fined in the treaty is to have the meaning which it has under the applicable tax laws of the country applying the 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 countries as that term is defined in the treaty. Furthermore, double taxation is often avoided by the treaty assigning one of the countries as the country of residence if, under the laws of the two countries, a person is a resident of both.

Under U.S. law, residence of an individual is important because a resident alien is taxed on the individual's worldwide income, while a nonresident alien is taxed only on the individual's U.S. source income and on the individual's income that is effectively connected with a U.S. trade or business. A company is a resident of the United States if it is organized in the United States. An individual who spends substantial time in the United States in any year or over a three-year period generally is a U.S. resident (Code sec. 7701(b)). A permanent resident for immigration purposes also is a U.S. resident. The standards for determining residence under the Code do not alone determine the residence of a U.S. citizen for the purpose of any U.S. tax treaty (such as a treaty that benefits residents, rather than citizens, of the United States).

The proposed treaty generally defines a "resident" of a country to mean any person who, under the laws of that country, is subject to tax therein by reason of domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature. However, the term "resident" of a country does not include any person who is subject to tax in that country in respect only of income from sources in that country.

This provision of the proposed treaty is generally based on the fiscal domicile article of the U.S. model and OECD model tax treaties and is similar to the provisions found in other U.S. tax treaties. Consistent with the U.S. model tax treaty, but unlike the OECD model and most U.S. income tax treaties, citizenship alone does establish residence. As a result, U.S. citizens residing overseas (in countries other than India) are entitled to the benefits of the treaty as U.S. residents. This provision is achieved in few treaties. Moreover, in the case of income derived or paid by a partnership, an estate, or trust, the term "resident" of a country applies only to the extent that the income derived by the partnership, estate, or trust is subject to tax in that country as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. For example, if the share of U.S. residents in the profits of a U.S. partnership is only one-half, India would have to reduce its withholding tax on only half of the Indian source income paid to the partnership.

The proposed treaty provides a set of "tie-breaker" rules to determine residence in the case of an individual who, under the basic treaty definition, is a resident of both countries. These rules are identical to the corresponding rules in the U.S. model treaty. Such a dual resident individual is deemed to be a resident of the country in which he or she has a permanent home available. If this perma

nent home test is inconclusive because the individual has a permanent home in both countries, the individual's residence is deemed to be the country with which the individual's personal and economic relations are closer, i.e., the individual's "center of vital interests." If the country of the individual's center of vital interests cannot be determined, or if the individual does not have a permanent home available in either country, the individual 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 of them, the individual is deemed to be a resident of the country of which he or she is a national (e.g., citizen). If the individual is a national of both countries or of neither of them, the competent authorities of the countries are to settle the question of residence by mutual agreement.

There is no tie-breaker rule for companies. A company could be treated as a resident of both countries under the basic treaty definition (a dual resident company) if it is incorporated in the United States but managed and controlled in India. In that case, the company is generally outside the scope of the proposed treaty. Certain provisions of the proposed treaty would apply, however, including the provisions relating to reduced withholding rates on dividends paid by the dual resident company, nondiscrimination, mutual agreement procedures, exchange of information and administrative assistance, and entry into force. This rule is not found in the U.S., OECD, or United Nations model treaties.

In the case of a person other than an individual or a company, e.g., an estate or trust, that is resident of both countries under the basic treaty definition, the proposed treaty requires the competent authorities of the two countries to settle the question by mutual agreement and to determine how the treaty applies to that person. This rule is identical to the corresponding rule in the U.S. model treaty.

ARTICLE 5. PERMANENT ESTABLISHMENT

The proposed treaty contains a definition of the term "permanent establishment" that follows, in some respects, the pattern of other recent U.S. income tax treaties and the U.S. and OECD model treaties. However, in order to reflect India's status as a developing country, the proposed treaty definition makes a number of concessions to the principle of taxation of income at source. Some of these concessions reflect positions suggested by the United Nations model income tax treaty for use between developed and developing countries.

The permanent establishment concept is one of the basic devices used in income tax treaties to avoid 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 amounts are taxed as business profits. U.S. taxation of business profits is discussed under Article 7.

The principal areas in which the proposed treaty departs from the U.S. model are in its inclusion in the permanent establishment definition of a drilling rig or ship or other installation or structure used for the exploration or development of natural resources in a country for more than 120 days (rather than 12 months); a construction project lasting more than 120 days (rather than 12 months); and the performance of services (other than certain services to which royalty treatment applies under Article 12) for more than 90 days or for a related enterprise. Also, the inclusion in the time period of supervisory activity connected with construction activity is a departure from the U.S. model. In addition, permanent establishment treatment of a dependent agent results from a broader list of activities under the proposed treaty than under the U.S. model. These departures from the U.S. model, however, are similar to the corresponding provisions of the United Nations model treaty and other recent U.S. income tax treaties with developing countries, such as the treaty with Barbados.

In general, under the proposed treaty, a permanent establishment is a fixed place of business in one country through which the business of an enterprise of the other country is wholly or partly carried on. Under the proposed treaty (as under the U.S. model), 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; and (as additions not found in the U.S. model) a warehouse (in relation to a person providing storage facilities for others), a farm, and a store or premises used as a sales outlet. Although not specifically provided in the U.S. model, the treatment of such a warehouse, farm, store or premises as a permanent establishment is consistent with the principles of the model and, according to Treasury's technical explanation to the proposed treaty, is implicitly provided in the U.S. model's definition of a permanent establishment.

