[DOCID: f:er002.110]
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110th Congress Exec. Rept.
SENATE
1st Session 110-2
======================================================================
TAX CONVENTION WITH BELGIUM
_______
November 14, 2007.--Ordered to be printed
_______
Mr. Biden, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 110-3]
The Committee on Foreign Relations, to which was referred
the Convention Between the Government of the United States of
America and the Government of the Kingdom of Belgium for the
Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, and accompanying
Protocol, signed at Brussels on November 27, 2006 (the
``Treaty'') (Treaty Doc. 110-3), having considered the same,
reports favorably thereon and recommends that the Senate give
its advice and consent to ratification thereof, as set forth in
this report and the accompanying resolution of advice and
consent.
CONTENTS
Page
I. Purpose..........................................................1
II. Background.......................................................2
III. Major Provisions.................................................2
IV. Entry Into Force; Effective Dates................................5
V. Implementing Legislation.........................................6
VI. Committee Action.................................................6
VII. Committee Recommendation and Comments............................6
VIII.Resolution of Advice and Consent to Ratification.................7
IX. Annex.--Technical Explanation....................................8
I. Purpose
The proposed Treaty is intended to promote closer
cooperation and further facilitate trade and investment between
the United States and Belgium. The Treaty's principal
objectives are to eliminate the withholding tax on dividends
arising from certain direct investments and on certain
dividends paid to pension funds; prevent the inappropriate use
of the Treaty's benefits by third-country residents; provide
for mandatory arbitration of disputes that have not been
resolved by the competent authorities; significantly expand the
circumstances under which the United States is able to obtain
information from Belgium that is helpful in enforcing U.S.
domestic tax rules; and generally modernize the existing tax
treaty relationship with Belgium to bring it into closer
conformity with U.S. tax treaty law and policy.
II. Background
The Treaty replaces the existing income tax treaty with
Belgium, which was concluded in 1970 and amended in 1987.
III. Major Provisions
A detailed article-by-article analysis of the Treaty may be
found in the Technical Explanation published by the Department
of the Treasury on July 17, 2007, which is reprinted in Annex
I. In addition, the staff of the Joint Committee on Taxation
prepared an analysis of the Treaty, Document JCX-45-07 (July
13, 2007), which has been of great assistance to the committee
in reviewing the Treaty. A summary of the key provisions of the
Treaty is set forth below.
1. Taxation of Cross-border Dividend Payments
Article 10 (Dividends) of the Treaty provides rules for the
taxation of dividends paid by a company that is a resident of
one treaty country to a beneficial owner that is a resident of
the other treaty country. Article 10 generally allows full
residence-country taxation and limited source-country taxation
of dividends.
The Treaty contains both a generally applicable maximum
rate of withholding at source of 15 percent and a reduced five-
percent maximum rate for dividends received by a company owning
at least 10 percent of the dividend-paying company.
Additionally, with some restrictions intended to prevent treaty
shopping, dividends paid by a U.S. subsidiary to its Belgian
parent company will be exempt from U.S. withholding tax if the
Belgian parent company owns (directly or indirectly) at least
80 percent of the voting power in the U.S. subsidiary for the
12-month period ending on the date entitlement to the dividend
is determined. The Treaty also provides, however, that the zero
rate for dividends paid by U.S. resident companies under
paragraph 3 of Article 10 may be terminated by the United
States with written notice to Belgium on or before June 30th of
any year, effective the following year, if the United States
has determined that Belgium's actions with respect to the
Articles of the Treaty regarding the exchange of information
(Article 25) and the mutual agreement procedure (Article 24)
have materially altered the balance of benefits of the Treaty.
Alternatively, the zero rate for dividends paid by U.S.
resident companies under paragraph 3 of Article 10 will be
terminated on January 1st of the 6th year following the year in
which the Treaty enters into force unless, by June 30th of the
5th year, the Secretary of the Treasury, on the basis of a
report of the Commissioner of Internal Revenue, certifies to
the Senate that Belgium has satisfactorily complied with its
obligations under Article 25.
Under the Treaty, a dividend paid by a Belgian company to a
U.S. company will be exempt from Belgian tax if the U.S.
company directly owns at least 10 percent of the capital of the
Belgian company for a 12-month period ending on the date the
dividend is declared.
The Treaty provides that dividends beneficially owned by a
pension fund may not be taxed by the country in which the
company paying the dividends is a resident, unless such
dividends are derived from the carrying on of a business,
directly by the pension fund, or indirectly, through an
associated enterprise.
The Treaty also includes special rules for dividends
received from U.S. Regulated Investment Companies (RICs) and
U.S. Real Estate Investment Trusts (REITs). These rules are
similar to rules included in other recent treaties and
protocols.
2. Interest and Royalties
Articles 11 and 12 of the Treaty provide that, subject to
certain rules and exceptions, interest and royalties
beneficially owned by a resident of one treaty country arising
from sources within the other treaty country may be taxed only
by the residence country.
3. Binding Arbitration
The Treaty, like the Protocol Amending the Tax Convention
with Germany (the ``German Protocol'') (Treaty Doc. 109-20),
includes a binding arbitration mechanism. The arbitration
procedure is sometimes referred to as ``last best offer''
arbitration or ``baseball arbitration'' because each of the
competent authorities proposes one and only one figure for
settlement and the arbitration board must select one of those
figures as the award. Under the Treaty, unless a taxpayer or
other ``concerned person'' (in general, a person whose tax
liability is affected by the arbitration determination) does
not accept the arbitration determination, it is binding on the
countries. There are two main differences, however, between the
arbitration procedures included in this Treaty and in the
German Protocol. First, the maximum length of the proceedings
under the Treaty is 6 months, instead of 9 months under the
German Protocol. Second, the arbitration procedure under the
Treaty can be exercised with respect to a dispute regarding the
application of any article in the Treaty, whereas the German
Protocol's arbitration procedure applies only to specified
articles.
