Example 1. 　　USCo is a corporation resident in the United States. USCo is engaged in an active manufacturing business in the United States. USCo owns 100 percent of the shares of Latco, a corporation resident in Latvia. Latco distributes USCo products in Latvia. Since the business activities conducted by the two corporations involve the same products, Latco's distribution business is considered to form a part of USCo's manufacturing business within the meaning of subparagraph 3(d). Example 2. 　　The facts are the same as in Example 1, except that USCo does not manufacture. Rather, USCo operates a large research and development facility in the United States that licenses intellectual property to affiliates worldwide, including Latco. Latco and other USCo affiliates then manufacture and market the USCo-designed products in their respective markets. Since the activities conducted by Latco and USCo involve the same product lines, these activities are considered to form a part of the same trade or business. Example 3. 　　Americair is a corporation resident in the United States that operates an international airline. LatSub is a wholly-owned subsidiary of Americair resident in Latvia. LatSub operates a chain of hotels in Latvia that are located near airports served by Americair flights. Americair frequently sells tour packages that include air travel to Latvia and lodging at LatSub hotels. Although both companies are engaged in the active conduct of a trade or business, the businesses of operating a chain of hotels and operating an airline are distinct trades or businesses. Therefore Latsub's business does not form a part of Americair's business. However, LatSub's business is considered to be complementary to Americair's business because they are part of the same overall industry (travel) and the links between their operations tend to make them interdependent. Example 4. 　　The facts are the same as in Example 3, except that Latsub owns an office building in Latvia instead of a hotel chain. No part of Americair's business is conducted through the office building. Latsub's business is not considered to form a part of or to be complementary to Americair's business. They are engaged in distinct trades or businesses in separate industries, and there is no economic dependence between the two operations. Example 5. 　　USFlower is a corporation resident in the United States. USFlower produces and sells flowers in the United States and other countries. USFlower owns all the shares of LatHolding, a corporation resident in Latvia. LatHolding is a holding company that is not engaged in a trade or business. LatHolding owns all the shares of three corporations that are resident in Latvia: LatFlower, LatLawn, and LatFish. LatFlower distributes USFlower flowers under the USFlower trademark in the other State. LatLawn markets a line of lawn care products in the other State under the USFlower trademark. In addition to being sold under the same trademark, LatLawn and LatFlower products are sold in the same stores and sales of each company's products tend to generate increased sales of the other's products. LatFish imports fish from the United States and distributes it to fish wholesalers in Latvia. For purposes of paragraph 3, the business of LatFlower forms a part of the business of USFlower, the business of LatLawn is complementary to the business of USFlower, and the business of LatFish is neither part of nor complementary to that of USFlower. 　　Finally, a resident in one of the States also will be entitled to the benefits of the Convention with respect to income derived from the other State if the income is "incidental" to the trade or business conducted in the recipient's State of residence. Subparagraph 3(d) provides that income derived from a State will be incidental to a trade or business conducted in the other State if the production of such income facilitates the conduct of the trade or business in the other State. An example of incidental income is the temporary investment of working capital derived from a trade or business. Substantiality -- Subparagraphs 3(a)(iii) and (c) 　　As indicated above, subparagraph 3(a)(iii) provides that income that a resident of a State derives from the other State will be entitled to the benefits of the Convention under paragraph 3 only if the income is derived in connection with a trade or business conducted in the recipient's State of residence and that trade or business is "substantial" in relation to the income-producing activity in the other State. Subparagraph 3(c) provides that whether the trade or business of the income recipient is substantial will be determined based on all the facts and circumstances. These circumstances generally would include the relative scale of the activities conducted in the two States and the relative contributions made to the conduct of the trade or businesses in the two States. 　　In addition to this subjective rule, subparagraph 3(c) provides a safe harbor under which the trade or business of the income recipient may be deemed to be substantial based on three ratios that compare the size of the recipient's activities to those conducted in the other State. The three ratios compare: 　　(i) the value of the assets in the recipient's State to the assets used in the other State; 　　(ii) the gross income derived in the recipient's State to the gross income derived in the other State; and 　　(iii) the payroll expense in the recipient's State to the payroll expense in the other State. 　　