Article 17 and the anti-abuse provisions of domestic law complement each other, as

Article 17 effectively determines whether an entity has a sufficient nexus to the Contracting State to be treated as a resident for treaty purposes, while domestic anti-abuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit principles) determine whether a particular transaction should be recast in accordance with its substance. Thus, internal law principles of the source State may be applied to identify the beneficial owner of an item of income, and Article 17 then will be applied to the beneficial owner to determine if that person is entitled to the benefits of the Convention with respect to such income.

Structure of the Article

The structure of the Article is as follows: Paragraph 1 states that a person that is a resident of a Contracting State and derives income from the other Contracting State is entitled to the benefits of the Convention only if that person possesses one of a series of listed attributes. Paragraph 2 provides further limitations on entidades and colectividades otherwise entitled to benefits under paragraph 1. Paragraph 3 provides an exception to paragraph 1 with respect to former-long-term-residents of the United States. Paragraph 4 provides that benefits also may be granted if the competent authority of the State from which benefits are claimed determines that it is appropriate to provide benefits in that case. Paragraph 5 defines the term "recognized securities exchange" as used in paragraph 1(e).

Paragraph 1

Paragraph 1 states that a person that is a resident of a Contracting State and derives income from the other Contracting State is entitled to the benefits of the Convention only if that person possesses one of a series of listed attributes of a resident of a Contracting State. The benefits otherwise accorded to residents under the Convention include all limitations on sourcebased taxation under Articles 6 through 16 and 18 through 23, the treaty-based relief from double taxation provided by Article 24 (Relief from Double Taxation), and the protection afforded to residents of a Contracting State under Article 25 (Non-Discrimination). Some provisions do not require that a person be a resident in order to enjoy the benefits of those provisions. These include paragraph 1 of Article 25 (Non-Discrimination), Article 26 (Mutual Agreement Procedure), and Article 28 (Diplomatic Agents and Consular Officers). Article 17 accordingly does not limit the availability of the benefits of these provisions.

Paragraph 1 has seven subparagraphs, each of which describes a category of residents that are entitled to all benefits of the Convention.

It is intended that the provisions of paragraph 1 will be self executing. Unlike the provisions of paragraph 4, discussed below, claiming benefits under paragraph 2 does not require advance competent authority ruling or approval. The tax authorities may, of course, on review, determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the benefits claimed.

Individuals -- Subparagraph 1(a)

Subparagraph (a) provides that an individual resident of a Contracting State will be entitled to all treaty benefits provided that the individual would not be considered a resident of another country under the principles of subparagraphs 3(a) and 3(b) of Article 4 (Residence). (This provision, modified from the corresponding provision in the U.S. Model, is intended to prevent a third-country resident individual from using Venezuela’s broad residency concept ( “domiciliado” ) to treaty-shop into the United States.) If such an individual receives income as a nominee on behalf of a third-country resident, benefits may be denied under the respective articles of the Convention by the requirement that the beneficial owner of the income be a resident of a Contracting State.

Governmental Entities -- Subparagraph 1(b)

Subparagraph (b) provides that the Contracting States, their political subdivisions and local authorities, and instrumentalities and companies wholly-owned by the Contracting States or one of their political subdivisions and local authorities, will be entitled to all benefits of the Convention.

Tax Exempt Organizations and Pension Funds -- Subparagraph 1(c)

Subparagraph 1(c) provides that not-for-profit organizations, including pension funds or private foundations, that because of such status generally are exempt from tax in their State of

residence, will be entitled to all the benefits of the Convention if more than half of the beneficiaries, members or participants, if any, in such an organization are themselves entitled to the benefits of the Convention.

Active Trade or Business -- Subparagraph 1(d)

Subparagraph 1(d) sets forth a test under which a resident of a Contracting State may receive treaty benefits with respect to certain items of income that are connected to an active trade or business conducted in its State of residence.

This subparagraph sets forth a three-pronged test that must be satisfied in order for a resident of a Contracting State to be entitled to the benefits of the Convention with respect to a particular item of income. First, the resident must be engaged in the active conduct of a trade or business in its State of residence. Second, the income derived from the other State must be derived in connection with, or be incidental to, that trade or business. Third, if there is common ownership of the activities in both States, the trade or business must be substantial in relation to the activity in the other State that generated the item of income. These determinations are made separately for each item of income derived from the other State. It therefore is possible that a person would be entitled to the benefits of the Convention with respect to one item of income but not with respect to another. If a resident of a Contracting State is entitled to treaty benefits with respect to a particular item of income under paragraph 3, the resident is entitled to all benefits of the Convention insofar as they affect the taxation of that item of income in the other State. Set forth below is a discussion of each of the three prongs of the test under paragraph 3.

