ARTICLE 10

Dividends

Under paragraph 1, dividends paid by a company which is a resident of a Contracting State to a shareholder resident in the other Contracting State may be taxed by that other State. Such dividends may also be taxed by the State of which the company paying the dividends is a

resident, but such tax may not be in excess of the rates specified in paragraph 2: 5 percent of the dividends, where the beneficial owner is a company which owns, directly or indirectly, at least 10 percent of the voting stock of the company paying the dividends, and 15 percent of the dividends in all other cases.

Paragraph 2 does not affect the taxation of the company's profits out of which the dividends are paid.

Paragraph 3 defines "dividends", for the purposes of Article 10, as income from shares or other rights (not debt-claims) participating in profits, and income from other corporate rights taxed in the same way as income from shares under the tax law of the State of which the company making the distribution is a resident.

Paragraph 4 provides that where dividends otherwise taxable at source at 5 or 15 percent as provided in paragraph 2 are attributable to a permanent establishment or regular base of the beneficial owner in the Contracting State of which the company paying the dividends is a resident, then the dividends are taxable by that State in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), rather than under the provisions of paragraph 2 of this Article. The term 'regular base' is used in the Convention at the request of Barbados in lieu of the more commonly used term fixed base.'' No difference in meaning is intended.

Paragraph 5 provides that the income of a Barbadian company derived from manufacture in Barbados of approved products under the tax incentive legislation of Barbados shall not be subject to the United States accumulated earnings tax. Generally, these companies are incorporated in Barbados to manufacture approved products in Barbados and to participate in a ''pioneering activity.'' Such companies are subject to a reduced corporate profits tax by Barbados. Paragraph 5 also provides that any company which is a resident of Barbados shall be exempt from United States accumulated earnings tax if individuals (other than U.S. citizens) who are residents of Barbados control, directly or indirectly, throughout the last half of the taxable year more than 50 percent of the entire voting power in that company.

Paragraph 6 provides, as a general rule, that a Contracting State may not impose tax on dividends paid by a company which is a resident of the other Contracting State. There are three exceptions to this rule:

(1) where dividends are paid to a resident of the first-mentioned State, (2) where the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or regular base in the first State, or

(3) where dividends are paid out of profits attributable to one or more permanent establishments of the paying company in the first State, provided that the company's gross income attributable to such permanent establishments constituted at least 50 percent of that company's gross income from all sources.

Where only the third of these three conditions applies, if the dividends are beneficially owned by a resident of the other Contracting State, the tax which may be imposed on such dividends is subject to the limitations provided in paragraph 2 of this Article.

For example, if a company which is a resident of Barbados is doing business in the United States and pays dividends, those dividends may be taxed by the United States:

(1) if paid to a resident of the United States; (2) if the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a regular base in the United States; or

(3) if the dividends are paid out of profits attributable to a permanent establishment of the Barbados company in the United States so long as at least 50 percent of the company's gross income from all sources as attributable to that permanent establishment.

The last case preserves the United Sates tax on dividends paid by a foreign corporation which are considered to have a U.S. source under section 86l(a)(2)(B) of the Code. If beneficially owned by a resident of Barbados, such dividends would be subject to U.S. tax at the reduced rates provided in paragraph 2(a).

It is to be noted that this Article is subject to the provisions of the saving clause of paragraph 3 of Article 1 (General Scope), so that the United States may tax a U.S. citizen on dividend income in all cases. In the case of dividends paid by a company resident in a third State, see Article 21 (Other Income).