Re Interpretation of the Convention 　　It is understood that provisions of the Treaty that are drafted according to the corresponding provisions of the Organization for Economic Cooperation and Development (OECD) Model Tax Convention on Income and on Capital shall generally be expected to have the same meaning as expressed in the OECD Commentary thereon. The understanding in the preceding sentence will not apply with respect to the following 　　a) any reservations or observations to the OECD Model or its Commentary by either Contracting　State; 　　b) any contrary interpretations in this Memorandum of Understanding; 　　c) any contrary interpretation in a published explanation by one of the Contracting States that has　been provided to the competent authority of the other Contracting State prior to the entry into force of the Convention; and 　　d) any contrary interpretation agreed to by the competent authorities after the entry into force of　the Convention. The Commentary - as it may be revised from time to time - constitutes a means of interpretation in the sense of the Vienna Convention on the Law of Treaties of May 23, 1969. 　　Re Article 4 (Residence of pass-through entities) 　　It is understood that the income derived or paid by pass-through entities, such as limited liability companies, is to be treated as the income of a resident of a Contracting State only to the extent that the income is subject to tax in that State in the hands of the beneficial owner or owners of the income as the income of a resident of that Contracting State Thus, the determination of the residence of such entities for purposes of the Convention is to be made on the same basis as that of a partnership. 　　Re Article 4 (Center or vital interests in the case of foreign assignments) 　　The center of vital interests may not be determinable solely by reviewing the circumstances prevailing in one single year; a longer period may have to be taken into consideration. 　　Re Article 6 (Income derived from the exploitation of rights in immovable property)Article 6 applies likewise to income derived from the exploitation of rights in immovable property. Thus, a U.S. corporation being the lessee of an Austrian building that is owned by a German corporation would be liable to Austrian taxation on the income received by virtue of sublease contracts concluded with the actual users of the premises; the mere fact that the U.S. corporation does not hold immovable property in Austria (because the rights of a lessee in the immovable property, being the source of income, are to be considered as movable assets) does not prevent the application of Article 6. 　　Re Article 10 (Effects of paragraph 1 for the country of source) 　　Paragraph 1 sets out that dividends "may be taxed" in the country of residence; a rule of that type does not prevent the country of source from also taxing such dividends. In the case of a U.S. REIT with an Austrian substantial participation the limitations provided in paragraph 2 do not affect the source country; this country therefore preserves its full right of taxation. 　　Re Article 16 (Anti-abuse concept of the treaty) 　　Special provisions of the treaty designed to curb abusive international transactions and to exclude them from treaty benefits, like Article 16, are not to be understood as preventing a Contracting State from applying a "substance over form" evaluation or facts in other cases not particularly covered by a specific anti-abuse clause of the treaty. 　　Re Article 16 (Limitation on Benefits) 　　The following understandings have been reached with respect to the application of Article 16: 　　Paragraph 1(c) It is intended that the provisions of subparagraph 1(c) will be self executing. Unlike the provisions of paragraph　2, claiming benefits under this subparagraph does not require advance　competent authority ruling or approval. The tax authorities may, or course, on review, determine that the taxpayer has improperly interpreted the subparagraph and is not entitled to the benefits claimed. 　　Agreement has been reached on certain interpretations with respect to particular terms used in the treaty provision: 　　　　　 "Engaged in the active conduct of a trade or business" 　　A person that is a resident of one of the States is considered to be engaged in the active conduct of a trade or business in that State not only if such person is directly so engaged but also,　e.g., if such person 　　(i) is a partner in a partnership so engaged; 　　(ii) is a person in which a controlling beneficial interest is held by a single person which　is engaged in the active conduct of a trade or business in that State; 　　(iii) is a person in which a controlling beneficial interest is held by a group of five or　fewer persons each member of which is engaged in activity in that State which is a component part of or directly related to the trade or business in that State; 　　(iv) is a company that is a member of a group of companies that form or could form a　consolidated group for tax purposes according to the law of that State (as applied without regard to　the residence of such companies), and the group is engaged in the active conduct of a trade or business in that State; 　　(v) owns, either alone or as a member of a group of five or fewer persons that are qualified persons or residents of an "identified state", a controlling beneficial interest in a person that is engaged in the active conduct of a trade or business in the State in which the owner is resident; 　　(vi) is together with another person that is so engaged, under the common control of a person (or a group of five or fewer persons) which (or, in the case of a group, each member of which) is a qualified person or a resident of an "identified state". 　　