ARTICLE 6 Source of Income 　　This article sets forth in a single provision, as in the 1954 Convention, the rules which are to be applied to determine the source of the different kinds of income covered by the Convention: dividends, interest, royalties, income from real property (including gains derived from the sale of such property), income from the rental of tangible persona] property, compensation for personal services, and income from the purchase and sale of personal property and industrial or commercial profits. In addition to the articles dealing with specific types of income, these rules affect the application of Article 4 (relating to general rules of taxation) and Article 5 (relating to relief from double taxation). 　　The source of any kind of income not covered by the Convention is to be determined under the internal law of the two States. In the case of different source rules applicable to an item of income, the competent authorities of the two States under the mutual agreement procedure may establish a common source for the item of income. This is made clear in paragraph (2)(c) of Article 25 (relating to the mutual agreement procedure). 　　Dividends will be treated as income from sources within a State only if paid by a corporation of that State. 　　Interest will be treated as income from sources within a State only if paid by that State, or by a political subdivision, local authority, or resident of that State. However, there are two situations relating to interest paid on indebtedness (other than interest incurred in connection with the purchase of ships or aircraft) where this general rule does not apply. The general rule does not apply, regardless of the residence of the person paying the interest, if the person paying the interest has a permanent establishment in either Contracting State in connection with which the indebtedness on which the interest is paid was incurred and the interest is borne by that permanent establishment. The general rule also does not apply if the person paying the interest is a resident of a Contracting State and has a permanent establishment in a State other than a Contracting State in connection with which the indebtedness on which the interest is paid was incurred and the interest is borne by that permanent establishment. In those cases in which the aforementioned exceptions to the general rule apply, such interest will be deemed to be from sources within the State in which the permanent establishment is located. The general rule set forth above in the first sentence corresponds generally to the Internal Revenue Code provision dealing with interest (other than interest on deposits with persons carrying on the banking business). The exceptions to this general rule, set forth above, are not contained in the Internal Revenue Code but are substantially similar to the rules contained in the United States-Belgian Income Tax Convention signed July 9, 1970. In the case of interest incurred in connection with the purchase of ships or aircraft, the residence of the payor will normally be determinative of the source of interest. 　　In determining whether a permanent establishment exists in a third State, the principles for determining the existence of a permanent establishment in one of the Contracting States (Article 9) are to be applied. 　　Royalties, described in paragraph (3)(a) and (b) of Article 14, other than payments for the use of, or the right to use, ships or aircraft, will be treated as income from sources within a State only if the property giving rise to the royalty is used within that State. 　　Income from real property including royalties from the operation of mines, quarries, or other natural resources and gains derived from the sale, exchange, or other disposition of such property or the right giving rise to such royalties, will be treated as income from sources within a State only if such property is located in that State. 　　Income from the rental of tangible personal property (other than income from the rental of ships or aircraft) will be treated as income from sources within the State in which such property is located. Income from the rental of ships or aircraft derived by a person not engaged in the operation of ships or aircraft in international traffic is to be treated as income from sources within a Contracting State only if the lessee is a resident of that State. 　　Compensation (other than directors' fees described in paragraph (5) of Article 18) received by an individual for his performance of labor or personal services, as an employee or in an independent capacity will be treated as income from sources within a State only if such services are performed in that State. However, compensation for labor or personal services performed aboard ships or aircraft operated by a resident of a Contracting State in international traffic will be treated as income from sources within that State, provided that the labor or services are performed by a member of a regular complement of the ship or aircraft. For purposes of this paragraph, compensation for labor or personal services includes pensions as defined in paragraph (2) of Article 23 paid in respect of such services. Notwithstanding the preceding, remuneration described in Article 21 (relating to governmental functions) is to be treated as income from sources within a State only if paid by, or out of the funds to which contributions are made by, that State or a political subdivision or local authority thereof. Directors' fees described in paragraph (5) of Article 18 are to be treated as income from sources within a State only if the corporation of which the individual is a director is a corporation of that State. 　　Income from the purchase and sale of personal property, whether tangible or intangible (other than gains defined as royalties in paragraph (3)(b) of Article 14 (relating to royalties)), is to be treated as income from sources within a State only if such property is sold in that State. This rule conforms fully to the rule set forth in section 861 (a)(6) of the Internal Revenue Code. 　　