ARTICLE 3

General Definitions

Paragraph 1

Paragraph 1 defines a number of basic terms used in the Convention. Certain others are defined in other articles of the Convention. For example, the term "resident of a Contracting State" is defined in Article 4 (Residence). The term "permanent establishment" is defined in Article 5 (Permanent Establishment). The terms "dividends," "interest" and "royalties" are defined in Articles 10, 11 and 12, respectively. The introduction to paragraph 1 makes clear that these definitions apply for all purposes of the Convention, unless the context requires otherwise. This latter condition allows flexibility in the interpretation of the treaty in order to avoid unintended results. Terms that are not defined in the Convention are dealt with in paragraph 2.

The term "Venezuela" is defined in subparagraph (a) to mean the Republic of Venezuela.

The term "United States" is defined in subparagraph (b) to mean the United States of America, which includes the territorial seas of the United States, but not including Puerto Rico, the Virgin Islands, Guam or any other United States possession or territory.

Paragraph 3 of the Protocol further provides that, only for purposes of this Convention and when referred to in a geographical sense, “Venezuela” and “United States” include the areas of the seabed and subsoil adjacent to their respective territorial seas in which they may exercise

rights in accordance with domestic legislation and with international law. This extension applies to the extent that the United States or Venezuela exercises sovereignty in accordance with domestic legislation and with international law for the purpose of natural resource exploration and exploitation of such areas. This extension of the definition applies, however, only if the person, property or activity to which the Convention is being applied is connected with such natural resource exploration or exploitation. Thus, for example, the extension would not include any activity involving the sea floor of an area over which the United States exercised sovereignty for natural resource purposes if that activity was unrelated to the exploration and exploitation of natural resources.

Subparagraph 1(c) defines the terms “Contracting State” and “the other Contracting State” as meaning Venezuela or the United States depending on the context in which the term is used. That is, a provision using the terms “Contracting State” and “other Contracting State” is bilateral, and “Contracting State” may be interpreted, as necessary, to be either Venezuela or the United States.

Subparagraph 1(d) defines the term "person" to include an individual, a trust, a partnership, a company and any other body of persons. The definition of “person” is significant for a variety of reasons. For example, under Article 4, only a "person" can be a "resident" and therefore eligible for most benefits under the treaty. Also, all "persons" are eligible to claim relief under Article 26 (Mutual Agreement Procedure).

Although are not expressly listed in subparagraph 1(d), Venezuelan “entidades” and “colectividades ”, as defined under Article 22.3 of Venezuela’s Organic Tax Code ( Código Orgánico Tributario ), shall, for the purposes of this Convention, be included within the term “person”. These entities, while not legal persons under Venezuelan law, are nevertheless taxable persons under the taxation laws of Venezuela. Therefore, it was agreed that they should be included within the definitions of “person,” as well as “national,” and “resident” (the latter subject to the Limitation on Benefits provisions of the Convention). In accordance with paragraph 2 of Article 3, the meaning of the terms "partnership," "trust" and "estate" is to be determined by reference to the law of the Contracting State whose tax is being applied.

The term "company" is defined in subparagraph (e) as a body corporate or an entity treated as a body corporate for tax purposes. Although the Convention does not add “in the State in which it is organized,” as does the U.S. Model, the result should be the same, as the Commentaries to the OECD Model interpret the language identical to that of the Convention in a manner consistent with the U.S. Model.

The terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" are defined in subparagraph (f) as an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State. The term "enterprise" is not defined in the Convention, nor is it defined in the OECD Model or its Commentaries. Despite the absence of a clear, generally accepted meaning for the term "enterprise," the term is understood to refer to any activity or set of activities that constitute a trade or business.

Like the U.S. Model, subparagraph (f) provides that these terms also encompass an enterprise conducted through an entity (such as a partnership) that is treated as fiscally transparent in the Contracting State where the entity’s owner is resident. This phrase has been included in the Convention in order to address more explicitly some of the problems presented by fiscally transparent entities. In accordance with Article 4 (Residence), entities that are fiscally transparent in the country in which their owners are resident are not considered to be residents of a Contracting State (although income derived by such entities may be taxed as the income of a resident, if taxed in the hands of resident partners or other owners). Given the approach taken in Article 4, an enterprise conducted by such an entity arguably could not qualify as an enterprise of a Contracting State under the OECD Model because the OECD definition of enterprise requires that the enterprise be conducted by a resident, although most countries would attribute the enterprise to the owners of the entity in such circumstances. The definition in the Convention is intended to make clear that an enterprise conducted by such an entity will be treated as carried on by a resident of a Contracting State to the extent its partners or other owners are residents. This approach is consistent with the Code, which under section 875 attributes a trade or business conducted by a partnership to its partners and a trade or business conducted by an estate or trust to its beneficiaries.

An enterprise of a Contracting State need not be carried on in that State. It may be carried on in the other Contracting State or a third state (e.g., a U.S. corporation doing all of its business in Venezuela would still be a U.S. enterprise).

The term "national," as it relates to the United States and to Venezuela, is defined in subparagraphs 1(g)(i) and (ii). This term is relevant for purposes of Articles 4 (Residence), 20 (Government Service) and 25 (Non-discrimination). A national of one of the Contracting States is

(1) an individual possessing the nationality of that State, and (2) any legal person, association or other entity (including an “entidad” or “colectividad” ) deriving its status as such from the law in force in the State where it is established. This definition is closely analogous to that found in the OECD Model.

