Paragraph 2 　　Paragraph 2 deals with the taxation of a pension paid by or from the public funds of one of the States or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority in the discharge of governmental functions. Subparagraph (a) provides that such a pension is taxable only in that State.Subparagraph (b) provides an exception under which such a pension is taxable only in the other State if the individual is a resident of, and a national of, that other State. Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When benefits paid by a State in respect of services rendered to that State or a subdivision or authority are in the form of social security benefits, however, those payments are covered by paragraph 2 of Article 18 (Pensions, Social Security, Annuities, Alimony, and Child Support). As a general matter, the result will be the same whether Article 18 or 19 applies, since social security benefits are taxable exclusively by the source country and so, as a general matter, are government pensions. The result will differ only when the payment is made to a citizen and resident of the other Contracting State, who is not also a citizen of the paying State. In such a case, social security benefits continue to be taxable at source while government pensions become taxable only in the residence country. 　　The phrase "functions of a governmental nature" is not defined. In general it is understood to encompass functions traditionally carried on by a government. It generally would not include functions that commonly are found in the private sector (e.g., education, health care, utilities). Rather, it is limited to functions that generally are carried on solely by the government (e.g., military, diplomatic service, tax administrators) and activities that directly support the carrying out of those functions. 　　The use of the phrase "paid from the public funds of a Contracting State" is intended to clarify that remuneration and pensions paid by such entities as government-owned corporations are covered by the Article, as long as the other conditions of the Article are satisfied. Relation to Other Articles 　　Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for permanent residence there (i.e., in the United States, a "green card" holder). Thus, a resident of Latvia, who in the course of performing functions of a governmental nature becomes a resident of the United States (but not a permanent resident), would be entitled to the benefits of this Article. However, an individual who receives a pension paid by the Government of Latvia in respect of services rendered to that Government is taxable on that pension only in Latvia unless the individual is a U.S. citizen or acquires a U.S. green card. ARTICLE 20 Students, Trainees and Researchers 　　This Article deals with visiting students, trainees and researchers. Unlike the U.S. Model, which deals only with maintenance, education or training payments that arise outside the host State, the Article also provides limited earned income exemption for persons covered by the Article, in order to reflect the particular economic and cultural relationships in this area between the United States and Latvia. Paragraph 1 　　Paragraph 1 of this Article generally provides that a resident of a Contracting State who visits the other Contracting State for the primary purpose of studying at a university or other recognized educational institution, securing training in a professional specialty, or studying or doing research as the recipient of a grant from a government or a charitable institution shall be exempt from tax in that Contracting State with respect to certain items of income derived during that period of study, research or training, provided certain conditions are met. Subparagraph 1(b) defines those exempt items of income as: 　　(1) payments from abroad for maintenance, education, study, research, or training; 　　(2) grants, allowances or awards; and 　　(3) income from personal services performed in that other Contracting State to the extent of $5,000 United States dollars or its equivalent in Latvian lats per taxable year. 　　The exemptions provided in paragraph 1 are available to the visiting student or trainee for a period not exceeding five taxable years from the beginning of the visit. The religious, charitable, etc. organization, described in subparagraph 1(a)(iii) is, for U.S. purposes, an organization that qualifies as tax-exempt under Code section 501(c)(3). 　　The exemption threshold in this, and subsequent paragraphs of the Article, applies in addition to, and not in lieu of, any allowances (e.g., personal exemptions and deductions) available to the person under the internal laws of the Contracting States. If the amount earned exceeds $5,000 per annum, under this paragraph, only the excess is taxable. 　　The reference in paragraph 1 to "primary purpose" is meant to describe individuals who are participating in a full time program of study, training or research. "Primary purpose" was substituted for the reference in the OECD Model to "exclusive purpose" to prevent too narrow an interpretation. It is not the intention, for example, to exclude full time students who, in accordance with their visas, may hold part-time employment. 　　A student must be studying at a university or other accredited educational institution to qualify for the benefits of this Article. An educational institution is understood to be an institution that normally maintains a regular faculty and normally has a regular body of students in attendance at the place where the educational activities are carried on. An educational institution will be considered to be accredited if it is accredited by an authority that generally is responsible for accreditation of institutions in the particular field of study. 　　