transfer. For purposes of determining whether the alienation qualified as a nonrecognition transaction, Code section 897 is to be disregarded. Thus, the alienation may qualify notwithstanding the rules of section 897(d) or (e), which in some cases may have overridden nonrecognition treatment in the case of the exchange of a U.S. real property interest for an interest the sale of which would not be subject to U.S. tax.

The special rule does not apply, however, unless certain residence requirements were met during the period before the disposition of the asset. First, between January 1, 1992 and the date of alienation, the resident, and any other person who owned the asset during that period, must have been entitled to Article 14 treaty benefits under the limitation on benefits article (Article 26) of the proposed treaty. Second, during the period from June 18, 1980 through December 31, 1991, each person who owned the asset must have been a resident of the United States or the Netherlands under the present treaty.

In addition, the special rule does not apply to several kinds of transactions. First, it does not apply to alienation of an asset that, at any time on or after June 18, 1980, formed part of the property of a permanent establishment (or pertained to a fixed base) of a resident of one of the countries that was situated in the other country. Second, it does not apply to an alienation by a resident of one country of an asset that was acquired directly or indirectly by any person on or after June 18, 1980, in a transaction that did not qualify for nonrecognition (determined without regard to Code section 897), or in a transaction in which it was acquired in exchange for an asset that was acquired in a transaction that did not qualify for nonrecognition (determined without regard to Code section 897). Third, it does not apply to an alienation of an asset that was acquired, directly or indirectly, by any person on or after June 18, 1980, in exchange for described above in this paragraph, or the alienation of which could have been taxed by the other country under the present treaty.

Other capital gains

Gains from the alienation of personal that forms part of the business property of a permanent establishment which an enterprise of one country has in the other country, or gains from the alienation of personal property pertaining to a fixed base available to a resident of one country in the other country for the purpose of performing independent personal services, including gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such a fixed base, may be taxed in that other country.35 The Technical Explanation indicates that this article permits gains from the alienation by a resident of one country of an interest in a partnership, trust, or estate that has a permanent establishment situated in the other country to be treated as gain under this paragraph of the proposed treaty. Thus, the proposed treaty permits the United States to tax gain from the disposition

36 In such a case, the effect of the deferred payment rules and the deferred gain rules for determining U.S.-effectively connected income under the Code (sec 864(c)(6) and (7)) on Dutch residents eligible for treaty benefits are dealt with in Article 24 (Basis of Taxation) of the proposed treaty.

of an interest in a partnership that has a U.S. permanent establishment, regardless of whether the partnership interest is an interest in U.S. real property.36

Notwithstanding the foregoing rules on gains in connection with permanent establishments and fixed bases, the proposed treaty restricts the taxation of the gain on the deemed alienation of property (as provided under Dutch internal law) that is deemed to be used in a permanent establishment or fixed base under Article 27 (Offshore Activities) of the proposed treaty. This restriction applies to gains from the deemed alienation of tangible depreciable personal property, if such property either forms part of the business property of a permanent establishment which an enterprise of one treaty country is deemed to have in the other treaty country under paragraph 3 of the offshore activities article (Article 27), or pertains to a fixed base deemed to be available to a resident of one of the treaty countries under paragraph 5 of that article for the purpose of performing independent personal services. Under the proposed treaty, such gains are taxable only in the residence country if the period during which the property has the above-mentioned nexus to the deemed permanent establishment or fixed base is less than 3 months, and the actual alienation of the property does not take place within one year after the date of its deemed alienation. If this restriction applies, the proposed treaty allows the source country, in taxing the income of the deemed permanent establishment or fixed base, to compute depreciation for the property based on the lower of book or market value as of the date that the property became part of the business property of the permanent establishment or first pertained to the fixed base.

