TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE CONVENTION AND PROTOCOL BETWEEN THE UNITED STATES OF AMERICA AND THE FEDERAL REPUBLIC OF GERMANY FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL AND TO CERTAIN OTHER TAXES（一） 　SIGNED AT BONN ON AUGUST 29, 1989 　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 　　GENERAL EFFECTIVE DATE UNDER ARTICLE 32: 1 JANUARY 1990 　　FOR FORMER GERMAN DEMOCRATIC REPUBLIC: 1 JANUARY 1991 　　　　　　　　　　　INTRODUCTION 　　This is a technical explanation of the Convention and Protocol between the United States and the Federal Republic of Germany signed on August 29, 1989 ("the Convention"). References are made to the Convention between the United States and the Federal Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and to Certain other Taxes, signed on 22 July, 1954, as amended by the Protocol signed on 17 September, 1965 ("the 1954 Convention"). The Convention replaces the 1954 Convention. Negotiations took as their starting point the U.S. Treasury Department's draft Model Income Tax Convention, published on June 16, 1981 ("the U.S. Model"), the Model Double Taxation Convention on Income and Capital, published by the OECD in 1977 ("the OECD Model"), and an unpublished German model treaty. 　　The Technical Explanation is an official guide to the Convention. It reflects the policies behind particular Convention provisions, as well as understandings reached with respect to the application and interpretation of the Convention. 　　The explanations of each article will include explanations of any Protocol provisions relating to that article. TABLE OF ARTICLES Article 1---------------------------------General Scope Article 2---------------------------------Taxes Covered Article 3---------------------------------General Definitions Article 4---------------------------------Residence Article 5---------------------------------Permanent Establishment Article 6---------------------------------Income from Immovable (Real) Property Article 7---------------------------------Business Profits Article 8---------------------------------Shipping and Air Transport Article 9---------------------------------Associated Enterprises Article 10--------------------------------Dividends Article 11--------------------------------Interest Article 12--------------------------------Royalties Article 13--------------------------------Gains Article 14--------------------------------Independent Personal Services Article 15--------------------------------Dependent Personal Services Article 16--------------------------------Directors' Fees Article 17--------------------------------Artistes and Athletes Article 18--------------------------------Pensions, Annuities, Alimony and Child Support Article 19--------------------------------Government Service; Social Security Article 20--------------------------------Visiting Professors and Teachers; Students and Trainees Article 21--------------------------------Other Income Article 22--------------------------------Capital Article 23--------------------------------Relief from Double Taxation Article 24--------------------------------Nondiscrimination Article 25--------------------------------Mutual Agreement Procedure Article 26--------------------------------Exchange of Information and Administrative Assistance Article 27--------------------------------Exempt Organizations Article 28--------------------------------Limitation on Benefits Article 29--------------------------------Refund of Withholding Tax Article 30--------------------------------Members of Diplomatic Missions and Consular Posts Article 31--------------------------------Berlin Clause Article 32--------------------------------Entry into Force Article 33--------------------------------Termination ARTICLE 1 General Scope 　　Article 1 provides that the Convention is applicable to residents of the United States or the Federal Republic of Germany ("Germany") except where the terms of the Convention provide otherwise. Under Article 4 (Residence) a person is treated as a resident of a Contracting State if that person is under the laws of that State liable to tax therein by reason of his domicile or other similar criteria, subject to certain limitations, as described in Article 4. If, however, a person is, under those criteria, a resident of both Contracting States, a single state of residence (or no state of residence) is assigned under Article 4. This definition governs for all provisions the Convention. Certain provisions are applicable to persons who may not be residents of either Contracting State. For example, Article 19 (Government Service; Social Security) may apply to citizen of a Contracting State who is resident in neither. Paragraph 1 of Article 24 (Nondiscrimination) applies to nationals of the Contracting States. Under Article 26 (Exchange of Information and Administrative Assistance), information may be exchanged with respect to residents of third states. 　　The provisions of paragraph 2 of Article 1 of the U.S. Model, describing the relationship between the rules of the Convention, on the one hand, and the laws of the Contracting States and other agreements between the Contracting States, on the other, and the provisions of paragraphs 3 and 4 of Article 1, preserving certain taxing rights of the Contracting States under the "saving clause", are found in Paragraph 1 of the Protocol. Although Paragraph 1 of the Protocol does not relate specifically to Article 1, its provisions are discussed here for ease of reference. 　　