Rev. Rul. 84-84

1984-1 C.B. 307, 1984-24 I.R.B. 17.

                       Internal Revenue Service
                                 Revenue Ruling

       U.S. - AUSTRIA INCOME TAX CONVENTION;  EXEMPTION FOR INTEREST PAID TO

                                 AUSTRIAN BANK

                            Published: June 11, 1984

  Subpart A. - -Tax Conventions

  United States-Austria Income Tax Convention 1957-2 C.B. 985

  U.S. - Austria Income Tax Convention;  exemption for interest paid to Austrian bank.  Payments of interest by U.S. citizens on mortgage loans secured by personal property are exempt from United States income taxation under Article VII of the United States-Austria Income Tax Convention.

ISSUE

  Whether payments of interest to BK by United States citizens on mortgage loans secured by personal property are exempt from United States income taxation under Article VII of the United States-Austria Income Tax Convention (the Convention), 1957-2 C.B. 985?

FACTS

  BK is an Austrian corporation engaged in the business of commercial banking in Austria.  During 1982 and in the ordinary course of its business, BK made interest-bearing mortgage loans to United States citizens.  These loans were secured by the borrowers' personal property located in the United States.

  BK has neither a branch office nor any other fixed place of business within the United States.  BK is not engaged in a trade or business in the United States through an agent or employee who has full power to negotiate and conclude contracts in the United States.  Under the Convention, BK is not considered to have a permanent establishment in the United States.

LAW AND ANALYSIS

  Section 894(a) of the Code states that income of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from U.S. taxation.

  Article VII of the Convention states that interest received from sources within one of the contracting States, on bonds, notes, debentures, securities or any other form of indebtedness (exclusive of interest on debts secured by mortgages) by a resident or corporation or other entity of the other contracting State shall be exempt from tax by the former State if such resident, corporation, or other entity has no permanent establishment in such former State.

  Article IX(1) of the Convention states that income from real property  (including gains derived from the sale or exchange of such property and interest on mortgages secured by such property) and royalties in respect of the operation of mines, oil wells, or other natural resources shall be taxable in the contracting State in which such property, mines, oil wells, or other natural resources are situated.

  Under the taxing structure of the Convention, Article VII is the general provision covering interest.  Article VII, however, excludes from its application interest on debts secured by mortgages.  Under Article IX(1), which encompasses income derived from real property, "interest on mortgages secured by such [real] property" is taxable where the property is located.  Articles VII and IX complement each other and provide, among other things, for the tax treatment of all interest paid to Austrian entities that do not have permanent establishments in the United States.  Therefore, the scope of the Article VII exemption for interest applies to all interest except for interest on mortgages secured by real property that, pursuant to Article IX, is specifically subject to tax in the contracting state in which the mortgaged real property is situated.  That is, the parenthetical mortgages exception appearing in Article VII includes only interest on loans secured by real property mortgages.  Under the facts of this revenue ruling, the loans are secured by personal property and, thus, the parenthetical mortgages exception in Article VII is inapplicable.

HOLDING

  Payments of interest to BK by United States citizens on mortgage loans secured by personal property are exempt from United States income taxation under Article VII of the Convention.

Rev. Rul. 84-84, 1984-1 C.B. 307, 1984-24 I.R.B. 17.