Paragraph 6 　　A State's right to tax dividends paid by a company that is a resident of the other State is restricted by paragraph 7 to cases in which the dividends are paid to a resident of that State or are attributable to a permanent establishment or fixed base in that State. Thus, a State may not impose a "secondary" withholding tax on dividends paid by a nonresident company out of earnings and profits from that State. In the case of the United States, paragraph 7, therefore, overrides the taxes imposed by sections 871 and 882(a) on dividends paid by foreign corporations that have a U.S. source under section 861(a)(2)(B). 　　The paragraph does not restrict a State's right to tax its resident shareholders on undistributed earnings of a corporation resident in the other State. Thus, the U.S. authority to impose the foreign personal holding company tax, its taxes on subpart F income and on an increase in earnings invested in U.S. property, and its tax on income of a Passive Foreign Investment Company that is a Qualified Electing Fund is in no way restricted by this provision. 　　Unlike the U.S. Model Convention and the OECD Model Convention, this Convention does not restrict a State's right to impose corporate level taxes on undistributed profits. Thus, the United States can apply the accumulated earnings tax and the personal holding company tax, which are not taxes covered in Article 2 (Taxes Covered), to undistributed earnings. Relation to Other Articles 　　Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 4 of Article 1 permits the United States to tax dividends received by its residents and citizens as if the Convention had not come into effect. 　　The benefits of this Article are also subject to the provisions of Article 23 (Limitation on Benefits). Thus, if a resident of the other Contracting State is the beneficial owner of dividends paid by a U.S. corporation, the shareholder must qualify for treaty benefits under at least one of the tests of Article 23 in order to receive the benefits of this Article. ARTICLE 11 Interest 　　Article 11 governs the taxation of interest. Generally, the Article provides for full residence country taxation of interest and for a limited source State right to tax such income. Paragraph 1 　　The right of a beneficial owner's country of residence to tax interest arising in the other Contracting State is preserved by paragraph 1. For interest from any other source paid to a resident, Article 22 (Other Income) grants the residence country exclusive taxing jurisdiction (other than for interest attributable to a permanent establishment or fixed base in the other State). Paragraph 2 　　Paragraph 2 grants to the source State the right to tax interest payments beneficially owned by a resident of the other Contracting State. The general rate of source country tax applicable to interest payments under paragraph 2 is limited to10 percent. Under the provisions of paragraph 3 the rate is modified and certain classes of interest payments are exempt from source country tax. 　　The term "beneficial owner" is not defined in the Convention, and is, therefore, defined as under the internal law of the country imposing tax (i.e., the source country). The beneficial owner of interest for purposes of Article 11 is the person to which the interest income is attributable for tax purposes under the laws of the source State. Thus, if interest arising in one of the States is received by a nominee or agent that is a resident of the other State on behalf of a person that is not a resident of that other State, the interest is not entitled to the benefits of this Article. However, interest received by a nominee on behalf of a resident of that other State would be entitled to benefits. These limitations are confirmed by paragraph 8 of the OECD Commentary on Article 11. See also, paragraph 24 of the OECD Commentaries to Article 1 (General Scope). Paragraph 3 　　Paragraphs 3(a) and 3(b) specify certain categories of interest that are exempt from source State taxation. Paragraph 3(a) exempts interest arising in one Contracting State paid to the Government of the other Contracting State, its political subdivisions and local authorities or to the central bank of the other Contracting State (i.e., The Central Bank of Latvia or any Federal Reserve Bank of the United States). Paragraph 3(a) also exempts interest arising in connection with a debt obligation that is guaranteed or insured by the other Contracting State, its political subdivisions and local authorities, or institutions, such as the U.S. Export-Import Bank and the Overseas Private Investment Corporation. Paragraph 3(b) exempts interest arising in a Contracting State that is paid with respect to an indebtedness arising as a consequence of the sale on credit of any merchandise or equipment by an enterprise in one Contracting State to an enterprise in the other Contracting State, except where the sale on credit is between related persons. 　　