its worldwide income, if it is organized in the United States or under the laws of the United States, a State, or the District of Columbia.

The proposed treaty generally would define "resident of a Contracting State" to mean any person who, under the laws of that State, is liable to tax therein by reason of his or her domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. The term "resident of a Contracting State" would not include, however, any person who is liable to tax in a country in respect only of income from sources in that country or capital situated therein.

In the case of income derived or paid by a partnership, estate, or trust, the term "resident of a Contracting State" would apply only to the extent that the income derived by such entity is subject to tax in that country as the income of a resident, either in the hands of the entity or in the hands of its partners or beneficiaries. For example, if the share of U.S. residents in the profits of a U.S. partnership is only one-half, Slovakia would have to reduce its withholding tax on only half of the Slovak source income paid to the partnership.

This definition of the proposed treaty generally is based on the fiscal domicile article of the U.S. model and OECD model tax treaties and is similar to the provisions found in other U.S. tax treaties. Consistent with most U.S. income tax treaties, a U.S. citizen or U.S. green card holder would not be considered a U.S. resident unless he or she has a substantial presence, permanent home, or habitual abode in the United States. As a result, U.S. citizens residing overseas (in countries other than Slovakia) generally would not be entitled to the benefits of the proposed treaty as U.S. residents. This result is contrary to U.S. treaty policy as expressed in the U.S. model, although the U.S. policy is achieved in very few treaties.

The definition of the term "resident of a Contracting State" also would include a treaty country, or a political subdivision or a local authority thereof. It would also cover any agency or instrumentality of any such country, subdivision or authority.

Finally, the proposed treaty provides that a pension trust or other organization that is constituted and operated exclusively to provide pension benefits or for religious, charitable, scientific, artistic, cultural, or other educational purposes and that is a resident of a treaty country under its domestic laws would be considered a resident of that country for purposes of the proposed treaty, notwithstanding that all or part of the income of that person is exempt from tax in that country. This would apply, for example, in the case of a pension fund which generally is exempt from U.S. income tax under the Code.

The proposed treaty provides a set of "tie-breaker" rules to determine residence in the case of an individual who, under the basic treaty definition, would be considered a resident of both the United States and Slovakia. Such a dual resident individual would be deemed a resident of the country in which he or she has a permanent home available to him or her. If this permanent home test is inconclusive because the individual has a permanent home in both countries, the country of residence would be deemed to be the coun

try with which the individual's personal and economic relations are closer, i.e., his or her "center of vital interests." If the individual's center of vital interests cannot be determined, or if there is a permanent home available to the individual in neither country, then the country of residence would be deemed to be the country in which he or she has an habitual abode. If the individual has an habitual abode in both countries or in neither of them, the country of residence would be deemed to be the country of which he or she is a national. If the person is a national of both countries or of neither of them, the competent authorities of the countries would settle the question of residence by mutual agreement.

If a company would be considered a dual resident (i.e., a resident of both the United States and Slovakia) under the general residence provisions of the proposed treaty, then the country of residence for purposes of application of the treaty would be the country under the laws of which (including the laws of its political subdivisions) the company is created. 14 In the case of a person other than an individual or a company that is resident in both treaty countries under the general definition, the proposed treaty would require the competent authorities of the two countries to settle the question by mutual agreement and to determine how the proposed treaty would apply to that person.

Article 5. Permanent Establishment

The proposed treaty contains a definition of the term "permanent establishment" which, with certain exceptions, would follow the pattern of other recent U.S. income tax treaties, the U.S. model, and the OECD model.

The permanent establishment concept is one of the basic devices used in income tax treaties to limit the taxing jurisdiction of the host country and thus mitigate double taxation. Generally, an enterprise that is a resident of one treaty country would not be taxable by the other country on its business profits unless those profits are attributable to a permanent establishment of the resident in the other country. In addition, the reduced rates of, or certain exemptions from, tax provided for dividends, interest, and royalties would apply unless the income is attributable to the permanent establishment, in which case such items of income would be taxed as business profits. U.S. taxation of business profits is discussed under Article 7 (Business Profits).

In general, under the proposed treaty, a permanent establishment would be a fixed place of business through which an enterprise resident in one treaty country engages in business in the other country. A permanent establishment would include a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry, or other place of extraction of natural resources. It also would include a building site or construction or installation project, or an installation or drilling rig or ship used for the exploration or exploitation of natural resources, pro

14 Under U.S. law, a company is treated as a U.S. resident if it is created or organized under the laws of the United States or any State. Under Slovak law, according to the Technical Explanation, a company is treated as a resident of Slovakia if its place of registration is in Slovakia. It may be that, due to the similarity in the determination of residence of a company under the laws of the two countries, there would be few actual cases where this provision of the proposed treaty would apply.

vided that the activity lasts for more than 12 months. The proposed treaty's 12-month period is consistent with the period required in the U.S. model treaty in determining whether similar activities constitute a permanent establishment.

The Technical Explanation elaborates on the application of these rules. It provides that the 12-month threshold would apply separately to each individual site or project. The testing period would begin when work (including preparatory work) physically begins in the treaty country. A series of commercially and geographically interdependent contracts or projects would be treated as a single project.15 If the 12-month period is exceeded, the site or project would constitute a permanent establishment from its first day.

Under a similar rule, the proposed treaty provides that the furnishing of services (including consultancy services) by an enterprise through employees or other personnel would constitute a permanent establishment if activities of that nature continue (either for the same or a connected project) within the treaty country for a period or periods aggregating more than 9 months in any 12 month period. A rule of this type is contained in neither the U.S. nor OECD model treaty.

