TAX CONVENTION WITH THE FEDERAL REPUBLIC OF GERMANY

1 CONVENTIONBETWEENTHE united states OF AMERICAANDTHE FEDERAL REPUBLIC OF GERMANYFOR THE AVOIDANCE OF DOUBLE TAXATIONAND THE PREVENTION OF FISCAL EVASIONWITH RESPECT TO TAXES ON INCOME AND CAPITALAND TO CERTAIN OTHER TAXESGENERAL EFFECTIVE DATE UNDER ARTICLE 32: 1 JANUARY 1990 FOR FORMER GERMAN DEMOCRATIC REPUBLIC : 1 JANUARY 1991 TABLE OF ARTICLESA rticle 1---------------------------------Person al ScopeArticle 2---------------------------------Taxes CoveredArticle 3---------------------------------Genera l DefinitionsArticle 4---------------------------------Reside nceArticle 5---------------------------------Perman ent EstablishmentArticle 6---------------------------------Income from Immovable (Real) PropertyArticle 7---------------------------------Busine ss ProfitsArticle 8---------------------------------Shippi ng and Air TransportArticle 9---------------------------------Associ ated EnterprisesArticle 10--------------------------------Divide ndsArticle 11--------------------------------Intere stArticle 12--------------------------------Royalt iesArticle 13--------------------------------GainsA rticle 14--------------------------------Indepe ndent Personal ServicesArticle 15--------------------------------Depend ent Personal ServicesArticle 16--------------------------------Direct ors FeesArticle 17--------------------------------Artist es and AthletesArticle 18--------------------------------Pensio ns.

2 Annuities, Alimony, and Child SupportArticle 19--------------------------------Govern ment Service; Social SecurityArticle 20--------------------------------Visiti ng Professors and Teachers; Students and TraineesArticle 21--------------------------------Other IncomeArticle 22--------------------------------Capita lArticle 23--------------------------------Relief from Double TaxationArticle 24--------------------------------Nondis criminationArticle 25--------------------------------Mutual Agreement ProcedureArticle 26--------------------------------Exchan ge of Information and Administrative AssistanceArticle 27--------------------------------Exempt OrganizationsArticle 28--------------------------------Limita tion on BenefitsArticle 29--------------------------------Refund of Withholding TaxArticle 30--------------------------------Member s of Diplomatic Missions and Consular PostsArticle

3 31--------------------------------Berlin ClauseArticle 32--------------------------------Entry into ForceArticle 33--------------------------------Termin ationProtocol ---------------------------------of 29 August, 1989 Letter of Submittal---------------------of 24 October, 1989 Letter of Transmittal-------------------of 5 February, 1990 Notes of Exchange 1-------------------of 29 August, 1989 Memorandum of Understanding -----of 29 August, 1989 Notes of Exchange 2-------------------of 29 August, 1990 The Saving Clause -------------------Paragraph 1 a) of ProtocolTAX CONVENTION WITH THE FEDERAL REPUBLIC OF GERMANYMESSAGEFROMTHE PRESIDENT OF THE united STATESTRANSMITTINGTHE CONVENTION BETWEEN THE united states OF AMERICAAND THE FEDERAL REPUBLIC OF GERMANY FOR THE AVOIDANCE OF DOUBLETAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXESON INCOME AND CAPITAL AND TO CERTAIN OTHER TAXES, TOGETHER WITH ARELATED PROTOCOL, SIGNED AT BONN ON AUGUST 29, 1989 LETTER OF SUBMITTALDEPARTMENT OF STATE,Washington, October 24, PRESIDENT,The White House.

4 THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senatefor advice and consent to ratification, the CONVENTION between the united states of America and theFederal REPUBLIC of GERMANY for the Avoidance of Double Taxation and the Prevention of FiscalEvasion with respect to Taxes on income and Capital and to Certain Other Taxes, together with arelated Protocol, signed at Bonn on August 29, 1989. The CONVENTION will replace the existing CONVENTION which was signed at Washington on July 22,1954 and amended by the protocol of September 17, 1965. The CONVENTION will reduce the withholding tax on direct investment dividends, on a reciprocalbasis, from the present 15 percent to 10 percent in 1990 and to the permanent rate of 5 percent in1992.

