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13161 United Kingdom - Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains


   
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TREATIES AND OTHER INTERNATIONAL ACTS SERIES 13161

DOUBLE TAXATION

Taxes on Income

 

 


Convention, with Exchange of Notes,
Between the
UNITED STATES OF AMERICA
and the UNITED KINGDOM OF
GREAT BRITAIN AND
NORTHERN IRELAND

 

Signed at London July 24, 2001


and


Protocol Amending the Convention

Signed at Washington July 19, 2002

 

 

 


 

 


NOTE BY THE DEPARTMENT OF STATE

Pursuant to Public Law 89—497, approved July 8, 1966
(80 Stat. 271; 1 U.S.C. 113)—

“. . .the Treaties and Other International Acts Series issued
under the authority of the Secretary of State shall be competent
evidence . . . of the treaties, international agreements other than
treaties, and proclamations by the President of such treaties and
international agreements other than treaties, as the case may be,
therein contained, in all the courts of law and equity and of maritime
jurisdiction, and in all the tribunals and public offices of the
United States, and of the several States, without any further proof
or authentication thereof.”


 


UNITED KINGDOM OF GREAT BRITAIN
AND NORTHERN IRELAND

Double Taxation: Taxes on Income

Convention, with exchange of notes,
Signed at London July 24, 2001; and
Protocol amending the convention,
Signed at Washington July 19, 2002;
Transmitted by the President of the United States of America
to the Senate November 14, 2002 (Treaty Doc. 107-19,
107th Congress, 2d Session);
Reported favorably by the Senate Committee on Foreign Relations
March 12, 2003 (Senate Executive Report No. 108-2,
108th Congress, 1st Session);
Advice and consent to ratification by the Senate
March 13, 2003;
Ratified by the President March 28, 2003;
Ratified by the United Kingdom of Great Britain and Northern
Ireland March 7, 2003;
Ratifications exchanged at Washington March 31, 2003;
Entered into force March 31, 2003.

CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE
GOVERNMENT OF THE UNITED KINGDOM
OF GREAT BRITAIN AND NORTHERN IRELAND
FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL GAINS
The Government of the United States of America and the Government of the United
Kingdom of Great Britain and Northern Ireland,
Desiring to conclude a new Convention for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income and on capital gains,
Have agreed as follows:
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ARTICLE 1
General Scope
1. Except as specifically provided herein, this Convention is applicable only to persons
who are residents of one or both of the Contracting States.
2. This Convention shall not restrict in any manner any benefit now or hereafter
accorded:
a) by the laws of either Contracting State; or
b) by any other agreement between the Contracting States.
3. a) Notwithstanding the provisions of sub-paragraph b) of paragraph 2 of this
Article:
(i) any question arising as to the interpretation or application of this
Convention and, in particular, whether a taxation measure is within the scope of
this Convention, shall be determined exclusively in accordance with the
provisions of Article 26 (Mutual Agreement Procedure) of this Convention; and
(ii) the provisions of Article II and Article XVII of the General
Agreement on Trade in Services shall not apply to a taxation measure unless the
competent authorities agree that the measure is not within the scope of Article
25 (Non-discrimination) of this Convention.
b) For the purposes of this paragraph, a "measure" is a law, regulation, rule,
procedure, decision, administrative action, or any similar provision or action.
4. Notwithstanding any provision of this Convention except paragraph 5 of this Article,
a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by
reason of citizenship may tax its citizens, as if this Convention had not come into effect.
5. The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 2 of Article 9
(Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of
Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support),
paragraph 1 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double
Taxation), 25 (Non-discrimination), and 26 (Mutual Agreement Procedure) of this
Convention; and
b) the benefits conferred by a Contracting State under paragraph 2 of Article 18
(Pension Schemes) and Articles 19 (Government Service), 20 (Students), and 28
(Diplomatic Agents and Consular Officers) of this Convention, upon individuals who
are neither citizens of, nor have been admitted for permanent residence in, that State.
6. A former citizen or long-term resident whose loss of citizenship or long-term
resident status had as one of its principal purposes the avoidance of tax (as defined under the
laws of the Contracting State of which the person was a citizen or long-term resident) shall be
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treated for the purposes of paragraph 4 of this Article as a citizen of that Contracting State but
only for a period of 10 years following the loss of such status. This paragraph shall apply only
in respect of income from sources within that Contracting State (including income deemed
under the domestic law of that State to arise from such sources). Paragraph 4 of this Article
shall not apply in the case of any former citizen or long-term resident of a Contracting State
who ceased to be a citizen or long-term resident of that State at any time before February 6th,
1995.
7. Where under any provision of this Convention income or gains arising in one of the
Contracting States are relieved from tax in that Contracting State and, under the law in force in
the other Contracting State, a person, in respect of the said income or gains, is subject to tax by
reference to the amount thereof which is remitted to or received in that other Contracting State
and not by reference to the full amount thereof, then the relief to be allowed under this
Convention in the first-mentioned Contracting State shall apply only to so much of the income
or gains as is taxed in the other Contracting State.
8. An item of income, profit or gain derived through a person that is fiscally transparent
under the laws of either Contracting State shall be considered to be derived by a resident of a
Contracting State to the extent that the item is treated for the purposes of the taxation law of
such Contracting State as the income, profit or gain of a resident.
ARTICLE 2
Taxes Covered
1. This Convention shall apply to taxes on income and on capital gains imposed on
behalf of a Contracting State irrespective of the manner in which they are levied.
2. There shall be regarded as taxes on income and on capital gains all taxes imposed on
total income, or on elements of income, including taxes on gains from the alienation of
property.
3. The existing taxes to which this Convention shall apply are:
a) in the case of the United States:
(i) the Federal income taxes imposed by the Internal Revenue Code (but
excluding social security taxes); and
(ii) the Federal excise taxes imposed on insurance policies issued by
foreign insurers and with respect to private foundations;
b) in the case of the United Kingdom:
(i) the income tax;
(ii) the capital gains tax;
(iii) the corporation tax; and
(iv) the petroleum revenue tax.
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4. This Convention shall apply also to any identical or substantially similar taxes that
are imposed after the date of signature of this Convention in addition to, or in place of, the
existing taxes. The competent authorities of the Contracting States shall notify each other of
any changes that have been made in their respective taxation or other laws that significantly
affect their obligations under this Convention.
ARTICLE 3
General Definitions
1. For the purposes of this Convention, unless the context otherwise requires:
a) the term "person" includes an individual, an estate, a trust, a partnership, a
company, and any other body of persons;
b) the term "company" means any body corporate or any entity that is treated as
a body corporate for tax purposes;
c) the term "enterprise" applies to the carrying on of any business;
d) the term "business" includes the performance of professional services and of
other activities of an independent character;
e) 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
Contracting State, and an enterprise carried on by a resident of the other Contracting
State;
f) the term "international traffic" means any transport by a ship or aircraft,
except when the ship or aircraft is operated solely between places in the other
Contracting State;
g) the term "competent authority" means:
(i) in the United States: the Secretary of the Treasury or his delegate;
and
(ii) in the United Kingdom: the Commissioners of Inland Revenue or
their authorised representative;
h) the term "United States" means the United States of America, and includes
the states thereof and the District of Columbia; such term also includes the territorial sea
thereof and the sea bed and sub-soil of the submarine areas adjacent to that territorial
sea, over which the United States exercises sovereign rights in accordance with
international law; the term, however, does not include Puerto Rico, the Virgin Islands,
Guam or any other United States possession or territory;
i) the term "United Kingdom" means Great Britain and Northern Ireland,
including any area outside the territorial sea of the United Kingdom which in
accordance with international law has been or may hereafter be designated, under the
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laws of the United Kingdom concerning the Continental Shelf, as an area within which
the rights of the United Kingdom with respect to the sea bed and sub-soil and their
natural resources may be exercised;
j) the term "national" of a Contracting State, means:
(i) in relation to the United States,
A) any individual possessing the citizenship of the United States;
and
B) any legal person, partnership, association or other entity
deriving its status as such from the laws in force in the United States;
(ii) in relation to the United Kingdom,
A) any British citizen, or any British subject not possessing the
citizenship of any other Commonwealth country or territory, provided he
has the right of abode in the United Kingdom; and
B) any legal person, partnership, association or other entity
deriving its status as such from the laws in force in the United Kingdom;
k) the term "qualified governmental entity" means:
(i) a Contracting State, or a political subdivision or local authority of a
Contracting State;
(ii) a person that is wholly owned, directly or indirectly, by a
Contracting State or a political subdivision or local authority of a Contracting
State, provided
A) it is organized under the laws of the Contracting State;
B) its earnings are credited to its own account with no portion of
its income inuring to the benefit of any private person;
C) its assets vest in the Contracting State, political subdivision or
local authority upon dissolution; and
D) it does not carry on a business;
l) the term "Contracting State" means the United States or the United Kingdom,
as the context requires;
m) the term "real property" means any interest (other than an interest solely as a
creditor) in land, crops or timber growing on land, mines, wells and other places of
extraction of natural resources, as well as any fixture built on land (buildings,
structures, etc.) and other property considered real or immovable property under the
law of the Contracting State in which the property in question is situated. The term
shall in any case include livestock and equipment used in agriculture and forestry,
rights to which the provisions of general law respecting landed property apply,
usufruct of real property and rights to variable or fixed payments as consideration
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for the working of, or the right to work, mineral deposits and other natural
resources; ships, boats and aircraft shall not be regarded as real property.
n) the term "conduit arrangement" means a transaction or series of transactions:
(i) which is structured in such a way that a resident of a Contracting
State entitled to the benefits of this Convention receives an item of income
arising in the other Contracting State but that resident pays, directly or indirectly,
all or substantially all of that income (at any time or in any form) to another
person who is not a resident of either Contracting State and who, if it received
that item of income direct from the other Contracting State, would not be
entitled under a convention for the avoidance of double taxation between the
state in which that other person is resident and the Contracting State in which the
income arises, or otherwise, to benefits with respect to that item of income
which are equivalent to, or more favourable than, those available under this
Convention to a resident of a Contracting State; and
(ii) which, has as its main purpose, or one of its main purposes, obtaining
such increased benefits as are available under this Convention.
o) the term "pension scheme" means any plan, scheme, fund, trust or other
arrangement established in a Contracting State which is:
(i) generally exempt from income taxation in that State; and
(ii) operated principally to administer or provide pension or retirement
benefits or to earn income for the benefit of one or more such arrangements.
2. As regards the application of this Convention at any time by a Contracting State, any
term not defined therein shall, unless the context otherwise requires, or the competent
authorities agree on a common meaning pursuant to the provisions of Article 26 (Mutual
Agreement Procedure) of this Convention, have the meaning which it has at that time under the
law of that State for the purposes of the taxes to which this Convention applies, any meaning
under the applicable tax laws of that State prevailing over a meaning given to the term under
other laws of that State.
ARTICLE 4
Residence
1. Except as provided in paragraphs 2 and 3 of this Article, the term "resident of a
Contracting State" means, for the purposes of this Convention, any person who, under the laws
of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of
management, place of incorporation, or any other criterion of a similar nature. This term,
however, does not include any person who is liable to tax in that State in respect only of income
from sources in that State or of profits attributable to a permanent establishment in that State.
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2. An individual who is a United States citizen or an alien admitted to the United States
for permanent residence (a "green card" holder) is a resident of the United States only if the
individual has a substantial presence, permanent home or habitual abode in the United States
and if that individual is not a resident of a State other than the United Kingdom for the purposes
of a double taxation convention between that State and the United Kingdom.
3. The term "resident of a Contracting State" includes:
a) a pension scheme;
b) a plan, scheme, fund, trust, company or other arrangement established in a
Contracting State that is operated exclusively to administer or provide employee
benefits and that, by reason of its nature as such, is generally exempt from income
taxation in that State;
c) an organization that is established exclusively for religious, charitable,
scientific, artistic, cultural, or educational purposes and that is a resident of a
Contracting State according to its laws, notwithstanding that all or part of its income or
gains may be exempt from tax under the domestic law of that State; and
d) a qualified governmental entity that is, is a part of, or is established in, that
State.
4. Where by reason of the provisions of paragraph 1 of this Article, an individual is a
resident of both Contracting States, then his status shall be determined as follows:
a) he shall be deemed to be a resident only of the State in which he has a
permanent home available to him; if he has a permanent home available to him in both
States, he shall be deemed to be a resident only of the State with which his personal and
economic relations are closer (centre of vital interests);
b) if the State in which he has his centre of vital interests cannot be determined,
or if he does not have a permanent home available to him in either State, he shall be
deemed to be a resident only of the State in which he has an habitual abode;
c) if he has an habitual abode in both States or in neither of them, he shall be
deemed to be a resident only of the State of which he is a national;
d) if he is a national of both States or of neither of them, the competent
authorities of the Contracting States shall endeavour to settle the question by mutual
agreement.
5. Where by reason of the provisions of paragraph 1 of this Article a person other than
an individual is a resident of both Contracting States, the competent authorities of the
Contracting States shall endeavour to determine by mutual agreement the mode of application
of this Convention to that person. If the competent authorities do not reach such an agreement,
that person shall not be entitled to claim any benefit provided by this Convention, except those
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provided by paragraph 4 of Article 24 (Relief from Double Taxation), Article 25 (Non-
discrimination) and Article 26 (Mutual Agreement Procedure).
6. A marriage before January 1st, 1974 between a woman who is a United States
national and a man domiciled within the United Kingdom shall be deemed to have taken place
on January 1st, 1974 for the purpose of determining her domicile for United Kingdom tax
purposes, on or after the date on which this Convention first has effect in relation to her.
ARTICLE 5
Permanent Establishment
1. For the purposes of this Convention, the term "permanent establishment" means a
fixed place of business through which the business of an enterprise is wholly or partly carried
on.
2. The term "permanent establishment" includes especially:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop; and
f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural
resources.
3. A building site or construction or installation project constitutes a permanent
establishment only if it lasts for more than twelve months.
4. Notwithstanding the preceding provisions of this Article, the term "permanent
establishment" shall be deemed not to include:
a) the use of facilities solely for the purpose of storage, display or delivery of
goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise, or of collecting information, for the enterprise;
e) 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;
f) the maintenance of a fixed place of business solely for any combination of the
activities mentioned in sub-paragraphs a) to e) of this paragraph, provided that the
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overall activity of the fixed place of business resulting from this combination is of a
preparatory or auxiliary character.
5. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, where a person
- other than an agent of an independent status to whom paragraph 6 of this Article applies - is
acting on behalf of an enterprise and has and habitually exercises in a Contracting State an
authority to conclude contracts that are binding on the enterprise, that enterprise shall be
deemed to have a permanent establishment in that State in respect of any activities that the
person undertakes for the enterprise, unless the activities of such person are limited to those
mentioned in paragraph 4 of this Article that, if exercised through a fixed place of business,
would not make this fixed place of business a permanent establishment under the provisions of
that paragraph.
6. An enterprise shall not be deemed to have a permanent establishment in a
Contracting State merely because it carries on business in that State through a broker, general
commission agent, or any other agent of an independent status, provided that such person is
acting in the ordinary course of his business as an independent agent.
7. The fact that a company that is a resident of a Contracting State controls or is
controlled by a company that is a resident of the other Contracting State, or that carries on
business in that other State (whether through a permanent establishment or otherwise), shall not
constitute either company a permanent establishment of the other.
ARTICLE 6
Income from Real Property
1. Income derived by a resident of a Contracting State from real property, including
income from agriculture or forestry, situated in the other Contracting State may be taxed in that
other State.
2. The provisions of paragraph 1 of this Article shall apply to income derived from the
direct use, letting, or use in any other form of real property.
3. The provisions of paragraphs 1 and 2 of this Article shall also apply to the income
from real property of an enterprise.
ARTICLE 7
Business Profits
1. The business profits of an enterprise of a Contracting State shall be taxable only in
that State unless the enterprise carries on business in the other Contracting State through a
permanent establishment situated therein. If the enterprise carries on business as aforesaid, the
business profits of the enterprise may be taxed in the other State but only so much of them as
are attributable to that permanent establishment.
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2. Subject to the provisions of paragraph 3 of this Article, where an enterprise of a
Contracting State carries on business in the other Contracting State through a permanent
establishment situated therein, there shall in each Contracting State be attributed to that
permanent establishment the business profits that it might be expected to make if it were a
distinct and separate enterprise engaged in the same or similar activities under the same or
similar conditions and dealing wholly independently with the enterprise of which it is a
permanent establishment. For this purpose, the business profits to be attributed to the
permanent establishment shall include only the profits derived from the assets used, risks
assumed and activities performed by the permanent establishment.
3. In determining the business profits of a permanent establishment, there shall be
allowed as deductions expenses that are incurred for the purposes of the permanent
establishment, including executive and general administrative expenses so incurred, whether in
the State in which the permanent establishment is situated or elsewhere.
4. For the purposes of the preceding paragraphs, the profits to be attributed to the
permanent establishment shall be determined by the same method year by year unless there is
good and sufficient reason to the contrary.
5. The United States excise tax on insurance policies issued by foreign insurers shall
not be imposed on insurance or reinsurance policies, the premiums on which are the receipts of
a business of insurance carried on by an enterprise of the United Kingdom. However, if such
policies are entered into as part of a conduit arrangement, the United States may impose excise
tax on those policies, unless the premiums in respect of those policies are, or are part of, the
income of a permanent establishment that the enterprise of the United Kingdom has in the
United States.
6. Where business profits include items of income that are dealt with separately in other
Articles of this Convention, then the provisions of those Articles shall not be affected by the
provisions of this Article.
7. In applying this Article, paragraph 5 of Article 10 (Dividends), paragraph 3 of Article
11 (Interest), paragraph 3 of Article 12 (Royalties), and paragraph 2 of Article 22 (Other
Income) of this Convention, income or profits attributable to a permanent establishment may,
notwithstanding that the permanent establishment has ceased to exist, be taxed in the
Contracting State in which it was situated.
ARTICLE 8
Shipping and Air Transport
1. Profits of an enterprise of a Contracting State from the operation of ships or aircraft
in international traffic shall be taxable only in that State.
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2. For the purposes of this Article, profits from the operation of ships or aircraft include
profits derived from the rental of ships or aircraft on a full (time or voyage) basis. They also
include profits from the rental of ships or aircraft on a bareboat basis if the rental income is
incidental to profits from the operation of ships or aircraft in international traffic. Profits
derived by an enterprise from the inland transport of property or passengers within either
Contracting State shall be treated as profits from the operation of ships or aircraft in
international traffic if such transport is undertaken as part of international traffic conducted by
such enterprise.
3. Profits of an enterprise of a Contracting State from the use, maintenance, or rental of
containers (including trailers, barges and related equipment for the transport of containers) used
in international traffic shall be taxable only in that State.
4. The provisions of paragraphs 1 and 3 of this Article shall also apply to profits from
participation in a pool, a joint business, or an international operating agency.
ARTICLE 9
Associated Enterprises
1. Where:
a) an enterprise of a Contracting State participates directly or indirectly in the
management, control or capital of an enterprise of the other Contracting State; or
b) the same persons participate directly or indirectly in the management,
