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（二） 　　　　　　　　　　　 ARTICLE 3 　　　　　　　　　 General Definitions 　　Paragraph 1 defines a number of basic terms used in the Convention. Some terms are not defined in the Convention. These are dealt within paragraph 2. Certain others are defined in other articles of the Convention. For example, the term "resident of a Contracting State" is defined in Article 4 (Residence). The term "permanent establishment" is defined in Article 5 (Permanent Establishment). The terms "dividends", "interest" and "royalties" are defined in Articles 10, 11 and 12, respectively, which deal with the taxation of those classes of income. 　　The terms "a Contracting State" and "the other Contracting State" are defined in subparagraph 1(a) to mean the United States or Germany, depending on the context in which the term is used. 　　The terms "United States" and "Federal Republic of Germany" are defined, for use in a geographical sense, in subparagraphs 1(b) and (c), respectively. The term "United States" is defined to mean the United States of America. The term does not include Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or territory. Although the Convention does not explicitly include the U.S. continental shelf within the definition of the United States, by virtue of section 638 of the Code the continental shelf is considered to be part of the United States for purposes of the Convention. The term "Federal Republic of Germany" means the area in which German tax law is in force. This includes the German continental shelf (with respect to the exploration or exploitation of natural resources), and, as provided in Article 31 (Berlin Clause), Land Berlin. 　　Subparagraph 1(d) defines the term "person" to include an individual or company.Because the term includes, but is not limited to, these two categories of person, this definition should not be interpreted as being substantively different from the definition of "person" in subparagraph l(a) of Article 3 of the U.S. Model, which also includes any other body of persons" within the definition. 　　The term "company" is defined in subparagraph l(e) as a body corporate or an entity treated as a body corporate for tax purposes. Since the term "body corporate" is not defined in the Convention, in accordance with paragraph 2 of this Article, it has the meaning which it has under the law of the Contracting State whose tax is being applied. Thus, for U.S. tax purposes, the principles of Code section 7701 will be applied to determine whether an entity is a body corporate. It is the understanding of the negotiators that generally a GmbH (Gesellschaft mit beschraenkter Haftung) will meet the requirements of section 7701, and be treated as a body corporate for U.S. tax purposes. 　　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. 　　Subparagraph 1(g) defines the term "international traffic''. The term means any transport by a ship or aircraft except when the vessel is operating solely between places within a Contracting State. The exclusion from international traffic of transport solely between placeswithin a Contracting State means, for example, that a carriage of goods or passengers between New York and Chicago by either a U.S. or a German carrier would not be treated as international traffic. 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. If the carrier is a German resident (if that were possible under U.S. law) the United States would not be required to exempt the income under Article 8. The income would, however, be treated as business profits under Article 7 (Business Profits), and would, therefore, be taxable in the United States only if attributable to a U.S. permanent establishment, and then only on a net basis. The gross basis U.S. tax would never apply under the circumstances described. If, however, goods or passengers are carried by a German carrier from Hamburg to New York, some of the goods or passengers are carried only to New York, and the rest are taken to Chicago, the entire transport would be international traffic. 　　The term "national", as it relates to both the United States and Germany, is defined in sub-subparagraphs 1(h)(aa) and (bb), respectively. A national of the United States is 　　(1) a U.S. citizen, and 　　(2) any legal person, partnership or association deriving its status, as such, from the law in force in the United States. 　　A national of Germany is defined, correspondingly, as 　　(1) a German within the meaning of paragraph 1 of Article 116 of the Basic Law of the Federal Republic of Germany, and 　　(2) any legal person, partnership or association deriving its status as such from the law in force in Germany. 　　These definitions are comparable to that found in the OECD Model, except that in that Model the definition is in Article 24 (Nondiscrimination). Since the term has application in other articles as well (e.g., Article 19 (Government Service; Social Security)), in this Convention it has been placed among the General Definitions. A U.S. national is defined in the U.S. Model as a citizen of the United States, and does not include juridical persons. The addition of juridical persons to the definition may have significance in relation to paragraph 1 of Article 24 (Nondiscrimination), which provides that nationals of one Contracting State not be subject in the other to any taxes or connected requirements that are other or more burdensome than those applicable to nationals of that other State who are in the same circumstances. 　　Sub-subparagraphs 1(i)(aa) and (bb) define the term "competent authority" for the United States and Germany 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 has, in turn, redelegated 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. In Germany, the competent authority is the Minister of Finance or his delegate. The competent authority functions in Germany are carried out by the Office for International Tax Relations with Industrial Countries in the Ministry of Finance. 　　Paragraph 2 provides that, in the application of the Convention, any term used but not defined in the Convention, unless the context requires otherwise, will have the meaning which it has under the law of the Contracting State whose tax is being applied. If, however, 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 which creates problems in the application of the Convention, the competent authorities may, pursuant to the provisions of paragraph 3(d) of Article 25 (Mutual Agreement Procedure), establish a common meaning in order to prevent double taxation or 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. ARTICLE 4 Residence 　　This Article sets forth rules for determining whether a person is a resident of a Contracting State for purposes of the Convention. Determination of residence is important because, as noted in the explanation to Article 1 (General Scope), 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 1954 Convention contains 110 comprehensive definition of residence. Article II of that Convention does provide that residence in Germany includes a customary place of abode in Germany. 