foundations. The proposed treaty, like the model, does not cover social security taxes.

(5) Like the present treaty, but unlike the U.S. model treaty, the proposed treaty covers the U.S. accumulated earnings tax and the personal holding company tax.

(6) By contrast with the present treaty, the proposed treaty introduces rules for determining when a person is a resident of either the United States or the Netherlands, and hence is entitled to benefits under the treaty. The proposed treaty, like the U.S. and OECD model treaties, provides tie-breaker rules for determining the residence for treaty purposes of "dual residents," or persons who, but for the tie-breaker rules, would have resident status in each of the treaty countries. These rules differ in some respects from the rules in the U.S. model treaty, but are consistent with rules in certain recent U.S. treaties. For example, under the proposed treaty, the Netherlands need not treat U.S. citizens or green card holders as U.S. residents unless they have a substantial presence, a permanent home, or an habitual abode in the United States. The U.S. model, by contrast, provides for the other country to reduce taxes on all U.S. citizens, regardless of where they reside. The United States frequently has been unable to negotiate coverage for nonresident citizens in its income tax treaties. Exceptions include treaties with Cyprus, Malta, Hungary, New Zealand, and Sweden. The proposed treaty, unlike the U.S. model treaty, does not treat a dual resident company as a resident of the country under whose laws it was created. Under the proposed treaty, any dual resident other than an individual will be treated as a resident of one or the other country only if the competent authorities can agree; if not, in the case of a company, the proposed treaty (unlike the U.S. model) expressly provides that the person generally shall be treated as a resident of neither country for purposes of enjoying treaty benefits, and hence is entitled to few treaty benefits.

(7) In the case of income derived by a partnership, the U.S. model treaty and U.S. treaties generally apply only to the extent that the income is subject to tax in a treaty country as the income of a resident, either in the partnership's hands or in the hands of its partners. The proposed treaty omits this language. The Treasury Department has indicated that this omission does not result in the application of a different rule, however.

(8) The proposed treaty defines the "United States" and "Netherlands" more broadly than the present treaty to include expressly the U.S. and Dutch portions of the continental shelf. These areas are now included in those definitions under the present treaty only because of changes in internal laws since the present treaty was drafted. Coupled with other treaty provisions, these definitions generally allow each country to tax certain income earned by residents of the other from the exploitation of natural resources, such as oil, found along the first country's portion of the continental shelf. Moreover, rights to the resources found there are treated as real property situated in that country under the proposed treaty. (9) The business profits article of the proposed treaty omits the force of attraction rules contained in the present treaty and the Code, providing instead that the business profits to be attributed to the permanent establishment shall include only the profits de

rived from the assets or activities of the permanent establishment. This is consistent with the U.S. model treaty.

(10) The proposed treaty, like the U.S. model treaty and similar to the present treaty, provides that profits of an enterprise of one treaty country from the operation of ships or aircraft in international traffic are taxable only in that country. However, unlike the U.S. model treaty, the proposed treaty generally does not include nonincidental bareboat leasing profits, or profits from the use or rental of containers and related equipment, in the category of profits to which this rule applies. Instead, they are covered by the business profits article.

(11) Like the associated enterprises article of the U.S. model treaty, the proposed treaty contains a "correlative adjustment" clause not found in the present treaty. Under the present treaty, each country may tax an enterprise resident in that country on profits that were, by virtue of its participation in the management or the financial structure of an enterprise of the other treaty country, reduced by non-arm's-length conditions agreed to or imposed upon the second enterprise. Under the correlative adjustment provision, the proposed treaty generally requires the other country to adjust any tax liability it previously imposed on an enterprise for profits reallocated to an associated enterprise by the other first country.

(12) Like the present treaty, but unlike the U.S. model and recent U.S. treaties, the proposed treaty omits language expressly permitting the use of internal law standards such as section 482 of the Code. The Treasury Department has indicated that this omission does not result in the application of a different rule than that applicable under the model, in light of current Treasury practice in the implementation of section 482.

