Article 22 describes the manner — U.S. Income Tax Treaty

State undertakes to relieve double taxation. The United States uses the foreign tax credit method. Austria uses a foreign tax

credit method as laid down in Article 23 B of the OECD Model
Convention.
   In paragraph 1, the United States agrees to allow its

citizens and residents to credit against their U.S. income tax the income taxes paid to Austria. Paragraph 1 also provides for

a deemed-paid credit, consistent with section 902 of the Code, to

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a U.S. corporation in respect of dividends received from an
Austrian corporation in which the U.S. corporation owns at least

10 percent of the voting shares. This credit is for the tax paid by the Austrian corporation.on the earnings out of which the

dividends are considered paid.

   The credit under the Convention is allowed in accordance

with the provisions and subject to the limitations of U.S. law, as that law may be amended overtime, so long as the general

principle of this Article, i.e., the allowance of a credit, is

retained. Thus, although the Convention provides for a foreign

tax credit, the terms of the credit are determined by the Provi
sions, at the time a credit is given, of the U.S. statutory

credit, U.S. law generally limits the credit against U.S. tax to

the amount of U.S. tax due with respect to net foreign source
income within the relevant foreign tax credit limitation category

(see Code section 904(a)). Nothing in the Convention prevents the limitation of the U.S. credit from being applied on a percountry or overall basis or on some variation thereof. Paragraph

4 specifies the rules for determining the source of income for

credit purposes under the Convention.

Paragraph I also provides that the Austrian income taxes specified in paragraphs 2(b) and 3 of Article 2 (Taxes Covered)

are to be treated as income taxes for purposes of allowing a

credit under the Convention. It is not U.S. policy to allow

credit by treaty for taxes that are not creditable under the

Code, and it was the understanding of the negotiators that the

Austrian income taxes specified in Article 2 for which credit is
allowed under Article 22 are creditable taxes under the Code.

   The Memorandum of Understanding clarifies that the relevant

laws for purposes of the U.S. foreign tax credit granted in paragraph 1 are the laws as of the date of entry into force of the treaty, as they may be subsequently amended. Under U.S. law, when the Alternative Minimum Tax (AMT) is due, foreign tax

credits may reduce the AMT, but not to zero, as such credits can

offset only 90 percent of the AMT. The Memorandum of Understand

ing notes that this limitation is consistent with the general

U.S. commitment to provide a foreign tax credit.

  The Memorandum of Understanding also illustrates how to

calculate the dividend gross-up and the deemed-paid credit. The

deemed-paid credit is calculated as the ratio of dividends
received to after-tax foreign earnings multiplied by creditable

foreign taxes. The U.S. parent must include in income the actual dividend received plus the "gross up" for foreign taxes deemed

paid. The total foreign tax credit allowed, subject to the
foreign tax credit limitation, equals the sum of actual
withholding taxes paid plus the deemed-paid credit.

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  Paragraph 2 sets out the rules for taxing U.S. citizens who
are residents of Austria. Since U.S. citizens are subject to
U.S. tax at ordinary progressive rates on their worldwide income,
the U.S. tax on the U.S. source income of a U.S. citizen resident
in Austria will often exceed the U.S. tax allowable under the
Convention on an item of U.S. source income derived by a resident
of Austria who is not a U.S. citizen.

Subparagraph 2(a) provides special Austrian credit ^rules ^for

certain items of income received by Austrian residents who are
U.S. citizens. For income that is either exempt from U.S. tax or
subject to a reduced rate of tax under the Convention when
derived by Austrian residents who are not U.S. citizens, Austria
shall allow a foreign tax credit to its residents who are U.S.
citizens only for the tax that the United States may impose under
the provisions of the Convention, other than the taxes that it
may impose only by reason of U.S. citizenship of the taxpayer
under the saving clause of paragraph 4 of Article 1 (Personal

Scope). Thus, if a U.S. citizen resident in Austria receives
U.S. source portfolio dividends, the foreign tax credit granted

by Austria would be limited to 15 percent of the dividend -- the

U.S. tax that may be imposed under subparagraph 2(b) of Article

10 (Dividends) -- even if the shareholder is subject to U.S. net

income tax because of his U.S. citizenship. With respect to
royalty (other than motion picture royalties) or interest income,
Austria would allow no foreign tax credit, because its residents

are exempt from U.S. tax on these classes of income under the
provisions of Articles 11 (Interest) and 12 (Royalties).