"Identified state" means any third country, identified by agreement of the competent authorities, which has effective provisions for the exchange of information with the State in which the person being tested under the above provisions is a resident Derived in connection with, or incidental to 　　Income is derived in connection with or is incidental to a trade or business, e.g., if the income- producing activity in Austria is a line of business which forms a part of or is complementary to the trade or business conducted in the United States by the income recipient or if the income in question is produced by assets forming part of the business property of the income recipient as recognized under the taxation law of the Contracting State in which the trade or business is carried on. 　　It is understood that in the case of associated enterprises the active conduct of the trade or business of the income recipient resident in one of the Contracting States must be substantial in relation to the activity carried on by an associated enterprise in the other Contracting State giving rise to the income in respect of which treaty benefits are being claimed in that other Contracting State. Whether the trade or business of the income recipient is substantial will generally be determined by reference to its proportionate share of the trade or business in the other State, the nature of the activities performed and the relative contributions made to the conduct of the trade or business in both States. In any case, however, the trade or business of the income recipient will be deemed to be substantial if, for the　preceding taxable year, the average of the ratios for the following factors exceeds 10 percent and each of the ratios exceeds 7.5 percent, provided that for any separate factor that does not meet the 7.5 percent test in the first preceding taxable year the average of the ratios for that factor in the three preceding taxable years may be substituted: 　　(i) the ratio of the value of assets used or held for use in the active conduct of the trade or business by the income recipient in the first-mentioned State to 511, or, as the case may be, the proportionate share of the value of such assets so used or held for use by the trade or business producing the income in the other State; 　　(ii) the ratio of gross income derived from the active conduct of the trade or business by　the income recipient in the first-mentioned State to all, or, as the case may be, the proportionate　share of the gross income so derived by the trade or business producing the income in the other State; and 　　(iii) the ratio of the payroll expense of the trade or business for services performed within the first-mentioned State to all, or, as the case may be, the proportionate share of the payroll expense of the trade or business for services performed in the other State. 　　The following examples reflect understandings reached by the negotiators as to the intended scope of subparagraph 1(c). The examples are structured for purposes of exposition in terms of an Austrian entity claiming U.S. treaty benefits. They are not intended to be exhaustive, but are merely illustrative of the kinds of considerations which are relevant in making a determination as to whether a particular case falls within the scope of subparagraph 1(c). Example I Facts: An Austrian resident company is owned by three persons, each resident in a different third country. The company is engaged in an active manufacturing business in Austria. It has a wholly-owned subsidiary in the United States which has been capitalized with debt and equity. The subsidiary is engaged in selling the output of the Austrian parent. The active manufacturing business in Austria is substantial in relation to the activities of the U.S. subsidiary. Are the subsidiary's interest and dividend payments to its Austrian parent eligible for treaty benefits in the United States? Analysis: 　　Treaty benefits would be allowed because the treaty requirements that the U.S. income is "derived in connection with or is incidental to" the Austrian active business, and that the Austrian business is substantial in relation to the U.S. income generating activity is substantial, are satisfied. This conclusion is based on two elements in the fact pattern presented: 　　(1) the income is connected with the active Austrian business-- in this example in