side the host country and paid to certain trainees on visits of 1 year or less where the compensation does not exceed $10,000 (or its Deutsche Mark equivalent). If either the visit exceeds one year, or the compensation exceeds $10,000, no host country tax reduction is required under this provision. The provision applies to a resident of one of the treaty countries who is an employee of an enterprise of that country or of a non-profit religious, charitable, scientific, literary, or educational private organization or a comparable public institution, and who is temporarily present in the other country (the host country) for a period not more than 1 year to acquire technical, professional, or business experience from any person other than his employer. There is no comparable provision in the U.S. or OECD model treaties.

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 Germany. This article is substantially identical to the corresponding article in the U.S. model treaty.

As a general rule, items of income not otherwise dealt with in the proposed treaty which are derived by residents of either country will be taxable only in the country of residence. This rule, for example, gives the United States the sole right under the treaty to tax income sourced in a third country and paid to a resident of the United States. This article is subject to the saving clause, so U.S. citizens who are German residents would continue to be taxable by the United States on their third-country income, with a foreign tax credit provided for income taxes paid to Germany.

The general rule just stated does not apply to income (other than income from immovable property (Article 6)) if the recipient of the income is a resident of one country and carries on business in the other country through a permanent establishment or a fixed base, and the right or property in respect of which the income is paid is effectively connected with the 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 prohibition on taxation by the country other than the residence country does apply, however, to income from immovable property that such country is not given permission to tax under Article 6. An example of such income is income from real property located in a third country.

Paragraph 19 of the proposed protocol provides a clarification of the effect of the exception for income attributed to a permanent establishment or fixed base in the case of a German source dividend earned by (i.e., constituting income attributable to) the U.S. permanent establishment or fixed base of a German resident. In this case, the protocol provides that Germany may tax such a dividend at the reduced rates permitted in the dividends article for dividends paid to U.S. residents. The United States, in turn, may tax the dividend income subject to a credit for the German tax.

ARTICLE 22. CAPITAL

Many countries impose a tax on capital in addition to imposing a tax on income. As a general rule, capital taxes are imposed when the income from the capital would be taxed by the other country imposing the capital tax. The United States does not currently impose a capital tax; however, Germany does. Under Article 2 (Taxes Covered), the German capital tax (Vermoegensteuer) is a covered tax. Article 22 therefore applies to the German capital tax. Under the proposed treaty, capital may be taxed by the country in which located if it is real property owned by a resident of either country, or if it is personal property forming part of the business property of a permanent establishment or fixed base maintained by a resident of the other country. The owner's country of residence could also tax that property. The right to tax ships, aircraft, containers, and related movable property operated in international traffic belongs to the country which has the right (under Article 8 (Shipping and Air Transport)) to tax income of the enterprise operating or using the property. Thus such capital is generally taxable exclusively by the country of which the person carrying on the enterprise is a resident. All other capital is taxable only in the country of residence.

This article is similar to Article XIV A of the present treaty and to the U.S. and OECD model treaties.

ARTICLE 23. RELIEF FROM DOUBLE TAXATION

In general.-One of the two principal purposes for entering into an income tax treaty is to limit double taxation of income earned by a resident of one of the countries that may be taxed by the other country. The United States seeks unilaterally to mitigate double taxation by generally allowing U.S. taxpayers to credit the foreign income taxes that they pay against U.S. tax imposed on their foreign source income. A fundamental premise of the foreign tax credit is that it may not offset the U.S. tax on U.S. source income. Therefore, the foreign tax credit provisions contain a limitation that ensures that the foreign tax credit offsets U.S. tax on foreign source income only. Moreover, the foreign tax credit provisions contain rules that prevent U.S. persons from converting U.S. source income into foreign source income through the use of an intermediate foreign payee.