The host-country exemption in the Article applies in subparagraph (b)(i) to payments received by the student, trainee or researcher from abroad for the purpose of his maintenance, education or training. A payment will be considered to be from abroad if the payer is located outside the host State. In all cases substance over form will prevail in determining the location and/or identity of the payer. Consequently, payments made directly or indirectly by the U.S. person with whom the visitor is training, but which have been routed through a non-host-country, such as, for example, a foreign affiliated organization, should not be treated as arising outside the United States for this purpose. Moreover, if a U.S. person reimbursed a foreign person for payments by the foreign person to the visitor, the payments by the foreign person would not be treated as arising outside the United States. Paragraph 2 　　Paragraph 2 deals with an individual resident of a Contracting State who is an employee of, or under contract with, an enterprise of that State, and who is temporarily present in the other Contracting State for the primary purpose of studying at an accredited educational institution in the host State or acquiring technical, professional or business experience from a person other than his employer. Such resident will be exempt from tax by the host State for a period of 12 consecutive months on compensation for personal services in an aggregate amount not exceeding $8,000 or its equivalent in Latvian lats. Paragraph 3 　　Paragraph 3 of the Article deals with an individual resident of a Contracting State who is temporarily present in the other Contracting State for a period not exceeding one year, as a participant in a program sponsored by the Government of the host State, for the primary purpose of training, research or study. Such an individual will be exempt from tax by the host State on compensation for personal services in respect of such training, research or study performed in the host State in an aggregate amount not exceeding $10,000 or its equivalent in Latvian lats. Paragraph 4 　　Paragraph 4 clarifies that, for the exemption of the preceding paragraphs to apply to income from research, the research must be undertaken in the public interest, and not primarily for the private benefit of a specific person or persons. For example, the exemption would not apply to a grant from a tax-exempt research organization to search for the cure to a disease if the results of the research become the property of a for-profit company. The exemption would not be denied, however, if the tax-exempt organization licensed the results of the research to a for-profit enterprise in consideration of an arm's length royalty consistent with its tax-exempt status. Relation to Other Articles 　　Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of Article 1) does not apply to this Article if the individual is neither a citizen of the host State nor admitted for permanent residence there. The saving clause, however, does apply with respect to citizens and permanent residents of the host State. Thus, a U.S. citizen who is a resident of Latvia and who visits the United States as a full time student at an accredited university will not be exempt from U.S. tax on remittances from abroad that otherwise constitute U.S. taxable income. A person, however, who is not a U.S. citizen, and who visits the United States as a student and remains long enough to become a resident under U.S. tax law, but does not become a permanent resident (i.e., does not acquire a green card), will be entitled to the full benefits of the Article. 　　Under subparagraph (g) of paragraph 3 of Article 26(Mutual Agreement Procedure), the competent authorities of the Contracting States may, by mutual agreement, increase any or all of the dollar thresholds in this article. ARTICLE 21 Offshore Activities 　　This Article deals exclusively with the taxation of activities carried on by a resident of one of the States on the continental shelf of the other State in connection with the exploration or exploitation of the natural resources of the shelf, principally activities connected with exploration for oil by offshore drilling rigs. This differs from the U.S. and OECD Models in which the income from these activities is subject to the standard rules found in the other articles of those Convention (e.g., the business profits and personal services articles). Paragraph 1 　　Paragraph 1 states that the provisions of Article 21 apply notwithstanding the provisions of Articles 4 through 20 of the Convention, which deal with the taxation of various classes of income. The most important of the other articles, in this context, over which this Article takes precedence, are Articles 5 (Permanent Establishment), 7 (Business Profits), 14 (Independent Personal Services) and 15 (Dependent Personal Services). For example, if a drilling rig of a U.S. enterprise is present on the continental shelf of Latvia for 5 months, and would not, therefore, constitute a permanent establishment under article 5, because of the 6-month construction site rule of paragraph 3 of that article, the rig would, nevertheless, be deemed to be a permanent establishment under paragraph 2 of this Article. Paragraph 2 　　Paragraph 2 provides that a resident of a Contracting State that is carrying on activities offshore in the other Contracting State, in connection with the exploration or exploitation