the form of a　"downstream" connection; and (2) the active Austrian business is substantial in relation to the business of the U.S. subsidiary. Example II Facts: 　　The facts are the same as Example I except that while the income is derived by the Austrian parent of the U.S. subsidiary, the relevant business activity in Austria is carried on by an Austrian subsidiary corporation. The Austrian subsidiary's activities meet the business relationship and substantiality tests of the business connection provision, as described in the preceding example. Are the U.S. subsidiary's dividends and interest payments to the Austrian parent eligible for U.S. treaty benefits? Analysis: 　　Benefits are allowed because the two Austrian entities (i.e., the one deriving the income and the one carrying on the substantial active business in Austria) are related. Benefits are not denied merely because the income is earned by an Austrian holding company and the relevant activity is carried on in Austria by an Austrian subsidiary. The existence of a similar holding company structure in the United States would not affect the right of the Austrian parent to treaty benefits. Thus, if the Austrian parent owns a subsidiary in the United States which is, itself, a holding company for the group's U.S. activities, which are related to the business activity in Austria, dividends paid by the U.S. holding company to the Austrian parent holding company would be tested for eligibility for benefits in the same way as described above, ignoring the fact that the activities are carried on by one entity and the income in respect of which benefits are claimed is paid by another, related, entity. Example III Facts: An Austrian resident company is owned by three persons, each resident in a different third country. The company is the worldwide headquarters and parent of an integrated international business carried on through subsidiaries in many countries. The company's wholly-owned U.S. and Austrian subsidiaries manufacture in their countries of residence products which are part of the group's product line. The United States subsidiary has been capitalized with debt and equity. The active manufacturing business of the Austrian subsidiary is substantial in relation to the activities of the U.S. subsidiary. The Austrian parent manages the worldwide group and also performs research and development to improve the manufacture of the group's product line. Are the U.S. subsidiary's dividend and interest payments to its Austrian parent eligible for treaty benefits in the United States? Analysis: 　　Treaty benefits would be allowed because the treaty requirement that the United States income is "derived in connection with or is incidental to" the Austrian active business is satisfied. This conclusion is based on two elements in the fact pattern presented: (1) the income is connected with the Austrian active business because the United States subsidiary and the Austrian subsidiary manufacture products which are part of the group's product line, the Austrian parent manages the worldwide group, and the parent performs research and development that benefits both subsidiaries; and (2) the active Austrian business is substantial in relation to the business of the U.S. subsidiary. Example IV 　　A third-country resident establishes an Austrian corporation for the purpose of acquiring a large U.S. manufacturing company. The sole business activity of the Austrian corporation (other than holding the stock of the U.S. corporation) is the operation of a small retailing outlet which sells products manufactured by the U.S. company. Is the Austrian corporation entitled to treaty benefits under subparagraph 1 (c) with respect to dividends it receives from the U.S. manufacturer? Analysis: 　　The dividends would not be entitled to benefits. Although there is, arguably, a business connection between the U.S. and the Austrian businesses, the "substantiality" requirement of the subparagraph is not met. Example V Facts: 　　Austrian, German and Belgian corporations create a joint venture in the form of a partnership organized in Austria to manufacture a product in a developing country. The joint venture owns a U.S. sales corporation, which pays dividends to the joint venture. Are these dividends eligible for U.S.-Austrian treaty benefits? Analysis: 　　Under Article 4, only the Austrian partner is a resident of Austria for purposes of the treaty. The question arises under this treaty, therefore, only with respect to the Austrian partner's share of the dividends. If the Austrian partner meets the ownership and base erosion tests of subparagraph 1(d) or the public trading tests of subparagraphs 1(e) or 1(f), it is entitled to benefits without reference to subparagraph 1(c). If not, the analysis of the previous examples would be applied to determine eligibility for benefits under 1(c). The determination of treaty benefits available to the German and Belgian partners will be made under the United States treaties with Germany and Belgium. Example VI Facts: 　　An Austrian corporation, a German corporation and a Belgian corporation create a joint venture in the form of an Austrian resident corporation in which they take equal shareholdings. The joint venture corporation engages in an active manufacturing business in Austria. Income derived from that business that is retained as working capital is invested in U.S. Government securities and other U.S. debt instruments until needed for use in the business. Is interest paid on these instruments eligible for U.S.