[DOCID: f:er007.106]
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106th Congress                                               Exec. Rpt.
                                 SENATE
 1st Session                                                    106-7

======================================================================



 
                      TAX CONVENTION WITH SLOVENIA

                                _______
                                

                November 3, 1999.--Ordered to be printed

                                _______


          Mr. Helms, from the Committee on Foreign Relations,
                        submitted the following

                              R E P O R T

                    [To accompany Treaty Doc. 106-9]

    The Committee on Foreign Relations, to which was referred 
the Convention between the United States of America and the 
Republic of Slovenia for the Avoidance of Double Taxation and 
the Prevention of Fiscal Evasion with Respect to Taxes on 
Income and Capital, signed at Ljubljana on June 21, 1999, 
having considered the same, reports favorably thereon, with one 
reservation, one understanding, one declaration and one 
proviso, and recommends that the Senate give its advice and 
consent to ratification thereof, as set forth in this report 
and the accompanying resolution of ratification.

                                CONTENTS

                                                                   Page

  I. Purpose..........................................................1
 II. Background.......................................................2
III. Summary..........................................................2
 IV. Entry Into Force and Termination.................................3
  V. Committee Action.................................................3
 VI. Committee Comments...............................................3
VII. Budget Impact...................................................11
VIII.Explanation of Proposed Treaty..................................11

 IX. Text of the Resolution of Ratification..........................50

                               I. Purpose

    The principal purposes of the proposed income tax treaty 
between the United States and Slovenia are to reduce or 
eliminate double taxation of income earned by residents of 
either country from sources within the other country and to 
prevent avoidance or evasion of the income taxes of the two 
countries. The proposed treaty is intended to continue to 
promote close economic cooperation and facilitate trade and 
investment between the two countries. It also is intended to 
enable the two countries to cooperate in preventing avoidance 
and evasion of taxes.

                             II. Background

    The proposed treaty was signed on June 21, 1999. No income 
tax treaty between the United States and Slovenia is in force 
at present.
    The proposed treaty was transmitted to the Senate for 
advice and consent to its ratification on September 13, 1999 
(see Treaty Doc. 106-9). The Committee on Foreign Relations 
held a public hearing on the proposed treaty on October 27, 
1999.

                              III. Summary

    The proposed treaty is similar to other recent U.S. income 
tax treaties, the 1996 U.S. model income tax treaty (``U.S. 
model''), and the model income tax treaty of the Organization 
for Economic Cooperation and Development (``OECD model''). 
However, the proposed treaty contains certain substantive 
deviations from those treaties and models.
    As in other U.S. tax treaties, these objectives principally 
are achieved through each country's agreement to limit, in 
certain specified situations, its right to tax income derived 
from its territory by residents of the other country. For 
example, the proposed treaty contains provisions under which 
each country generally agrees not to tax business income 
derived from sources within that country by residents of the 
other country unless the business activities in the taxing 
country are substantial enough to constitute a permanent 
establishment or fixed base (Articles 7 and 14). Similarly, the 
proposed treaty contains ``commercial visitor'' exemptions 
under which residents of one country performing personal 
services in the other country will not be required to pay tax 
in the other country unless their contact with the other 
country exceeds specified minimums (Articles 14, 15, and 17). 
The proposed treaty provides that dividends, interest, 
royalties, and certain capital gains derived by a resident of 
either country from sources within the other country generally 
may be taxed by both countries (Articles 10, 11, 12, and 13); 
however, the rate of tax that the source country may impose on 
a resident of the other country on dividends, interest, and 
royalties generally will be limited by the proposed treaty 
(Articles 10, 11, and 12).
    In situations where the country of source retains the right 
under the proposed treaty to tax income derived by residents of 
the other country, the proposed treaty generally provides for 
relief from the potential double taxation through the allowance 
by the country of residence of a tax credit for certain foreign 
taxes paid to the other country (Article 23).
    The proposed treaty contains the standard provision (the 
``saving clause'') included in U.S. tax treaties pursuant to 
which each country retains the right to tax its residents (and 
citizens in the case of the United States) as if the treaty had 
not come into effect (Article 1). In addition, the proposed 
treaty contains the standard provision providing that the 
treaty may not be applied to deny any taxpayer any benefits to 
which the taxpayer would be entitled under the domestic law of 
a country or under any other agreement between the two 
countries (Article 1).
    The proposed treaty contains certain ``main purpose'' tests 
which operate to deny the benefits of the dividends article 
(Article 10), the interest article (Article 11), the royalties 
article (Article 12) and the other income article (Article 21) 
if the main purpose or one of the main purposes of a person is 
to take advantage of the benefits of the respective article 
through a creation or assignment of shares, debt claims, or 
rights that would give rise to income to which the respective 
article would apply.
    The proposed treaty also contains a detailed limitation on 
benefits provision to prevent the inappropriate use of the 
treaty by third-country residents (Article 22).

                  IV. Entry Into Force and Termination


                          A. ENTRY INTO FORCE

    The proposed treaty will enter into force upon the exchange 
of instruments of ratification. With respect to taxes withheld 
at source, the proposed treaty takes effect for amounts paid or 
credited on or after the first day of the third month following 
the date on which the proposed treaty enters into force. With 
respect to other taxes, the proposed treaty takes effect for 
taxable periods beginning on or after the first of January 
following the date on which the proposed treaty enters into 
force.

                             B. TERMINATION

    The proposed treaty will continue in force until terminated 
by either country. Either country may terminate the proposed 
treaty by giving notice of termination to the other country 
through diplomatic channels. With respect to taxes withheld at 
source, a termination is effective for amounts paid or credited 
after the expiration of the six month period beginning on the 
date on which notice of termination was given. In the case of 
other taxes, a termination is effective for taxable periods 
beginning on or after the expiration of the six month period 
beginning on the date on which notice of termination was given.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed treaty with Slovenia (Treaty Doc. 106-9), as well 
as on other proposed treaties and protocols, on October 27, 
1999. The hearing was chaired by Senator Hagel. The Committee 
considered these proposed treaties and protocols on November 3, 
1999, and ordered the proposed treaty with Slovenia favorably 
reported by a voice vote, with the recommendation that the 
Senate give its advice and consent to ratification of the 
proposed treaty, subject to a reservation, an understanding, a 
declaration, and a proviso.

                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed treaty with Slovenia is in the interest of 
the United States and urges that the Senate act promptly to 
give advice and consent to ratification. The Committee has 
taken note of certain issues raised by the proposed treaty, and 
believes that the following comments may be useful to the 
Treasury Department officials in providing guidance on these 
matters should they arise in the course of future treaty 
negotiations.

                         A. MAIN PURPOSE TESTS

In general

    The proposed treaty includes a series of ``main purpose'' 
tests that can operate to deny the benefits of the dividends 
article (Article 10), the interest article (Article 11), the 
royalties article (Article 12), and the other income article 
(Article 21). This series of main purpose tests is not found in 
any other U.S. treaty, and is not included in the U.S. model or 
the OECD model.\1\
---------------------------------------------------------------------------
    \1\ Although not included in the OECD model, paragraph 17 of the 
commentary to the dividends article of the OECD model suggests that the 
treaty partners may find it appropriate to adopt a rule to deny treaty 
benefits if the acquisition of stock was ``primarily for the purpose of 
taking advantage of this provision.''
---------------------------------------------------------------------------

Description of provisions

    Under the proposed treaty, the provisions of the dividends 
article (Article 10) will not apply if it was the main purpose 
or one of the main purposes of any person concerned with the 
creation or assignment of the shares or rights in respect of 
which the dividend is paid to take advantage of the dividends 
article by means of that creation or assignment. Similarly, the 
interest article (Article 11) provides that its provisions will 
not apply if it was the main purpose or one of the main 
purposes of any person concerned with the creation or 
assignment of the debt claim in respect of which the interest 
is paid to take advantage of the interest article by means of 
that creation or assignment. Substantially similar main purpose 
tests apply in the case of the royalties article (Article 12) 
and the other income article (Article 21).
    The Technical Explanation indicates that the main purpose 
tests are to be ``self-executing.'' The Technical Explanation 
further states that the tax authorities of one of the treaty 
countries may, on review, deny the benefits of the respective 
article if the conditions of the main purpose tests are 
satisfied. In addition, the proposed treaty provides that under 
the mutual agreement procedures article (Article 25) the 
competent authorities of the treaty countries may agree that 
the conditions for application of the main purpose tests are 
met. The Technical Explanation states that the competent 
authority agreement does not have to relate to a particular 
case. Rather, if the competent authorities agree that a type of 
transaction entered into by several taxpayers is entered into 
with a main purpose of taking advantage of the treaty, treaty 
benefits can be denied to all taxpayers who had entered into 
such a transaction. The Technical Explanation states that it is 
anticipated that the public would be notified of such generic 
agreements through the issuance of press releases.

Committee concerns with the ``main purpose'' tests

    The Committee has several concerns with the new main 
purpose tests. The inclusion of such tests in the specific 
articles of the proposed treaty represents a fundamental shift 
in U.S. treaty policy. As a general matter, such changes in 
policy should be made only after careful consideration of 
whether circumstances warrant such a change, and whether the 
proposed change is appropriate. The Treasury Department should 
engage in meaningful consultations with the Congress when 
proposing to make such a policy shift. The Committee is 
concerned that such consultations did not occur in this 
instance, and that the Committee has not been afforded an 
opportunity to weigh the relevant policy considerations 
(including whether a need for such a provision exists) and to 
evaluate alternative approaches with respect to the proposed 
new tests.
    The Treasury Department has acknowledged that the United 
States presently has the right to apply its domestic law 
(including anti-abuse principles such as the business purpose 
doctrine) in the treaty context; this is a broad authority that 
would allow treaty benefits to be denied in tax avoidance 
transactions. The Treasury Department has stated, however, that 
the proposed main purpose tests are intended to go beyond 
present U.S. domestic law. Although the Committee shares the 
Treasury Department's concern with abusive transactions, the 
Treasury Department has not convinced the Committee that a 
higher standard is necessary in U.S. treaties than that which 
applies under domestic law. In addition, the Committee is 
concerned that the Treasury Department has not adequately 
explained the potential implications of going beyond present 
U.S. law in the treaty context.
    The new main purpose tests in the proposed treaty are 
subjective, vague and add uncertainty to the treaty. It is 
unclear how the provisions are to be applied. In addition, the 
provisions lack conformity with other U.S. tax treaties. This 
uncertainty could create difficulties for legitimate business 
transactions, and can hinder a taxpayer's ability to rely on 
the treaty.
    In the past, the United States has determined that 
subjective tests are not appropriate in the treaty context. For 
example, older U.S. treaties containing limitation on benefits 
provisions (which address an abuse of a treaty whereby 
residents of third countries try to take advantage of the 
treaty provisions through what is known as treaty shopping) 
applied broad subjective tests looking to whether the 
acquisition, maintenance, or operation of an entity did not 
have ``as a principal purpose obtaining benefits under'' the 
treaty. These subjective tests have been replaced in recent 
treaties (including the proposed treaty) with limitation on 
benefits provisions that apply clear, bright-line objective 
tests (such as ownership and base erosion tests, public company 
tests, as well as active business tests). The reasons for 
moving away from subjective standards are illustrated by a 
statement in the Technical Explanation to the limitation on 
benefits provision of the proposed treaty that acknowledges in 
connection with a principal purpose test that a ``fundamental 
problem presented by this approach is that it is based on the 
taxpayer's motives in establishing an entity in a particular 
country, which a tax administrator is normally ill-equipped to 
identify.'' Although this criticism is specific to a principal 
purpose test with respect to an anti-treaty shopping provision, 
the same concern applies with respect to subjective tests in 
general.
    The main purpose standard in the relevant provisions of the 
proposed treaty is that ``the main purpose or one of the main 
purposes'' is to ``take advantage of'' the particular article 
in which the main purpose tests appear. This is a subjective 
standard, dependent upon the intent of the taxpayer, that is 
difficult to evaluate. Such a standard is inconsistent with 
present U.S. treaty policy. In addition, the Committee is 
concerned that a broad standard based on whether one of the 
main purposes of a taxpayer is to take advantage of a 
particular treaty provision does not adequately distinguish 
between legitimate business transactions and tax avoidance 
transactions. While it is true that under U.S. domestic law, 
``a principal purpose'' test is used as an anti-abuse rule in a 
variety of contexts, its use generally has been limited to 
circumscribed situations. The Committee is concerned that the 
circumstances for inclusion of a main purpose test in the 
proposed treaty are not well-defined and that the standard 
potentially has much broader implications in the treaty context 
then in its analogs under U.S. domestic law. The Committee 
believes that consideration should be given to alternative 
formulations of anti-abuse standards, including objective 
standards such as those contained in the limitation on benefits 
provisions of modern U.S. income tax treaties.
    It is also unclear how the proposed the main purpose tests 
would be administered. The Technical Explanation indicates that 
the tests are intended to be self-executing. In the absence of 
a taxpayer applying the tests to itself, the tax authorities of 
one of the countries may, on review, deny the treaty benefits. 
The Committee is concerned that the Treasury Department has not 
provided adequate assurances that the tests will not be used by 
treaty partners to deny treaty benefits for legitimate business 
activity.
    A fairness question also may be raised insofar as the 
proposed treaty provides the competent authorities with the 
ability to declare an entire class of transactions as abusive 
and, accordingly, deny treaty benefits to that class without 
the necessity of evaluating the facts of each specific 
transaction. It is unclear what degree of deference would be 
accorded to such a competent authority agreement by responsible 
tax administrative authorities or by the courts. Moreover, 
because the main purpose tests do not appear in other U.S. 
treaties or with respect to other articles of this proposed 
treaty, an issue arises as to whether its inclusion in specific 
provisions of this proposed treaty creates a negative inference 
as to the United States' ability to raise its internal anti-
abuse rules in connection with other treaties (or other 
provisions of this proposed treaty) in which such main purpose 
tests do not appear. The Technical Explanation states that no 
such inference with respect to other treaties is intended. The 
Committee believes that further consideration and analysis of 
these issues are necessary.

