienation of personal property forming part of the business property of a permanent establishment or pertaining to a fixed base that are received after the permanent establishment or

fixed base no longer exists.
   This provision permits gains from the alienation.by a
resident of a Contracting State of an interest in a partnership,
trust, or estate that has a permanent establishment situated in

the other Contracting State to be taxed as gains attributable to such permanent establishment under paragraph 3. Thus, for

example, the United States may tax gains derived from the dispo
sition of an interest in a partnership that has a permanent
establishment in the United States, whether or not the assets of

the partnership consist of real property as defined in Article

13.

Paragraph 4 contains a rule to coordinate the interaction of Code section 864(c) (7) with the analogous provision of Austrian law. Under the Code rule, if an asset which had been part of the business property of a U.S. trade or business (or, in a treaty

context, of a permanent establishment or fixed base in the United
States) is alienated within ten years of its removal from the
U.S. trade or business (or permanent establishment/fixed base),
the gain realized on such alienation is subject to U.S. tax.
   Austria's income tax act (Section 6, subparagraph 6)
provides that a transfer of property used in a permanent
establishment in Austria to a permanent establishment outside of
Austria is a taxable event.
   Paragraph 4 provides that gain that accrued during the time
an asset formed part of the business property of a permanent
establishment or fixed base that a resident of a Contracting
State has or had in the other Contracting State may be taxed in

the other State, but only to the extent of the gain that accrued

during the time the asset formed part of the business property of
a permanent establishment or fixed base that the resident has or

had in that other State. Thus, for example, with regard to the

transfer of appreciated assets from a U.S. company's permanent

establishment in Austria to a permanent establishment in a third

country, paragraph 4 would coordinate and modify the application
of U.S. and Austrian law.
  With regard to the sale of appreciated assets by an Austrian
company, the U.S. may tax the gain to the extent accrued during
the time the asset formed part of the business property of a
permanent establishment that the Austrian company has or had in
the United States. This is a limitation on the amount of the

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gain that is taxable under section 864(c)(7) of the Code.
Further, although this rule does not impose a time limitation to
the U.S. right to tax the gain, under section 864(c)(7), the
United States may not tax a gain that is realized after the tenyear period has lapsed.
   The provision also restricts the application of U.S. laws to
U.S. citizens and residents that had property in an Austrian
permanent establishment or fixed base to the extent that Austria
taxed the gain in accordance with this paragraph. Under the
provision, the residence State of the taxpayer must exclude from
the income that it subjects to tax any amount of gain that has
been taxed, in accordance with paragraph 4, by the State in which
the permanent establishment or fixed base is, or was, located.
Thus, for example, if a U.S. person alienates an asset that at
one time formed part of the business property of a permanent
establishment of that person in Austria, and if the total gain is
$100, and $25 of that gain accrued during the time that the asset
was part of the Austrian permanent establishment, Austria will
have taxed $25 of the gain at the time the asset was removed from
Austria, and the United States may tax the remaining $75 of gain
at the time of alienation.

   Paragraph 5 provides that gains derived by an enterprise of
a Contracting State from the alienation of ships, aircraft or
containers used in international traffic shall be taxable only in
that Contracting State. Consistent with the definition of
containers provided in paragraph 3 of Article 8, containers
include trailers, barges, and related equipment for the transport
of containers. Thus, such gains are taxable on the same basis as

income from the operation of ships or aircraft under Article 8

(Shipping and Air Transport).

   Paragraph 5 also provides that those gains that are included
within the definition of royalties in paragraph 3 of Article 12

(Royalties) will be subject to the rules of that Article, and not

Article 13. The gains referred to are those derived from the
alienation of any right or property that gives rise to royalties
that are contingent on the productivity, use, or further alien
ation thereof. The source country will either exempt such gains
or tax them at not more than 10 percent, in accordance with
Article 12.

   Paragraph 6 provides that gains from the alienation of
property other than property referred to in paragraphs 1 through
5 are taxable only in the Contracting State of which the alien
ator is a resident. Thus, gain from the sale of corporate
securities or other tangible personal property not covered in
paragraphs 3 and 4 is exempt from tax at source.

   Under the Austrian tax law for the reorganization of

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enterprises, if a foreign corporation has a permanent establishment in Austria and transfers permanent establishment assets into a subsidiary, Austria will tax the appreciation in the assets on incorporation unless the shares remain subject to Austrian tax. This is consistent with paragraph 3, which permits

the Contracting State in which the permanent establishment is
located to tax gains on the alienation of personal property
forming part of the business property of the permanent
establishment.

    In the reverse case, with regard to the transfer of
appreciated assets of an Austrian company's permanent
establishment in the United States to a U.S. subsidiary,
paragraph 3 also would permit the United States to tax such

gains. However, the transaction may not be taxable under the .corporate reorganization provisions of ^the ^Internal ^Revenue ^Code

(section 351 and related provisions).
   Paragraph 7 provides that where property was transferred by
a resident of the United States to an Austrian company as a
capital contribution and, in application of the Austrian
Reorganization Tax Act (Umgruendungssteuergesetz), no capital
gains taxation took place, a subsequent alienation of the
respective shares in the Austrian company that takes place

through the year 2010 shall remain taxable in Austria. This rule applies to the disposition of stock that was received on the

incorporation of a permanent establishment in Austria if the
capital gains were not taxed on the incorporation of the
subsidiary.

The operation of paragraph 7 is illustrated by the following example. A U.S. corporation (A) has a permanent establishment in Austria, with assets having a tax basis of 1,000 and a net market

value of 5,000.. Thus, the permanent establishment represents a

business with untaxed (hidden) reserves of 4,000. Assume that, in 1996 (or in any year thereafter before 2011), the Austrian

permanent establishment is transformed into an Austrian company

(B). This can be arranged under the current Austrian tax regime

tax free, which means that the assets of the permanent

establishment will be incorporated into the financial accounts of the new company at 1,000. Correspondingly, the shares held by A

in the newly created Austrian company B will be valued for tax
purposes at 1,000. If the shares were sold in 1999 (assume for

5,500), then this transaction would be taxable in Austria (capital gain: 4,500). In case the sales price is only 4,000,

the capital gain would be 3,000.

   Under these same facts, except that another form of
alienation is chosen, such as a contribution of the shares into

the U.S. or Austrian company (X) before the year 2011, the result

would be the same; the capital gain would be taxable in Austria

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because, if X subsequently sells its stock to company Z, this

transaction could not be taxed any more under the new treaty even
within the interim period ending in 2010.

Under these same facts, except that the stock of B is sold

or otherwise alienated after year 2010, the transaction would not
be taxable in Austria.

   In the event that a transfer of stock is treated as an

"alienation" for Austrian tax purposes and double taxation

results, it is expected that any such double taxation would be
addressed under competent authority procedures.

   Notwithstanding the foregoing limitations on source State

taxation of certain gains, the saving clause of paragraph 4 of

Article 1 (Personal Scope) permits the Contracting States to tax
their citizens and residents as if the Convention had not come

into effect. The rules of paragraph 4 of this Article, however, continue to apply to the citizens and residents of a Contracting

State by virtue of the exceptions to the saving clause of para

graph 5 of Article 1. As with all benefits under this

Convention the granting of benefits under this Article is subject

to the requirement that the beneficial owner of the income qualify for benefits under the provisions of Article 16

(Limitation on Benefits).