• Paragraph 1
• Paragraph 2
• Paragraph 3
• Paragraph 4
• Paragraph 5
• Paragraph 6
• Relation to Other Articles

ARTICLE 13 - Capital Gains

Article 13 assigns either primary or exclusive taxing jurisdiction over gains from the alienation of property to the State of residence or the State of source and defines the terms necessary to apply the Article.

Paragraph 1

Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source to tax gains attributable to the alienation of real property situated in that State. The paragraph therefore permits the United States to apply section 897 of the Code to tax gains derived by a resident of Lithuania that are attributable to the alienation of real property situated in the United States (as defined in paragraph 2). Gains attributable to the alienation of real property include gain from any other property that is treated as a real property interest within the meaning of paragraph 2. Although Lithuania uses the term ``immovable property'', it is to be understood from the parenthetical use of the term ``real'' that the two terms are synonymous.

Paragraph 2

This paragraph defines the term ``immovable (real) property situated in the other Contracting State'', gains from which are subject to the rule of paragraph 1. The term includes real property referred to in Article 6 (i.e., an interest in the real property itself), and a ``United States real property interest'' when the United States is the other Contracting State under paragraph 1. It also includes shares of stock of a company the property of which consists at least 50 percent of immovable (real) property situated in that other State, and an interest in a partnership, trust or estate to the extent that its assets consist of immovable (real) property situated in that other State. The OECD Model does not refer to real property interests other than the real property itself, and the United States has entered a reservation on this point with respect to the OECD Model, reserving the right to apply its tax under FIRPTA to all real estate gains encompassed by that provision.

Under section 897(c) of the Code the term ``United States real property interest'' includes shares in a U.S. corporation that owns sufficient U.S. real property interests to satisfy an asset- ratio test on certain testing dates. The term also includes certain foreign corporations that have elected to be treated as U.S. corporations for this purpose. Section 897(i). In applying paragraph 1 the United States will look through distributions made by a REIT. Accordingly, distributions made by a REIT are taxable under paragraph 1 of Article 13 (not under Article 10 (Dividends)) when they are attributable to gains derived from the alienation of real property.

Paragraph 3

Paragraph 3 of Article 13 deals with the taxation of certain gains from the alienation of personal (movable) property forming part of the business property of a permanent establishment that an enterprise of a Contracting State has in the other Contracting State or of personal property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services. This also includes gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base. Such gains may be taxed in the State in which the permanent establishment or fixed base is located. Although Lithuania uses the term ``movable property'', and the United States uses the term ``personal property'' it is understood that the two terms are synonymous.

A resident of Lithuania that is a partner in a partnership doing business in the United States generally will have a permanent establishment in the United States as a result of the activities of the partnership, assuming that the activities of the partnership rise to the level of a permanent establishment. Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under paragraph 3, the United States generally may tax a partner's distributive share of income realized by a partnership on the disposition of movable property forming part of the business property of the partnership in the United States.

Paragraph 4

This paragraph limits the taxing jurisdiction of the state of source with respect to gains derived by an enterprise of a Contracting State that operates ships or aircraft in international traffic from the alienation of ships, aircraft, or containers operated in international traffic or movable property pertaining to the operation of such ships, aircraft, or containers. Under paragraph 4, when such income is derived by an enterprise of a Contracting State it is taxable only in that Contracting State. Notwithstanding paragraph 3, these rules apply even if the income is attributable to a permanent establishment maintained by the enterprise in the other Contracting State.

However, if the gains from alienation of ships, aircraft or containers is not derived by an enterprise of a Contracting State that operates ships or aircraft in international traffic, then such gains are taxable in the source state as well. An example of such gains taxable in the source state is income derived from the alienation of ships, aircraft or containers owned by a bank that does not itself operate the equipment but instead leases the equipment to an operator.

Paragraph 5

Paragraph 5 makes it clear that the taxing rules of this Article do not apply to the alienation of any right or property that would give rise to royalties, to the extent the gain is contingent on the productivity, use, or further alienation thereof. Such amounts may be taxed in accordance with Article 12 (Royalties) as described in the explanation of paragraph 3 of Article 12.

Paragraph 6

Paragraph 6 grants to the State of residence of the alienator the exclusive right to tax gains from the alienation of property other than property referred to in paragraphs 1 through 5. For example, gain derived from shares, other than shares described in paragraphs 2 or 3, debt instruments and various financial instruments, may be taxed only in the State of residence, to the extent such income is not otherwise characterized as income taxable under another article (e.g., Article 10 (Dividends) or Article 11 (Interest)). Similarly gain derived from the alienation of movable property, other than movable property described in paragraph 3, may be taxed only in the State of residence of the alienator. Sales by a resident of a Contracting State of real property located in a third state are not taxable in the other Contracting State, even if the sale is attributable to a permanent establishment located in the other Contracting State.

Relation to Other Articles

Notwithstanding the foregoing limitations on taxation of certain gains by the State of source, the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its citizens and residents as if the Convention had not come into effect. Thus, any limitation in this Article on the right of the United States to tax gains does not apply to gains of a U.S. citizens or resident. The benefits of this Article are also subject to the provisions of Article 23 (Limitation on Benefits). Thus, only a resident of a Contracting State that satisfies one of the conditions in Article 23 is entitled to the benefits of this Article.

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