Active Conduct of Trade or Business Requirement

The term "trade or business" is not defined in the Convention. Pursuant to paragraph 2 of Article 3 (General Definitions), when determining whether a resident of the other State is entitled to the benefits of the Convention under subparagraph 1(d) with respect to income derived from U.S. sources, the United States will ascribe to this term the meaning that it has under the law of the United States. Accordingly, the United States competent authority will refer to the regulations issued under section 367(a) for the definition of the term "trade or business." In general, therefore, a trade or business will be considered to be a specific unified group of activities that constitute or could constitute an independent economic enterprise carried on for profit. Furthermore, a corporation generally will be considered to carry on a trade or business only if the officers and employees of the corporation conduct substantial managerial and operational activities. See Code section 367(a)(3) and the regulations thereunder.

Notwithstanding this general definition of trade or business, subparagraph 1(d) provides that the business of making or managing investments will be considered to be a trade or business only when part of banking, insurance or securities activities conducted by a bank, insurance company, or registered securities dealer. Conversely, such activities conducted by a person other than a bank, insurance company or registered securities dealer will not be considered to be the conduct of an active trade or business, nor would they be considered to be the conduct of an active trade or business if conducted by a banking or insurance company or registered securities dealer, but not as part of the company's banking, insurance or dealer business.

Because a headquarters operation is in the business of managing investments, a company that functions solely as a headquarters company will not be considered to be engaged in an active trade or business for purposes of paragraph 1(d).

Derived in Connection With Requirement

Under the second prong of the test of subparagraph 1(d) income is derived in connection with a trade or business if the income-producing activity in the other State is a line of business that forms a part of or is complementary to the trade or business conducted in the State of residence by the income recipient. Although no definition of the terms "forms a part of" or "complementary" is set forth in the Convention, it is intended that a business activity generally will be considered to "form a part of" a business activity conducted in the other State if the two activities involve the design, manufacture or sale of the same products or type of products, or the provision of similar services. In order for two activities to be considered to be "complementary," the activities need not relate to the same types of products or services, but they should be part of the same overall industry and be related in the sense that the success or failure of one activity will tend to result in success or failure for the other. In cases in which more than one trade or business is conducted in the other State and only one of the trades or businesses forms a part of or is complementary to a trade or business conducted in the State of residence, it is necessary to identify the trade or business to which an item of income is attributable. Royalties generally will be considered to be derived in connection with the trade or business to which the underlying intangible property is attributable. Dividends will be deemed to be derived first out of earnings and profits of the treaty-benefited trade or business, and then out of other earnings and profits. Interest income may be allocated under any reasonable method consistently applied. A method that conforms to U.S. principles for expense allocation will be considered a reasonable method. The following examples illustrate the application of this provision of subparagraph 1(d).

Example 1. USCo is a corporation resident in the United States. USCo is engaged in an active manufacturing business in the United States. USCo owns 100 percent of the shares of FCo, a corporation resident in Venezuela. FCo distributes USCo products in Venezuela. Since the business activities conducted by the two corporations involve the same products, FCo's distribution business is considered to form a part of USCo's manufacturing business within the meaning of subparagraph 1(d).

Example 2. The facts are the same as in Example 1, except that USCo does not manufacture. Rather, USCo operates a large research and development facility in the United States that licenses intellectual property to affiliates worldwide, including FCo. FCo and other USCo affiliates then manufacture and market the USCo-designed products in their respective markets. Since the activities conducted by FCo and USCo involve the same product lines, these activities are considered to form a part of the same trade or business.

Example 3. Americair is a corporation resident in the United States that operates an international airline. FSub is a wholly-owned subsidiary of Americair resident in

Venezuela. FSub operates a chain of hotels in Venezuela that are located near airports served by Americair flights. Americair frequently sells tour packages that include air travel to Venezuela and lodging at FSub hotels. Although both companies are engaged in the active conduct of a trade or business, the businesses of operating a chain of hotels and operating an airline are distinct trades or businesses. Therefore FSub's business does not form a part of Americair's business. However, FSub's business is considered to be complementary to Americair's business because they are part of the same overall industry (travel) and the links between their operations tend to make them interdependent.