5 This will be a major benefit to united states multinationals with investments, or plans to invest, inthe FEDERAL REPUBLIC of GERMANY . The united states Government and the united states businesscommunity have been pressing the Germans for such a change since the introduction of the presentGerman integrated tax system in 1977. This withholding reduction will also increase the attractiveness ofinvestment in the united states for German multinationals. The CONVENTION also introduces several changes necessary to accommodate important aspects ofthe Tax Reform Act of 1986. These include, principally, provision for the imposition of a branch tax andstrong measures to prevent "treaty shopping." The united states branch tax, prohibited under theexisting CONVENTION , will be imposed on united states branches of German corporations for taxableyears beginning on or after January 1, 1991.

6 The proposed anti-abuse provision is uniquely tailored totake account of the practical realities of European integration in a manner that promises to become amodel for future treaties with European partners. A number of provisions in the CONVENTION will have significant impact on particular groups of incomerecipients. The FEDERAL REPUBLIC of GERMANY will reduce its withholding rate on dividends paid to UnitedStates portfolio investors, on a non-reciprocal basis, from 15 percent to 10 percent. The united Stateswill treat this reduction as a partial imputation refund, analogous to the imputation credit for corporatetax which German shareholders receive in the FEDERAL REPUBLIC with respect to such dividends.

7 Thistreatment in the united states will assure that the benefit of the German reduction inures to the UnitedStates shareholders rather than to the united states Treasury. The united states withholding rate onsuch dividend to German investors will remain at 15 percent. Provisions of the existing CONVENTION permit German resident investors to make portfolio investmentsin the united states through united states Regulated Investment Companies (RICs) and receive anexemption on the income in the FEDERAL REPUBLIC . This exemption had been intended only for directinvestment income. The CONVENTION will correct this abuse and make such income taxable in the FederalRepublic, with a credit for united states tax, effective in 1991, one year after the general effective datefor the CONVENTION 's provisions.

8 The additional year is intended to allow German investors to adjust tothe change in a way which would minimize market disruption. A similar rule will apply to certain Germaninvestments in united states Real Estate Investment Trusts (REITs). In addition, the CONVENTION will provide for exemption of German residents from united states taxon united states Social Security benefits. The CONVENTION further provides both states with the flexibility to deal with "hybrid" financialinstruments that have both debt and equity features. In the FEDERAL REPUBLIC of GERMANY this will includesleeping partnership interests and in the united states equity kicker loans. As long as the State in whichpayments with respect to such instruments arise permits such payments to be deducted in calculating thetaxable income of the payer, that State will be permitted to apply its statutory withholding rate ratherthan the reduced treaty rate otherwise applicable to the payments.

9 In general, the provisions of the CONVENTION will have effect in 1990. For taxes levied on anassessment basis, the CONVENTION will have effect for taxable years beginning on or after January 1,1990. For income subject to withholding at source, the CONVENTION will have effect for payments madeon or after January 1, 1990. Two exchanges of notes and a memorandum of understanding are included for information only. A technical memorandum explaining in detail the provisions of the CONVENTION is being prepared bythe Department of the Treasury and will be submitted separately to the Senate Committee on ForeignRelations. The Department of the Treasury, with the cooperation of the Department of State, was primarilyresponsible for the negotiation of the CONVENTION .

10 It has the full approval of both Departments. Respectfully submitted,JAMES BAKER : As OF TRANSMITTALTHE WHITE HOUSE, February 5, the Senate of the united states : I transmit herewith for Senate advice and consent to ratification the CONVENTION between the UnitedStates of America and the FEDERAL REPUBLIC of GERMANY for the Avoidance of Double Taxation and thePrevention of Fiscal Evasion with respect to Taxes on Income and Capital and to Certain Other Taxes,together with a related Protocol, signed at Bonn on August 29, 1989. I also transmit the report of theDepartment of State on the CONVENTION . The CONVENTION replaces the tax CONVENTION that was signed with the FEDERAL REPUBLIC of Germanyon July 22, 1954, and amended by the protocol of September 17, 1965.