Notwithstanding the above - described rules, paragraph (8) of Article 6 provides that industrial and commercial profits attributable to a permanent establishment which the recipient, being a resident of one State has in the other State, including income dealt with in the articles pertaining to income derived from real property and natural resources and dividends, interest, royalties and capital gains, if from rights or property which are effectively connected with such permanent establishment, will be treated as income from sources within that other State. This source rule is consistent with one of the underlying policies of the Foreign Investors Tax Act of 1966 [1966-2 C.B. 656] in that the force of attraction principle is abandoned in favor of the adoption of the effectively-connected concept, although it should be noted that while the 1966 Act abandons the principle in part, the Convention abandons it fully. This change in policy is also reflected in the U.S. conventions entered into or substantially modified since that time.Under sections 871 (b) and 882 (a) of the Internal Revenue Code, as amended by the Foreign Investors Tax Act of 1966, United States tax is imposed at the usual rates on taxable income which is effectively connected with the conduct of a trade or business within the United States by a nonresident alien or a foreign corporation. Under section 864 (c), as amended by the Act, capital gains and losses and certain other income (including interest, dividends, rents, royalties and capital gains) of a nonresident alien or foreign corporation from sources within the United States may be effectively connected with the conduct of a trade or business within the United States, depending upon the application of various factors; all other income from United States sources is treated as effectively connected with the conduct of a trade or business within the United States. Only limited types of income from sources outside the United States are treated as effectively connected with the conduct of a trade or business within the United States. Thus, under the Code, the determination of the source of income is separate from and preliminary to, the determination of whether income if effectively connected with the conduct of a trade or business within the United States. 　　The source of income is determined differently under paragraph (8) of Article 6 of the Convention. In effect, source of income depends on whether income is attributable to a permanent establishment (or whether the property or right giving rise to the interest, etc. is effectively connected with the permanent establishment) and is not dependent upon the determination of source under other rules. Thus, interest, dividends and other income dealt with in the other articles of the Convention are deemed to be from sources within the Contracting States in which the permanent establishment is situated if the property or rights from which they arise are effectively connected with that permanent establishment, regardless of the source of such income under the specific source rules. 　　The factors taken into account in determining whether property or rights are effectively connected with a permanent establishment will include whether the property or rights are used, or held for use, in carrying on industrial or commercial activity through such permanent establishment, and whether the activities carried on through such permanent establishment were a material factor in the realization of the income derived from such property or rights. For this purpose, due regard will be given to whether or not such property, rights or income were accounted for through such permanent establishment. These factors are substantially the same as the corresponding factors enumerated under section 864(c)(2) of the Code. 　　Most of the source rules set out in this article differ in minor respects from those existing in the Internal Revenue Code. Since Article 4 (relating to general rules of taxation) provides that the Convention will not increase a person's United States tax a taxpayer is entitled to use the more beneficial of the Code, or the Convention rules in calculating his income for United States tax purposes, or in the case of a citizen or resident of the United States, his foreign tax credit. For example, the rule on interest in this article permits Japan, under the proper circumstances, to impose a tax on any interest paid by a permanent establishment in Japan of a United States resident. While the rule appears to be fully reciprocal, the United States will not, because of section 861 (a)(1)(C) and (D) of the Code impose on nonresident aliens and foreign corporations a tax on interest paid by a resident of Japan unless 50 percent or more of such resident's gross income (for the 3-year period ending with the close of the taxable year of such resident preceding the payment of such interest) is effectively connected with the conduct by the resident of a trade or business in the United States. However, in the case of a United States branch of a Japanese bank, interest paid by such branch to a nonresident alien or foreign corporation is treated as sourced outside the United States provided it is not effectively connected with the conduct of trade or business in the United States by the recipient. If the interest is so effectively connected, or if paid to a U.S. corporation, citizen or resident, the interest is treated as U.S. source income.After 1975, all interest paid by a U.S. branch of a foreign bank will be treated as U.S. source income. 　　While, as stated, a U.S. taxpayer can choose between the source rules of the Convention or the Code, the taxpayer cannot combine the source rules of the Convention and the Code with respect to an item of income to achieve a benefit greater than that he could have achieved under either the Code or the Convention. 　　