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（五） 　 　　　　　　　　　　 ARTICLE 13 Gains 　　Article 13 provides rules for source and residence country taxation of gains from the alienation of property. 　　Paragraph 1 of Article 13 preserves the source country right to tax gains derived from the alienation of immovable property situated in the source (i.e., situs) State. Thus, paragraph 1 permits gains derived by a resident of one Contracting State from the alienation of immovable property referred to in Article 6 (Income from Immovable (Real) Property) and situated in the other Contracting State to be taxed by such other Contracting State. 　　For purposes of Article 13 only, paragraph 2 defines "immovable property situated in the other Contracting State" to include immovable property referred to in Article 6 (i.e., interests in the immovable property itself) and certain indirect interests in immovable property. Such indirect interests include shares or comparable interests in a company that is (or is treated as) a resident of the source state, the assets of which company consist or consisted wholly or principally of immovable property situated in the source state. The reference to companies "treated as" residents of the source state makes clear that interests in non-U.S. corporations that have elected under section 897(i) of the Code to be treated as U.S. corporations are included in this definition of indirect interest. In addition, interests in a partnership, trust, or estate, to the extent that the assets of such entity consist of immovable property situated in the source state, are included in this definition of indirect interest. Paragraph 13 of the Protocol makes clear that in all events the term "immovable property situated in the other Contracting State" includes a United States real property interest when the United States is the other Contracting State. Thus, the United States preserves its right to collect the tax imposed by section 897 of the Code on gains derived by foreign persons from the disposition of United States real property interests. For this purpose, the source rules of section 861(a)(5) of the cede shall determine whether a United States real property interest is situated in the United States. 　　Because the definition of "immovable property situated in the other Contracting State" contained in paragraph 2 of Article 13 is specifically limited to Article 13, such definition has no effect on the right to tax income covered in other articles. For example, the inclusion of interests in certain corporations in the definition of immovable property situated in the other Contracting State for purposes of permitting source country taxation of gains derived from dispositions of such interests under Article 13 does not affect the treatment of dividends paid by such corporations. Such dividends remain subject to the limitations on source country taxation contained in Article 10 (Dividends) and are not governed by the unlimited source country taxation right contained in Article 6 with respect to immovable property. 　　In the case of gains from the alienation of movable property, paragraph 3 of Article 13 preserves the source country right to tax in certain circumstances. It provides that gains from the alienation of movable property forming part of the business property of a permanent establishment that an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State. Paragraph 14 of the Protocol makes clear that nothing in Article 13 is intended to prevent gains from the alienation by a resident of a Contracting State of an interest in a partnership, trust, or estate that has a permanent establishment situated in the other Contracting State from being taxed as gains attributable to such permanent establishment under paragraph 3 of Article 13. Thus, for example, the United States may tax gains derived from the disposition of an interest in a partnership that has a permanent establishment in the United States, regardless of whether the assets of such partnership consist of immovable property as defined in Article 13. 　　Paragraph 4 provides that gains from the alienation of ships, aircraft, or containers operated in international traffic or movable property pertaining to the operation of such ships, aircraft, or containers shall be taxable only in the Contracting State in which the profits of the enterprise deriving such income are taxable according to Article 8 (Shipping and Air Transport). Generally, Article 8 exempts such income from source country taxation. 　　Subject to the special rule of paragraph 6, paragraph 5 grants to the residence State the exclusive right to tax gains from the alienation of other than property referred to in paragraphs 1 through 4. 　　Paragraph 6 provides an exception to the general exemption from source country tax contained in paragraph 5 for gains derived by certain individuals from its alienation of shares forming part of a 25 percent interest in a company resident in the source state. Under this rule, if an individual was a resident of a Contracting State and, after giving up residency in that State, becomes a resident of the other Contracting State under the rules of Article 4 (Residency), and such individual derives gains from the disposition of a 25 percent interest in a company that is a resident in the first-mentioned Contracting State, the first-mentioned State may tax such gain under its national law, provided the alienation giving rise to the gain occurs within ten years of the date on which the individual gave up residence in the first-mentioned State. Gains subject to source country taxation under this special rule are limited to gains accrued during the period the individual was a resident of the first-mentioned State. For purposes of imposing its own tax on such gains, the residence state will calculate gain by reference to the value of the shares on the date the individual ceased to be a resident of the first-mentioned State. In the case of a person giving up German residence and becoming a resident of the United States, this will be accomplished by stepping up the basis of the individual in the shares to the value of such shares on the date such individual ceased to be a resident of Germany. Such a basis step-up is only required to the extent any gain is actually subject to tax in the Federal Republic of Germany. For example, if an individual resident of Germany acquires a 25 percent