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 Lithuania 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 Lithuania who is a U.S. citizen even if, under the provisions of this Article, a resident of Lithuania 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" in 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 Lithuania 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 firstmentioned 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 Lithuania 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 Lithuania 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. ARTICLE 23 Limitation of Benefits Purpose of Limitation on Benefits Provisions 　　The United States views an income tax treaty as a vehicle for providing treaty benefits to residents of the two Contracting States. This statement begs the question of who is to be treated as a resident of a Contracting State for the purpose of being granted treaty benefits. The Commentaries to the OECD Model authorize a tax authority to deny benefits, under substanceover- form principles, to a nominee in one State deriving income from the other on behalf of a third-country resident. In addition, although the text of the OECD Model does not contain express anti-abuse provisions, the Commentaries to Article 1 contain an extensive discussion approving the use of such provisions in tax treaties in order to limit the ability of third state residents to obtain treaty benefits. The United States holds strongly to the view that tax treaties should include provisions that specifically prevent misuse of treaties by residents of third countries.Consequently, all recent U.S. income tax treaties contain comprehensive Limitation on Benefits provisions. 　　A treaty that provides treaty benefits to any resident of a Contracting State permits "treaty shopping": the use, by residents of third states, of legal entities established in a Contracting State with a principal purpose to obtain the benefits of a tax treaty between the two Contracting States. It is important to note that this definition of treaty shopping does not encompass every case in which a third state resident establishes an entity in a treaty partner, and that entity enjoys treaty benefits to which the third state resident would not itself be entitled. If the third country resident had substantial reasons for establishing the structure that were unrelated to obtaining treaty benefits, the structure would not fall within the definition of treaty shopping set forth above. 　　Of course, the fundamental problem presented by this approach is that it is based on the taxpayer's intent, which a tax administrator is normally ill-equipped to identify. In order to avoid the necessity of making this subjective determination, Article 23 sets forth a series of objective tests. The assumption underlying each of these tests is that a taxpayer that satisfies the requirements of any of the tests probably has a real business purpose for the structure it has adopted, or has a sufficiently strong nexus to the other Contracting State (e.g., a resident individual) to warrant benefits even in the absence of a business connection, and that this business purpose or connection is sufficient to justify the conclusion that obtaining the benefits of the Treaty is not a principal purpose of establishing or maintaining residence. 　　For instance, the assumption underlying the active trade or business test under paragraph 3 is that a third country resident that establishes a "substantial" operation in Lithuania and that derives income from a related activity in the United States would not do so primarily to avail itself of the benefits of the Treaty; it is presumed in such a case that the investor had a valid business purpose for investing in Lithuania, and that the link between that trade or business and the U.S. activity that generates the treaty-benefited income manifests a business purpose for placing the U.S. investments in the entity in Lithuania. It is considered unlikely that the investor would incur the expense of establishing a substantial trade or business in Lithuania simply to obtain the benefits of the Convention. A similar rationale underlies other tests in Article 23. 　　While these tests provide useful surrogates for identifying actual intent, these mechanical tests cannot account for every case in which the taxpayer was not treaty shopping. Accordingly, Article 23 also includes a provision (paragraph 4) authorizing the competent authority of a Contracting State to grant benefits. While an analysis under paragraph 4 may well differ from that under one of the other tests of Article 23, its objective is the same: to identify investors whose residence in the other State can be justified by factors other than a purpose to derive treaty benefits. 　　