ARTICLE 20

Government Service

Paragraph 1

Subparagraphs (a) and (b) of paragraph 1 deal with the taxation of government compensation (other than a pension addressed in paragraph 2). Subparagraph (a) provides that remuneration paid by a Contracting State or its political subdivisions or local authorities to any individual who is rendering services to that State, political subdivision or local authority, is exempt from tax by the other State. Under subparagraph (b), such payments are, however, taxable exclusively in the other State (i.e., the host State) if the services are rendered in that other State and the individual is a resident of that State who is either a national of that State or a person who did not become resident of that State solely for purposes of rendering the services. Unlike the OECD Model, the paragraph applies both to government employees and to independent contractors engaged by governments to perform services for them.

Paragraph 2

Paragraph 2 provides rules for the taxation of pensions paid from public funds in respect of governmental services. The paragraph provides that such pensions may be taxed only by the

paying State unless the individual recipient is a resident and national of the other State, in which case only the other (residence) State may tax the pension. This rule is subject to the provisions of paragraph 2 of Article 19 (Pensions, Social Security, Annuities, and Child Support), which provides that social security benefits paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States may be taxed by the paying State.

Paragraph 3

The exemptions provided in this Article are limited to remuneration and pensions in respect of services of a governmental nature. Paragraph 3 provides that remuneration and pensions for services to a government-owned business are taxable under the provisions of Articles 14 (Independent Personal Services), 15 (Dependent Personal Services), 16 (Directors' Fees), 18 (Artistes and Athletes), or 19 (Pensions, Social Security, Annuities, and Child Support), as the case may be. Thus, if a local government runs a business, even though the employees who are working for the business are employees of the local government, the compensation of those employees is covered by Article 15 and not Article 20, because the employees are not engaging in a governmental function when they perform their employment duties. Further, the remuneration of artistes or sportsmen who are performing in one Contracting State and are sponsored by the government of the other Contracting State is taxable under paragraph 3 of Article 18 (Artistes and Sportsmen) only in the State sponsoring the performance. Such remuneration is not taxable under this Article because such performers are not employees of the government nor are they discharging functions of a governmental nature. Whether functions are of a governmental nature is determined by reference to the concept of a governmental function in the State in which the income arises.

Relation to Other Articles

Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for permanent residence there (i.e., in the United States, a "green card" holder). Thus, a resident of a Contracting State who in the course of performing functions of a governmental nature becomes a resident of the other State (but not a permanent resident), would be entitled to the benefits of this Article.