withhold tax and need refund the tax only upon application at the end of the calendar year concerned. As discussed below, Article 29 (Refund of Withholding Tax) independently permits each country to impose statutory withholding tax at statutory rates, with the treaty reductions implemented by refund. In addition, under paragraph 6 of Article 29, the competent authorities of the United States and Germany may establish by mutual agreement other procedures for the implementation of the treaty tax reductions. The protocol language regarding German withholding on U.S. residents not subject to tax under the entertainers and athletes article states that it (the protocol) does not affect the competent authorities' ability under paragraph 6 of Article 29 to establish other procedures for the implementation of treaty tax reductions.

The proposed treaty provides that where income in respect of activities exercised by an entertainer or athlete in his capacity as such accrues not to the entertainer or athlete, but to another person, that income may be taxed by the country in which the activities are exercised unless it is established that neither the entertainer or athlete nor persons related to him participate directly or indirectly in the profits of that other person in any manner, including the accrual or receipt of deferred remuneration, bonuses, fees, dividends, partnership income, or other income distributions. (This provision applies notwithstanding the business profits and personal service articles (Articles 7, 14, and 15).) This provision prevents certain performers 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 foregoing provisions are similar to provisions in the U.S. and OECD model treaty articles dealing with entertainers and athletes. The proposed treaty departs from the models in excluding from the article income derived from activities performed in a country by entertainers or athletes if the visit to that country is substantially supported, directly or indirectly, by public funds of the other country or a political subdivision or a local authority thereof. In that case, the income is taxable only in the entertainer's or athlete's residence country.

ARTICLE 18. PENSIONS, ANNUITIES, ALIMONY, AND CHILD SUPPORT

Under the proposed treaty, pensions and other similar remuneration beneficially derived by a resident of either country in consideration of past employment are subject to tax only in the recipient's country of residence. This rule is subject to the provisions of Article 19 (Government Service; Social Security). Thus it does not apply, for example, in the case of pensions paid to a resident of one country attributable to services performed for government entities of the other, unless the resident of the first country is also a citizen of the first country.

The proposed treaty also provides that annuities may be taxed only in the country of residence of the person who beneficially derives them. (This rule is also subject to the provisions of Article 19 (Government Service; Social Security).) An annuity is defined as a

stated sum paid periodically at stated times during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services).

The proposed treaty provides for the treatment of alimony and child support payments, unlike the present treaty. The proposed treaty is similar to the U.S. model to the extent that it provides that alimony is taxable only where the recipient resides and that child support is taxable only in the source country. However, the proposed treaty precludes source country tax on alimony only to the extent it is deductible to the payor. Further, the proposed treaty precludes residence country tax on "non-deductible" alimo

ny.

German internal law differs from U.S. internal law in limiting the alimony deduction by amount, and forbidding any deduction if the recipient is not subject to unlimited tax liability in Germany. The proposed treaty does not require Germany to allow a deduction in excess of the internal law monetary amount limitation. However, paragraph 16 of the proposed protocol provides that in determining the taxable income of a German resident individual, alimony or similar allowances paid to a U.S. resident individual will be deductible in the same amount as if the recipient were subject to unlimited German tax liability.

The term "alimony" as used in this article means periodic payments (made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support) that are taxable to the recipient under the laws of the country of which he or she is a resident.

Child support payments made by a resident of one country to a resident of the other country for the support of a minor child, pursuant to a written separation agreement or decree of divorce, separate maintenance, or compulsory support, may be taxed only in the first country under the proposed treaty.

These treaty rules on alimony and child support are not superseded by the saving clause. Thus under the treaty, a U.S. citizen resident in Germany could not be taxed by the United States on alimony paid by a U.S. resident, despite the tax jurisdiction generally maintained by the United States over its citizens.