-Austrian treaty benefits? Analysis: 　　The interest would be eligible for treaty benefits. Interest income earned from short term investment of working capital is incidental to the business in Austria of the Austrian joint venture corporation. Paragraph l (h) A person shall be considered a recognized headquarter company if: 　　a) it provides in its state of residence a substantial portion of the overall supervision and administration of the group, which may include, but cannot be principally, group financing; 　　b) the corporate group consists of corporations resident in, and engaged in an active business in, at　least five countries, and the business activities carried on in each of the five countries (or five groupings of countries) generate at least 10 percent of the gross income of the group; 　　c) the business activities carried on in any one country other than the State of residence of the headquarter company generate less than 50 percent of the gross income of the group; 　　d) no more than 25 percent of its gross income is derived from the other State; 　　e) it has, and exercises, independent discretionary authority to carry out the functions referred to in subparagraph (a); 　　f) it is subject to the same income taxation rules in its country of residence as other persons entitled to the benefits of this Convention; and 　　g) the income derived in the other State either is derived in connection with, or is incidental to, the　business activities referred to in subparagraph b). 　　If the income requirements for being considered a recognized headquarter company (subparagraphs b, c, or d) are not fulfilled, they will be deemed to be fulfilled if the required ratios are met when averaging the gross income of the preceding four years. Paragraph 2 　　Paragraph 2 of Article 16 provides that a resident of a Contracting State that derives income from the other Contracting State and is not entitled to the benefits of the Convention under any of the provisions of paragraph 1, may, nevertheless, be granted benefits at the discretion of the competent authority of the Contracting State in which the income arises. The paragraph itself provides no guidance to competent authorities or taxpayers as to how the discretionary authority is to be exercised. This memorandum of understanding is intended to provide some discussion and guidance. 　　It is assumed that, for purposes of implementing paragraph 2, a taxpayer will be permitted to present his case to his competent authority for an advance determination based on the facts, and will not be required to wait until the tax authorities of one of the Contracting States have determined that benefits are denied. In these circumstances, it is also expected that if the competent authority determines that benefits are to be allowed, benefits 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. In making determinations under paragraph 2, the competent authority shall take into account as a guideline whether the establishment, acquisition, or maintenance of such person or the conduct of its operations has or had as its principal purpose the obtaining of benefits under the Convention. It is understood that the competent authorities will take into account all relevant facts and circumstances. The factual criteria that the competent authorities are expected to take into account may include, among others, the existence of a clear business purpose for the structure and location of the income earning entity in question; the conduct of an active trade or business (as opposed to a mere investment activity) by such entity; a valid business nexus between that entity and the activity giving rise to the income; and, the extent to which the entity, if it is a corporation, would be entitled to treaty benefits comparable to those afforded by this Convention if it had been incorporated in the country of residence of the majority. The following example illustrates the application of some of these principles: Facts: 　　Austrian, German and Belgian companies, each of which is engaged directly or through its affiliates in substantial active business operations in its country of residence, decide to cooperate in the development, production and marketing of an advanced passenger aircraft through a corporate joint venture with its statutory seat in Austria. The development, production and marketing aspects of the project are carried out by the individual joint venturers in their respective countries of residence. The joint venture company, which is staffed with a significant number of managerial and financial personnel seconded by the joint venturers, acts as the general headquarters for the joint venture, responsible for the overall management of the project including coordination of the functions separately performed by the individual joint venturers on behalf of the joint venture company, the investment of working capital contributed by the joint venturers and the financing of the project's additional capital requirements through public and private borrowings. The joint venture company derives portfolio investment income from U.S. sources. Is this income eligible for benefits under the U.S.