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. A person who, under those laws, is a resident of one Contracting State and not of the other need look no further. That person is a resident for purposes of the Convention 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 assign one State of residence to such a person for purposes of the Convention through the use of tie-breaker rules. 　　Paragraph 1 defines a "resident of a Contracting State". In general, this definition incorporates the definitions of residence in U.S. and German law, 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 domicile, place of management, place of incorporation or any other similar criterion. Except as provided in Paragraph 2 of the Protocol, residents of the United States include aliens who are considered U.S. residents under Code section 7701(b). Unlike the U.S. Model, "citizenship" is not included among the criteria of residence. Thus, a U.S. citizen must have some tie to the United States in addition to citizenship to be treated as a U.S. resident for purposes of the Convention. (See discussion, below, of Paragraph 2 of the Protocol for the application of these rules to nonresident U.S. citizens and aliens lawfully admitted for permanent residence (i.e., "green card" holders).) 　　If, under subparagraph 1(a), a person is liable to tax in a Contracting State only in respect of income from sources within that State, or, in the case of Germany, only in respect of capital situated in Germany, the person will not be treated as a resident of that Contracting State for purposes of the Convention. Thus, for example, a German consular official 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. income, would not be considered a resident of the United States for purposes of the Convention. Similarly, a German enterprise with a permanent establishment in the United States is not, by virtue of that permanent establishment, a resident of the United States. The enterprise is subject to U.S. tax only with respect to its income which is attributable to the U.S. permanent establishment, not with respect to its worldwide income, as is a U.S. resident. 　　Under subparagraph 1(b), a partnership, estate or trust will be treated as a resident of a Contracting State for purposes of the Convention to the extent that the income derived by such person is subject to tax in that State as the income of a resident, either in the hands of the person deriving the income or in the hands of its partners or beneficiaries. Under U.S. law, a partnership is never, and an estate or trust is often not, a taxable entity. Thus, for U.S. tax purposes, the question of whether income received by a partnership is received by a resident will be determined by the residence of its partners (looking through any partnerships which are themselves partners) rather than by the residence of the partnership itself. Similarly, the treatment under the Convention of income received by a trust or estate will be determined by the residence for taxation purposes of the person subject to tax on such income, which may be the grantor, the beneficiaries or the estate or trust itself, depending on the particular circumstances.This rule regarding the residence of partnerships, estates or trusts is applied to determine the extent to which that person is entitled to treaty benefits with respect to income which it receives from the other Contracting State. 　　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 2 to determine a single State of residence for that individual. The first test is 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 his Contracting State of citizenship. If he is a citizen of both States or of neither, the matter will be considered by the competent authorities, who will attempt by mutual agreement to assign a single State of residence. 　　Paragraph 2 of the Protocol elaborates on the rules to be used for determining whether a U.S. citizen or a green card holder is to be treated as a U.S. resident for purposes of the Convention. If such a person is a resident both of the United States and Germany, whether or not he is to be treated as a resident of the United States for purposes of the Convention is determined by the tie-breaker rules of paragraph 2 of the Article. If, however, he is resident in the United States and not Germany but has ties to a third State, in the absence of Protocol Paragraph 2 he would always be a resident of the United States, no matter how tenuous his relationship with the United States relative to that with the third State. Paragraph 2 of the Protocol provides that a U.S. citizen or green card holder 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, permanent home or habitual abode in the United States. Thus, for example, an individual resident of Mexico who is a U.S. citizen by birth, or who is a Mexican citizen and holds a U.S. green card, but who, in either case, has never lived in the United States, would not be entitled to German benefits under the treaty. On the other hand, a U.S. citizen employed by a U.S.corporation who is transferred to Mexico for two years but who maintains a permanent home or habitual abode in the United States would be entitled to treaty benefits. 　　Paragraph 3 seeks to settle dual-residence issues for persons other than individuals. A corporation is treated as resident in the United States if it is created or organized under the laws of the United States or a political subdivision. Under German law a corporation is treated as a resident of Germany if it is either incorporated or managed and controlled there. Dual residence, therefore, can arise if a U.S. corporation is managed in Germany. Since neither party was prepared to give up its test of corporate residence under a tie-breaker, the paragraph provides that if a corporation or other person, other than an individual, is resident in both the United States and Germany under paragraph 1, the competent authorities shall seek to determine a single State of residence for that person for purposes of the Convention. If, however, they are unable to reach agreement, that person shall not be considered to be a resident of either the United States or Germany 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 Germany, the U.S. paying agent would withhold on that dividend at the appropriate treaty rate, since reduced withholding is a benefit enjoyed by the resident of Germany, not by the dual resident. The dual resident corporation which is the payor of the dividend would, for this purpose, be treated as a resident of the United States under the Convention. ARTICLE 5 Permanent Establishment 　　This Article defines the term "permanent establishment". This definition is significant for several articles of the Convention. The existence of a permanent establishment in a Contracting State is necessary under Article 7 (Business Profits) for the taxation by that State of the business profits of a resident of the other Contracting State. Since the term "fixed base" in Article 14 (Independent Personal Services) is understood by reference to the definition of "permanent establishment", this Article is also relevant for purposes of Article 14. Articles 10, 11 and 12 (dealing with dividends, interest, and royalties, respectively) provide for reduced rates of tax at source on payments of these items of income to a resident of the other State only when the income is not attributable to a permanent establishment or fixed base which the recipient has in the source State. 　　