ARTICLE 2 Taxes Covered 　　This Article specifies the U.S. and Estonian taxes to which the Convention applies. With two exceptions, the taxes specified in Article 2 are the covered taxes for all purposes of the Convention. A broader coverage applies, however, for purposes of Articles 24 (Nondiscrimination) and 26 (Exchange of Information and Administrative Assistance). Article 24 applies with respect to all taxes, including those imposed by state and local governments. 　　Article 26 applies with respect to all taxes imposed at the national level. Paragraph 1 　　Subparagraph 1(a) provides that the United States covered taxes are the Federal income taxes imposed by the Code, together with the excise taxes imposed with respect to the investment income of private foundations (Code sections 4940 through 4948). Although they may be regarded as income taxes, social security taxes (Code sections 1401, 3101, 3111 and 3301) are specifically excluded from coverage, as are the accumulated earnings tax and the personal holding company tax. The U.S. covered taxes are referred to in the Convention as "United States Tax." 　　Subparagraph 1(b) specifies the existing taxes of Estonia that are covered by the Convention. They are the income tax (but excluding the tax on insurance companies provided in paragraph 35 of the Estonian income tax law), and the local income. They are referred to in the Convention as "Estonian tax." Paragraph 2 　　Under paragraph 2, the Convention will apply to any taxes that are identical, or substantially similar, to those enumerated in paragraph 1, and which are imposed in addition to, or in place of, the existing taxes after the date of signature of the Convention. The paragraph also provides that the competent authorities of the Contracting States will notify each other of significant changes in their taxation laws or of other laws that affect their obligations under the Convention. The use of the term "significant" means that changes must be reported that are of significance to the operation of the Convention. Other laws that may affect a Contracting State's obligations under the Convention may include, for example, laws affecting bank secrecy. The competent authorities are also obligated to notify each other of official published materials concerning the application of the Convention. This requirement encompasses materials such as technical explanations, regulations, rulings and judicial decisions relating to the Convention. ARTICLE 3 General Definitions 　　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 (Resident). 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. Paragraph 1 　　The term "Contracting State" is defined in subparagraph 1(a) to mean either the United States or Estonia, depending on the context in which the term is used. The term "United States" is defined in subparagraph 1(b) to mean the United States of America, including the states, the District of Columbia and the territorial sea of the United States. The term does not include Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or territory. The geographical meaning of the term United States also includes the territorial sea of the United States, and for certain purposes, the definition is extended to include the sea bed and subsoil of undersea areas adjacent to the territorial sea of the United States. This extension applies to the extent that the United States exercises sovereignty in accordance 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, it 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. The term "Estonia" is defined in subparagraph 1(c). The term means the Republic of Estonia, and, when used in a geographical sense, means the territory of the Republic of Estonia and any other area adjacent to the territorial waters of the Republic of Estonia within which under the laws of Estonia and in accordance with international law, the rights of Estonia may be exercised with respect to the sea bed and its subsoil and their natural resources. Subparagraph 1(d) defines the term "person" to include an individual, an estate, a trust, a partnership, a company and any other body of persons. The definition 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 25 (Mutual Agreement Procedure). The term "company" is defined in subparagraph 1(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 theCommentaries 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 1(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. 　　Although subparagraph 1(f) does not include the U.S. Model's explicit reference to fiscally transparent enterprises, the negotiators understood that the terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" 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. In accordance with Article 4 (Resident), 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). This treatment ensures 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 Estonia would still be a U.S. enterprise). 　　Subparagraph 1(g) defines the term "international traffic." The term means any transport by a ship or an aircraft operated by an enterprise of a Contracting State except when the transport is operated solely between places within a Contracting State. This definition is applicable principally in the context of Article 8 (Shipping and Air Transport). Shipping and air transport not operated by an enterprise (i.e., a resident) of a Contracting State is excluded from the definition of international traffic in the Convention, whereas the U.S. Model definition of international traffic includes all income from shipping and air transport, other than transport solely between places in a Contracting State, whether or not the operator is a resident of the Contracting States. This narrower definition in the Convention, when applied in the context of paragraph 1 of Article 8, limits the exclusive residence country taxation under Article 8 of income from the lease of ships and aircraft to lease income derived by a resident of a Contracting State that operates ships or aircraft in international traffic. Income from the lease of ships or aircraft that is derived by a lessor that is not an operator of ships or aircraft in international traffic would not fall under Article 8. 　　