Relationship to Other Articles The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to paragraph 2 of Article 9 by virtue of the exceptions to the saving clause in paragraph 5(a) of Article 1. Thus, even if the statute of limitations has run, a refund of tax can be made in order to implement a correlative adjustment. Statutory or procedural limitations, however, cannot be overridden to impose additional tax, because paragraph 2 of Article 1 provides that the Convention cannot restrict any statutory benefit. ARTICLE 10 Dividends 　　Article 10 provides rules for the taxation of dividends paid by a resident of one Contracting State to a beneficial owner that is a resident of the other Contracting State. The article provides for full residence country taxation of such dividends and a limited source-State right to tax. Article 10 also provides rules for the imposition of a tax on branch profits by the State of source. Finally, the article prohibits a State from imposing a tax on dividends paid by companies resident in the other Contracting State, except in specific circumstances. Paragraph 1 　　The right of the country of residence of the beneficial owner of a dividend to tax dividends arising in the source country is preserved by paragraph 1, which permits a Contracting State to tax its residents on dividends beneficially owned by them and paid to them by a resident of the other Contracting State. For dividends from any other source paid to a resident, Article 22 (Other Income) grants the residence country exclusive taxing jurisdiction (other than for dividends attributable to a permanent establishment or fixed base in the other State). Paragraph 2 　　The State of source may also tax dividends beneficially owned by a resident of the other State, subject to the limitations in paragraph 2. Generally, the source State's tax is limited to 15 percent of the gross amount of the dividend paid. If, however, the beneficial owner of the dividends is a company resident in the other State that holds at least 10 percent of the voting shares of the company paying the dividend, then the source State's tax is limited to 5 percent of the gross amount of the dividend. Indirect ownership of voting shares (through tiers of corporations) and direct ownership of non-voting shares are not taken into account for purposes of determining eligibility for the 5 percent direct dividend rate. Shares are considered voting shares if they provide the power to elect, appoint or replace any person vested with the powers ordinarily exercised by the board of directors of a U.S. corporation. The Convention does not require that the 10-percent voting interest be held for a minimum period prior to the dividend payment date. 　　The benefits of paragraph 2 may be granted at the time of payment by means of reduced withholding at source. It also is consistent with the paragraph for tax to be withheld at the time of payment at full statutory rates, and the treaty benefit to be granted by means of a subsequent refund so long as such procedures are applied in a reasonable manner.. 　　Paragraph 2 does not affect the taxation of the profits out of which the dividends are paid. The taxation by a Contracting State of the income of its resident companies is governed by the internal law of the Contracting State, subject to the provisions of paragraph 5 of Article 25 (Nondiscrimination). 　　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 the dividend for purposes of Article 10 is the person to which the dividend income is attributable for tax purposes under the laws of the source State. Thus, if a dividend paid by a corporation that is a resident of one of the States (as determined under Article 4 (Resident)) 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 dividend is not entitled to the benefits of this Article. However, a dividend received by a nominee on behalf of a resident of that other State would be entitled to benefits. These limitations are confirmed by paragraph 12 of the OECD Commentaries to Article 10. See also, paragraph 24 of the OECD Commentaries to Article 1 (General Scope). 　　Companies holding shares through fiscally transparent entities such as partnerships are considered for purposes of this paragraph to hold their proportionate interest in the shares held by the intermediate entity. As a result, companies holding shares through such entities may be able to claim the benefits of subparagraph (a) under certain circumstances. The lower rate applies when the company's proportionate share of the shares held by the intermediate entity meets the 10 percent voting stock threshold. Whether this ownership threshold is satisfied may be difficult to determine and often will require an analysis of the partnership or trust agreement. 　　The flush text in paragraph 2 provides rules that modify the maximum rates of tax at source when a RIC or REIT paying the dividend is a U.S. person. The first sentence of the flush text denies the lower direct investment withholding rate of 5% in paragraph 2(a) for dividends paid by a U.S. Regulated Investment Company (RIC) or a U.S. Real Estate Investment Trust (REIT). The second sentence allows the benefit of the lower 15% withholding rate in paragraph 2(b) for dividends paid by a U.S. RIC. The third sentence of the flush text denies the benefits of both subparagraphs (a) and (b) of paragraph 2 to dividends paid by U.S. REITs in certain circumstances, allowing them to be taxed at the U.S. statutory rate (30 percent). Under this paragraph the United States limits the source tax on dividends paid by a REIT to the 15 percent rate when the beneficial owner of the dividend is an individual resident of Lithuania that owns a less than 10 percent interest in the REIT 　　The denial of the 5 percent withholding rate at source to all RIC and REIT shareholders, and the denial of the 15 percent rate to all but small individual shareholders of REITs is intended to prevent the use of these entities to gain unjustifiable source taxation benefits for certain shareholders resident in Lithuania. For example, a corporation resident in Lithuania that wishes to hold a diversified portfolio of U.S. corporate shares may hold the portfolio directly and pay a U.S. withholding tax of 15 percent on all of the dividends that it receives. Alternatively, it may acquire a diversified portfolio by purchasing shares in a RIC. Since the RIC may be a pure conduit, there may be no U.S. tax costs to interposing the RIC in the chain of ownership. Absent the special rule in paragraph 2, use of the RIC could transform portfolio dividends, taxable in the United States under the Convention at 15 percent, into direct investment dividends taxable only at 5 percent. 　　