authority is instructed in the proposed treaty to consider as its guideline whether the establishment, acquisition or maintenance of a company or the conduct of its operations has or had as one of its principal purposes the obtaining of benefits under the treaty. According to the Understanding, the competent authority may, therefore, determine under a given set of facts that a change in circumstances that would cause a company to cease to qualify for treaty benefits under the more objective anti-treaty shopping tests need not necessarily result in a denial of benefits. Such changed circumstances may include a change in the state of residence of a major shareholder of a company, the sale of part of the stock of a Dutch company to a person resident in another EC member country, or an expansion of a company's activities in other EC member countries, all under ordinary business conditions. The Understanding provides that the competent authority will consider these changed circumstances (in addition to other relevant factors normally considered in applying its discretion to allow treaty benefits) in determining whether such a company will remain qualified for treaty benefits with respect to income received from United States sources. If these changed circumstances are not attributable to tax avoidance motives, the Understanding provides that this also will be considered by the competent authority to be a factor weighing in favor of continued qualification.

It may be that, as a practical matter, a corporation that would satisfy the tests under the limitation on benefits article of the proposed treaty may generally also meet the definition of "qualified resident" for branch profits tax purposes in the Code. However, the proposed treaty and the Understanding provide extensive details not now provided under section 884 and the regulations thereunder. Moreover, some of those details obviously differ. Thus, it may be incorrect to assume that the tests in the proposed treaty and in the Code are substantially the same. For example, a Dutch corporation qualifies for treaty benefits under the proposed treaty if there is substantial and regular trading of its principal class of stock on a recognized stock exchange, as those concepts are defined in the proposed treaty, while that corporation would not meet the 1986 Act's public company test unless such company's stock were primarily traded on an established securities market (or the corporation were wholly owned by another corporation whose stock were primarily so traded), applying the rules of Treas. Reg. sec. 1.884-5T(d), which as noted above are different. Similarly, the derivative benefits rules, and the active business test and headquarters company tests in the proposed treaty require the United States to allow treaty benefits in cases where the Treasury Secretary arguably might exercise his discretion under section 884(d)(4)(D) to reach a different result in a particular case.

Article 27. Offshore Activities

This provision is similar to corresponding provisions in the U.SU.K. and U.S.-Norway treaties, and is intended to deal primarily with the activities of certain U.S. independent drilling contractors and their employees in the Dutch sector of the North Sea. As a practical matter, the provision makes it clear that the proposed treaty does not prevent the Netherlands from taxing the activities

of these drilling contractors or their employees under its domestic laws. While the provision was negotiated primarily to deal with activities of U.S. persons in the North Sea, it also makes it clear than Dutch activities in connection with activities on the U.S. continental shelf are subject to U.S. tax.

As discussed above in connection with Article 3 (General Definitions), the terms "Netherlands” and “United States" are defined to include the sea bed and sub-soil and their natural resources over which the countries exercise rights. Oil companies have entered into contracts with U.S. drilling companies and service and supply companies with respect to mineral exploration and exploitation in the North Sea through the use of movable drilling rigs. The proposed treaty limits the Netherlands's right to tax business profits of a U.S. company to profits that are attributable to a permanent establishment. The term "permanent establishment" may include "a building site or construction or installation project,... if it lasts more than twelve months," but it is not clear whether this language would encompass these drilling rigs. Furthermore, the activities of independent drilling contractors with respect to any one project frequently are completed in less than 12 months. In addition, individuals performing independent services in the North Sea who could establish that they did not themselves have a fixed base in the Netherlands might, under certain circumstances, be exempt from Dutch tax on their income from the performance of services. The proposed treaty provides that an enterprise of a treaty country which carries on offshore activities in the other country for more than 30 days in a calendar year generally will be deemed to be carrying on in respect of those activities a business in that other country through a permanent establishment therein. (For purposes of measuring the period of activity, activities carried on by associated enterprises on a single project are aggregated. Enterprises are regarded as associated based on ownership of one-third or more of the enterprises' capital.) Similarly, a resident of one country who carries on in the other country, for a continuous period of 30 days or more, offshore activities that are professional services or other activities of an independent character in the other country generally will be deemed to be performing those activities from a fixed base in the other country. Finally, employment income in connection with offshore activities carried on through a permanent establishment in a treaty country may be taxed in that country to the extent that the employment is exercised offshore in that country. Staff understands that this right to tax extends to employment income from an activity that is only deemed to give rise to a permanent establishment under the other provisions of this article. These special rules on offshore activities do not apply where the activities of a person otherwise constitute for that person a permanent establishment as defined in Article 5 (Permanent Establishment). Similarly, the rules under this article do not apply where offshore activities of the person otherwise would constitute a fixed base under Article 15 (Independent Personal Services).