of the seabed and subsoil and their natural resources, will be deemed to be carrying on a business in that other State through a permanent establishment or a fixed base situated in that other State. Thus, as noted above, even if under the rules of Articles 5 and 7 a resident of a Contracting State engaged in offshore drilling activities in the other State would not have a permanent establishment in the host State, according to paragraph 1, the rules of Articles 5 and 7 are overridden by this Article, and a permanent establishment would be deemed to exist under the rules of paragraph 2 of this Article. Whether a permanent establishment or fixed base would, in fact, be deemed to exist under this paragraph is subject to several conditions spelled out in paragraphs 3 and 4 of this Article. Paragraph 3 　　Paragraph 3, first of all, sets a time threshold test for the application of paragraph 2. The provisions of paragraph 2 (i.e., the presence of a permanent establishment) will apply when offshore activities are carried on in the host State for a period or periods aggregating more than 30 days in any 12-month period. 　　Subparagraphs (a) and (b) of paragraph 3 set further conditions for the application of paragraph 2. Under subparagraph (a), if a resident of a Contracting State is carrying on offshore activities in the other Contracting State, and another person that is associated with the firstmentioned resident is also carrying on offshore activities of essentially the same kind as the activities carried on by the first-mentioned resident, that other person's activities will be regarded as having been carried on by the first-mentioned resident. This rule is intended to prevent taxpayers from avoiding the time threshold by artificially splitting activities between different entities. Accordingly, the rule will not apply, however, to the extent that the activities of the two persons are being carried on at the same time. If the principal and the related person each exceed the time threshold, both will be considered to have a permanent establishment. If the principal is present on the offshore sector for, say, 25 days, and the related party is present for 10 days, during which time period the principal is not present, the principal will have a permanent establishment, but the related party will not. 　　Subparagraph (b) defines "associated persons" for purposes of subparagraph (a). Two persons will be considered as associated if one is controlled directly or indirectly by the other, or if both persons are controlled directly or indirectly by a third person or persons. Paragraph 4 　　Paragraph 4 identifies three classes of activities to which the provisions of this Article do not apply. Subparagraph (a) excludes the activities mentioned in paragraph 4 of Article 5 (Permanent Establishment) that do not give rise to a permanent establishment under that Article even if they are carried on through a fixed place of business. Subparagraph (b) excludes towing or anchor handling by ships primarily designed for that purpose, and other activities performed by such ships. Subparagraph (c) excludes any transport by ships or aircraft of supplies or personnel in international traffic. The activities described in subparagraphs (a) and (c) will be exempt from tax by the host country under Articles 7 (Business Profits) and 8 (Shipping and Air Transport), respectively, whether or not the income is attributable to a permanent establishment. Activities under group (b) are subject to the normal rules of Articles 5 and 7, i.e., if the income is not attributable to a permanent establishment there will be no host country tax. Paragraph 5 　　Paragraph 5 provides rules for the taxation of income from personal services performed in connection with offshore activities. Subparagraph (a) provides, as a general rule, that the host State may tax wages, salaries and similar remuneration derived by an individual who is a resident of the other State in respect of employment exercised in connection with the offshore activities described in the preceding paragraphs of the Article, to the extent that the duties are performed offshore in the host State. If, however, the employment is carried on offshore for an employer who is not a resident of the host State, and it is carried on for a period or periods aggregating 30 days or less in any 12-month period, the subparagraph provides that only the residence State of the employee, and not the host State, may tax the income of the employee. This may in certain circumstances give a taxing right that would not exist under Article 15 (Dependent Personal Services). 　　Subparagraph (b) of paragraph 5 deals with the taxation of income from employment exercised on a ship or aircraft that is transporting supplies or personnel to a site on the offshore sector where exploration or exploitation activities are being carried on, or between such sites. The rule of subparagraph (b) also applies to employment exercised aboard tugboats or similar vessels that are auxiliary to activities on the offshore sector. Under this subparagraph such employment income may be taxed in the Contracting State in which the employer is resident. This does not grant an exclusive taxing right to the residence State of the employer. Relation to Other Articles 　　This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States may tax the income of a resident of Latvia who is a U.S. citizen even if, under the provisions of this Article, a resident of Latvia would not be subject to U.S. tax. As with any benefit of the Convention, a person claiming a benefit under this Article must be entitled to the benefit under the provisions of Article 23 (Limitation on Benefits). ARTICLE 22 Other Income 　　Article 22 of the Convention is identical to Article 21 (Other Income) of the U.S. Model.The Article generally assigns taxing jurisdiction over income not dealt with in the other articles　(Articles 6 through 21) of the Convention to the State of residence of the beneficial owner of the income and defines the terms necessary to apply the Article. An item of income is "dealt with" another article if it is the type of income described in the Article and it has its source in a Contracting State. For example, all royalty income that arises in a Contracting State and that is beneficially owned by a resident of the other Contracting State is "dealt with" in Article 12 (Royalties). 　　