control, or capital of an enterprise of a Contracting State and an enterprise of the other
Contracting State,
and in either case conditions are made or imposed between the two enterprises in their
commercial or financial relations that differ from those that would be made between
independent enterprises, then any profits that, but for those conditions, would have accrued to
one of the enterprises, but by reason of those conditions have not so accrued, may be included
in the profits of that enterprise and taxed accordingly.
2. Where a Contracting State includes in the profits of an enterprise of that State, and
taxes accordingly, profits on which an enterprise of the other Contracting State has been
charged to tax in that other State, and the other Contracting State agrees that the profits so
included are profits that would have accrued to the enterprise of the first-mentioned State if the
conditions made between the two enterprises had been those that would have been made
between independent enterprises, then that other State shall make an appropriate adjustment to
the amount of the tax charged therein on those profits. In determining such adjustment, due
regard shall be paid to the other provisions of this Convention and the competent authorities of
the Contracting States shall if necessary consult each other.
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ARTICLE 10
Dividends
1. Dividends paid by a company which is a resident of a Contracting State to a resident
of the other Contracting State may be taxed in that other State.
2. However, such dividends may also be taxed in the Contracting State of which the
company paying the dividends is a resident and according to the laws of that State, but if the
dividends are beneficially owned by a resident of the other Contracting State, the tax so charged
shall not exceed, except as otherwise provided,
a) 5 per cent. of the gross amount of the dividends if the beneficial owner is a
company that owns shares representing directly or indirectly at least 10 per cent. of the
voting power of the company paying the dividends;
b) 15 per cent. of the gross amount of the dividends in all other cases.
This paragraph shall not affect the taxation of the company in respect of the profits out of which
the dividends are paid.
3. Notwithstanding the provisions of paragraph 2 of this Article, dividends shall not be
taxed in the Contracting State of which the company paying the dividends is a resident if the
beneficial owner of the dividends is a resident of the other Contracting State and either:
a) a company that has owned shares representing 80 per cent. or more of the
voting power of the company paying the dividends for a 12-month period ending on the
date the dividend is declared, and that:
(i) owned shares representing, directly or indirectly, at least 80 per cent.
of the voting power of the company paying the dividends prior to October 1st,
1998; or
(ii) is a qualified person by reason of sub-paragraph c) of paragraph 2 of
Article 23 (Limitation on Benefits) of this Convention; or
(iii) is entitled to benefits with respect to the dividends under paragraph
3 or paragraph 6 of that Article; or
b) a pension scheme, provided that such dividends are not derived from the
carrying on of a business, directly or indirectly, by such pension scheme.
4. Sub-paragraph a) of paragraph 2 and paragraph 3 of this Article shall not apply in the
case of dividends paid by a pooled investment vehicle which is a resident of a Contracting
State. Sub-paragraph b) of paragraph 2 of this Article shall apply in the case of dividends paid
by a pooled investment vehicle, the assets of which consist wholly or mainly of shares,
securities or currencies or derivative contracts relating to shares, securities or currencies. In the
case of dividends paid by a pooled investment vehicle not described in the preceding sentence,
sub-paragraph b) of paragraph 2 of this Article shall apply only if:
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a) the beneficial owner of the dividends is an individual holding an interest of
not more than 10 per cent. in the pooled investment vehicle;
b) the dividends are paid with respect to a class of stock that is publicly traded
and the beneficial owner of the dividends is a person holding an interest of not more
than 5 per cent. of any class of the stock of the pooled investment vehicle; or
c) the beneficial owner of the dividends is a person holding an interest of not
more than 10 per cent. in the pooled investment vehicle and that vehicle is diversified.
5. The previous provisions of this Article shall not apply if the beneficial owner of the
dividends, being a resident of a Contracting State, carries on business in the other Contracting
State, of which the payer is a resident, through a permanent establishment situated therein, and
the dividends are attributable to such permanent establishment. In such case, the provisions of
Article 7 (Business Profits) of this Convention shall apply.
6. A Contracting State may not impose any tax on dividends paid by a company which
is a resident of the other Contracting State, except insofar as the dividends are paid to a resident
of the first-mentioned State or the dividends are attributable to a permanent establishment
situated in that State, nor may it impose tax on a company's undistributed profits, except as
provided in paragraph 7 of this Article, even if the dividends paid or the undistributed profits
consist wholly or partly of profits or income arising in that State.
7. A company that is a resident of a Contracting State and that has a permanent
establishment in the other Contracting State, or that is subject to tax in that other State on a net
basis on its income or gains that may be taxed in that other State under Article 6 (Income from
Real Property) or under paragraph 1 of Article 13 (Gains) of this Convention, may be subject in
that other State to a tax in addition to any tax that may be imposed by that other State in
accordance with the other provisions of this Convention. Such tax, however, may be imposed
on only the portion of the business profits of the company attributable to the permanent
establishment, and the portion of the income or gains referred to in the preceding sentence that
is subject to tax under Article 6 or under paragraph 1 of Article 13, that, in the case of the
United States, represents the dividend equivalent amount of such profits, income or gains and,
in the case of the United Kingdom, is an amount that is analogous to the dividend equivalent
amount. This paragraph shall not apply in the case of a company which:
a) prior to October 1st, 1998 was engaged in activities giving rise to profits
attributable to that permanent establishment or to income or gains to which the
provisions of Article 6 or, as the case may be, paragraph 1 of Article 13 apply;
b) is a qualified person by reason of sub-paragraph c) of paragraph 2 of Article
23 (Limitation on Benefits) of this Convention; or
c) is entitled to benefits under paragraph 3 or paragraph 6 of that Article with
respect to an item of income, profit or gain described in this paragraph.
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8. The additional tax referred to in paragraph 7 of this Article may not be imposed at a
rate in excess of the rate specified in sub-paragraph a) of paragraph 2 of this Article.
9. The provisions of this Article shall not apply in respect of any dividend paid under,
or as part of, a conduit arrangement.
10. For the purposes of this Article:
a) the term "dividends" means income from shares or other rights, not being
debt-claims, participating in profits, as well as income from other corporate rights and
any other item which, under the laws of the Contracting State of which the company
paying the dividend is a resident, is treated as a dividend or a distribution of a company;
b) the term "pooled investment vehicle" means a person:
(i) whose assets consist wholly or mainly of real property, or of shares,
securities or currencies, or of derivative contracts relating to shares, securities or
currencies or real property;
(ii) whose gross income consists wholly or mainly of dividends, interest,
gains from the alienation of assets and rents and other income and gains from the
holding and alienation of real property; and
(iii) which, in respect of its income, profits or gains, is exempt from, or is
not chargeable to, tax in the State of which it is a resident, or is subject to tax at
a special rate in that State, or which is entitled to a deduction for dividends paid
to its shareholders in computing the amount of its income, profits or gains;
c) a pooled investment vehicle is "diversified" if the value of no single interest
in real property exceeds 10 per cent. of the pooled investment vehicle's total interests in
real property. For the purposes of this rule, foreclosure property shall not be considered
an interest in real property. Where a pooled investment vehicle holds an interest in a
partnership, it shall be treated as owning directly a proportion of the partnership's
interests in real property corresponding to the proportion of its interest in the
partnership.
ARTICLE 11
Interest
1. Interest arising in a Contracting State and beneficially owned by a resident of the
other Contracting State shall be taxable only in that other State.
2. The term "interest" as used in this Article means income from debt-claims of every
kind, whether or not secured by mortgage, and whether or not carrying a right to participate in
the debtor's profits, and, in particular, income from government securities and income from
bonds or debentures, including premiums or prizes attaching to such securities, bonds or
debentures, and all other income that is subjected to the same taxation treatment as income
15
from money lent by the taxation law of the Contracting State in which the income arises.
Income dealt with in Article 10 (Dividends) of this Convention and penalty charges for late
payment shall not be regarded as interest for the purposes of this Article.
3. The provisions of paragraph 1 of this Article shall not apply if the beneficial owner
of the interest, being a resident of a Contracting State, carries on business in the other
Contracting State, in which the interest arises, through a permanent establishment situated
therein, and the interest is attributable to such permanent establishment. In such case, the
provisions of Article 7 (Business Profits) of this Convention shall apply.
4. Where, by reason of a special relationship between the payer and the beneficial
owner or between both of them and some other person, the amount of the interest exceeds, for
whatever reason, the amount which would have been agreed upon by the payer and the
beneficial owner in the absence of such relationship, the provisions of this Article shall apply
only to the last-mentioned amount. In such case, the excess part of the payments shall remain
taxable according to the laws of each State, due regard being had to the other provisions of this
Convention.
5. a) Notwithstanding the provisions of paragraph 1 of this Article, interest paid by
a resident of a Contracting State and determined by reference to receipts, sales, income,
profits or other cash flow of the debtor or a related person, to any change in the value of
any property of the debtor or a related person or to any dividend, partnership distribution
or similar payment made by the debtor to a related person, may also be taxed in the
Contracting State in which it arises, and according to the laws of that State, but if the
beneficial owner is a resident of the other Contracting State the gross amount of the
interest may be taxed at a rate not exceeding the rate prescribed in sub-paragraph b) of
paragraph 2 of Article 10 (Dividends) of this Convention.
b) Sub-paragraph a) of this paragraph shall not apply to any interest solely by
reason of the fact that it is paid under an arrangement the terms of which provide:
(i) that the amount of interest payable shall be reduced in the event of an
improvement in the factors by reference to which the amount of interest payable
is determined; or
(ii) that the amount of interest payable shall be increased in the event of
a deterioration in the factors by reference to which the amount of interest
payable is determined.
6. Notwithstanding the provisions of paragraph 1 of this Article, a Contracting State
may tax, in accordance with its domestic law, interest paid with respect to the ownership
interests in a vehicle used for the securitisation of real estate mortgages or other assets, to the
extent that the amount of interest paid exceeds the return on comparable debt instruments as
specified by the domestic law of that State.
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7. The provisions of this Article shall not apply in respect of any interest paid under, or
as part of, a conduit arrangement.
ARTICLE 12
Royalties
1. Royalties arising in a Contracting State and beneficially owned by a resident of the
other Contracting State shall be taxable only in that other State.
2. The term "royalties" as used in this Article means:
a) any consideration for the use of, or the right to use, any copyright of literary,
artistic, scientific or other work (including computer software and cinematographic
films) including works reproduced on audio or video tapes or disks or any other means
of image or sound reproduction, any patent, trade mark, design or model, plan, secret
formula or process, or other like right or property, or for information concerning
industrial, commercial or scientific experience; and
b) any gain derived from the alienation of any right or property described in
sub-paragraph a) of this paragraph, to the extent that the amount of such gain is
contingent on the productivity, use, or disposition of the right or property.
3. The provisions of paragraph 1 of this Article shall not apply if the beneficial owner
of the royalties, being a resident of a Contracting State, carries on business in the other
Contracting State, in which the royalties arise, through a permanent establishment situated
therein, and the royalties are attributable to such permanent establishment. In such case, the
provisions of Article 7 (Business Profits) of this Convention shall apply.
4. Where, by reason of a special relationship between the payer and the beneficial
owner or between both of them and some other person, the amount of the royalties paid
exceeds, for whatever reason, the amount which would have been agreed upon by the payer and
the beneficial owner in the absence of such relationship, the provisions of this Article shall
apply only to the last-mentioned amount. In such case, the excess part of the payments shall
remain taxable according to the laws of each Contracting State, due regard being had to the
other provisions of this Convention.
5. The provisions of this Article shall not apply in respect of any royalty paid under, or
as part of, a conduit arrangement.
ARTICLE 13
Gains
1. Gains derived by a resident of a Contracting State that are attributable to the
alienation of real property situated in the other Contracting State may be taxed in that other
State.
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2. For the purposes of this Article the term "real property situated in the other
Contracting State" shall include:
a) rights to assets to be produced by the exploration or exploitation of the sea
bed and sub-soil of that other State and their natural resources, including rights to
interests in or the benefit of such assets;
b) where that other State is the United States, a United States real property
interest; and
c) where that other State is the United Kingdom:
(i) shares, including rights to acquire shares, other than shares in which
there is regular trading on a stock exchange, deriving their value or the greater
part of their value directly or indirectly from real property situated in the United
Kingdom; and
(ii) an interest in a partnership or trust to the extent that the assets of the
partnership or trust consist of real property situated in the United Kingdom, or of
shares referred to in clause (i) of this sub-paragraph.
3. Gains from the alienation of property (other than real property) forming part of the
business property of a permanent establishment that an enterprise of a Contracting State has or
had in the other Contracting State, including gains from the alienation of such a permanent
establishment (alone or with the whole enterprise), may be taxed in that other State, whether or
not that permanent establishment exists at the time of the alienation.
4. Gains derived by an enterprise of a Contracting State from the alienation of ships or
aircraft operated in international traffic by the enterprise, or of containers used in international
traffic, or of property (other than real property) pertaining to the operation or use of such ships,
aircraft or containers, shall be taxable only in that State.
5. Gains from the alienation of any property other than property referred to in the
preceding paragraphs of this Article shall be taxable only in the Contracting State of which the
alienator is a resident.
6. The provisions of paragraph 5 of this Article shall not affect the right of a
Contracting State to levy according to its law a tax on gains from the alienation of any property
derived by an individual who is a resident of the other Contracting State and has been a resident
of the first-mentioned Contracting State at any time during the six years immediately preceding
the alienation of the property.
ARTICLE 14
Income from Employment
1. Subject to the provisions of Articles 15 (Directors' Fees), 17 (Pensions, Social
Security, Annuities, Alimony, and Child Support) and 19 (Government Service) of this
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Convention, salaries, wages, and other similar remuneration derived by a resident of a
Contracting State in respect of an employment shall be taxable only in that State unless the
employment is exercised in the other Contracting State. If the employment is so exercised,
such remuneration as is derived therefrom may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1 of this Article, remuneration derived
by a resident of a Contracting State in respect of an employment exercised in the other
Contracting State shall be taxable only in the first-mentioned State if:
a) the recipient is present in the other State for a period or periods not exceeding
in the aggregate 183 days in any twelve-month period commencing or ending in the
taxable year or year of assessment concerned;
b) the remuneration is paid by, or on behalf of, an employer who is not a
resident of the other State; and
c) the remuneration is not borne by a permanent establishment which the
employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration described in
paragraph 1 of this Article that is derived by a resident of a Contracting State in respect of an
employment as a member of the regular complement of a ship or aircraft operated in
international traffic shall be taxable only in that State.
ARTICLE 15
Directors' Fees
Directors' fees and other similar payments derived by a resident of a Contracting State
for services rendered in the other Contracting State in his capacity as a member of the board of
directors of a company that is a resident of the other Contracting State may be taxed in that
other State.
ARTICLE 16
Entertainers and Sportsmen
1. Income derived by a resident of a Contracting State as an entertainer, such as a
theatre, motion picture, radio, or television artiste, or a musician, or as a sportsman, from his
personal activities as such exercised in the other Contracting State, which income would be
exempt from tax in that other State under the provisions of Article 7 (Business Profits) or 14
(Income from Employment) of this Convention, may be taxed in that other State, except where
the amount of the gross receipts derived by that resident, including expenses reimbursed to him
or borne on his behalf, from such activities does not exceed twenty thousand United States
dollars ($20,000) or its equivalent in pounds sterling for the taxable year or year of assessment
concerned.
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2. Income in respect of activities exercised by an entertainer or a sportsman in his
capacity as such which accrues not to the entertainer or sportsman himself but to another person
may, notwithstanding the provisions of Article 7 (Business Profits) or 14 (Income from
Employment) of this Convention, be taxed in the Contracting State in which the activities of the
entertainer or sportsman are exercised, unless that other person establishes that neither the
entertainer or sportsman nor persons related thereto participate 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.
ARTICLE 17
Pensions, Social Security, Annuities, Alimony, and Child Support
1. a) Pensions and other similar remuneration beneficially owned by a resident of a
Contracting State shall be taxable only in that State.
b) Notwithstanding sub-paragraph a) of this paragraph, the amount of any such
pension or remuneration paid from a pension scheme established in the other Contracting State
that would be exempt from taxation in that other State if the beneficial owner were a resident
thereof shall be exempt from taxation in the first-mentioned State.
2. Notwithstanding the provisions of paragraph 1 of this Article, a lump-sum payment
derived from a pension scheme established in a Contracting State and beneficially owned by a
resident of the other Contracting State shall be taxable only in the first-mentioned State.
3. Notwithstanding the provisions of paragraph 1 of this Article, payments made by a
Contracting State under the provisions of the social security or similar legislation of that State
to a resident of the other Contracting State shall be taxable only in that other State.
4. Any annuity derived and beneficially owned by an individual ("the annuitant") who
is a resident of a Contracting State shall be taxable only in that State. The term "annuity" as
used in this paragraph means a stated sum paid periodically at stated times during the life of the
annuitant, or during a specified or ascertainable period of time, under an obligation to make the
payments in return for adequate and full consideration (other than in return for services
rendered).
5. Periodic payments, made pursuant to a written separation agreement or a decree of
divorce, separate maintenance, or compulsory support, including payments for the support of a
child, paid by a resident of a Contracting State to a resident of the other Contracting State, shall
be exempt from tax in both Contracting States, except that, if the payer is entitled to relief from
tax for such payments in the first-mentioned State, such payments shall be taxable only in the
other State.
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ARTICLE 18
Pension Schemes
1. Where an individual who is a resident of a Contracting State is a member or
beneficiary of, or participant in, a pension scheme established in the other Contracting State,
income earned by the pension scheme may be taxed as income of that individual only when,
and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony,
and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that
individual from the pension scheme (and not transferred to another pension scheme).
2. Where an individual who is a member or beneficiary of, or participant in, a pension
scheme established in a Contracting State exercises an employment or self-employment in the
other Contracting State:
a) contributions paid by or on behalf of that individual to the pension scheme
during the period that he exercises an employment or self-employment in the other State
