• Paragraph 1
• Paragraph 2
• Paragraph 3
• Paragraph 4
• Paragraph 5
• Paragraph 6

ARTICLE 6 - Income from Immovable (Real) Property

This Article deals with the taxation of income from immovable, or real, property. Those two terms should be understood to have the same meaning.

Paragraph 1

The first paragraph of Article 6 states the general rule that income of a resident of a Contracting State derived from real property situated in the other Contracting State may be taxed in the Contracting State in which the property is situated. The paragraph specifies that income from real property includes income from agriculture and forestry. Income from agriculture and forestry are dealt with in Article 6 rather than in Article 7 (Business Profits). Given the availability of the net election in paragraph 6, taxpayers generally should be able to obtain the same tax treatment in the situs country regardless of whether the income is treated as business profits or real property income. Paragraph 3 clarifies that the income referred to in paragraph 1 also means income from any use of real property, including, but not limited to, income from direct use by the owner (in which case income may be imputed to the owner for tax purposes) and rental income from the letting of real property. This Article does not grant an exclusive taxing right to the situs State; the situs State is merely given the primary right to tax. The Article does not impose any limitation in terms of rate or form of tax on the situs State. It is understood, however, as noted above, that both States either allow or require the taxpayer to be taxed on a net basis.

Paragraph 2

The term ``immovable (real) property'' is defined in paragraph 2 mainly by reference to the internal law definition in the situs State. In the case of the United States, the term has the meaning given to it by Reg. 1.897-1(b). In addition to the statutory definitions in the two Contracting States, the paragraph specifies certain additional classes of property that, regardless of internal law definitions, are to be included within the meaning of the term for purposes of the Convention. This expanded definition with the exception of the last sentence conforms to that in the OECD Model. The definition of ``immovable (real) property'' for purposes of Article 6 is more limited than the expansive definition of ``real property situated in the Other Contracting State'' in paragraph 2 of Article 13 (Capital Gains). The Article 13 term includes not only immovable property as defined in Article 6 but certain other interests in real property.

Paragraph 3

Paragraph 3 makes clear that all forms of income derived from the exploitation of real property are taxable in the Contracting State in which the property is situated. In the case of a net lease of real property, if a net taxation election has not been made, the gross rental payment (before deductible expenses incurred by the lessee) is treated as income from the property. Income from the disposition of an interest in real property, however, is not considered ``derived'' from real property and is not dealt with in this Article. The taxation of that income is addressed in Article 13 (Capital Gains). Also, the interest paid on a mortgage on real property and distributions by a U.S. Real Estate Investment Trust are not dealt with in Article 6. Such payments would fall under Articles 10 (Dividends), 11 (Interest) or 13 (Capital Gains). Finally, dividends paid by a United States Real Property Holding Corporation are not considered to be income from the exploitation of real property: such payments would fall under Article 10 (Dividends) or 13 (Capital Gains).

Paragraph 4

Paragraph 4 is not found in the U.S. Model, it was inserted at the request of Estonia. It provides that where the ownership of shares or other corporate rights in a company entitles the owner to the enjoyment of immovable property held by the company, any income from the direct use, letting or use in any other form of this right of enjoyment may be taxed in the Contracting State in which the immovable property is situated. This rule is intended to clarify that such income is to be treated as income from immovable property and not as income from movable property. The principal application of this provision is expected to be with respect to the taxation of income from the rental of cooperative apartments by a shareholder in the cooperative, though it would apply to commercial property as well. Under paragraph 5, these rules apply to income from a right of enjoyment of an enterprise and to income from such a right used for the performance of independent personal services.

Paragraph 5

This paragraph specifies that the basic rule of paragraph 1 (as elaborated in paragraph 3) applies to income from real property of an enterprise and to income from real property used for the performance of independent personal services. This clarifies that the situs country may tax the real property income (including rental income) of a resident of the other Contracting State in the absence of attribution to a permanent establishment or fixed base in the situs State. This provision represents an exception to the general rule under Articles 7 (Business Profits) and 14 (Independent Personal Services) that income must be attributable to a permanent establishment or fixed base, respectively, in order to be taxable in the situs State.

Paragraph 6

This paragraph provides that a resident of one Contracting State that derives real property income from the other may elect, for any taxable year, to be subject to tax in that other State on a net basis, as though the income were attributable to a permanent establishment in that other State. In the United States, the election may be terminated with the consent of the competent authority and such revocation will be granted in accordance with the provisions of Treas. Reg. section 1.871-10(d)(2). In Estonia, such treatment is mandatory.

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