Paragraph 2 　The treatment of social security benefits is dealt with in paragraph 2. This paragraph provides that, notwithstanding the provision of paragraph 1, under which private pensions are taxable exclusively in the State of residence of the beneficial owner, payments made by one of the Contracting States under the provisions of its social security or similar legislation to a resident of the other Contracting State or to a citizen of the United States will be taxable only in the Contracting State making the payment. This paragraph applies to social security beneficiaries whether they have contributed to the system as private sector or Government employees. 　　The phrase "similar legislation" is intended to refer to United States tier 1 Railroad Retirement benefits. The reference to U.S. citizens is necessary to ensure that a social security payment by Estonia to a U.S. citizen who is not resident in the United States will not be taxable by the United States. Paragraph 3 　　Under paragraph 3, annuities that are derived and beneficially owned by a resident of a Contracting State are taxable only in that State. An annuity, as the term is used in this paragraph, means a stated sum, other than a pension, which is dealt with in paragraph 1, that is paid periodically at stated times during a specified number of years, under an obligation to make the payment in return for adequate and full consideration (other than for services rendered). An annuity received in consideration for services rendered would be treated as deferred compensation and generally taxable in accordance with Article 15 (Dependent Personal Services). Paragraphs 4 and 5 　　Paragraphs 4 and 5 deal with alimony and child support payments. Both alimony, under paragraph 4, and child support payments, under paragraph 5, are defined as periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, compulsory support. Paragraph 4, however, deals only with payments of that type that are deductible to the payer and taxable to the payee. Under that paragraph, alimony (i.e., a deductible payment that is taxable in the hands of the recipient) paid by a resident of a Contracting State to a resident of the other Contracting State is taxable under the Convention only in the State of residence of the recipient. Paragraph 5 deals with those periodic payments that are for the support of a child and that are not covered by paragraph 4 (i.e., those payments that either are not deductible to the payer or not taxable to the payee). These types of payments by a resident of a Contracting State to a resident of the other Contracting State are not taxable in the State of residence of the payee. Relationship to Other Articles 　　Paragraphs 1, 3 and 4 of Article 18 are subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, a U.S. citizen who is resident in the other Contracting State, and receives either a pension, annuity or alimony payment from the United States, may be subject U.S. tax on the payment, notwithstanding the rules in those three paragraphs that give the State of residence of the recipient the exclusive taxing right. Paragraphs 2 and 5, however, are excepted from the saving clause by virtue of paragraph 5(a) of Article 1. Thus, the United States will allow U.S. citizens and residents the benefits of those paragraphs. ARTICLE 19 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 one of the States or its political subdivisions or local authorities to any individual who is rendering services to that State, political subdivision or local authority, as an employee of 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 a resident of that State solely for purposes of rendering the services. 　　This paragraph is consistent with the OECD Model, but differs from the U.S. Model, in that it applies only to government employees and not to independent contractors engaged by governments to perform services for them. Independent contractors who provide services for a government or government agency are subject to the provisions of Article 14 (Independent Personal Services), and not this Article. 　　The remuneration described in paragraph 1 is subject to the provisions of this paragraph and not to those of Articles 15 (Dependent Personal Services) or 17 (Artistes and Sportsmen). If, however, the conditions of paragraph 1 are not satisfied, those other Articles will apply. 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 19, 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 17 (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. Paragraph 2 　　Paragraph 2 deals with the taxation of a pension paid by or from the public funds of one of the States or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority in the discharge of governmental functions. Subparagraph (a) provides that such a pension is taxable only in that State. Subparagraph (b) provides an exception under which such a pension is taxable only in the other State if the individual is a resident of, and a national of, that other State. Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When benefits paid by a State in respect of services rendered to that State or a subdivision or authority are in the form of social security benefits, however, those payments are covered by paragraph 2 of Article 18 (Pensions, Social Security, Annuities, Alimony, and Child Support). As a general matter, the result will be the same whether Article 18 or 19 applies, since social security benefits are taxable exclusively by the source country and so, as a general matter, are government pensions. The result will differ only when the payment is made to a citizen and resident of the other Contracting State, who is not also a citizen of the paying State. In such a case, social security benefits continue to be taxable at source while government pensions become taxable only in the residence country. 　　