DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF SOUTH AFRICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS (9) Paragraph 6 - Contributions, Earnings and Rollovers 　　Paragraph 6 provides a limited deferral of income where an individual works in one State (work State) and participates in a pension plan in the other State (plan State). Paragraph 6 is intended to prevent certain differences between U.S. and South African law regarding the treatment of pension contributions, earnings, and transfers from one plan to another from inhibiting the flow of personal services between the two States. 　　Paragraph 6 provides three types of benefits in the work State with respect to pension plans located in the plan State, to the extent such benefits are allowed by the work State with respect to its own tax favored pension plans: 　　(1) deductions (or exclusions) at the plan participant and employer level for contributions to a pension plan (subparagraph (a)); 　　(2) deferral of tax on undistributed earnings realized by the plan (subparagraph (b)); and 　　(3) deferral of tax on rollovers from the plan State plan to a work State plan (subparagraph (c)). Subparagraph 6(a) allows the individual a deduction (or exclusion) in computing his taxable income in the work State for contributions made by or on behalf of the individual to a plan in the plan State. Subparagraph 6(a) also provides that any benefits accrued under the plan or payments made to the plan by or on behalf of the individual's plan State employer during that period will not be treated as part of the individual's work State taxable income and will be allowed as a deduction in computing the profits of the employer in the work State. 　　Where the United States is the work State, the exclusion of the individual's contributions from the individual's income under this paragraph is limited to elective contributions not in excess of the amount specified in section 402(g). Deduction of employer contributions is subject to the limitations of sections 415 and 404. The section 404 limitation on deductions would be calculated as if the individual were the only individual covered by the plan. 　　Subparagraph 6(b) provides that income earned by the plan will not be taxable in the work State until and to the extent that the earnings are distributed. At such time, the provisions of paragraph 1 would apply to the distributions. 　　Subparagraph 6(c) permits the individual to withdraw funds from the plan in the plan State for the purpose of rolling over the amounts to a plan established in the work State without being subjected to tax currently in the work State with respect to such amounts. This benefit is subject to any restrictions on rollovers under the laws of the work State. For instance, in the United States a rollover ordinarily must be made within 60 days of the withdrawal from the first plan under section 408(d)(3)(A)(i) and section 402(c). For purposes of maintaining the taxexempt status of a U.S. pension arrangement receiving rolled-over amounts, the assets received will be treated as assets rolled over from a qualified plan. The benefits of this paragraph are allowed to an individual who is present in the work State to perform either dependent or independent personal services. 　　Subparagraph 6(d) provides that the individual can receive the benefits of this paragraph only if he was contributing to the plan in the plan State, or to a plan that was replaced by the plan to which he is contributing, before coming to the work State. The allowance of a successor plan would apply if, for example, the employer has been taken over by another corporation that replaces the existing plan with its own plan, rolling membership in the old plan over into the new plan. 　　In addition, the work State competent authority must determine that the recognized plan to which a contribution is made in the plan State generally corresponds to a pension plan recognized for tax purposes in the work State. It is understood that United States plans eligible for the benefits of paragraph 6 include qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), section 408(p) accounts, and other individual retirement accounts), section 403(a) qualified annuity plans, and section 403(b) plans. This list is narrower than the similar list provided under paragraph 1. This is because in the U.S. most non-qualified plans are not eligible for deductions of contributions by the employer and/or the participant. 　　Finally, the benefits under this paragraph are limited to the benefits that the work State accords to the work State plan most similar to that in the plan State, even if the plan State would have afforded greater benefits under its law. Thus, for example, if the work State has a cap on contributions equal to, say, five percent of the remuneration, and the plan State has a seven percent cap, the deduction is limited to five percent, even though the individual would have been allowed the larger deduction had he remained in the plan State. Paragraph 7 - Source 　　For purposes of the Treaty, the source of pension distributions, including distributions attributable to both contributions and earnings, is determined with reference to the place at which the services creditable under the pension arrangement are performed. For example, if a U.S. citizen works only in South Africa for a U.S. corporation with a U.S. pension plan, the distributions received by the U.S. citizen upon retirement will be completely foreign source, including the portion of the distributions attributable to earnings within the U.S. pension plan. Relationship to Other Articles 　　Pensions in respect of government service are generally covered by paragraph 2 of Article 19 (Government Service), and not by this Article. Exceptions to this rule are pensions in respect of government service in the form of social security benefits, which are covered by paragraph 2 of this Article. Thus, Article 19 covers section 457, 401(a) and 403(b) plans established for government employees. However, if a pension in respect of government service is not covered by Article 19 solely because the service is rendered in connection with any trade or business carried on by either State, the pension is covered by this Article. 　　Paragraphs 1 and 3 of Article 18 are subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, for example, a U.S. citizen who is a resident of South Africa, and receives a pension distribution from the United States, may be subject to full U.S. tax at graduated rates on the distribution, notwithstanding the rule in paragraph 1 that limits U.S. taxation of the distribution to 15 percent of the gross amount. Similarly, a U.S. citizen who is a resident of South Africa may be subject to U.S. tax on U.S. source annuities notwithstanding the fact that the annuity was purchased while the U.S. citizen was a resident of South Africa. 　　Paragraphs 2, 4, 5, 6 and 7 are excepted from the saving clause by virtue of paragraph 5(a) of Article 1. Thus, the United States will allow U.S. citizens and residents the benefits of paragraphs 2, 4, 5, 6 and 7. 　　　　　　　　　　　　　　ARTICLE 19 　　　　　　　　　　　　　Government Service 　　Paragraph 1 of Article 19 deals with the taxation of remuneration for services rendered to the Government of a Contracting State, including political subdivisions and local authorities of those States, in connection with Governmental activities. The paragraph applies both to government employees and to independent contractors engaged by governments to perform services for them. Paragraph 2 deals with the taxation of pensions in respect of the services referred to in paragraph 1. Paragraph 1 　　Subparagraph (a) provides that remuneration paid by, or out of funds created by one of the States or its political subdivisions or local authorities to an individual who is rendering services to that State, political subdivision or local authority is exempt from tax by the other State. Paragraph 3 makes clear that the services dealt with in paragraph 1 must be rendered in the discharge of governmental functions. 　　