Committee conclusions

    The Committee shares the Treasury Department's concerns 
with respect to abusive transactions that inappropriately take 
advantage of treaty benefits. The Committee does not believe, 
however, that the main purpose tests in the proposed treaty 
have been fully and adequately developed. The Committee 
believes that there are many issues, including the need for 
such tests and, if needed, what the appropriate tests should be 
as a matter of U.S. treaty policy, that must be addressed 
before it would be appropriate to include such provisions in 
any U.S. income tax treaty. Accordingly, the Committee has 
included in its recommended resolution of ratification a 
reservation requiring that the main purpose tests be stricken 
from the proposed treaty.
    Notwithstanding the Committee's concerns with the main 
purpose tests in the proposed treaty and its recommendation of 
a reservation in this regard, on balance the Committee believes 
that the proposed treaty with Slovenia is in the interest of 
the United States and strongly urges the Treasury Department to 
pursue an exchange of instruments of ratification with the 
aforementioned reservation with the same zeal with which it 
negotiated the proposed treaty in the first instance.
    In addition, the Committee is committed to working with the 
Treasury Department to develop appropriate ways to address tax 
avoidance in the treaty context. The Committee requests that 
the Treasury Department provide it with a comprehensive 
analysis of (1) the need for a main purpose or similar test 
including specific examples of abusive transactions that cannot 
be adequately addressed under present U.S. law; (2) 
alternatives to such a test including alternatives that rely on 
objective standards; (3) the interaction of such a test with 
present domestic law and the corresponding rules under the 
relevant foreign law; (4) any potential inferences that may be 
created with respect to other U.S. treaties and other 
provisions of the specific treaty that do not contain such a 
test; (5) the expected standards of judicial review with 
respect to the application of such a test and the degree of 
deference that may be accorded to competent authority 
agreements with respect to such a test; (6) the experience of 
foreign countries that presently include such a test or similar 
tests in their income tax treaties; and (7) any other relevant 
considerations.
    Until these issues have been fully considered by both the 
Treasury Department and the Committee, the Committee strongly 
recommends that the Treasury Department not modify its model 
treaty to include these or similar main purpose tests and not 
include such main purpose tests or similar tests in future 
treaties.

                       B. EXCHANGE OF INFORMATION

    One of the principal purposes of the proposed treaty 
between the United States and Slovenia is to prevent avoidance 
or evasion of taxes of the two countries. The exchange of 
information article of the proposed treaty (Article 26) is one 
of the primary vehicles used to achieve that purpose.
    The exchange of information article contained in the 
proposed treaty generally conforms to the corresponding article 
of the OECD model and the U.S. model. As is true under these 
model treaties, under the proposed treaty a country is not 
required to carry out administrative measures at variance with 
the laws and administrative practice of either country, to 
supply information that is not obtainable under the laws or in 
the normal course of the administration of either country, or 
to supply information that discloses any trade, business, 
industrial, commercial, or professional secret or trade 
process, or information the disclosure of which is contrary to 
public policy.
    The exchange of information article contained in the 
proposed treaty varies significantly from the U.S. model in one 
respect: the authority to obtain information from third parties 
(commonly referred to as the ``bank secrecy'' provision). This 
provision of the U.S. model provides that, notwithstanding the 
limitations described in the preceding paragraph, a country has 
the authority to obtain and provide information held by 
financial institutions, nominees, or persons acting in a 
fiduciary capacity. This information must be provided to the 
requesting country notwithstanding any laws or practices of the 
requested country that would otherwise preclude acquiring or 
disclosing such information.
    One issue the Committee has considered is the significance 
of the omission of this provision with respect to this proposed 
treaty. The Technical Explanation to Article 26 notes the 
omission of this provision. The Technical Explanation states 
that:

          The United States has received assurances from the 
        Slovenian Ministry of Finance concerning Slovenia's 
        ability to exchange third-party information obtained 
        from banks and other financial institutions 
        (hereinafter referred as ``banks''). Specifically, 
        Article 30 of Slovenia's Law on Tax procedures allows 
        Slovenia to obtain from banks any and all information 
        relevant to assessment and collection of taxes, whether 
        the information pertains to the party under 
        investigation or another party involved in the tax 
        matter. Article 26 of this law also imposes on banks 
        and savings banks an obligation to send without 
        specific request to the tax authorities information 
        about accounts which are held by individuals and legal 
        persons and information about transactions through 
        these accounts.

    The Treasury Department has received a letter dated June 
14, 1999, from the Ministry of Finance of the Republic of 
Slovenia containing these assurances. Because of the 
Committee's view as to the vital nature of these exchanges of 
third-party information, the Committee has conditioned 
ratification of the proposed treaty on the following 
understanding, which shall be included in the instrument of 
ratification, and shall be binding on the President:

          Exchange of Information.--The United States 
        understands that, pursuant to Article 26 of the 
        Convention, both the competent authority of the United 
        States and the competent authority of the Republic of 
        Slovenia have the authority to obtain and provide 
        information held by financial institutions, nominees or 
        persons acting in an agency or fiduciary capacity, or 
        respecting interests in a person.

    Another issue the Committee has considered is the 
implications of the omission of this provision from this treaty 
with respect to future treaty negotiations. While some treaty 
partners do not object to this bank secrecy provision, other 
treaty partners have resisted its inclusion in tax treaties. 
The broader issue of transparency of transactions involving 
third parties is a significant issue internationally. The 
United States has attempted to advance greater transparency in 
its treaty negotiations. It is possible that the omission of 
the bank secrecy provision from this treaty may be interpreted 
by other treaty partners as a weakening of the U.S. commitment 
to greater transparency and may make other treaty negotiations 
with respect to this issue more difficult. The Committee 
intends that the omission of this provision from this treaty 
does not indicate in any way a lessening of the commitment of 
the United States to pursue broader exchanges of information in 
future treaty negotiations.
    The Committee would have serious concerns with respect to a 
proposed treaty if the other country restricted access to this 
information and were unwilling to change its internal laws to 
accommodate full exchanges of information. The exchange of 
information provisions in treaties are central to the purposes 
for which tax treaties are entered into, and significant 
limitations on their effect, relative to the preferred U.S. tax 
treaty position, should not be accepted in negotiations with 
other countries that seek to have or maintain the benefits of a 
tax treaty relationship with the United States.
    The Committee understands that the Treasury Department has 
stated that other countries have expressed ``diplomatic'' 
concerns regarding the bank secrecy provision in the current 
U.S. model. While the Committee is sensitive to these concerns, 
the Committee is at the same time fully committed to full 
exchanges of information with other treaty partners. The 
Committee understands that the Treasury Department may be 
considering removing this bank secrecy provision from the U.S. 
model. The Committee believes that, while revisions to that 
provision might be appropriate, it is vital that future tax 
treaties (as well as the U.S. model) retain explicit language 
providing for full exchanges of information, including 
exchanges of information held by third parties. The Committee 
expects that the Treasury Department will consult fully with 
the Committee prior to any modification of the U.S. model 
relating to this issue.

                           C. TREATY SHOPPING

    The proposed treaty, like a number of U.S. income tax 
treaties, generally limits treaty benefits for treaty country 
residents so that only those residents with a sufficient nexus 
to a treaty country will receive treaty benefits. Although the 
proposed treaty generally is intended to benefit only residents 
of Slovenia and the United States, residents of third countries 
sometimes attempt to use a treaty to obtain treaty benefits. 
This is known as treaty shopping. Investors from countries that 
do not have tax treaties with the United States, or from 
countries that have not agreed in their tax treaties with the 
United States to limit source country taxation to the same 
extent that it is limited in another treaty may, for example, 
attempt to reduce the tax on interest on a loan to a U.S. 
person by lending money to the U.S. person indirectly through a 
country whose treaty with the United States provides for a 
lower rate of withholding tax on interest. The third-country 
investor may attempt to do this by establishing in that treaty 
country a subsidiary, trust, or other entity which then makes 
the loan to the U.S. person and claims the treaty reduction for 
the interest it receives.
    The anti-treaty-shopping provision of the proposed treaty 
is similar to anti-treaty-shopping provisions in the Code (as 
interpreted by Treasury regulations) and in the U.S. model. The 
provision also is similar to the anti-treaty-shopping provision 
in several recent treaties. The degree of detail included in 
these provisions is notable in itself. The proliferation of 
detail may reflect, in part, a diminution in the scope afforded 
the IRS and the courts to resolve interpretive issues adversely 
to a person attempting to claim the benefits of a treaty; this 
diminution represents a bilateral commitment, not alterable by 
developing internal U.S. Tax policies, rules, and procedures, 
unless enacted as legislation that would override the treaty. 
(In contrast, the IRS generally is not limited under the 
proposed treaty in its discretion to allow treaty benefits 
under the anti-treaty-shopping rules.) The detail in the 
proposed treaty does represent added guidance and certainty for 
taxpayers that may be absent under treaties that may have 
somewhat simpler and more flexible provisions.
    One provision of the anti-treaty-shopping-article differs 
from the comparable rule of some earlier U.S. treaties, but the 
effect of the change is not clear. The general test applied by 
those treaties to allow benefits to an entity that does not 
meet the bright-line ownership and base erosion tests is a 
broadly subjective one, looking to whether the acquisition, 
maintenance, operation of an entity did not have ``as a 
principal purpose obtaining benefits under'' the treaty. By 
contrast, the proposed treaty contains a more precise test that 
allows denial of benefits only with respect to income not 
derived in connection with (or incidental to) the active 
conduct of a substantial trade or business. (However, this 
active trade or business test does not apply with respect to a 
business of making or managing investments carried on by a 
person other than a bank, insurance company, or registered 
securities dealer, so benefits may be denied with respect to 
such a business regardless of how actively it is conducted). In 
addition, the proposed treaty (like all recent treaties) gives 
the competent authority of the country in which the income 
arises the authority to determine that the benefits of the 
treaty will be granted to a person even if the specified tests 
are not satisfied.
    The practical difference between the proposed treaty tests 
and the corresponding tests in other treaties will depend upon 
how they are interpreted and applied. Given the relatively 
bright line rules provided in the proposed treaty, the range of 
interpretation under it may be fairly narrow.
    The Committee believes that limitation on benefits 
provisions are important to protect against ``treaty shopping'' 
by limiting benefits of a treaty to bona fide residents of the 
treaty partner. The Committee further believes that the United 
States should maintain its policy of limiting treaty shopping 
opportunities whenever possible. The Committee continues to 
believe further that, in exercising any latitude the Treasury 
Department has to adjust the operation of the proposed treaty, 
the rules as applied should adequately deter treaty shopping 
abuses. The proposed anti-treaty-shopping provision may be 
effective in preventing third-country investors from obtaining 
treaty benefits by establishing investing entities in Slovenia 
because third-country investors may be unwilling to allow 50 
percent or more of such investing entities to be owned by U.S. 
or Slovenian residents or other qualified owners in order to 
meet the ownership test of the anti-treaty-shopping provision. 
In addition, the base erosion test provides protection from 
certain potential abuses of a Slovenian conduit. On the other 
hand, implementation of the tests for treaty shopping set forth 
in the treaty may raise factual, administrative, or other 
issues that cannot currently be foreseen. The Committee 
emphasizes that the proposed anti-treaty-shopping provision 
must be implemented so as to serve as an adequate tool for 
preventing possible treaty shopping abuses in the future.