The foreign tax credit limitation is generally computed on a worldwide consolidated basis. Hence, all income taxes paid to all foreign countries are combined to offset U.S. taxes on all foreign income, subject to the separate limitation rules discussed above. The limitation is computed separately for certain classifications of income (e.g., passive income, high withholding tax interest, financial services income, shipping income, dividends from noncontrolled section 902 corporations, DISC dividends, FSC dividends, and taxable income of a FSC attributable to foreign trade income) in order to prevent the averaging of foreign taxes on certain types of traditionally high-taxed foreign source income against the U.S. tax on certain items of traditionally low-taxed foreign source income. Also, a special limitation applies to the credit for foreign taxes imposed on oil and gas extraction income.

Foreign tax credits generally cannot exceed 90 percent of the pre-foreign tax credit alternative minimum tax (determined without regard to the net operating loss deduction). However, no such limitation will be imposed on a corporation if more than 50 percent of its stock is owned by U.S. persons, all of its operations are in one foreign country with which the United States has an income tax treaty with information exchange provisions, and certain other requirements are met. The 90 percent alternative minimum tax foreign tax credit limitation, enacted in 1986, overrode contrary provisions of then-existing treaties.

An indirect or "deemed-paid" credit is also provided. A U.S. corporation that owns 10 percent or more of the voting stock of a foreign corporation and receives a dividend from the foreign corporation (or an inclusion of the foreign corporation's income) is deemed to have paid a portion of the foreign income taxes paid by the foreign corporation on its accumulated earnings. The taxes deemed paid by the U.S. corporation are included in its total foreign taxes paid for the year the dividend is received and go into the relevant pool or pools of separate limitation category taxes to be credited. Unilateral efforts to limit double taxation are imperfect. Because of differences in rules as to when a person may be taxed on business income, a business may be taxed by two countries as if it were engaged in business in both countries. Also, a corporation or individual may be treated as a resident of more than one country and be taxed on a worldwide basis by both.

Part of the double tax problem is dealt with in other articles that limit the right of a source country to tax income. This article provides further relief where both Germany and the United States would otherwise still tax the same item of income. This article is not subject to the saving clause, so that the country of citizenship or residence waives its overriding taxing jurisdiction to the extent that this article applies.

The present treaty provides separate rules for relief from double taxation for the United States and Germany. The present treaty generally provides for relief from double taxation of U.S. residents and citizens by the United States permitting a credit against its tax for the appropriate amount of taxes paid to Germany on income from German sources. The present treaty generally provides for relief from double taxation of German residents by Germany exempting from its tax those items of U.S. source income and U.S. capital that the treaty would permit the United States to tax. However, Germany retains the right to impose tax on certain U.S. source portfolio dividends and on wages, salaries, pensions, and similar compensation paid by a U.S. government to a German citizen. Under the present treaty Germany has generally agreed to allow a credit against its tax for the appropriate amount of taxes paid to the United States on this income. Where a U.S. citizen is a resident of Germany and is hence subject to tax under the internal laws of both countries on his worldwide income, the present treaty provides a rule under which Germany will exempt that person's U.S. source income under the above rules, but will give a foreign tax credit for U.S. tax on all other U.S. source income.

With some modifications, the proposed treaty retains the system of the present treaty. The modifications include broadening the

class of U.S. source portfolio dividends for which Germany will grant an exemption, adding to the classes of income for which Germany agrees to give a foreign tax credit, and amending the rule applicable to U.S. citizens resident in Germany.

United States

The proposed treaty contains a provision under which the United States allows a citizen or resident a foreign tax credit for income taxes imposed by Germany. The credit is to be computed in accordance with the provisions of and subject to the limitations of U.S. law (as those provisions and limitations may change from time to time without changing the "general principles hereof"). This provision is similar to that found in many U.S. income tax treaties.