The phrase "functions of a governmental nature" is not defined. In general it is understood to encompass functions traditionally carried on by a government. It generally would not include functions that commonly are found in the private sector (e.g., education, health care, utilities). Rather, it is limited to functions that generally are carried on solely by the government (e.g., military, diplomatic service, tax administrators) and activities that directly support the carrying out of those functions. 　　The use of the phrase "paid from the public funds of a Contracting State" is intended to clarify that remuneration and pensions paid by such entities as government-owned corporations are covered by the Article, as long as the other conditions of the Article are satisfied. 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 Estonia, who in the course of performing functions of a governmental nature becomes a resident of the United States (but not a permanent resident), would be entitled to the benefits of this Article. However, an individual who receives a pension paid by the Government of Estonia in respect of services rendered to that Government is taxable on that pension only in Estonia unless the individual is a U.S. citizen or acquires a U.S. green card. ARTICLE 20 Students, Trainees And Researchers 　　This Article deals with visiting students, trainees and researchers. Unlike the U.S. Model, which deals only with maintenance, education or training payments that arise outside the host State, the Article also provides limited earned income exemption for persons covered by the Article, in order to reflect the particular economic and cultural relationships in this area between the United States and Estonia. Paragraph 1 　　Paragraph 1 of this Article generally provides that a resident of a Contracting State who visits the other Contracting State for the primary purpose of studying at a university or other recognized educational institution, securing training in a professional specialty, or studying or doing research as the recipient of a grant from a government or a charitable institution shall be exempt from tax in that Contracting State with respect to certain items of income derived during that period of study, research or training, provided certain conditions are met. Subparagraph 1(b) defines those exempt items of income as: 　　(1) payments from abroad for maintenance, education, study, research, or training; 　　(2) grants, allowances or awards; and 　　(3) income from personal services performed in that other Contracting State to the extent of $5,000 United States dollars or its equivalent in Estonian kroons per taxable year. The exemptions provided in paragraph 1 are available to the visiting student or trainee for a period not exceeding five taxable years from the beginning of the visit. The religious, charitable, etc. organization, described in subparagraph 1(a)(iii) is, for U.S. purposes, an organization that qualifies as tax-exempt under Code section 501(c)(3). 　　The exemption threshold in this, and subsequent paragraphs of the Article, applies in addition to, and not in lieu of, any allowances (e.g., personal exemptions and deductions) available to the person under the internal laws of the Contracting States. If the amount earned exceeds $5,000 per annum, under this paragraph, only the excess is taxable. The reference in paragraph 1 to "primary purpose" is meant to describe individuals who are participating in a full time program of study, training or research. "Primary purpose" was substituted for the reference in the OECD Model to "exclusive purpose" to prevent too narrow an interpretation. It is not the intention, for example, to exclude full time students who, in accordance with their visas, may hold part-time employment. 　　A student must be studying at a university or other accredited educational institution to qualify for the benefits of this Article. An educational institution is understood to be an institution that normally maintains a regular faculty and normally has a regular body of students in attendance at the place where the educational activities are carried on. An educational institution will be considered to be accredited if it is accredited by an authority that generally is responsible for accreditation of institutions in the particular field of study. 　　