Paragraph 3(c) reserves the right of the United States to tax an excess inclusion of a residual holder of a Real Estate Mortgage Investment Conduit (REMIC) in accordance with U.S. domestic law, that is, at the statutory withholding tax of 30 percent. This is consistent with the policy of Code sections 860E(e) and 860G(b) that excess inclusions with respect to a real estate mortgage investment conduit (REMIC) should bear full U.S. tax in all cases. Without a full tax at source, foreign purchasers of residual interests would have a competitive advantage over U.S. purchasers at the time these interests are initially offered. Also, absent this rule the U.S. FISC would suffer a revenue loss with respect to mortgages held in a REMIC because of opportunities for tax avoidance created by differences in the timing of taxable and economic income produced by these interests. 　　Paragraph 3(d) deals with so-called "contingent interest". Under this provision interest arising in one of the Contracting States that is determined by reference to the receipts, sales, income, profits or other cash flow of the debtor or a related person, to any change in the value of any property of the debtor or a related person or to any dividend, partnership distribution or similar payment made by the debtor to a related person, also may be taxed in the Contracting State in which it arises, and according to the laws of that State. However, if the beneficial owner is a resident of the other Contracting State, the gross amount of the interest may be taxed at a rate not exceeding the 15% rate prescribed in subparagraph (b) of paragraph 2 of Article 10 (Dividends). Paragraph 4 　　The term "interest" as used in Article 11 is defined in paragraph 4 to include, inter alia, income from debt claims of every kind, whether or not secured by a mortgage. Penalty charges for late payment are excluded from the definition of interest. Interest that is paid or accrued subject to a contingency is within the ambit of Article 11. This includes income from a debt obligation carrying the right to participate in profits. The term does not, however, include amounts that are treated as dividends under Article 10 (Dividends). 　　The term interest also includes amounts subject to the same tax treatment as income from money lent under the law of the State in which the income arises. Thus, for purposes of the Convention, amounts that the United States will treat as interest include (i) the difference between the issue price and the stated redemption price at maturity of a debt instrument, i.e., original issue discount (OID), which may be wholly or partially realized on the disposition of a debt instrument (section 1273), (ii) amounts that are imputed interest on a deferred sales contract (section 483), (iii) amounts treated as interest or OID under the stripped bond rules (section 1286), (iv) amounts treated as original issue discount under the below-market interest rate rules (section 7872), (v) a partner's distributive share of a partnership's interest income (section 702), (vi) the interest portion of periodic payments made under a "finance lease" or similar contractual arrangement that in substance is a borrowing by the nominal lessee to finance the acquisition of property, (vii) amounts included in the income of a holder of a residual interest in a REMIC (section 860E), because these amounts generally are subject to the same taxation treatment as interest under U.S. tax law, and (viii) embedded interest with respect to notional principal contracts. Paragraph 5 　　Paragraph 5 provides an exception to the taxing rules of paragraphs 1 and 2 in cases where the beneficial owner of the interest carries on business through a permanent establishment in the State of source or performs independent personal services from a fixed base situated in that State and the interest is attributable to that permanent establishment or fixed base. In such cases the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services) will apply and the State of source will retain the right to impose tax on such interest income on a net basis. 　　In the case of a permanent establishment or fixed base that once existed in the State but that no longer exists, the provisions of paragraph 5 also apply, by virtue of paragraph 9 of Article 7 (Business Profits), to interest that would be attributable to such a permanent establishment or fixed base if it did exist in the year of payment or accrual. (See the Technical Explanation of paragraph 9 of Article 7.) Paragraph 6 　　Paragraph 6 contains the source rule for interest. This rule provides that the source of an interest payment generally is the State of residence of the payor, unless the interest is borne by a permanent establishment or fixed base in the other State, in which case the source is assigned to that other State. Paragraph 7 　　Paragraph 7 provides that in cases involving special relationships between persons, Article 11 applies only to that portion of the total interest payments between those persons that would have been made absent such special relationships (i.e., an arm' length interest payment). Any excess amount of interest paid remains taxable according to the laws of the United States and Latvia, respectively, with due regard to the other provisions of the Convention. Thus, if the excess amount would be treated under the source country's law as a distribution of profits by a corporation, such amount could be taxed as a dividend rather than as interest, but the tax would be subject, if appropriate, to the rate limitations of paragraph 2 of Article 10 (Dividends). 　　