Gains of an enterprise of one of the treaty countries from the alienation of ships or aircraft operated in international traffic, and gains from alienation of personal property pertaining to the operation of such ships and aircraft operated in international traffic, are taxable only in the residence country of the person carrying on that enterprise. Gains described in the royalties article-i.e., gains derived from alienation of certain intangible property contingent on productivity, use, or disposition-are taxable in accordance with that article (Article 13).

Generally, gains from the alienation of any property other than that discussed above will be taxable under the proposed treaty only in the country where the alienator is a resident. As under the present treaty, however, this rule does not in all cases prevent the Netherlands from imposing its tax on gains from the disposition of a substantial interest in a Dutch corporation. Under the proposed treaty the Netherlands may tax gains, derived by an individual U.S. resident who resided in the Netherlands at any time during the preceding 5-year period, from the alienation of shares or other corporate rights participating in profits in a Dutch resident company, if at the time of the alienation the U.S. resident owns, either alone or together with related individuals, at least 25 percent of any class of the company's shares. For this purpose, the term “related individuals" means the alienator's spouse and his relatives (by blood or marriage) in the direct line (ancestors and lineal de

36 See Rev. Rul. 91-32, 1991-1 C.B. 107.

scendants) and his relatives (by whole or half blood or by marriage) in the second degree in the collateral line (siblings or their spouses).

By its terms this provision of the proposed treaty gives the United States and the Netherlands reciprocal taxation rights and obligations. However, it currently applies chiefly to Dutch tax on U.S. residents, because present internal U.S. tax law generally does not impose tax based on these criteria.

În corporate reorganizations and other cases, the proposed treaty, similar to the U.S.-Canada income tax treaty, requires each treaty country to coordinate its nonrecognition rules with those of the other country to some extent, in a case where a resident of the other country qualifies for nonrecognition treatment in its country of residence. This coordination rule imposes requirements on one treaty country when a resident of the other treaty country alienates property in the course of a corporate organization, reorganization, amalgamation, division or similar transaction, and the tax law of the second treaty country provides for nonrecognition or deferral of profit, gain, or income with respect to the alienation. In that case, the first treaty country generally is required to defer any tax that would it would otherwise impose with respect to the alienation, to the extent and for the period that tax would have been deferred if the alienator had been its own resident (but for no longer and in no greater amount than in the other country).37

However, this deferral is only required provided that the tax can be collected upon a later alienation, and the collection of the amount of tax in question upon the later alienation is secured to the satisfaction of the competent authorities of both countries. The competent authorities are to develop procedures for implementing this rule. According to the Understanding, it is understood that the limitation of source country tax does not apply to an alienation by a treaty country resident if the tax that would otherwise be imposed on such alienation by the other country cannot reasonable be imposed or collected at a later time. For example, under U.S. law, a foreign corporation that qualifies as a U.S. real property holding corporation is taxed in some circumstances if it transfers its assets to a U.S. corporation in a reorganization. In such a case, the Understanding provides that only if the shareholders of the foreign corporation agree to reduce basis (if and only to the extent available) by closing agreement can the tax that otherwise would be imposed on the alienation be reasonably imposed or collected at a later time.

Article 15. Independent Personal Services

Services income in general

The United States taxes the income of a nonresident alien at the regular graduated rates if the income is effectively connected with the conduct of a trade or business in the United States by the individual. (See discussion of U.S. taxation of business profits under Article 7 (Business Profits).) The performance of personal services

37 Nothing in this limitation prevents, for example, the United States from taxing the U.S. subsidiary of a Dutch corporation on the distribution of its assets in complete liquidation, as provided in section 367(eX2).

within the United States can be a trade or business within the United States (Code sec. 864(b)).

Under the Code, the income of a nonresident alien from the performance of personal services in the United States is excluded from U.S. source income, and therefore not taxed by the United States in the absence of a U.S. trade or business, if certain criteria are met. The criteria are: (1) the individual is not in the United States for over 90 days during a taxable year, (2) the compensation does not exceed $3,000, and (3) the services are performed as an employee of or under a contract with a foreign person not engaged in a trade or business in the United States, or they are performed for a foreign office or place of business of a U.S. person.