The host-country exemption in the Article applies in subparagraph (b)(i) to payments received by the student, trainee or researcher from abroad for the purpose of his maintenance, education or training. A payment will be considered to be from abroad if the payer is located outside the host State. In all cases substance over form will prevail in determining the location and/or identity of the payer. Consequently, payments made directly or indirectly by the U.S. person with whom the visitor is training, but which have been routed through a non-host-country,such as, for example, a foreign affiliated organization, should not be treated as arising outside the United States for this purpose. Moreover, if a U.S. person reimbursed a foreign person for payments by the foreign person to the visitor, the payments by the foreign person would not be treated as arising outside the United States. Paragraph 2 　　Paragraph 2 deals with an individual resident of a Contracting State who is an employee of, or under contract with, an enterprise of that State, and who is temporarily present in the other Contracting State for the primary purpose of studying at an accredited educational institution in the host State or acquiring technical, professional or business experience from a person other than his employer. Such resident will be exempt from tax by the host State for a period of 12 consecutive months on compensation for personal services in an aggregate amount not exceeding $8,000 or its equivalent in Estonian kroons. Paragraph 3 　　Paragraph 3 of the Article deals with an individual resident of a Contracting State who is temporarily present in the other Contracting State for a period not exceeding one year, as a participant in a program sponsored by the Government of the host State, for the primary purpose of training, research or study. Such an individual will be exempt from tax by the host State on compensation for personal services in respect of such training, research or study performed in the host State in an aggregate amount not exceeding $10,000 or its equivalent in Estonian kroons. Paragraph 4 　　Paragraph 4 clarifies that, for the exemption of the preceding paragraphs to apply to income from research, the research must be undertaken in the public interest, and not primarily for the private benefit of a specific person or persons. For example, the exemption would not apply to a grant from a tax-exempt research organization to search for the cure to a disease if the results of the research become the property of a for-profit company. The exemption would not be denied, however, if the tax-exempt organization licensed the results of the research to a for-profit enterprise in consideration of an arm's length royalty consistent with its tax-exempt status. 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 this Article if the individual is neither a citizen of the host State nor admitted for permanent residence there. The saving clause, however, does apply with respect to citizens and permanent residents of the host State. Thus, a U.S. citizen who is a resident of Estonia and who visits the United States as a full time student at an accredited university will not be exempt from U.S. tax on remittances from abroad that otherwise constitute U.S. taxable income. A person, however, who is not a U.S. citizen, and who visits the United States as a student and remains long enough to become a resident under U.S. tax law, but does not become a permanent resident (i.e., does not acquire a green card), will be entitled to the full benefits of the Article. 　　Under subparagraph (g) of paragraph 3 of Article 25 (Mutual Agreement Procedure), the competent authorities of the Contracting States may, by mutual agreement, increase any or all of the dollar thresholds in this article. ARTICLE 21 Other Income 　　This Article provides the rules for the taxation of items of income not dealt with in the other Articles of the Convention. An item of income is "dealt with" in another article if it is the type of income described in the Article and it has its source in a Contracting State. For example, all royalty income that arises in a Contracting State and that is beneficially owned by a resident of the other Contracting State is "dealt with" in Article 12 (Royalties). Article 21 of the Convention differs from Article 21 (Other Income) of the U.S. Model. Like the U.S. Model, the Article generally assigns taxing jurisdiction over income not dealt with in the other articles (Articles 6 through 20) of the Convention to the State of residence of the beneficial owner of the income and defines the terms necessary to apply the Article. Unlike the U.S. Model, paragraph 3 of this Article also allows the other Contracting State to tax in cases where the income of a resident of a Contracting State has its source in the other Contracting State. 　　This Article deals both with types of income which are not dealt with elsewhere, such as, for example, lottery winnings, and also with income of a type dealt with elsewhere in the Convention, but from sources in third States, and, therefore, not covered by the other Articles. 　　Examples of items of income covered by Article 21 include income from gambling,punitive (but not compensatory) damages, covenants not to compete, and income from financial instruments to the extent derived by persons not engaged in the trade or business of dealing in such instruments (unless the transaction giving rise to the income is related to a trade or business, in which case it is dealt with under Article 7 (Business Profits)). The Article also applies to items of income that are not dealt with in the other articles because of their source or some other characteristic. For example, Article 11 (Interest) addresses only the taxation of interest arising in a Contracting State. Interest arising in a third State that is not attributable to a permanent establishment, therefore, is subject to Article 21. Distributions from partnerships and distributions from trusts are not generally dealt with under Article 21 because partnership and trust distributions generally do not constitute income. Under the Code, partners