proposed treaty, a permanent establishment would arise with respect to the furnishing of services (including consultancy services) in one treaty country by an enterprise of the other country through employees or other personnel 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 permanent establishment would not exist, however, in any taxable year in which the activity (i.e., the furnishing of services) continues for a period or periods aggregating less than 30 days in that year.

(7) The proposed treaty provides clarification in a number of instances with respect to the ability of a country to tax profits derived by a business enterprise or derived from the performance of independent personal services. Specifically, the proposed treaty states that such profits may, in certain cases, be taxed by a country in which an enterprise carries on or has carried on business or where a person performs or has performed services. This clarifies that Code section 864(c)(6) would not be overridden by the proposed treaty.

(8) Unlike either the U.S. or OECD model treaties, the proposed treaty explicitly provides that nothing in Article 7 (Business Profits) would affect the application of any internal law of a treaty country relating to the determination of the tax liability of a person in cases where the information available to the competent authority of that country is inadequate to determine the profits to be attributed to a permanent establishment. This rule would apply only if, on the basis of the available information, the determination of the profits of the permanent establishment is consistent with the principles underlying Article 7.

(9) Both the proposed treaty and the U.S. model treaty contain definitions of the term "business profits." Under the U.S. model definition (as well as under the definition contained in many other U.S. income tax treaties), business profits include income from rental of tangible personal property. Thus, such rental income earned by a resident of one treaty country from sources in the other country would only be taxable in the source country if the income is attributable to a permanent establishment or fixed base of that taxpayer in that country. The proposed treaty, by contrast, would treat payments for the use of, or the right to use, industrial, commercial, or scientific equipment as royalties. These payments generally would be subject to a 10-percent source country withholding tax imposed on a gross income basis in absence of the required nexus to a source country permanent establishment.

(10) As is true of some other existing U.S. income tax treaties, the proposed treaty would not provide protection from source country taxation of income from bareboat (i.e., without crew) leases of ships and aircraft in international traffic to the same extent as the U.S. model treaty, which exempts such income from source country tax as income from the operation of ships or aircraft in international traffic. For example, the model provides for exemption from tax in the source country for a bareboat lessor (such as a financial institution or a leasing company) that does not operate ships or aircraft in international traffic, but that leases ships or aircraft to others for use in international traffic. Under the pro

posed treaty, the exemption for shipping profits would not apply to profits from the rental on a bareboat basis of ships or aircraft unless those rental activities are incidental to international shipping activities of the lessor.

(11) Similar to the OECD model treaty, the article on associated enterprises (Article 9) of the proposed treaty omits the provision found in the U.S. model treaty and in most other U.S. treaties which clarifies that neither treaty country is precluded from (or limited in) the use of any domestic law which permits the distribution, apportionment, or allocation of income, deductions, credits, or allowances between persons, whether or not residents of one of the treaty countries, owned or controlled directly or indirectly by the same interests, where necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such persons. It is understood, however, that the United States would be entitled under the proposed treaty to utilize the rules of Code section 482 in cases where it is necessary to reallocate profits among related enterprises to reflect results which would prevail in a transaction between independent enterprises.

(12) The proposed treaty, as well as both the U.S. and OECD models, provide for a correlative adjustment to be made by the competent authority of a treaty country to the income of a taxpayer in response to an adjustment made to that taxpayer's income by the other treaty country pursuant to its authority under the provisions of Article 9 (Associated Enterprises). The proposed treaty, unlike the models, specifies that no correlative adjustment would be required in the case of fraud, gross negligence, or willful default. (13) Under the proposed treaty, as under the U.S. 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. Other dividends generally will be taxable by the source country at a rate no greater than 15 percent. However, like recent U.S. treaties, the proposed treaty would apply a withholding tax rate of 15 percent on dividends if those dividends are paid by a U.S. regulated investment company (RIC) regardless of whether the RIC dividends are paid to a direct or portfolio investor. The proposed treaty would not provide for a reduction of U.S. withholding tax on dividends paid by a real estate investment trust (REIT), unless the dividend is beneficially owned by an individual Slovak resident holding a less than 10-percent interest in the REIT.