interest in a German company for $ 100 while a resident of Germany, ceases to be a resident of Germany when the stock is worth $150, and sells the stock for $200 after becoming a resident of the United States and within 10 years of the date he ceased to be a German resident, Germany retains the right to tax the $50 gain that accrued while the individual was a resident of Germany. For purposes of calculating U.S. tax on the gain, the United States will step up the individual's cost basis in the stock to $150 (the value on the date the individual ceased to be a resident of Germany) and impose its tax only on the $50 gain that accrued after the individual ceased to be a resident of Germany. If the alienation occurs more than 10 years after the individual gave up German residency, Germany will waive its statutory right to tax the full gain. The special rule of paragraph 6 also affects the taxation of former residents of the United States who dispose of stock in U.S. companies while resident in Germany. 　　Notwithstanding the foregoing limitations on source country taxation of certain gains, subparagraph (a) of Paragraph 1 of the Protocol permits the United States to tax its citizens and residents as if the Convention had not come into effect. The rules of paragraph 6 of this Article, however, continue to apply to U.S. citizens and residents by virtue of the exceptions to the saving clause in subparagraph (b)(aa) of Paragraph 1 of the Protocol. ARTICLE 14 Independent Personal Services 　　The Convention deals in separate articles with different classes of income from personal services. Article 14 deals with the general class of income from independent personal services and Article 15 deals with the general class of dependent personal service income. Exceptions or additions to these general rules are found in Articles 16 through 20 for directors' fees (Article 16); performance income of artistes and athletes (Article 17); pensions in respect of personal service income, annuities, alimony, and child support payments (Article 18); government service salaries and pensions and social security benefits (Article 19); and the income of visiting professors and teachers, and students and trainees (Article 20). 　　Article 14 provides the general rule that an individual who is a resident of a Contracting State and who derives income from the performance of personal services in an independent capacity will be exempt from tax in respect of that income by the other Contracting State unless certain conditions are satisfied. The income may be taxed in the other Contracting State if the services are performed there and the income is attributable to a fixed base which is regularly available to the individual in that other State for the purpose of performing his services. If, however, the individual is a German resident who performs independent personal services in the United States, and he is also a U.S. citizen, the United States may, by virtue of the saving clause of subparagraph (a) of Paragraph 1 of the Protocol, tax his income without regard to the restrictions of this Article, subject to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief from Double Taxation). 　　The term "fixed base" is not defined in the Convention, but its meaning is understood to be analogous to that of the term "permanent establishment", as defined in Article 5 (Permanent Establishment). Similarly, some rules of Article 7 (Business Profits) for attributing income and expenses to a permanent establishment are relevant for attributing income to a fixed base. However, the taxing right conferred by this Article with respect to income from independent personal services is somewhat more limited than that provided in Article 7 for the taxation of business profits. In both articles the income of a resident of one Contracting State must be attributable to a permanent establishment or fixed base in the other in order for that other State to have a taxing right. In Article 14, in addition, the income must be attributable to services performed in that other State, while Article 7 does not require that all of the income generating activities be performed in the State where the permanent establishment is located. 　　Paragraph 2 notes that the term "personal services in an independent capacity" includes independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, lawyers, engineers, economists, architects, dentists, and accountants. This list is clearly not exhaustive. The term includes all personal services performed by an individual for his own account, whether as a sole proprietor or a partner, where he receives the income and bears the risk of loss arising from the services. Income from services in which capital is a material income producing factor will, however, generally be governed by the provisions of Article 7 (Business Profits). The taxation of income of an individual from those types of independent services which are covered by Articles 16 through 20 is governed by the provisions of those Articles. 　　Paragraph 3 of the Protocol refers to this Article as well as Article 5. The Paragraph provides that a resident of a Contracting State that engages in artistic performances 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 fixed base (or permanent establishment) in that other State if the person's presence there does not exceed 183 days in the calendar year. 　　There is no special rule in the Protocol with respect to this Article comparable to Paragraph 4 of the Protocol which is applicable to Articles 7 (Business Profits) and 13 (Gains). That rule clarifies that income which is attributable to a permanent establishment, but is deferred and received after the permanent establishment no longer exists, may nevertheless be taxed by the State in which the permanent establishment was located. An analogous rule applies with respect to Article 14, under which income derived by an individual resident of a Contracting State from services performed in the other Contracting State and attributable to a fixed base there may be taxed by that other State even if the income is deferred and received after there is no longer a fixed base there available to the resident. It was not considered necessary to specify this rule in the Protocol with respect to Article 14 because there is nothing in the text of the Article which requires that the performance of services and the receipt of income be in the same time frame. 　　