4. Exchange of Information
Article 25 of the Treaty would improve the ability of the
United States to obtain information from Belgium when seeking
to enforce U.S. tax law. In particular, Belgium would be
obligated to provide information held by financial
institutions, despite Belgian bank secrecy rules. Moreover,
Belgium agreed to certain other provisions that override
aspects of Belgian domestic law that currently restrict the
ability of the United States to receive information from
Belgium. As discussed previously, if Belgium has not
satisfactorily complied with its obligations under Article 25
or if Belgium's actions with respect Article 24 and 25 have
materially altered the balance of benefits of the Treaty, the
zero-rate provision for dividends paid by U.S. resident
companies may be terminated as provided for in paragraph 12 of
Article 10.
5. Scope
Article 1 of the Treaty, entitled ``General Scope''
generally conforms with the 2006 U.S. Model Tax Treaty (the
``U.S. Model'') and reflects changes in U.S. tax law made in
the last few years.
The Treaty generally provides that, with the exception of
certain benefits, the United States may continue to tax its own
citizens and residents as if the Treaty were not in force. In
addition, notwithstanding any other provision in the Treaty,
the United States may also tax, in accordance with its law,
certain former citizens and long-term residents for ten years
following the loss of such status. This change is consistent
with section 877 of the Internal Revenue Code, which provides
special rules for the imposition of U.S. income tax on former
U.S. citizens and long-term residents for a period of ten years
following the loss of citizenship or long-term resident status.
The Treaty also includes an additional paragraph (Article
1, paragraph 6), which is not in the existing tax treaty with
Belgium. Paragraph 6 addresses special issues presented by
fiscally transparent entities such as partnerships and certain
estates and trusts. When there is a difference of views between
the United States and Belgium on whether an entity is fiscally
transparent, the entity in question may be subject to double
taxation or double non-taxation. Paragraph 6 solves this
problem by providing that an item of income, profit, or gain
derived by or through an entity that is fiscally transparent
under the laws of either treaty country is considered to be the
income, profit, or gain of a resident of one of the treaty
countries only to the extent that the item is subject to tax in
that country as the income, profit, or gain of a resident.
6. Pension Plans
The Treaty includes provisions related to cross-border
pension contributions and earnings, which generally conform
with the U.S. Model and prevent the taxation of pension
contributions and earnings when an individual participates in a
pension plan established in one country while performing
services in the other, provided certain requirements are met.
One such requirement is that the competent authority in the
country where the services are performed must agree that the
pension plan generally corresponds to a pension plan recognized
as such for tax purposes by that country. The Treasury
Department has indicated in its Technical Explanation and in
response to questions for the record that there will be further
discussions on this matter with Belgium, at which time it is
expected that the competent authorities of each country will
reach agreement on a list of types of pension plans that should
be covered under this provision. Once an agreement is reached,
the text of that agreement will be posted on the website of the
IRS and published in the Internal Revenue Bulletin.
The pension provisions also apply in certain circumstances
when a pension fund is a resident of a ``comparable third
state'' as defined in the Treaty.
7. Students, Trainees, Teachers and Researchers
Article 19 of the Treaty provides that certain payments
received by a student or business trainee who is a resident of
a treaty country and is temporarily present in the other treaty
country for the purpose of a full-time education or full-time
training will be exempt from income tax in the host country on
certain payments (in the case of a business trainee, for up to
two years). Additionally, students and business trainees
receive an annual exemption of up to $9000 (or its equivalent
in euro) for income from personal services performed in the
host country, with this amount adjusted every five years to
reflect changes in the U.S. personal exemption and standard
deduction and the Belgian basic allowance. Article 19 further
provides that a teacher or researcher who is a resident of a
treaty country and then visits the other treaty country for the
purpose of teaching or doing research at a school, college,
university or other educational or research institution, will
be exempted from tax by the host country on any remuneration
for such teaching or research for up to two years if such
research is undertaken in the public interest and not primarily
for private benefit.
8. Limitation on Benefits
The existing treaty with Belgium contains a ``Limitation on
Benefits'' provision, which is designed to avoid treaty-
shopping. The proposed Treaty's provision on this subject,
Article 21, is stronger in protecting against abuse by third-
country residents and would bring the provision into line with
the U.S. Model and other more recent U.S. tax treaties. Among
other changes, the new provision provides that a treaty-country
company whose shares are regularly traded on a recognized stock
exchange may qualify for treaty benefits if the company
satisfies one of two tests: either the company must be
primarily traded on a recognized stock exchange in a specified
region or the company's primary place of management and control
must be in the country of residence. This new requirement is
intended to ensure an adequate connection to the company's
claimed country of residence.
IV. Entry Into Force; Effective Dates
The United States and Belgium shall notify each other
through the diplomatic channel, accompanied by an instrument of
ratification, when each has completed its applicable procedures
for entry into force. In accordance with Article 28, the Treaty
will enter into force on the date on which the later of the
notifications is received.
The Treaty's provisions shall have effect with respect to
taxes withheld at source, for amounts paid or credited on or
after the first day of the second month next following the date
on which the Treaty enters into force. The Treaty's provisions
shall have effect with respect to other covered taxes for
taxable periods beginning on or after the first day of January
next following the date on which the Treaty enters into force.
Article 21(5)(f) shall not have effect until January 1, 2011.
If any person entitled to benefits under the existing
treaty from 1970, as modified in 1987, would have been entitled
to greater benefits under the older treaty than under this
Treaty, the older 1970 treaty, as modified in 1987, shall, at
the election of such person, continue to have effect in its
entirety with respect to such person for a twelve-month period
from the date on which the provisions of this Treaty would
otherwise have effect.
Notwithstanding other provisions, Article 25 shall have
effect from the date of entry into force of the Treaty, without
regard to the taxable period to which the matter relates.
Article 24(7) and (8), which provide for binding arbitration,
shall have effect with respect to cases that are under
consideration by the competent authorities as of the date on
which the Treaty enters into force, and cases that come under
such consideration after that time.
V. Implementing Legislation
As is the case generally with income tax treaties, the
Protocol is self-executing and thus does not require
implementing legislation for the United States.