The special offshore activities rules permit income from such activities, whether business profits or income from personal services, to be taxed by the country in which the activities are performed under the business profits or personal services articles. "Offshore

activities" means activities carried on offshore in connection with the exploration of exploitation of the sea bed and its sub-soil and their natural resources, situated in one of the treaty countries. Under the rule deeming a permanent establishment to exist by virtue of offshore activities, the term "offshore activities" does not include the preparatory and auxiliary activities, as listed in the proposed treaty's general definition of "permanent establishment," that would not themselves give rise to a permanent establishment (Article 5, paragraph 4). Nor for this purpose does the term "offshore activities" include towing or anchor handling by ships primarily designed for that purpose and any other activities performed by such ships, or the transport of supplies or personnel by ships or aircraft in international traffic. According the Understanding, it is understood that transport of supplies or personnel between one of the treaty countries and a location where activities are carried on offshore in that country, or between such locations, is to be considered as transport between places in that country, and therefore not as "international traffic."

If the offshore activities take place in the United States and U.S. tax is imposed on a Dutch national or resident in accordance with the proposed treaty on the resulting income, then the Netherlands is obliged to reduce its tax on this income, in conformity with the rules of the double taxation article (Article 25, paragraph 2), so long as documentary evidence is produced that the U.S. tax has been paid.

Article 28. Non-discrimination

The proposed treaty contains a comprehensive nondiscrimination article relating to all taxes of every kind imposed at the national, state, or local level. It is similar to the nondiscrimination article in the U.S. model treaty and to provisions that have been embodied in other recent U.S. income tax treaties. It is broader than the nondiscrimination provision of the present treaty. The nondiscrimination article of the proposed treaty differs from the U.S. and OECD models in its treatment of contributions to foreign pension plans. The proposed treaty differs from the U.S. model in protecting all legal persons deriving their status as such from the United States, not only U.S. citizens. In the latter regard, the nondiscrimination article of the proposed treaty more closely resembles that of the OECD model treaty.

In general, under the proposed treaty, one country cannot discriminate by imposing other or more burdensome taxes (or requirements connected with taxes) on nationals of the other country than it would impose on its nationals in the same circumstances. This provision applies whether or not the nationals in question are residents of the United States or the Netherlands. A U.S. national who is not a resident of the United States and a Dutch national who is not a resident of the United States are not deemed to be in the same circumstances for U.S. tax purposes.

Under the proposed treaty, neither country may tax a permanent establishment of an enterprise of the other country less favorably than it taxes its own enterprise carrying on the same activities. Consistent with the U.S. and OECD model treaties, however, a country is not obligated to grant residents of the other country any

personal allowances, reliefs, or reductions for tax purposes on account of civil status or family responsibilities which it grants to its own residents.