  Subparagraph 2(b) deals with the potential for double taxa
tion which can arise as a result of the absence, because of
subparagraph 2(a), of a full Austrian foreign tax credit for the
U.S. tax imposed on its citizens resident in Austria. The
subparagraph provides that the United States will credit the
Austrian income tax paid after allowance of the credit provided
for in subparagraph 2(a). It further provides that in allowing
the credit, the United States will not reduce its tax below the
amount allowed as a creditable tax in Austria under subparagraph
2(a). Since the income dealt with in this paragraph is U.S.
source income, it is necessary to resource some of the income in
respect of which the United States is required to allow a credit
under subparagraph 2(b) as Austrian source in order for the

United States to be able to credit the Austrian tax effectively.
Subparagraph 2(c) provides for this resourcing. It deems the
items of income referred to in subparagraph 2(a) to be from
Austrian sources to the extent necessary to avoid double taxation

under subparagraph 2(b). This resourcing is for the exclusive
purpose of relieving double taxation in the United States with
respect to certain U.S. source income of its citizens who are
resident in Austria. This provision is not affected by the
general foreign tax credit source rules in paragraph 4.

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   Paragraph 3 describes how Austria will avoid double taxation

under the Convention. Subparagraph 3(a) provides that Austria

will allow a resident of Austria who derives income that may be
taxed in the United States (unless the U.S..right to tax is
solely by virtue of citizenship under the saving clause of
paragraph 4 of Article 1 (Personal Scope)), to deduct from
Austrian tax (i._., to credit) an amount equal to the tax paid on

that income in the United States. The credit, however, may not

exceed that part of the Austrian income tax (computed before the

credit) that is attributable to the income that the United States

may tax. The branch tax levied under paragraph 6 of Article 10
(Dividends) shall be attributable to the income of the permanent
establishment in the year in which the tax is levied.

Subparagraph 3(b) allows Austria to take into account any

income that is exempt from tax under this Convention when comput
ing the amount of Austrian tax due on the remaining income of the

resident (i.e., Austria may apply exemption with progression).

Paragraph 4 sets forth the rules for determining the source

of income and profits for purposes of double tax relief under the

Convention. For determining the source of income for U.S.

foreign tax credit purposes, the rules of this paragraph apply

only for crediting the taxes referred to in paragraphs 2(b) and 3 of Article 2 (Taxes Covered). As a general rule, where under the

treaty (other than by application of the saving clause of para
graph 4 of Article 1 (Personal Scope)) a Contracting State may
tax a resident of the other Contracting State on an item of
income, that income is deemed to be sourced in the first```

mentioned State. Where income of a resident of a Contracting

State may not be taxed in the other State, the income is deemed to be sourced in the State of residence of the income recipient. In general, such source rules provided in the Convention for


purposes of determining the taxing rights of the Contracting
States, are consistent with the Code source rules for foreign tax

credit and other purposes. Where, however, the Convention and Code source rules are inconsistent, the Code source rules (eg.,


Code section **904(g))** will be used to determine the limits for the

allowance of a credit under the Convention. (Paragraph 2 of the

Article provides an exception to this general rule with respect

to certain U.S. source income of U.S. citizens resident in Austria, as discussed above.)

This Article is not subject to the saving clause of paragraph


**4** of Article 1 (Personal Scope). Thus, the United States will
allow a credit to its citizens and residents in accordance with the
Article, even if such credit were to provide a benefit not

available under U.S. law. Article 23. NONDISCRIMINATION


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This Article assures that nationals and residents of a
Contracting State will not be subject to discriminatory taxation
in the other Contracting State. It also provides for nondiscrim
inatory taxation of residents of the taxing. State with respect to
deductions for amounts paid to residents of the other State. It
also prohibits a State from imposing discriminatory taxation upon

its resident companies that are owned, partly or wholly, by

residents of the other State. Non-discrimination, in the context

of this Article, means providing national treatment.


Paragraph **1** provides that a national of one Contracting
State may not be subject to taxation or connected requirements in

the other contracting State which are other or more burdensome


than the taxes and connected requirements imposed upon a national
of that other State in the same circumstances. **A** national of a
Contracting State is afforded protection under this paragraph
even if the national is not a resident of either Contracting
State. Thus, a **U.S.** citizen who is resident in a third country

is entitled, under this paragraph, to the same treatment in


Austria as an Austrian national who is in similar circumstances

(i.e., who is also resident in the third country). The term
"national" is defined in subparagraph 1(h) of Article **3** (General

Definitions).


The United States is not obligated, **by** virtue of paragraph **1,**
to apply the same taxing regime to an Austrian national who is
not resident in the United States and a **U.S.** national who is not
resident in the United States since that paragraph applies only
when the nationals **of** the two Contracting States are in the same

circumstances. United States citizens who are not residents of
the United States but _who_ are, nevertheless, subject to United

States tax on their worldwide income are not in the same circum

stances with respect to United States taxation as citizens of


Austria who are not United States residents. Thus, for example,
Article **23** would not entitle an Austrian national not resident in
the United States to the net basisrtaxation of **U.S.** source
dividends or other investment income that applies to a **U.S.**

citizen not resident in the United States.