ARTICLE 19. GOVERNMENT SERVICE; SOCIAL SECURITY

Article 19 of the proposed treaty carries over without change the government service provisions of Article XI of the present treaty. Thus, under the present and proposed treaties, wages, salaries, and similar compensation and pensions paid by the United States or by its states or political subdivisions to a natural person (other than a German national) are exempt from German tax. Likewise, wages, salaries, and similar compensation and pensions paid by Germany or by its Laender or by municipalities, or pensions paid by a public pension fund thereof to a natural person (other than a U.S. citizen or green card holder) are exempt from U.S. tax. For these purposes, the term "pensions" includes annuities paid to a retired civilian government employee.

Also carried over from Article XI of the present treaty is the rule that pensions, annuities, and other amounts paid by one of the

countries or by a juridical person organized under the public laws of that country as compensation for an injury or damage sustained as a result of hostilities or political persecution are exempt from tax by the other state. Thus, for example, the United States may not tax a war reparation payment made by Germany.

Under the model treaties, unlike the present and proposed German treaties, employment compensation paid by a government of one country is exempt from tax by the other country only if the services rendered were in discharge of functions of a governmental nature. If a country or one of its political subdivisions or local authorities is carrying on a business (as opposed to functions of a governmental nature), the provisions of Articles 15 (Dependent Personal Services), 16 (Directors' Fees), 18 (Artistes and Athletes), and 19 (Pensions, Etc.) would apply under the model treaties to remuneration for services rendered in connection with the business. For example, under either the model or the present and proposed_treaties, a German government official stationed in the United States is not subject to U.S. income tax. However, a person who is neither a U.S. citizen nor U.S. green card holder, and who works for a German state-owned commercial bank in the United States would be taxable by the United States on his wages under the model treaties, but is not so taxable under the present and proposed treaties. The proposed treaty, unlike the present treaty, expressly provides for the taxation of social security benefits and other public pensions not arising from government service. While the U.S. model, and many existing U.S. treaties, 13 would permit only the source country to tax such benefits, the proposed treaty permits taxation only by the residence country.

Prior to 1983, U.S. social security benefit payments generally were excluded from gross income by the United States. In 1983, Congress imposed a 30-percent withholding tax on one-half of the amount of social security benefit payments to nonresident aliens, and removed the income exclusion on a portion of social security benefit payments received by U.S. citizens and residents.

In permitting only the residence country to tax social security benefits, the proposed treaty is similar to the U.S. treaties with Canada, Egypt, Italy, and Japan. The residence country is required, however, to treat benefits paid by the social security system of the other country as if they were paid by the residence country's system. Thus, for example, the treaty would give a U.S. resident receiving German benefits the right to the same degree of exclusion of the benefits from income (under Code sec. 86) as would apply if the benefits were paid by the U.S. social security system. In this respect the provision is unique to the proposed treaty, although the Canadian treaty provides for an exclusion from residence country tax for a portion of social security benefits from the other country. Because the saving clause does not apply to this clause of the treaty, it prevents the United States from taxing U.S. social security payments made to U.S. citizens who are residents of Germany. The only other example of a similar rule involving social security

13 See the U.S. treaties with Australia, Barbados, Belgium, China, Cyprus, Finland, France, Hungary, Iceland, Jamaica, Korea, New Zealand, the Philippines, and Šri Lanka, and pending treaties such as Denmark, Indonesia, and India.

benefits appears in the 1984 U.S.-Italy income tax treaty. That treaty, however, only prohibited U.S. taxation of U.S. social security income of U.S. citizens who were also residents and citizens of Italy.

ARTICLE 20. VISITING PROFESSORS AND TEACHERS; STUDENTS AND

TRAINEES

Professors and teachers.-The treatment afforded professors and teachers under the proposed treaty, as amended by the proposed protocol, corresponds generally to the treatment afforded them under the present treaty. There is no corresponding language in the U.S. or OECD models, although other U.S. treaties provide similar benefits.

