DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS（八） ARTICLE 20 Students and Trainees 　　This Article provides rules for host-country taxation of visiting students, apprentices or business trainees. Persons who meet the tests of the Article will be exempt from tax in the State that they are visiting with respect to designated classes of income. Several conditions must be satisfied in order for an individual to be entitled to the benefits of this Article. 　　First, the visitor must have been, either at the time of his arrival in the host State or immediately before, a resident of the other Contracting State. 　　Second, the purpose of the visit must be the full-time education or training of the visitor. Thus, if the visitor comes principally to work in the host State but also is a part-time student, he would not be entitled to the benefits of this Article, even with respect to any payments he may receive from abroad for his maintenance or education, and regardless of whether or not he is in a degree program. Whether a student is to be considered full-time will be determined by the rules of the educational institution at which he is studying. Similarly, a person who visits the host State for the purpose of obtaining business training and who also receives a salary from his employer for providing services would not be considered a trainee and would not be entitled to the benefits of this Article. 　　Third, a student must be studying at a recognized educational institution. (This requirement does not apply to business trainees or apprentices.) 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 recognized 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 only to payments received by the student, apprentice or business trainee for the purpose of his maintenance, education or training that arise outside the host State. A payment will be considered to arise outside the host State if the payor is located outside the host State. Thus, if an employer from the U.S. sends an employee to Ireland for training, the payments the trainee receives from abroad from his employer for his maintenance or training while he is present in the host State will be exempt from host-country tax. In all cases substance over form should prevail in determining the identity of the payor. 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 source, such as, for example, a foreign bank account, should not be treated as arising outside the United States for this purpose. 　　In the case of an apprentice or business trainee, the benefits of the Article will extend only for a period of one year from the time that the visitor first arrives in the host country. If, however, an apprentice or trainee remains in the host country for a second year, thus losing the benefits of the Article, he would not retroactively lose the benefits of the Article for the first year. 　　The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this Article with respect to an individual who is neither a citizen of the host State nor has been 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 Ireland 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. 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. 　　　　　　　　　　　　　ARTICLE 21 　　　　　Offshore Exploration and Exploitation Activities 　　This Article deals exclusively with the taxation of activities carried on by a resident of one of the Contracting States on the continental shelf of the other Contracting State in connection with the exploration or exploitation of the natural resources of the shelf, principally activities connected with exploration for oil by offshore drilling rigs. In the U.S. and OECD Models, the income from these activities is subject to the standard rules found in the other Articles of the Convention (e.g., the business profits and personal services articles). Other U.S. treaties with countries bordering on the North Sea (e.g., Norway, the United Kingdom and the Netherlands), however, have articles dealing with offshore activities. Several recent Irish treaties and the Irish model treaty also contain such provisions. The prior Convention had no similar provision. The normal business profits and personal services provisions, therefore, applied under the prior Convention to offshore income. Paragraph 1 　　Paragraph 1 states that the provisions of Article 21 apply, notwithstanding any other provision of the Convention, to activities carried on offshore in connection with the exploration or exploitation of the sea bed and subsoil and their natural resources situated in a Contracting State. 　　These activities are referred to as "exploration activities" and "exploitation activities" respectively. Although there are no explicit references to other articles, the implicit references are principally to Articles 5 (Permanent Establishment), 7 (Business Profits), 14 (Independent Personal Services) and 15 (Dependent Personal Services). For example, if a drilling rig of a U.S. enterprise is present on the continental shelf of Ireland for 10 months and would, therefore, not constitute a permanent establishment because of the 12-month construction site rule of paragraph 3 of Article 5, the rig would, nevertheless, be deemed to be a permanent establishment under paragraph 2 of this Article. Paragraphs 2 and 3 　　Paragraphs 2 and 3 provide the basic rules for determining when an enterprise is deemed to have a permanent establishment as a result of offshore activities. The general rule is that all exploitation activities give rise to a permanent establishment, while exploration activities create a permanent establishment only if they continue for a period of 120 days in a twelve-month period. 　　Paragraph 2 provides that, subject to the exception of paragraph 3, an enterprise of one Contracting State carrying on exploration activities or exploitation activities in the other Contracting State will be deemed to be carrying on business through a permanent establishment situated there. 　　Paragraph 3 provides that an enterprise of a Contracting State carrying on exploration activities in the other Contracting State will not constitute a permanent establishment unless the activities are carried on there for a period or periods aggregating more than 120 days within any period of twelve months. Paragraph 3 also provides rules for aggregating the activities of related parties for purposes of determining whether the threshold has been met. If the enterprise carrying on the offshore activities is associated with another enterprise, and that associated enterprise is carrying on substantially similar exploration activities there, the former enterprise shall be deemed to be carrying on all such activities, except to the extent that those activities are carried on at the same time. For purposes of this rule, an enterprise is associated with another if one participates directly or indirectly in the management, control or capital of the other or if the same persons participate directly or indirectly in the management, control or capital of both enterprises. 　　Ireland agrees, in Paragraph 8 of the Protocol, to limit the "balancing charge" that otherwise would apply upon the cessation of offshore activities. Under Ireland's domestic law, a balancing charge may be levied upon the termination of a permanent establishment to tax deemed gain on the assets of the permanent establishment. Where a permanent establishment is deemed to exist by virtue of Article 21, the Protocol provision limits the balancing charge so that it is imposed only to the extent that the person carrying on the activities has claimed accelerated capital allowances (depreciation). Normal capital allowances would be allowed and would not be subject to recapture through a balancing charge. Since Ireland currently has no accelerated capital allowances, the Protocol provision currently prevents Ireland from imposing any balancing charges upon the termination of offshore activity where a permanent establishment is deemed to exist by virtue of Article 21. Paragraphs 4 and 5 　　Paragraphs 4 and 5 provide thresholds with respect to offshore activities consisting of personal services that are similar to the thresholds in paragraphs 2 and 3. Paragraph 4 provides that income derived by a resident of a Contracting State carrying on exploitation activities in the other Contracting State that consist of professional services or other activities of an independent character will be deemed to be attributable to a fixed base in the other Contracting State. That is also true with respect to services of an independent character that constitute exploration activities, but only if the activities are performed in the other Contracting State for a period or periods in excess of 120 days within a twelve-month period. 　　