(13) Under the proposed treaty, as under the model treaty, direct investment dividends (i.e., dividends paid to companies resident in the other country that own directly at least 10 percent of the voting shares of the payor) generally will be taxable by the source country at a rate no greater than 5 percent. The present treaty has a similar rate schedule, but in order to qualify for the direct dividend withholding rate, a higher ownership threshold must be met (either 25 percent stock ownership by one recipient corporation residing in the other country, or 25 percent ownership by a group of recipient corporations resident in that country each of which owns at least 10 percent), and must be met for the period ending on the date the dividend is paid and beginning at the start of the paying corporation's previous taxable year. (Different rules, discussed below, are provided for dividends from a regulated investment company (RIC), real estate investment trust (REIT), or Dutch investment organization (beleggingsinstelling).)

(14) Under the present treaty, the prohibition on source country tax on direct investment dividends exceeding 5 percent does not apply in certain cases where more than 25 percent of the gross income of the payor for the prior taxable year consisted of interest and dividends. The proposed treaty eliminates this rule, replacing it with rules similar to those adopted in recent treaties and protocols that allow source country tax in excess of 5 percent on direct investment dividends from a RIC or REIT. The proposed treaty al

lows a withholding rate of 15 percent on dividends if those dividends are paid by a RIC or a beleggingsinstelling, regardless of whether the RIC or beleggingsinstelling dividends are paid to a direct or portfolio investor. The proposed treaty eliminates the present treaty's reduction of U.S. withholding tax on dividends if those dividends are paid by a REIT, unless the dividend is beneficially owned by an individual Dutch resident holding a less than 25-percent interest in the REIT, or by a Dutch company that is a beleggingsinstelling, in which case the 15-percent rate applies, Dutch withholding taxes on dividends from a beleggingsinstelling generally are unrestricted to a similar extent if the beleggingsinstelling invests in real estate sufficiently to meet the relevant requirements for a U.S. corporation to be treated as a REIT.

(15) Unlike the present treaty as interpreted by the Treasury Department, the proposed treaty expressly permits the United States to impose the branch profits tax. However, under the proposed treaty, the branch tax only applies to dividend equivalent amounts with respect to profits earned after the proposed treaty takes effect; other recent treaties permit the taxation of dividend equivalent amounts with respect to all post-1986 profits. The present and proposed treaties also expressly prevent imposition of any other form of second-level withholding tax. The U.S. branch profits tax may be imposed at a rate not exceeding 5 percent under the proposed trea

ty.

(16) Although the proposed treaty, like the present treaty, the U.S. model, and several U.S. treaties, generally provides for absence of source country taxation on interest (including the branch level tax on excess interest deductions), the proposed treaty expressly allows the United States to impose withholding tax at the dividend rate on income from any arrangement, including debt obligations, carrying the right to participate in profits. Thus the United States can, consistent with the proposed treaty, impose withholding tax on deductible interest paid under an "equity kicker" loan. Similarly, the proposed treaty permits the Netherlands to impose withholding tax at the dividend rate on income from a profitsharing bond. There is no similar provision in the present treaty or the U.S. or OECD models. The internal laws of both the Netherlands and the United States (under a provision added to the Code in the Omnibus Budget Reconciliation Act of 1993) impose withholding tax in such cases. Moreover, it is understood that under the present treaty, the Netherlands imposes dividend withholding tax on payments under a profit-sharing bond.

(17) The interest article in the proposed treaty expressly provides that it does not interfere with the jurisdiction of the United States to tax under its internal law an excess inclusion with respect to a residual interest in a real estate mortgage investment conduit (REMIC). Currently, internal U.S. law applies regardless of treaties (such as the present treaty) that were in force when the REMIC provisions were enacted.

(18) Subject to exceptions, the present and proposed treaties expressly prevent imposition of U.S. tax on certain interest paid by Dutch corporations. The proposed treaty makes the exemption reciprocal and conforms it more closely to the U.S. model.

(19) Income from the rental or licensing of cinematographic films and films, tapes, and other means of reproduction for use in radio or television broadcasting is not treated as royalty income under the the proposed treaty, and, although not specified in the proposed treaty, the Treasury Department has indicated that such income is treated as business profits under the proposed treaty (Article 7). Under the present treaty, such income generally would be treated as royalties. Under both treaties, however, a treaty country generally would not be entitled to tax a resident of the other country on such income, unless the income was attributable to a permanent establishment in the first country.