VI. Committee Action
The committee held a public hearing on the Treaty on July
17, 2007 (a hearing print of this session will be forthcoming).
Testimony was received by Mr. John Harrington, International
Tax Counsel, Office of the International Tax Counsel at the
Department of the Treasury; Thomas A. Barthold, Acting Chief of
Staff of the Joint Committee on Taxation; the Honorable William
A. Reinsch, President of the National Foreign Trade Council;
and Ms. Janice Lucchesi, Chairwoman of the Board, Organization
for International Development. On October 31, 2007, the
Committee considered the Protocol, and ordered it favorably
reported by voice vote, with a quorum present and without
objection.
VII. Committee Recommendation and Comments
The Committee on Foreign Relations believes that the Treaty
will stimulate increased investment, substantially deny
``treaty-shoppers'' the benefits of this tax treaty, and
promote closer cooperation and facilitate trade and investment
between the United States and Belgium. The committee therefore
urges the Senate to act promptly to give advice and consent to
ratification of the Protocol, as set forth in this report and
the accompanying resolution of advice and consent. The
committee has taken note, however, of certain issues raised by
the Protocol and has certain comments to offer the Executive
Branch on these matters.
The Treaty was considered by the Committee on October 31,
2007, along with three other tax treaties: (1) The Protocol
Amending Tax Convention with Finland (Treaty Doc. 109-18); (2)
The Protocol Amending Tax Convention with Denmark (Treaty Doc.
109-19); and (3) The Protocol Amending Tax Convention with
Germany (Treaty Doc. 109-20). In the committee's reports
regarding the Protocol Amending Tax Convention with Finland and
the Protocol Amending Tax Convention with Germany, also filed
this day, the committee set forth comments on several issues,
all of which are relevant here.
A. TECHNICAL EXPLANATIONS AND TREATY SHOPPING
In the committee's report regarding the Protocol Amending
Tax Convention with Finland, the committee suggested first that
the Treasury Department consider sharing the Technical
Explanation it develops with its treaty partners, prior to its
public release. Second, the committee encouraged the Treasury
Department to further strengthen anti-treaty-shopping
provisions in tax treaties whenever possible, with a particular
focus on closing the loophole created by those U.S. tax
treaties currently in force that do not have an anti-treaty-
shopping provision. A detailed discussion regarding these
issues can be found in Section VII of the committee's report
regarding the Protocol Amending Tax Convention with Finland
(Exec. Rept. 110-4).
B. PENSION FUNDS
In the committee's report regarding the Protocol Amending
Tax Convention with Germany, the committee welcomed the
inclusion of provisions related to cross-border pension
contributions and earnings, which generally conform to the U.S.
Model and prevent the taxation of pension contributions and
earnings when an individual participates in a pension plan
established in one country while performing services in the
other, provided certain requirements are met. Unlike the German
Protocol, the Treaty does not identify pre-qualified plans in
the Treaty. Nevertheless, the Treasury Department indicated in
responses to questions for the record that the U.S. and Belgian
tax authorities have exchanged lists of the types of plans that
they believe should be covered and there is the expectation
that a generally applicable authority agreement will be entered
into under Article 24 of the Treaty shortly after the entry
into force of the Treaty. The committee urges the Treasury
Department to conclude the agreement as soon as possible,
because the pre-approval of certain plans effectively
streamlines what could otherwise be a cumbersome process.
C. ARBITRATION
In the committee's report regarding the Protocol Amending
Tax Convention with Germany, the committee provided a number of
comments that relate to the binding arbitration mechanism that
is included in both the Treaty and the German Protocol. Those
comments are relevant here and can be found in Section VII of
the committee's report regarding the Protocol Amending Tax
Convention with Germany (Exec. Rept. 110-5).
VIII. Text of Resolution of Advice and Consent to Ratification
Resolved (two-thirds of the Senators present concurring
therein), The Senate advises and consents to the ratification
of the Convention between the Government of the United States
of America and the Government of the Kingdom of Belgium for the
Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income, and accompanying
Protocol, signed at Brussels on November 27, 2006 (Treaty Doc.
110-3)
IX. Annex.--Technical Explanation
DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION
BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE
GOVERNMENT OF THE KINGDOM OF BELGIUM FOR THE AVOIDANCE OF DOUBLE
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON
INCOME SIGNED AT BRUSSELS ON NOVEMBER 27, 2006
This is a technical explanation of the Convention between
the Government of the United States of America and the
Government of the Kingdom of Belgium for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income, signed at Brussels on November 27,
2006 (the ``Convention''), and the Protocol also signed at
Brussels on November 27, 2006, which forms an integral part
thereto (the ``Protocol''). The Protocol is discussed below in
connection with relevant provisions of the Convention.
References are made to the Convention between the
Government of the United States of America and the Government
of the Kingdom of Belgium for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with respect to Taxes on
Income, signed at Brussels on July 9, 1970, as amended by
protocol signed December 31, 1987 (the ``prior Convention'').
The Convention and Protocol replace the prior Convention.
Negotiations took into account the U.S. Treasury
Department's current tax treaty policy and the Treasury
Department's Model Income Tax Convention, published on November
15, 2006 (the ``U.S. Model''). Negotiations also took into
account the Model Tax Convention on Income and on Capital,
published by the Organisation for Economic Cooperation and
Development (the ``OECD Model''), and recent tax treaties
concluded by both countries.
The Technical Explanation is an official guide to the
Convention. It reflects the policies behind particular
Convention provisions, as well as understandings reached with
respect to the application and interpretation of the
Convention. References in the Technical Explanation to ``he''
or ``his'' should be read to mean ``he or she'' or ``his and
her.''
ARTICLE 1 (GENERAL SCOPE)
Paragraph 1
Paragraph 1 of Article 1 provides that the Convention
applies only to residents of the United States or Belgium
except where the terms of the Convention provide otherwise.
Under Article 4 (Resident) a person is generally treated as a
resident of a Contracting State if that person is, under the
laws of that State, liable to tax therein by reason of his
domicile, citizenship, residence, or other similar criteria.