In a provision not contained in the present treaty, each country is required (subject to the arm's-length pricing rules of Articles 9(1) (Associated Enterprises), 12(5) (Interest), and 13(4) (Royalties)) to allow its residents to deduct interest, royalties, and other disbursements paid by them to residents of the other country under the same conditions that it allows deductions for such amounts paid to residents of the same country as the payor. The Technical Explanation indicates that term "other disbursements" is understood to include a reasonable allocation of executive and administrative expenses, research and development expenses, and other expenses incurred for the benefit of a group of related enterprises. The Technical Explanation confirms that the so-called "earnings stripping" rules under Code section 163(j) are consistent with this standard. An analogous rule applies to pension plan contributions on behalf of an employee resident (or temporarily present) in a treaty country, where the plan is recognized for tax purposes in the other country. In the United States, for example, a contribution on behalf of an employee to a "qualified pension plan" may be both deductible from the employer's income and excluded from the employee's gross income for the year of the contribution, while a contribution to a plan that is not qualified may not be deductible to the employer until the year that it is included in the income of the employee.58 The proposed treaty provides that in determining for tax purposes the employment income of a resident of, or temporary visitor to, a treaty country, that country may be required to treat a contribution to a pension plan recognized for tax purposes in the other country as a contribution paid to a pension plan that is recognized for tax purposes in the first country. In order for the first country to be so required, the employee must not be a national of the first country, and must have been contributing to the pension plan before becoming resident, or temporarily present, in the first country. In addition, the competent authority of the first country must agree that the pension plan corresponds to a pension plan recognized for tax purposes by that country.

The rule of nondiscrimination also applies under the proposed treaty to enterprises of one country that are owned in whole or in part by residents of the other country. Enterprises resident in one country, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other country, will not be subjected in the first country to any taxation or any connected requirement which is other or more burdensome than the taxation and connected requirements that the first country imposes or may impose on its similar enterprises.

The saving clause (which allows the country of residence or citizenship to tax notwithstanding certain treaty provisions) does not apply to the nondiscrimination article.

58 See Code secs. 402(a), 404(a), and 404A.

Article 29. Mutual Agreement Procedure

The proposed treaty contains the standard mutual agreement provision, with some variation, which authorizes the competent authorities of the United States and the Netherlands to consult together to attempt to alleviate individual cases of double taxation not in accordance with the proposed treaty. The saving clause of the proposed treaty does not apply to this article, so that the application of this article may result in waiver (otherwise mandated by the proposed treaty) of taxing jurisdiction by the country of citizenship or residence.

Under this article a resident of one country, who considers that the action of one or both of the countries will cause him to pay a tax not in accordance with the treaty, may present his case to the competent authority of the country of which he is a resident or citizen. The competent authority will then make a determination as to whether the objection appears justified. If the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, then that competent authority will endeavor to resolve the case by mutual agreement with the competent authority of the other country, with a view to the avoidance of taxation which is not in accordance with the treaty. The provision authorizes a waiver of the statute of limitations of either country so as to permit the issuance of a refund or credit notwithstanding the statute of limitations. The provision, however, contains its own limitations period, providing that the competent authority of the other country must have received notification that a case exists within 6 years from the end of the taxable year to which the case relates.

The six-year limitation on notification of the other competent authority is not the preferred U.S. treaty position nor is it in the present Dutch treaty. It is similar, however, to provisions in the U.S.-Canada and U.S.-Finland income tax treaties.59 The OECD model treaty includes a three-year limitation on the time that may lapse between the first notification of the action resulting in taxation not in accordance with the treaty, and the presentation of the case to the competent authority. However, that time limitation generally cannot run until the taxpayer is formally on notice that a problem exists. Under the proposed treaty, a refund may be denied absent some reason to believe that a refund case will exist before the end of 6 years from the tax year in question.

The competent authorities of the countries are to endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the treaty. They may also consult together for the elimination of double taxation in cases not provided for in the treaty.

Like the U.S. model treaty, the proposed treaty makes express provision for competent authorities to mutually agree on the allocation of income, deductions, credits, or allowances, the determination of the source of income, the characterization of particular items of income, the common meaning of a term, the application of penalties, fines, and interest under internal law, increases (where appropriate in light of economic or monetary developments) in the dollar thresholds in provisions such as the artistes and athletes ar

59 See also Article 26(2) of the proposed U.S.-Mexico income tax treaty.