Article 23 and the anti-abuse provisions of domestic law complement each other, as Article 23 effectively determines whether an entity has a sufficient nexus to the Contracting State to be treated as a resident for treaty purposes, while domestic anti-abuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit principles) determine whether a particular transaction should be recast in accordance with its substance. Thus, internal law principles of the source State may be applied to identify the beneficial owner of an item of income, and Article 23 then will be applied to the beneficial owner to determine if that person is entitled to the benefits of the Convention with respect to such income. Structure of the Article 　　The structure of the Article is as follows: Paragraph 1 states the general rule that residents are entitled to benefits otherwise accorded to residents only if the resident is a "qualified resident," as defined in the Article. Paragraph 2 lists a series of attributes of a qualified resident, the presence of any one of which will entitle that person to all the benefits of the Convention. Paragraph 3 provides that, with respect to a person that is not a qualified resident, and is, therefore, not entitled to benefits under paragraph 2, benefits nonetheless may be granted to that person with regard to certain types of income. Paragraph 4 provides that benefits also may be granted to a person that is not a qualified person if the competent authority of the State from which benefits are claimed determines that it is appropriate to provide benefits in that case. Paragraph 5 defines the term "recognized stock exchange" as used in paragraph 2(e). Paragraph 1 　　Paragraph 1 provides that a resident of a Contracting State will be entitled to the benefits otherwise accorded to residents of a Contracting State under the Convention only if it is a qualified resident as provided in the Article. The benefits otherwise accorded to residents under the Convention include all limitations on source-based taxation under Articles 6 through 22, the treaty-based relief from double taxation provided by Article 24 (Relief from Double Taxation), and the protection afforded to residents of a Contracting State under Article 25 (Nondiscrimination). Some provisions do not require that a person be a resident in order to enjoy the benefits of those provisions. These include paragraph 1 of Article 25 (Nondiscrimination), Article 26 (Mutual Agreement Procedure), and Article 28 (Diplomatic Agents and Consular Officers). Article 23 accordingly does not limit the availability of the benefits of these provisions. Paragraph 2 　　Paragraph 2 has seven subparagraphs, each of which describes a category of residents that can be a qualified resident and thus enjoy the benefits of the Convention. 　　It is intended that the provisions of paragraph 2 will be self-executing. Unlike the provisions of paragraph 4, discussed below, claiming benefits under paragraph 2 does not require advance competent authority ruling or approval. The tax authorities may, of course, on review, determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the benefits claimed. 　　Individuals -- Subparagraph 2(a) 　　Subparagraph (a) provides that individual residents of a Contracting State are qualified residents and thus will be entitled to all treaty benefits. If such an individual receives income as a nominee on behalf of a third country resident, benefits may be denied under the respective articles of the Convention by the requirement that the beneficial owner of the income be a resident of a Contracting State. 　　Contracting State -- Subparagraph 2(b) 　　Subparagraph (b) provides that certain governmental entities also will be entitled to all benefits of the Convention. These include the entities listed under paragraph 3(a) of Article 4 (Resident) which include a Contracting State, a political subdivision or a local authority thereof, or an agency or instrumentality of such State, subdivision or authority. Ownership/Base Erosion -- Subparagraph 2(c)(i) 　　Subparagraph 2(c) provides a two part test, the so-called ownership and base erosion test. This test applies under subparagraph 2(c) to a company that is a resident of a Contracting State. As described below, the rules of subparagraph 2(c) also apply, in accordance with subparagraph 2(d), to a trust or estate that is a resident of a Contracting State. Both prongs of the test must be satisfied for the resident to be entitled to benefits under subparagraph 2(c). 　　The ownership prong of the test, under clause (i), requires that on at least half the days of the taxable year the beneficial owners of at least 50 percent of each class of the company's shares be owned by qualified residents by reason of subparagraphs (a), (b), (e) or (f). The ownership may be indirect through other persons, each of which are, themselves, entitled to benefits under paragraph 2. 　　The base erosion prong of the test under subparagraph 2(c)(ii) requires that less than 50 percent of the company's gross income for the taxable year be paid or accrued, directly or indirectly, to persons who are not qualified residents of either State nor U.S. citizens (unless income is attributable to a permanent establishment located in either Contracting State), in the form of payments that are deductible for tax purposes in the entity's State of residence.Depreciation and amortization deductions, which are not "payments," are disregarded for this purpose. Payments made at arm's length in the ordinary course of business for services or tangible property also are disregarded for the purposes of applying the base-erosion rule. The purpose of this provision is to determine whether the income derived from the source State is in fact subject to the tax regime of either State. Consequently, payments to any qualified resident of either State or U.S. citizens, are not considered base eroding payments for this purpose (to the extent that these recipients do not themselves base erode to non-residents). 　　The term "gross income" is not defined in the Convention. Thus, in accordance with paragraph 2 of Article 3 (General Definitions), in determining whether a person deriving income from United States sources is entitled to the benefits of the Convention, the United States will ascribe the meaning to the term that it has in the United States. In such cases, "gross income" will be defined as gross receipts less cost of goods sold.