The term "special relationship" is not defined in the Convention. In applying this paragraph the United States considers the term to include the relationships described in Article 9 (Associated Enterprises), which in turn correspond to the definition of "control" for purposes of section 482 of the Code. 　　This paragraph does not address cases where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest is less than an arm' length amount. In those cases a transaction may be characterized to reflect its substance and interest may be imputed consistent with the definition of interest in paragraph 4. Consistent with Article 9 (Associated Enterprises) the United States would apply section 482 or 7872 of the Code to determine the amount of imputed interest in those cases. Paragraph 8 Paragraph 8 permits the United States to impose its branch level interest tax on a　corporation resident in Latvia. The base of this tax is the excess, if any, of the interest deductible in the United Stated in computing the profits of the corporation that are subject to tax in the United States and either attributable to a permanent establishment in the United States or subject to tax in the Unites States under Article 6 or Article 13 of this Convention over the interest paid by or from the permanent establishment or trade or business in the United States. Relation to Other Articles 　　Notwithstanding the limitations on source country taxation of interest contained in this Article, the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax interest received by its residents and citizens as if the Convention had not come into effect. 　　As with any other benefit of the Convention, a resident of one of the States claiming the benefit of this Article must be entitled to the benefit under the provisions of Article 23 (Limitation on Benefits). ARTICLE 12 Royalties 　　Article 12 provides rules for source and residence country taxation of royalties. Generally, the Article provides for full residence country taxation of royalties and for a limited source State right to tax such income. Paragraph 1 　　The right of a beneficial owner's country of residence to tax royalties arising in the other Contracting State is preserved by paragraph 1. For royalties from any other source paid to a resident, Article 22 (Other Income) grants the residence country exclusive taxing jurisdiction (other than for royalties attributable to a permanent establishment or fixed base in the other State). Paragraph 2 　　Paragraph 2 grants to the source State the right to tax royalty payments but limits the rate of source State tax if the royalties are beneficially owned by a resident of the other Contracting State. The maximum rate of tax allowed by the source State varies depending upon the nature of the payment. The maximum rate of source country tax is 5 percent if the royalty payment is received for the rental of industrial, commercial or scientific equipment. All other royalties are subject to tax at a maximum rate of 10 percent under subparagraph 2(b). 　　The term "beneficial owner" is not defined in the Convention, and is, therefore, defined as under the internal law of the country imposing tax (i.e., the source country). The beneficial owner of royalties for purposes of Article 12 is the person to which the royalty income is attributable for tax purposes under the laws of the source State. Thus, if royalties arising in one of the States is received by a nominee or agent that is a resident of the other State on behalf of a person that is not a resident of that other State, the royalties are not entitled to the benefits of this Article. However, royalties received by a nominee on behalf of a resident of that other State would be entitled to benefits. These limitations are confirmed by paragraph 4 of the OECD Commentaries to Article 12. See also, paragraph 24 of the OECD Commentaries to Article 1 (General Scope). Paragraph 3 　　Paragraph 3 defines the term "royalties" for purposes of the Article. The term means payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work including computer software, cinematographic films and films or tapes and other means of image or sound reproduction for radio and television broadcasting; for the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process or other like right or property; or for information concerning industrial, commercial, or scientific experience; for the use of, or the right to use information concerning industrial, commercial or scientific experience. In deviation from the OECD Model and from most U.S. treaties, "royalties" also includes payments of any kind received as a consideration for the use of, or the right to use industrial, commercial or scientific equipment. As noted above in the explanation to Paragraph 2, such royalties are taxed at the lower 5 percent rate. 　　