The average of the three ratios with respect to the preceding taxable year must exceed 10 percent, and each individual ratio must exceed 7.5 percent. If any individual ratio does not exceed 7.5 percent for the preceding taxable year, the average for the three preceding taxable years may be used instead. Thus, if the taxable year is 2002, the preceding year is 2001. If one of the ratios for 2001 is not greater than 7.5 percent, the average ratio for 1999, 2000, and 2001 with respect to that item may be used. 　　The term "value" also is not defined in the Convention. Therefore, this term also will be defined under U.S. law for purposes of determining whether a person deriving income from United States sources is entitled to the benefits of the Convention. In such cases, "value" generally will be defined using the method used by the taxpayer in keeping its books for purposes of financial reporting in its country of residence. See Treas. Reg. 1.884-5(e)(3)(ii)(A). 　　Only items actually located or incurred in the two Contracting States are included in the computation of the ratios. If the person from whom the income in the other State is derived is not wholly-owned by the recipient (and parties related thereto) then the items included in the computation with respect to such person must be reduced by a percentage equal to the percentage control held by persons not related to the recipient. For instance, if a United States corporation derives income from a corporation in Latvia in which it holds 80 percent of the shares, and unrelated parties hold the remaining shares, for purposes of subparagraph 3(c) only 80 percent of the assets, payroll and gross income of the company in Latvia would be taken into account. 　　Consequently, if neither the recipient nor a person related to the recipient has an ownership interest in the person from whom the income is derived, the substantiality test always will be satisfied (the denominator in the computation of each ratio will be zero and the numerator will be a positive number). Of course, the other two prongs of the test under paragraph 3 would have to be satisfied in order for the recipient of the item of income to receive treaty benefits with respect to that income. For example, assume that a resident of Latvia is in the business of banking in Latvia. The bank loans money to unrelated residents of the United States. The bank would satisfy the substantiality requirement of this subparagraph with respect to interest paid on the loans because it has no ownership interest in the payors. Paragraph 4 　　Paragraph 4 provides that a resident of one of the States that is not otherwise entitled to the benefits of the Convention may be granted benefits with respect to income arising in the other Contracting State under the Convention if the competent authority of the State from which benefits are claimed so determines. This discretionary provision is included in recognition of the fact that, with the increasing scope and diversity of international economic relations, there may be cases where significant participation by third country residents in an enterprise of a Contracting State is warranted by sound business practice or long-standing business structures and does not necessarily indicate a motive of attempting to derive unintended Convention benefits. 　　The competent authority of a State will base a determination under this paragraph on whether the establishment, acquisition, or maintenance of the person seeking benefits under the Convention, or the conduct of such person's operations, has or had as one of its principal purposes the obtaining of benefits under the Convention. Thus, persons that establish operations in one of the States with the principal purpose of obtaining the benefits of the Convention ordinarily will not be granted relief under paragraph 4. 　　The competent authority may determine to grant all benefits of the Convention, or it may determine to grant only certain benefits. For instance, it may determine to grant benefits only with respect to a particular item of income in a manner similar to paragraph 3. Further, the competent authority may set time limits on the duration of any relief granted. 　　It is assumed that, for purposes of implementing paragraph 4, a taxpayer will not be required to wait until the tax authorities of one of the States have determined that benefits are denied before he will be permitted to seek a determination under this paragraph. In these circumstances, it is also expected that if the competent authority determines that benefits are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty provision or the establishment of the structure in question, whichever is later. Paragraph 5 　　Paragraph 5 provides that the term "recognized stock exchange" means 　　(a) in the United States, the NASDAQ System owned by the National Association of Securities Dealers, and any stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934; and 　　(b) in Latvia, the Riga Stock Exchange (Rigas Fondu Birza), and any other stock exchanges approved by the State Authorities. 　　