The narrower definition of international traffic similarly combines with paragraph 3 of Article 8 (Shipping and Air Transport) to limit the exclusive residence country taxation under Article 8 to income from the use, maintenance or rental of containers derived by persons engaged in international traffic (i.e., persons engaged in the operation of ships or aircraft in international traffic). 　　The exclusion from international traffic 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 international traffic, whether carried by a U.S. or a Estonian 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 Estonia (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 Estonian 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 Estonia 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 traffic," 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 language of the Convention, based on U.S. Model language, 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(h)(i) and (ii) define the term "competent authority" for the United States and Estonia, 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 Estonian competent authority is the Minister of Finance or his authorized representative. 　　The term "national," as it relates to the United States and to Estonia, is defined in subparagraphs 1(i)(i) and (ii). This term is relevant for purposes of Articles 19 (Government Service) and 24 (Nondiscrimination). A national of one of the Contracting States is 　　(1) an individual who is a citizen or national of that State, 　　(2) any legal person, partnership or association deriving its status as such from the law in force in the State where it is established, and in the case of Estonia only, 　　(3) a personal enterprise without rights of a legal person deriving its status as such from the laws in force in a Contracting State. 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. The paragraph makes clear that if the term is defined under both the tax and non-tax laws of a Contracting State, the definition in the tax law will take precedence over the definition in the non-tax laws. 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(f) of Article 25 (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. 　　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. This use of "ambulatory" definitions, 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. ARTICLE 4 Resident 　　This Article sets forth rules for determining whether a person is a resident of a Contracting State for purposes of the Convention. As a general matter only residents of the Contracting States may claim the benefits of the Convention. The treaty definition of residence is to be used only for purposes of the Convention. The fact that a person is determined to be a resident of a Contracting State under Article 4 does not necessarily entitle that person to the benefits of the Convention. In addition to being a resident, a person also must qualify for benefits under Article 22 (Limitation on Benefits) in order to receive benefits conferred on residents of a Contracting State. 　　The determination of residence for treaty purposes looks first to a person's liability to tax as a resident under the respective taxation laws of the Contracting States. As a general matter, a person who, under those laws, is a resident of one Contracting State and not of the other need look no further. For purposes of the Convention that person is 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 Article proceeds, where possible, to use tie-breaker rules to assign a single State of residence to such a person for purposes of the Convention. Paragraph 1 　　The term "resident of a Contracting State" is defined in paragraph 1. In general, this definition incorporates the definitions of residence in U.S. law and that of Estonia by referring to a resident as a person who, under the laws of a Contracting State, is subject to tax there by reason of his residence, domicile, citizenship, place of management, place of incorporation or any other similar criterion. Thus, residents of the United States include aliens who are considered U.S. residents under Code section 7701(b). Certain entities that are nominally subject to tax but that in practice rarely pay tax also would generally be treated as residents and therefore accorded treaty benefits. For example, RICs, REITs and REMICs are all residents of the United States for purposes of the treaty. Although the income earned by these entities normally is not subject to U.S. tax in the hands of the entity, they are taxable to the extent that they do not currently distribute their profits, and therefore may be regarded as "liable to tax." They also must satisfy a number of requirements under the Code in order to be entitled to special tax treatment. Paragraph 2 　　Paragraph 2 identifies three circumstances where the definition of residence set forth in paragraph 1 does not apply or is limited. 　　Subparagraph (a) provides that a person who is liable to tax in a Contracting State only in respect of income from sources within that State will not be treated as a resident of that Contracting State for purposes of the Convention. Thus, a consular official of Estonia who is posted in the United States, who may be subject to U.S. tax on U.S. source investment income, but is not taxable in the United States on non-U.S. source income, would not be considered a resident of the United States for purposes of the Convention. (See Code section 7701(b)(5)(B)). Similarly, although not explicitly stated in the Convention, as it is in the U.S. Model, an enterprise of Estonia with a permanent establishment in the United States is not, by virtue of that permanent establishment, a resident of the United States. The enterprise generally 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, as it would be if it were a U.S. resident. 　　