shall be deductible (or excludable) in computing his taxable income in that other State;
and
b) any benefits accrued under the pension scheme, or contributions made to the
pension scheme by or on behalf of the individual's employer, during that period shall
not be treated as part of the employee's taxable income and any such contributions shall
be allowed as a deduction in computing the business profits of his employer in that other
State.
The reliefs available under this paragraph shall not exceed the reliefs that would be allowed by
the other State to residents of that State for contributions to, or benefits accrued under, a
pension scheme established in that State.
3. The provisions of paragraph 2 of this Article shall not apply unless:
a) contributions by or on behalf of the individual, or by or on behalf of the
individual's employer, to the pension scheme (or to another similar pension scheme for
which the first-mentioned pension scheme was substituted) were made before the
individual began to exercise an employment or self-employment in the other State; and
b) the competent authority of the other State has agreed that the pension scheme
generally corresponds to a pension scheme established in that other State.
4. Where, under sub-paragraph a) of paragraph 2 of this Article, contributions to a
pension scheme are deductible (or excludable) in computing an individual's taxable income in a
Contracting State and, under the laws in force in that State, the individual is subject to tax in
that State, in respect of income, profits or gains, by reference to the amount thereof which is
remitted to or received in that State and not by reference to the full amount thereof, then the
relief that would otherwise be available to that individual under that sub-paragraph in respect of
such contributions shall be reduced to an amount that bears the same proportion to that relief as
21
the amount of the income, profits or gains in respect of which the individual is subject to tax in
that State bears to the amount of the income, profits or gains in respect of which he would be
subject to tax if he were so subject in respect of the full amount thereof and not only in respect
of the amount remitted to or received in that State.
5. a) Where a citizen of the United States who is a resident of the United Kingdom
exercises an employment in the United Kingdom the income from which is taxable in
the United Kingdom and is borne by an employer who is a resident of the United
Kingdom or by a permanent establishment situated in the United Kingdom, and the
individual is a member or beneficiary of, or participant in, a pension scheme established
in the United Kingdom,
(i) contributions paid by or on behalf of that individual to the pension
scheme during the period that he exercises the employment in the United
Kingdom, and that are attributable to the employment, shall be deductible (or
excludable) in computing his taxable income in the United States; and
(ii) any benefits accrued under the pension scheme, or contributions
made to the pension scheme by or on behalf of the individual's employer, during
that period, and that are attributable to the employment, shall not be treated as
part of the employee's taxable income in computing his taxable income in the
United States.
This paragraph shall apply only to the extent that the contributions or benefits qualify for tax
relief in the United Kingdom.
b) The reliefs available under this paragraph shall not exceed the reliefs that
would be allowed by the United States to its residents for contributions to, or benefits
accrued under, a generally corresponding pension scheme established in the United
States.
c) For purposes of determining an individual's eligibility to participate in and
receive tax benefits with respect to a pension scheme established in the United States,
contributions made to, or benefits accrued under, a pension scheme established in the
United Kingdom shall be treated as contributions or benefits under a generally
corresponding pension scheme established in the United States to the extent reliefs are
available to the individual under this paragraph.
d) This paragraph shall not apply unless the competent authority of the United
States has agreed that the pension scheme generally corresponds to a pension scheme
established in the United States.
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ARTICLE 19
Government Service
1. Notwithstanding the provisions of Articles 14 (Income from Employment), 15
(Directors' Fees) and 16 (Entertainers and Sportsmen) of this Convention:
a) salaries, wages and other similar remuneration, other than a pension, paid
from the public funds of a Contracting State or a political subdivision or a local
authority thereof to an individual in respect of services rendered to that State or
subdivision or authority shall, subject to the provisions of sub-paragraph b) of this
paragraph, be taxable only in that State;
b) such salaries, wages and other similar remuneration, however, shall be
taxable only in the other Contracting State if the services are rendered in that State and
the individual is a resident of that State who:
(i) is a national of that State; or
(ii) did not become a resident of that State solely for the purpose of
rendering the services.
2. Notwithstanding the provisions of paragraphs 1 and 2 of Article 17 (Pensions, Social
Security, Annuities, Alimony, and Child Support) of this Convention:
a) any pension paid by, or out of funds created by, a Contracting State or a
political subdivision or a local authority thereof to an individual in respect of services
rendered to that State or subdivision or authority shall, subject to the provisions of sub-
paragraph b) of this paragraph, be taxable only in that State;
b) such pension, however, shall be taxable only in the other Contracting State if
the individual is a resident of, and a national of, that State.
3. The provisions of Articles 14 (Income from Employment), 15 (Directors' Fees), 16
(Entertainers and Sportsmen) and 17 (Pensions, Social Security, Annuities, Alimony, and Child
Support) of this Convention shall apply to salaries, wages and other similar remuneration, and
to pensions, in respect of services rendered in connection with a business carried on by a
Contracting State or a political subdivision or a local authority thereof.
ARTICLE 20
Students
Payments received by a student or business apprentice who is, or was immediately
before visiting a Contracting State, a resident of the other Contracting State, and who is present
in the first-mentioned State for the purpose of his full-time education at a university, college or
other recognised educational institution of a similar nature, or for his full-time training, shall
not be taxed in that State, provided that such payments arise outside that State, and are for the
purpose of his maintenance, education or training. The exemption from tax provided by this
23
Article shall apply to a business apprentice only for a period of time not exceeding one year
from the date he first arrives in the first-mentioned Contracting State for the purpose of his
training.
ARTICLE 21
Offshore Exploration and Exploitation Activities
1. The provisions of this Article shall apply notwithstanding any other provision of this
Convention where activities are carried on offshore in a Contracting State in connection with
the exploration (hereinafter called "exploration activities") or exploitation (hereinafter called
"exploitation activities") of the sea bed and sub-soil and their natural resources situated in that
State.
2. An enterprise of a Contracting State which carries on exploration activities or
exploitation activities in the other Contracting State shall, subject to paragraph 3 of this Article,
be deemed to be carrying on business in that other State through a permanent establishment
situated therein.
3. Exploration activities which are carried on by an enterprise of a Contracting State in
the other Contracting State for a period or periods not exceeding in the aggregate 30 days
within any period of twelve months shall not constitute the carrying on of business through a
permanent establishment situated therein. For the purposes of determining such period or
periods:
a) where an enterprise of a Contracting State carrying on exploration activities
in the other Contracting State is associated with another enterprise carrying on
substantially similar exploration activities there, the former enterprise shall be deemed
to be carrying on all such activities of the latter enterprise, except to the extent that those
activities are carried on at the same time as its own activities;
b) an enterprise shall be regarded as associated with another enterprise if one
participates directly or indirectly in the management, control or capital of the other or if
the same persons participate directly or indirectly in the management, control or capital
of both enterprises.
4. Salaries, wages and other similar remuneration derived by a resident of a Contracting
State from an employment in respect of exploration activities or exploitation activities carried
on in the other Contracting State may be taxed in that other State, to the extent that the duties
are performed offshore in that other State. However, income derived by a resident of a
Contracting State in respect of such employment performed in the other Contracting State shall
not be taxable in that other State if the employment is performed in that other State for a period
or periods not exceeding in the aggregate 30 days within any period of twelve months.
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ARTICLE 22
Other Income
1. Items of income beneficially owned by a resident of a Contracting State, wherever
arising, not dealt with in the foregoing Articles of this Convention (other than income paid out
of trusts or the estates of deceased persons in the course of administration) shall be taxable only
in that State.
2. The provisions of paragraph 1 of this Article shall not apply to income, other than
income from real property, if the beneficial owner of the income, being a resident of a
Contracting State, carries on business in the other Contracting State through a permanent
establishment situated therein, and the income is attributable to such permanent establishment.
In such case, the provisions of Article 7 (Business Profits) of this Convention shall apply.
3. Where, by reason of a special relationship between the resident referred to in
paragraph 1 of this Article and some other person, or between both of them and some third
person, the amount of the income referred to in that paragraph exceeds the amount (if any)
which would have been agreed upon between them in the absence of such relationship, the
provisions of this Article shall apply only to the last-mentioned amount. In such a case, the
excess part of the income shall remain taxable according to the laws of each Contracting State,
due regard being had to the other applicable provisions of this Convention.
4. The provisions of this Article shall not apply in respect of any income paid under, or
as part of, a conduit arrangement.
ARTICLE 23
Limitation on Benefits
1 . Except as otherwise provided in this Article, a resident of a Contracting State that
derives income, profits or gains from the other Contracting State shall be entitled to all the
benefits of this Convention otherwise accorded to residents of a Contracting State only if such
resident is a "qualified person" as defined in paragraph 2 of this Article and satisfies any other
specified conditions for the obtaining of such benefits.
2. A resident of a Contracting State is a qualified person for a taxable or chargeable
period only if such resident is either:
a) an individual;
b) a qualified governmental entity;
c) a company, if
(i) the principal class of its shares is listed or admitted to dealings on a
recognized stock exchange specified in clauses (i) or (ii) of sub-paragraph a) of
paragraph 7 of this Article and is regularly traded on one or more recognized
stock exchanges, or
25
(ii) shares representing at least 50 per cent. of the aggregate voting
power and value of the company are owned directly or indirectly by five or fewer
companies entitled to benefits under clause (i) of this sub-paragraph, provided
that, in the case of indirect ownership, each intermediate owner is a resident of
either Contracting State;
d) a person other than an individual or a company, if:
(i) the principal class of units in that person is listed or admitted to
dealings on a recognized stock exchange specified in clauses (i) or (ii) of sub-
paragraph a) of paragraph 7 of this Article and is regularly traded on one or more
recognized stock exchanges, or
(ii) the direct or indirect owners of at least 50 per cent. of the beneficial
interests in that person are qualified persons by reason of clause (i) of sub-
paragraph c) or clause (i) of this sub-paragraph;
e) a person described in sub-paragraph a), b) or c) of paragraph 3 of Article 4
(Residence) of this Convention, provided that, in the case of a person described in sub-
paragraph a) or b) of that paragraph, more than 50 per cent. of the person's
beneficiaries, members or participants are individuals who are residents of either
Contracting State;
f) a person other than an individual, if:
(i) on at least half the days of the taxable or chargeable period persons
that are qualified persons by reason of sub-paragraphs a), b), clause (i) of sub-
paragraph c), clause (i) of sub-paragraph d), or sub-paragraph e) of this
paragraph own, directly or indirectly, shares or other beneficial interests
representing at least 50 per cent. of the aggregate voting power and value of the
person, and
(ii) less than 50 per cent. of the person's gross income for that taxable or
chargeable period is paid or accrued, directly or indirectly, to persons who are
not residents of either Contracting State in the form of payments that are
deductible for the purposes of the taxes covered by this Convention in the State
of which the person is a resident (but not including arm's length payments in the
ordinary course of business for services or tangible property and payments in
respect of financial obligations to a bank, provided that where such a bank is not
a resident of a Contracting State such payment is attributable to a permanent
establishment of that bank located in one of the Contracting States); or
g) a trust or trustee of a trust in their capacity as such if at least 50 per cent. of
the beneficial interest in the trust is held by persons who are either:
26
(i) qualified persons by reason of sub-paragraphs a), b), clause (i) of sub-
paragraph c), clause (i) of sub-paragraph d), or sub-paragraph e) of this
paragraph; or
(ii) equivalent beneficiaries,
provided that less than 50 per cent. of the gross income arising to such trust or
trustee in their capacity as such for the taxable or chargeable period is paid or
accrued, directly or indirectly, to persons who are not residents of either
Contracting State in the form of payments that are deductible for the purposes of
the taxes covered by this Convention in the Contracting State of which that trust
or trustee is a resident (but not including arm's length payments in the ordinary
course of business for services or tangible property and payments in respect of
financial obligations to a bank, provided that where such a bank is not a resident
of a Contracting State such payment is attributable to a permanent establishment
of that bank located in one of the Contracting States).
3. Notwithstanding that a company that is a resident of a Contracting State may not be a
qualified person, it shall be entitled to the benefits of this Convention otherwise accorded to
residents of a Contracting State with respect to an item of income, profit or gain if it satisfies
any other specified conditions for the obtaining of such benefits and:
a) shares representing at least 95 per cent. of the aggregate voting power
and value of the company are owned, directly or indirectly, by seven or fewer
persons who are equivalent beneficiaries; and
b) less than 50 per cent. of the company's gross income for the taxable
or chargeable period in which the item of income, profit or gain arises is paid or
accrued, directly or indirectly, to persons who are not equivalent beneficiaries, in
the form of payments that are deductible for the purposes of the taxes covered by
this Convention in the State of which the company is a resident (but not
including arm's length payments in the ordinary course of business for services
or tangible property and payments in respect of financial obligations to a bank,
provided that where such a bank is not a resident of a Contracting State such
payment is attributable to a permanent establishment of that bank located in one
of the Contracting States).
4. a) Notwithstanding that a resident of a Contracting State may not be a qualified
person, it shall be entitled to the benefits of this Convention with respect to an item of
income, profit or gain derived from the other Contracting State, if the resident is
engaged in the active conduct of a trade or business in the first-mentioned State (other
than the business of making or managing investments for the resident's own account,
unless these activities are banking, insurance or securities activities carried on by a
27
bank, insurance company or registered securities dealer), the income, profit or gain
derived from the other Contracting State is derived in connection with, or is incidental
to, that trade or business and that resident satisfies any other specified conditions for the
obtaining of such benefits.
b) If a resident of a Contracting State or any of its associated enterprises carries
on a trade or business activity in the other Contracting State which gives rise to an item
of income, profit or gain, sub-paragraph a) of this paragraph shall apply to such item
only if the trade or business activity in the first-mentioned State is substantial in relation
to the trade or business activity in the other State. Whether a trade or business activity
is substantial for the purposes of this paragraph shall be determined on the basis of all
the facts and circumstances.
c) In determining whether a person is engaged in the active conduct of a trade or
business in a Contracting State under sub-paragraph a) of this paragraph, activities
conducted by a partnership in which that person is a partner and activities conducted by
persons connected to such person shall be deemed to be conducted by such person. A
person shall be connected to another if one possesses at least 50 per cent. of the
beneficial interest in the other (or, in the case of a company, shares representing at least
50 per cent. of the aggregate voting power and value of the company or of the beneficial
equity interest in the company) or another person possesses, directly or indirectly, at
least 50 per cent. of the beneficial interest (or, in the case of a company, shares
representing at least 50 per cent. of the aggregate voting power and value of the
company or of the beneficial equity interest in the company) in each person. In any
case, a person shall be considered to be connected to another if, on the basis of all the
facts and circumstances, one has control of the other or both are under the control of the
same person or persons.
5. Notwithstanding the preceding provisions of this Article, if a company that is a
resident of a Contracting State, or a company that controls such a company, has outstanding a
class of shares:
a) which is subject to terms or other arrangements which entitle its holders to a
portion of the income, profit or gain of the company derived from the other Contracting
State that is larger than the portion such holders would receive in the absence of such
terms or arrangements; and
b) 50 per cent. or more of the voting power and value of which is owned by
persons who are not equivalent beneficiaries,
the benefits of this Convention shall apply only to that proportion of the income which those
holders would have received in the absence of those terms or arrangements.
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6. A resident of a Contracting State that is neither a qualified person nor entitled to
benefits with respect to an item of income, profit or gain under paragraph 3 or 4 of this Article
shall, nevertheless, be granted benefits of this Convention with respect to such item if the
competent authority of the other Contracting State determines that the establishment,
acquisition or maintenance of such resident and the conduct of its operations did not have as
one of its principal purposes the obtaining of benefits under this Convention.
The competent authority of the other Contracting State shall consult with the competent
authority of the first-mentioned State before refusing to grant benefits of this Convention under
this paragraph.
7. For the purposes of this Article the following rules and definitions shall apply:
a) the term "recognized stock exchange" means:
(i) the NASDAQ System and any stock exchange registered with the
U.S. Securities and Exchange Commission as a national securities exchange
under the U.S. Securities Exchange Act of 1934;
(ii) the London Stock Exchange and any other recognised investment
exchange within the meaning of the Financial Services Act 1986 or, as the case
may be, the Financial Services and Markets Act 2000;
(iii) the Irish Stock Exchange, the Swiss Stock Exchange and the stock
exchanges of Amsterdam, Brussels, Frankfurt, Hamburg, Johannesburg, Madrid,
Milan, Paris, Stockholm, Sydney, Tokyo, Toronto and Vienna; and
(iv) any other stock exchange which the competent authorities agree to
recognise for the purposes of this Article;
b) (i) the term "principal class of shares" means the ordinary or common
shares of the company, provided that such class of shares represents the majority
of the voting power and value of the company. If no single class of ordinary or
common shares represents the majority of the aggregate voting power and value
of the company, the "principal class of shares" is that class or those classes that
in the aggregate represent a majority of the aggregate voting power and value of
the company;
(ii) the term "shares" shall include depository receipts thereof or trust
certificates thereof;
c) the term "units" as used in sub-paragraph d) of paragraph 2 of this Article
includes shares and any other instrument, not being a debt-claim, granting an
entitlement to share in the assets or income of, or receive a distribution from, the
person. The term "principal class of units" means the class of units which
represents the majority of the value of the person. If no single class of units
represents the majority of the value of the person, the "principal class of units" is
29
those classes that in the aggregate represent the majority of the value of the
person;
d) an equivalent beneficiary is a resident of a Member State of the European
Community or of a European Economic Area state or of a party to the North
American Free Trade Agreement but only if that resident:
(i) A) would be entitled to all the benefits of a
comprehensive convention for the avoidance of double taxation
between any Member State of the European Community or a
European Economic Area state or any party to the North
American Free Trade Agreement and the Contracting State from
which the benefits of this Convention are claimed, provided that
if such convention does not contain a comprehensive limitation
on benefits article, the person would be a qualified person under
paragraph 2 of this Article (or for the purposes of sub-paragraph
g) of paragraph 2, under the provisions specified in clause (i) of
that sub-paragraph) if such person were a resident of one of the