In addition, subparagraph (c) of paragraph 5 provides for the competent authorities to agree upon any other recognized stock exchanges. Other exchanges, including exchanges located in third countries, may be recognized for this purpose by agreement of the competent authorities. Paragraph 6 　　Paragraph 6 provides additional authority to the competent authorities (in addition to that of Article 26 (Mutual Agreement Procedure)) to consult together to develop a common application of the provisions of this Article, including the publication of regulations or other public guidance. The competent authorities shall, in accordance with the provisions of Article 27 (Exchange of Information and Administrative Assistance) exchange such information as is necessary to carry out the provisions of the Article. ARTICLE 24 Relief from Double Taxation 　　This Article describes the manner in which each Contracting State undertakes to relieve double taxation. The United States uses the foreign tax credit method both under internal law, and by treaty. Under Latvian law, Latvia uses a foreign tax credit for purposes of the enterprise tax and the personal income tax. Under Article 24, Latvia allows a credit for both taxes. Paragraph 1 　　The United States agrees, in paragraph 1, to allow to its citizens and residents a credit against U.S. tax for income taxes paid or accrued to Latvia. Paragraph 1(a), by referring to "Latvian tax", which is the term used in Article 2 (Taxes Covered) to describe Latvia's taxes covered, also makes clear that Latvia's covered taxes are to be treated as income taxes under Article 24, for U.S. foreign tax credit purposes. The provision of a credit for these taxes is based on the Treasury Department's review of Latvia's laws. 　　The credit under the Convention is allowed in accordance with the provisions and subject to the limitations of U.S. law, as that law may be amended over time, so long as the general principle of this Article (i.e., the allowance of a credit) is retained. Thus, although the Convention provides for a foreign tax credit, the terms of the credit are determined by the provisions, at the time a credit is given, of the U.S. statutory credit. 　　As indicated, the U.S. credit under the Convention is subject to the various limitations of U.S. law (see Code sections 901 - 908). For example, the credit against U.S. tax generally is limited to the amount of U.S. tax due with respect to net foreign source income within the relevant foreign tax credit limitation category (see Code section 904(a) and (d)), and the dollar amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g., Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits and other inter-year adjustments. When the alternative minimum tax is due, the alternative minimum tax foreign tax credit generally is limited in accordance with U.S. law to 90 percent of alternative minimum tax liability. Furthermore, nothing in the Convention prevents the limitation of the U.S. credit from being applied on a per-country basis (should internal law be changed), an overall basis, or to particular categories of income (see, e.g., Code section 865(h)). 　　Subparagraph (b) provides for a deemed-paid credit, consistent with section 902 of the Code, to a U.S. corporation in respect of dividends received from a Latvian corporation, of which the U.S. corporation owns at least 10 percent of the voting stock. This credit is for the tax paid by the Latvian corporation on the profits out of which the dividends are considered paid. Paragraph 2 　　Paragraph 2 contains the rules under which Latvia will avoid double taxation under the Convention. Under subparagraph (a) of this paragraph, Latvia agrees to allow a credit to a resident of Latvia deriving income from the United States for United States tax paid (as defined in subparagraph 1(a) of Article 2), to the extent it is paid in accordance with the Convention. The credit is for the full amount of United States tax, but not to exceed the Latvian tax on that income. The provision does not apply with respect to United States tax imposed on a resident of Latvia by reason of that person's U.S. citizenship, under the saving clause in paragraph 4 of Article 1 (General Scope). The paragraph also specifies that, consistent with paragraph 2 of Article 1, if a more favorable treatment is provided under Latvian law, that treatment will take precedence over the credit provided in the Convention. 　　Subparagraph (b) provides for a deemed-paid credit to a Latvian corporation in respect of dividends received from a corporation resident in the United States of which the Latvian corporation controls, directly or indirectly, at least 10 percent of the voting power. This credit is for the tax paid by the U.S. corporation on the profits out of which the dividends are paid, in addition to the U.S. tax paid by the Latvian corporation on the dividend itself. Paragraph 3 　　For the purposes of allowing relief from double taxation pursuant to this Article, income derived by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with this Convention (other than solely by reason of citizenship in accordance with paragraph 4 of Article 1 (General Scope)) shall be deemed to arise in that other State. Except as provided in Article 13 (Capital Gains), the preceding sentence is subject to such source rules in the domestic laws of the Contracting States as apply for purposes of limiting the foreign tax credit. Relation to Other Articles 　　By virtue of the exceptions in subparagraph 5(a) of Article 1 (General Scope), this Article is not subject to the saving clause of paragraph 4 of Article 1. Thus, the United States will allow a credit to its citizens and residents in accordance with the Article, even if such credit were to provide a benefit not available under the Code. ARTICLE 25 Nondiscrimination 　　This Article assures that nationals of a Contracting State, in the case of paragraph 1, and residents of a Contracting State, in the case of paragraphs 2 through 5, will not be subject, directly or indirectly, to discriminatory taxation in the other Contracting State. For this purpose, nondiscrimination means providing national treatment. Not all differences in tax treatment, either as between nationals of the two States, or between residents of the two States, are violations of this national treatment standard. Rather, the national treatment obligation of this Article applies only if the nationals or residents of the two States are comparably situated. 　　