Paragraph 4 　　This paragraph provides an exception to the rules of paragraph 2 that limit the rate of source country taxation of royalties. This paragraph applies in cases where the beneficial owner of the royalties 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 royalties are 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. 　　The provisions of paragraph 9 of Article 7 (Business Profits) apply to this paragraph. For example, royalty income that is attributable to a permanent establishment or a fixed base and that accrues during the existence of the permanent establishment or fixed base, but is received after the permanent establishment or fixed base no longer exists, remains taxable under the provisions of Articles 7 (Business Profits) or 14 (Independent Personal Services), respectively, and not under this Article. Paragraph 5 　　Paragraph 5 provides that in cases involving special relationships between the payor and beneficial owner of royalties, Article 12 applies only to the extent the royalties would have been paid absent such special relationships (i.e., an arm' length royalty). Any excess amount of royalties paid remains taxable according to the laws of the two Contracting States with due regard to the other provisions of the Convention. If, for example, the excess amount is treated as a distribution of corporate profits under domestic law, such excess amount will be taxed as a dividend rather than as royalties, but the tax imposed on the dividend payment will be subject to the rate limitations of paragraph 2 of Article 10 (Dividends). Paragraph 6 　　Subparagraphs 6(a) and 6 (b) provide rules for determining the source of royalty payments. 　　Subparagraph 6(c) provides rules for determining the source of payments received as consideration for the use of containers. 　　Under subparagraph 6(a), royalties are generally deemed to arise in a Contracting State if paid by a resident of that State. However, if the obligation to pay the royalties was incurred in connection with a permanent establishment or a fixed base in one of the Contracting States, and the royalties are borne by that permanent establishment or fixed base, the royalties are deemed to arise in that State, regardless of whether the payor is resident in one of the Contracting States. In general, royalties are considered borne by a permanent establishment or fixed base if deductible in computing the taxable income of that permanent establishment or fixed base. Under subparagraph 6(b), if royalties are neither paid by a resident of one of the Contracting States nor borne by a permanent establishment or fixed base in either State, so that they are not covered by subparagraph 6(a), but they relate to the use of a right or property in one of the Contracting States, they will be deemed to arise in the State where the right or property is used. For example, if a Latvian resident were to grant franchise rights to a resident of Mexico for use in the United States, the royalty paid by the Mexican resident to the Latvian resident for those rights would be U.S. source income under this Article, subject to U.S. withholding at the 10 percent rate provided in paragraph 2. 　　The rules of this Article differ from those provided under U.S. domestic law. Under U.S. domestic law, a royalty is considered to be from U.S. sources if it is paid for the use of, or the privilege of using, an intangible within the United States; the residence of the payor is irrelevant. If paid to a nonresident alien individual or other foreign person, a U.S. source royalty is generally subject to withholding tax at a rate of 30 percent under U.S. domestic law. By reason of paragraph 2 of Article 1 (Personal Scope), a Latvian resident would be permitted to apply the rules of U.S. domestic law to its royalty income if those rules produced a more favorable result in its case than those of this Article. However, under a basic principle of tax treaty interpretation, the prohibition against so-called "cherry-picking," the Latvian resident would be precluded from claiming selected benefits under the Convention (e.g., the tax rates only) and other benefits under U.S. domestic law (e.g., the source rules only) with respect to its royalties. See, e.g., Rev. Rul. 84-17, 1984-1 C.B. 308. For example, if a Latvian company granted franchise rights to a resident of the United States for use 50 percent in the United States and 50 percent in Mexico, the Convention would permit the Latvian company to treat all of its royalty income from that single transaction as U.S. source income entitled to the withholding tax reduction under paragraph 2. U.S. domestic law would permit the Latvian company to treat 50 percent of its royalty income as U.S. source income subject to a 30 percent withholding tax and the other 50 percent as foreign source income exempt from U.S. tax. The Latvian company could choose to apply either the provisions of U.S. domestic law or the provisions of the Convention to the transaction, but would not be permitted to claim both the U.S. domestic law exemption for 50 percent of the income and the Convention's reduced withholding rate for the remainder of the income. 　　Subparagraph 6(c) provides a rule that applies only to payments received as consideration for the use of containers (including trailers, barges, and related equipment for the transport of containers) used in transportation of passengers or property (other than transportation solely between places within a Contracting State) not dealt with in Article 8 (Shipping and Air Transport). Such payments not included in Article 8 are those received as consideration for the non-incidental rental of containers. Such payments are deemed to arise in neither Contracting State, and thus, do not fall under the taxing rules of Article 12, since as noted in paragraph 1 of Article 12, Article 12 only applies to payments of royalties that arise in a Contracting State. Nonincidental container leasing is not included as Royalties in Article 12 nor as profits from the operation of ships and aircraft in international traffic in Article 8 and thus falls under Other Income in Article 22. Other income beneficially owned by a resident of a Contracting State is only taxable by that resident's State. Thus, non-incidental container leasing is taxed in the same way in both this Convention and the U.S. model. Relation to Other Articles 　　Notwithstanding the foregoing limitations on source country taxation of royalties, the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its residents and citizens as if the Convention had not come into force. 　　