The inclusion of juridical persons in the definition may have significance in relation to paragraph 1 of Article 25 (Non-discrimination), which provides that nationals of one Contracting State may not be subject in the other to any taxes or connected requirements that are other or more burdensome than those applicable to nationals of that other State who are in the same circumstances.

Subparagraph 1(h) defines the term "international operation of ships or aircraft." The term means any transport by a ship or aircraft except when the transport is solely between places within a Contracting State. This definition is applicable principally in the context of Article 8 (Shipping and Air Transport), which refers to “operation of ships or aircraft in international traffic”, which is to be understood to have the same meaning as “international operation of ships or aircraft”. The definition in the OECD Model refers to the operator of the ship or aircraft having its place of effective management in a Contracting State (i.e., being a resident of that State). This Convention does not include that limitation. The broader definition combines with paragraphs 2 and 3 of Article 8 to exempt from tax by the source State income from the rental of

ships, aircraft or containers that is earned both by lessors that are operators of ships and aircraft and by those lessors that are not (e.g., banks or container leasing companies).

The exclusion from the definition of “international operation of ships or aircraft” of transport solely between places within a Contracting State means, for example, that carriage of goods or passengers solely between New York and Chicago would not be treated as the international operation of ships or aircraft, whether carried by a U.S. or a foreign carrier. The substantive taxing rules of the Convention relating to the taxation of income from transport, principally Article 8 (Shipping and Air Transport), therefore, would not apply to income from such carriage. Thus, if the carrier engaged in internal U.S. traffic were a resident of Venezuela (assuming that were possible under U.S. law), the United States would not be required to exempt the income from that transport under Article 8. The income would, however, be treated as business profits under Article 7 (Business Profits), and therefore would be taxable in the United States only if attributable to a U.S. permanent establishment of the foreign carrier, and then only on a net basis. The gross basis U.S. tax imposed by section 887 would never apply under the circumstances described. If, however, goods or passengers are carried by a carrier resident in Venezuela from a non-U.S. port to, for example, New York, and some of the goods or passengers continue on to Chicago, the entire transport would be international traffic. This would be true if the international carrier transferred the goods at the U.S. port of entry from a ship to a land vehicle, from a ship to a lighter, or even if the overland portion of the trip in the United States was handled by an independent carrier under contract with the original international carrier, so long as both parts of the trip were reflected in original bills of lading. For this reason, the Convention refers, in the definition of "international operation of ships or aircraft," to "such transport" being solely between places in the other Contracting State, while the OECD Model refers to the ship or aircraft being operated solely between such places. The Convention’s definition is intended to make clear that, as in the above example, even if the goods are carried on a different aircraft for the internal portion of the international voyage than is used for the overseas portion of the trip, the definition applies to that internal portion as well as the external portion.

Finally, a “cruise to nowhere,” i.e., a cruise beginning and ending in a port in the same Contracting State with no stops in a foreign port, would not constitute international traffic.

Subparagraphs 1(i)(i) and (ii) define the term "competent authority" for the United States and Venezuela, respectively. The U.S. competent authority is the Secretary of the Treasury or his delegate. The Secretary of the Treasury has delegated the competent authority function to the Commissioner of Internal Revenue, who in turn has delegated the authority to the Assistant Commissioner (International). With respect to interpretative issues, the Assistant Commissioner acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue Service. The Venezuelan competent authority is the Integrated National Service of Tax Administration ( Servicio Nacional Integrado de Administración Tributaria -- SENIAT ), its authorized representative or the authority which is designated by the Ministry of Finance as competent authority.

Paragraph 2

Paragraph 2 provides that in the application of the Convention, any term used but not defined in the Convention will have the meaning that it has under the law of the Contracting State whose tax is being applied, unless the context requires otherwise. Finally, there also may be cases where the tax laws of a State contain multiple definitions of the same term. In such a case, the definition used for purposes of the particular provision at issue, if any, should be used.

If the meaning of a term cannot be readily determined under the law of a Contracting State, or if there is a conflict in meaning under the laws of the two States that creates difficulties in the application of the Convention, the competent authorities, as indicated in paragraph 3(e) of Article 26 (Mutual Agreement Procedure), may establish a common meaning in order to prevent double taxation or to further any other purpose of the Convention. This common meaning need not conform to the meaning of the term under the laws of either Contracting State.

It is understood that the reference in paragraph 2 to the internal law of a Contracting State means the law in effect at the time the treaty is being applied, not the law as in effect at the time the treaty was signed. Even before its explicit inclusion in the U.S. Model, this use of "ambulatory definitions" was implicitly understood in previous U.S. and OECD Models.

The use of an ambulatory definition, however, may lead to results that are at variance with the intentions of the negotiators and of the Contracting States when the treaty was negotiated and ratified. The reference in both paragraphs 1 and 2 to the "context otherwise requiring" a definition different from the treaty definition, in paragraph 1, or from the internal law definition of the Contracting State whose tax is being imposed, under paragraph 2, refers to a circumstance where the result intended by the Contracting States is different from the result that would obtain under either the paragraph 1 definition or the statutory definition. Thus, flexibility in defining terms is necessary and permitted.