                           VII. Budget Impact

    The Committee has been informed by the staff of the Joint 
Committee on Taxation that the proposed treaty is estimated to 
cause a negligible change in fiscal year Federal budget 
receipts during the 1999-2008 period.

                  VIII. Explanation of Proposed Treaty

    A detailed, article-by-article explanation of the proposed 
income tax treaty between the United States and Slovenia is set 
forth below.

Article 1. General Scope

            Overview
    The general scope article describes the persons who may 
claim the benefits of the proposed treaty. It also includes a 
``saving clause'' provision similar to provisions found in most 
U.S. income tax treaties.
    The proposed treaty generally applies to residents of the 
United States and to residents of Slovenia, with specific 
modifications to such scope provided in other articles (e.g., 
Article 24 (Non-Discrimination) and Article 26 (Exchange of 
Information and Administrative Assistance)). This scope is 
consistent with the scope of other U.S. income tax treaties, 
the U.S. model, and the OECD model. For purposes of the 
proposed treaty, residence is determined under Article 4 
(Residence).
    The proposed treaty provides that it does not restrict in 
any manner any exclusion, exemption, deduction, credit, or 
other allowance or benefit accorded by internal law or by any 
other agreement between the United States and Slovenia. Thus, 
the proposed treaty will not apply to increase the tax burden 
of a resident of either the United States or Slovenia. 
According to the Treasury Department's Technical Explanation 
(hereinafter referred to as the ``Technical Explanation''), the 
fact that the proposed treaty only applies to a taxpayer's 
benefit does not mean that a taxpayer may select inconsistently 
among treaty and internal law provisions in order to minimize 
its overall tax burden. In this regard, the Technical 
Explanation sets forth the following example. Assume a resident 
of Slovenia has three separate businesses in the United States. 
One business is profitable and constitutes a U.S. permanent 
establishment. The other two businesses generate taxable income 
under the Internal Revenue Code (the ``Code''), but do not 
constitute permanent establishments as determined under the 
proposed treaty; one business is profitable and the other 
business generates a net loss. Under the Code, all three 
businesses would be subject to U.S. income tax, in which case 
the losses from the unprofitable business could offset the 
taxable income from the other businesses. On the other hand, 
only the income of the business which gives rise to a permanent 
establishment is taxable by the United States under the 
proposed treaty. The Technical Explanation makes clear that the 
taxpayer may not invoke the proposed treaty to exclude the 
profits of the profitable business that does not constitute a 
permanent establishment and invoke U.S. internal law to claim 
the loss of the unprofitable business that does not constitute 
a permanent establishment to offset the taxable income of the 
permanent establishment.\2\
---------------------------------------------------------------------------
    \2\ See Rev. Rul. 84-17, 1984-1 C.B. 308.
---------------------------------------------------------------------------
    The proposed treaty provides that the dispute resolution 
procedures under its mutual agreement article take precedence 
over the corresponding provisions of any other agreement to 
which the United States and Slovenia are parties in determining 
whether a measure is within the scope of the proposed treaty. 
Unless the competent authorities determine that a taxation 
measure is outside the scope of the proposed treaty, only the 
proposed treaty's non-discrimination rules, and not the non-
discrimination rules of any other agreement in effect between 
the United States and Slovenia, generally apply to that law or 
other measure. The only exception to this general rule is such 
national treatment or most favored nation obligations as may 
apply to trade in goods under the General Agreement on Tariffs 
and Trade. For purposes of this provision, the term ``measure'' 
means a law, regulation, rule, procedure, decision, 
administrative action, or any other form of measure.
            Saving clause
    Like all U.S. income tax treaties, and the U.S. model, the 
proposed treaty includes a ``saving clause.'' Under this 
clause, with specific exceptions described below, the proposed 
treaty does not affect the taxation by either treaty country of 
its residents or citizens. By reason of this saving clause, 
unless otherwise specifically provided in the proposed treaty, 
the United States may continue to tax its citizens who are 
residents of Slovenia as if the treaty were not in force. For 
purposes of the proposed treaty (and, thus, for purposes of the 
saving clause), the term ``resident of a Contracting State,'' 
which is defined in Article 4 (Residence), includes 
corporations and other entities as well as individuals.
    The proposed treaty contains a provision under which the 
saving clause (and therefore a country's jurisdiction to tax) 
applies to a former citizen or long-term resident whose loss of 
citizenship had as one of its principal purposes the avoidance 
of tax as defined under the laws of the country of which the 
person was a citizen or long-term resident; such application is 
limited to the ten-year period following the loss of 
citizenship. Section 877 of the Code provides special rules for 
the imposition of U.S. income tax on former U.S. citizens and 
long-term residents for a period of ten years following the 
loss of citizenship or resident status; these special tax rules 
apply to a former citizen or long-term resident only if his or 
her loss of U.S. citizenship or resident status had as one of 
its principal purposes the avoidance of U.S. income, estate or 
gift taxes. For purposes of applying the special tax rules to 
former citizens and long-term residents, individuals who meet a 
specified income tax liability threshold or a specified net 
worth threshold generally are considered to have lost 
citizenship or resident status for a principal purpose of U.S. 
tax avoidance.
    Exceptions to the saving clause are provided for the 
following benefits conferred by a treaty country: the allowance 
of correlative adjustments when the profits of an associated 
enterprise are adjusted by the other country (Article 9, 
paragraph 2); the exemption from residence country tax for 
social security benefits and certain child support payments 
(Article 18, paragraphs 2 and 5); relief from double taxation 
through the provision of a foreign tax credit (Article 23); 
protection from discriminatory tax treatment with respect to 
transactions with residents of the other country (Article 24); 
and benefits under the mutual agreement procedures (Article 
25). These exceptions to the saving clause permit residents and 
citizens of the United States or Slovenia to obtain such 
benefits of the proposed treaty with respect to their country 
of residence (or citizenship).
    In addition, the saving clause does not apply to the 
following benefits conferred by one of the countries upon 
individuals who neither are citizens of that country nor have 
immigrant status in that country. Under this set of exceptions 
to the saving clause, the specified treaty benefits are 
available to, for example, a Slovenian citizen who spends 
enough time in the United States to be taxed as a U.S. resident 
but who has not acquired U.S. immigrant status (i.e., does not 
hold a ``green card''). The benefits that are covered under 
this set of exceptions are the exemptions from host country tax 
for certain compensation from government service (Article 19), 
certain income received by students, trainees, professors and 
researchers (Article 20), and certain income of diplomats and 
consular officers (Article 27).

Article 2. Taxes Covered

    The proposed treaty generally applies to the income taxes 
of the United States and Slovenia. However, Article 24 (Non-
Discrimination) is applicable to all taxes imposed at all 
levels of government, including state and local taxes. 
Moreover, Article 26 (Exchange of Information and 
Administrative Assistance) generally is applicable to all 
national-level taxes, including, for example, estate and gift 
taxes.
    In the case of the United States, the proposed treaty 
applies to the Federal income taxes imposed by the Code, but 
excludes social security taxes. The proposed treaty also 
applies to the Federal excise taxes imposed with respect to 
private foundations.
    In the case of Slovenia, the proposed treaty applies to the 
tax on profits of legal persons; the tax on income of 
individuals, including wages and salaries, income from 
agricultural activities, income from business, capital gains 
and income from immovable and movable property; and the assets 
tax on banks and savings institutions.
    The proposed treaty also contains a rule generally found in 
U.S. income tax treaties which provides that the proposed 
treaty applies to any identical or substantially similar taxes 
that may be imposed subsequently in addition to or in place of 
the taxes covered. The proposed treaty obligates the competent 
authority of each country to notify the competent authority of 
the other country of any significant changes in its internal 
tax laws or other laws affecting their obligations under the 
proposed treaty and of any official published material 
concerning the application of the treaty including 
explanations, regulations, rulings or judicial decisions. The 
Technical Explanation states that this requirement relates to 
changes that are significant to the operation of the proposed 
treaty.

Article 3. General Definitions

    The proposed treaty provides definitions of a number of 
terms for purposes of the proposed treaty. Certain of the 
standard definitions found in most U.S. income tax treaties are 
included in the proposed treaty.
    The term ``person'' includes an individual, an estate, a 
trust, a partnership, a company, and any other body of persons. 
A ``company'' under the proposed treaty is any body corporate 
or any entity which is treated as a body corporate for tax 
purposes according to the laws of the country in which it is 
organized.
    The terms ``enterprise of a Contracting State'' and 
``enterprise of the other Contracting State'' mean, 
respectively, an enterprise carried on by a resident of a 
treaty country and an enterprise carried on by a resident of 
the other treaty country. The proposed treaty does not define 
the term ``enterprise.'' The Technical Explanation states that 
the term ``enterprise'' generally is understood to refer to any 
activity or set of activities that constitute a trade or 
business.
    The proposed treaty defines ``international traffic'' as 
any transport by a ship or aircraft except when the transport 
is solely between places in a treaty country. Accordingly, with 
respect to a Slovenian enterprise, purely domestic transport 
within the United States does not constitute ``international 
traffic.'' The Technical Explanation states that transportation 
that constitutes international traffic includes any portion of 
the transport that is between two points within a country, even 
if the internal portion of the transport involves a transfer to 
a land vehicle or is handled by an independent carrier 
(provided that the original bills of lading include such 
portion of such transport).
    The U.S. ``competent authority'' is the Secretary of the 
Treasury or his delegate. The U.S. competent authority function 
has been delegated to the Commissioner of Internal Revenue, who 
has redelegated the authority to the Assistant Commissioner 
(International). On interpretative issues, the latter acts with 
the concurrence of the Associate Chief Counsel (International) 
of the IRS. The Slovenian ``competent authority'' is the 
Ministry of Finance or its authorized representative.
    The term ``United States'' means the United States of 
America, and includes the States, the District of Columbia, and 
the territorial sea of the United States; it also includes the 
seas, seabed and subsoil of the submarine areas adjacent to the 
territorial sea over which the United States has sovereign 
rights in accordance with international law. The term does not 
include, however, Puerto Rico, the Virgin Islands, Guam, or any 
other U.S. possession or territory. The Technical Explanation 
states that the sea bed and subsoil of undersea areas adjacent 
to the territorial sea of the United States are included only 
to the extent that the person, property, or activity to which 
the proposed treaty is being applied is connected with the 
exploration or exploitation of natural resources.
    The term ``Slovenia'' means the Republic of Slovenia, as 
well as the territorial sea, sea bed, and subsoil adjacent to 
the territorial sea over which Slovenia, in accordance with 
international law and its domestic legislation, exercises its 
sovereign rights or jurisdiction.
    Under the proposed treaty, a person is a ``national'' of 
one of the treaty countries if the person is an individual 
possessing nationality or citizenship of that country or is a 
legal person, partnership or association deriving its status as 
such from the laws in force in that country.
    The term ``qualified governmental entity'' under the 
proposed treaty means any person or body of persons that 
constitutes a governing body of one of the treaty countries, or 
a political subdivision or local authority of the country. It 
also includes a person that is wholly owned, directly or 
indirectly, by one of the treaty countries or a political 
subdivision or local authority of the country. Such a wholly-
owned person, however, is only a qualified governmental entity 
if it is organized under the laws of the treaty country; its 
earnings are credited to its own account with no portion of its 
income inuring to the benefit of any private person; and its 
assets vest in the treaty country (or its political subdivision 
or local authority) upon dissolution--provided that such 
wholly-owned entity does not carry on commercial activities. A 
qualified governmental entity also includes a pension or trust 
fund of a person described above and that is constituted and 
operated exclusively to administer or provide pension benefits 
described in the government service article (Article 19), 
provided that the pension or trust fund does not carry on 
commercial activities.
    The proposed treaty also contains the standard provision 
that, unless the context otherwise requires or the competent 
authorities agree to a common meaning, all terms not defined in 
the treaty have the meaning that they have under the respective 
laws of the country that is applying the treaty. Where a term 
is defined both under a country's tax law and under a non-tax 
law, the definition in the tax law is to be used in applying 
the proposed treaty.