This Article follows closely both the U.S. and OECD Model provisions. It does not differ in substance from the definition of a permanent establishment in the 1954 Convention. 　　Paragraph 1 provides the basic definition of the term "permanent establishment". As used in the Convention, the term means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 　　Paragraph 2 contains a list of fixed places of business which will constitute a permanent establishment. The list is illustrative and nonexclusive. According to paragraph 2, the term permanent establishment includes a place of management, a branch, an office, a factory, a workshop, and a mine, quarry or other place of extraction of natural resources. 　　Paragraph 3 provides rules to determine when a building site or a construction, assembly or installation project constitutes a permanent establishment. Only if the site, project, etc., lasts for more than twelve months does it constitute a permanent establishment. The twelve-month test applies separately to each individual site or project. The twelve-month period begins when work (including preparatory work carried on by the enterprise) physically begins in a Contracting State. A series of contracts or projects which are interdependent both commercially and geographically are to be treated as a single project for purposes of applying the twelve-month threshold test. For example, the construction of a housing development 'would be considered as single project even if each house is constructed for a different purchaser. If the twelve-month threshold is exceeded, the site or project constitutes a permanent establishment from its first day. 　　This interpretation of the Article is based on the Commentaries to paragraph 3 of Article 5 of the OECD Model, which contains language almost identical to that in the Convention. This interpretation, therefore, constitutes the generally accepted international interpretation of the language in paragraph 3 of Article 5 of the Convention. It is understood that drilling rigs, both onshore and offshore, are covered by this construction site rule, and must, therefore, be present in a Contracting State for 12 months to constitute a permanent establishment. 　　Paragraph 4 contains exceptions to the general rule of paragraph 1 that a fixed place of business through which a business is carried on constitutes a permanent establishment. The paragraph lists a number of activities which may be carried on through a fixed place of business, but which, nevertheless, will not give rise to a permanent establishment. The use of facilities solely to store, display or deliver merchandise belonging to an enterprise will not constitute a permanent establishment of that enterprise. The maintenance of a stock of goods belonging to an enterprise solely for the purpose of storage, display or delivery, or solely for the purpose of processing by another enterprise will not give rise to a permanent establishment of the firstmentioned enterprise. The maintenance of a fixed place of business solely for activities that have a preparatory or auxiliary character for the enterprise, such as advertising, the supply of information or scientific activities, will not constitute a permanent establishment of the enterprise. A combination of these activities will not give rise to a permanent establishment so long as the combination results in an overall activity that is of a preparatory or auxiliary character. This combination rule differs from that in the U.S. Model. In the Model, any combination of otherwise excepted activities is not deemed to give rise to a permanent establishment, without the qualification in the Convention that the combination, as distinct from each constituent activity, be preparatory or auxiliary. It is assumed that, as a general rule, if activities which are, themselves, preparatory or auxiliary arc combined, the combination will also be of a character which is preparatory or auxiliary. If, however, this is not the case, a permanent establishment may result from a combination of activities. 　　Paragraphs 5 and 6 specify when the use of an agent will constitute a permanent establishment. Under paragraph 5, a dependent agent of an enterprise will be deemed to be a permanent establishment of the enterprise, if the agent has and habitually exercises an authority to conclude contracts in the name of that enterprise. If, however, his activities are limited to those activities specified in paragraph 4 which would not constitute a permanent establishment if carried on by the enterprise through a fixed place of business, the agent will not be a permanent establishment of the enterprise. 　　Under paragraph 6, an enterprise will not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through an independent agent, including a broker or general commission agent, if the agent is acting in the ordinary course of his business. 　　Paragraph 7 clarifies that a company which is a resident of a Contracting State will not be deemed to have a permanent establishment in the other Contracting State merely because it controls, or is controlled by, a company that is a resident of that other Contracting State, or that carries on business in that other Contracting State. The determination of whether or not a permanent establishment exists will be made solely on the basis of the factors described in paragraphs 1 through 6 of the Article. Whether or not a company is a permanent establishment of a related company, therefore, is based solely on those factors and not on the ownership or control relationship between the companies. 　　Paragraph 3 of the Protocol refers to Article 5, in relation to permanent establishments, and to Article 14 (Independent Personal Services) in relation to fixed bases. The paragraph provides that a resident of a Contracting State that performs in artistic performances (such as, for example, circuses, ice revues and similar shows) in the other Contracting State and is not subject to tax in that other State under the provisions of Article 17 (Artistes and Athletes), will not be deemed to have a permanent establishment or a fixed base in that other State if the person's presence there does not exceed 183 days in the calendar year.