Subparagraph (b) provides an exception to the rule in subparagraph (a). Under this subparagraph, such payments are taxable exclusively in the other State (i.e., the host State) if the services are rendered in that other State and the individual is a resident of that State who is either a national of that State or a person who did not become resident of that State solely for purposes of rendering the services. For example, if the U.S. Embassy in Pretoria hires a South African citizen, or a South African resident who was already resident there before applying for the position in the Embassy, the salary that the person receives from the U.S. Embassy will be subject to tax only in South Africa. 　　The use of the phrase "paid by, or out of funds created by, 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. Paragraph 2 　　Paragraph 2 deals with the taxation of a pension paid by, or out of funds created by, 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 (i.e., the services dealt with in paragraph 1). 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 and Annuities). The result will usually 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. Paragraph 3 　　Paragraph 3 provides that payments in respect of services rendered in connection with a trade or business carried on by a Contracting State, or a political subdivision or local authority of that State are not covered by Article 19. This applies both to remuneration for services and to pensions. This is analogous to the language in the U.S. Model that limits the application of Article 19 to services rendered "in the discharge of functions of a governmental nature." This is understood to encompass functions traditionally carried on by a government. It would not include functions that commonly are found in the private sector (e.g., air transport, 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 remuneration that is carved out of coverage of Article 19 by the provisions of paragraph 3 is subject to the provisions of Articles 14 (Independent Personal Services), 15 (Dependent Personal Services), 16 (Directors' Fees), 17 (Entertainers and Sportsmen) or 18 (Pensions and Annuities). Thus, if a local government sponsors a basketball team in an international tournament, and pays the athletes from public funds, the compensation of the players is covered by Article 17 and not Article 19, because the athletes are not engaging in a governmental function when they play basketball. 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 the United States under Article 19 if the recipient of the benefits is neither a citizen of the United States, nor a person who has been admitted for permanent residence there (i.e., a "green card" holder). Thus, a South African resident who in the course of performing functions of a governmental nature for South Africa becomes a resident of the United States (but not a permanent resident), would be entitled to the benefits of this Article. Similarly, an individual who receives a pension paid by the Government of South Africa in respect of services rendered to that Government is taxable on that pension only in South Africa unless the individual is a U.S. citizen or acquires a U.S. green card. 　　　　　　　　　　　　　　ARTICLE 20 　　　　　Students, Apprentices and Business Trainees 　　This Article provides rules for host-country taxation of visiting students, apprentices or business trainees. Persons who meet the tests of the Article will be exempt from tax in the State that they are visiting with respect to designated classes of income. Several conditions must be satisfied in order for an individual to be entitled to the benefits of this Article. 　　First, the visitor must have been, either at the time of his arrival in the host State or immediately before, a resident of the other Contracting State. 　　Second, the purpose of the visit must be the full-time education or training of the visitor. Thus, if the visitor comes principally to work in the host State but also is a part-time student, he would not be entitled to the benefits of this Article, even with respect to any payments he may receive from abroad for his maintenance or education, and regardless of whether or not he is in a degree program. Whether a student is to be considered full-time will be determined by the rules of the educational institution at which he is studying. Similarly, a person who visits the host State for the purpose of obtaining business training and who also receives a salary from his host country employer for providing services would not be considered a trainee and would not be entitled to the benefits of this Article. 　　The host-country exemption in the Article applies only to payments received by the student, apprentice or business trainee for the purpose of his maintenance, education or training that arise outside the host State. A payment will be considered to arise outside the host State if the payor is located outside the host State. Thus, if an employer from South Africa sends an employee to the United States for training, the payments the trainee receives from abroad from his employer for his maintenance or training while he is present in the United States will be exempt from United States tax. In all cases substance over form will prevail in determining the identity of the payor. 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-U.S. source, such as, for example, a foreign bank account, would 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. 　　In the case of an apprentice or business trainee, the benefits of the Article will extend only for a period of one year from the time that the visitor first arrives in the host country. If, however, an apprentice or trainee remains in the host country for a second year, thus losing the benefits of the Article, he would not retroactively lose the benefits of the Article for the first year. 　　The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this Article with respect to an individual who is neither a citizen of the United States nor has been admitted for permanent residence there. The saving clause, however, does apply with respect to U.S. citizens and permanent residents. Thus, a U.S. citizen who is a resident of South Africa 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. 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. 　　　　　　　　　　　　　ARTICLE 21 　　　　　　　　　　　　　Other Income 　　Article 21 generally assigns taxing jurisdiction over income not dealt with in the other articles (Articles 6 through 20) 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 21 include income from gambling, punitive (but not compensatory) damages, covenants not to compete, and certain 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 21. 　　Distributions from partnerships and distributions from trusts are not generally dealt with under Article 21 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 21 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 to "items of income beneficially owned by a resident of a Contracting State" is intended to make clear 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 South Africa 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 Property (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 South Africa 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 22 (Limitation on Benefits). Thus, if a resident of South Africa earns income that falls within the scope of paragraph 1 of Article 21, 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 21 only if the resident satisfies one of the tests of Article 22 for entitlement to benefits.