Paragraph 2 provides that a permanent establishment in a

Contracting State of an enterprise of the other Contracting State may not be less favorably taxed in the first-mentioned than an


enterprise of that first-mentioned State which is carrying on the
same activities. This provision, however, does not obligate a
Contracting State to grant to a resident of the other Contracting

State any tax allowances, reliefs, etc., which it grants to its


own residents on account of their civil status or family
responsibilities. Thus, if an individual resident in Austria
owns an Austrian enterprise that has a permanent establishment in

the United States, in assessing income tax on the profits

attributable to the permanent establishment, the United States is.

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not obligated to allow to the Austrian resident the personal allowances for himself and his family that he would be permitted to take if the permanent establishment were a sole proprietorship owned and operated by a U.S. resident.

Section 1446 of the Code imposes on any partnership with income effectively connected with a U.S. trade or business the obligation to withhold tax on amounts allocable to a foreign


partner. In the context of the Convention, this obligation

applies with respect to an Austrian resident partner's share of the partnership income attributable to a U.S. permanent estab

lishment. There is no similar obligation with respect to the distributive shares of U.S. resident partners. The Memorandum of Understanding makes clear, however, that this distinction is not a form of discrimination within the meaning of paragraph 2 of the Article. No distinction is made between U.S. and Austrian partnerships, since the law requires that partnerships of both domiciles withhold tax in respect of the partnership shares of non-U.S partners. In distinguishing between U.S. and Austrian


partners, the requirement to withhold on the Austrian but not **the**

U.S. partner's share is not discriminatory taxation; rather, like

other withholding on nonresident aliens, is merely a reasonable method for the collection of tax from persons who are not contin ually present in the United States, and as to whom it may otherwise be difficult for the United States to enforce its tax

jurisdiction. If tax has been over-withheld, the partner can, as in other cases of overwithholding, file a U.S. tax return claiming a refund.

The Memorandum of Understanding also notes that paragraph 2 requires Austria to grant to an Austrian permanent establishment of a U.S. corporation the same carry-forward of losses that would be dllowed to a permanent establishment of an Austrian corpora tion.

The Memorandum of Understanding also notes that paragraph 2 requires Austria to grant to an Austrian permanent establishment

Paragraph 3 prohibits discrimination in the allowance of deductions. When an enterprise of a Contracting State pays interest, royalties or other disbursements to a resident of the other Contracting State, the first Contracting State must allow a deduction for those payments in computing the taxable profits of the enterprise under the same conditions as if the payment had been made to a resident of the first Contracting State. An exception to this rule is provided for cases where the provisions


of paragraph 1 of Article **9** (Associated Enterprises), paragraph 4

of Article 11 (Interest) or paragraph 5 of Article 12 (Royalties) apply, because all of these provisions permit deductions to be denied in certain circumstances in respect of transactions between related persons. This exception would include the denial or deferral of certain interest deductions under Code section 163(j). The term "other disbursements" is understood to include a reasonable allocation of executive and general administrative


**AUSTRIA** **391**

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expenses, research and development expenses and other expenses
incurred **for** the benefit of a group of related persons which
includes the person incurring the expense.

Paragraph **3** also provides that any debts of an enterprise of
a Contracting State to a resident of the other Contracting <sup>State</sup>
are deductible in the first Contracting State in computing the
capital tax of the enterprise under the same conditions as if the
debt had been contracted to a resident of the first-mentioned
Contracting State. Even though a Contracting State may not now

impose a national tax on capital, because the nondiscrimination

provisions apply to all taxes levied at all levels of government

in the **U.S.** and Austria, this provision may be relevant for **U.S.**
as well as Austrian. tax purposes, because of taxes on capital,

such as real property taxes, levied by sub-national governments.


Paragraph 4 prohibits a Contracting State from subjecting an
enterprise of that State that is wholly or partly owned or

controlled, directly or indirectly, by one or more residents of

the other Contracting State to taxation or connected requirements
that are other or more burdensome than the taxation or connected
requirements imposed on other similar enterprises in the first
State.

As in the case of its other treaties, the United States


takes the position, confirmed in the Memorandum of Understanding,
that the provisions of Code section 367(e) (2) regarding the
taxation of corporations on certain distributions in liquidation
to foreign parent -corporations are not contrary to paragraph 4 of
the Article. It takes the same position with respect to its
rules providing that -a corporation with nonresident alien share
holders is not eligible to make an election to be an **"S"** corpora
tion. In both cases, this position is based on the fact that

corporations eligible for these benefits are not similarly

situated. In the first case, a foreign parent corporation will

not be subject to U.S. tax on a subsequent alienation, as would a

**U.S.** corporation. In the second case, a foreign shareholder is
not subject to **U.S.** tax on worldwide income, as are **U.S.** resident

shareholders.