Paragraph 20 of the proposed protocol clarifies the meaning of this language. It states that where the treaty gives Germany the right to tax income, and the income is regarded as U.S. source income under U.S. law, the United States shall grant the credit provided for in the treaty, subject to any U.S. law limiting the foreign tax credit in a way that prevents the crediting of a foreign tax against U.S. source income. The proposed protocol provides that the phrase "general principle hereof" means the avoidance of double taxation by allowing a credit for taxes imposed on items of income arising in Germany, as determined under applicable U.S. source rules, as modified by the treaty. The proposed protocol states that while the details and limitations of the credit pursuant to this definition may change as provisions of U.S. law changes, any such changes must preserve a credit for German taxes paid or accrued with respect to items of German source income.

The proposed treaty also allows the U.S. deemed paid credit to U.S. corporate shareholders of German companies receiving dividends in any taxable year from those companies if the U.S. company owns 10 percent or more of the voting stock of the German company.

The double taxation article provides that German income taxes covered by the treaty (Article 2 (Taxes Covered)) are to be considered income taxes for purposes of the U.S. foreign tax credit. Credits allowed solely by reason of this article, when added to otherwise allowable credits for taxes covered by the treaty, may not in any taxable year exceed that proportion of the U.S. tax on income that German source taxable income bears to total taxable income. Thus, any credit allowed solely by the treaty and not by the Code alone could not be used to offset U.S. tax on income from third-country foreign sources.

Germany

Exemption. The proposed treaty's general rule for German residents is that if under the treaty the United States may tax an item of U.S. source income, or an item of capital situated within the United States, then Germany will exclude that item from the basis on which German tax is imposed. The proposed treaty allows Germany to employ an "exemption with progression" method with respect to such income. Under the exemption with progression method such income, while exempt from German tax, may be

taken into the German tax base for purposes of determining German tax on non-exempt income.

In the case of dividends, the exemption generally applies only to such income from distributions of profits on corporate rights subject to tax under U.S. law as are paid to a German resident company (not including partnerships) by a U.S. resident company of which the German company owns directly at least 10 percent of the voting shares. However, the exemption does not apply to any dividends paid by RICS or other distributions of amounts that have been deducted for U.S. tax purposes in calculating the payor's prof its (for example, in the case of a REIT). (This point is clarified in a diplomatic note from Germany to the United States dated November 3, 1989.) Where a German resident owns stock the dividends on which would be exempt from German tax under these rules, the stock is also excluded from the basis on which the capital tax is imposed.

Under paragraph 21 of the proposed protocol, Germany may in some cases override the application of the treaty exemption rule. Under this rule Germany may override the exemption (providing a foreign tax credit instead) as to an item of income or capital in certain cases where the United States and Germany take different views either as to the applicable treaty provision, or as to the taxpayer to whom the income or capital is attributable (unless the difference relates to an attribution under Article 9 (Associated Enterprises). In that case Germany may override the exemption if, as a result of the differing views, the income is subject either to double taxation or double exemption (or inappropriate reduction) from tax. Thus, for example, assume that an item of income is treated by the United States as interest earned by a German resident without a U.S. permanent establishment, and therefore exempt from U.S. tax. Assume also that the same item is treated by Germany as direct dividend income of a German resident or interest income of a U.S. permanent establishment of a German resident, and therefore exempt from German tax without regard to paragraph 21 of the proposed protocol. The protocol permits Germany in this instance to tax the income subject to a foreign tax credit.

Paragraph 21 of the proposed protocol also permits Germany to prospectively override the exemption (and apply instead a foreign tax credit) in order to prevent the exemption of other items of income from taxation in both treaty countries, or other arrangements for the improper use of the treaty. Germany can only override the exemption in such a case after due consultation and subject to the limitations of its internal law, and after notifying the United States through diplomatic channels of the items of income for which it intends to override the exemption.

If Germany notifies the United States of such an override, the United States may, subject to notification through diplomatic channels, characterize such income under the treaty consistently with the characterization of that income by Germany. A notification made under paragraph 21 shall have effect only from the first day of the calendar year following the year in which it was transmitted and any legal prerequisites under the domestic law of the notifying country for giving it effect have been fulfilled.