As with other benefits of the Convention, the benefits of reduced source state taxation of royalties under paragraph 2 of Article 12 are available to a resident of the other State only if that resident is entitled to those benefits under Article 23 (Limitation on Benefits). ARTICLE 13 Capital Gains 　　Article 13 assigns either primary or exclusive taxing jurisdiction over gains from the alienation of property to the State of residence or the State of source and defines the terms necessary to apply the Article. Paragraph 1 　　Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source to tax gains attributable to the alienation of real property situated in that State. The paragraph therefore permits the United States to apply section 897 of the Code to tax gains derived by a resident of Latvia that are attributable to the alienation of real property situated in the United States (as defined in paragraph 2). Gains attributable to the alienation of real property include gain from any other property that is treated as a real property interest within the meaning of paragraph 2.Although Latvia uses the term "immovable property", it is to be understood from the parenthetical use of the term "real" that the two terms are synonymous. Paragraph 2 　　This paragraph defines the term "immovable (real) property situated in the other Contracting State," gains from which are subject to the rule of paragraph 1. The term includes real property referred to in Article 6 (i.e., an interest in the real property itself), and a "United States real property interest" when the United States is the other Contracting State under paragraph 1. It also includes shares of stock of a company the property of which consists at least 50 percent of immovable (real) property situated in that other State, and an interest in a partnership, trust or estate to the extent that its assets consist of immovable (real) property situated in that other State. The OECD Model does not refer to real property interests other than the real property itself, and the United States has entered a reservation on this point with respect to the OECD Model, reserving the right to apply its tax under FIRPTA to all real estate gains encompassed by that provision. 　　Under section 897(c) of the Code the term "United States real property interest" includes shares in a U.S. corporation that owns sufficient U.S. real property interests to satisfy an assetratio test on certain testing dates. The term also includes certain foreign corporations that have elected to be treated as U.S. corporations for this purpose. Section 897(i). In applying paragraph 1 the United States will look through distributions made by a REIT. Accordingly, distributions made by a REIT are taxable under paragraph 1 of Article 13 (not under Article 10 (Dividends)) when they are attributable to gains derived from the alienation of real property. Paragraph 3 　　Paragraph 3 of Article 13 deals with the taxation of certain gains from the alienation of personal (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 personal 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. This also includes gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base. Such gains may be taxed in the State in which the permanent establishment or fixed base is located. Although Latvia uses the term "movable property", and the United States uses the term "personal property" it is understood that the two terms are synonymous. 　　A resident of Latvia that is a partner in a partnership doing business in the United States generally will have a permanent establishment in the United States as a result of the activities of the partnership, assuming that the activities of the partnership rise to the level of a permanent establishment. Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under paragraph 3, the United States generally may tax a partner's distributive share of income realized by a partnership on the disposition of movable property forming part of the business property of the partnership in the United States. Paragraph 4 　　This paragraph limits the taxing jurisdiction of the state of source with respect to gains derived by an enterprise of a Contracting State that operates ships or aircraft in international traffic 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. Under paragraph 4, when such income is derived by an enterprise of a Contracting State it is taxable only in that Contracting State. Notwithstanding paragraph 3, these rules apply even if the income is attributable to a permanent establishment maintained by the enterprise in the other Contracting State. 　　However, if the gains from alienation of ships, aircraft or containers is not derived by an enterprise of a Contracting State that operates ships or aircraft in international traffic, then such gains are taxable in the source state as well. An example of such gains taxable in the source state is income derived from the alienation of ships, aircraft or containers owned by a bank that does not itself operate the equipment but instead leases the equipment to an operator. Paragraph 5 　　Paragraph 5 makes it clear that the taxing rules of this Article do not apply to 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. Such amounts may be taxed in accordance with Article 12 (Royalties) as described in the explanation of paragraph 3 of Article 12. Paragraph 6 　　Paragraph 6 grants to the State of residence of the alienator the exclusive right to tax gains from the alienation of property other than property referred to in paragraphs 1 through 5. For example, gain derived from shares, other than shares described in paragraphs 2 or 3, debt instruments and various financial instruments, may be taxed only in the State of residence, to the extent such income is not otherwise characterized as income taxable under another article (e.g., Article 10 (Dividends) or Article 11 (Interest)). Similarly gain derived from the alienation of movable property, other than movable property described in paragraph 3, may be taxed only in the State of residence of the alienator. Sales by a resident of a Contracting State of real property located in a third state are not taxable in the other Contracting State, even if the sale is attributable to a permanent establishment located in the other Contracting State. Relation to Other Articles 　　Notwithstanding the foregoing limitations on taxation of certain gains by the State of source, the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its citizens and residents as if the Convention had not come into effect. Thus, any limitation in this Article on the right of the United States to tax gains does not apply to gains of a U.S. citizens or resident. The benefits of this Article are also subject to the provisions of Article 23 (Limitation on Benefits). Thus, only a resident of a Contracting State that satisfies one of the conditions in Article 23 is entitled to the benefits of this Article.