Subparagraphs (a) and (b) of Paragraph 1 of the Protocol contain the traditional saving clause. Unlike the similar provision in the U.S. Model, the saving clause in the Protocol is unilateral, applying only for United States tax purposes. Under subparagraph (a), the United States reserves its right, except as provided in paragraph (b), to tax U.S. resident's and citizens as provided in the Internal Revenue Code ("Code"), notwithstanding any Convention provisions tothe contrary. If, for example, a German resident performs independent personal services in the United States and the income from the services is not attributable to a fixed base in the United States, Article 14 (Independent Personal Services) would normally prevent the United States from taxing the income. If, however, the German resident is also a citizen of the United States, the saving clause permits the United States to include the remuneration in the worldwide income of the citizen and subject it to tax under the normal Code rules. (For special foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident in Germany, see paragraph 3 of Article 23 (Relief from Double Taxation).) "Residence", for the purpose of the saving clause, is determined under Article 4 (Residence). Thus; for example, if an individual who is not a U.S. citizen is a resident of the United States under the Code, and is also a resident of Germany under German law, and that individual has a permanent home available to him in Germany and not in the United States, he would be treated as a resident of Germany under Article 4 and for purposes of the saving clause. The United States would not be permitted to apply its statutory rules to that person if they are inconsistent with the treaty. Under paragraph (a), the United States also reserves its right to tax former U.S. citizens whose loss of citizenship had as one of its principal purposes the avoidance of U.S. income tax. Such a former citizen is taxable in accordance with the provisions of section 877 of the Code for 10 years following the loss of citizenship. 　　Subparagraph (b) sets forth certain exceptions to the saving clause in cases where its application would contravene policies reflected in the treaty which are intended to extend U.S. benefits to U.S. citizens and residents. Sub-subparagraph (b)(aa) lists certain provisions of the Convention which will be applicable to all U.S. citizens and residents despite the general saving clause rule of subparagraph (a): 　　(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative adjustment, and, particularly, permits the override of the statute of limitations for the purpose of refunding tax under such a correlative adjustment. 　　(2) Paragraph 6 of Article 13 (Gains) provides special basis adjustment rules for U.S. taxation of gains derived by certain U.S. residents on the alienation of shares which represent a substantial holding in a German corporation. The rule coordinates U.S. and German taxation, and is intended to apply to U.S. citizens. 　　(3) Paragraphs 3 and 4 of Article 18 (Pensions, Annuities, Alimony and Child Support) deal with alimony and child support payments. Their inclusion in the exceptions to the saving clause means that alimony paid by a U.S. resident to a German resident who is a U.S. citizen will not be taxed by the United States as income of the U.S. citizen. Similarly, if a resident of Germany pays child support to a resident of the United States, the United States may not tax the recipient. 　　(4) Subparagraph 1(c) of Article 19 (Government Service; Social Security) provides that only the paying State may tax payments to a resident of the other which are compensation for injury or damage suffered as a result of hostility or persecution. This refers to German war reparations payments. The exception to the saving clause prohibits the United States from taxing such payments received by its residents and citizens even if they would otherwise be taxable under the Code. 　　(5) Paragraph 2 of Article 19 provides for the taxation of social security benefits only in the State of residence of the beneficiary. Excepting this rule from the saving clause means that the United States may not apply the Code rules to tax its citizens resident in Germany on U.S. social security benefits. 　　(6) Article 23 (Relief from Double Taxation) confers the benefit of a foreign tax credit on U.S. citizens and residents. To apply the saving clause to this Article would render the Article meaningless. 　　(7) Article 25 (Mutual Agreement Procedure) may confer benefits on U.S. citizens and residents. The statute of limitations may be waived for refunds, the competent authorities are permitted to use a definition of a term which differs from the Code definition, or they may refer an issue to an arbitration panel. As with the foreign tax credit, these benefits are intended to be granted by a Contracting State to its citizens and residents. 　　Sub-subparagraph (b)(bb) provides a different set of exceptions to the saving clause. The benefits referred to are all intended to be granted to temporary U.S. residents, but not to U.S. citizens and immigrants. If beneficiaries of these provisions come to the United States from Germany and remain in the United States long enough to become residents under the Code, but do not acquire immigrant status (i.e., they do not become "green card" holders) and are not citizens of the United States, the United States will continue to grant these benefits even if they conflict with the Code rules. The benefits preserved by this paragraph are the host country exemptions for the following items of income: Government service salaries and pensions under subparagraph 1(b) of Article 19 (Government Service; Social Security); certain income of visiting teachers, students and trainees under Article 20 (Visiting Professors and Teachers; Students and Trainees); and the income of diplomatic and consular officers under Article 30 (Members of Diplomatic Missions and Consular Posts). 　　Subparagraph (c) of Paragraph 1 of the Protocol is the same as paragraph 2 of Article 1 of the U.S. Model. It is also essentially the same as paragraph 2 of Article XVIII of the 1954 Convention. This paragraph makes explicit, on a reciprocal basis, the generally accepted principle that no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other allowance accorded by the tax laws of the Contracting States. Thus, for example, if a deduction would be allowed under the Code in computing the taxable income of a resident of Germany, the deduction will be available to that person in computing income under the treaty. In no event may the treaty increase the tax burden on residents of the Contracting States. Thus, a right to tax given by the treaty cannot be exercised by the United States unless that right also exists under the Code. 　　