Example 4. The facts are the same as in Example 3, except that FSub owns an office building in Venezuela instead of a hotel chain. No part of Americair's business is conducted through the office building. FSub's business is not considered to form a part of or to be complementary to Americair's business. They are engaged in distinct trades or businesses in separate industries, and there is no economic dependence between the two operations.

Example 5. USFlower is a corporation resident in the United States. USFlower produces and sells flowers in the United States and other countries. USFlower owns all the shares of ForHolding, a corporation resident in Venezuela. ForHolding is a holding company that is not engaged in a trade or business. ForHolding owns all the shares of three corporations that are resident in Venezuela: ForFlower, ForLawn, and ForFish. ForFlower distributes USFlower flowers under the USFlower trademark in Venezuela. ForLawn markets a line of lawn care products in the other State under the USFlower trademark. In addition to being sold under the same trademark, ForLawn and ForFlower products are sold in the same stores and sales of each company's products tend to generate increased sales of the other's products. ForFish imports fish from the United States and distributes it to fish wholesalers in Venezuela. For purposes of paragraph 1(d), the business of ForFlower forms a part of the business of USFlower, the business of ForLawn is complementary to the business of USFlower, and the business of ForFish is neither part of nor complementary to that of USFlower.

Finally, a resident in one of the States also will be entitled to the benefits of the Convention with respect to income derived from the other State if the income is "incidental" to the trade or business conducted in the recipient's State of residence. Subparagraph 1(d) provides that income derived from a State will be incidental to a trade or business conducted in the other State if the production of such income facilitates the conduct of the trade or business in the other State. An example of incidental income is the temporary investment of working capital derived from a trade or business.

Substantiality

As indicated above, subparagraph 1(d) provides that income that a resident of a State derives from the other State will be entitled to the benefits of the Convention under paragraph 1 only if the income is derived in connection with a trade or business conducted in the recipient's

State of residence and that trade or business is "substantial" in relation to the income-producing activity in the other State. Subparagraph 1(d) provides that whether the trade or business of the income recipient is substantial will be determined based on all the facts and circumstances. These circumstances generally would include the relative scale of the activities conducted in the two States and the relative contributions made to the conduct of the trade or businesses in the two States.

Publicly-Traded Corporations -- Subparagraph 1(e)

Subparagraph (e) applies to publicly-traded corporations, and provides that a company will be entitled to all the benefits of the Convention if in the principal class of shares of the company there is substantial and regular trading on a “recognized securities exchange” located in either Contracting State. The term "recognized securities exchange" is defined in paragraph 5.

The term "principal class of shares" is not defined in the Convention, but will be interpreted by the United States, consistently with other recent U.S. tax treaties and the U.S. Model, to mean that class of shares that represents the majority of the voting power and value of the company. In most cases, this class will be the ordinary or common shares of the company. If the company has more than one class of shares, it is necessary as an initial matter to determine whether one of the classes accounts for more than half of the voting power and value of the company. If so, then only those shares are considered for purposes of the regular trading requirement. If no single class of shares accounts for more than half of the company's voting power and value, it is necessary to identify a group of two or more classes of the company's voting power and value, and then to determine whether each class of shares in this group satisfy the regular trading requirement. Although in a particular case involving a company with several classes of shares it is conceivable that more than one group of classes could be identified that account for more than 50% of the shares, it is only necessary for one such group to satisfy the requirements of this subparagraph in order for the company to be entitled to benefits. Benefits would not be denied to the company even if a second, non-qualifying, group of shares with more than half of the company's voting power and value could be identified.

The term "substantial and regular trading" is not defined in the Convention. In accordance with paragraph 2 of Article 3 (General Definitions), this term will be defined by reference to the domestic tax laws of the State from which treaty benefits are sought, generally the source State. In the case of the United States, this term is understood to have the meaning it has under Treas. Reg. § 1.884-5(d)(4)(i)(B), relating to the branch tax provisions of the Code. Under these regulations, a class of shares is considered to be "regularly traded" if two requirements are met: trades in the class of shares are made in more than de minimis quantities on at least 60 days during the taxable year, and the aggregate number of shares in the class traded during the year is at least 10 percent of the average number of shares outstanding during the year. Sections 1.884-5(d)(4)(i)(A), (ii) and (iii) will not be taken into account for purposes of defining the term "regularly traded" under the Convention. Authorized but unissued shares are not considered for purposes of this test.

