Article 17 applies to all income directly connected with a

performance by the entertainer, such as appearance fees, award or

prize money, and a share of the gate receipts. Income derived
from a Contracting State from other than actual performance, such
as royalties.from record sales and payments for product endorse­
ments, is not covered by this Article, but by other articles of
the Convention, such as Article 12 (Royalties) or Article 14

(Independent Personal Services). For example, if an entertainer
receives royalty income from the sale of live recordings, the
royalty income would be exempt from source country tax under
Article 12, even if the performance was conducted in the source
country, although he could be taxed in the source country with
respect to income from the performance itself under this Article

if the dollar threshold is exceeded.

   In determining whether income falls under Article 17 or
another article, the controlling factor will be whether the

income in question is predominantly attributable to the perfor­
mance itself or other activities or property rights. For in­
stance, a fee paid to a performer for endorsement of a perfor­
mance in which the performer will participate would be considered
to be so closely associated with the performance itself that it
normally would fall within Article 17. Similarly, a sponsorship
fee paid by a business in return for the right to attach its name
to the performance would be so closely associated with the
performance that it would fall under Article 17 as well. A
cancellation fee would not be considered to fall within Article

17 but would be other income within the meaning of Article 21
(Other Income). Each case must be evaluated based on its indi­
vidual facts and circumstances.

  As indicated in paragraph 4 of the Commentaries to Article 17
of the OECD Model, where an individual fulfills a dual role as
performer and non-performer (such as a player-coach or an
actor-director), but his role in one of the two capacities
is negligible the predominant character of the individual's
activities should control the characterization of those
activities. In other cases there should be an apportionment
between the performance-related compensation and other
compensation.

   Paragraph 2 is intended to deal with the potential for abuse

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when income from a performance by an entertainer or athlete does not accrue to the performer but, instead, accrues to another person. Foreign entertainers commonly perform in the United

States as employees of, or under contract with, a company or
other person. The relationship may truly be one of employee and
employer, with no abuse of the tax system either intended or

realized. On the other hand, the "employer" may, for example, be

a company established and owned by the performer,.which is merely
acting as the nominal income recipient in respect of the remuner­
ation for the entertainer's performance. The entertainer may be
acting as an "employee" receiving a modest salary and arranging
to receive the remainder of the income from the performance in
another form or at a later time. In such case, absent the
provisions of paragraph 2, the company providing the
entertainer's services can escape host State tax because it earns
business profits but has no permanent establishment in that
State. The income could later be paid out to the entertainer at
a time when the entertainer is not subject to host country tax,
perhaps as salary payments, dividends or liquidating distribu­
tions.

   Paragraph 2 seeks to prevent this type of abuse while at the
same time allowing the benefits of the Convention when a legiti­
mate employee-employer relationship exists between the performer

and the person providing services. Under paragraph 2, when the

income accrues to a person other than the performer, resident in
the same Contracting State as the performer, and the performer
(or persons related to him or her) participate, directly or
indirectly, in the profits of that other person, the income may
be taxed in the Contracting State where the performer's services
are exercised, without regard to the provisions of the Convention
concerning business profits (Article 7) or independent personal
services (Article 14). Thus, even if the "employer" has no
permanent establishment or fixed base in the host country, its
income may be subject to tax there under the provisions of
paragraph 2. If the "employer" is resident in a third State,
this Convention does not apply to its income. It is, therefore,
subject to the host country's internal law, or to the provisions
of a treaty if one exists, between the host country and the
country of residence of the "employer."

Taxation under paragraph 2 is on the person providing the

services of the entertainer or athlete. This paragraph does not
affect.the rules of paragraph 1, which apply to the entertainer
or athlete himself. To the extent of salary payments to the per­
former, which are treated under paragraph 1, the income taxable
by virtue of paragraph 2 to the person providing his services is
reduced.
   For purposes of paragraph 2, income is deemed to accrue to
another person (i.e., the person providing the services of the

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entertainer or athlete) if that other person has control over, or the right to receive, gross income in respect of the services of the entertainer or athlete. Direct or indirect participation in the profits of a person may include, but is not limited to, the accrual or receipt of deferred remuneration, bonuses, fees,

dividends, partnership income or other income or distributions.

The paragraph 2 override of the protection of Articles 7 (Business Profits) and 14 (Independent Personal Services) does

not apply if it is established that neither the entertainer or

athlete, nor any persons related to the entertainer or athlete,

participates directly or indirectly in the profits of the person

providing the services of the entertainer or athlete. Consider

for example, a circus owned by a U.S. corporation that performs
in Vienna and the Austrian promoters of the performance pay the

circus, which, in turn, pays salaries to the clowns. The circus has no permanent establishment in Austria. Since the clowns do not participate in the profits of the circus, but merely receive

their salaries from the circus' gross receipts, the circus is

protected by Article 7 and its income is not subject to Austrian tax. Whether the salaries of the clowns are subject to Austrian

tax depends on whether the salaries exceed the $20,000 threshold.

This exception for non-abusive cases is not in the OECD Model,

but reflects the U.S. position that the purpose of the paragraph

is to prevent abuse of the provisions of Articles 7 and 14 in

this context.

Paragraph 3 authorizes the Contracting State where a

performer's activities are exercised to withhold tax on payments
made to a person other than the entertainer or athlete for
activities exercised by the entertainer or athlete in cases where

paragraph 2 does not apply. Whereas paragraph 2 covers abusive cases, this paragraph is needed where there is no abuse, but payment is made to an agent of the entertainer or athlete. This language conforms to U.S. policy. Upon request of the person to whom the payment is made, the amount withheld in excess of the

tax liability of the entertainer or athlete shall be refunded.

Refund claims must be accompanied by the necessary documentation.

For example, the Austrian organizer of a domestic public performance enters into a contract with a U.S. artiste promotion

agency. Under that contract the U.S. agency agrees to send a

U.S. entertainer (who has no contractual arrangements with the Austrian organizer but only with the promotion agency) to perform

in Austria. The Austrian organizer has to pay 1,000,000 to the

agency which in turn has to pay a contractual fee of 600,000 to

the artiste. Under paragraph 3, Austria is entitled to withhold

20% of the 1,000,000 paid to the agency and the agency in turn is

entitled to claim a refund of 20% of 400,000 (provided it can prove that only 600,000 was paid to the artiste). However, if paragraph 2 applies, no tax refund would take place.

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   The Memorandum of Understanding provides the following

clarification of the treatment of orchestras and their members:

Paragraph 1 of Article 17 relates only to individuals. Legal

   entities operating an orchestra (like associations,

municipalities, and states) are, according to paragraph 1, not taxable in the country where such orchestra performs, although such entities may be subject to tax in the country

   of performance under paragraph 2 of this Article or under