Under the proposed treaty, a professor or teacher who is a resi dent of one country and who is present in the other country (the host country) for a period not more than two years for the purposes of carrying out advanced study or research or for teaching at an accredited university, college, school, or other educational institution, or a public research institution or other institution engaged in research for the public benefit, will be exempt from tax in the host country on remuneration for such work. However, this rule does not apply to income from research if the research is undertaken not in the public interest but primarily for the private benefit of a specific person or persons. Under the present treaty, only remuneration for teaching is exempted from host-country tax.

Eligibility for this treaty benefit is contingent on the shortness of time spent in the host country. Thus, paragraph 18 of the proposed protocol provides that if a resident of a country remains in the other, host country for longer than 2 years, the host country may tax the individual under its internal law for the entire period of the visit, unless in a particular case the competent authorities of the two countries agree otherwise. A similar rule applies, for example, under Article 20 of the U.S.-U.K. income tax treaty. Furthermore, under that treaty, rules have been prescribed that prevent an individual from avoiding the tax on income during the initial two years of the visit by exiting the host country briefly before the prescribed period expires, and then returning to continue work there.

The benefits of this rule also will not be available to a person who during the immediately preceding period enjoyed the benefits of the other host country tax reductions, described below, applicable to noncompensatory receipts either from outside the host country or from non-profit organizations or comparable public institutions, or applicable to compensation under $5,000 earned by students and business apprentices.

Students and business apprentices.-A student or business apprentice (including Volontaere and Praktikanten in Germany) who is or was immediately before visiting the host country, a resident of the other country is not taxable in the host country on certain payments he or she receives.

First, if the individual is present in the host country for the purposes of his full-time education or training, the host country may not tax payments, other than compensation for personal services,

received for his maintenance, education, or training, if the payments arise from sources, or are remitted from, outside the host country. This provision is excluded from the saving clause. It closely resembles the corresponding provisions of the OECD model treaty and 1981 U.S. model treaty.

Paragraph 17 of the proposed protocol states that payments made out of public funds of one of the treaty countries or by a scholarship organization endowed with such funds shall be considered to arise in full from sources outside the other country. This rule also applies when the payments are made under programs funded jointly by organizations of both countries if more than 50 percent of these funds are provided out of public funds of the first country or by a scholarship organization endowed with such funds. The competent authorities are to consult with each other to identify those scholarship programs whose payments will be treated as arising from sources outside a country under these rules (cf. Rev. Rul. 89-67).

Second, the host country may not tax payments, other than compensation for personal services, received as a grant, allowance, or award from a non-profit religious, charitable, scientific, literary, or educational private organization or a comparable public institution. A similar rule is contained in the present treaty, but not the U.S. or OECD models.

Third, a person described under either of the two foregoing rules who is present in the host country for not more than 4 years will not be taxed there on any income from dependent personal services that is not in excess of $5,000 (or its Deutsche Mark equivalent) per year, provided that such services are performed for the purpose of supplementing funds available otherwise for maintenance, education, or training.

This provision does not appear in the present treaty or the model treaties. The $5,000 exemption is intended to be in addition to any other deductions (e.g., personal allowances or the standard deduction) available under the internal laws of the host country. Under current U.S. law, this $5,000 in effect gives the individual the equivalent of the standard deduction applicable to a joint return or the approximate equivalent of the sum of the standard deduction applicable to a single person's return and an additional personal exemption deduction. If the student or business apprentice is not a U.S. resident subject to U.S. tax on his worldwide income, then no standard deduction is available, and his personal exemptions may be limited to one. However, insofar as this treaty provision may apply to an individual who does qualify for the standard deduction and multiple personal exemptions, it will reduce that person's U.S. tax liability further.

Like the benefit for professors and teachers, eligibility for this treaty benefit is contingent on the shortness of time spent in the host country. Thus, if a student or business apprentice remains in the host country for longer than 4 years, the host country may tax the individual's compensation income under its internal law for the entire period of the visit, unless in a particular case the competent authorities of the two countries agree otherwise.

Trainees.-Like the present treaty, the proposed treaty provides a host country tax exemption on compensation remitted from out