Similarly, a resident of Lithuania directly holding U.S. real property would pay U.S. tax either at a 30 percent rate on the gross income or at graduated rates on the net income. As in the preceding example, by placing the real property in a REIT, the investor could transform real estate income into dividend income, taxable at the rates provided in Article 10, significantly reducing the U.S. tax that otherwise would be imposed. To prevent this circumvention of U.S. rules applicable to real property, most REIT shareholders are subject to 30 percent tax at source. However, since a relatively small individual investor who might be subject to a U.S. tax of 15 percent of the net income even if he earned the real estate income directly, individuals who hold less than a 10 percent interest in the REIT remain taxable at source at a 15 percent rate. Paragraph 3 　　Paragraph 3 defines the term dividends for purposes of Article 10 broadly and flexibly. The definition is intended to cover all arrangements that yield a return on an equity investment in a corporation as determined under the tax law of the state of source, as well as arrangements that might be developed in the future. 　　The term dividends includes income from shares or other rights that are not debt-claims and that participate in profits. It also includes income derived from other corporate rights that is subjected to the same taxation treatment as income from shares by the domestic taxation laws of the Contracting State of which the company making the distribution is a resident. Thus, a constructive dividend that results from a non-arm's length transaction between a corporation and a related party is a dividend. The term "dividends" further specifically includes income from arrangements (including instruments denominated as debt claims) that carry the right to participate in profits, or that are determined by reference to profits, to the extent the income from the arrangement is characterized as a dividend under the law of the Contracting State in which the income arises. 　　In general, this definition has the effect of deferring to the source State's characterization of income as a dividend. It ensures, for example, that a payment denominated as interest that is made by a thinly capitalized corporation may be treated as a dividend to the extent that the debt is recharacterized as equity under the laws of the source State. In the case of the United States, the term "dividend" also includes amounts treated as a dividend under U.S. law upon the sale or redemption of shares or upon a transfer of shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-40 IRB 10 (sale of foreign subsidiary's stock to U.S. sister company is a deemed dividend to extent of subsidiary's and sister's earnings and profits). Further, a distribution from a U.S. publicly traded limited partnership, which is taxed as a corporation under U.S. law, is a dividend for purposes of Article 10. However, a distribution by a limited liability company ("LLC") is not recognized by the United States as a dividend and, therefore, is not a dividend for purposes of Article 10, provided the LLC is not characterized as an association taxable as a corporation under U.S. law. Paragraph 4 　　Paragraph 4 excludes from the general source country limitations under paragraph 2 dividends paid with respect to holdings that form part of the business property of a permanent establishment or a fixed base. Such dividends will be taxed on a net basis using the rates and rules of taxation generally applicable to residents of the State in which the permanent establishment or fixed base is located, as modified by the Convention. An example of dividends paid with respect to the business property of a permanent establishment would be dividends derived by a dealer in stock or securities from stock or securities that the dealer held for sale to customers. 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 dividends 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 5 　　Paragraph 5 permits a State to impose a branch profits tax on a company resident in the other State. The tax is in addition to other taxes permitted by the Convention. The term company is defined in paragraph 1(d) of Article 3 (General Definitions). Lithuania currently has no branch profits tax. 　　A State may impose a branch profits tax on a company if the company has income attributable to a permanent establishment in that State, derives income from real property in that State that is taxed on a net basis under Article 6, or realizes gains taxable in that State under paragraph 1 of Article 13. The tax, however, is limited to the aforementioned items of income that are included in the "dividend equivalent amount." 　　Paragraph 5 permits the United States generally to impose its branch profits tax on a corporation resident in Lithuania to the extent of the corporation's 　　(i) business profits that are attributable to a permanent establishment in the United States 　　(ii) income that is subject to taxation on a net basis because the corporation has elected under section 882(d) of the Code to treat income from real property not otherwise taxed on a net basis as effectively connected income and 　　(iii) gain from the disposition of a United States Real Property Interest, other than an interest in a United States Real Property Holding Corporation. 　　The United States may not impose its branch profits tax on the business profits of a corporation resident in Lithuania that are effectively connected with a U.S. trade or business but that are not attributable to a permanent establishment and are not otherwise subject to U.S. taxation under Article 6 or paragraph 1 of Article 13. 　　The term "dividend equivalent amount" used in paragraph 5 has the same meaning that it has under section 884 of the Code, as amended from time to time, provided the amendments are consistent with the purpose of the branch profits tax. Generally, the dividend equivalent amount for a particular year is the income described above that is included in the corporation's effectively connected earnings and profits for that year, after payment of the corporate tax under Articles 6, 7 or 13, reduced for any increase in the branch's U.S. net equity during the year or increased for any reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg. section 1.884-1. The dividend equivalent amount for any year approximates the dividend that a U.S. branch office would have paid during the year if the branch had been operated as a separate U.S. subsidiary company. In the case that Lithuania also enacts a branch profits tax, the base of its tax is limited to an amount that is analogous to the dividend equivalent amount. 　　The branch profits tax permitted by paragraph 5 shall not exceed five percent of the portion of the profits of the company subject to tax in the other State. In the United States this is the dividend equivalent amount of such profits and in Lithuania this would be an amount analogous to the dividend equivalent amount. The five percent rate was chosen to be consistent with the direct investment dividend withholding rate. 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 Lithuania 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).