The taxing rule in paragraph I of the Article differs from that in the 1954 Convention. Under Article X of the 1954 Convention the host State may tax income from independent personal services performed by a resident of the other State only if the person performing the services is present in the host State for a period or periods aggregating more than 183 days in the taxable year or is under contract with a person not resident in the taxpayer's State of residence. 　　　　　　　　　　　　　　ARTICLE 15 　　　　　　　　　　　Dependent Personal Services 　　This Article deals with the taxation of remuneration derived by a resident of a Contracting State as an employee. 　　Under paragraph 1, remuneration derived by an individual who is a resident of a Contracting State as an employee may be taxed by his State of residence. To the extent his remuneration is derived from an employment exercised in the other Contracting State, the remuneration may also be taxed by that other Contracting State, subject to the conditions specified in paragraph 2. Consistent with the general rule of construction that the more specific rule takes precedence over the more general, income dealt within Articles 16 (Directors' Fees), 17 (Artistes and Athletes), 18 (Pensions, Annuities, Alimony and Child Support), 19 (Government Service; Social Security), and 20 (Visiting Professors and Teachers; Students and Trainees) is governed by the provisions of those Articles rather than this Article. 　　Under paragraph 2, even where the remuneration of a resident of a Contracting State (described in paragraph 1 is derived from sources within the other Contracting State (i.e., the services are performed there), that other State may not tax the remuneration if three conditions are satisfied: 　　(1) the individual is present in the other Contracting State for a period or periods not exceeding 183 days in the calendar year; 　　(2) the remuneration is paid by, or on behalf of, an employer who is not a resident of that other Contracting State; and 　　(3) the remuneration is not borne as a deductible expense by a permanent establishment or fixed base that the employer has in that other State. 　　If a foreign employer pays the salary of an employee, but a host country corporation or permanent establishment reimburses the foreign employer in a deductible payment which can be identified as a reimbursement, neither condition (2) nor (3), as the case may be, will be considered to have been fulfilled. Conditions (2) and (3) are intended to assure that a Contracting State will not be required both to allow a deduction to the payor for the amount paid and to exempt the employee on the amount received. In order for the remuneration to be exempt from tax in the source State, all three conditions must be satisfied. 　　Paragraph 3 contains a special rule applicable to remuneration for services performed by an individual who is a resident of a Contracting State as an employee aboard a ship or aircraft operated in international traffic. Such remuneration may be taxed only in the Contracting State of residence of the employee if the services are performed as a member of the regular complement of the ship or aircraft. The "regular complement" includes the crew. In the case of a cruise ship, it may also include others, such as entertainers, lecturers, etc., employed by the shipping company to serve on the ship. The use of the term "regular complement" is intended to clarify that a person who exercises his employment as, for example, an insurance salesman while aboard a ship or aircraft is not covered by this paragraph. 　　The comparable paragraph in the OECD Model provides a different rule. Under paragraph 3 in the OECD Model such income may be taxed (on a non-exclusive basis) in the Contracting State in which the place of effective management of the employing enterprise is situated. The United States does not use this rule in its Model, because under U.S. law, a taxing right over an employee of an enterprise managed in the United States (or an employee of a U.S. resident) cannot be exercised with respect to non-U.S. source income unless the employee is also a U.S. citizen or resident. 　　If a U.S. citizen who is resident in Germany performs dependent services in the United States and meets the conditions of paragraph 2, or is a crew member on a German ship or airline, and would, therefore, be exempt from U.S. tax were he not a U.S. citizen, he is, nevertheless, taxable in the United States on his remuneration by virtue of the saving clause of subparagraph (a) of Paragraph 1 of the Protocol, subject to the special foreign tax credit rule of paragraph 3 of Article 23 (Relief from Double Taxation). ARTICLE 16 Directors' Fees 　　This Article provides that a Contracting State may tax the fees paid by a company which is a resident of that State for services performed in that State by a resident of the other Contracting State in his capacity as a director of the company. This rule is an exception to the more general rules of Article 14 (Independent Personal Services) and Article 15 (Dependent Personal Services). Thus, for example, in determining whether a non-employee director's fee is subject to tax in the country of residence of the corporation, whether the fee is attributable to a fixed base is not relevant. 　　The U.S. Model has no comparable provision. The preferred U.S. policy is to treat a corporate director in the same manner as any other individual performing personal servicesoutside directors would be subject to the provisions of Article 14 (Independent Personal Services) and inside directors would be subject to the provisions of Article 15 (Dependent Personal Services). The preferred German position, on the other hand, is that reflected in the OECD Model, in which a resident of one Contracting State who is a director of a corporation which is resident in the other Contracting State is subject to tax in that other State in respect of his directors' fees regardless of where the services are performed. The provision in Article 16 of the Convention represents a compromise between these two positions. The State of residence of the corporation may tax nonresident directors with no threshold, but only with respect to remuneration for services performed in that State. 　　This Article is subject to the saving clause of subparagraph (a) of Paragraph 1 of the Protocol. Thus, if a U.S. citizen who is a German resident is a director of a U.S. corporation, the United States may tax his full remuneration regardless of the place of performance of his services. 　　