Article 4. Residence

    The assignment of a country of residence is important 
because the benefits of the proposed treaty generally are 
available only to a resident of one of the treaty countries as 
that term is defined in the proposed treaty. Furthermore, 
issues arising because of dual residency, including situations 
of double taxation, may be avoided by the assignment of one 
treaty country as the country of residence when under the 
internal laws of the treaty countries a person is a resident of 
both countries.
            Internal taxation rules

United States

    Under U.S. law, the residence of an individual is important 
because a resident alien, like a U.S. citizen, is taxed on his 
or her worldwide income, while a nonresident alien is taxed 
only on certain U.S.-source income and on income that is 
effectively connected with a U.S. trade or business. An 
individual who spends sufficient time in the United States in 
any year or over a three-year period generally is treated as a 
U.S. resident. A permanent resident for immigration purposes 
(i.e., a ``green card'' holder) also is treated as a U.S. 
resident.
    Under U.S. law, a company is taxed on its worldwide income 
if it is a ``domestic corporation.'' A domestic corporation is 
one that is created or organized in the United States or under 
the laws of the United States, a State, or the District of 
Columbia.

Slovenia

    Under Slovenian law, resident individuals are subject to 
tax on their worldwide income, while nonresident individuals 
are subject to tax only on certain income derived in Slovenia. 
An individual who is present in Slovenia for at least 183 
consecutive days in a calendar year is considered a resident 
for tax purposes. Individuals who are present in Slovenia for a 
period of less than 183 consecutive days in a calendar year are 
nonresidents for tax purposes and are taxable in Slovenia only 
on Slovenian-source taxable income.
    Under Slovenian law, resident legal entities and companies 
generally are subject to tax on their worldwide income. 
Nonresident legal entities generally are subject to Slovenian 
tax only on income attributable to a permanent establishment 
(within the meaning of Slovenian law) in Slovenia and on income 
attributable to any agents of the foreign company entitled to 
conclude contracts on its behalf (other than contracts for the 
mere purchase of products or services). A company or legal 
entity is a nonresident if it does not have its head office in 
Slovenia
            Proposed treaty rules
    The proposed treaty specifies rules to determine whether a 
person is a resident of the United States or Slovenia for 
purposes of the proposed treaty. The rules generally are 
consistent with the rules of the U.S. model.
    The proposed treaty generally defines ``resident of a 
Contracting State'' to mean any person who, under the laws of 
that country, is liable to tax in that country by reason of the 
person's domicile, residence, citizenship, place of management, 
place of incorporation, or any other criterion of a similar 
nature. The proposed treaty provides that a U.S. citizen or 
alien lawfully admitted to the United States for permanent 
residence (a ``green card'' holder) will be treated as a U.S. 
resident only if such person has a substantial presence, 
permanent home or habitual abode in the United States. The term 
``resident of a Contracting State'' does not include any person 
that is liable to tax in that country only on income from 
sources in that country or capital situated in that country or 
profits attributable to a permanent establishment in that 
country.
    The proposed treaty provides a special rule for fiscally 
transparent entities. Under this rule, the income of a 
partnership, estate, or trust is considered to be a resident of 
one of the treaty countries only to the extent that the income 
it derives is subject to tax in that country as the income of a 
resident, either in its hands or in the hands of its partners, 
beneficiaries, members, or grantors. The Technical Explanation 
states that this includes a U.S. limited liability company that 
is classified as a partnership for U.S. tax purposes. Under 
this provision, for example, if the U.S. partners' share of the 
income of a U.S. partnership is only one-half, the proposed 
treaty's limitations on withholding tax rates would apply to 
only one-half of the Slovenian source income paid to the 
partnership. Under Slovenian law, all entities are subject to 
tax at the entity level and, accordingly, this aspect of the 
proposed treaty has no effect as applied to Slovenian entities.
    The proposed treaty also provides a special rule to treat 
as residents of a treaty country certain organizations that 
generally are exempt from tax in that country. Under this rule, 
certain organizations that are established and maintained in a 
country exclusively for religious, charitable, educational, 
scientific or similar purposes or to provide pension or similar 
benefits to employees pursuant to a plan are treated as 
residents of that country, notwithstanding that all or part of 
its income may be exempt from tax under the domestic law of 
that country.
    Qualified governmental entities (as defined in Article 
3(1)(i)) are treated as residents of the countries in which 
they are established for purposes of the proposed treaty.
    A set of ``tie-breaker'' rules is provided to determine 
residence in the case of an individual who, under the basic 
residence definition, would be considered to be a resident of 
both countries. Under these rules, an individual is deemed to 
be a resident of the country in which he or she has a permanent 
home available. If the individual has a permanent home in both 
countries, the individual's residence is deemed to be the 
country with which his or her personal and economic relations 
are closer (i.e., his or her ``center of vital interests''). If 
the country in which the individual has his or her center of 
vital interests cannot be determined, or if he or she does not 
have a permanent home available in either country, he or she is 
deemed to be a resident of the country in which he or she has 
an habitual abode. If the individual has an habitual abode in 
both countries or in neither country, he or she is deemed to be 
a resident of the country of which he or she is a national. If 
the individual is a national of both countries or neither 
country, the competent authorities of the countries will settle 
the question of residence by mutual agreement.
    A company that would be a resident of both countries under 
the basic definition in the proposed treaty is deemed to be a 
resident of the country in which it is created or organized. If 
the company is dual-incorporated, then the company will be 
treated as a resident of one of the countries only if and to 
the extent that the competent authorities can agree to a single 
country of residence for the company. In the case of any other 
persons other than individuals or companies (such as trusts or 
estates) that would be a resident of both countries under the 
basic definition in the proposed treaty, the proposed treaty 
requires the competent authorities to settle the issue of 
residence by mutual agreement and to determine the mode of 
application of the proposed treaty to such person.

Article 5. Permanent Establishment

    The proposed treaty contains a definition of the term 
``permanent establishment'' that generally follows the pattern 
of 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 to mitigate double 
taxation. Generally, an enterprise that is a resident of one 
country is not 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 permanent establishment concept is used to 
determine whether the reduced rates of, or exemptions from, tax 
provided for dividends, interest, and royalties apply, or 
whether those items of income will be taxed as business 
profits.
    In general, under the proposed treaty, a permanent 
establishment is a fixed place of business through which the 
business of an enterprise is wholly or partly carried on. A 
permanent establishment includes a place of management, a 
branch, an office, a factory, a workshop, a mine, an oil or gas 
well, a quarry, or any other place of extraction of natural 
resources. It also includes a building site or a construction 
or installation project, or an installation or drilling rig or 
ship used for the exploration of natural resources, if the 
site, project, or activities continue for more than twelve 
months. The Technical Explanation states that the twelve-month 
test applies separately to each individual site or project, 
with a series of contracts or projects that are interdependent 
both commercially and geographically treated as a single 
project. The Technical Explanation further states that if the 
twelve-month threshold is exceeded, the site or project 
constitutes a permanent establishment as of the first day that 
work in the country began. The U.S. and OECD models contain 
similar rules (except for the absence in the OECD model of a 
rule for drilling rigs).
    Under the proposed treaty, the following activities are 
deemed not to constitute a permanent establishment: the use of 
facilities solely for storing, displaying, or delivering goods 
or merchandise belonging to the enterprise; 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; the maintenance of a fixed 
place of business solely for the purchase of goods or 
merchandise or for the collection of information for the 
enterprise; and the maintenance of a fixed place of business 
solely for the purpose of carrying on for the enterprise any 
other activity of a preparatory or auxiliary character. The 
Technical Explanation gives advertising or the supply of 
information as examples of such preparatory and auxiliary 
activities.
    Under the proposed treaty, as under the U.S. model, the 
maintenance of a fixed place of business solely for any 
combination of the above-listed activities does not constitute 
a permanent establishment. The proposed treaty does not contain 
the OECD model's qualification that a fixed place of business 
used solely for any combination of these activities does not 
constitute a permanent establishment, provided that the overall 
activity of the fixed place of business is of a preparatory or 
auxiliary character. In this regard, the Technical Explanation 
states that it is the United States position that a combination 
of activities that are each preparatory or auxiliary activities 
always will result in an overall activity that is also 
preparatory or auxiliary.
    Under the proposed treaty, if a person, other than an 
independent agent, is acting on behalf of an enterprise and 
has, and habitually exercises in a country, the authority to 
conclude contracts that are binding on such enterprise, the 
enterprise is deemed to have a permanent establishment in that 
country in respect of any activities undertaken for that 
enterprise. This rule does not apply where the contracting 
authority is limited to the activities listed above, such as 
storage, display, or delivery of merchandise, which are 
excluded from the definition of a permanent establishment.
    Under the proposed treaty, no permanent establishment is 
deemed to arise if the agent is a broker, general commission 
agent, or any other agent of independent status, provided that 
the agent is acting in the ordinary course of its business. The 
Technical Explanation states that whether an enterprise and an 
agent are independent is a factual determination; relevant 
factors include the extent to which the agent operates based on 
instructions from the enterprise, which party bears the 
business risk associated with the agent's activities on behalf 
of the enterprise, and whether the agent has an exclusive or 
nearly exclusive relationship with the principal.
    The proposed treaty provides that the fact that a company 
that is a resident of one country controls or is controlled by 
a company that is a resident of the other country or that 
carries on business in the other country (whether through a 
permanent establishment or otherwise) does not of itself cause 
either company to be a permanent establishment of the other.

Article 6. Income from Real Property (Immovable Property)

    This article covers income from real property. The rules 
covering gains from the sale of real property are in Article 13 
(Gains).
    Under the proposed treaty, income derived by a resident of 
one country from real property (immovable property), including 
income from agriculture or forestry, situated in the other 
country may be taxed in the country where the property is 
located. This rule is consistent with the rules in the U.S. and 
OECD models.
    The term ``real property'' (``immovable property'') has the 
meaning which it has under the law of the country in which the 
property in question is situated.\3\ The proposed treaty 
specifies that the term in any case includes property accessory 
to immovable property, livestock and equipment used in 
agriculture and forestry, rights to which the provisions of 
general law respecting landed property apply, usufruct of 
immovable property, and rights to variable or fixed payments as 
consideration for the working of, or the right to work, mineral 
deposits, sources, and other natural resources. Ships, boats, 
and aircraft are not considered to be immovable property.
---------------------------------------------------------------------------
    \3\ In the United States, the term ``real property'' is defined in 
Treas. Reg. sec. 1.897-1(b).
---------------------------------------------------------------------------
    The proposed treaty specifies that the country in which the 
property is situated also may tax income derived from the 
direct use, letting, or use in any other form of real property. 
The proposed treaty further provides that the rules of this 
article permitting source country taxation apply to the income 
from real property of an enterprise and to income from real 
property used for the performance of independent personal 
services.
    Like the U.S. model and certain other U.S. income tax 
treaties, the proposed treaty provides residents of a country 
with an election to be taxed on a net basis by the other 
country on income from real property in that other country. 
Such election is binding for the taxable year and all 
subsequent taxable years unless the competent authority of the 
country where the real property is located agrees to terminate 
the election. U.S. internal law provides such a net-basis 
election in the case of income from a foreign person from U.S. 
real property. (Code secs. 871(d) and 882(d)).