Subparagraph (b) addresses special problems presented by transparent entities, such as partnerships, estates and trusts. The entity itself may be treated as a resident of a Contracting State to the extent that the entity is subject to tax in that State on the income as the income of a resident. This subparagraph also applies to any resident of a Contracting State who is subject to tax as a resident of that State on income derived through an entity that is treated as fiscally transparent under the laws of either Contracting State. Entities falling under this description in the United States would include partnerships, common investment trusts under section 584 and grantor trusts. This paragraph also applies to U.S. limited liability companies ("LLC's") that are treated as partnerships for U.S. tax purposes. Subparagraph (b) provides that an item of income derived through such fiscally transparent entities will be considered to be derived by a resident of a Contracting State if the resident is treated under the taxation laws of the State where he is resident as deriving the item of income. For example, if an Estonian corporation distributes a dividend to an entity that is treated as fiscally transparent for U.S. tax purposes, the dividend will be considered to be derived by a resident of the U.S. only to the extent that U.S. tax law treats one or more U.S. residents (whose status as U.S. residents is determined, for this purpose, under U.S. tax law) as deriving the dividend income for U.S. tax purposes. In the case of a partnership, the persons who are, under U.S. tax law, treated as partners of the entity would normally be the persons whom the U.S. tax law would treat as deriving the dividend income through the partnership. Also, it follows that partners whom the U.S. treats as deriving the dividend income for U.S. tax purposes but who are not U.S. residents under U.S. tax law may not claim a benefit for the dividend paid to the entity under the Convention, because they are not residents of the United States for purposes of claiming this treaty benefit. (If, however, the country in which they are treated as resident for tax purposes, as determined under the laws of that country, has an income tax convention with Estonia, they may be entitled to claim a benefit under that convention.) In contrast, if, for example, an entity is organized under U.S. laws and is classified as a corporation for U.S. tax purposes, dividends paid by a Estonia corporation to the U.S. entity will be considered derived by a resident of the United States since the U.S. corporation is treated under U.S. taxation laws as a resident of the United States and as deriving the income. These results would obtain even if the entity were viewed differently under the tax laws of Estonia (e.g., as not fiscally transparent in the first example above where the entity is treated as a partnership for U.S. tax purposes or as fiscally transparent in the second example where the entity is viewed as not fiscally transparent for U.S. tax purposes). Similarly, the characterization of the entity in a third country is also irrelevant, even if the entity is organized in that third country. The results obtain regardless of whether the entity is disregarded as a separate entity under the laws of one jurisdiction but not the other, such as a single owner entity that is viewed as a branch for U.S. tax purposes and as a corporation for Estonian tax purposes. The results also obtain regardless of where the entity is organized, i.e., in the United States, in Estonia, or in a third country. 　　For example, income from Estonian sources received by an entity organized under the laws of Estonia, which is treated for U.S. tax purposes as a corporation and is owned by a U.S. shareholder who is a U.S. resident for U.S. tax purposes, is not considered derived by the shareholder of that corporation even if, under the tax laws of Estonia, the entity is treated as fiscally transparent. Rather, for purposes of the Convention, the income is treated as derived by the Estonian entity. 　　The rule also applies to trusts to the extent that they are fiscally transparent in either Contracting State. For example, if X, a resident of Estonia, creates a revocable trust and names persons resident in a third country as the beneficiaries of the trust, X would be treated as the beneficial owner of income derived from the United States under the Code's rules. If Estonia has no rules comparable to those in sections 671 through 679 of the Code then it is possible that under Estonian law neither X nor the trust would be taxed on the income derived from the United States. In these cases it is to be understood that the trust's income would be regarded as being derived by a resident of Estonia only to the extent that the laws of Estonia treat Estonian residents as deriving the income for tax purposes. 　　The taxation laws of a Contracting State may treat an item of income, profit or gain as　income, profit or gain of a resident of that State even if the resident is not subject to tax on that　particular item of income, profit or gain. For example, if a Contracting State has a participation exemption for certain foreign-source dividends and capital gains, such income or gains would be regarded as income or gain of a resident of that State who otherwise derived the income or gain, despite the fact that the resident could be exempt from tax in that State on the income or gain. Income is "derived through" a fiscally transparent entity if the entity's participation in the transaction giving rise to the income, profit or gain in question is respected after application of any source State anti-abuse principles based on substance over form and similar analyses. For example, if a partnership with U.S. partners receives income arising in Estonia, that income will be considered to be derived through the partnership by its partners as long as the partnership's participation in the transaction is not disregarded for lack of economic substance. In such a case, the partners would be considered to be the beneficial owners of the income. A U.S. citizen would generally be treated as a resident of the United States under paragraph 