include in income their distributive share of partnership income annually, and partnership distributions themselves generally do not give rise to income. Also, under the Code, trust income and distributions have the character of the associated distributable net income and therefore would generally be covered by another article of the Convention. See Code section 641 et seq. Paragraph 1 　　The general rule of Article 21 is contained in paragraph 1. Items of income not dealt with in other articles and beneficially owned by a resident of a Contracting State will be taxable only in the State of residence. This exclusive right of taxation applies whether or not the residence State exercises its right to tax the income covered by the Article. Paragraph 3 of this Article alters this exclusive right of taxation in cases where the income of a resident of a Contracting State is sourced in the other Contracting State. 　　The reference in this paragraph to "items of income beneficially owned by a resident of a Contracting State" rather than simply "items of income of a resident of a Contracting State," as in the OECD Model, is intended merely to make explicit the implicit understanding in other treaties that the exclusive residence taxation provided by paragraph 1 applies only when a resident of a Contracting State is the beneficial owner of the income. Thus, source taxation of income not dealt with in other articles of the Convention is not limited by paragraph 1 if it is nominally paid to a resident of the other Contracting State, but is beneficially owned by a resident of a third State. Paragraph 2 　　This paragraph provides an exception to the general rule of paragraph 1 for income, other than income from real property, that is attributable to a permanent establishment or fixed base maintained in a Contracting State by a resident of the other Contracting State. The taxation of such income is governed by the provisions of Articles 7 (Business Profits) and 14 (Independent Personal Services). Therefore, income arising outside the United States that is attributable to a permanent establishment maintained in the United States by a resident of Estonia generally would be taxable by the United States under the provisions of Article 7. This would be true even if the income is sourced in a third State. 　　There is an exception to this general rule with respect to income a resident of a Contracting State derives from real property located outside the other Contracting State (whether in the first-mentioned Contracting State or in a third State) that is attributable to the resident's permanent establishment or fixed base in the other Contracting State. In such a case, only the first-mentioned Contracting State (i.e., the State of residence of the person deriving the income) and not the host State of the permanent establishment or fixed base may tax that income. This special rule for foreign-situs property is consistent with the general rule, also reflected in Article 6 (Income from Immovable (Real) Property), that only the situs and residence States may tax real property and real property income. Even if such property is part of the property of a permanent establishment or fixed base in a Contracting State, that State may not tax it if neither the situs of the property nor the residence of the owner is in that State. Paragraph 3 　　Paragraph 3 provides that where an item of income of a resident of a Contracting State dealt with in Paragraph 1 is sourced in the other Contracting State, the State of source also may tax the income. This does not grant exclusive taxing rights to the source State. Income attributable to notional principal contracts and other financial instruments to the extent that the income is attributable to a trade or business dealing in such instruments, or is otherwise related to a trade or business (as in the case of a notional principal contract entered into for the purpose of hedging currency risk arising from an active trade or business) that is derived by a resident of one Contracting State in connection with the conduct of a trade or business situated in the other Contracting State is taxable as business profits under Article 7 (Business Profits) and not under this Article. Relation to Other Articles 　　This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States may tax the income of a resident of Estonia that is not dealt with elsewhere in the Convention, if that resident is a citizen of the United States. The Article is also subject to the provisions of Article 22 (Limitation on Benefits). Thus, if a resident of Estonia earns income that falls within the scope of paragraph 1 of Article 21, but that is taxable by the United States under U.S. law, the income would be exempt from U.S. tax under the provisions of Article 21 only if the resident satisfies one of the tests of Article 22 for entitlement to benefits. ARTICLE 22 Limitation of Benefits 　　Purpose of Limitation on Benefits Provisions The United States views an income tax treaty as a vehicle for providing treaty benefits to residents of the two Contracting States. This statement begs the question of who is to be treated as a resident of a Contracting State for the purpose of being granted treaty benefits. The Commentaries to the OECD Model authorize a tax authority to deny benefits, under substanceover- form principles, to a nominee in one State deriving income from the other on behalf of a third-country resident. In