Under the proposed treaty, a permanent establishment also includes any installation or structure (including a drilling rig, according to the Treasury's technical explanation of the proposed treaty) used for the exploration or exploitation of natural resources, but only if the installation or structure lasts for more than 120 days in any twelve-month period. Similarly, a permanent establishment includes any building site, construction, assembly, or installation project, or supervisory activities in connection therewith, but only if the site, project, or activities continue for more than 120 days in any twelve-month period.

An enterprise also has a permanent establishment generally if it furnishes services in a country through employees or other personnel, but only if these services are performed within that country for more than 90 days in any twelve-month period. However, the 90-day minimum requirement does not apply, and a permanent establishment does exist, if the services are performed for a related enterprise within the meaning of Article 9 (Associated Enterprises). This services provision is similar to the six-month services rule of the United Nations model treaty. It is not found in the U.S. model treaty but similar provisions have been included in some recent U.S. income tax treaties with developing countries (e.g., Barbados, Jamaica, and the Philippines).

The services provision includes an exception for certain technical or consultancy services related to the use of intangibles, which are known as "included services" and are defined in Article 12 (Royalties). A permanent establishment does not result from the provision of included services, on which withholding tax may be imposed at the rate applicable to royalties under Article 12.

As specified in paragraph I (Ad Article 5) of the proposed protocol, a permanent establishment does not exist in any taxable year in which a natural resources installation or structure; a building site, project, or activity; or the provision of services continues for a period or periods aggregating less than 30 days. However, such lessthan-30 day periods are included in determining whether the 120day and 90-day thresholds have been met in any twelve-month period.

The general permanent establishment rule is modified to provide that a fixed place of business that is used for any of a number of specified activities does not constitute a permanent establishment. These activities include the use of facilities solely for storing, displaying, or occasionally delivering goods or merchandise belonging to the enterprise, and the maintenance of a stock of goods or merchandise belonging to the enterprise solely for purposes of storage, display, or occasional delivery. Also included are the maintenance of a stock of goods or merchandise 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; and the maintenance of a fixed place of business solely for the purpose of advertising, the supply of information, scientific research or other activities that have a preparatory or auxiliary character for the enterprise.

If an enterprise of one country maintains an agent in the other country who has, and habitually exercises, the authority to enter into contracts in that other country in the name of the enterprise, then the enterprise is deemed to have a permanent establishment in the other country with respect to the activities which the agent undertakes on its behalf. This rule does not apply if the contracting authority is limited to those activities (described above) such as storage, display, or delivery of merchandise that are excepted from the definition of permanent establishment. However, the enterprise is treated as having a permanent establishment if an agent habitually maintains in that other country a stock of goods or merchandise from which the agent regularly makes deliveries on behalf of the enterprise and some additional activities conducted in that other country on behalf of the enterprise (whether by the agent or by any other person) have contributed to the sale of the goods or merchandise. This rule is not found in the U.S. model.

In addition, unlike the U.S. model treaty, the enterprise is treated as having a permanent establishment if an agent habitually secures orders in that other country wholly or almost wholly on behalf of that enterprise. As explained in the diplomatic notes exchanged at the time of the signing of the proposed treaty, in order for an agent to be treated as habitually securing orders wholly or almost wholly for the enterprise all of the following tests must be met: (1) The agent frequently accepts orders for goods or merchandise on behalf of the enterprise; (2) substantially all of the agent's

sales-related activities in the other country consist of activities for the enterprise; (3) the agent habitually represents to persons offering to buy goods or merchandise that acceptance of an order by the agent constitutes the agreement of the enterprise to supply goods or merchandise under the terms and conditions specified in the order; and (4) the enterprise takes actions that give purchasers the basis for a reasonable belief that the agent has authority to bind the enterprise.

The proposed treaty contains the usual provision that the agency rule does not apply if the agent is a broker, general commission agent, or other agent of independent status acting in the ordinary course of its business. However, the proposed treaty adds the limitation (similar to one found in the United Nations model treaty and some recent U.S. treaties) that, when the activities of the agent are devoted wholly or almost wholly on behalf of that enterprise, the agent is not considered an agent of independent status if the transactions between the agent and the enterprise are not made under arm's-length conditions.

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

ARTICLE 6. INCOME FROM IMMOVABLE PROPERTY (REAL PROPERTY)

This article covers only income from "immovable property" (or, for U.S. purposes, real property). The rule permitting situs-country taxation of gains from the sale of immovable property is found in Article 13.

Under the proposed treaty, income derived by a resident of one country from immovable property situated in the other country, including income from agriculture or forestry, may be taxed in the country where the immovable property is located. The situs country may tax income derived from the direct use, letting, or use in any other form of immovable property. These rules permitting situs country taxation also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.

The term "immovable property" has the meaning which it has under the law of the country in which the property in question is situated. For property situated in the United States, the term means "real property" as defined by U.S. law.

This article is identical in substance to the article of the U.S. model treaty governing income from real property, except that the U.S. model permits a resident of one country to elect to be taxed on a net basis by the other country on income from real property in that other country. Though the proposed treaty does not contain this election, such treatment is provided for U.S. real property income under the Code (secs. 871(d) and 882(d)). The Committee understands that net basis taxation of Indian real property income is provided under Indian domestic law.