However, if a person is considered a resident of both
Contracting States, Article 4 provides rules for determining a
State of residence (or no State of residence). This
determination governs for all purposes of the Convention.
Certain provisions are applicable to persons who may not be
residents of either Contracting State. For example, paragraph 1
of Article 23 (Non-Discrimination) applies to nationals of the
Contracting States. Under Article 25 (Exchange of Information
and Administrative Assistance), information may be exchanged
with respect to residents of third states.
Paragraph 2
Paragraph 2 states the generally accepted relationship both
between the Convention and domestic law and between the
Convention and other agreements between the Contracting States.
That is, no provision in the Convention may restrict any
exclusion, exemption, deduction, credit or other benefit
accorded by the tax laws of the Contracting States, or by any
other agreement between the Contracting States. The
relationship between the non-discrimination provisions of the
Convention and other agreements is addressed not in paragraph 2
but in paragraph 3.
Under paragraph 2, for example, if a deduction would be
allowed under the U.S. Internal Revenue Code (the ``Code'') in
computing the U.S. taxable income of a resident of Belgium, the
deduction also is allowed to that person in computing taxable
income under the Convention. Paragraph 2 also means that the
Convention may not increase the tax burden on a resident of a
Contracting State beyond the burden determined under domestic
law. Thus, a right to tax given by the Convention cannot be
exercised unless that right also exists under internal law.
It follows that, under the principle of paragraph 2, a
taxpayer's U.S. tax liability need not be determined under the
Convention if the Code would produce a more favorable result. A
taxpayer may not, however, choose among the provisions of the
Code and the Convention in an inconsistent manner in order to
minimize tax. For example, assume that a resident of Belgium
has three separate businesses in the United States. One is a
profitable permanent establishment and the other two are trades
or businesses that would earn taxable income under the Code but
that do not meet the permanent establishment threshold tests of
the Convention. One is profitable and the other incurs a loss.
Under the Convention, the income of the permanent establishment
is taxable in the United States, and both the profit and loss
of the other two businesses are ignored. Under the Code, all
three would be subject to tax, but the loss would offset the
profits of the two profitable ventures. The taxpayer may not
invoke the Convention to exclude the profits of the profitable
trade or business and invoke the Code to claim the loss of the
loss trade or business against the profit of the permanent
establishment. (See Rev. Rul. 84-17, 1984-1 C.B. 308.) If,
however, the taxpayer invokes the Code for the taxation of all
three ventures, he would not be precluded from invoking the
Convention with respect, for example, to any dividend income he
may receive from the United States that is not effectively
connected with any of his business activities in the United
States.
Similarly, nothing in the Convention can be used to deny
any benefit granted by any other agreement between the United
States and Belgium. For example, if certain benefits are
provided for military personnel or military contractors under a
Status of Forces Agreement between the United States and
Belgium, those benefits or protections will be available to
residents of the Contracting States regardless of any
provisions to the contrary (or silence) in the Convention.
Paragraph 3
Paragraph 3 specifically relates to non-discrimination
obligations of the Contracting States under the General
Agreement on Trade in Services (the ``GATS'').
The provisions of paragraph 3 are an exception to the rule
provided in paragraph 2 of this Article under which the
Convention shall not restrict in any manner any benefit now or
hereafter accorded by any other agreement between the
Contracting States.
Subparagraph (a) of paragraph 3 provides that, unless the
competent authorities determine that a taxation measure is not
within the scope of the Convention, the national treatment
obligations of the GATS shall not apply with respect to that
measure. Further, any question arising as to the interpretation
of the Convention, including in particular whether a measure is
within the scope of the Convention shall be considered only by
the competent authorities of the Contracting States, and the
procedures under the Convention exclusively shall apply to the
dispute. Thus, paragraph 3 of Article XXII (Consultation) of
the GATS may not be used to bring a dispute before the World
Trade Organization unless the competent authorities of both
Contracting States have determined that the relevant taxation
measure is not within the scope of Article 23 (Non-
Discrimination) of the Convention.
The term ``measure'' for these purposes is defined broadly
in subparagraph (b) of paragraph 3. It would include, for
example, a law, regulation, rule, procedure, decision,
administrative action or guidance, or any other form of
measure.
Paragraph 4
Paragraph 4 contains the traditional saving clause found in
all U.S. treaties. The Contracting States reserve their rights,
except as provided in paragraph 5, to tax their residents and
citizens as provided in their internal laws, notwithstanding
any provisions of the Convention to the contrary. For example,
if a resident of Belgium performs professional services in the
United States and the income from the services is not
attributable to a permanent establishment in the United States,
Article 7 (Business Profits) would by its terms prevent the
United States from taxing the income. If, however, the resident
of Belgium is also a citizen of the United States, the saving
clause permits the United States to include the remuneration in
the worldwide income of the citizen and subject it to tax under
the normal Code rules (i.e., without regard to Code section
894(a)). However, subparagraph 5(a) of Article 1 preserves the
benefits of special foreign tax credit rules applicable to the
U.S. taxation of certain U.S. income of its citizens resident
in Belgium. See paragraph 4 of Article 22 (Relief from Double
Taxation).
For purposes of the saving clause, ``residence'' is
determined under Article 4 (Resident). Thus, an individual who
is a resident of the United States under the Code (but not a
U.S. citizen) but who is determined to be a resident of Belgium
under the tie breaker rules of Article 4 would be subject to
U.S. tax only to the extent permitted by the Convention. The
United States would not be permitted to apply its statutory
rules to that person to the extent the rules are inconsistent
with the treaty.
However, the person would be treated as a U.S. resident for
U.S. tax purposes other than determining the individual's U.S.
tax liability. For example, in determining under Code section
957 whether a foreign corporation is a controlled foreign
corporation, shares in that corporation held by the individual
would be considered to be held by a U.S. resident. As a result,
other U.S. citizens or residents might be deemed to be United
States shareholders of a controlled foreign corporation subject
to current inclusion of Subpart F income recognized by the
corporation. See, Treas. Reg. section 301.7701 (b)-7(a)(3).