Both of the above rules would be subject to a limitation under the proposed treaty. Under this limitation, a permanent establishment would not exist in any taxable year in which the activity (i.e., the building site or construction or installation project, etc., or the furnishing of services) continues for a period or periods aggregating less than 30 days in that year.

The general rule would be modified to provide that a fixed place of business that is used solely for specified activities would not constitute a permanent establishment. These activities include the use of facilities solely for storing, displaying, or delivering merchandise belonging to the enterprise or for the maintenance of a stock of goods or merchandise belonging to the enterprise solely for storage, display, or delivery, or solely for processing by another enterprise. These activities also include the maintenance of a fixed place of business solely for the purchase of goods or merchandise or for the collection of information, or solely for the purpose of carrying on, for the enterprise, any other similar activity of a preparatory or auxiliary character. In addition, these activities include the maintenance of a fixed place of business solely for any combination of the activities mentioned in this paragraph.

If a person has, and habitually exercises, the authority to conclude contracts in a treaty country on behalf of an enterprise of the other country, then the enterprise generally would be deemed to have a permanent establishment in the first country. This rule. would not apply where the person's activities are limited to the activities specified in the previous paragraph which would not constitute a permanent establishment if carried on by the enterprise through a fixed place or business located in the first country (e.g., the purchase of goods or the collection of information). The proposed treaty contains the usual provision that this "agency" rule would not apply to create a permanent establishment if the agent

15 For example, the drilling of several oil and gas wells within the same geographic area or by the same person would be considered a single permanent establishment.

is a broker, general commission agent, or other agent of independent status acting in the ordinary course of its business.

The determination whether a company resident in one treaty country has a permanent establishment in the other country would be made without regard to the fact that the company is related to a company that is a resident of the other country or to a company that engages in business in that other country. The relationship of the two companies, thus, would not be relevant; only the activities of the company being tested would be relevant.

Article 6. Income from Real Property (Immovable Property) This article covers income derived from the ownership of real (immovable) property. The rules governing income from the sale of real property are set forth in Article 13 (Gains).

Under the proposed treaty, income derived by a resident of one treaty country from real property situated in the other country would be taxable in the country where the real property is located. Income from real property specifically would include income from agriculture or forestry.

The term "real property" would have the meaning which it has under the law of the country in which the property in question is situated. The term in any case would include property accessory to real property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of real property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits and other natural resources. Thus, income from real property would include royalties and other payments in respect of the exploitation of natural resources (e.g., oil). Ships, boats, and aircraft used in international traffic would not be real property.

The source country (i.e., the country where the real property is situated) could tax income derived from the direct use, letting, or use in any other form of real property. These rules that allow source-country taxation would also apply to the income from real property of an enterprise and to income from real property used for the performance of independent personal services.

Certain U.S. treaties and the U.S. model treaty permit residents of one treaty country to elect to be taxed on income from real property in the other country on a net basis (i.e., as if the income were attributable to a permanent establishment). The proposed treaty also would provide for such an election. For purposes of taxation by the United States, a net-basis election made by a taxpayer under the proposed treaty would be binding for the taxable year of the election and for all subsequent taxable years unless the U.S. competent authority agrees to its termination.

Under the article on gains (Article 13), gains from the alienation of real property also would be taxable by the country where the property is located. In addition, gains from the alienation of shares of certain corporations owning real property situated in a treaty country would be taxable in that country.

Article 7. Business Profits

U.S. Code rules

U.S. law distinguishes between the business income and the other U.S. income of a nonresident alien or foreign corporation. A nonresident alien or foreign corporation is subject to a flat 30-percent rate (or lower treaty rate) of tax on certain U.S. source income if that income is not effectively connected with the conduct of a trade or business within the United States. The regular individual or corporate rates apply to income (from any source) which is effectively connected with the conduct of a trade or business within the United States.

The taxation of income as U.S. business income or not varies depending upon whether the source of the income is U.S. or foreign. În general, U.S. source periodic income (such as interest, dividends, rents, and wages), and U.S. source capital gains are effectively connected with the conduct of a trade or business within the United States only if the asset generating the income is used in or held for use in the conduct of the trade or business, or if the activities of the trade or business were a material factor in the realization of the income. All other U.S. source income of a person engaged in a trade or business in the United States is treated as effectively connected with the conduct of a trade or business in the United States (thus, it is said to be taxed as if it were business income under a limited "force of attraction" rule).

In the case of foreign persons other than insurance companies, foreign source income is effectively connected income only if the foreign person has an office or other fixed place of business in the United States and the income is attributable to that place of business. For such persons, only three types of foreign source income can be effectively connected income: rents and royalties derived from the active conduct of a licensing business; dividends and interest either derived in the active conduct of a banking, financing or similar business in the United States, or received by a corporation the principal business of which is trading in stocks or securities for its own account; and certain sales income attributable to a U.S. sales office.

The foreign source income of a foreign corporation that is subject to tax under the insurance company provisions of the Code may be treated as effectively connected with a U.S. trade or business without regard to the foregoing rules, so long as such income is attributable to its U.S. business. In addition, the net investment income of such a company which must be treated as effectively connected with the conduct of an insurance business within the United States is not less than an amount based on a combination of asset/liability ratios and rates of return on investments experienced by the foreign person in its worldwide operations and by the U.S. insurance industry.

Trading in stocks, securities, or commodities in the United States for one's own account generally does not constitute a trade or business in the United States, and accordingly, income from those activities is not taxed by the United States as business income. Thus, income from trading through a U.S.-based employee, a resident broker, commission agent, custodian, or other agent, or trading by