(14) Generally, the proposed treaty, the U.S. model, and the OECD model all share a common definition of the term "dividends."4 The proposed treaty further defines this term, however, to include income from arrangements, including debt obligations, carrying the right to participate in profits, to the extent so characterized under the local law on the treaty country in which the income arises. That is, each country would apply its domestic law, for example, in differentiating dividends from interest.

That definition is income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the treaty country of which the company making the distribution is a resident.

(15) The proposed treaty, similar to U.S. treaties negotiated since 1986, would expressly permit imposition of the U.S. branch profits tax in certain cases. The rate of that tax could not exceed 5 percent.

The United States would be allowed under the proposed treaty to impose the branch profits tax on a Slovak corporation that either has a permanent establishment in the United States, or is subject to tax on a net basis in the United States on income from real property or gains from the disposition of interests in real property. In cases where a Slovak corporation conducts a trade or business in the United States but not through a permanent establishment, the proposed treaty would completely eliminate the branch profits tax that the Code would otherwise impose on such corporation (unless the corporation earned income from real property as described above).

According to the Treasury Department's technical explanation of the proposed treaty (hereinafter referred to as the "Technical Explanation"), it is understood that the U.S. branch profits tax imposed under the proposed treaty on a Slovak company would be based on the company's dividend equivalent amount (as that term is defined under U.S. internal law). Moreover, the proposed treaty makes clear that nothing in the non-discrimination article (Article 25) should be construed as preventing either country from imposing its branch profits tax.

(16) Under the proposed treaty, like the U.S. model treaty, interest generally is exempt from source-country taxation. However, no exemption or reduction of U.S. withholding tax would be granted under the proposed treaty to a Slovak resident that is a holder of a residual interest in a U.S. real estate mortgage investment conduit (REMIC) with respect to any excess inclusion.

(17) The proposed treaty generally exempts from source-country taxation royalties for the use of a copyright of literary, artistic, or scientific work, including films, tapes, and other means of image or sound reproduction, However, the proposed treaty would allow source-country taxation of certain other types of royalties at a maximum rate of 10 percent. Both the U.S. and OECD models exempt royalties from source-country tax. The category of royalties which would be subject to source country tax includes payments of any kind received as a consideration for the use of, or the right to use any patent, trademark, design or model, plan, secret formula or process, or other like right or property, or for industrial, commercial, or scientific equipment, or for information concerning industrial, commercial, or scientific experience.

(18) Although not found in the OECD model, the U.S. model, or many other U.S. treaties, the proposed treaty contains a special provision for determining the source of royalties. The staff understands that this provision would apply only for purposes of determining whether royalties are taxable in the source country; it would not be applicable in determining the source of royalties for purposes of computing the foreign tax credit under the article on relief from double taxation (Article 24). The special sourcing provision includes three separate rules. First, if the royalty is paid by a person, whether or not a resident of the United States or Slovakia, that has a permanent establishment or fixed base in one of

the countries in connection with which the liability to pay the royalty arose, and if the royalty is actually borne (i.e., is deducted in computing taxable income) by that permanent establishment or fixed base, then the royalty would be deemed to arise in the country in which the permanent establishment or fixed base is located. Second, if the royalty is not borne by a permanent establishment or fixed base located in one of the countries, then it would be treated as arising in the country of the payor's residence (as determined under the proposed treaty). Third, where the person paying a royalty neither is a resident of, nor has a permanent establishment or fixed base in, one of the treaty countries, but the royalty relates to the use of (or right to use) property in one of the countries, then the royalty would be treated as arising in the country where such property is used. Similar source rules for royalties are contained in the U.S. treaties with Australia, New Zealand and Spain.