Under paragraph 4, each Contracting State also reserves its
right to tax former citizens and former long-term residents for
a period of ten years following the loss of such status. Thus,
paragraph 4 allows the United States to tax former U.S.
citizens and former U.S. long-term residents in accordance with
Section 877 of the Code. Section 877 generally applies to a
former citizen or long-term resident of the United States who
relinquishes citizenship or terminates long-term residency if
either of the following criteria exceed established thresholds:
(a) the average annual net income tax of such individual for
the period of 5 taxable years ending before the date of the
loss of status, or (b) the net worth of such individual as of
the date of the loss of status. The annual net income tax
threshold is adjusted annually for inflation. The United States
defines ``long-term resident'' as an individual (other than a
U.S. citizen) who is a lawful permanent resident of the United
States in at least 8 of the prior 15 taxable years. An
individual is not treated as a lawful permanent resident for
any taxable year if such individual is treated as a resident of
a foreign country under the provisions of a tax treaty between
the United States and the foreign country and the individual
does not waive the benefits of such treaty applicable to
residents of the foreign country.
Paragraph 5
Paragraph 5 sets forth certain exceptions to the saving
clause. The referenced provisions are intended to provide
benefits to citizens and residents even if such benefits do not
exist under internal law. Paragraph 5 thus preserves these
benefits for citizens and residents of the Contracting States.
Subparagraph (a) lists certain provisions of the Convention
that are applicable to all citizens and residents of a
Contracting State, despite the general saving clause rule of
paragraph 4:
(1) Paragraph 2 of Article 9 (Associated Enterprises)
grants the right to a correlative adjustment with respect to
income tax due on profits reallocated under Article 9.
(2) Paragraphs 1 b), 2, and 5 of Article 17 (Pensions,
Social Security, Annuities, Alimony and Child Support) provide
exemptions from source or residence State taxation for certain
pension distributions, social security payments and child
support.
(3) Paragraph 6 of Article 17 (Pensions, Social Security,
Annuities, Alimony and Child Support) provides an exemption for
certain investment income of pension funds located in Belgium,
while paragraph 9 provides benefits for certain contributions
by or on behalf of a U.S. citizen to certain pension funds
established in Belgium.
(4) Article 22 (Relief from Double Taxation) confirms to
citizens and residents of one Contracting State the benefit of
a credit for income taxes paid to the other or an exemption for
income earned in the other State.
(5) Article 23 (Non-Discrimination) protects residents and
nationals of one Contracting State against the adoption of
certain discriminatory practices in the other Contracting
State.
(6) Article 24 (Mutual Agreement Procedure) confers certain
benefits on citizens and residents of the Contracting States in
order to reach and implement solutions to disputes between the
two Contracting States. For example, the competent authorities
are permitted to use a definition of a term that differs from
an internal law definition. The statute of limitations may be
waived for refunds, so that the benefits of an agreement may be
implemented.
Subparagraph (b) of paragraph 5 provides a different set of
exceptions to the saving clause. The benefits referred to are
all intended to be granted to temporary residents of a
Contracting State (for example, in the case of the United
States, holders of non- immigrant visas), but not to citizens
or to persons who have acquired permanent residence in that
State. If beneficiaries of these provisions travel from one of
the Contracting States to the other, and remain in the other
long enough to become residents under its internal law, but do
not acquire permanent residence status (i.e., in the U.S.
context, they do not become ``green card'' holders) and are not
citizens of that State, the host State will continue to grant
these benefits even if they conflict with the statutory rules.
The benefits preserved by this paragraph are: (1) the host
country exemptions for government service salaries and pensions
under Article 18 (Government Service), certain income of
visiting students and trainees under Article 19 (Students and
Trainees, Teachers and Researchers), and the income of
diplomatic agents and consular officers under Article 27
(Members of Diplomatic Missions and Consular Posts); and (2)
the beneficial tax treatment of pension fund contributions
under paragraph 7 of Article 17 (Pensions, Social Security,
Annuities, Alimony and Child Support).
Paragraph 6
Paragraph 6 addresses special issues presented by fiscally
transparent entities such as partnerships and certain estates
and trusts. Because different countries frequently take
different views as to when an entity is fiscally transparent,
the risk of both double taxation and double non-taxation are
relatively high. The intention of paragraph 6 is to eliminate a
number of technical problems that arguably would have prevented
investors using such entities from claiming treaty benefits,
even though such investors would be subject to tax on the
income derived through such entities. The provision also
prevents the use of such entities to claim treaty benefits in
circumstances where the person investing through such an entity
is not subject to tax on the income in its State of residence.
The provision, and the corresponding requirements of the
substantive rules of Articles 6 through 20, should be read with
those two goals in mind.
In general, paragraph 6 relates to entities that are not
subject to tax at the entity level, as distinct from entities
that are subject to tax, but with respect to which tax may be
relieved under an integrated system. This paragraph applies to
any resident of a Contracting State who is entitled to income
derived through an entity that is treated as fiscally
transparent under the laws of either Contracting State.
Entities falling under this description in the United States
include partnerships, common investment trusts under section
584 and grantor trusts. This paragraph also applies to U.S.
limited liability companies (``LLCs'') that are treated as
partnerships or as disregarded entities for U.S. tax purposes.
