DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF LATVIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVA
颁布时间:1998-01-15
ARTICLE 3
General Definitions
Paragraph 1 defines a number of basic terms used in the Convention.
Certain others are defined in other articles of the Convention. For
example, the term "resident of a Contracting State" is defined in Article
4 (Resident). 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. The
introduction to paragraph 1 makes clear that these definitions apply for
all purposes of the Convention, unless the context requires otherwise.
This latter condition allows flexibility in the interpretation of the
treaty in order to avoid unintended results. Terms that are not defined in
the Convention are dealt with in paragraph 2.
Paragraph 1
The term "Contracting State" is defined in subparagraph 1(a) to mean
either the United States or Latvia, depending on the context in which the
term is used.
The term "United States" is defined in subparagraph 1(b) to mean the
United States of America, including the states, the District of Columbia
and the territorial sea of the United States. The term does not include
Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or
territory. The geographical meaning of the term United States also
includes the territorial sea of the United States, and for certain
purposes, the definition is extended to include the sea bed and subsoil of
undersea areas adjacent to the territorial sea of the United States. This
extension applies to the extent that the United States exercises
sovereignty in accordance with international law for the purpose of
natural resource exploration and exploitation of such areas.This extension
of the definition applies, however, only if the person, property or
activity to which the Convention is being applied is connected with such
natural resource exploration or exploitation. Thus, it would not include
any activity involving the sea floor of an area over which the United
States exercised sovereignty for natural resource purposes if that
activity was unrelated to the exploration and exploitation of natural
resources.
The term "Latvia" is defined in subparagraph 1(c). The term means the
Republic of Latvia, and, when used in a geographical sense, means the
territory of the Republic of Latvia and any other area adjacent to the
territorial waters of the Republic of Latvia within which under the
laws of Latvia and in accordance with international law, the rights of
Latvia may be exercised with respect to the sea bed and its sub-soil and
their natural resources.
Subparagraph 1(d) defines the term "person" to include an individual,
an estate, a trust, a partnership, a company and any other body of
persons. The definition is significant for a variety of reasons. For
example, under Article 4, only a "person" can be a "resident" and
therefore eligible for most benefits under the treaty. Also, all "persons"
are eligible to claim relief under Article 26 (Mutual Agreement
Procedure).
The term "company" is defined in subparagraph 1(e) as a body corporate
or an entity treated as a body corporate for tax purposes. Although the
Convention does not add "in the State in which it is organized," as does
the U.S. Model, the result should be the same, as the Commentaries to the
OECD Model interpret the language identical to that of the Convention in a
manner consistent with the U.S. Model.
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, nor is it defined in the OECD Model or its
Commentaries. Despite the absence of a clear, generally accepted meaning
for the term "enterprise," the term is understood to refer to any activity
or set of activities that constitute a trade or business.
Although subparagraph 1(f) does not include the U.S. Model's explicit
reference to fiscally transparent enterprises, the negotiators understood
that the terms "enterprise of a Contracting State" and "enterprise of the
other Contracting State" encompass an enterprise conducted through an
entity (such as a partnership) that is treated as fiscally transparent in
the Contracting State where the entity's owner is resident. In accordance
with Article 4 (Resident), entities that are fiscally transparent in the
country in which their owners are resident are not considered to be
residents of a Contracting State (although income derived by such entities
may be taxed as the income of a resident, if taxed in the hands of
resident partners or other owners).This treatment ensures that an
enterprise conducted by such an entity will be treated as carried on by a
resident of a Contracting State to the extent its partners or other owners
are residents. This approach is consistent with the Code, which under
section 875 attributes a trade or business conducted by a partnership to
its partners and a trade or business conducted by an estate or trust to
its beneficiaries.
An enterprise of a Contracting State need not be carried on in that
State. It may be carried on in the other Contracting State or a third
state (e.g., a U.S. corporation doing all of its business in Latvia would
still be a U.S. enterprise).