Contracting States under Article 4 (Residence) of this
Convention; and
B) with respect to income referred to in Article 10
(Dividends), 11 (Interest) or 12 (Royalties) of this Convention,
would be entitled under such convention to a rate of tax with
respect to the particular class of income for which benefits are
being claimed under this Convention that is at least as low as the
rate applicable under this Convention; or
(ii) is a company resident in a Member State of the European
Community which is entitled under the provisions of any Directive of the
European Community to receive the particular class of income for which
benefits are being claimed under this Convention free of withholding tax.
e) For the purposes of paragraph 2 of this Article, the shares in a class of shares
or the units in a class of units are considered to be regularly traded on one or more
recognized stock exchanges in a chargeable or taxable period if the aggregate number of
shares or units of that class traded on such stock exchange or exchanges during the
twelve months ending on the day before the beginning of that taxable or chargeable
period is at least six per cent. of the average number of shares or units outstanding in
that class during that twelve-month period.
30
f) A body corporate or unincorporated association shall be considered to be an
insurance company if its gross income consists primarily of insurance or reinsurance
premiums and investment income attributable to such premiums.
ARTICLE 24
Relief from Double Taxation
1. In accordance with the provisions and subject to the limitations of the law of the
United States (as it may be amended from time to time without changing the general principle
hereof), the United States shall allow to a resident or citizen of the United States as a credit
against the United States tax on income
a) the income tax paid or accrued to the United Kingdom by or on behalf of
such citizen or resident; and
b) in the case of a United States company owning at least 10 per cent. of the
voting stock of a company that is a resident of the United Kingdom and from which the
United States company receives dividends, the income tax paid or accrued to the United
Kingdom by or on behalf of the payer with respect to the profits out of which the
dividends are paid.
For the purposes of this paragraph, the taxes referred to in sub-paragraph b) of paragraph 3 and
in paragraph 4 of Article 2 (Taxes Covered) of this Convention shall be considered income
taxes.
2. For the purposes of applying paragraph 1 of this Article,
a) subject to sub-paragraph b) of this paragraph, an item of gross income, as
determined under the laws of the United States, derived by a resident of the United
States that, under this Convention, may be taxed in the United Kingdom shall be
deemed to be income from sources in the United Kingdom;
b) however, gains derived by an individual while that individual was a resident
of the United States, that are taxed in the United States in accordance with this
Convention, and that may also be taxed in the United Kingdom by reason only of
paragraph 6 of Article 13 (Gains) of this Convention, shall be deemed to be gains from
sources in the United States.
3. Notwithstanding the provisions of paragraph 1 of this Article, the amount of United
Kingdom petroleum revenue tax allowable as a credit against United States tax shall be limited
to the amount attributable to the United Kingdom source taxable income in the following way,
namely:
a) the amount of United Kingdom petroleum revenue tax on income from the
extraction of minerals from oil or gas wells in the United Kingdom to be allowed as a
credit for a taxable year shall not exceed the amount, if any, by which the product of the
31
maximum statutory United States tax rate applicable to a corporation for such taxable
year and the amount of such income exceeds the amount of other United Kingdom tax
on such income;
b) the amount of United Kingdom petroleum revenue tax on income from the
extraction of minerals from oil or gas wells in the United Kingdom that is not allowable
as a credit under sub-paragraph a) of this paragraph, shall be deemed to be income taxes
paid or accrued in the two preceding or five succeeding taxable years, to the extent not
deemed paid or accrued in a prior taxable year, and shall be allowable as a credit in the
year in which it is deemed paid or accrued subject to the limitation in sub-paragraph a)
of this paragraph;
c) the provisions of sub-paragraphs a) and b) of this paragraph shall apply
separately, mutatis mutandis, to the amount of United Kingdom petroleum revenue tax
on income from initial transportation, initial treatment and initial storage of minerals
from oil or gas wells in the United Kingdom.
4. Subject to the provisions of the law of the United Kingdom regarding the allowance
as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom
(which shall not affect the general principle hereof):
a) United States tax payable under the laws of the United States and in
accordance with this Convention, whether directly or by deduction, on profits, income
or chargeable gains from sources within the United States (excluding, in the case of a
dividend, United States tax in respect of the profits out of which the dividend is paid)
shall be allowed as a credit against any United Kingdom tax computed by reference to
the same profits, income or chargeable gains by reference to which the United States tax
is computed;
b) in the case of a dividend paid by a company which is a resident of the United
States to a company which is a resident of the United Kingdom and which controls
directly or indirectly at least 10 per cent. of the voting power in the company paying the
dividend, the credit shall take into account (in addition to any United States tax for
which credit may be allowed under the provisions of sub-paragraph a) of this paragraph)
the United States tax payable by the company in respect of the profits out of which such
dividend is paid;
c) United States tax shall not be taken into account under sub-paragraph b) of
this paragraph for the purpose of allowing credit against United Kingdom tax in the case
of a dividend paid by a company which is a resident of the United States if and to the
extent that
(i) the United Kingdom treats the dividend as beneficially owned by a
resident of the United Kingdom; and
(ii) the United States treats the dividend as beneficially owned by a
resident of the United States; and
(iii) the United States has allowed a deduction to a resident of the United
States in respect of an amount determined by reference to that dividend;
d) the provisions of paragraph 2 of Article 1 (General Scope) of this Convention
shall not apply to sub-paragraph c) of this paragraph.
For the purposes of this paragraph, the income taxes referred to in clause (i) of sub-paragraph a)
of paragraph 3 and in paragraph 4 of Article 2 (Taxes Covered) of this Convention shall be
considered United States tax.
5. For the purposes of paragraph 4 of this Article, profits, income and chargeable gains
owned by a resident of the United Kingdom which may be taxed in the United States in
accordance with this Convention shall be deemed to arise from sources within the United
States.
6. Where the United States taxes, in accordance with paragraph 4 of Article 1 (General
Scope) of this Convention, a United States citizen, or a former United States citizen or long-
term resident, who is a resident of the United Kingdom:
a) the United Kingdom shall not be bound to give credit to such resident for
United States tax on profits, income or chargeable gains from sources outside the United
States as determined under the laws of the United Kingdom;
b) in the case of profits, income or chargeable gains from sources within the
United States, the United Kingdom shall take into account for the purposes of
computing the credit to be allowed under paragraph 4 of this Article only the amount of
tax, if any, that the United States may impose under the provisions of this Convention
on a resident of the United Kingdom who is not a United States citizen;
c) for the purposes of computing United States tax on the profits, income or
chargeable gains referred to in sub-paragraph b) of this paragraph, the United States
shall allow as a credit against United States tax the income tax and capital gains tax paid
to the United Kingdom after the credit referred to in sub-paragraph b) of this paragraph;
the credit so allowed shall not reduce the portion of the United States tax that is
creditable against the United Kingdom tax in accordance with sub-paragraph b) of this
paragraph; and
d) for the exclusive purpose of relieving double taxation in the United States
under sub-paragraph c) of this paragraph, profits, income and chargeable gains referred
to in sub-paragraph b) of this paragraph shall be deemed to arise in the United Kingdom
to the extent necessary to avoid double taxation of such profits, income or chargeable
gains under sub-paragraph c) of this paragraph.
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ARTICLE 25
Non-Discrimination
1. Nationals of a Contracting State shall not be subjected in the other Contracting State
to any taxation or any requirement connected therewith that is more burdensome than the
taxation and connected requirements to which nationals of that other State in the same
circumstances, particularly with respect to taxation on worldwide income, are or may be
subjected.
2. The taxation on a permanent establishment that an enterprise of a Contracting State
has in the other Contracting State shall not be less favourably levied in that other State than the
taxation levied on enterprises of that other State carrying on the same activities.
3. Except where the provisions of the second sentence of paragraph 5 of Article 7
(Business Profits), paragraph 1 of Article 9 (Associated Enterprises), paragraph 9 of Article 10
(Dividends), paragraphs 4 and 7 of Article 11 (Interest), paragraphs 4 and 5 of Article 12
(Royalties), or paragraphs 3 and 4 of Article 22 (Other Income) of this Convention apply,
interest, royalties, and other disbursements paid by a resident of a Contracting State to a
resident of the other Contracting State shall, for the purpose of determining the taxable profits
of the first-mentioned resident, be deductible under the same conditions as if they had been paid
to a resident of the first-mentioned State.
4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of the other Contracting State, shall
not be subjected in the first-mentioned State to any taxation or any requirement connected
therewith that is more burdensome than the taxation and connected requirements to which other
similar enterprises of the first-mentioned State are or may be subjected.
5. Nothing in this Article shall be construed as obliging either Contracting State to
grant to individuals not resident in that State any of the personal allowances, reliefs and
reductions for tax purposes which are granted to individuals so resident or to its nationals.
6. Nothing in this Article shall be construed as preventing either Contracting State from
imposing a tax as described in paragraph 7 of Article 10 (Dividends) of this Convention.
7. The provisions of this Article shall, notwithstanding the provisions of Article 2
(Taxes Covered) of this Convention, also apply to taxes of every kind and description imposed
by each Contracting State or by its political sub-divisions or local authorities.
ARTICLE 26
Mutual Agreement Procedure
1. Where a person considers that the actions of one or both of the Contracting States
result or will result for him in taxation not in accordance with the provisions of this
Convention, he may, irrespective of the remedies provided by the domestic law of those States,
34
present his case to the competent authority of the Contracting State of which he is a resident or
national. The case must be presented within three years from the first notification of the action
resulting in taxation not in accordance with the provisions of this Convention or, if later, within
six years from the end of the taxable year or chargeable period in respect of which that taxation
is imposed or proposed.
2. The competent authority shall endeavour, if the objection appears to it to be justified
and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual
agreement with the competent authority of the other Contracting State, with a view to the
avoidance of taxation which is not in accordance with this Convention. Any agreement reached
shall be implemented notwithstanding any time limits or other procedural limitations in the
domestic law of the Contracting States, except such limitations as apply for the purposes of
giving effect to such an agreement.
3. The competent authorities of the Contracting States shall endeavour to resolve by
mutual agreement any difficulties or doubts arising as to the interpretation or application of this
Convention. In particular the competent authorities of the Contracting States may agree:
a) to the same attribution of income, deductions, credits, or allowances of an
enterprise of a Contracting State to its permanent establishment situated in the other
Contracting State;
b) to the same allocation of income, deductions, credits, or allowances between
persons;
c) to the same characterization of particular items of income, including the same
characterization of income that is assimilated to income from shares by the taxation law
of one of the Contracting States and that is treated as a different class of income in the
other Contracting State;
d) to the same characterization of persons;
e) to the same application of source rules with respect to particular items of
income;
f) to a common meaning of a term;
g) that the conditions for the application of the second sentence of paragraph 5
of Article 7 (Business Profits), paragraph 9 of Article 10 (Dividends), paragraph 7 of
Article 11 (Interest), paragraph 5 of Article 12 (Royalties), or paragraph 4 of Article 22
(Other Income) of this Convention are met; and
h) to the application of the provisions of domestic law regarding penalties,
fines, and interest in a manner consistent with the purposes of this Convention.
They may also consult together for the elimination of double taxation in cases not provided for
in this Convention.
35
4. The competent authorities of the Contracting States may communicate with each
other directly for the purpose of reaching an agreement in the sense of the preceding
paragraphs.
ARTICLE 27
Exchange of Information and Administrative Assistance
1. The competent authorities of the Contracting States shall exchange such information
as is necessary for carrying out the provisions of this Convention or of the domestic laws of the
Contracting States concerning taxes covered by this Convention insofar as the taxation
thereunder is not contrary to this Convention, including for the purposes of preventing fraud
and facilitating the administration of statutory provisions against legal avoidance. This includes
information relating to the assessment or collection of, the enforcement or prosecution in
respect of, or the determination of appeals in relation to, the taxes covered by this Convention.
The exchange of information is not restricted by paragraph 1 of Article 1 (General Scope) of
this Convention. Any information received by a Contracting State shall be treated as secret in
the same manner as information obtained under the domestic laws of that State but may be
disclosed to and only to persons or authorities (including courts and administrative bodies)
involved in the assessment, collection, or administration of, the enforcement or prosecution in
respect of, or the determination of appeals in relation to, the taxes covered by this Convention
or the oversight of the above. Such persons or authorities shall use the information only for
such purposes. They may disclose the information in public court proceedings or in judicial
decisions.
2. If information is requested by a Contracting State in accordance with this Article, the
other Contracting State shall obtain that information in the same manner and to the same extent
as if the tax of the first-mentioned State were the tax of that other State and were being imposed
by that other State, notwithstanding that the other State may not, at that time, need such
information for the purposes of its own tax.
3. In no case shall the provisions of paragraphs 1 and 2 of this Article be construed so
as to impose on a Contracting State the obligation:
a) to carry out administrative measures at variance with the laws and
administrative practice of that or of the other Contracting State;
b) to supply information that is not obtainable under the laws or in the normal
course of the administration of that or of the other Contracting State;
c) to supply information that would disclose any trade, business, industrial,
commercial, or professional secret or trade process, or information the disclosure of
which would be contrary to public policy.
36
4. If specifically requested by the competent authority of a Contracting State, the
competent authority of the other Contracting State shall provide information under this Article
in the form of authenticated copies of unedited original documents (including books, papers,
statements, records, accounts, and writings), to the same extent such documents can be obtained
under the laws and administrative practices of that other State with respect to its own taxes.
5. Each of the Contracting States shall endeavour to collect on behalf of the other
Contracting State such amounts as may be necessary to ensure that relief granted by this
Convention from taxation imposed by that other State does not inure to the benefit of persons
not entitled thereto. This paragraph shall not impose upon either of the Contracting States the
obligation to carry out administrative measures that would be contrary to its sovereignty,
security, or public policy.
6. The competent authority of a Contracting State intending to send officials of that
State to the other Contracting State to interview individuals and examine books and records
with the consent of the persons subject to examination shall notify the competent authority of
the other Contracting State of that intention.
7. The competent authorities of the Contracting States shall consult with each other for
the purpose of co-operating and advising in respect of any action to be taken in implementing
this Article.
ARTICLE 28
Diplomatic Agents and Consular Officers
Nothing in this Convention shall affect the fiscal privileges of diplomatic agents or
consular officers under the general rules of international law or under the provisions of special
agreements.
ARTICLE 29
Entry into Force
1. This Convention shall be subject to ratification in accordance with the applicable
procedures of each Contracting State and instruments of ratification shall be exchanged as soon
as possible.
2. This Convention shall enter into force upon the exchange of instruments of
ratification and its provisions shall have effect:
a) in the United States:
(i) in respect of taxes withheld at source, for amounts paid or credited on
or after the first day of the second month next following the date on which this
Convention enters into force;
37
(ii) in respect of other taxes, for taxable periods beginning on or after the
first day of January next following the date on which this Convention enters into
force; and
b) in the United Kingdom:
(i) in respect of taxes withheld at source, for amounts paid or credited on
or after the first day of the second month next following the date on which this
Convention enters into force;
(ii) in respect of income tax not described in clause (i) of this sub-
paragraph and capital gains tax, for any year of assessment beginning on or after
the sixth day of April next following the date on which this Convention enters
into force;
(iii) in respect of corporation tax, for any financial year beginning on or
after the first day of April next following the date on which this Convention
enters into force;
(iv) in respect of petroleum revenue tax, for chargeable periods
beginning on or after the first day of January next following the date on which
this Convention enters into force.
3. The Convention between the Government of the United States of America and the
Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and
Capital Gains, signed at London on December 31st, 1975, as modified by subsequent notes and
protocols ("the prior Convention") shall cease to have effect in relation to any tax with effect
from the date on which this Convention has effect in relation to that tax in accordance with
paragraph 2 of this Article. Notwithstanding the preceding sentence, where any person entitled
to benefits under the prior Convention would have been entitled to greater benefits thereunder
than under this Convention, the prior Convention shall, at the election of such person, continue
to have effect in its entirety with respect to that person for a twelve-month period from the date
on which the provisions of this Convention otherwise would have effect under paragraph 2 of
this Article. The prior Convention shall terminate on the last date on which it has effect in
relation to any tax in accordance with the foregoing provisions of this paragraph.
4. Notwithstanding the entry into force of this Convention, an individual who is entitled
to the benefits of Article 20 (Teachers) of the prior Convention at the time of the entry into
force of this Convention shall continue to be entitled to such benefits until such time as the
individual would have ceased to be entitled to such benefits if the prior Convention had
remained in force.
5. Notwithstanding the entry into force of this Convention, an individual who is entitled
to the benefits of Article 21 (Students and Trainees) of the prior Convention at the time of entry
38
into force of this Convention shall continue to be entitled to such benefits as if the prior
Convention had remained in force.
ARTICLE 30
Termination
This Convention shall remain in force until terminated by a Contracting State. Either
Contracting State may terminate this Convention by giving notice of termination to the other
Contracting State through diplomatic channels. In such event, this Convention shall cease to
have effect:
a) in the United States:
(i) in respect of taxes withheld at source, for amounts paid or credited
after the date that is six months after the date on which notice of termination
was given; and
(ii) in respect of other taxes, for taxable periods beginning on or after
the date that is six months after the date on which notice of termination was
given.
b) in the United Kingdom:
(i) in respect of taxes withheld at source, for amounts paid or credited
after the date that is six months after the date on which notice of termination
was given;
(ii) in respect of income tax not described in clause (i) of this sub-
paragraph and capital gains tax, for any year of assessment beginning on or
after the date that is six months after the date on which notice of termination
was given;
(iii) in respect of corporation tax, for any financial year beginning on or
after the date that is six months after the date on which notice of termination
was given; and
(iv) in respect of petroleum revenue tax, for chargeable periods
beginning on or after the date that is six months after the date on which
notice of termination was given.
39
IN WITNESS WHEREOF, the undersigned, being duly authorised thereto by their
respective Governments, have signed this Convention.
DONE at London in duplicate, this twenty-fourth day of July, 2001.
FOR THE GOVERNMENT OF
THE UNITED STATES OF AMERICA:
FOR THE GOVERNMENT OF
THE UNITED KINGDOM OF GREAT
BRITAIN AND NORTHERN IRELAND:

London
24 July 2001
Excellency:
I have the honour to refer to the Convention between the Government of the United Kingdom of
Great Britain and Northern Ireland and the Government of the United States of America for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income and on Capital Gains which has been signed today and to make on behalf of the
Government of the United Kingdom of Great Britain and Northern Ireland the following
proposals:
With reference to paragraph 3 of Article I (General Scope):
it is understood that, at the time of the signing of the Convention, the only agreements in force
as between the two Contracting States that may impose national treatment or most-favoured
nation obligations are the General Agreement on Trade in Services, the General Agreement on
Tariffs and Trade, A Convention to Regulate the Commerce between the Territories of the
United States and of His Britannic Majesty, signed in London on July 3rd, 1815, and the Treaty
of Amity, Commerce, and Navigation, between His Britannic Majesty and the United States of
America, signed at London, on November 19th, 1794. If it is determined that there were, at the
date of the signing of the Convention, additional agreements in force between the Contracting
States that create such obligations, the Contracting States will consider whether amendments to
the Convention are necessary to ensure the proper interaction of the Convention and such other
agreement with respect to tax measures.
With reference to paragraph 6 of Article I (General Scope):
(1) it is understood that an individual shall be regarded as a former long-term resident of a
Contracting State only if that individual (not being a citizen of that Contracting State) was a
lawful permanent resident of that Contracting State in at least eight of the fifteen fiscal years
ending with the fiscal year in which the individual ceased to be a long-term resident of that
Contracting State;
The Honourable William S. Farish
The American Ambassador to the Court of St James
London
(2) it is further understood that, in the case of an individual who is a former citizen of a
Contracting State, the following factors shall be considered favourably in determining whether
or not one of the principal purposes of that individual's loss of citizenship of that Contracting
State was the avoidance of tax,
a) at the time of the individual's ceasing to be a citizen of that Contracting State or within
a reasonable period thereafter, the individual is or becomes a resident fully liable to
income tax in the other Contracting State, and
b) (i) the individual was a citizen of both Contracting States at birth and has remained a
citizen of the other Contracting State;
(ii) at the time of the loss of such citizenship (or within a reasonable period
thereafter), the individual was or became a citizen of the other Contracting State, and that
other Contracting State was that individual's country of birth, or the country of birth of that
individual's spouse or of either of that individual's parents;
(iii) in the 10 years preceding the loss of such citizenship the individual was present
in that Contracting State for no more than 30 days in any taxable year or year of
assessment; or
(iv) the loss of citizenship occurred before the individual attained the age of 181/2
years;
(3) it is further understood that, in the case of an individual who is a former long-term resident
of a Contracting State, the following factors shall be considered favourably in determining
whether or not one of the principal purposes of that individual's ceasing to be a long-term
resident of that Contracting State was the avoidance of tax,
a) at the time of the individual's ceasing to be a long-term resident of that Contracting
State or within a reasonable period thereafter, the individual is or becomes a resident fully
liable to income tax in the other Contracting State, and that other Contracting State is
(i) the country in which the individual was born;
(ii) the country in which the individual's spouse was born; or
(iii) the country where either of the individual's parents was born;
b) in the 10 years preceding the individual's ceasing to be a long-term resident of that
Contracting State, the individual was present in that Contracting State for no more than 30
days in each taxable year or year of assessment; or
2
c) the individual ceases to be a long-term resident of that Contracting State before
reaching the age of 18 1/2 years; and
(4) it is understood that, for the purposes of sub-paragraph a) of paragraph (2) and sub-
paragraph a) of paragraph (3) above, an individual is not to be regarded as fully liable to income
tax in a Contracting State if that individual is subject to tax in that State, in respect of income
arising in the other Contracting State, by reference to the amount of such income which is
remitted to or received in the first-mentioned State and not by reference to the full amount
thereof.
With reference to paragraph 8 of Article 1 (General Scope):
it is understood that where an item of income, profit or gain is derived through a person which is
a resident of a Contracting State the provisions of the paragraph shall not prevent that
Contracting State from taxing the item as the income, profit or gain of that person.
It is further understood that, where, by virtue of the paragraph, an item of income, profit or gain
is considered by a Contracting State to be derived by a person who is a resident of that
Contracting State, and the same item is considered by the other Contracting State to be derived
by that person or by a person who is a resident of that other Contracting State, the paragraph
shall not prevent either Contracting State from taxing the item as the income, profit or gain of
the person considered by that State to have derived the item of income, profit or gain.
It is further understood that, in applying the paragraph, the United Kingdom shall, exceptionally,
regard an item of income, profit or gain arising to a person as falling within the paragraph where
another person is charged to United Kingdom tax in respect of that item of income, profit or gain
a) under section 660A or 739, Income and Corporation Taxes Act 1988; or
b) under section 77 or 86, Taxation of Chargeable Gains Act 1992.
It is further understood that, in applying the paragraph, a person shall be regarded as fiscally
transparent under the laws of the United Kingdom in relation to an item of income, profit or gain
where a charge is made on another person on that item either:
a) by virtue of section 13, Taxation of Chargeable Gains Act 1992; or
b) because that other person has (or, under section 118, Finance Act 1993, is treated as
having) an equitable right in possession in a trust.
With reference to Article 2 (Taxes Covered):
3
it is understood that, if a political sub-division or local authority of the United States seeks to
impose tax on the profits of any enterprise of the United Kingdom from the operation of ships or
aircraft in international traffic, in circumstances where the Convention would preclude the
imposition of a Federal income tax on those profits, the United States Government will use its
best endeavours to persuade that political sub-division or local authority to refrain from
imposing tax.
With reference to sub-paragraph o) of paragraph 1 of Article 3 (General Definitions):
it is understood that pension schemes shall include the following and any identical or
substantially similar schemes which are established pursuant to legislation introduced after the
date of signature of the Convention:
a) under the law of the United Kingdom, employment-related arrangements (other than a
social security scheme) approved as retirement benefit schemes for the purposes of
Chapter I of Part XIV of the Income and Corporation Taxes Act 1988, and personal
pension schemes approved under Chapter IV of Part XIV of that Act; and
b) under the law of the United States, qualified plans under section 401(a) of the Internal
Revenue Code, individual retirement plans (including individual retirement plans that are
part of a simplified employee pension plan that satisfies section 408(k), individual
retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth
IRAs under section 408A), section 403(a) qualified annuity plans, and section 403(b)
plans.
With reference to Article 7 (Business Profits):
it is understood that the OECD Transfer Pricing Guidelines will apply, by analogy, for the
purposes of determining the profits attributable to a permanent establishment. Accordingly, any
of the methods described therein — including profits methods — may be used to determine the
income of a permanent establishment so long as those methods are applied in accordance with
the Guidelines. In particular, in determining the amount of attributable profits, the permanent
establishment shall be treated as having the same amount of capital that it would need to support
its activities if it were a distinct and separate enterprise engaged in the same or similar activities.
With respect to financial institutions other than insurance companies, a Contracting State may
determine the amount of capital to be attributed to a permanent establishment by allocating the
institution's total equity between its various offices on the basis of the proportion of the financial
institution's risk-weighted assets attributable to each of them.
With reference to paragraph 2 of Article 8 (Shipping and Air Transport):
it is understood that income earned by an enterprise from the inland transport of property or
4
passengers within either Contracting State falls within Article 8 if the transport is undertaken as
part of the international transport of property or passengers by the enterprise. Thus, if an
enterprise of a Contracting State contracts to carry property from the other State to the first-
mentioned State and, as part of that contract, it transports the property by truck from its point of
origin to an airport in the other State (or it contracts with a trucking company to carry the
property to the airport) the income earned by the enterprise from the overland leg of the journey
would be taxable only in the first-mentioned State. Similarly, it is understood that Article 8 also
would apply to income from lighterage undertaken as part of the international transport of
goods.
With reference to Article 9 (Associated Enterprises), paragraph 4 of Article 11 (Interest) and
paragraph 4 of Article 12 (Royalties):
it is understood that, if the amount of interest or royalties paid exceeds the amount that would
have been paid in the absence of a special relationship, a Contracting State generally will adjust
the amount of deductible interest or royalties paid under the authority of Article 9 and make such
other adjustments as are appropriate. If such an adjustment is made, the Contracting State
making such adjustment will not also impose its domestic rate of withholding tax with respect to
such excess amount.
With reference to paragraph 7 of Article 10 (Dividends):
it is understood that the general principle of the "dividend equivalent amount", as used in United
States law, is to approximate that portion of the income mentioned in paragraph 7 of Article 10
that is comparable to the amount that would be distributed as a dividend if such income were
earned by a subsidiary incorporated in the United States. For any year, a foreign corporation's
dividend equivalent amount is equal to the after-tax earnings attributable to the foreign
corporation's (i) income attributable to a permanent establishment in the United States, (ii)
income from real property in the United States that is taxed on a net basis under Article 6
(Income from Real Property), and (iii) gain from a real property interest taxable by the United
States under paragraph 1 of Article 13 (Gains), reduced by any increase in the foreign
corporation's net investment in U. S. assets or increased by any reduction in the foreign
corporation's net investment in U. S. assets.
With reference to Article 14 (Income from Employment):
it is understood that any benefits, income or gains enjoyed by employees under share/stock
option plans are regarded as "other similar remuneration" for the purposes of Article 14.
It is further understood that where an employee:
a) has been granted a share/stock option in the course of an employment in one of the
5
Contracting States;
b) has exercised that employment in both States during the period between grant and exercise of
the option;
c) remains in that employment at the date of the exercise; and
d) under the domestic law of the Contracting States, would be taxable by both Contracting
States in respect of the option gain,
then, in order to avoid double taxation, a Contracting State of which, at the time of the exercise
of the option, the employee is not a resident will tax only that proportion of the option gain
which relates to the period or periods between the grant and the exercise of the option during
which the individual has exercised the employment in that Contracting State.
With the aim of ensuring that no unrelieved double taxation arises the competent authorities of
the Contracting States will endeavour to resolve by mutual agreement any difficulties or doubts
arising as to the interpretation or application of Article 14 and Article 24 (Relief from Double
Taxation) in relation to employee share/stock option plans.
With reference to paragraph 1 of Article 17 (Pensions, Social Security, Annuities, Alimony, and
Child Support):
it is understood that a payment shall be treated as a pension or other similar remuneration under
paragraph 1 of Article 17 if it is a payment under a pension scheme as defined in sub-paragraph
o) of paragraph 1 of Article 3 (General Definitions) of the Convention.
With reference to sub-paragraph b) of paragraph 3 and sub-paragraph d) of paragraph 5 of
Article 18 (Pension Schemes):
it is understood that the pension schemes listed with respect to a Contracting State in this
exchange of notes in connection with sub-paragraph o) of paragraph 1 of Article 3 (General
Definitions) shall generally correspond to the pension schemes listed in this exchange of notes
with respect to the other Contracting State.
With reference to paragraph 1 of Article 22 (Other Income):
it is understood that the purpose of the exclusion from the paragraph for income paid out of
trusts or the estates of deceased persons in the course of administration is to allow a recipient of
such income the relief that would have been available to him under the provisions of the
Convention had he received the income direct instead of through the trust or estate.
With reference to Article 23 (Limitation on Benefits):
it is understood that the term "gross income" means the total revenues derived by a resident of a
Contracting State from its principal operations, less the direct costs of obtaining such revenues.
6
With reference to paragraph 4 of Article 23 (Limitation on Benefits):
it is understood that an item of income, profit or gain is to be considered as derived "in
connection" with an active trade or business in a Contracting State if the activity generating the
item in the other Contracting State is a line of business which forms a part of, or is
complementary to, the trade or business conducted in the first-mentioned State. The line of
business in the first-mentioned State may be 'upstream' to that going on in the other State (e.g.,
providing inputs to a manufacturing process that occurs in that other State), 'downstream' (e.g.,
selling the output of a manufacturer which is a resident of the other State) or 'parallel' (e.g.,
selling in one Contracting State the same sorts of products that are being sold by the trade or
business carried on in the other Contracting State).
It is understood that an item of income, profit or gain derived from a Contracting State would be
considered "incidental" to the trade or business carried on in the other Contracting State if the
item is not produced by a line of business which forms a part of, or is complementary to, the
trade or business conducted in that other Contracting State by the recipient of the item, but the
production of such item facilitates the conduct of the trade or business in that other Contracting
State. An example of such "incidental" item of income, profit or gain is interest income earned
from the short-term investment of working capital of a resident of a Contracting State in
securities issued by persons in the other Contracting State.
With reference to paragraph 6 of Article 23 (Limitation on Benefits):
it is understood that in applying paragraph 6 of Article 23, the competent authorities will
consider the obligations imposed upon the United Kingdom by its membership of the European
Community and by its being a party to the European Economic Area Agreement, and on the
United States by its being a party to the North American Free Trade Agreement. In particular,
they will have regard to any legal requirements for the facilitation of the free movement of
capital and persons, the differing internal tax systems, tax incentive regimes and existing tax
treaty policies among Member States of the European Community or European Economic Area
states, or, as the case may be, parties to the North American Free Trade Agreement.
Paragraph 6 of Article 23 requires the competent authority of the State from which benefits are
claimed to consider whether the establishment, acquisition or maintenance of a resident and the
conduct of its operations had as one of its principal purposes the obtaining of benefits under the
Convention. That competent authority may determine under a given set of facts that a change in
circumstances that would cause a qualified person to cease to qualify for treaty benefits under
paragraph 2 of Article 23 need not result in a denial of benefits. Such changes in circumstances
may include:
a) a change in the state of residence of a major participator in a company;
7
b) the sale of part of the ownership interests in a company to a resident of another Member State
of the European Community or another European Economic Area state or, as the case may be,
another party to the North American Free Trade Agreement; or
c) an expansion of a company's activities in other Member States of the European Community
or other European Economic Area states or, as the case may be, other parties to the North
American Free Trade Agreement,
all under ordinary business conditions.
If the competent authority is satisfied that these changed circumstances are not attributable to tax
avoidance motives, this will be a factor weighing in favour of granting benefits in accordance
with paragraph 6 of Article 23.
With reference to sub-paragraph e) of paragraph 7 of Article 23 (Limitation on Benefits):
it is understood that, if a class of shares was not listed on a recognised stock exchange in the
twelve months referred to in the sub-paragraph, that class of shares will be treated as regularly
traded only if that class meets the aggregate trading requirements of the sub-paragraph for the
taxable or chargeable period in which the income arises.
With reference to Article 24 (Relief from Double Taxation):
it is understood that, under paragraph 4 or 8 of Article 1 (General Scope), the provisions of the
Convention may permit the Contracting State of which a person is a resident (or, in the case of
the United States, a citizen), to tax an item of income, profit or gain derived through another
person (the entity) which is fiscally transparent under the laws of either Contracting State, and
may permit the other Contracting State to tax
a) the same person;
b) the entity; or
c) a third person
with respect to that item. Under such circumstances, the tax paid or accrued by the entity shall
be treated as if it were paid or accrued by the first-mentioned person for the purposes of
determining the relief from double taxation to be allowed by the State of which that first-
mentioned person is a resident (or, in the case of the United States, a citizen), except that, in the