As described more fully below, the regular trading requirement can be met by trading on any recognized exchange or exchanges located in either State. Trading on one or more

recognized securities exchanges may be aggregated for purposes of this requirement. Thus, a U.S. company could satisfy the regularly traded requirement through trading, in whole or in part, on a recognized securities exchange located in the other Contracting State.

Subsidiaries of Publicly-Traded Corporations -- Subparagraph 1(f)

Subparagraph 1(f) applies to subsidiaries of publicly-traded corporations, and provides a test under which certain companies that are directly or indirectly controlled by companies satisfying the publicly-traded test of subparagraph 1(e) may be entitled to the benefits of the Convention. Under this test, a company will be entitled to the benefits of the Convention if 50 percent or more of each class of shares in the company is directly or indirectly owned by five or fewer companies that are described in subparagraph 1(f).

This test differs from that under subparagraph 1(e) in that 50 percent of each class of the company's shares, not merely the class or classes accounting for more than 50 percent of the company's votes and value, must be held by publicly-traded companies described in subparagraph 1(e). Thus, the test under subparagraph 1(f) considers the ownership of every class of shares outstanding, while the test under subparagraph 1(e) only considers those classes that account for a majority of the company's voting power and value.

Subparagraph 1(f) permits indirect ownership. Consequently, the ownership by publiclytraded companies described in subparagraph 1(e) need not be direct. However, any intermediate owners in the chain of ownership must themselves be entitled to benefits under paragraph 1.

Ownership/Base Erosion -- Subparagraph 1(g)

Subparagraph 1(g) provides a two part test, the so-called ownership and base erosion test. This test applies to any form of legal entity that is a resident of a Contracting State. Both prongs of the test must be satisfied for the resident to be entitled to benefits under this subparagraph.

The ownership prong of the test, under clause i), requires that 50 percent or more of each class of beneficial interests in the person (in the case of a corporation, 50 percent or more of each class of its shares) be owned by persons who are themselves entitled to benefits under other tests of paragraph 1 (i.e., subparagraphs (a), (b), (c), (e), or (f)). The ownership may be indirect through other persons themselves entitled to benefits under paragraph 1.

Trusts may be entitled to benefits under this provision if they are treated as residents under Article 4 (Residence) and they otherwise satisfy the requirements of this subparagraph. For purposes of this subparagraph, the beneficial interests in a trust will be considered to be owned by its beneficiaries in proportion to each beneficiary's actuarial interest in the trust. The interest of a remainder beneficiary will be equal to 100 percent less the aggregate percentages held by income beneficiaries. A beneficiary's interest in a trust will not be considered to be owned by a person entitled to benefits under the other provisions of paragraph 1 if it is not possible to determine the beneficiary's actuarial interest. Consequently, if it is not possible to determine the actuarial interest of any beneficiaries in a trust, the ownership test under clause i) cannot be satisfied, unless all beneficiaries are persons entitled to benefits under the other subparagraphs of

paragraph 1.

The base erosion prong of the test under subparagraph 1(g) requires that less than 50 percent of the person's gross income for the taxable year be paid or accrued, directly or indirectly, to non-residents of either State, in the form of payments that are deductible for tax purposes in the entity's State of residence. To the extent they are deductible from the taxable base, trust distributions would be considered deductible payments. Depreciation and amortization deductions, which are not "payments," are disregarded for this purpose. The purposed of this provision is to determine whether the income derived from the source State is in fact subject to the tax regime of either State. Consequently, payments to any resident of either State, are not considered base eroding payments for this purpose (to the extent that these recipients do not themselves base erode to non-residents).

The term "gross income" defined in paragraph 6.