Under paragraph 6, an item of income, profit or gain
derived by such a fiscally transparent entity will be
considered to be derived by a resident of a Contracting State
if a resident is treated under the taxation laws of that State
as deriving the item of income. For example, if a company that
is a resident of Belgium pays interest to an entity that is
treated as fiscally transparent for U.S. tax purposes, the
interest will be considered derived by a resident of the U.S.
only to the extent that the taxation laws of the United States
treats one or more U.S. residents (whose status as U.S.
residents is determined, for this purpose, under U.S. tax law)
as deriving the interest for U.S. tax purposes. In the case of
a partnership, the persons who are, under U.S. tax laws,
treated as partners of the entity would normally be the persons
whom the U.S. tax laws would treat as deriving the interest
income through the partnership. Also, it follows that persons
whom the United States treats as partners but who are not U.S.
residents for U.S. tax purposes may not claim a benefit for the
interest paid to the entity under the Convention, because they
are not residents of the United States for purposes of claiming
this treaty benefit. (If, however, the country in which they
are treated as resident for tax purposes, as determined under
the laws of that country, has an income tax convention with
Belgium, they may be entitled to claim a benefit under that
convention.) In contrast, if, for example, an entity is
organized under U.S. laws and is classified as a corporation
for U.S. tax purposes, interest paid by a company that is a
resident of Belgium to the U.S. entity will be considered
derived by a resident of the United States since the U.S.
corporation is treated under U.S. taxation laws as a resident
of the United States and as deriving the income.
The same result obtains even if the entity were viewed
differently under the tax laws of Belgium (e.g., as not
fiscally transparent in the first example above where the
entity is treated as a partnership for U.S. tax purposes).
Similarly, the characterization of the entity in a third
country is also irrelevant, even if the entity is organized in
that third country. The results follow regardless of whether
the entity is disregarded as a separate entity under the laws
of one jurisdiction but not the other, such as a single owner
entity that is viewed as a branch for U.S. tax purposes and as
a corporation for tax purposes under the laws of Belgium. These
results also obtain regardless of where the entity is organized
(i.e., in the United States, in Belgium or, as noted above, in
a third country).
For example, income from U.S. sources received by an entity
organized under the laws of the United States, which is treated
for tax purposes under the laws of Belgium as a corporation and
is owned by a shareholder who is a resident of Belgium for its
tax purposes, is not considered derived by the shareholder of
that corporation even if, under the tax laws of the United
States, the entity is treated as fiscally transparent. Rather,
for purposes of the treaty, the income is treated as derived by
the U.S. entity.
These principles also apply to trusts to the extent that
they are fiscally transparent in either Contracting State. For
example, if X, a resident of Belgium, creates a revocable trust
in the United States and names persons resident in a third
country as the beneficiaries of the trust, the trust's income
would be regarded as being derived by a resident of Belgium
only to the extent that the laws of Belgium treat X as deriving
the income for its tax purposes, perhaps through application of
rules similar to the U.S. ``grantor trust'' rules.
Paragraph 6 is not an exception to the saving clause of
paragraph 4. Accordingly, paragraph 6 does not prevent a
Contracting State from taxing an entity that is treated as a
resident of that State under its tax law. For example, if a
U.S. LLC with members who are residents of Belgium elects to be
taxed as a corporation for U.S. tax purposes, the United States
will tax that LLC on its worldwide income on a net basis,
without regard to whether Belgium views the LLC as fiscally
transparent.
ARTICLE 2 (TAXES COVERED)
This Article specifies the U.S. taxes and the taxes of
Belgium to which the Convention applies. With two exceptions,
the taxes specified in Article 2 are the covered taxes for all
purposes of the Convention. A broader coverage applies,
however, for purposes of Articles 23 (Non-Discrimination) and
25 (Exchange of Information and Administrative Assistance).
Article 23 (Non-Discrimination) applies with respect to all
taxes, including those imposed by state and local governments.
Article 25 (Exchange of Information and Administrative
Assistance) applies with respect to all taxes imposed at the
national level.
Paragraph 1
Paragraph 1 identifies the category of taxes to which the
Convention applies. Paragraph 1 is based on the OECD Model and
defines the scope of application of the Convention. The
convention applies to taxes on income, including gains, imposed
on behalf of a Contracting State, irrespective of the manner in
which they are levied. Except with respect to Article 23 (Non-
Discrimination), state and local taxes are not covered by the
Convention.
Paragraph 2
Paragraph 2 also is based on the OECD Model and provides a
definition of taxes on income and on capital gains. The
Convention covers taxes on total income or any part of income
and includes tax on gains derived from the alienation of
property. The Convention does not apply, however, to social
security charges, or any other charges where there is a direct
connection between the levy and individual benefits. Nor does
it apply to property taxes, except with respect to Article 23
(Non-Discrimination).
Paragraph 3
Paragraph 3 lists the taxes in force at the time of
signature of the Convention to which the Convention applies.
Subparagraph 3 a) provides a list of income taxes imposed
in Belgium that are covered taxes under the Convention. These
taxes include: i) the individual income tax, ii) the corporate
income tax, iii) the income tax on legal entities, and iv) the
income tax on non-residents. All of these taxes include the
prepayments and the surcharges on these taxes and prepayments.
Subparagraph 3 b) provides that the existing U.S. taxes
subject to the rules of the Convention are the Federal income
taxes imposed by the Code, together with the excise taxes
imposed with respect to private foundations (Code sections 4940
through 4948). Social security and unemployment taxes (Code
sections 1401, 3101, 3111 and 3301) are excluded from coverage.
Paragraph 4
Under paragraph 4, the Convention will apply to any taxes
that are identical, or substantially similar, to those
enumerated in paragraph 3, and which are imposed in addition
to, or in place of, the existing taxes after November 27, 2006,
the date of signature of the Convention. The paragraph also
provides that the competent authorities of the Contracting
States will notify each other of any changes that have been
made in their laws, whether tax laws or non-tax laws, that
affect significantly their obligations under the Convention.
Non-tax laws that may affect a Contracting State's obligations
under the Convention may include, for example, laws affecting
bank secrecy.
ARTICLE 3 (GENERAL DEFINITIONS)
Article 3 provides general definitions and rules of
interpretation applicable throughout the Convention. Certain
other terms are defined in other articles of the Convention.
For example, the term ``resident of a Contracting State'' is
defined in Article 4 (Resident). The term ``permanent
establishment'' is defined in Article 5 (Permanent
Establishment). These definitions are used consistently
throughout the Convention. Other terms, such as ``dividends,''
``interest'' and ``royalties'' are defined in specific articles
for purposes only of those articles.