-Austrian treaty? Analysis: If the joint venture corporations's activities constitute an active business and the income is connected to that business, benefits would be allowed under subparagraph 1(c). If not, it is expected that the U.S. competent authority would determine that treaty benefits should be allowed in accordance with paragraph (2) under the facts presented, particularly in view of (i) the clear business purpose for the formation and location of the joint venture company; and (ii) the significant headquarters functions performed by that company in addition to financial functions. International Economic Integration It is understood that Austria's membership in the European Union (EU) will become an element in the determination under paragraph 2 of eligibility for benefits of Austrian companies with significant non-Austrian, but EU Member, ownership, or with significant business activities carried on in EU member States as well as in Austria. The special U.S. ties to Canada and Mexico under the North American Free Trade Agreement will have a similar impact on competent authority determinations under paragraph 2 with respect to Austrian benefits claimed by U.S. residents. In addition to reflecting Austria's EU membership in competent authority determinations under paragraph 2, it is also understood that the United States and Austria will discuss whether a need exists to amend Article 16 to reflect the closer relationship between Austria and its EU partners. If such amendments appear desirable, a Protocol to this Convention will be promptly negotiated to reflect this understanding. Re Article 17 (Treatment of orchestras) Paragraph 1 of Article 17 relates only to individuals. Legal entities operating an orchestra (like associations, municipalities, and states) are, according to paragraph 1, not taxable in the country where such orchestra performs, although such entities may be subject to tax in the country of performance under paragraph 2 of this Article or under Article 7 (Business Profits). The individual musicians would be taxable there, but only if their annual remuneration received for the performances in the host state exceeded the threshold of 20,000 U.S. dollars. In the case of a monthly paid salary only that portion of the monthly pay may become taxable which is allocable to the days physically spent in the host country. If, however, a performance-related global payment is made, then the whole amount shall be taken into consideration without any deduction for periods of preparation spent outside the host state. Re Article 18 (social security payments) The term "social security payments" as used in this article is not restricted to old age pensions but refers to all sorts of social security benefits, e.g., also to benefits granted in kind and to payments made in compensation for work related diseases or accidents. The term "other public pensions" as used in subparagraph 1(b) is intended to refer to tier 1 Railroad Retirement benefits. Re Article 19 (coverage of personnel) It is understood that an entity (e.g., an Embassy or Consulate) performing governmental functions within the meaning of Article 19 paragraph 1 is acting through all of its personnel; therefore, personnel engaged in activities such as driving and cleaning are to be considered as acting in the "discharge of governmental functions" and are thus covered by Article 19 paragraph 1. Re Article 22 (Relief from Double Taxation), paragraph 1 It is understood that paragraph 1 of Article 22, which requires the United States to grant a foreign tax credit for Austrian taxes "in accordance with the provisions and subject to the limitations of the law of the United States", refers to the laws as of the date of entry into force of the treaty, as they may be subsequently amended. U.S. law contains rules designed to ensure that all taxpayers pay a certain minimum--liability the Alternative Minimum Tax ("AMT"). Although the AMT may be reduced by foreign tax credits, such credits cannot reduce it to zero, but can offset only 90 percent of the AMT. It is agreed that this 90 percent AMT limitation is consistent with the general U.S. commitment to provide a foreign tax credit. Re Article 22 Relief from Double Taxation), paragraph 1 Calculation of dividend gross-up and the deemed-paid credit. U.S. parent companies calculate their U.S. taxes based on the income received from certain of their foreign subsidiaries 1 plus the foreign taxes credited to this income. 　　