Article 7. Business Profits

            Internal taxation rules

United States

    U.S. law distinguishes between the U.S. 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 treatment of income as effectively connected with a 
U.S. trade or business depends upon whether the source of the 
income is U.S. or foreign. In 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 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 (under what is referred to as a ``force of 
attraction'' rule).
    Foreign-source income generally 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. Only three types of 
foreign-source income are considered to be effectively 
connected income: rents and royalties for the use of certain 
intangible property derived from the active conduct of a U.S. 
business; certain 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. Special rules apply for purposes of determining 
the foreign-source income that is effectively connected with a 
U.S. business of an insurance company.
    Any income or gain of a foreign person for any taxable year 
that is attributable to a transaction in another year is 
treated as effectively connected with the conduct of a U.S. 
trade or business if it would have been so treated had it been 
taken into account in that other year (Code sec. 864(c)(6)). In 
addition, if any property ceases to be used or held for use in 
connection with the conduct of a trade or business within the 
United States, the determination of whether any income or gain 
attributable to a sale or exchange of that property occurring 
within ten years after the cessation of business is effectively 
connected with the conduct of a trade or business within the 
United States is made as if the sale or exchange occurred 
immediately before the cessation of business (Code sec. 
864(c)(7)).

Slovenia

    Nonresident legal entities (i.e., companies or entities 
that do not have their head office in Slovenia) generally are 
subject to Slovenian tax only on income attributable to a 
permanent establishment (within the meaning of Slovenian law) 
in Slovenia, on income attributable to any agents of the 
foreign company entitled to conclude contracts on its behalf 
(other than contracts for the mere purchase of products or 
services), and on Slovenian-source dividends. Nonresident 
individuals generally are subject to Slovenian tax only on 
Slovenian-source income.
            Proposed treaty limitations on internal law

Business profits subject to host country tax

    Under the proposed treaty, business profits of an 
enterprise of one of the countries are taxable in the other 
country only to the extent that they are attributable to a 
permanent establishment in the other country through which the 
enterprise carries on business. This is one of the basic 
limitations on a country's right to tax income of a resident of 
the other country. The rule is similar to those contained in 
the U.S. and OECD models.
    The taxation of business profits under the proposed treaty 
differs from U.S. internal law rules for taxing business 
profits primarily by requiring more than merely being engaged 
in a trade or business before a country can tax business 
profits and by substituting an ``attributable to'' standard for 
the Code's ``effectively connected'' standard. Under the 
proposed treaty, some level of fixed place of business would 
have to be present and the business profits generally would 
have to be attributable to that fixed place of business.
    The proposed treaty provides that there will be attributed 
to a permanent establishment the business profits which it 
might be expected to make if it were a distinct and independent 
entity engaged in the same or similar activities under the same 
or similar conditions. The Technical Explanation explains that 
this incorporates the arm's-length standard for purposes of 
determining the profits attributable to a permanent 
establishment. The Technical Explanation further states that it 
is understood that this provision permits the use of methods 
other than separate accounting to determine the arm's-length 
profits of a permanent establishment where it is necessary to 
do so for practical reasons, such as when the affairs of the 
permanent establishment are so closely bound up with those of 
the head office that it would be impossible to disentangle them 
on any strict basis of accounts.

Treatment of expenses

    In computing taxable business profits, the proposed treaty 
provides that deductions are allowed for expenses, wherever 
incurred, which are incurred for the purposes of the permanent 
establishment. These deductions include a reasonable allocation 
of executive and general administrative expenses, research and 
development expenses, interest, and other expenses incurred for 
purposes of the enterprise as a whole (or, if not the 
enterprise as whole, at least the part of the enterprise that 
includes the permanent establishment). According to the 
Technical Explanation, under this language, each treaty country 
is permitted to (but not required to) apply the type of expense 
allocation rules provided by U.S. law (such as Treas. Reg. 
secs. 1.861-8 and 1.882-5). Thus, for example, a Slovenian 
company that has a branch office in the United States but which 
has its head office in Slovenia may, in computing the U.S. tax 
liability, be entitled to deduct a portion of the executive and 
general administrative expenses incurred in Slovenia by the 
head office for purposes of operating the U.S. branch, 
allocated and apportioned in accordance with Treas. Reg. sec. 
1.861-8 (or 1.882-5). The Committee believes that it is 
appropriate to apply reasonable allocation methods for these 
purposes. In addition, the Technical Explanation states that 
this rule does not permit a deduction for expenses charged to a 
permanent establishment by another unit of the enterprise. 
Thus, a permanent establishment may not deduct a royalty deemed 
paid to the head office.

Other rules

    Business profits are not attributed to a permanent 
establishment merely by reason of the purchase of goods or 
merchandise by the permanent establishment for the enterprise. 
Thus, where a permanent establishment purchases goods for its 
head office, the business profits attributed to the permanent 
establishment with respect to its other activities are not 
increased by a profit element in its purchasing activities.
    The amount of profits attributable to a permanent 
establishment must be determined by the same method each year 
unless there is good and sufficient reason to change the 
method. The Technical Explanation states that this rule does 
not restrict a treaty country from imposing additional 
requirements, such as the rules under Code section 481, to 
prevent amounts from being duplicated or omitted following a 
change in accounting method.
    The proposed treaty provides that the business profits 
attributed to a permanent establishment shall include only the 
profits derived from the assets or activities of the permanent 
establishment. The proposed treaty does not incorporate the 
limited force of attraction rule of Code section 864(c)(3). The 
proposed treaty is consistent with the U.S. model treaty and 
other existing U.S. treaties in this regard.
    Where business profits include items of income that are 
dealt with separately in other articles of the proposed treaty, 
those other articles, and not the business profits article, 
govern the treatment of those items of income (except where 
such other articles specifically provide to the contrary). 
Thus, for example, dividends are taxed under the provisions of 
Article 10 (Dividends), and not as business profits, except as 
specifically provided in Article 10.
    The proposed treaty follows the U.S. model and defines the 
term ``business profits'' broadly to mean income derived from 
any trade or business, including income derived from the 
performance of personal services and from the rental of 
tangible property.
    The proposed treaty also provides that, for purposes of the 
taxation of business profits, income or gain may be 
attributable to a permanent establishment or fixed base (and 
therefore may be taxable in the country where the permanent 
establishment or fixed base was situated) even if the payment 
of such income is deferred until after the permanent 
establishment or fixed base has ceased to exist. This rule 
incorporates into the proposed treaty the rule of Code section 
864(c)(6). The rule applies with respect to business profits 
(Article 7, paragraphs 1 and 2), dividends (Article 10, 
paragraph 6), interest (Article 11, paragraph 5), royalties 
(Article 12, paragraph 4), gains (Article 13, paragraph 3), 
independent personal services (Article 14), and other income 
(Article 21, paragraph 2).

Article 8. Shipping and Air Transport

    Article 8 of the proposed treaty covers income from the 
operation or rental of ships, aircraft, and containers in 
international traffic. The rules governing income from the 
disposition of ships, aircraft, and containers are in Article 
13 (Gains).
    The United States generally taxes the U.S.-source income of 
a foreign person from the operation of ships or aircraft to or 
from the United States. An exemption from U.S. tax is provided 
if the income is earned by a corporation that is organized in, 
or an alien individual who is resident in, a foreign country 
that grants an equivalent exemption to U.S. corporations and 
residents. The United States has entered into agreements with a 
number of countries providing such reciprocal exemptions.
    Under the proposed treaty, profits which are derived by an 
enterprise of one country from the operation in international 
traffic of ships or aircraft are taxable only in that country, 
regardless of the existence of a permanent establishment in the 
other country. ``International traffic'' means any transport by 
a ship or aircraft, except where the transport is solely 
between places in the other country (Article 3(1)(d) (General 
Definitions)).
    The proposed treaty provides that profits from the rental 
of ships or aircraft on a full (time or voyage) basis 
constitute profits from the operation of ships or aircraft. 
Thus, such profits from the rental of ships or aircraft for use 
in international traffic are exempt from tax in the other 
country. In addition, the proposed treaty provides that profits 
from the operation of ships or aircraft include profits derived 
from the rental of ships or aircraft on a bareboat basis if the 
ships or aircraft are operated in international traffic by the 
lessee, or if such rental profits are incidental to other 
profits of the lessor from the operation of ships or aircraft 
in international traffic. Thus, the exemption from source-
country tax for shipping profits applies to 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 the ships or aircraft for use in international 
traffic. In addition, profits derived by an enterprise from the 
inland transport of property or passengers within a country are 
treated as profits from the operation of ships or aircraft in 
international traffic if such transport is undertaken as part 
of international traffic by the enterprise. These rules are the 
same as the rules in the U.S. model.
    Like the U.S. model, the proposed treaty provides that 
profits of an enterprise of a country from the use, 
maintenance, or rental of containers (including trailers, 
barges, and related equipment for the transport of containers) 
used in international traffic is exempt from tax in the other 
country.
    Also like the U.S. model, the shipping and air transport 
provisions of the proposed treaty apply to profits from 
participation in a pool, joint business, or international 
operating agency. This refers to various arrangements for 
international cooperation by carriers in shipping and air 
transport.

Article 9. Associated Enterprises

    The proposed treaty, like most other U.S. tax treaties, 
contains an arm's-length pricing provision. The proposed treaty 
recognizes the right of each country to make an allocation of 
profits to an enterprise of that country in the case of 
transactions between related enterprises, if conditions are 
made or imposed between the two enterprises in their commercial 
or financial relations which differ from those which would be 
made between independent enterprises. In such a case, a country 
may allocate to such an enterprise the profits which it would 
have accrued but for the conditions so imposed. This treatment 
is consistent with the U.S. model.
    For purposes of the proposed treaty, an enterprise of one 
country is related to an enterprise of the other country if one 
of the enterprises participates directly or indirectly in the 
management, control, or capital of the other enterprise. 
Enterprises are also related if the same persons participate 
directly or indirectly in their management, control, or 
capital.
    Under the proposed treaty, when a redetermination of tax 
liability has been made by one country under the provisions of 
this article, and the other country agrees that the adjustment 
was appropriate to reflect arm's-length conditions, the other 
country will make an appropriate adjustment to the amount of 
tax paid in that country on the redetermined income. In making 
such adjustment, due regard is to be given to other provisions 
of the proposed treaty, and the competent authorities of the 
two countries are to consult with each other if necessary. The 
proposed treaty's saving clause retaining full taxing 
jurisdiction in the country of residence or citizenship does 
not apply in the case of such adjustments. Accordingly, 
internal statute of limitations provisions do not prevent the 
allowance of appropriate correlative adjustments.
    According to the Technical Explanation, it is understood 
that this article does not replace the internal law provisions 
that permit this type of adjustment. Adjustments are permitted 
under internal law provisions even if such adjustments are 
different from, or go beyond, the adjustments authorized by 
this article, provided that such adjustments are consistent 
with the general principles of this article permitting 
adjustments to reflect arm's-length terms. The Technical 
Explanation states that this article also permits the tax 
authorities of the countries to address thin capitalization 
issues.