Subparagraph 1(g) defines the term "international traffic." The term
means any transport by a ship or an aircraft operated by an enterprise of
a Contracting State except when the transport is operated solely between
places within a Contracting State. This definition is applicable
principally in the context of Article 8 (Shipping and Air
Transport). Shipping and air transport not operated by an enterprise
(i.e., a resident) of a Contracting State is excluded from the definition
of international traffic in the Convention, whereas the U.S. Model
definition of international traffic includes all income from shipping and
air transport, other than transport solely between places in a Contracting
State, whether or not the operator is a resident of the Contracting
States. This narrower definition in the Convention, when applied in the
context of paragraph 1 of Article 8, limits the exclusive residence
country taxation under Article 8 of income from the lease of ships and
aircraft to lease income derived by a resident of a Contracting State that
operates ships or aircraft in international traffic. Income from the lease
of ships or aircraft that is derived by a lessor that is not an operator
of ships or aircraft in international traffic would not fall under Article
8.
The narrower definition of international traffic similarly combines
with paragraph 3 of Article 8 (Shipping and Air Transport) to limit the
exclusive residence country taxation under Article 8 to income from the
use, maintenance or rental of containers derived by persons engaged in
international traffic (i.e., persons engaged in the operation of ships or
aircraft in international traffic).
The exclusion from international traffic of transport solely between
places within a Contracting State means, for example, that carriage of
goods or passengers solely between New York and Chicago would not be
treated as international traffic, whether carried by a U.S. or a Latvian
carrier. 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. Thus,
if the carrier engaged in internal U.S. traffic were a resident of Latvia
(assuming that were possible under U.S. law), the United States would not
be required to exempt the income from that transport under Article 8. The
income would, however, be treated as business profits under Article 7
(Business Profits), and therefore would be taxable in the United States
only if attributable to a U.S. permanent establishment of the Latvian
carrier, and then only on a net basis. The gross basis U.S. tax imposed by
section 887 would never apply under the circumstances described. If,
however, goods or passengers are carried by a carrier resident in Latvia
from a non-U.S. port to, for example, New York, and some of the goods or
passengers continue on to Chicago, the entire transport would be
international traffic. This would be true if the international carrier
transferred the goods at the U.S. port of entry from a ship to a
land vehicle, from a ship to a lighter, or even if the overland portion of
the trip in the United States was handled by an independent carrier under
contract with the original international carrier, so long as both parts of
the trip were reflected in original bills of lading. For this reason,
the Convention refers, in the definition of "international traffic," to
"such transport" being solely between places in the other Contracting
State, while the OECD Model refers to the ship or aircraft being operated
solely between such places. The language of the Convention, based on U.S.
Model language, is intended to make clear that, as in the above example,
even if the goods are carried on a different aircraft for the internal
portion of the international voyage than is used for the overseas portion
of the trip, the definition applies to that internal portion as well as
the external portion.
Finally, a "cruise to nowhere," i.e., a cruise beginning and ending in
a port in the same Contracting State with no stops in a foreign port,
would not constitute international traffic.
Subparagraphs 1(h)(i) and (ii) define the term "competent authority"
for the United States and Latvia, 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 in turn has delegated 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. The Latvian competent authority is the Ministry of
Finance or its authorized representative.
The term "national," as it relates to the United States and to Latvia,
is defined in subparagraphs 1(i)(i) and (ii). This term is relevant for
purposes of Articles 19 (Government Service) and 25 (Nondiscrimination). A
national of one of the Contracting States is (1) an individual who is a
citizen or national of that State, and
(2) any legal person, partnership or association deriving its status
as such from the law in force in the State where it is established.
Paragraph 2
Paragraph 2 provides that in the application of the Convention, any
term used but not defined in the Convention will have the meaning that it
has under the law of the Contracting State whose tax is being applied,
unless the context requires otherwise. The paragraph makes clear that if
the term is defined under both the tax and non-tax laws of a Contracting
State, the definition in the tax law will take precedence over the
definition in the non-tax laws. Finally, there also may be cases where the
tax laws of a State contain multiple definitions of the same term. In such
a case, the definition used for purposes of the particular provision at
issue, if any, should be used.
If 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 that creates difficulties in the application of the
Convention, the competent authorities, as indicated in paragraph 3(f) of
Article 26 (Mutual Agreement Procedure), may establish a common meaning in
order to prevent double taxation or to 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.
