Article 4 sets forth rules for determining whether a

person is a resident of a Contracting State for purposes of the Convention. The treaty definition of residence is to be used only for purposes of the Convention. The 1956 Convention does

not contain a comprehensive definition of residence.

   Determination of residence is important because, as noted in
the explanation to Article 1 (General Scope), as a general matter
only residents of the Contracting States may claim the benefits

of the Convention. Any entitlement to benefits of a resident of

a Contracting State is, however, subject to the requirements of
Article 16 (Limitation on Benefits).

   The determination of residence for treaty purposes looks to a
person's liability to tax under the laws of the Contracting

States. A person who, under those laws, is a resident of one

Contracting State and not of the other need look no further.

Except as specifically provided in the Article (e.g., subpara­

graph 1(c)) for purposes of the Convention that person will be
treated as a resident of the State in which he is resident under

internal law. If, however, a person is resident in both

Contracting States under their respective taxation laws, the
tie-breaker rules attempt to assign one State of residence to
such a person.

Paragraph 1 defines a "resident of a Contracting State."

In general, this definition incorporates the definitions of resi­
dence in U.S. and Austrian law, by defining a resident as a
person who, under the laws of a Contracting State, is subject to
tax there by reason of his domicile, residence, citizenship,
place of management, place of incorporation, or any other similar

criterion. Thus, as a general matter, residents of the United

States include U.S. citizens as well as aliens who are considered
U.S. residents under U.S. law.

   Paragraph 1 provides certain exceptions to this general

rule. Under subparagraph 1(a), if a person is liable to tax only

in respect of income from sources within a State, the person will
not be treated as a resident of that Contracting State for

purposes of the Convention. Thus, for example, an Austrian

consular official in the United States, who may be subject to
U.S. tax on U.S. source investment income, but who is not taxable

in the United States on non-U.S. income, would not be considered

a resident of the United States for purposes of the Convention

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(See Code section 7701(b)(5)(B)). Similarly, an Austrian enter­

prise with a permanent establishment in the United States is not, by virtue of that permanent establishment, a resident of the United States. The enterprise is subject to U.S. tax only with

respect to its income that is attributable to the U.S. permanent

establishment, not with respect to its worldwide income.

   Subparagraph 1(b) provides that the income of a partnership,

estate or trust will be treated as the income of a resident of a Contracting State only to the extent that the income derived or paid by such person is subject to tax in that State as the income of a resident, either in the hands of the person deriving the

income or in the hands of its partners, beneficiaries or grantor.

The Memorandum of Understanding describes the treatment of passthrough entities, such as limited liability companies, not explicitly referred to in the Article.

Under U.S. law, any organization classified as a partnership for tax purposes is taxable on a transparent basis. (Certain

publicly-traded partnerships, however, will be classified for tax

purposes as corporations taxable at the entity level.) Thus, under paragraph 1(b) of Article 4, Austrian source income

received by an entity classified as a partnership for U.S. tax
purposes will generally be treated as income of a U.S. resident
to the extent the income is included in the distributive share of
partners or members that are themselves U.S. residents (looking

through any partnerships that are themselves partners or members

and applying the provisions of Article 16 (Limitation on
Benefits).

   Certain limited liability companies are classified as

partnerships for U.S. tax purposes. Under the Memorandum of

Understanding, the residence of entities treated as pass-throughs
for tax purposes is determined on the same basis as for a

partnership. Similarly, the treatment under the Convention of income received by a trust or estate will be determined by the

residence for taxation purposes of the person subject to tax on
such income, which may be the grantor, the beneficiaries or the
estate or trust itself, depending on the circumstances.

   Subparagraph 1(c) specifies additional conditions for
determining whether a U.S. citizen or an alien lawfully admitted

for permanent residence in the United States (i.., a "green card" holder) will be treated as a U.S. resident for purposes of the Convention. If such an individual is not also a resident of Austria under paragraph 1, he will be treated as a resident of

the United States only if he has a substantial presence, perma­

nent home or habitual abode in the United States. Substantial presence for this purpose is a similar concept to "substantial presence" under section 7701(b) of the U.S. Internal Revenue code

and the regulations thereunder (a minimum physical presence of

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more than 30 days in the calendar year for which the

determination is relevant and a total of at least 183 days in the

current and previous two calendar years). Thus, for example, an
individual resident of Mexico who is a U.S. citizen by birth, or
who is a Mexican citizen and holds a U.S. green card, but who, in
either case, does not live in the United States, would not be

entitled to benefits under the treaty. On the other hand, a U.S. citizen who is transferred to Mexico for two years but who

maintains a permanent home or habitual abode in the United States

would be entitled to treaty benefits. However, the residence of

a U.S. citizen or green card holder who is also a resident of
Austria under Austrian law will be determined by application of

the tie-breaker rules of paragraph 2.

   Subparagraph 1(d) clarifies that a Contracting State, and
its political subdivisions or local authorities, or agencies or

instrumentalities of such governments, subdivisions, etc., will be treated as residents of that State. Thus, such governmental entities are entitled to treaty benefits as residents of a

Contracting State.