Article 10. Dividends

            Internal taxation rules

United States

    The United States generally imposes a 30-percent tax on the 
gross amount of U.S.-source dividends paid to nonresident alien 
individuals and foreign corporations. The 30-percent tax does 
not apply if the foreign recipient is engaged in a trade or 
business in the United States and the dividends are effectively 
connected with that trade or business. In such a case, the 
foreign recipient is subject to U.S. tax on such dividends on a 
net basis at graduated rates in the same manner that a U.S. 
person would be taxed.
    Under U.S. law, the term dividend generally means any 
distribution of property made by a corporation to its 
shareholders, either from accumulated earnings and profits or 
current earnings and profits. However, liquidating 
distributions generally are treated as payments in exchange for 
stock and thus are not subject to the 30-percent withholding 
tax described above (see discussion of capital gains in 
connection with Article 13 below).
    Dividends paid by a U.S. corporation generally are U.S.-
source income. Also treated as U.S.-source dividends for this 
purpose are portions of certain dividends paid by a foreign 
corporation that conducts a U.S. trade or business. The U.S. 
30-percent withholding tax imposed on the U.S.-source portion 
of the dividends paid by a foreign corporation is referred to 
as the ``second-level'' withholding tax. This second-level 
withholding tax is imposed only if a treaty prevents 
application of the statutory branch profits tax.
    In general, corporations are not entitled under U.S. law to 
a deduction for dividends paid. Thus, the withholding tax on 
dividends theoretically represents imposition of a second level 
of tax on corporate taxable income. Treaty reductions of this 
tax reflect the view that where the United States already 
imposes corporate-level tax on the earnings of a U.S. 
corporation, a 30-percent withholding rate may represent an 
excessive level of source-country taxation. Moreover, the 
reduced rate of tax often applied by treaty to dividends paid 
to direct investors reflects the view that the source-country 
tax on payments of profits to a substantial foreign corporate 
shareholder may properly be reduced further to avoid double 
corporate-level taxation and to facilitate international 
investment.
    A real estate investment trust (``REIT'') is a corporation, 
trust, or association that is subject to the regular corporate 
income tax, but that receives a deduction for dividends paid to 
its shareholders if certain conditions are met. In order to 
qualify for the deduction for dividends paid, a REIT must 
distribute most of its income. Thus, a REIT is treated, in 
essence, as a conduit for federal income tax purposes. Because 
a REIT is taxable as a U.S. corporation, a distribution of its 
earnings is treated as a dividend rather than income of the 
same type as the underlying earnings. Such distributions are 
subject to the U.S. 30-percent withholding tax when paid to 
foreign owners.
    A REIT is organized to allow persons to diversify ownership 
in primarily passive real estate investments. As such, the 
principal income of a REIT often is rentals from real estate 
holdings. Like dividends, U.S.-source rental income of foreign 
persons generally is subject to the 30-percent withholding tax 
(unless the recipient makes an election to have such rental 
income taxed in the United States on a net basis at the regular 
graduated rates). Unlike the withholding tax on dividends, 
however, the withholding tax on rental income generally is not 
reduced in U.S. income tax treaties.
    U.S. internal law also generally treats a regulated 
investment company (``RIC'') as both a corporation and a 
conduit for income tax purposes. The purpose of a RIC is to 
allow investors to hold a diversified portfolio of securities. 
Thus, the holder of stock in a RIC may be characterized as a 
portfolio investor in the stock held by the RIC, regardless of 
the proportion of the RIC's stock owned by the dividend 
recipient.
    A foreign corporation engaged in the conduct of a trade or 
business in the United States is subject to a flat 30-percent 
branch profits tax on its ``dividend equivalent amount.'' The 
dividend equivalent amount is the corporation's earnings and 
profits which are attributable to its income that is 
effectively connected with its U.S. trade or business, 
decreased by the amount of such earnings that are reinvested in 
business assets located in the United States (or used to reduce 
liabilities of the U.S. business), and increased by any such 
previously reinvested earnings that are withdrawn from 
investment in the U.S. business. The dividend equivalent amount 
is limited by (among other things) aggregate earnings and 
profits accumulated in taxable years beginning after December 
31, 1986.

Slovenia

    Slovenia generally imposes a withholding tax on dividend 
payments to nonresident legal entities and individuals at a 
rate of 15 percent.
            Proposed treaty limitations on internal law
    Under the proposed treaty, dividends paid by a resident of 
a treaty country to a resident of the other country may be 
taxed in such other country. Dividends paid by a resident of a 
treaty country to a resident of the other country may also be 
taxed by the country in which the payor is resident, but the 
rate of such tax is limited. Under the proposed treaty, source-
country taxation (i.e., taxation by the country in which the 
payor is resident) generally is limited to 5 percent of the 
gross amount of the dividend if the beneficial owner of the 
dividend is a company which owns at least 25 percent of the 
voting shares of the payor company (or, in the case of 
Slovenia, if there is no voting stock, at least 25 percent of 
the statutory capital of the payor company). The source country 
dividend withholding tax generally is limited to 15 percent of 
the gross amount of the dividends beneficially owned by 
residents of the other country in all other cases.
    The rates of source country dividend withholding tax 
permitted under the proposed treaty are the same as those 
provided for in the U.S. model and the OECD model, but the 
ownership requirement generally follows the OECD model. The 
proposed treaty provides that these rules do not affect the 
taxation of the payor company on the profits out of which the 
dividends are paid.
    The proposed treaty allows the United States to impose a 
15-percent tax on a U.S.-source dividend paid by a RIC to a 
Slovenian person. The proposed treaty allows the United States 
to impose a 15-percent tax on a U.S.-source dividend paid by a 
REIT to a Slovenian person if: (1) the beneficial owner of the 
dividend is an individual holding an interest of not more than 
10 percent of the REIT; (2) the dividend is paid with respect 
to a class of stock that is publicly traded and the beneficial 
owner of the dividend is a person holding an interest of not 
more than 5 percent of any class of the REIT's stock; or (3) 
the beneficial owner of the dividend is a person holding an 
interest of not more than 10 percent of the REIT and the REIT 
is diversified. There is no limitation in the proposed treaty 
on the tax that may be imposed by the United States with 
respect to a REIT dividend that does not satisfy at least one 
of these requirements. Thus, such a dividend is taxable at the 
30-percent U.S. statutory withholding rate. For purposes of 
this provision, the Technical Explanation states that a REIT 
will be considered to be diversified if the value of no single 
interest in the REIT's real property exceeds 10 percent of the 
REIT's total interests in real property.
    Like the U.S. model, the proposed treaty exempts dividends 
paid to qualified governmental entities (that do not control 
the payor) from tax in the treaty country of source. This 
provision is analogous to the exemption provided to foreign 
governments under section 892 of the Code and makes that 
exemption reciprocal.
    The proposed treaty provides a definition of ``dividends'' 
that is broad and flexible and generally follows the U.S. 
model. The proposed treaty generally defines ``dividends'' as 
income from shares or other rights which participate in profits 
and which are not debt claims. The term also includes income 
from other corporate rights if such income is subjected to the 
same tax treatment by the country in which the distributing 
corporation is resident as income from shares.
    The proposed treaty's reduced rates of tax on dividends do 
not apply if the beneficial owner of the dividend carries on 
business through a permanent establishment (or a fixed base, in 
the case of an individual who performs independent personal 
services) in the source country and the dividends are 
attributable to the permanent establishment (or fixed base). 
Such dividends are taxed as business profits (Article 7) or as 
income from the performance of independent personal services 
(Article 14), as the case may be. In addition, dividends 
attributable to a permanent establishment or fixed base, but 
received after the permanent establishment or fixed base is no 
longer in existence are taxable in the country where the 
permanent establishment or fixed base existed (Article 7, 
paragraph 8).
    The proposed treaty contains a general limitation on the 
taxation by a treaty country of dividends paid to a resident of 
the other country by a corporation that is not a resident of 
the first country (a so-called ``second-level withholding 
tax''). Under this provision, a treaty country may not impose 
any tax on dividends paid by a corporation that is resident in 
the other country except where the dividends are paid to a 
resident of the first country, or insofar as the holding in 
respect of which the dividends are paid is effectively 
connected with a permanent establishment or fixed base of the 
recipient in the first country.
    The proposed treaty permits the imposition of a branch 
profits tax, but limits the rate of such tax to five percent. 
In the case of the United States, the branch profits tax may be 
imposed on a corporation resident in Slovenia to the extent of 
the corporation's (1) business profits that are attributable to 
a permanent establishment in the United States, (2) income that 
is subject to taxation on a net basis because the corporation 
has elected under section 882(d) of the Code to treat income 
from real property not otherwise taxed on a net basis as 
effectively connected income and (3) gain from the disposition 
of certain U.S. real property interests. Such tax may be 
imposed only on the portion of the business profits 
attributable to such permanent establishment, or the portion of 
such real property income or gains, that represents the 
``dividend equivalent amount.'' The Technical Explanation 
states that the term ``dividend equivalent amount'' has the 
same meaning as it has under section 884 of the Code (as it may 
be amended).
    The proposed treaty provides a ``main purpose'' test that 
is not specifically included in the dividends articles of the 
U.S. model or OECD model. Under this rule, the proposed 
treaty's reduced rates of tax on dividends do not apply if the 
main purpose, or one of the main purposes, for the creation or 
assignment of shares or other rights in respect of which 
dividends are paid is to take advantage of the dividends 
article of the proposed treaty. The Technical Explanation 
states that it is intended that the provisions of this article 
will be self-executing, but the tax authorities of one of the 
treaty countries, on review, may deny the benefits of the 
reduced rate of tax on dividends. In addition, the Technical 
Explanation states that the competent authorities of both of 
the treaty countries may together agree that this standard has 
been met in a particular case or with respect to a type of 
transaction entered into by a number of taxpayers.

Article 11. Interest

            Internal taxation rules

United States

    Subject to several exceptions (such as those for portfolio 
interest, bank deposit interest, and short-term original issue 
discount), the United States imposes a 30-percent withholding 
tax on U.S.-source interest paid to foreign persons under the 
same rules that apply to dividends. U.S.-source interest, for 
purposes of the 30-percent tax, generally is interest on the 
debt obligations of a U.S. person, other than a U.S. person 
that meets specified foreign business requirements. Also 
subject to the 30-percent tax is interest paid by the U.S. 
trade or business of a foreign corporation. A foreign 
corporation is subject to a branch-level excess interest tax 
with respect to certain ``excess interest'' of a U.S. trade or 
business of such corporation; under this rule, an amount equal 
to the excess of the interest deduction allowed with respect to 
the U.S. business over the interest paid by such business is 
treated as if paid by a U.S. corporation to a foreign parent 
and therefore is subject to the 30-percent withholding tax.
    Portfolio interest generally is defined as any U.S.-source 
interest that is not effectively connected with the conduct of 
a trade or business if such interest (1) is paid on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto and (2) is not received by a 10-
percent owner of the issuer of the obligation, taking into 
account shares owned by attribution. However, the portfolio 
interest exemption does not apply to certain contingent 
interest income.
    If an investor holds an interest in a fixed pool of real 
estate mortgages that is a real estate mortgage interest 
conduit (``REMIC''), the REMIC generally is treated for U.S. 
tax purposes as a pass-through entity and the investor is 
subject to U.S. tax on a portion of the REMIC's income (which 
generally is interest income). If the investor holds a so-
called ``residual interest'' in the REMIC, the Code provides 
that a portion of the net income of the REMIC that is taxed in 
the hands of the investor--referred to as the investor's 
``excess inclusion''--may not be offset by any net operating 
losses of the investor, must be treated as unrelated business 
income if the investor is an organization subject to the 
unrelated business income tax, and is not eligible for any 
reduction in the 30-percent rate of withholding tax (by treaty 
or otherwise) that would apply if the investor were otherwise 
eligible for such a rate reduction.