The term "royalties" also includes gain derived from the alienation of any right or property that would give rise to royalties, to the extent the gain is contingent on the productivity, use, or further alienation thereof. As a consequence, such amounts may be taxed in accordance with this Article. Gains that are not so contingent are dealt with under Article 13 (Gains). 　　The term royalties is defined in the Convention and therefore is generally independent of domestic law. Certain terms used in the definition are not defined in the Convention, but these may be defined under domestic tax law. For example, the term "secret process or formulas" is found in the Code, and its meaning has been elaborated in the context of sections 351 and 367. See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 64-56, 1964-1 C.B. 133; Rev. Proc. 69-19, 1969-2 C.B. 301. 　　Consideration for the use or right to use cinematographic films, or works on film, tape, or other means of reproduction in radio or television broadcasting is specifically included in the definition of royalties. The reference to "other means of reproduction" as it relates to cinematographic films, or works on file and tape makes clear that future technological advances in the field of radio and television broadcasting will not affect the inclusion of payments relating to the use of such means of reproduction within the definition of royalties. If an artist who is resident in one Contracting State records a performance in the other Contracting State, retains a copyrighted interest in a recording, and receives payments for the right to use the recording based on the sale or public playing of the recording, then the right of such other Contracting State to tax those payments is governed by Article 12. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810 F.2d 209 (D.C. Cir. 1986). 　　Computer software generally is protected by copyright laws around the world. Under the Convention, consideration received for the use, or the right to use, computer software is treated either as royalties or as business profits, depending on the facts and circumstances of the transaction giving rise to the payment. 　　The primary factor in determining whether consideration received for the use, or the right to use, computer software is treated as royalties or as business profits, is the nature of the rights transferred. See Treas. Reg. section 1.861-18. The fact that the transaction is characterized as a license for copyright law purposes is not dispositive. For example, as was discussed and understood among the negotiators, a typical retail sale of "shrink wrap" software generally will not be considered to give rise to royalty income, even though for copyright law purposes it may be characterized as a license. 　　The means by which the computer software is transferred are not relevant for purposes of the analysis. Consequently, if software is electronically transferred but the rights obtained by the transferee are substantially equivalent to rights in a program copy, the payment will be considered business profits. 　　The term "industrial, commercial, or scientific experience" (sometimes referred to as "know-how") has the meaning ascribed to it in paragraph 11 of the Commentary to Article 12 of the OECD Model Convention. Consistent with that meaning, the term may include information that is ancillary to a right otherwise giving rise to royalties, such as a patent or secret process. 　　Know-how also may include, in limited cases, technical information that is conveyed through technical or consultancy services. It does not include general educational training of the user's employees, nor does it include information developed especially for the user, for example, a technical plan or design developed according to the user's specifications. Thus, as provided in paragraph 11 of the Commentaries to Article 12 of the OECD Model, the term "royalties" does not include payments received as consideration for after-sales service, for services rendered by a seller to a purchaser under a guarantee, or for pure technical assistance. 　　The term "royalties" also does not include payments for professional services (such as architectural, engineering, legal, managerial, medical, software development services). For example, income from the design of a refinery by an engineer (even if the engineer employed know-how in the process of rendering the design) or the production of a legal brief by a lawyer is not income from the transfer of know-how taxable under Article 12, but is income from services taxable under either Article 14 (Independent Personal Services) or Article 15 (Dependent Personal Services). Professional services may be embodied in property that gives rise to royalties, however. Thus, if a professional contracts to develop patentable property and retains rights in the resulting property under the development contract, subsequent license payments made for those rights would be royalties.