1 If a U.S. corporation owns ten percent or more of the voting stock of a foreign corporation from which it receives a dividend, it will be deemed to have paid the foreign income taxes paid by the subsidiary attributable to that dividend. The "deemed-paid" (or "indirect") foreign tax credit extends to taxes paid on dividends distributed by second and third tier foreign corporations if the parent of each meets the ten percent voting stock requirement. But, for these lower tier subsidiaries, the U.S. parent must have an indirect ownership in such subsidiaries of at least five percent. 　　Under U.S. law (Section 902 of the Internal Revenue Code), when a U.S. parent receives dividends from its Controlled Foreign Corporation (CFC), the taxes paid to the foreign government by the CFC are "deemed-paid" by the U.S. parent. These deemed-paid taxes are added to the direct foreign withholding taxes paid for purposes of calculating the foreign tax credit 　　The deemed-paid credit is calculated as the ratio of dividends received to after-tax foreign earnings multiplied by creditable foreign taxes, which usually only include income taxes but may in special cases include other taxes that are considered to be "equivalent" to income taxes or to be paid "in lieu" of an income tax. The deemed-paid credit is calculated as: Deemed-paid Dividends received Credit = ---------------------- x creditable After-tax net earnings foreign taxes and profits of foreign corporation 　　The U.S. parent must "gross up" the dividend received from the foreign subsidiary by the amount of the foreign taxes deemed-paid. The total grossed-up foreign dividend equals the actual dividend received plus the foreign taxes deemed-paid on this dividend. 　　The total foreign tax credit allowed equals the sum of withholding taxes plus the deemed-paid credit. The foreign tax credit is limited to the ratio of foreign-source taxable income to total worldwide taxable income multiplied by the U.S. tax liability. This approach allows an averaging of high and low foreign tax rates. Such averaging, however, can take place only within a single income basket. The Code provides for a number of baskets for various classes of income for purposes of calculating foreign tax credits (e.g., passive income, high withholding tax, and financial service income). Excess FTCs may be carried forward five years and backward two years. When dividends paid by the CFC exceed current earnings, the excess of current dividends over current income is attributed to previous years' undistributed incomes in reverse order, last year first. Since l986, firms are required to pool all post-1986 CFC earnings and foreign taxes to construct a multiple-year average foreign tax rate for purposes of calculating the indirect FTC. The pooling of earnings and profits is used only for determining the amount of the deemed foreign tax credit and is not used for other purposes. Example: U.S. parent has a wholly owned Austrian subsidiary that pays out all of its income. Assume Austria imposes a 34 percent corporate income tax and a 5 percent dividend withholding tax. The U.S. taxes worldwide income at a 35 percent rate. Pre-tax earnings of Austrian CFC 100.0 Austrian corporate income tax (34%) 34.0 Post tax Austrian earnings 66.0 Dividend withholding tax (5%) 3.3 Foreign creditable tax Direct withholding tax 3.3 Deemed-paid credit for subsidiary's income tax 34.0 Creditable taxes 37.3 U.S. Income Dividend received 66.0 Austrian deemed-paid tax 34.0 Total grossed-up income 100.0 U.S. tax (35%) 35.0 Foreign tax credit 35.0 Net U.S. tax due 0 Re Article 23 (Treatment of Losses incurred in Austrian PEs) 　　Article 23 paragraph 2 requires that losses incurred in an Austrian permanent establishment of a U.S. corporation must be granted a carry forward under the same conditions which would be applicable if that permanent establishment were one of an Austrian enterprise. In the latter case, losses can be carried forward over a period of 7 years to the extent that they cannot be offset against other income of that enterprise. Re Article 23 (Distribution of a appreciated property) 　　Under U.S. law, a U.S. corporation that is liquidated is taxed on the gain on the appreciated property it distributes. There is an exception in the case of property distributed to a U.S. parent corporation by a U.S. subsidiary controlled 80 percent or more by the parent, on the theory that the appreciation on that property will be taxable when the parent disposes of the asset. The exception does not apply when property is distributed to parent corporations that are tax exempt, and generally it does not apply when property is distributed to foreign parent corporations, because the tax is deferred only if it can be collected on a subsequent distribution. As this distinction in tax treatment is not dependent on whether the stock is owned by foreign or U.S. persons, but on whether the recipients are subject to U.S. corporate tax, it is understood that this rule is not inconsistent with paragraph 5 of Article 23. Re