1. However, subparagraph 2(c) provides that a U.S. citizen or alien lawfully admitted for permanent residence (i.e., a "green card" holder) who is not, under the introductory language of paragraph 1 of this Article, an individual resident of Estonia will be treated as a resident of the United States for purposes of the Convention, and, thereby entitled to treaty benefits, only if he has a substantial presence (see section 7701(b)(3)), permanent home or habitual abode in the United States. If, however, such an individual is a resident both of the United States and Estonia under the general rule of paragraph 1, whether he is to be treated as a resident of the United States or of Estonia for purposes of the Convention is determined by the tie-breaker rules of paragraph 4 of the Article, regardless of how close his nexus to the United States may be. However, the fact that a U.S. citizen who does not have close ties to the United States may not be treated as a U.S. resident under the Convention does not alter the application of the saving clause of paragraph 4 of Article 1 (General Scope) to that citizen. For example, a U.S. citizen who pursuant to the "citizen/green card holder" rule is not considered to be a resident of the United States still is taxable on his worldwide income under the generally applicable rules of the Code. Paragraph 3 　　Subparagraph (a) makes clear the generally understood practice of including within the term "resident of a Contracting State" the Government of that state as well as any political subdivisions or local authorities, agencies and other instrumentalities of that State. Subparagraph (b) provides that certain tax-exempt entities such as pension funds and charitable organizations will also be regarded as residents of a Contracting State regardless of whether they are generally liable for income tax in the State where they are established. An entity is dealt with in this subparagraph if it is generally exempt from tax by reason of the fact that it is organized and operated exclusively to perform a charitable or similar purposes, or to provide pension or similar benefits to employees pursuant to a plan. The reference to "similar benefits" is intended to encompass employee benefits such as health and disability benefits. 　　The inclusion of this provision is intended to clarify the generally accepted practice of treating an entity that would be liable for tax as a resident under the internal law of a state but for a specific exemption from tax (either complete or partial) as a resident of that state for purposes of paragraph 1. The reference to a "general" exemption is intended to reflect the fact that under U.S. law, certain organizations that generally are considered to be tax-exempt entities may be subject to certain excise taxes or to income tax on their unrelated business income. Thus, a U.S. pension trust, or an exempt section 501(c) organization (such as a U.S. charity) that is generally exempt from tax under U.S. law is considered a resident of the United States for all purposes of the treaty. Paragraph 4 　　If, under the laws of the two Contracting States, and, thus, under paragraph 1, an individual is deemed to be a resident of both Contracting States, a series of tie-breaker rules are provided in paragraph 4 to determine a single State of residence for that individual. These tests are to be applied in the order in which they are stated. The first test is based on where the individual has a permanent home. If that test is inconclusive because the individual has a permanent home available to him in both States, he will be considered to be a resident of the Contracting State where his personal and economic relations are closest (i.e., the location of his "center of vital interests"). If that test is also inconclusive, or if he does not have a permanent home available to him in either State, he will be treated as a resident of the Contracting State where he maintains 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 the Contracting State of which he is a national. If he is a national of both States or of neither, the matter will be considered by the competent authorities, who will assign a single State of residence. Paragraph 5 　　Paragraph 5 seeks to settle dual-residence issues for companies. A company is treated as a resident in the United States if it is created or organized under the laws of the United States or a political subdivision thereof. In Estonia, a corporation is treated as a resident of Estonia if it is either incorporated there or managed and controlled there. Dual residence, therefore, can arise if a U.S.-incorporated corporation is managed and controlled in Estonia. The paragraph provides that if a company is resident in both the United States and Estonia under paragraph 1, the competent authorities shall seek to determine a single State of residence for the company for purposes of the Convention. If, however, they are unable to reach agreement, then the company shall not be considered to be a resident of either the United States or Estonia for purposes of deriving any benefits of the Convention. Since it is only for the purposes of deriving treaty benefits that such dual residents are excluded from the Convention, they may be treated as resident for other purposes. For example, if a dual resident corporation pays a dividend to a resident of Estonia, the U.S. withholding agent would be permitted to withhold on that dividend at the appropriate treaty rate, since reduced withholding is a benefit enjoyed by the resident of Estonia receiving the dividend, not by the dual resident. The dual resident corporation that pays the dividend would, for this purpose, be treated as a resident of the United States under the Convention. Paragraph 6 　　Dual residents other than individuals or companies (such as trusts or estates) are addressed by paragraph 6. If such a person is, under the rules of paragraph 1, resident in both Contracting States, the competent authorities shall seek to determine a single State of residence for that person for purposes of the Convention.