case of an item of income from real property to which paragraph 1 of Article 6 (Income from
Real Property) of the Convention applies, or a gain from the alienation of real property to which
paragraph 1 of Article 13 (Gains) applies, the tax paid or accrued by the person who is a resident
8
of the Contracting State in which the real property is situated shall be treated as if it were paid or
accrued by the person who is a resident of the other Contracting State.
In the case where the same item of income, profit or gain derived through a trust is treated by
each Contracting State as derived by different persons resident in either State, and
a) the person taxed by one State is the settlor or grantor of a trust; and
b) the person taxed by the other State is a beneficiary of that trust,
the tax paid or accrued by the beneficiary shall be treated as if it were paid or accrued by the
settlor or grantor for the purposes of determining the relief from double taxation to be allowed
by the State of which that settlor or grantor is a resident (or, in the case of the United States, a
citizen), except that, in the case of an item of income from real property to which paragraph 1 of
Article 6 (Income from Real Property) of the Convention applies, or a gain from the alienation of
real property to which paragraph 1 of Article 13 (Gains) applies, the tax paid or accrued by the
person who is a resident of the Contracting State in which the real property is situated shall be
treated as if it were paid or accrued by the person who is a resident of the other Contracting
State.
It is further understood that paragraphs 2 and 5 of Article 24 shall apply to such an item of
income, profit or gain to the extent necessary to provide relief from double taxation.
With reference to paragraphs I and 4 of Article 24 (Relieffrom Double Taxation):
it is understood that, if a resident of a Contracting State receives a dividend that is described in
sub-paragraph b) of paragraph 1 or sub-paragraph b) of paragraph 4 of Article 24, such dividend
will be deemed to be income from sources in the other Contracting State, even if it may be taxed
only in the first-mentioned Contracting State because of sub-paragraph a) of paragraph 3 of
Article 10 (Dividends).
With reference to paragraph 2 of Article 26 (Mutual Agreement Procedure):
it is understood that where the competent authorities are endeavouring to resolve a case pursuant
to the Article, neither Contracting State shall seek to collect the tax which is in dispute until the
mutual agreement procedure has been completed. Any tax which is payable following the
completion of the mutual agreement procedure shall, however, be subject to interest charges,
and, if appropriate, surcharges or penalties, as long as it remains unpaid.
With reference to paragraph 3 of Article 26 (Mutual Agreement Procedure):
it is understood that any principle of general application established by an agreement between
9
the competent authorities shall be published by both competent authorities.
With reference to Article 27 (Exchange of Information and Administrative Assistance):
it is understood that the powers of each Contracting State's competent authorities to obtain
information include powers to obtain information held by financial institutions, nominees, or
persons acting in an agency or fiduciary capacity (not including information that would reveal
confidential communications between a client and an attorney, solicitor or other legal
representative, where the client seeks legal advice), and information relating to the ownership of
legal persons, and that each Contracting State's competent authorities are able to exchange such
information in accordance with the Article.
With reference to Article 29 (Entry into Force):
it is understood that the provisions of Article 26 (Mutual Agreement Procedure) and Article 27
(Exchange of Information and Administrative Assistance) of the Convention shall have effect
from the date of entry into force of the Convention, without regard to the taxable or chargeable
period to which the matter relates.
In General:
it is understood that the two Governments shall consult together at regular intervals regarding the
terms, operation and application of the Convention to ensure that it continues to serve the
purposes of avoiding double taxation and preventing fiscal evasion and shall, where they
consider it appropriate, conclude Protocols to amend the Convention. The first such
consultation shall take place no later than December 31st in the fifth year following the date on
which the Convention enters into force in accordance with the provisions of Article 29 (Entry
into Force). Further consultations shall take place thereafter at intervals of no more than five
years.
Notwithstanding the preceding paragraph, either Government may at any time request
consultations with the other Government on matters relating to the terms, operation and
application of the Convention which it considers require urgent resolution.
If the foregoing proposals are acceptable to the Government of the United States of America, I
have the honour to suggest that the present note and Your Excellency's reply to that effect should
be regarded as constituting an agreement between the two Governments in this matter, which
shall enter into force at the same time as the Convention.
10
I avail myself of this opportunity to extend to Your Excellency the assurance of my highest
consideration.
Richard Wilkinson CVO
Director Americas
Foreign and Commonwealth Office
London
11
EMBASSY OF THE UNITED STATES OF AMERICA
LONDON
Note No. 074
July 24, 2001
Sir:
I have the honor to acknowledge receipt of your note of today which reads as
follows:
"I have the honour to refer to the Convention between the Government of the
United Kingdom of Great Britain and Northern Ireland and the Government of the
United States of America for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income and on Capital Gains which has been
signed today and to make on behalf of the Government of the United Kingdom of Great
Britain and Northern Ireland the following proposals:
With reference to paragraph 3 of Article 1 (General Scope):
it is understood that, at the time of the signing of the Convention, the only
agreements in force as between the two Contracting States that may impose national
treatment or most-favored nation obligations are the General Agreement on Trade in
Services, the General Agreement on Tariffs and Trade, A Convention to Regulate the
Commerce between the Territories of the United States and of His Britannic Majesty,
signed in London on July 3rd, 1815, and the Treaty of Amity, Commerce, and
Navigation, between His Britannic Majesty and the United States of America, signed at
London, on November 19th, 1794. If it is determined that there were, at the date of the
signing of the Convention, additional agreements in force between the Contracting
States that create such obligations, the Contracting States will consider whether
amendments to the Convention are necessary to ensure the proper interaction of the
Convention and such other agreement with respect to tax measures.
With reference to paragraph 6 of Article 1 (General Scope):
(1) it is understood that an individual shall be regarded as a former long-term
resident of a Contracting State only if that individual (not being a citizen of that
Contracting State) was a lawful permanent resident of that Contracting State in at least
eight of the fifteen fiscal years ending with the fiscal year in which the individual ceased
to be a long-term resident of that Contracting State;
(2) it is further understood that, in the case of an individual who is a former citizen
of a Contracting State, the following factors shall be considered favorably in
determining whether or not one of the principal purposes of that individual's loss of
citizenship of that Contracting State was the avoidance of tax,
a) at the time of the individual's ceasing to be a citizen of that Contracting
State or within a reasonable period thereafter, the individual is or becomes a resident
fully liable to income tax in the other Contracting State, and
b) (i) the individual was a citizen of both Contracting States at birth and
has remained a citizen of the other Contracting State;
(ii) at the time of the loss of such citizenship (or within a reasonable
period thereafter), the individual was or became a citizen of the other Contracting State,
and that other Contracting State was that individual's country of birth, or the country of
birth of that individual's spouse or of either of that individual's parents;
(iii) in the 10 years preceding the loss of such citizenship the individual
was present in that Contracting State for no more than 30 days in any taxable year or
year of assessment; or
(iv) the loss of citizenship occurred before the individual attained the
age of 181/2 years;
(3) it is further understood that, in the case of an individual who is a former long-
term resident of a Contracting State, the following factors shall be considered favorably
in determining whether or not one of the principal purposes of that individual's ceasing
to be a long-term resident of that Contracting State was the avoidance of tax,
a) at the time of the individual's ceasing to be a long-term resident of that
Contracting State or within a reasonable period thereafter, the individual is or becomes
a resident fully liable to income tax in the other Contracting State, and that other
Contracting State is
(i) the country in which the individual was born;
(ii) the country in which the individual's spouse was born; or
(iii) the country where either of the individual's parents was born;
b) in the 10 years preceding the individual's ceasing to be a long-term
resident of that Contracting State, the individual was present in that Contracting State
for no more than 30 days in each taxable year or year of assessment; or
2
c) the individual ceases to be a long-term resident of that Contracting State
before reaching the age of 18 1/2 years; and
(4) it is understood that, for the purposes of sub-paragraph a) of paragraph (2) and
sub-paragraph a) of paragraph (3) above, an individual is not to be regarded as fully
liable to income tax in a Contracting State if that individual is subject to tax in that State,
in respect of income arising in the other Contracting State, by reference to the amount of
such income which is remitted to or received in the first-mentioned State and not by
reference to the full amount thereof.
With reference to paragraph 8 of Article 1 (General Scope):
it is understood that where an item of income, profit or gain is derived through a
person which is a resident of a Contracting State the provisions of the paragraph shall
not prevent that Contracting State from taxing the item as the income, profit or gain of
that person.
It is further understood that, where, by virtue of the paragraph, an item of income,
profit or gain is considered by a Contracting State to be derived by a person who is a
resident of that Contracting State, and the same item is considered by the other
Contracting State to be derived by that person or by a person who is a resident of that
other Contracting State, the paragraph shall not prevent either Contracting State from
taxing the item as the income, profit or gain of the person considered by that State to
have derived the item of income, profit or gain.
It is further understood that, in applying the paragraph, the United Kingdom shall,
exceptionally, regard an item of income, profit or gain arising to a person as falling
within the paragraph where another person is charged to United Kingdom tax in respect
of that item of income, profit or gain
a) under section 660A or 739, Income and Corporation Taxes Act 1988; or
b) under section 77 or 86, Taxation of Chargeable Gains Act 1992.
It is further understood that, in applying the paragraph, a person shall be regarded
as fiscally transparent under the laws of the United Kingdom in relation to an item of
income, profit or gain where a charge is made on another person on that item either:
a) by virtue of section 13, Taxation of Chargeable Gains Act 1992; or
b) because that other person has (or, under section 118, Finance Act 1993, is
treated as having) an equitable right in possession in a trust.
3
With reference to Article 2 (Taxes Covered):
it is understood that, if a political sub-division or local authority of the United
States seeks to impose tax on the profits of any enterprise of the United Kingdom from
the operation of ships or aircraft in international traffic, in circumstances where the
Convention would preclude the imposition of a Federal income tax on those profits, the
United States Government will use its best endeavors to persuade that political sub-
division or local authority to refrain from imposing tax.
With reference to sub-paragraph o) of paragraph 1 of Article 3 (General
Definitions):
it is understood that pension schemes shall include the following and any
identical or substantially similar schemes which are established pursuant to legislation
introduced after the date of signature of the Convention:
a) under the law of the United Kingdom, employment-related arrangements
(other than a social security scheme) approved as retirement benefit schemes for the
purposes of Chapter I of Part XIV of the Income and Corporation Taxes Act 1988, and
personal pension schemes approved under Chapter IV of Part XIV of that Act; and
b) under the law of the United States, qualified plans under section 401(a) of
the Internal Revenue Code, individual retirement plans (including individual retirement
plans that are part of a simplified employee pension plan that satisfies section 408(k),
individual retirement accounts, individual retirement annuities, section 408(p) accounts,
and Roth IRAs under section 408A), section 403(a) qualified annuity plans, and section
403(b) plans.
With reference to Article 7 (Business Profits):
it is understood that the OECD Transfer Pricing Guidelines will apply, by
analogy, for the purposes of determining the profits attributable to a permanent
establishment. Accordingly, any of the methods described therein — including profits
methods — may be used to determine the income of a permanent establishment so long as
those methods are applied in accordance with the Guidelines. In particular, in
determining the amount of attributable profits, the permanent establishment shall be
treated as having the same amount of capital that it would need to support its activities if
it were a distinct and separate enterprise engaged in the same or similar activities. With
respect to financial institutions other than insurance companies, a Contracting State may
determine the amount of capital to be attributed to a permanent establishment by
allocating the institution's total equity between its various offices on the basis of the
proportion of the financial institution's risk-weighted assets attributable to each of them.
4
With reference to paragraph 2 of Article 8 (Shipping and Air Transport):
it is understood that income earned by an enterprise from the inland transport of
property or passengers within either Contracting State falls within Article 8 if the
transport is undertaken as part of the international transport of property or passengers by
the enterprise. Thus, if an enterprise of a Contracting State contracts to carry property
from the other State to the first-mentioned State and, as part of that contract, it transports
the property by truck from its point of origin to an airport in the other State (or it
contracts with a trucking company to carry the property to the airport) the income
earned by the enterprise from the overland leg of the journey would be taxable only in
the first-mentioned State. Similarly, it is understood that Article 8 also would apply to
income from lighterage undertaken as part of the international transport of goods.
With reference to Article 9 (Associated Enterprises), paragraph 4 of Article 11
(Interest) and paragraph 4 of Article 12 (Royalties):
it is understood that, if the amount of interest or royalties paid exceeds the amount
that would have been paid in the absence of a special relationship, a Contracting State
generally will adjust the amount of deductible interest or royalties paid under the
authority of Article 9 and make such other adjustments as are appropriate. If such an
adjustment is made, the Contracting State making such adjustment will not also impose
its domestic rate of withholding tax with respect to such excess amount.
With reference to paragraph 7 of Article 10 (Dividends):
it is understood that the general principle of the "dividend equivalent amount", as
used in United States law, is to approximate that portion of the income mentioned in
paragraph 7 of Article 10 that is comparable to the amount that would be distributed as a
dividend if such income were earned by a subsidiary incorporated in the United States.
For any year, a foreign corporation's dividend equivalent amount is equal to the after-tax
earnings attributable to the foreign corporation's (i) income attributable to a permanent
establishment in the United States, (ii) income from real property in the United States
that is taxed on a net basis under Article 6 (Income from Real Property), and (iii) gain
from a real property interest taxable by the United States under paragraph 1 of Article 13
(Gains), reduced by any increase in the foreign corporation's net investment in U.S.
assets or increased by any reduction in the foreign corporation's net investment in U.S.
assets.
With reference to Article 14 (Income from Employment):
it is understood that any benefits, income or gains enjoyed by employees under
share/stock option plans are regarded as "other similar remuneration" for the purposes
of Article 14.
5
It is further understood that where an employee:
a) has been granted a share/stock option in the course of an employment in
one of the Contracting States;
b) has exercised that employment in both States during the period between
grant and exercise of the option;
c) remains in that employment at the date of the exercise; and
d) under the domestic law of the Contracting States, would be taxable by
both Contracting States in respect of the option gain,
then, in order to avoid double taxation, a Contracting State of which, at the time
of the exercise of the option, the employee is not a resident will tax only that proportion
of the option gain which relates to the period or periods between the grant and the
exercise of the option during which the individual has exercised the employment in that
Contracting State.
With the aim of ensuring that no unrelieved double taxation arises the competent
authorities of the Contracting States will endeavor to resolve by mutual agreement any
difficulties or doubts arising as to the interpretation or application of Article 14 and
Article 24 (Relief from Double Taxation) in relation to employee share/stock option
plans.
With reference to paragraph 1 of Article 17 (Pensions, Social Security, Annuities,
Alimony, and Child Support):
it is understood that a payment shall be treated as a pension or other similar
remuneration under paragraph 1 of Article 17 if it is a payment under a pension scheme
as defined in sub-paragraph o) of paragraph 1 of Article 3 (General Definitions) of the
Convention.
With reference to sub-paragraph b) of paragraph 3 and sub-paragraph d) of
paragraph 5 of Article 18 (Pension Schemes):
it is understood that the pension schemes listed with respect to a Contracting
State in this exchange of notes in connection with sub-paragraph o) of paragraph 1 of
Article 3 (General Definitions) shall generally correspond to the pension schemes listed
in this exchange of notes with respect to the other Contracting State.
6
With reference to paragraph 1 of Article 22 (Other Income):
it is understood that the purpose of the exclusion from the paragraph for income
paid out of trusts or the estates of deceased persons in the course of administration is to