Paragraph 1
Paragraph 1 defines a number of basic terms used in the
Convention. The introduction to paragraph 1 makes clear that
these definitions apply for all purposes of the Convention,
unless the context requires otherwise. This latter condition
allows flexibility in the interpretation of the treaty in order
to avoid results not intended by the treaty's negotiators.
Subparagraph 1(a) defines the term ``person'' to include an
individual, an estate, a trust, a partnership, a company and
any other body of persons. The definition is significant for a
variety of reasons. For example, under Article 4, only a
``person'' can be a ``resident'' and therefore eligible for
most benefits under the treaty. Also, all ``persons'' are
eligible to claim relief under Article 24 (Mutual Agreement
Procedure).
The term ``company'' is defined in subparagraph 1(b) as a
body corporate or an entity treated as a body corporate for tax
purposes in the state where it is organized. The definition
refers to the law of the state in which an entity is organized
in order to ensure that an entity that is treated as fiscally
transparent in its country of residence will not get
inappropriate benefits, such as the reduced withholding rate
provided by subparagraph 2(b), or paragraphs 3 or 4 of Article
10 (Dividends). It also ensures that the Limitation on Benefits
provisions of Article 21 will be applied at the appropriate
level.
The terms ``enterprise of a Contracting State'' and
``enterprise of the other Contracting State'' are defined in
subparagraph 1(c) as an enterprise carried on by a resident of
a Contracting State and an enterprise carried on by a resident
of the other Contracting State. An enterprise of a Contracting
State need not be carried on in that State. It may be carried
on in the other Contracting State or a third state (e.g., a
U.S. corporation doing all of its business in Belgium would
still be a U.S. enterprise).
Subparagraph 1(c) further provides that these terms also
encompass an enterprise conducted through an entity (such as a
partnership) that is treated as fiscally transparent in the
Contracting State where the entity's owner is resident. The
definition makes this point explicitly to ensure that the
purpose of the Convention is not thwarted by an overly
technical application of the term ``enterprise of a Contracting
State'' to activities carried on through partnerships and
similar entities. In accordance with Article 4 (Resident),
entities that are fiscally transparent in the country in which
their owners are resident are not considered to be residents of
a Contracting State (although income derived by such entities
may be taxed as the income of a resident, if taxed in the hands
of resident partners or other owners). It could be argued that
an enterprise conducted by such an entity is not conducted by a
resident of a Contracting State, and therefore would not
benefit from provisions applicable to enterprises of a
Contracting State. The definition is intended to make clear
that an enterprise conducted by such an entity will be treated
as carried on by a resident of a Contracting State to the
extent its partners or other owners are residents. This
approach is consistent with the Code, which under section 875
attributes a trade or business conducted by a partnership to
its partners and a trade or business conducted by an estate or
trust to its beneficiaries.
Subparagraph (d) defines the term ``enterprise'' as any
activity or set of activities that constitutes the carrying on
of a business. The term ``business'' is not defined, but
subparagraph (e) provides that it includes the performance of
professional services and other activities of an independent
character. Both subparagraphs are identical to definitions
recently added to the OECD Model in connection with the
deletion of Article 14 (Independent Personal Services) from the
OECD Model. The inclusion of the two definitions is intended to
clarify that income from the performance of professional
services or other activities of an independent character is
dealt with under Article 7 (Business Profits) and not Article
20 (Other Income).
Subparagraph 1(f) defines the term ``international
traffic.'' The term means any transport by a ship or aircraft
except when such transport is solely between places within a
Contracting State. This definition is applicable principally in
the context of Article 8 (Shipping and Air Transport). The
definition combines with paragraphs 2 and 3 of Article 8 to
exempt from tax by the source State income from the rental of
ships or aircraft that is earned both by lessors that are
operators of ships and aircraft and by those lessors that are
not (e.g., a bank or a container leasing company).
The exclusion from international traffic of transport
solely between places within a Contracting State means, for
example, that carriage of goods or passengers solely between
New York and Chicago would not be treated as international
traffic, whether carried by a U.S. or a foreign carrier. The
substantive taxing rules of the Convention relating to the
taxation of income from transport, principally Article 8
(Shipping and Air Transport), therefore, would not apply to
income from such carriage. Thus, if the carrier engaged in
internal U.S. traffic were a resident of Belgium (assuming that
were possible under U.S. law), the United States would not be
required to exempt the income from that transport under Article
8. The income would, however, be treated as business profits
under Article 7 (Business Profits), and therefore would be
taxable in the United States only if attributable to a U.S.
permanent establishment of the foreign carrier, and then only
on a net basis. The gross basis U.S. tax imposed by section 887
would never apply under the circumstances described. If,
however, goods or passengers are carried by a carrier resident
in Belgium from a non-U.S. port to, for example, New York, and
some of the goods or passengers continue on to Chicago, the
entire transport would be international traffic. This would be
true if the international carrier transferred the goods at the
U.S. port of entry from a ship to a land vehicle, from a ship
to a lighter, or even if the overland portion of the trip in
the United States was handled by an independent carrier under
contract with the original international carrier, so long as
both parts of the trip were reflected in original bills of
lading. For this reason, the Convention refers, in the
definition of ``international traffic,'' to ``such transport''
being solely between places in the other Contracting State,
while the OECD Model refers to the ship or aircraft being
operated solely between such places. The Convention is
consistent with the language in the U.S. Model and is intended
to make clear that, as in the above example, even if the goods
are carried on a different aircraft for the internal portion of
the international voyage than is used for the overseas portion
of the trip, the definition applies to that internal portion as
well as the external portion.
Finally, a ``cruise to nowhere,'' i.e., a cruise beginning
and ending in a port in the same Contracting State with no
stops in a foreign port, would not constitute international
traffic.