Each of the relevant paragraphs of the Article provides that two persons that are comparably situated must be treated similarly. Although the actual words differ from paragraph to paragraph (e.g., paragraphs 1 and 2 refer to two persons "in the same circumstances," paragraph 3 refers to two enterprises "carrying on the same activities" and paragraph 5 refers to two enterprises that are "similar"), the common underlying premise is that if the difference in treatment is directly related to a tax-relevant difference in the situations of the domestic and foreign persons being compared, that difference is not to be treated as discriminatory (e.g., if one person is taxable in a Contracting State on worldwide income and the other is not, or if tax may be collectible from one person at a later stage, but not from the other, distinctions in treatment would be justified under paragraph 1). Other examples of such factors that can lead to nondiscriminatory differences in treatment will be noted in the discussions of each paragraph. 　　The operative paragraphs of the Article also use different language to identify the kinds of differences in taxation treatment that will be considered discriminatory. For example, paragraphs 1, 2 and 5 speak of "any taxation or any requirement connected therewith that is other or more burdensome," while paragraph 3 specifies that a tax "shall not be less favorably levied." Regardless of these differences in language, only differences in tax treatment that materially disadvantage the foreign person relative to the domestic person are properly the subject of the Article. Paragraph 1 　　Paragraph 1 provides that a national of one Contracting State may not be subject to taxation or connected requirements in the other Contracting State that are different from, or more burdensome than, the taxes and connected requirements imposed upon a national of that other State in the same circumstances. As noted above, whether or not the two persons are both taxable on worldwide income is a significant circumstance for this purpose. Although, like the OECD Model, the text refers to "residence" rather than to "taxation on worldwide income," as a relevant circumstance, since, for most countries, worldwide taxation is based on residence, while in the United States it is based on citizenship, the intent of both approaches is clearly the same. This is confirmed by the last sentence of the paragraph, which states that the United States is not required to apply the same taxing regime to a national of Latvia who is not resident in the United States and a U.S. national who is not resident in the United States. United States citizens who are not residents of the United States but who are, nevertheless, subject to United States tax on their worldwide income are not in the same circumstances with respect to United States taxation as citizens of Latvia who are not United States residents. Thus, for example, Article 25 would not entitle a national of Latvia resident in a third country to taxation at graduated rates on U.S. source dividends or other investment income that applies to a U.S. citizen resident in the same third country. 　　A national of a Contracting State is afforded protection under this paragraph even if the national is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a third country is entitled, under this paragraph, to the same treatment in Latvia as a citizen of Latvia who is in similar circumstances (i.e., who is resident in a third State). The term "national" in relation to a Contracting State is defined in subparagraph 1(i) of Article 3 (General Definitions). The term includes both individuals and juridical persons. Paragraph 2 　　Paragraph 2 is found in the OECD Model Convention, but is not in any other U.S. income tax conventions. The paragraph requires both Contracting States to provide national treatment to stateless persons who are residents of either Contracting State. As with paragraph 1, the stateless person and the national to whom the stateless person is being compared must be in the same circumstances. One circumstance specifically mentioned in this context is residence, or, particularly in the case of the United States, taxation on worldwide income. Thus, for example, if a stateless person is resident in the United States, Latvia may not subject that person to other or more burdensome taxes than the taxes to which Latvian nationals are subjected by the Latvia.This rule will not apply, however, if a stateless person resident in the United States and a Latvian national resident in the United States are not in the same circumstances with respect to Latvian taxation. The two will be in the same circumstances if they are both subject to Latvian tax only on Latvian source income, and only at the rates provided for in the U.S.-Latvia treaty. The paragraph specifically provides that a U.S. national resident in Latvia , and who is subject to U.S.tax on worldwide income, is not in the same circumstances with respect to U.S. taxation as a stateless person who is resident in Latvia 　　The term "stateless person" is understood to refer to a person who is not considered as a national by any State under the operation of its law. This definition is derived from a 1954 multilateral Convention relating to the status of stateless persons. Under Article 29 of that Convention stateless persons must be accorded national treatment.