Paragraph 2

Paragraph 2 provides that an entidad or colectividad formed under the laws of Venezuela otherwise entitled to benefits under paragraph 1 will not be entitled to the benefits of this Convention if 50 percent or more of the vote or value of a "disproportionate" class of interests is owned by persons other than citizens of the United States or residents of the United States or Venezuela that meet the requirements of subparagraphs (a), (b), (c), (e), or (f) of paragraph 1. In general, a class of interests is "disproportionate" for these purposes if the interests entitle the owner to a disproportionately higher participation in the earnings that the company generates in the other State through particular assets or activities of the company. Such participation may take any form, including dividends or redemption payment. Such a class of interests would include so-called alphabet stock or tracking stock that entitles the holder to earnings produced by a particular division or subsidiary of the company in the source State. This provision applies if the disproportionate class of interests is issued by the company claiming benefits, or by a company that controls the company claiming benefits. In this context, control does not require majority ownership.

Paragraph 3

Paragraph 3 provides that notwithstanding paragraph 1, a former long-term resident of the United States shall not be entitled to the benefits of the Convention for the 10-year period following the loss of long-term-resident status if such loss had for one of its principal purposes the avoidance of U.S. tax. Under section 877 of the Code, under which certain former U.S. citizens and long-term residents are subject to U.S. tax, an individual shall be presumed as having a principal purpose to avoid U.S. tax if

(1) the average annual net income tax of such individual for the period of 5 taxable years ending before the date of the loss of status is greater than $100,000 (indexed for inflation after 1994); or (2) the net worth of such individual as of the date of the loss of status is $500,000 or more (indexed for inflation after 1994).

Paragraph 14 of the Protocol provides that “long-term resident” shall mean any individual who is a lawful permanent resident of the United States in 8 or more taxable years during the preceding 15 taxable years. The paragraph further provides that in determining whether the threshold in the preceding sentence is met, there shall not count any year in which the individual is treated as a resident of Venezuela under this Convention, or as a resident of any country other than the United States under the provisions of any other tax treaty of the United States, and, in either case, the individual does not waive the benefits of such treaty applicable to residents of the other country.

Paragraph 4

Paragraph 4 provides that a resident of one of the States that is not otherwise entitled to the benefits of the Convention may be granted benefits under the Convention if the competent authority of the State from which benefits are claimed so determines. This discretionary provision is included in recognition of the fact that, with the increasing scope and diversity of international economic relations, there may be cases where significant participation by thirdcountry residents in an enterprise of a Contracting State is warranted by sound business practice or long-standing business structures and does not necessarily indicate a motive of attempting to derive unintended Convention benefits.

The competent authority of a State will base a determination under this paragraph on whether the establishment, acquisition, or maintenance of the person seeking benefits under the Convention, or the conduct of such person's operations, has or had as one of its principal purposes the obtaining of benefits under the Convention. Thus, persons that establish operations in one of the States with the principal purpose of obtaining the benefits of the Convention ordinarily will not be granted relief under paragraph 4.

The competent authority may determine to grant all benefits of the Convention, or it may determine to grant only certain benefits. For instance, it may determine to grant benefits only with respect to a particular item of income in a manner similar to subparagraph 1(d). Further, the competent authority may set time limits on the duration of any relief granted.

It is assumed that, for purposes of implementing paragraph 4, a taxpayer will not be required to wait until the tax authorities of one of the States have determined that benefits are denied before he will be permitted to seek a determination under this paragraph. In these circumstances, it is also expected that if the competent authority determines that benefits are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty provision or the establishment of the structure in question, whichever is later.

Finally, there may be cases in which a resident of a Contracting State may apply for discretionary relief to the competent authority of his State of residence. For instance, a resident of a State could apply to the competent authority of his State of residence in a case in which he had been denied a treaty-based credit under Article 24 on the grounds that he was not entitled to benefits of the article under Article 17.

Paragraph 5

Paragraph 5 provides that the term "recognized securities exchange" means, in subparagraph (a), the Caracas and Maracaibo Stock Exchanges, the Bolsa Electrónica, and any stock exchanges registered with the Comisión Nacional De Valores, in accordance with the Ley de Mercado de Capitales, and in subparagraph (b) the NASDAQ System owned by the National Association of Securities Dealers, and any stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934. Subparagraph (c) provides that the competent authorities may also agree to recognize additional exchanges for the purposes of this Article.

Paragraph 6

Paragraph 6 provides a definition of the term “gross income” as used in the base erosion test of paragraph 1 (g)(ii). For the purposes of that subparagraph, “gross income” means gross receipts. However, for enterprises engaged in manufacturing, or the production of goods, “gross income” means gross receipts less direct costs of labor and materials attributable to such manufacture or production and paid or payable our of such receipts.