Paragraph 5 contains the rules for the taxation of employment income connected with offshore activities. It provides for a broader host-country taxing right than does Article 15 (Dependent Personal Services). Under paragraph 5, salaries and other remuneration of a resident of one Contracting State derived from an employment in connection with offshore activities carried on through a permanent establishment in the other may be taxed by the other State. Paragraph 5 contains no special rule regarding the taxation of persons employed on ships, etc., in connection with offshore activities. Under Article 15, the presence of a permanent establishment is not sufficient to subject the employee to host country taxation. Under paragraph 5 of Article 21, however, an employee merely needs to be engaged in offshore activities carried on in connection with an Irish permanent establishment engaged in offshore activities in Ireland to be subject to tax, regardless of who pays his salary and whether it is deductible in Ireland, and regardless of the amount of time he has spent in, or off the shore of, Ireland. Relation to Other Articles 　　As with any benefit of the Convention, an enterprise or individual claiming a benefit under this Article must be entitled to the benefit under the provisions of Article 23 (Limitation on Benefits). ARTICLE 22 Other Income 　　Article 22 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. 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). 　　Examples of items of income covered by Article 22 include income from gambling, punitive (but not compensatory) damages, covenants not to compete, and income from certain 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 22. 　　Distributions from partnerships and distributions from trusts are not generally dealt with under Article 22 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 22 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. 　　This paragraph differs in one respect from the OECD Model, but is consistent with the current U.S. Model, by referring 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." This is not a substantive change. It 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. This should also be understood from the phrase "income of a resident of a Contracting State." The addition of a reference to beneficial ownership merely removes any possible ambiguity. 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 Ireland 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 Property (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 if neither the situs of the property nor the residence of the owner is in that State. 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 Ireland 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 23 (Limitation on Benefits). Thus, if a resident of Ireland earns income that falls within the scope of paragraph 1 of Article 22, 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 22 only if the resident satisfies one of the tests of Article 23 for entitlement to benefits. ARTICLE 23 Limitation on 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 United States and the other Contracting State. 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 U.S. 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 administration is normally ill-equipped to identify. In order to avoid the necessity of making this subjective determination, Article 23 sets forth a series of mechanical 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 outweighs any purpose to obtain the benefits of the Convention. 　　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 Ireland and that derives income from a similar activity in the United States would not do so primarily to avail itself of the benefits of the Convention; it is presumed in such a case that the investor had a valid business purpose for investing in Ireland, and that the link between that trade or business and the U.S. activity that generates the treaty-benefited income manifests a business purpose for placing the U.S. investments in the entity in Ireland. It is considered unlikely that the investor would incur the expense of establishing a substantial trade or business in Ireland simply to obtain the benefits of the Convention. A similar rationale underlies other tests in Article 23. 　　While mechanical tests provide useful surrogates for identifying actual intent, they cannot account for every case in which the taxpayer was not treaty shopping. Accordingly, Article 23 also includes a provision (paragraph 6) authorizing the competent authority of a Contracting State to grant benefits. While an analysis under paragraph 6 may well differ from that under one of the other tests of Article 23, 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 23 and the anti-abuse provisions of domestic law complement each other, as Article 23 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 23 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 　　Article 23 follows the form used in other recent U.S. income tax treaties. (See, e.g., the Convention between the United States of America and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.) The structure of the Article is as follows: Paragraph 1 states the general rule of the article that a resident is entitled to all the benefits otherwise accorded to residents only if such resident is a "qualified person" as defined in this Article. Paragraph 2 lists a series of six attributes of a resident, any one of which suffices to make such resident a "qualified person" and thus entitled to all the benefits of the Convention. Paragraph 3 sets forth the active trade or business test, under which a person not entitled to benefits under paragraph 2 may nonetheless be granted benefits with regard to certain types of income. Paragraph 4 provides for limited socalled "derivative benefits" for shipping and air transport income. Paragraph 5 provides a more general derivative benefits rule. Paragraph 6 provides that benefits also may be granted if the competent authority of the State from which benefits are claimed determines that it is appropriate to provide benefits in that case. Paragraph 7 limits treaty benefits in certain so-called "triangular" cases. Paragraph 8 defines the terms used specifically in this Article. Paragraph 9 authorizes the competent authorities to develop agreed applications of the provisions of this Article and to exchange information necessary to carry out the provisions of this Article. Paragraph 1 　　Paragraph 1 provides that a resident of a Contracting State will be entitled to all the benefits of the Convention otherwise accorded to residents of a Contracting State only if the resident is a "qualified person" as defined in Article 23. The benefits otherwise accorded to residents under the Convention include all limitations on source-based taxation under Articles 6 through 22, the treaty-based relief from double taxation provided by Article 24 (Relief from Double Taxation), and the protection afforded to residents of a Contracting State under Article 25 (Non-Discrimination). 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 25 (Non- Discrimination), Article 26 (Mutual Agreement Procedure), and Article 28 (Diplomatic Agents and Consular Officers). Article 23 accordingly does not limit the availability of the benefits of these provisions.