The reference in paragraph 2 to the internal law of a Contracting
State means the law in effect at the time the treaty is being applied, not
the law as in effect at the time the treaty was signed. This use of
"ambulatory" definitions, however, may lead to results that are at
variance with the intentions of the negotiators and of the Contracting
States when the treaty was negotiated and ratified. The reference in both
paragraphs 1 and 2 to the "context otherwise requiring" a definition
different from the treaty definition, in paragraph 1, or from the internal
law definition of the Contracting State whose tax is being imposed, under
paragraph 2, refers to a circumstance where the result intended by the
Contracting States is different from the result that would obtain under
either the paragraph 1 definition or the statutory definition. Thus,
flexibility in defining terms is necessary and permitted.
ARTICLE 4
Resident
This Article sets forth rules for determining whether a person is a
resident of a Contracting State for purposes of the Convention. 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 fact that a person is
determined to be a resident of a Contracting State under Article 4 does
not necessarily entitle that person to the benefits of the Convention. In
addition to being a resident, a person also must qualify for benefits
under Article 23 (Limitation on Benefits) in order to receive benefits
conferred on residents of a Contracting State.
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. As a general matter, a person who, under those
laws, is a resident of one Contracting State and not of the other need
look no further. For purposes of the Convention that person is a resident
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 use tie-breaker
rules to assign a single State of residence to such a person for purposes
of the Convention.
Paragraph 1
The term "resident of a Contracting State" is defined in paragraph 1.
In general, this definition incorporates the definitions of residence in
U.S. law and that of Latvia 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 residence, domicile, citizenship, place of management, place of
incorporation or any other similar criterion. Thus, residents of the
United States include aliens who are considered U.S. residents under Code
section 7701(b).
Certain entities that are nominally subject to tax but that in
practice rarely pay tax also would generally be treated as residents and
therefore accorded treaty benefits. For example, RICs, REITs and REMICs
are all residents of the United States for purposes of the treaty.
Although the income earned by these entities normally is not subject to
U.S. tax in the hands of the entity, they are taxable to the extent that
they do not currently distribute their profits, and therefore may be
regarded as "liable to tax." They also must satisfy a number of
requirements under the Code in order to be entitled to special tax
treatment.
Paragraph 2
Paragraph 2 identifies three circumstances where the definition of
residence set forth in paragraph 1 does not apply or is limited.
Subparagraph (a) provides that a person who is liable to tax in a
Contracting State only in respect of income from sources within that State
will not be treated as a resident of that Contracting State for purposes
of the Convention. Thus, a consular official of Latvia who is posted 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.
source income, would not be considered a resident of the United States for
purposes of the Convention. (See Code section 7701(b)(5)(B)). Similarly,
although not explicitly stated in the Convention, as it is in the U.S.
Model, an enterprise of Latvia with a permanent establishment in the
United States is not, by virtue of that permanent establishment, a
resident of the United States. The enterprise generally is subject to
U.S. tax only with respect to its income that is attributable to the U.S.
permanent establishment, not with respect to its worldwide income, as it
would be if it were a U.S. resident.
Subparagraph (b) addresses special problems presented by transparent
entities, such as partnerships, estates and trusts. The entity itself may
be treated as a resident of a Contracting State to the extent that the
entity is subject to tax in that State on the income as the income of a
resident. This subparagraph also applies to any resident of a Contracting
State who is subject to tax as a resident of that State on income derived
through an entity that is treated as fiscally transparent under the laws
of either Contracting State. Entities falling under this description in
the United States would include partnerships, common investment trusts
under section 584 and grantor trusts. This paragraph also applies to U.S.
limited liability companies ("LLC's") that are treated as partnerships for
U.S. tax purposes.
Subparagraph (b) provides that an item of income derived through such
fiscally transparent entities will be considered to be derived by a
resident of a Contracting State if the resident is treated under the
taxation laws of the State where he is resident as deriving the item of
income.
For example, if a Latvia corporation distributes a dividend to an
entity that is treated as fiscally transparent for U.S. tax purposes, the
dividend will be considered to be derived by a resident of the U.S. only
to the extent that U.S. tax law treats one or more U.S. residents (whose
status as U.S. residents is determined, for this purpose, under U.S. tax
law) as deriving the dividend income for U.S. tax purposes. In the case of
a partnership, the persons who are, under U.S. tax law, treated as
partners of the entity would normally be the persons whom the U.S. tax
law would treat as deriving the dividend income through the partnership.