It should also be noted that the source rules do not serve to extend the benefits of the Convention to persons other than residents of the two States. Because the rules are only applicable for taxing residents of either State, they are not applicable in determining source of income of residents of other States, although the income of such other residents is of a type referred to in this article. ARTICLE 7 Nondiscrimination 　　The Convention bans discrimination by one State against the citizens of the other State or permanent establishments of residents of the other State (as compared with its own citizens or residents) or corporations owned by residents of the other State (as compared with corporations owned by its own residents). Thus, for example, a citizen of Japan who is a resident of the United States and who meets the requirements specified in section 911 of the Internal Revenue Code would, under this article of the Convention, be eligible for the benefits of section 911 although he is not a citizen of the United States. 　　This article provides, however, that a State need not accord to residents of the other State special treatment accorded to its own residents on the basis of civil status or family responsibility. 　　Under paragraph (3) of Article 1, the ban on discrimination extends to all taxes without regard to subject matter and whether imposed at the national, state, or local level. ARTICLE 8 Business Profits 　　This article sets forth the usual treaty rule that industrial or commercial profits of a resident of one State are taxable in the other State only if the resident has a permanent establishment in that other State. Where there is a permanent establishment, only the profits attributable to the permanent establishment can be taxed by that other State. For purposes of Article 5 (relating to relief from double taxation) which provides for the granting of a foreign tax credit by a State with respect to the other State's taxes on income from sources within that other State, such profits are considered to be from sources within the State in which the permanent establishment is located. 　　While under the 1954 Convention, as under most of the old United States conventions, industrial or commercial profits were not taxed in the absence of a permanent establishment, once there was a permanent establishment the 1954 Convention (as did all such old conventions) provided generally that the provisions reducing the tax rate on interest, dividends, and royalties were not applicable. This rule, known as the "force of attraction" principle, is replaced in the new Convention, as in all our recent conventions, with the "effectively connected" concept. Under the new approach, only interest, dividends, and royalties which are effectively connected with the permanent establishment are taxable as part of the industrial or commercial profits and do not benefit from the reduced rate. 　　In determining the proper attribution of industrial or commercial profits under the new Convention, paragraph (2) of this article provides generally that a permanent establishment will be treated as if it were an independent entity and considered as realizing the profits which would be realized if the permanent establishment dealt with the resident of which it is a permanent establishment on an arm's length basis. Under paragraph (3), expenses, wherever incurred, which are reasonably connected with profits attributable to the permanent establishment, including executive and general administrative expenses, will be allowed as deductions by the State in which the permanent establishment is located in computing the tax due to such State. However, it is not necessary to allow a profit to the head office for ancillary services furnished to the permanent establishment even though the permanent establishment deducts the allocable costs incurred by the head office. 　　Paragraph (4) of this article provides that the mere purchase of goods or merchandise in a State by a permanent establishment of a resident of the other State, or by the resident, for the account of such resident will not cause attribution of profits to such permanent establishment. It is not intended that paragraph (2) of this article should override paragraph (4). Thus, where a permanent establishment maintained in one of the States by a resident of the other State purchases goods for the account of that resident, and the purchasing activity is not an integral part of a broader range of activities carried on by the permanent establishment, no attribution of industrial and commercial profits will be made under paragraph (2) with respect to that activity of the permanent establishment. 　　The term "industrial or commercial profits" is defined by setting forth several examples of activities which constitute the active conduct of a trade or business, including, inter alia, insurance activities, agricultural activities the furnishing of personal services, and the rental of tangible personal property other than ships or aircraft. The term also includes income derived from real property and natural resources, dividends, interest, royalties, and capital gains arising from property which is effectively connected with a permanent establishment. The term does not include income received by an individual as compensation for personal services (either as an employee or in an independent capacity) and income derived by a corporation or other entity of a State from sources within the other State from furnishing personal services of an individual who does not or would not qualify for exemption under paragraph (2) of Article 18 (relating to dependent personal services) by reason of paragraph (3) thereof. 　　Income from the rental of ships or aircraft is discussed under Article 10 (relating to shipping and air transport) and Article 14 (relating to royalties).