Article 23 (Partnership withholding) U.S. law requires that a partnership that derives income effectively connected with a U.S. trade or business withhold 20 percent of distributions to foreign partners. Such withholding does not apply to distributions to U.S. partners. The withholding tax is not a final liability, but is a prepayment of tax which will be refunded to the extent that it exceeds the partner's liability. It is understood that this is a reasonable collection mechanism, not in conflict with Article 23. Re Article 23 (S corporation election) 　　U.S. law permits a small corporation (35 or fewer individual shareholders) to elect to have its income taxed in the hands of the shareholders, rather than at the corporate level, as if it were a partnership. This election is available only if all the shareholders are U.S. citizens or residents, who are fully subject to U.S. tax at the individual level, so that, for example, they can take into account losses, deductions or credits. Nonresident aliens are not subject to U.S. tax on a net basis, and, therefore, do not qualify as S corporation shareholders. This election distinguishes between U.S. and foreign persons not on the basis of nationality, but because they are taxed differently. It is understood that　this distinction is not in conflict with Article 23. Re Article 24 (The nature of the mutual agreement procedure) 　　The mutual agreement procedure is not intended to create new treaty law but is fully governed by the provisions of the treaty and of internal legislation. One of its main purposes is to find a coordinated understanding of treaty provisions that leaves room for diverging interpretations. The mutual agreement procedure shall open the possibility to find an agreed position, between the contracting parties as to which interpretation shall be given precedence in order to reflect best the real intention of the treaty. Re Article 25 (Exchange of information) 　　The Contracting States agree that appropriate committees of the U.S. Congress and the U.S. General Accounting Office (GAO) shall be afforded access to the information exchanged under this treaty where such access is necessary to carry out their oversight responsibilities. Any information provided to these organizations shall be used only for such purposes., The effect of this understanding is to make clear that the treaty authorizes the Finance Committee, the Ways and Means Committee and the Joint Committee on Taxation, as well as the GAO, to have access to all information received under the treaty under the above described conditions. On the part of Austria under the same conditions disclosure of information to the Accounting Court (Rechnungshof) and to Committees of Parliament is permitted. Re Article 25 (Judicial procedures) 　　It is understood that a request for administrative assistance duly presented by the competent authority and meeting the requirements as set out in Article 25 cannot be rejected by the requested State merely because the request was made for the purposes of pending judicial proceedings in tax matters. Re Article 25 (Penal investigations) 　　It is understood that the term "penal investigations" applies to proceedings carried out by either judicial or administrative bodies. For example, the commencement of a criminal investigation by the Criminal Investigation Division of the Internal Revenue Service constitutes a penal investigation. Re Article 25 (Bank secrecy) 　　On the basis of paragraph 19 of the OECD Commentary on Article 26 of the OECD Model Convention, it is agreed that provisions on bankers' discretion (bank secrecy rules) do not constitute a professional, trade, business, industrial, or commercial secret. This opinion is, inter alia, supported by German and Austrian jurisprudence (Decision of the German Bundesfinanzhof of 20 February 1979, VII R 1 6/78, BStBl. 11, 1979, 268 and Ruling of the Verwa1tungsgerichtshof of 27 February 1992, 86/17/0169, (OStB 1992, 580): Re Article 25 (No recovery of penalties) 　　It is understood that the mutual assistance in the recovery of taxes includes interest but does not include the collection of fines or other penalties. Re Article 25 ("Essential-interest-clause") 　　It is agreed that the "essential interest clause" can be invoked by a Contracting State if he or she is requested to recover a tax on behalf of the other Contracting State and if he or she denies 　　that the tax in question is levied in accordance with the provisions of this Convention. Re Article 25 (Ambulatory application of the Article) 　　It is understood that for purposes of this Article the requested State shall be obligated to obtain the requested information according to its procedures at the time of the request. Re Article 25 (Mutual assistance) and Article 28 (Entry into Force) 　　It is understood that the mutual assistance article (Article 25) does not allocate taxation rights; it is therefore not confined to taxes levied, or to information coming into existence, after the date referred to in the second sentence of paragraph 2 of Article 28.