The 1954 Convention contains no special rule dealing with corporate directors. They are subject to the normal rules regarding the taxation of persons performing personal services. ARTICLE 17 Artistes and Athletes 　　This Article deals with the taxation in a Contracting State of artistes (i.e., performing artists and entertainers) and athletes resident in the other Contracting State from the performance of their services as such. The Article applies both to the income of an entertainer or athlete who performs services on his own behalf and one who performs his services on behalf of another person, either as an employee of that person, or pursuant to any other arrangement. The rules of this Article take precedence over those of Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services). This Article applies, however, only with respect to the income of performing artists and athletes. Others involved in a performance or athletic event, such as producers, directors, technicians, managers, coaches, etc., remain subject to the provisions of Articles 14 and 15. 　　Paragraph 1 describes the circumstances in which a Contracting State may tax the performance income of an entertainer or athlete who is a resident of the other Contracting State. Under the paragraph, income derived by a resident of a Contracting State from his personal activities as an entertainer or athlete exercised in the other Contracting State may be taxed in that other State if the amount of the gross receipts derived by the individual exceeds $20,000 (or its equivalent in Deutsche Mark) for the calendar year. The $20,000 includes expenses reimbursed to the individual or borne on his behalf. If the gross receipts exceed $20,000, the full amount, not just the excess, may be taxed in the State of performance. 　　The OECD Model provides for taxation by the country of performance of the remuneration of entertainers or athletes with no dollar or time threshold. The United States introduces the dollar threshold test in its treaties to distinguish between two groups of entertainers and athletes - those who are paid very large sums of money for very short periods of service, and who would, therefore, normally be exempt from host country tax under the standard personal services income rules, and those who earn only modest amounts and are, therefore, not clearly distinguishable from those who earn other types of personal service income. 　　Paragraph 1 applies notwithstanding the provisions of Articles 7 (Business Profits), 14 (Independent Personal Services) or 15 (Dependent Personal Services). Thus, if an individual would otherwise be exempt from tax under those Articles, but is subject to tax under this Article, he may be taxed. An entertainer or athlete who receives less than the $20,000 threshold amount, and who is, therefore, not affected by this Article, may, nevertheless, be subject to tax in the host country under Articles 14 or 15 if the tests for taxability under those Articles are met. For example, if an entertainer who is an independent contractor earns only $19,000 of income for the calendar year, but the income is attributable to a fixed base regularly available to him in the State of performance, that State may tax his income under Article 14. 　　Since it is frequently not possible to know until year end whether the income an entertainer or athlete derived from performance in a Contracting State will exceed $20,000, nothing in the Convention precludes that Contracting State from withholding tax during the year and refunding after the close of the year if the taxability threshold has not been met. Paragraph 15 of the Protocol specifically authorizes Germany to withhold tax on an entertainer or athlete. If, at the end of the year, it is determined that the entertainer or athlete is not subject to German tax under the provisions of paragraph 1 of the Article, Germany is obligated to refund the tax withheld only upon application at the end of the calendar year concerned. 　　Income derived from a Contracting State by an entertainer or athlete who is a resident of the other Contracting State in connection with his activities as such, but from other than actual performance, such as royalties from record sales and payments for product endorsements, is not covered by this Article, but by other articles of the Convention, as appropriate, such as Article 12 (Royalties) or Article 14 (Independent Personal Services). For example, if an entertainer receives royalty income from the sale of recordings of a concert given in a State, the royalty income would be exempt from source country tax under Article 12, even if the remuneration from the concert itself may have been covered by this Article. In this connection, see Paragraph 12 of the Protocol, and the discussion of it in the technical. explanation of Article 12 (Royalties). 　　Paragraph 2 is intended to deal with the potential for abuse when income from a performance by an entertainer or athlete does not accrue to the performer himself, but to another person. Foreign entertainers commonly perform in the United States as employees of, or under contract with, a company or other person. The relationship may truly be one of employee and employer, with no abuse of the tax system either intended or realized. On the other hand, the "employer" may, for example, be a company established and owned by the performer, which is merely acting as the nominal income recipient in respect of the remuneration for the entertainer's performance. The entertainer may be acting as an "employee", receiving a modest salary, and arranging to receive the remainder of the income from his performance in another form or at a later time. In such case, absent the provisions of paragraph 2, the company providing the entertainer's services can escape host country tax because it earns business profits but has no permanent establishment in that country. The entertainer may largely or entirely escape host country tax by receiving only a small salary in the year the services are performed, perhaps small enough to place him below the dollar threshold in paragraph 1. He would arrange to receive further payments in a later year, when lie is not subject to host country tax, perhaps as salary payments, dividends or liquidating distributions.