   Although the Article does not deal explicitly with the

residence of a tax-exempt organization, including pension funds,

it is understood that such an organization that is established
under the laws of a Contracting State, and is, therefore, a

resident of that State under its law, is to be treated as a

resident of that State for purposes of the Convention as well.

The United States and Austrian negotiators agreed that such an organization is "liable to the tax laws" of its State of resi­

dence, under which it pays zero tax if it complies with certain
standards, and that if it does not comply with these standards it
will pay tax on its income. Thus, the United States and Austria
agree that the fact that a charitable organization or pension
fund is exempt from tax in its resident country is not to be
construed to deny such organization or fund resident status under

the Convention. Paragraph 1(g) of Article 16 also affects the treatment of such entities for purposes of the Convention.

   Paragraph 2 provides a series of tie-breaker rules to

determine a single State of residence for an individual who, under paragraph 1, would be a resident of both countries. The first test is where the individual has a permanent home. If that test is inconclusive because the individual has a permanent home

available in both States or in neither State, his residence is in
the Contracting State where his personal and economic relations

are closest, i.e., his "center of vital interests". The Memoran­

dum of Understanding clarifies that a period of time beyond a

year may have to be examined to identify the center of vital

interests.

   If the center of vital interests test is also inconclusive,

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residence is in the Contracting State where the individual main­

tains an habitual abode. If he has an habitual abode in both

States or in neither of them, he will be treated as a resident of

his Contracting State of nationality. If he is a national of

both States or of neither of them, the competent authorities
shall endeavor to assign a single State of residence by mutual

agreement.

Paragraph 3 resolves dual-residence issues for corporations. Under U.S. law, a corporation is treated as resident in the United States if it is created or organized under the laws of the United States or a political subdivision. Under Austrian law a corporation is treated as a resident of Austria if it is regis­ tered or managed and controlled there. Dual residence, there­

fore, can arise if a corporation organized in the U.S. is managed

and controlled in Austria. Under paragraph 3, a dual-resident

corporation will be treated as a resident of a Contracting State
if it is created under the laws of that State, or political
subdivision thereof. This provision conforms to U.S. law.
   Paragraph 4 deals with persons other than individuals or
companies that are resident in both the United States and Austria

under paragraph 1. The competent authorities are instructed to

determine by mutual agreement a single State of residence for
that person for purposes of the Convention and to determine the
mode of application of the Convention to such person.

Article S. PERMANENT ESTABLISHMENT

This Article defines the term "permanent establishment," which is significant for several articles of the Convention. The existence of a permanent establishment in a Contracting State is

necessary under Article 7 (Business Profits) for taxation by that
State of the business profits of a resident of the other Con­

tracting State. Since the term "fixed base" in Article 14

(Independent Personal Services) is understood by reference to the

definition of "permanent establishment," this Article is also relevant for purposes of Article 14. Articles 10, 11, and 12

(dealing with dividends, interest, and royalties, respectively)
provide for reduced rates of tax at source on payments of these
items of income to a resident of the other State only when the
income is not attributable to a permanent establishment or fixed

base that the recipient has in the source State. The concept is also relevant in determining which Contracting State may tax certain gains under Article 13 (Capital Gains) and certain "other

income" under Article 21 (Other Income).

   This Article follows closely recent U.S. treaties and the

OECD Model provisions. It is similar to the definition of a

permanent establishment in the 1956 Convention except that the

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exceptions from the definition of "permanent establishment" have been broadened to include not only certain specified activities

but also any other activity of a preparatory or auxiliary

character. Like other recent U.S. income tax conventions, it

adds a rule that treats drilling rigs or ships in the same manner
as construction sites.

   Paragraph 1 provides the basic definition of the term

"permanent establishment." The term means a fixed place of

business through which the business of an enterprise is wholly or
partly carried on.

   Paragraph 2 lists examples of fixed places of business that

constitute a permanent establishment. The list is illustrative and non-exclusive and includes a place of management, a branch,

an office, a factory, a workshop, and a mine, an oil or gas well,
a quarry, or any other place of extraction of natural resources.

   Paragraph 3 provides rules to determine when a building site
a construction, assembly or installation project, or an installa­
tion or drilling rig or ship used to explore or develop natural
resources constitutes a permanent establishment. The site,
project, etc., constitutes a permanent establishment only if it
lasts for more than 12 months. The twelve-month test applies
separately to each individual site or project and the period
begins when work (including preparatory work carried on by the
enterprise) physically begins in a Contracting State. A series
of contracts or projects that are interdependent, both commer­
cially and geographically, are to, be treated as a single project
for purposes of applying the twelve-month threshold test. For
example, the construction of a housing development would be
considered as a single project even if each house is constructed
for a different purchaser. If the twelve-month threshold is
exceeded, the site or project constitutes a permanent establish­
ment from its first day. This interpretation is based on the
Commentaries to paragraph 3 of Article 5 (Permanent Establish­
ment) of the OECD Model, which contains language almost identical
to that in this Convention with respect to construction activi­
ties, and, therefore, conforms to the generally accepted interna­
tional interpretation of the language in paragraph 3 of Article 5
of the Convention with respect to such activities. Paragraph 3
applies the same twelve-month threshold test to drilling rigs,
both onshore and offshore. Rigs must, therefore, be present in a
Contracting State for twelve months to constitute a permanent
establishment.