Also, it follows that partners whom the U.S. treats as deriving the
dividend income for U.S. tax purposes but who are not U.S. residents under
U.S. tax law may not claim a benefit for the dividend paid to the entity
under the Convention, because they are not residents of the United States
for purposes of claiming this treaty benefit. (If, however, the country in
which they are treated as resident for tax purposes, as determined under
the laws of that country, has an income tax convention with Latvia, they
may be entitled to claim a benefit under that convention.) In contrast,
if, for example, an entity is organized under U.S. laws and is classified
as a corporation for U.S. tax purposes, dividends paid by a Latvia
corporation to the U.S. entity will be considered derived by a resident of
the United States since the U.S. corporation is treated under U.S.
taxation laws as a resident of the United States and as deriving the
income.
These results would obtain even if the entity were viewed differently
under the tax laws of Latvia (e.g., as not fiscally transparent in the
first example above where the entity is treated as a partnership for U.S.
tax purposes or as fiscally transparent in the second example where the
entity is viewed as not fiscally transparent for U.S. tax purposes).
Similarly, the characterization of the entity in a third country is also
irrelevant, even if the entity is organized in that third country. The
results obtain regardless of whether the entity is disregarded as a
separate entity under the laws of one jurisdiction but not the other, such
as a single owner entity that is viewed as a branch for U.S. tax purposes
and as a corporation for Latvian tax purposes. The results also
obtain regardless of where the entity is organized, i.e., in the United
States, in Latvia, or in a third country.
For example, income from Latvian sources received by an entity
organized under the laws of Latvia, which is treated for U.S. tax purposes
as a corporation and is owned by a U.S. shareholder who is a U.S. resident
for U.S. tax purposes, is not considered derived by the shareholder of
that corporation even if, under the tax laws of Latvia, the entity is
treated as fiscally transparent. Rather, for purposes of the Convention,
the income is treated as derived by the Latvian entity.
The rule also applies to trusts to the extent that they are fiscally
transparent in either Contracting State. For example, if X, a resident of
Latvia, creates a revocable trust and names persons resident in a third
country as the beneficiaries of the trust, X would be treated as the
beneficial owner of income derived from the United States under the Code's
rules. If Latvia has no rules comparable to those in sections 671 through
679 of the Code then it is possible that under Latvian law neither X nor
the trust would be taxed on the income derived from the United States. In
these cases it is to be understood that the trust's income would be
regarded as being derived by a resident of Latvia only to the extent that
the laws of Latvia treat Latvian residents as deriving the income for tax
purposes.
The taxation laws of a Contracting State may treat an item of income,
profit or gain as income, profit or gain of a resident of that State even
if the resident is not subject to tax on that particular item of income,
profit or gain. For example, if a Contracting State has a participation
exemption for certain foreign-source dividends and capital gains, such
income or gains would be regarded as income or gain of a resident of that
State who otherwise derived the income or gain, despite the fact that the
resident could be exempt from tax in that State on the income or gain.
Income is "derived through" a fiscally transparent entity if the
entity's participation in the transaction giving rise to the income,
profit or gain in question is respected after application of any source
State anti-abuse principles based on substance over form and similar
analyses. For example, if a partnership with U.S. partners receives income
arising in Latvia, that income will be considered to be derived through
the partnership by its partners as long as the partnership's participation
in the transaction is not disregarded for lack of economic substance. In
such a case, the partners would be considered to be the beneficial owners
of the income.
A U.S. citizen would generally be treated as a resident of the United
States under paragraph 1. However, subparagraph 2(c) provides that a U.S.
citizen or alien lawfully admitted for permanent residence (i.e., a "green
card" holder) who is not, under the introductory language of paragraph 1
of this Article, an individual resident of Latvia 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 (see
section 7701(b)(3)), permanent home or habitual abode in the United
States. If, however, such an individual is a resident both of the United
States and Latvia under the general rule of paragraph 1, whether he is to
be treated as a resident of the United States or of Latvia for purposes of
the Convention is determined by the tie-breaker rules of paragraph 4 of
the Article, regardless of how close his nexus to the United States may
be. However, the fact that a U.S. citizen who does not have close ties to
the United States may not be treated as a U.S. resident under the
Convention does not alter the application of the saving clause of
paragraph 4 of Article 1 (General Scope) to that citizen. For example, a
U.S. citizen who pursuant to the "citizen/green card holder" rule is not
considered to be a resident of the United States still is taxable on his
worldwide income under the generally applicable rules of the Code.