addition, although the text of the OECD Model does not contain express anti-abuse provisions, the Commentaries to Article 1 contain an extensive discussion approving the use of such provisions in tax treaties in order to limit the ability of third state residents to obtain treaty benefits. The United States holds strongly to the view that tax treaties should include provisions that specifically prevent misuse of treaties by residents of third countries. Consequently, all recent U.S. income tax treaties contain comprehensive Limitation on Benefits provisions. A treaty that provides treaty benefits to any resident of a Contracting State permits "treaty shopping": the use, by residents of third states, of legal entities established in a Contracting State with a principal purpose to obtain the benefits of a tax treaty between the two Contracting States. It is important to note that this definition of treaty shopping does not encompass every case in which a third state resident establishes an entity in a treaty partner, and that entity enjoys treaty benefits to which the third state resident would not itself be entitled. If the third country resident had substantial reasons for establishing the structure that were unrelated to obtaining treaty benefits, the structure would not fall within the definition of treaty shopping set forth above. Of course, the fundamental problem presented by this approach is that it is based on the taxpayer's intent, which a tax administrator is normally ill-equipped to identify. In order to avoid the necessity of making this subjective determination, Article 22 sets forth a series of objective tests. The assumption underlying each of these tests is that a taxpayer that satisfies the requirements of any of the tests probably has a real business purpose for the structure it has adopted, or has a sufficiently strong nexus to the other Contracting State (e.g., a resident individual) to warrant benefits even in the absence of a business connection, and that this business purpose or connection is sufficient to justify the conclusion that obtaining the benefits of the Treaty is not a principal purpose of establishing or maintaining residence. For instance, the assumption underlying the active trade or business test under paragraph 3 is that a third country resident that establishes a "substantial" operation in Estonia and that derives income from a related activity in the United States would not do so primarily to avail itself of the benefits of the Treaty; it is presumed in such a case that the investor had a valid business purpose for investing in Estonia, and that the link between that trade or business and the U.S. activity that generates the treaty-benefitted income manifests a business purpose for placing the U.S. investments in the entity in Estonia. It is considered unlikely that the investor would incur the expense of establishing a substantial trade or business in Estonia simply to obtain the benefits of the Convention. A similar rationale underlies other tests in Article 22. While these tests provide useful surrogates for identifying actual intent, these mechanical tests cannot account for every case in which the taxpayer was not treaty shopping. Accordingly, Article 22 also includes a provision (paragraph 4) authorizing the competent authority of a Contracting State to grant benefits. While an analysis under paragraph 4 may well differ from that under one of the other tests of Article 22, its objective is the same: to identify investors whose residence in the other State can be justified by factors other than a purpose to derive treaty benefits. Article 22 and the anti-abuse provisions of domestic law complement each other, as Article 22 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 22 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 the general rule that residents are entitled to benefits otherwise accorded to residents only if the resident is a "qualified resident," as defined in the Article. Paragraph 2 lists a series of attributes of a qualified resident, the presence of any one of which will entitle that person to all the benefits of the Convention. Paragraph 3 provides that, with respect to a person that is not a qualified resident, and is, therefore, not entitled to benefits under paragraph 2, benefits nonetheless may be granted to that person with regard to certain types of income. Paragraph 4 provides that benefits also may be granted to a person that is not a qualified person 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 stock exchange" as used in paragraph 2(e). Paragraph 1 Paragraph 1 provides that a resident of a Contracting State will be entitled to the benefits otherwise accorded to residents of a Contracting State under the Convention only if it is a qualified resident as provided in the Article. The benefits otherwise accorded to residents under the Convention include all limitations on source-based taxation under Articles 6 through 21, the treaty-based relief from double taxation provided by Article 23 (Relief from Double Taxation),and the protection afforded to residents of a Contracting State under Article 24 (Nondiscrimination). 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 24 (Nondiscrimination), Article 25 (Mutual Agreement Procedure), and Article 27 (Member of Diplomatic Missions and Consular Posts). Article 22 accordingly does not limit the availability of the benefits of these provisions.