   Paragraph 4 contains exceptions to the general rule of
paragraph 1 that a fixed place of business through which a
business is carried on constitutes a permanent establishment.
The paragraph lists a number of activities that may be carried on
through a fixed place of business, but that, nevertheless, will

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not give rise to a permanent establishment. The use of facili­

ties solely to store, display or deliver merchandise belonging to

an enterprise will not constitute a permanent establishment of

that enterprise. The maintenance of a stock of goods belonging to an enterprise solely for the purpose of storage, display or delivery, or solely for the purpose of processing by another enterprise will not give rise to a permanent establishment of the

first-mentioned enterprise. The maintenance of a fixed place of

business solely for activities that have a preparatory or auxil­
iary character for the enterprise, such as advertising or the

supply of information (but not including the carrying on of scientific research), will not constitute a permanent establish­ ment of the enterprise. It is understood that a combination of

these activities will not give rise to a permanent establishment.

Paragraphs 5 and 6 specify when the use of an agent will constitute a permanent establishment. Under paragraph 5, a

dependent agent acting on behalf of an enterprise will be deemed

to be a permanent establishment of the enterprise, if the agent has and habitually exercises an authority to conclude contracts

in the name of that enterprise. The contracts referred to are those relating to the essential business operations of the

enterprise; not those relating to ancillary activities. If,

however, the agent's activities are limited to those activities

specified in paragraph 4 that would not constitute a permanent

establishment if carried on by the enterprise through a fixed

place of business, the agent will not be a permanent establish­
ment of the enterprise.

   Paragraph 6 provides that an enterprise will not be deemed

to have a permanent establishment in a Contracting State merely because it carries on business in that State through an indepen­ dent agent, including a broker or general commission agent, if the agent is acting in the ordinary course of his business.

Paragraph 7 clarifies that a company that is a resident of a

Contracting State will not be deemed to have a permanent
establishment in the other Contracting State merely because it

controls, or is controlled by, a company that is a resident of that other Contracting State, or that carries on business in that

other Contracting State. The determination of whether or not a permanent establishment exists will be made solely on the basis

of the factors described in paragraphs 1 through 6 of the Article and not on the ownership or control relationship between the

companies.

         Article 6. INCOME FROM REAL PROPERTY

Paragraph 1 provides that income of a resident of a Con­ tracting State derived from real property situated in the other

Contracting State may be taxed in the Contracting State in which

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the property is situated. Like the OECD Model, the paragraph specifies that income from real property includes ^{income from} agriculture or forestry. This Article does not grant an exclu­ sive taxing right to the situs State, but assigns it the primary

taxing right. The Article does not impose any limitation in
terms of rate or form of tax on the situs State, although, as
discussed below in connection with paragraph 5, it does allow the
taxpayer the right to elect to be taxed on a net basis.

   Paragraph 2 defines the term "real property" as having the

meaning that it has under the laws of the situs country. In

addition, the paragraph specifies certain classes of property
which, regardless of internal law definitions, are to be included
within the meaning of the term for purposes of the Convention.
The definition conforms to that in the OECD Model.
   Paragraph 3 elaborates on the general rule of paragraph 1 by
specifying that the income referred to in paragraph 1 means
income from any use of real property, including, but not limited
to, income from direct use by the owner and rental income from
the letting or sub-letting of real property.

   The Memorandum of Understanding further elaborates on
paragraph 3. It clarifies that Article 6 applies not only to
income earned through the use of real property owned by the
income recipient, but also to income from the exploitation of
rights in real property. For example, consider a piece of real
property in Austria owned by a resident of Germany and leased by
the German owner to a U.S. corporation, which then sub-leases the
property. It is understood that the rules of Article 6 will
apply to the income earned by the U.S. corporation from its sub­
lease of the property, even though the U.S. corporation does not
own the Austrian real property, and the property that it does own
(i e., the rights in the property) is technically movable
property.

   Paragraph 4 specifies that the basic rule of paragraph 1 (as
elaborated in paragraph 3) applies to.income from real property
of an enterprise and to income from real property used for the
performance of independent personal services. This provision
clarifies that the situs State may tax the real property income
of a resident of the other Contracting State in the absence of a
permanent establishment or fixed base in the situs State, not­
withstanding the requirements of Articles 7 (Business Profits)
and 14 (Independent Personal Services) that to be taxable, income
must be attributable to a permanent establishment or fixed base,
respectively.

   Paragraph 5 permits a taxpayer to elect to be taxed on real
property income on a net basis, that is, as if such income were
attributable to a permanent establishment. The election is

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binding for the taxable year of the election and all subsequent
taxable years unless the competent authorities, upon request of
the taxpayer, agree to terminate the election. In the United
 States, revocation will be granted in accordance with the provi­
 sions of the relevant regulations under section 897.