The proposed treaty limits the right of a country to tax income from the performance of personal services by a resident of the other country. Under the proposed treaty (unlike the present treaty), income from the performance of independent personal services (i.e., services performed as an independent contractor, not as an employee) is treated separately from income from the performance of dependent personal services.

Independent personal services

Income from the performance of independent personal services by a resident of one country will be exempt from tax in the other country, unless the services are performed outside the residence country, and the individual performing the services has a fixed base regularly available to him in the second country for the purpose of performing the activities. In that case, the nonresidence country can tax only that portion of the individual's income which is attributable to the fixed base. The effect of the deferred payment rules and the deferred gain rules for determining U.S.-effectively connected income under the Code (sec. 864(c)(6) and (7)) on Dutch residents eligible for treaty benefits are dealt with in Article 24 (Basis of Taxation) of the proposed treaty.

The proposed treaty generally provides a broader exemption from source country tax for income from independent personal services than Article XVI of the present treaty provides for income from personal services income other than employment income. Generally, under the present treaty, an exemption from tax in one country is available to a resident of the other country only if his stay in the first country does not exceed 183 days. Thus the present treaty does not contain the fixed base limitation found in the proposed treaty.

The exemption from source country tax provided in the proposed treaty for independent personal services income is somewhat different than that contained in either the OECD or the U.S. model treaties, which also differ as between themselves. The differences are as follows: Under the U.S. model, the nonresidence country may only tax income from independent personal services if the services are performed there; under the OECD model, the nonresidence country may tax income from services provided in the residence country, assuming that the fixed base requirement is otherwise met.

For purposes of this article, independent personal services include independent scientific, literary, artistic, educational, or teach

ing activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists, and accountants.

Article 16. Dependent Personal Services

Under the proposed treaty, wages, salaries, and other similar remuneration derived from services performed as an employee in one country (the source country) by a resident of the other country will be taxable only in the country of residence if three requirements are met: (1) the individual is present in the source country for fewer than 184 days during the taxable year concerned; (2) his employer is not a resident of the source country; and (3) the compensation is not borne by a permanent establishment or fixed base of the employer in the source country. This degree of limitation on source country taxation is consistent with the present treaty, as well as the U.S. and OECD models.

The proposed treaty provides that compensation derived from employment as a member of the regular complement of a ship or aircraft operated in international traffic may be taxed only in the employee's country of residence.

This article is modified in some respects for directors' fees (Article 17), pensions (Article 19), government service (Article 20), and income of entertainers or athletes (Article 18) and teachers or researchers (Article 21).

Article 17. Directors' Fees

Under the proposed treaty, directors' fees and other remuneration derived by a resident of one country for services rendered in the other country as a member of the board of directors, a bestuurder, or a commissaris of a company which is a resident of that other country may be taxed in that other country.38 However, the country where the recipient resides has exclusive taxing jurisdiction over directors' fees where the services are performed in that country.

This treaty rule for directors' fees differs from that of the present treaty and the U.S. model treaty. These generally treat directors' fees as personal service income. The proposed treaty rule also differs from the OECD model treaty, which places no limits on the ability of the country of residence of the company to tax the fees of that company's directors.

Article 18. Artistes and Athletes

Like the U.S. and OECD models, the proposed treaty contains a separate set of rules that apply to the taxation of income earned by entertainers (such as theater, motion picture, radio, or television "artistes," or musicians) and athletes. These rules apply notwithstanding the other provisions dealing with the taxation of income from personal services (Articles 14 and 15) and business profits (Article 7) and are intended, in part, to prevent entertainers and athletes from using the treaty to avoid paying any tax on their income earned in one of the countries.

38 These Dutch terms refer to members of, respectively, the board of managing directors, or the board of supervisory directors, of a Dutch company.