Slovenia

    Slovenia does not generally impose a withholding tax on 
Slovenian-source interest paid to nonresidents legal entities. 
Slovenia does, however, impose a withholding tax at a rate of 
25 percent when the payment is from a Slovenian legal entity to 
a nonresident individual.
            Proposed treaty limitations on internal law
    The proposed treaty provides that interest arising in one 
of the countries and paid to a resident of the other country 
generally may be taxed by both countries. This is contrary to 
the position of the U.S. model which provides for an exemption 
from source-country tax for interest earned by a resident of 
the other country, but not unlike other U.S. treaties with 
developing countries.
    The proposed treaty limits the rate of source-country tax 
that may be imposed on interest income. Under the proposed 
treaty, if the beneficial owner of interest is a resident of 
the other country, the source-country tax on such interest 
generally may not exceed five percent of the gross amount of 
such interest.
    The proposed treaty provides for a complete exemption from 
source-country withholding tax in the case of certain 
categories of interest earned by residents of the other 
country. Interest arising in one of the treaty countries and 
paid to a qualified government entity is exempt from source-
county tax, provided that the qualified governmental entity 
does not control the person paying the interest. Moreover, 
interest arising in either country in connection with a debt 
obligation that is guaranteed or insured by a qualified 
governmental entity of the other country is exempt from source-
country tax. In addition, the proposed treaty exempts from 
source-country tax interest paid or accrued with respect to a 
deferred payment for personal property (movable property) or 
services.
    The proposed treaty defines the term ``interest'' as income 
from debt claims of every kind, whether or not secured by a 
mortgage and whether or not carrying a right to participate in 
the debtor's profits. In particular, it includes income from 
government securities and from bonds or debentures, including 
premiums or prizes attaching to such securities, bonds, or 
debentures. The proposed treaty includes in the definition of 
interest any other income that is treated as income from money 
lent by the domestic law of the country in which the income 
arises. The proposed treaty provides that the term ``interest'' 
does not include amounts treated as dividends under Article 10 
(Dividends) or penalty charges for late payment.
    In the case of the United States, the proposed treaty 
permits limited source-country taxation of the excess, if any, 
of (1) the amount of interest borne by a permanent 
establishment, fixed base, or trade or business subject to tax 
on a net basis with respect to real property income or gains, 
over (2) the interest paid by that permanent establishment, 
fixed base or trade or business in the United States. This rule 
allows the United States to impose its branch-level excess 
interest tax; however, such tax may be imposed only at the 
treaty rate applicable to interest payments (i.e., five 
percent).
    The proposed treaty's reductions in source-country tax on 
interest do not apply if the beneficial owner carries on 
business in the source country through a permanent 
establishment located in that country and the interest is 
attributable to that permanent establishment. In such an event, 
the interest is taxed as business profits (Article 7). The 
proposed treaty's reduced rates of tax on interest also do not 
apply if the interest recipient is a resident of a treaty 
country who performs independent personal services in the other 
treaty country from a fixed base located in the other country 
and such interest is attributable to the fixed base. In such a 
case, the interest attributable to the fixed base is taxed as 
income from the performance of independent personal services 
(Article 14). The Technical Explanation states that these rules 
also apply if the permanent establishment or fixed base no 
longer exists when the interest is paid but such interest is 
attributable to the former permanent establishment or fixed 
base.
    The proposed treaty addresses the issue of non-arm's-length 
interest charges between related parties (or parties otherwise 
having a special relationship) by providing that the amount of 
interest for purposes of applying this article is the amount of 
interest that would have been agreed upon by the payor and the 
beneficial owner in the absence of the special relationship. 
Any amount of interest paid in excess of such amount is taxable 
according to the laws of each country, taking into account the 
other provisions of the proposed treaty. For example, excess 
interest paid by a subsidiary corporation to its parent 
corporation may be treated as a dividend under local law and 
thus be subject to the provisions of Article 10 (Dividends). 
The provision of the proposed treaty does not address cases in 
which the amount of interest is less than an arm's-length 
amount. The Technical Explanation states that in those cases, a 
transaction may be characterized to reflect its substance and 
interest may be imputed.
    The proposed treaty provides two anti-abuse exceptions to 
the general source-country reduction in tax discussed above. 
The first exception relates to ``contingent interest'' 
payments. If interest is paid by a source-country resident to a 
resident of the other country and is determined with reference 
(1) to receipts, sales, income, profits, or other cash flow of 
the debtor or a related person, (2) to any change in the value 
of any property of the debtor or a related person, or (3) to 
any dividend, partnership distribution, or similar payment made 
by the debtor to a related person, such interest may be taxed 
in the source country in accordance with its internal laws. 
However, if the beneficial owner is a resident of the other 
country, such interest may not be taxed at a rate exceeding 15 
percent (i.e., the rate prescribed in subparagraph (b) of 
paragraph 2 of Article 10 (Dividends)). The second anti-abuse 
exception provides that the reductions in and exemption from 
source-country tax do not apply to excess inclusions with 
respect to a residual interest in a REMIC. Such income may be 
taxed in accordance with each country's internal law.
    The proposed treaty provides that interest is treated as 
arising in a country if the payor is a resident of that 
country.\4\ If, however, the interest expense is borne by a 
permanent establishment or a fixed base in a treaty country, 
the interest would have as its source the country in which the 
permanent establishment or fixed base is located, regardless of 
the residence of the payor. Thus, for example, if a French 
resident has a permanent establishment in Slovenia and that 
French resident incurs indebtedness to a U.S. person, the 
interest on which is borne by the Slovenian permanent 
establishment, the interest would be treated as having its 
source in Slovenia.
---------------------------------------------------------------------------
    \4\ This is consistent with the source rules of U.S. law, which 
provide as a general rule that interest income has as its source the 
country in which the payor is resident.
---------------------------------------------------------------------------
    The proposed treaty also provides a main purpose test 
similar to that for dividends (Article 10) under which the 
provision with respect to interest will not apply if the main 
purpose, or one of the main purposes, for the creation or 
assignment of the debt claim in respect of which interest is 
paid is to take advantage of the interest article of the 
proposed treaty.

Article 12. Royalties

            Internal taxation rules

United States

    Under the same system that applies to dividends and 
interest, the United States imposes a 30-percent withholding 
tax on U.S.-source royalties paid to foreign persons. U.S.-
source royalties include royalties for the use of or the right 
to use intangible property in the United States.

Slovenia

    Slovenia does not generally impose a withholding tax on 
Slovenian-source royalties paid to nonresidents legal entities. 
Slovenia does, however, impose a withholding tax at a rate of 
15 percent when the payment is from a Slovenian legal entity to 
a nonresident individual.
            Proposed treaty limitations on internal law
    The proposed treaty provides that royalties arising in a 
treaty country and paid to a resident of the other country may 
be taxed by that other country. In addition, the proposed 
treaty allows the country where the royalties arise to tax such 
royalties. However, if the beneficial owner of the royalties is 
a resident of the other country, the source-country tax 
generally may not exceed five percent of the gross royalties. 
The U.S. and OECD models generally exempt royalties from 
source-country taxation.
    For purposes of this five-percent limitation, the term 
``royalties'' means payment of any kind received as 
consideration for the use of, or the right to use, any 
copyright of literary, artistic, scientific or other work 
(including computer software, cinematographic films, audio or 
video tapes or disks, and other means of image or sound 
reproduction), any patent, trademark, design or model, plan, 
secret formula or process or other like right or property, or 
for information concerning industrial, commercial or scientific 
experience. The term also includes gains derived from the 
alienation of such rights or property or rights provided that 
such gains are contingent on the productivity, use, or 
disposition of such property. According to the Technical 
Explanation, it is understood that whether payments with 
respect to computer software are treated as royalties (or as 
business profits) will depend on the facts and circumstances of 
the particular transaction. The Technical Explanation also 
states that it is understood that payments with respect to 
transfers of ``shrink wrap'' computer software will be treated 
as business profits.
    The proposed treaty rates with respect to royalties do not 
apply if the beneficial owner is an enterprise that carries on 
business through a permanent establishment in the source 
country, and the royalties are attributable to the permanent 
establishment. In that event, the royalties are taxed as 
business profits (Article 7). The proposed treaty's rates of 
tax on royalties also do not apply if the beneficial owner is a 
Slovenian resident who performs independent personal services 
in the United States from a fixed base located in the United 
States and such royalties are attributable to the fixed base. 
In such a case, the royalties attributable to the fixed base 
are taxed as income from the performance of independent 
personal services (Article 14). The Technical Explanation 
states that these rules also apply if the permanent 
establishment or fixed base no longer exists when the royalties 
are paid but such royalties are attributable to the former 
permanent establishment or fixed base.
    The proposed treaty addresses the issue of non-arm's-length 
royalties between related parties (or parties otherwise having 
a special relationship) by providing that the amount of 
royalties for purposes of applying this article is the amount 
that would have been agreed upon by the payor and the 
beneficial owner in the absence of the special relationship. 
Any amount of royalties paid in excess of such amount is 
taxable according to the laws of each country, taking into 
account the other provisions of the proposed treaty. For 
example, excess royalties paid by a subsidiary corporation to 
its parent corporation may be treated as a dividend under local 
law and thus be subject to the provisions of Article 10 
(Dividends).
    The proposed treaty provides special source rules for 
royalties which are not included in the U.S. model. Royalties 
are deemed to arise within a country if the payor is that 
country, including its political or administrative subdivisions 
and local authorities, or a resident of that country. If, 
however, the royalty expense is borne by a permanent 
establishment (or fixed base) that the payor has in Slovenia or 
the United States, the royalty has as its source the country in 
which the permanent establishment (or fixed base) is located, 
regardless of the residence of the payor. Thus, for example, if 
a French resident has a permanent establishment in Slovenia and 
that French resident pays a royalty to a U.S. person which is 
attributable to the Slovenian permanent establishment, then the 
royalty would be treated as having its source in Slovenia. The 
proposed treaty provides that notwithstanding the foregoing 
rules, royalties with respect to the use of, or right to use, 
rights or property within a treaty county may be deemed to 
arise within that country. Thus, consistent with U.S. internal 
law, the United States may treat royalties with respect to the 
use of property in the United States as U.S. source income.
    As in the case of dividends (Article 10) and interest 
(Article 11), the proposed treaty includes a main purpose test 
under which the royalty provision will not apply if the main 
purpose, or one of the main purposes, for the creation or 
assignment of rights in respect of which royalties are paid is 
to take advantage of the proposed treaty's royalty article.

Article 13. Gains

            Internal taxation rules

United States

    Generally, gain realized by a nonresident alien or a 
foreign corporation from the sale of a capital asset is not 
subject to U.S. tax unless the gain is effectively connected 
with the conduct of a U.S. trade or business or, in the case of 
a nonresident alien, he or she is physically present in the 
United States for at least 183 days in the taxable year. A 
nonresident alien or foreign corporation is subject to U.S. tax 
on gain from the sale of a U.S. real property interest as if 
the gain were effectively connected with a trade or business 
conducted in the United States. ``U.S. real property 
interests'' include interests in certain corporations if at 
least 50 percent of the assets of the corporation consist of 
U.S. real property.

Slovenia

    Under Slovenian law, with respect to legal entities, gain 
from the sale of a capital asset generally is treated as 
ordinary business income and subject to tax at the regular 
corporate rates. Nonresident legal entities would be subject to 
tax by Slovenia on Slovenian-source capital gains and on 
capital gains attributable to a permanent establishment in 
Slovenia. Nonresident individuals are subject to tax on 
Slovenian-source capital gains to the extent that such gains 
would be taxable if the individual were a resident of Slovenia. 
Capital gains for this purpose include gains from the sale of 
real estate if the real estate is sold within three years from 
the date of acquisition, and securities and other shares in 
capital.
            Proposed treaty limitations on internal law
    The proposed treaty specifies rules governing when a 
country may tax gains from the alienation of property by a 
resident of the other country. The rules are generally 
consistent with those contained in the U.S. model.
    Under the proposed treaty, gains derived by a resident of 
one treaty country from the alienation of real property 
situated in the other country may be taxed in the country where 
the property is situated. In addition, gains derived by a 
resident of one country from the alienation of an interest in a 
partnership, trust, or estate, to the extent attributable to 
real property situated in the other country, may be taxed in 
the country where the property is situated. For the purposes of 
this article, real property in the other country includes (1) 
real property as defined in Article 6 (Income from Real 
Property (Immovable Property)) situated in the other country, 
(2) an interest in a partnership, trust, or estate, to the 
extent that its assets consist of real property situated in 
that other country, and (3) shares or other comparable rights, 
other than shares that are regularly traded on an established 
securities market, in a company that is a resident of a treaty 
country and that derives at least 50 percent of its value 
directly or indirectly from immovable property situated in the 
other treaty country. The Technical Explanation states that 
this provision is intended to cover U.S. real property 
interests as well as any similar interests in Slovenian real 
property. The Technical Explanation also states that the United 
States will look through distributions made by a REIT and treat 
those distributions as gains subject to this article when they 
are attributable to gains derived from the alienation of real 
property.
    Gains from the alienation of personal property (movable 
property) that form a part of the business property of a 
permanent establishment which an enterprise of one country has 
in the other country, gains from the alienation of movable 
property pertaining to a fixed base which is available to a 
resident of one country in the other country for the purpose of 
performing independent personal services, and gains from the 
alienation of such a permanent establishment (alone or with the 
whole enterprise) or such a fixed base, may be taxed in that 
other country. The Treasury Explanation makes clear that this 
rule also applies if the permanent establishment or fixed base 
no longer exists when the gains are recognized but such gains 
relate to the former permanent establishment or fixed base.
    Gains from the alienation of ships, aircraft, or containers 
operated in international traffic, (or movable property 
pertaining to the operation of ships, aircraft, or containers) 
are taxable only in the country in which the person disposing 
of such property is resident.
    Gains from the alienation of any property other than that 
discussed above is taxable under the proposed treaty only in 
the country in which the person disposing of the property is 
resident.