A taxpayer may always rely on the more favorable Code treatment. This does not mean, however, that a taxpayer may pick and choose among Code and treaty provisions in an inconsistent manner in order to minimize tax. For example, assume a resident of Germany has three separate businesses in the United States. One is a profitable permanent establishment and the other two are trades or businesses which would earn taxable income under the Code but which do not meet the permanent establishment threshold tests of the Convention. One is profitable and the other incurs a loss. Under the Convention, the income of the permanent establishment is taxable, and both the profit and loss of the other two businesses are ignored. Under the Code, all three would be taxable. The loss would be offset against the profits of the two profitable ventures. The taxpayer may not invoke the Convention to exclude the profits of the profitable trade or business and invoke the Code to claim the loss of the loss trade or business against the profit of the permanent establishment. (See Rev. Rul. 84-17 C.B. 1984-1, 10.) If the taxpayer invokes the Code for the taxation of all three ventures, he would not be precluded from invoking the Convention with respect, for example, to any dividend income he may receive from the United States which is not effectively connected with any of his business activities in the United States. 　　Similarly, nothing in the Convention can be used to deny any benefit granted by any other agreement between the United States and Germany. For example, if certain benefits are provided for military personnel or military contractors under the Status of Forces Agreement, or if certain protection, not found in the Convention, is afforded under the Treaty of Friendship, Commerce and Navigation, or the Treaty of Friendship, Commerce and Consular Rights, those benefits or protections will be available to residents of the Contracting States regardless of any provisions to the contrary (or silence) in the Convention. 　　Subparagraph (d) of Paragraph 1 of the Protocol contains a rule relating to German tax. In much the same way that the saving clause preserves U.S. taxing rights with respect to its citizens and residents, this paragraph preserves German statutory rights with respect to the income of German residents. It further provides that if any tax imposed by virtue of this paragraph results in double taxation, the competent authorities will seek to eliminate the double taxation by use of the mutual agreement procedure, particularly paragraph 3 of Article 25 (Mutual Agreement Procedure) which provides, among other things, for consultation between the competent authorities to eliminate double taxation in cases not provided for in the Convention. ARTICLE 2 Taxes Covered 　　This Article identifies the U.S. and German taxes to which the Convention applies. These are referred to in the Convention as "United States tax" and "German tax" respectively. 　　In the case of the United States, as indicated in subparagraph 1(a), the covered taxes are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371). With respect to the tax on insurance premiums, the Convention applies only to the extent that the risks covered by such premiums are not reinsured, directly or indirectly, with a person not entitled, under this or any other Convention, to exemption from the tax. The Article specifies that the Convention does not apply to the accumulated earnings tax (Code section 531), the personal holding company tax (Code section 541) or the social security taxes (Code sections 1401, 3101 and 3111). U.S. and German social security taxes are dealt within the bilateral Social Security Totalization Agreement, which entered into force on December 1, 1979, and was amended by a supplementary agreement signed on October 2, 1986. Except with respect to Article 24 (Nondiscrimination), state and local taxes in the United States are not covered by the Convention. Article 24 prohibits discriminatory taxation with respect to all taxes, whether or not they are covered taxes under Article 2, and whether they are imposed by the Contracting States, their political subdivisions or local authorities. 　　Providing Convention coverage for the U.S. insurance excise tax effectively exempts German companies which insure U.S. risks from the tax, subject to the anti-conduit rule for reinsurance, described above. Under the Code, the tax is applicable to a German company only if it earns premiums which are not attributable to a permanent establishment in the United States. Under Article 7 (Business Profits), the United States does not subject the business profits of a German enterprise to tax (i.e., a covered tax) if the income of the enterprise is not attributable to a permanent establishment which the enterprise has in the United States. In contrast with this Convention, the 1954 Convention did not cover the insurance excise tax, thus allowing it to be imposed on premiums paid to German insurers which were not attributable to a permanent establishment of the German insurer in the United States. The 1954 Convention also did not exclude the accumulated earnings tax, personal holding company tax and social security taxes. The 1954 Convention had the same broad coverage for purposes of the nondiscrimination provisions as this Convention. 　　Subparagraph 1(b) specifics the existing German taxes which are covered by the Convention. They are the income tax (Einkommensteuer), the corporation tax (Koerperschaftsteuer), the trade tax (Gewerbesteuer) and the capital tax (Vermoegensteuer). These are the same as the German taxes covered by the 1954 Convention. 　　Under paragraph 2, the Convention will apply to any taxes which 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 August 29, 1989 (the date of signature of the Convention). The paragraph also provides that the U.S. and German competent authorities will notify each other of significant changes in their taxation laws. This refers to changes which are of significance to the operation of the Convention.