Examples of items of income covered by Article 22 include income from gambling, punitive (but not compensatory) damages, covenants not to compete, and income from financial instruments to the extent derived by persons not engaged in the trade or business of dealing in such instruments (unless the transaction giving rise to the income is related to a trade or business, in which case it is dealt with under Article 7 (Business Profits)). The Article also applies to items of income that are not dealt with in the other articles because of their source or some other characteristic. For example, Article 11 (Interest) addresses only the taxation of interest arising in a Contracting State. Interest arising in a third State that is not attributable to a permanent establishment, therefore, is subject to Article 22. 　　Distributions from partnerships and distributions from trusts are not generally dealt with under Article 22 because partnership and trust distributions generally do not constitute income. Under the Code, partners include in income their distributive share of partnership income annually, and partnership distributions themselves generally do not give rise to income. Also, under the Code, trust income and distributions have the character of the associated distributable net income and therefore would generally be covered by another article of the Convention. See Code section 641 et seq. Paragraph 1 　　The general rule of Article 22 is contained in paragraph 1. Items of income not dealt with in other articles and beneficially owned by a resident of a Contracting State will be taxable only in the State of residence. This exclusive right of taxation applies whether or not the residence State exercises its right to tax the income covered by the Article. 　　The reference in this paragraph to "items of income beneficially owned by a resident of a Contracting State" rather than simply "items of income of a resident of a Contracting State," as in the OECD Model, is intended merely to make explicit the implicit understanding in other treaties that the exclusive residence taxation provided by paragraph 1 applies only when a resident of a Contracting State is the beneficial owner of the income. Thus, source taxation of income not dealt with in other articles of the Convention is not limited by paragraph 1 if it is nominally paid to a resident of the other Contracting State, but is beneficially owned by a resident of a third State. Paragraph 2 　　This paragraph provides an exception to the general rule of paragraph 1 for income, other than income from real property, that is attributable to a permanent establishment or fixed base maintained in a Contracting State by a resident of the other Contracting State. The taxation of such income is governed by the provisions of Articles 7 (Business Profits) and 14 (Independent Personal Services). Therefore, income arising outside the United States that is attributable to a permanent establishment maintained in the United States by a resident of Latvia generally would be taxable by the United States under the provisions of Article 7. This would be true even if the income is sourced in a third State. 　　There is an exception to this general rule with respect to income a resident of a Contracting State derives from real property located outside the other Contracting State (whether in the first-mentioned Contracting State or in a third State) that is attributable to the resident's permanent establishment or fixed base in the other Contracting State. In such a case, only the first-mentioned Contracting State (i.e., the State of residence of the person deriving the income) and not the host State of the permanent establishment or fixed base may tax that income. This special rule for foreign-situs property is consistent with the general rule, also reflected in Article 6 (Income from Immovable (Real) Property), that only the situs and residence States may tax real property and real property income. Even if such property is part of the property of a permanent establishment or fixed base in a Contracting State, that State may not tax it if neither the situs of the property nor the residence of the owner is in that State. Relation to Other Articles 　　This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States may tax the income of a resident of Latvia that is not dealt with elsewhere in the Convention, if that resident is a citizen of the United States. The Article is also subject to the provisions of Article 23 (Limitation on Benefits). Thus, if a resident of Latvia earns income that falls within the scope of paragraph 1 of Article 22, but that is taxable by the United States under U.S. law, the income would be exempt from U.S. tax under the provisions of Article 22 only if the resident satisfies one of the tests of Article 23 for entitlement to benefits.