allow a recipient of such income the relief that would have been available to him under
the provisions of the Convention had he received the income direct instead of through
the trust or estate.
With reference to Article 23 (Limitation on Benefits):
it is understood that the term "gross income" means the total revenues derived by
a resident of a Contracting State from its principal operations, less the direct costs of
obtaining such revenues.
With reference to paragraph 4 of Article 23 (Limitation on Benefits):
it is understood that an item of income, profit or gain is to be considered as derived
"in connection" with an active trade or business in a Contracting State if the activity
generating the item in the other Contracting State is a line of business which forms a
part of, or is complementary to, the trade or business conducted in the first-mentioned
State. The line of business in the first-mentioned State may be 'upstream' to that going
on in the other State (e.g., providing inputs to a manufacturing process that occurs in
that other State), 'downstream' (e.g., selling the output of a manufacturer which is a
resident of the other State) or 'parallel' (e.g., selling in one Contracting State the same
sorts of products that are being sold by the trade or business carried on in the other
Contracting State).
It is understood that an item of income, profit or gain derived from a Contracting
State would be considered "incidental" to the trade or business carried on in the other
Contracting State if the item is not produced by a line of business which forms a part of,
or is complementary to, the trade or business conducted in that other Contracting State
by the recipient of the item, but the production of such item facilitates the conduct of the
trade or business in that other Contracting State. An example of such "incidental" item
of income, profit or gain is interest income earned from the short-term investment of
working capital of a resident of a Contracting State in securities issued by persons in the
other Contracting State.
With reference to paragraph 6 of Article 23 (Limitation on Benefits):
it is understood that in applying paragraph 6 of Article 23, the competent
authorities will consider the obligations imposed upon the United Kingdom by its
membership of the European Community and by its being a party to the European
Economic Area Agreement, and on the United States by its being a party to the North
American Free Trade Agreement. In particular, they will have regard to any legal
requirements for the facilitation of the free movement of capital and persons, the
7
differing internal tax systems, tax incentive regimes and existing tax treaty policies
among Member States of the European Community or European Economic Area states,
or, as the case may be, parties to the North American Free Trade Agreement.
Paragraph 6 of Article 23 requires the competent authority of the State from
which benefits are claimed to consider whether the establishment, acquisition or
maintenance of a resident and the conduct of its operations had as one of its principal
purposes the obtaining of benefits under the Convention. That competent authority may
determine under a given set of facts that a change in circumstances that would cause a
qualified person to cease to qualify for treaty benefits under paragraph 2 of Article 23
need not result in a denial of benefits. Such changes in circumstances may include:
a) a change in the state of residence of a major participator in a company;
b) the sale of part of the ownership interests in a company to a resident of
another Member State of the European Community or another European Economic Area
state or, as the case may be, another party to the North American Free Trade Agreement;
or
c) an expansion of a company's activities in other Member States of the
European Community or other European Economic Area states or, as the case may be,
other parties to the North American Free Trade Agreement,
all under ordinary business conditions.
If the competent authority is satisfied that these changed circumstances are not
attributable to tax avoidance motives, this will be a factor weighing in favour of granting
benefits in accordance with paragraph 6 of Article 23.
With reference to sub paragraph e) of paragraph 7 of Article 23 (Limitation on
Benefits):
it is understood that, if a class of shares was not listed on a recognised stock
exchange in the twelve months referred to in the sub-paragraph, that class of shares will
be treated as regularly traded only if that class meets the aggregate trading requirements
of the sub-paragraph for the taxable or chargeable period in which the income arises.
With reference to Article 24 (Relief from Double Taxation):
it is understood that, under paragraph 4 or 8 of Article 1 (General Scope), the
provisions of the Convention may permit the Contracting State of which a person is a
resident (or, in the case of the United States, a citizen), to tax an item of income, profit or
gain derived through another person (the entity) which is fiscally transparent under the
laws of either Contracting State, and may permit the other Contracting State to tax
a) the same person;
8
b) the entity; or
c) a third person
with respect to that item. Under such circumstances, the tax paid or accrued by
the entity shall be treated as if it were paid or accrued by the first-mentioned person for
the purposes of determining the relief from double taxation to be allowed by the State of
which that first-mentioned person is a resident (or, in the case of the United States, a
citizen), except that, in the case of an item of income from real property to which
paragraph 1 of Article 6 (Income from Real Property) of the Convention applies, or a
gain from the alienation of real property to which paragraph 1 of Article 13 (Gains)
applies, the tax paid or accrued by the person who is a resident of the Contracting State
in which the real property is situated shall be treated as if it were paid or accrued by the
person who is a resident of the other Contracting State.
In the case where the same item of income, profit or gain derived through a trust
is treated by each Contracting State as derived by different persons resident in either
State, and
a) the person taxed by one State is the settlor or grantor of a trust; and
b) the person taxed by the other State is a beneficiary of that trust,
the tax paid or accrued by the beneficiary shall be treated as if it were paid or
accrued by the settlor or grantor for the purposes of determining the relief from double
taxation to be allowed by the State of which that settlor or grantor is a resident (or, in the
case of the United States, a citizen), except that, in the case of an item of income from
real property to which paragraph 1 of Article 6 (Income from Real Property) of the
Convention applies, or a gain from the alienation of real property to which paragraph 1
of Article 13 (Gains) applies, the tax paid or accrued by the person who is a resident of
the Contracting State in which the real property is situated shall be treated as if it were
paid or accrued by the person who is a resident of the other Contracting State.
It is further understood that paragraphs 2 and 5 of Article 24 shall apply to such
an item of income, profit or gain to the extent necessary to provide relief from double
taxation.
With reference to paragraphs 1 and 4 of Article 24 (Relief from Double Taxation):
it is understood that, if a resident of a Contracting State receives a dividend that is
described in sub-paragraph b) of paragraph 1 or sub-paragraph b) of paragraph 4 of
Article 24, such dividend will be deemed to be income from sources in the other
Contracting State, even if it may be taxed only in the first-mentioned Contracting State
because of sub-paragraph a) of paragraph 3 of Article 10 (Dividends).
9
With reference to paragraph 2 of Article 26 (Mutual Agreement Procedure):
it is understood that where the competent authorities are endeavoring to resolve a
case pursuant to the Article, neither Contracting State shall seek to collect the tax which
is in dispute until the mutual agreement procedure has been completed. Any tax which
is payable following the completion of the mutual agreement procedure shall, however,
be subject to interest charges, and, if appropriate, surcharges or penalties, as long as it
remains unpaid.
With reference to paragraph 3 of Article 26 (Mutual Agreement Procedure):
it is understood that any principle of general application established by an
agreement between the competent authorities shall be published by both competent
authorities.
With reference to Article 27 (Exchange of Information and Administrative
Assistance):
it is understood that the powers of each Contracting State's competent authorities
to obtain information include powers to obtain information held by financial institutions,
nominees, or persons acting in an agency or fiduciary capacity (not including
information that would reveal confidential communications between a client and an
attorney, solicitor or other legal representative, where the client seeks legal advice), and
information relating to the ownership of legal persons, and that each Contracting State's
competent authorities are able to exchange such information in accordance with the
Article.
With reference to Article 29 (Entry into Force):
it is understood that the provisions of Article 26 (Mutual Agreement Procedure)
and Article 27 (Exchange of Information and Administrative Assistance) of the
Convention shall have effect from the date of entry into force of the Convention, without
regard to the taxable or chargeable period to which the matter relates.
In General:
it is understood that the two Governments shall consult together at regular
intervals regarding the terms, operation and application of the Convention to ensure that
it continues to serve the purposes of avoiding double taxation and preventing fiscal
evasion and shall, where they consider it appropriate, conclude Protocols to amend the
Convention. The first such consultation shall take place no later than December 31st in
the fifth year following the date on which the Convention enters into force in accordance
with the provisions of Article 29 (Entry into Force). Further consultations shall take
place thereafter at intervals of no more than five years.
10
Notwithstanding the preceding paragraph, either Government may at any time
request consultations with the other Government on matters relating to the terms,
operation and application of the Convention which it considers require urgent resolution.
If the foregoing proposals are acceptable to the Government of the United States
of America, I have the honor to suggest that the present note and Your Excellency's
reply to that effect should be regarded as constituting an agreement between the two
Governments in this matter, which shall enter into force at the same time as the
Convention."
The foregoing proposals being acceptable to the Government of the United States
of America, I have the honor to confirm that your note and this reply shall be regarded
as constituting an agreement between the two Governments in this matter which shall
enter into force at the same time as the Convention.
Please accept the renewed assurance of my high consideration.
Sincerely,
William S. Farish
Ambassador
Richard Wilkinson, CVO,
Director Americas,
Foreign and Commonwealth Office,
London.
11
PROTOCOL AMENDING
THE CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND
THE GOVERNMENT OF THE UNITED KINGDOM
OF GREAT BRITAIN AND NORTHERN IRELAND
FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL GAINS,
SIGNED AT LONDON ON 24th JULY 2001
The Government of the United States of America and the Government of the United
Kingdom of Great Britain and Northern Ireland;
Desiring to conclude a Protocol to amend the Convention for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital
Gains, signed at London on 24 July 2001 (hereinafter referred to as "the Convention");
Have agreed as follows:
ARTICLE I
Paragraph 5 of Article 1 of the Convention shall be deleted and replaced by the
following:
"5. The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 2 of Article 9
(Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of
Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support),
paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From
Double Taxation), 25 (Non-discrimination), and 26 (Mutual Agreement Procedure) of
this Convention; and
b) the benefits conferred by a Contracting State under paragraph 2 of Article 18
(Pension Schemes) and Articles 19 (Government Service), 20 (Students), 20A
(Teachers), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon
individuals who are neither citizens of, nor have been admitted for permanent residence
in, that State."
ARTICLE II
Paragraph 4 of Article 10 of the Convention shall be deleted and replaced by the
following:
"4. Sub-paragraph a) of paragraph 2 and sub-paragraph a) of paragraph 3 of this Article
shall not apply in the case of dividends paid by a pooled investment vehicle which is a resident of
a Contracting State. Sub-paragraph b) of paragraph 2 and sub-paragraph b) of paragraph 3 of this
Article shall apply in the case of dividends paid by a pooled investment vehicle, the assets of
which consist wholly or mainly of shares, securities or currencies or derivative contracts relating
to shares, securities or currencies. In the case of dividends paid by a pooled investment vehicle
not described in the preceding sentence, sub-paragraph b) of paragraph 2 and sub-paragraph b) of
paragraph 3 of this Article shall apply only if
a) the beneficial owner of the dividends is an individual or pension scheme, in
either case holding an interest of not more than 10 per cent. in the pooled investment
vehicle;
b) the dividends are paid with respect to a class of stock that is publicly traded
and the beneficial owner of the dividends is a person holding an interest of not more
than 5 per cent. of any class of the stock of the pooled investment vehicle; or
c) the beneficial owner of the dividends is a person holding an interest of not
more than 10 per cent. in the pooled investment vehicle and that vehicle is diversified."
ARTICLE III
The following new Article 20A shall be inserted:
2
"ARTICLE 20A
Teachers
1. A professor or teacher who visits one of the Contracting States for a period not
exceeding two years for the purpose of teaching or engaging in research at a university, college
or other recognised educational institution in that Contracting State and who was immediately
before that visit a resident of the other Contracting State, shall be exempted from tax by the
first-mentioned Contracting State on any remuneration for such teaching or research for a
period not exceeding two years from the date he first visits that State for such purpose.
2. The exemption provided in this Article may be applied by the Contracting State in
which the teaching or research is performed to current payments to such professor or teacher in
anticipation or fulfilment of the requirements of paragraph 1 or by way of withholding and
refund, but in either case exemption shall be conditional upon fulfilment of the requirements of
paragraph 1.
3. This Article shall apply to income from research only if such research is undertaken
by the professor or teacher in the public interest and not primarily for the benefit of some other
private person or persons."
ARTICLE IV
Sub-paragraph d) of paragraph 7 of Article 23 of the Convention shall be deleted and
replaced by the following:
"d) an equivalent beneficiary is a resident of a Member State of the European
Community or of a European Economic Area state or of a party to the North
American Free Trade Agreement but only if that resident:
(i) A) would be entitled to all the benefits of a comprehensive
convention for the avoidance of double taxation between any Member State of
the European Community or a European Economic Area state or any party to the
North American Free Trade Agreement and the Contracting State from which
the benefits of this Convention are claimed, provided that if such convention
does not contain a comprehensive limitation on benefits article, the person
would be a qualified person under paragraph 2 of this Article (or for the
purposes of sub-paragraph g) of paragraph 2, under the provisions specified in
clause (i) of that sub-paragraph) if such person were a resident of one of the
Contracting States under Article 4 (Residence) of this Convention; and
B) with respect to income referred to in Article 10 (Dividends),
11 (Interest) or 12 (Royalties) of this Convention, would be entitled under such
convention to a rate of tax with respect to the particular class of income for
which benefits are being claimed under this Convention that is at least as low as
the rate applicable under this Convention; or
3
(ii) is a qualified person by reason of sub-paragraphs a), b), clause (i) of
sub-paragraph c), clause (i) of sub-paragraph d), or sub-paragraph e) of
paragraph 2 of this Article.
For the purposes of applying paragraph 3 of Article 10 (Dividends) in order to determine
whether a person, owning shares, directly or indirectly, in the company claiming the benefits of
this Convention, is an equivalent beneficiary, such person shall be deemed to hold the same
voting power in the company paying the dividend as the company claiming the benefits holds
in such company."
ARTICLE V
1. Paragraph 3 of Article 29 of the Convention shall be deleted and replaced by the
following:
"3. a) The Convention between the Government of the United States of America and
the Government of the United Kingdom of Great Britain and Northern Ireland for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income and Capital Gains, signed at London on December 31st, 1975, as
modified by subsequent notes and protocols ("the prior Convention") shall cease to have
effect in relation to any tax with effect from the date on which this Convention has effect
in relation to that tax in accordance with paragraph 2 of this Article. In relation to tax
credits in respect of dividends paid by companies which are residents of the United
Kingdom, the prior Convention shall terminate and cease to be effective in respect of
dividends paid on or after the first day of the second month next following the date on
which this Convention enters into force.
b) Notwithstanding sub-paragraph a) of this paragraph, where any person
entitled to benefits under the prior Convention would have been entitled to greater
benefits thereunder than under this Convention, the prior Convention shall, at the
election of such person, continue to have effect in its entirety with respect to that person
for a twelve-month period from the date on which the provisions of this Convention
otherwise would have effect under paragraph 2 of this Article. The prior Convention
shall terminate on the last date on which it has effect in relation to any tax or to any
entitlement to tax credits in accordance with the foregoing provisions of this sub-
paragraph."
2. Paragraph 4 of Article 29 of the Convention shall be deleted and paragraph 5 shall be
re-numbered as paragraph 4.
ARTICLE VI
1. This Protocol shall be subject to ratification in accordance with the applicable
procedures of each Contracting State and instruments of ratification shall be exchanged as soon
as possible.
4
2. This Protocol shall enter into force upon the exchange of instruments of ratification,
and shall thereupon have effect in accordance with Article 29 of the Convention.
ARTICLE VII
This Protocol shall remain in force as long as the Convention remains in force.
IN WITNESS WHEREOF, the undersigned, being duly authorized thereto by their
respective Governments, have signed this Convention.
DONE at Washington, in duplicate, this 19th day of July, 2002.
FOR THE GOVERNMENT OF
THE UNITED STATES OF AMERICA:
FOR THE GOVERNMENT OF
THE UNITED KINGDOM OF
GREAT BRITAIN AND
NORTHERN IRELAND:
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