(20) Unlike the royalties articles in the present treaty and the U.S. and OECD model treaties, the royalties article in the proposed treaty has a general limitation on the taxation of royalties paid by residents of the other country. The effect of this provision is in some cases to override the U.S. rule sourcing royalties, and therefore fixing primary tax jurisdiction, in the place of use. Except in cases where an enumerated exception applies, the proposed treaty generally prevents the United States from imposing withholding tax on royalties paid by Dutch residents to third-country residents, even if under the Code, such royalties are U.S. source income and, had the payor been a resident of any other country, would have been subject to a U.S. gross-basis tax. One of the exceptions allows the United States to impose tax on a royalty in the case of backto-back licenses, employing a passive Dutch intermediary, for the use of intangible property in the United States; this exception allows the United States to tax a royalty paid by a Dutch licensee or such rights to a third country resident, if the Dutch licensee has in turn licensed its rights to a U.S. resident or permanent establishment.

(21) The proposed treaty partially retains U.S. tax jurisdiction, under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), over gains of Dutch residents from the disposition of "U.S. real property interests," a term that includes not only real property but also certain stock and other interests indirectly representing real property. Dutch residents have been fully subject to FIRPTA, which in part conflicts with and overrides the present treaty, since 1985. However, the proposed treaty would give certain Dutch residents a step-up in basis for purposes of computing gain on disposition of the interests. This step-up would apply only to Dutch residents who, since June 18, 1980, have owned U.S. real property interests the gains from which would not have been taxable in the United States if the present treaty had not been overridden by FIRPTA. The step-up forgives U.S. tax on such gain attributable to the period prior to the date FIRPTA overrode the present treaty (January 1, 1985). A similar but more broadly applicable step-up was provided under the 1983 protocol to the U.S.Canada treaty, although that protocol (unlike the proposed treaty) was negotiated and came into force before the effective date of the FIRPTA treaty override.

(22) Similar to the U.S.-Canada treaty, the proposed treaty requires each treaty country to coordinate with the other country the tax rules that apply to a corporate reorganization or other case where a resident of the other country qualifies for nonrecognition

treatment in its country of residence. Under this rule each treaty country may be required to defer any tax that it would otherwise impose on an alienation by a resident of the other country, to the extent and for the period that tax would have been deferred if the alienator had been its own resident (but no longer and in no greater amount than in the other country). Deferral is only required to the extent that the competent authorities are satisfied that the tax ultimately can be collected.

(23) The proposed treaty, like the present treaty, permits the Netherlands to impose its statutory tax on gains from the disposition by a former Dutch resident, now resident in the United States, of stock in a Dutch resident company if the U.S. resident and related individuals own 25 percent or more of any class of stock in the Dutch company, and the U.S. resident was a Dutch resident within the previous 5 years. The Netherlands must allow a foreign tax credit for U.S. tax in such a case. The treaty gives the United States reciprocal taxation rights in this respect, although internal U.S. tax law generally would impose tax in this situation only in a limited class of cases involving tax avoidance.

(24) The proposed treaty provisions relating to independent personal services generally conform to those of the U.S. model treaty. Under the present treaty, independent personal services generally can be taxed in the country where the services are performed, unless the person earning the income is present in the source country less than 184 days during a taxable year. Under the proposed treaty, like the U.S. model treaty, independent personal services performed by a resident of one country in the other country can only be taxed by the source country if the income is attributable to a fixed base regularly available to the individual in the source country for the purpose of performing his or her activities.

(25) The proposed treaty prohibits source country tax on remuneration of a treaty country resident employed as a member of the regular complement of a ship or aircraft operating in international traffic. This is the same as the U.S. model provision, but differs from the present treaty (which provides no special rule for such employment income) and from the OECD model, which permits taxation in such case by the country in which the place of effective management of the employer is situated.

(26) Like some other U.S. treaties, the proposed treaty allows directors' fees and similar payments made by a company resident in one country to a resident of the other country to be taxed in the first country if the fees are paid for services performed in that country. The U.S. model treaty and the present treaty, on the other hand, treat directors' fees as personal service income. Under the U.S. model treaty, the country where the recipient resides generally has primary taxing jurisdiction over personal service income and the source country tax on directors' fees is limited. By contrast, under the OECD model treaty the country where the company is resident has full taxing jurisdiction over directors' fees and other similar payments the company makes to residents of the other treaty country, regardless of where the services are performed. Thus, the proposed treaty represents a compromise between the U.S. model and the OECD model treaty positions.