Article 14. Independent Personal Services

            Internal taxation rules

United States

    The United States taxes the income of a nonresident alien 
individual 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. The performance of 
personal services within the United States may constitute a 
trade or business within the United States.
    Under the Code, the income of a nonresident alien 
individual from the performance of personal services in the 
United States is excluded from U.S.-source income, and 
therefore is not taxed by the United States in the absence of a 
U.S. trade or business, if the following criteria are met: (1) 
the individual is not in the United States for over 90 days 
during the 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 are performed for a 
foreign office or place of business of a U.S. person.

Slovenia

    Nonresident individuals generally are subject to tax on 
salaries or wages income earned under a contract for temporary 
work, and other income if the income is derived from services 
or work in the territory of Slovenia. Such income is taxed 
according to the same general rules and rates that apply to 
Slovenian residents.
            Proposed treaty limitations on internal law
    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, 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.
    Under the proposed treaty, income in respect of 
professional services or other activities of an independent 
character performed in one country by a resident of the other 
country is exempt from tax in the country where the services 
are performed (the source country), except that an individual 
may be taxed in the source country if he or she has a fixed 
base regularly available to him or her in that country for the 
purpose of performing the services.\5\ In that case, the source 
country is permitted to tax only that portion of the 
individual's income which is attributable to the fixed base.
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    \5\ According to the Technical Explanation, it is understood that 
the concept of a fixed base is analogous to the concept of a permanent 
establishment.
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    For purposes of this article of the proposed treaty, 
``professional services'' includes especially independent 
scientific, literary, artistic, educational or teaching 
activities as well as independent activities of physicians, 
lawyers, engineers, architects, dentists, and accountants. This 
list is derived from the OECD model and, according to the 
Technical Explanation, is not exhaustive.
    The principles of paragraph 3 of Article 7 (Business 
Profits) are applicable under the proposed treaty for 
determining taxable independent personal services income. Thus, 
according to the Technical Explanation, all relevant expenses, 
including expenses not incurred in the country in which the 
fixed base is located, must be allowed as deductions in 
computing independent personal services net income.

Article 15. 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 are taxable only by the country of residence 
if three requirements are met: (1) the individual must be 
present in the source country for not more than 183 days in any 
twelve-month period; (2) his or her employer must not be a 
resident of the source country; and (3) the compensation must 
not be borne by a permanent establishment or fixed base of the 
employer in the source country. These limitations on source-
country taxation are identical to the rules of the U.S. model 
and the OECD model.
    The proposed treaty provides that remuneration derived by a 
resident of one country in respect of employment as a member of 
the regular complement of a ship or aircraft operated in 
international traffic shall be taxable only by that country. 
This rule follows the U.S. model.
    This article is subject to the provisions of the separate 
articles covering directors' fees (Article 16), pensions, 
social security benefits, annuities, alimony and child support 
(Article 18), and government service income (Article 19).

Article 16. Directors' Fees

    Under the proposed treaty, directors' fees and other 
compensation derived by a resident of one country for services 
rendered in the other country as a member of the board of 
directors of a company which is a resident of that other 
country is taxable in that other country. This rule is the same 
as the corresponding rule in the U.S. model.

Article 17. Artistes and Sportsmen

    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 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.
    Under the proposed treaty, income derived by an entertainer 
or athlete who is a resident of one country from his or her 
personal activities as such in the other country may be taxed 
in the other country if the amount of the gross receipts 
derived by him or her from such activities (including 
reimbursed expenses) exceeds $15,000 or its Slovenian currency 
equivalent. Under this rule, if a Slovenian entertainer or 
athlete maintains no fixed base in the United States and 
performs (as an independent contractor) for one day of a 
taxable year in the United States for total compensation of 
$14,000, the United States could not tax that income. If, 
however, that entertainer's or athlete's total compensation 
were $16,000, the full amount would be subject to U.S. tax.
    The proposed treaty provides that where income in respect 
of activities exercised by an entertainer or athlete in his or 
her capacity as such accrues not to the entertainer or athlete 
but to another person, that income is taxable by the country in 
which the activities are exercised unless it is established 
that neither the entertainer or athlete nor persons related to 
him or her participated directly or indirectly in the profits 
of that other person in any manner, including the receipt of 
deferred remuneration, bonuses, fees, dividends, partnership 
distributions, or other distributions. (This provision applies 
notwithstanding the business profits and personal service 
articles (Articles 7, 14, and 15).) This provision prevents 
highly-paid entertainers and athletes from avoiding tax in the 
country in which they perform by, for example, routing the 
compensation for their services through a third entity such as 
a personal holding company or a trust located in a country that 
would not tax the income.
    The proposed treaty provides that these rules do not apply 
to income derived from activities performed in a country by 
entertainers or athletes if such activities are wholly or 
mainly supported by public funds of the other country or a 
political subdivision or a local authority thereof. In such a 
case, the income is taxable only in the entertainer's or 
athlete's country of residence. This rule is not contained in 
the U.S. or OECD models, but is contained in some other U.S. 
treaties.

Article 18. Pensions, Social Security, Annuities, Alimony, and Child 
        Support

    Under the proposed treaty, pensions and other similar 
remuneration beneficially owned by a resident of either country 
in consideration of past employment, whether paid periodically 
or in a lump sum, is taxable only in the recipient's country of 
residence; however, that country may not tax such income to the 
extent that it has already been included in taxable income in 
the other country prior to its distribution.
    The proposed treaty provides that payments made by one of 
the countries under the provisions of the social security or 
similar legislation of the country to a resident of the other 
country or to a U.S. citizen are taxable only by the source 
country, and not by the country of residence. The Technical 
Explanation states that the term ``similar legislation'' is 
intended to include U.S. tier 1 Railroad Retirement benefits. 
Consistent with the U.S. model, this rule with respect to 
social security payments is an exception to the proposed 
treaty's saving clause.
    The proposed treaty also provides that annuities are taxed 
only in the country of residence of the individual who 
beneficially owns and derives them. The term ``annuities'' is 
defined for purposes of this provision as a stated sum paid 
periodically at stated times during a specified number of 
years, or for life, under an obligation to make the payments in 
return for adequate and full consideration (other than services 
rendered).
    The proposed treaty also provides that alimony paid by a 
resident of one treaty country, and deductible in that country, 
to a resident of the other country are taxable only in the 
country of residence of the recipient. The term ``alimony'' for 
this purpose is defined as periodic payments made pursuant to a 
written separation agreement or decree of divorce, separate 
maintenance, or compulsory support and which are taxable to the 
recipient in its country of residence. In addition, the 
proposed treaty provides that periodic payments for child 
support made pursuant to a written separation agreement or 
decree of divorce, separate maintenance, or compulsory support, 
which are not otherwise alimony, are exempt from tax in both 
the United States and Slovenia. These rules are similar to the 
corresponding rules in the U.S. model.

Article 19. Government Service

    Under the proposed treaty, wages and other remuneration, 
other than a pension, paid from the pubic funds of one of the 
countries (or a political subdivision or local authority 
thereof) to an individual in respect of services rendered to 
that country (or subdivision or authority) in the discharge of 
functions of a governmental nature generally is taxable only by 
that country. Such remuneration is taxable only in the other 
country, however, if the services are rendered in that other 
country by an individual who is a resident of that country and 
who (1) is also a national of that country or (2) did not 
become a resident of that country solely for the purpose of 
rendering the services. This treatment is consistent with the 
rules under the U.S. and OECD models.
    The proposed treaty further provides that any pension paid 
from the public funds of one of the countries (or a political 
subdivision or local authority thereof) to an individual in 
respect of services rendered to that country (or subdivision or 
authority) in the discharge of functions of a governmental 
nature is taxable only by that country. Such a pension is 
taxable only by the other country, however, if the individual 
is a national and resident of that other country. This 
treatment is consistent with the rules under the U.S. and OECD 
models. When benefits paid by a country in respect of services 
rendered to that country are in the form of social security 
benefits, those payments are covered by paragraph 2 of the 
article dealing with pensions, social security and the like 
(Article 18).
    The provisions described in the foregoing paragraphs are 
exceptions to the proposed treaty's saving clause for 
individuals who are neither citizens nor permanent residents of 
the country where the services are performed. Thus, for 
example, payments by the government of Slovenia to its 
employees in the United States are exempt from U.S. tax if the 
employees are not U.S. citizens or green card holders and were 
not residents of the United States at the time they became 
employed by the Slovenian government.
    The Technical Explanation clarifies that if a country or 
one of its political subdivisions or local authorities is 
carrying on business (as opposed to functions of a governmental 
nature), the provisions of Articles 14 (Independent Personal 
Services), 15 (Dependent Personal Services), 16 (Directors' 
Fees), and 17 (Artistes and Sportsmen) apply to remuneration 
for services rendered in connection with the business.

Article 20. Students, Trainees, Professors and Researchers

    Under the proposed treaty, a resident of a country that 
visits the other country (the host country) for the primary 
purpose of studying at a university or other recognized 
educational institution, securing training in a professional 
specialty, or studying or doing research as a recipient of a 
grant, allowance, or award from a governmental, religious, 
charitable, scientific, literary, or educational organization, 
is not taxable in the host country on certain items of income. 
Those exempt items include payments from abroad, other than 
compensation for personal services, for the purpose of 
maintenance, education, study, research or training; a grant, 
allowance or award; and income from personal services in the 
host country in an aggregate amount not in excess of $5,000 (or 
the equivalent in Slovenian tolars) for the taxable year 
involved. The exemptions are available for a period not 
exceeding five years from the beginning of the visit, and for 
such additional time as is necessary to complete, as a full 
time student, requirements to be a candidate for a postgraduate 
or professional degree from a recognized educational 
institution. The U.S. and OECD models also provide for some 
host-country exemptions for students and trainees. The U.S. 
model provides a time limit of one year for such exemption; 
there is no such time limit in the OECD model.
    The proposed treaty also provides that a resident of a 
country who is employed or under contract with a resident of 
the same country and who temporarily visits the other country 
(the host country) for the primary purpose of acquiring 
technical, professional, or business experience from a person 
other than that other resident, or for studying at a university 
or other recognized educational institution in that other 
country is exempt from tax by the host country for a period not 
to exceed 12 months with respect to income from personal 
services in an aggregate amount not to exceed $8,000 (or the 
equivalent in Slovenian tolars).
    Under the proposed treaty, an individual who is, or was 
immediately before visiting the host country, a resident of the 
other country and who is present in the host country for the 
purpose of teaching or engaging in research at a recognized 
educational or research institution is not taxable in the host 
country on his or her remuneration from personal services for 
teaching or research for a period not exceeding two years from 
the date of the individual's arrival in the host country. The 
proposed treaty provides that in no event will any individual 
have the benefits of this rule apply for more than five taxable 
years.
    The proposed treaty provides that the special exemptions do 
not apply to income from research if such research is 
undertaken not in the public interest but primarily for the 
private benefit of a specific person or persons. This article 
of the proposed treaty is an exception from the saving clause 
in the case of persons who are neither citizens nor lawful 
permanent residents of the host country.

Article 21. Other Income

    This article is a catch-all provision intended to cover 
items of income not specifically covered in other articles, and 
to assign the right to tax income from third countries to 
either the United States or Slovenia. As a general rule, items 
of income not otherwise dealt with in the proposed treaty which 
are derived by residents of one of the countries are taxable 
only in the country of residence. This rule is similar to the 
rules in the U.S. and OECD models.
    This rule, for example, gives the United States the sole 
right under the proposed treaty to tax income derived from 
sources in a third country and paid to a U.S. resident. This 
article is subject to the saving clause, so U.S. citizens who 
are residents of Slovenia will continue to be taxable by the 
United States on their third-country income.
    The general rule just stated does not apply to income 
(other than income from real property as defined in paragraph 2 
of Article 6) if the beneficial owner of the income is a 
resident of one country and carries on business in the other 
country through a permanent establishment, or performs services 
in the other country from a fixed base, and the income is 
attributable to such permanent establishment or fixed base. In 
such a case, the provisions of Article 7 (Business Profits) or 
Article 14 (Independent Personal Services), as the case may be, 
will apply.
    The proposed treaty contains a main purpose test similar to 
that provided with respect to the dividends, interest, and 
royalties articles