By contrast, since the U.S. model does not specifically provide (for any purpose) a sourcing rule for royalties, the applicable rule of domestic law applies. With respect to the domestic law of the United States, royalties generally are sourced in the country where the property giving rise to the royalty is used (Code sec. 861(a)(4)). (19) In a manner similar to the U.S. model treaty, the proposed treaty provides that income derived by an individual who is a resident of one of the treaty countries from the performance of personal services in an independent capacity generally would not be taxable in the other treaty country unless the person has a fixed base in the other country which he or she regularly makes use of in performing his or her activities; in such a case, the other country would be permitted to tax the income from services performed in that country which is attributable to the fixed base. Contrary to the U.S. model, however, the proposed treaty also would allow a treaty country to tax income attributable to independent personal services performed within its territory by a resident of the other country if the individual is present in the source country for a period or periods exceeding a total of 183 days in any 12-month period.

(20) The dependent personal services article of the proposed treaty varies slightly from that article of the U.S. model. Under the U.S. model, salaries, wages, and other similar remuneration derived by a resident of one treaty country in respect of employment exercised in the other country is taxable only in the residence country (i.e., is not taxable in the source country) if the recipient is present in the other country for a period or periods not exceeding in the aggregate 183 days in the taxable year concerned and certain other conditions are satisfied. The proposed treaty contains a similar rule, but provides that the measurement period for the 183day test would not be limited to the taxable year; rather, the source country could not tax the income if the individual is not present there for a period or periods exceeding in the aggregate 183 days in a 12-month period.

(21) The proposed treaty would allow directors' fees derived by a resident of one treaty country for services performed in the other country in his or her capacity as a member of the board of directors (or another similar organ) of a company which is a resident of the other country to be taxed in that other country. The U.S. model

treaty, on the other hand, generally treats directors' fees under other applicable articles, such as those on personal service income. Under the U.S. model (and the proposed treaty), the country where the recipient resides generally has primary taxing jurisdiction over personal service income.

(22) The proposed treaty contains a limitation on benefits, or "anti-treaty shopping," article similar to the limitation on benefits articles contained in recent U.S. income tax treaties and protocols and in the branch tax provisions of the Internal Revenue Code.

(23) Like the U.S. model treaty, the proposed treaty would allow a source country to tax income derived by artistes and sportsmen from their activities as such, without regard to the existence of a fixed base or other contacts with the source country, if that income exceeds $20,000 in a taxable year. U.S. income tax treaties gen erally follow the U.S. model rule, but often use a lower annual income threshold. Under the OECD model, entertainers and sportsmen may be taxed by the country of source, regardless of the amount of income that they earn from artistic or athletic endeav

ors.

The proposed treaty includes an exception from source country taxation of artistes and sportsmen resident in the other country if the visit to the source country is substantially supported by public funds of the country of residence or is made pursuant to a specific arrangement agreed to by the Governments of the two countries. Neither the U.S. model nor the OECD model contains such an exception.

(24) The U.S. model treaty provides that pensions (other than those relating to government service) and other similar remuneration derived and beneficially owned by a resident of a treaty country in consideration of past employment are taxable only in the residence country. The proposed treaty contains a similar provision, but would extend coverage explicitly to pensions and other similar remuneration in consideration of past employment by another individual resident of the same country as the person deriving and beneficially owning the income. Thus, for example, the proposed treaty makes it clear that it would cover pension payments received by a person related to past employment of that person's spouse.

(25) The U.S. model, the OECD model, and the proposed treaty all provide a general exemption from host-country taxation of certain payments from abroad received by students and trainees who are or were resident in one country and studying or training in the host country. Whereas the U.S. and OECD models permit this exemption without regard to any income threshold or time limit, the proposed treaty, in certain cases, would allow it only for certain limited time periods, and in other cases, subject to maximum income thresholds. Unlike the models, the proposed treaty also would exempt anywhere from $5,000 to $10,000 per year (depending on the circumstances) of personal services income of persons who qualify for benefits under this article (Article 21).

The proposed treaty would extend benefits under this article to certain teachers and researchers.

(26) The relief from double taxation article of the proposed treaty contains a special rule for U.S. citizens who reside in Slovakia. In this case, the proposed treaty provides that items of income which