For the reasons given above in connection with the discus
sion of paragraph 2, it is also understood that the provision in

section 1446 of the Code for withholding tax on non-U.S. partners


does not violate paragraph 4 of the Article.

Paragraph 5 specifies that no provision of the Article will prevent either Contracting State from imposing the branch tax


described in paragraphs **6** and **7** of Article **10** (Dividends). Thus,

even if the branch tax were judged to violate the provisions of


paragraphs 2 or 4 of this Article, neither Contracting State

would be constrained from imposing the tax.


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As noted above, notwithstanding the specification of taxes covered by the Convention in Article 2 (Taxes Covered),.for purposes of providing nondiscrimination protection this Article applies to taxes of every kind and description imposed by a Contracting State or a political subdivision or local authority thereof. (Customs duties are not considered to be taxes for this purpose.)

The saving clause of paragraph 4 of Article 1 (Personal


Scope) does not apply to this Article, **by** virtue of the excep

tions in subparagraph 5(a) of that Article. Thus, for example, a U.S. citizen who is resident in Austria may claim benefits in the United States under this Article. 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).

Article 24. MUTUAL AGREEMENT PROCEDURE

This Article provides for cooperation between the competent authorities of the Contracting States to resolve disputes which may arise under the Convention and to resolve cases of double taxation not provided for in the Convention. The competent


authorities of the two Contracting States are identified in
subparagraph 1(e) of Article **3** (General Definitions).

Paragraph 1 provides that where a person considers that the actions of one or both Contracting States will result for him in taxation which is not in accordance with the Convention he may present his case to the competent authority of his State of


residence or nationality. It is not necessary for a person first

to have exhausted the remedies provided under the national laws


**of** the Contracting States before presenting a case to the compe

tent authorities.

Paragraph 2 provides that if the competent authority of the Contracting State to which the case is presented judges the case to have merit but cannot reach a unilateral solution, it shall

seek agreement with the competent authority of the other Con tracting State so as to avoid taxation not in accordance with the Convention. If agreement is reached under this provision, it is to be implemented even if implementation is otherwise barred by


the statute of limitations or **by** some other procedural limita

tion, such as a closing agreement. Because, under paragraph 2 of Article 1 (Personal Scope), the Convention cannot operate to


increase a taxpayer's liability, time or other procedural limita
tions can be overridden only for the purpose of making refunds

and not to impose additional tax.


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Paragraph 3 authorizes the competent authorities to seek to resolve difficulties or doubts that may arise on the application

or interpretation of the Convention. The paragraph includes a


non-exhaustive list of examples of the matters about which the

competent authorities may reach agreement. They may agree to the
same attribution of income, deductions, credits or allowances

between an enterprise in one Contracting State and its permanent

establishment in the other State or between related persons. The competent authorities may also agree to settle a variety of conflicting applications of the Convention, including those regarding the characterization of items of income, the applica tion of source rules to particular items of income, and to a common meaning of a term.

The paragraph also authorizes the competent authorities to consult for purposes of eliminating double taxation in cases not provided for in the Convention. This provision is intended to permit the competent authorities to implement the Convention in particular cases in a manner that is consistent with its expressed general purposes, even though the cases are not, specifically covered by the Convention. An example of such a case might be double taxation arising from a transfer pricing adjustment between two permanent establishments of a thirdcountry resident, one in the United States and one in Austria. Since no resident of a Contracting State is involved in the case (both permanent establishments being residents of the third State), the Convention does not, by its terms, apply, but the competent authorities may, nevertheless, use the authority of the Convention to seek to prevent the.double taxation.

Paragraph 4 provides that the competent authorities may communicate with each other directly for the purpose of reaching agreement under this Article.

Paragraph 5 directs the competent authorities to consult with each other to develop an agreed application of the provi sions of the Convention, including Article 16 (Limitation on Benefits). It also allows the competent authorities to prescribe regulations and carry out the purposes of the Convention.

The Memorandum of Understanding explains that the mutual agreement procedure is fully governed by the provisions of the treaty and of internal legislation and is not intended to create new treaty law. However, one of the main purposes of this provision is to find a coordinated understanding of treaty provisions that leaves room for divergent interpretations.

This Article is not subject to the saving clause of para graph 4 Article 1 (Personal Scope), by virtue of the exceptions to the saving clause in subparagraph 5(a) of that Article. Thus, rules, definitions, procedures, etc., which are agreed upon by


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the competent authorities under this Article, may be applied by the United States with respect to its citizens and residents even


if 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.