Subparagraph 1(g) designates the ``competent authorities''
for Belgium and the United States, respectively. The Belgium
competent authority is the Minister of Finance or his
authorized representative. The U.S. competent authority is the
Secretary of the Treasury or his delegate. The Secretary of the
Treasury has delegated the competent authority function to the
Commissioner of Internal Revenue, who in turn has delegated the
authority to the Deputy Commissioner (International) LMSB. With
respect to interpretative issues, the Deputy Commissioner
(International) LMSB acts with the concurrence of the Associate
Chief Counsel (International) of the Internal Revenue Service.
The geographical scope of the Convention with respect to
Belgium is set out in subparagraph 1(h). It encompasses the
territory of Belgium, including the territorial sea and the
seabed and subsoil and the superjacent waters of the adjacent
submarine areas beyond the territorial sea over which Belgium
exercises sovereign rights in accordance with international
law.
The geographical scope of the Convention with respect to
the United States is set out in subparagraph 1(i). It
encompasses the United States of America, including the states,
the District of Columbia and the territorial sea of the United
States. The term does not include Puerto Rico, the Virgin
Islands, Guam or any other U.S. possession or territory. For
certain purposes, the term ``United States'' includes the sea
bed and subsoil of undersea areas adjacent to the territorial
sea of the United States. This extension applies to the extent
that the United States exercises sovereignty in accordance with
international law for the purpose of natural resource
exploration and exploitation of such areas. This extension of
the definition applies, however, only if the person, property
or activity to which the Convention is being applied is
connected with such natural resource exploration or
exploitation. Thus, it would not include any activity involving
the sea floor of an area over which the United States exercised
sovereignty for natural resource purposes if that activity was
unrelated to the exploration and exploitation of natural
resources. This result is consistent with the result that would
be obtained under Section 638, which treats the continental
shelf as part of the United States for purposes of natural
resource exploration and exploitation.
The term ``national,'' as it relates to the United States
and to Belgium, is defined in subparagraph 1(j). This term is
relevant for purposes of Articles 18 (Government Service) and
23 (Non-Discrimination). A national of one of the Contracting
States is (1) an individual who is a citizen or national of
that State, and (2) any legal person, partnership or
association deriving its status, as such, from the law in force
in the State where it is established.
Subparagraph (k) defines the term ``pension fund'' to
include any person established in a Contracting State that is
operated principally to administer or provide pension or
retirement benefits or to earn income for the benefit of one or
more such arrangements and, in the case of Belgium, an entity
organized under Belgian law and regulated by the Bank Finance
and Insurance Commission or, in the case of the United States,
generally exempt from income taxation with respect to such
activities. In the case of the United States, the term
``pension fund'' includes the following: a trust providing
pension or retirement benefits under a Code section 401(a)
qualified pension plan, profit sharing or stock bonus plan, a
trust providing pension or retirement benefits under a Code
section 403(b) plan, a trust that is an individual retirement
account under Code section 408, a Roth individual retirement
account under Code section 408A, or a simple retirement account
under Code section 408(p), a trust providing pension or
retirement benefits under a simplified employee pension plan
under Code section 408(k), a trust described in section 457(g)
providing pension or retirement benefits under a Code section
457(b) plan, and the Thrift Savings Fund (section 770 1(j)).
Section 401(k) plans and group trusts described in Revenue
Ruling 8 1-100 and meeting the conditions of Revenue Ruling
2004-67 qualify as pension funds because they are covered by
Code section 40 1(a).
Paragraph 2
Terms that are not defined in the Convention are dealt with
in paragraph 2.
Paragraph 2 provides that in the application of the
Convention, any term used but not defined in the Convention
will have the meaning that it has under the law of the
Contracting State whose tax is being applied, unless the
context requires otherwise, or the competent authorities have
agreed on a different meaning pursuant to Article 24 (Mutual
Agreement Procedure). If the term is defined under both the tax
and non-tax laws of a Contracting State, the definition in the
tax law will take precedence over the definition in the non-tax
laws. Finally, there also may be cases where the tax laws of a
State contain multiple definitions of the same term. In such a
case, the definition used for purposes of the particular
provision at issue, if any, should be used.
If the meaning of a term cannot be readily determined under
the law of a Contracting State, or if there is a conflict in
meaning under the laws of the two States that creates
difficulties in the application of the Convention, the
competent authorities, as indicated in paragraph 3(d)(iv) of
Article 24 (Mutual Agreement Procedure), may establish a common
meaning in order to prevent double taxation or to further any
other purpose of the Convention. This common meaning need not
conform to the meaning of the term under the laws of either
Contracting State.
The reference in paragraph 2 to the internal law of a
Contracting State means the law in effect at the time the
treaty is being applied, not the law as in effect at the time
the treaty was signed. The use of ``ambulatory'' definitions,
however, may lead to results that are at variance with the
intentions of the negotiators and of the Contracting States
when the treaty was negotiated and ratified. The reference in
both paragraphs 1 and 2 to the ``context otherwise
requir[ing]'' a definition different from the treaty
definition, in paragraph 1, or from the internal law definition
of the Contracting State whose tax is being imposed, under
paragraph 2, refers to a circumstance where the result intended
by the Contracting States is different from the result that
would obtain under either the paragraph 1 definition or the
statutory definition. Thus, flexibility in defining terms is
necessary and permitted.
ARTICLE 4 (RESIDENT)
This Article sets forth rules for determining whether a
person is a resident of a Contracting State for purposes of the
Convention. As a general matter only residents of the
Contracting States may claim the benefits of the Convention.
The treaty definition of residence is to be used only for
purposes of the Convention. The fact that a person is
determined to be a resident of a Contracting State under
Article 4 does not necessarily entitle that person to the
benefits of the Convention. In addition to being a resident, a
person also must qualify for benefits under Article 21
(Limitation on Benefits) in order to receive benefits conferred
on residents of a Contracting State.
The determination of residence for treaty purposes looks
first to a person's liability to tax as a resident under the
respective taxation laws of the Contracting States. As a
general matter, a person who, under those laws, is a resident
of one Contracting State and not of the other need look no
further. For purposes of the Convention, that person is a
resident of the State in which he is resident under internal
law. If, however, a person is resident in both Contracting
States under their respective taxation laws, the Article
proceeds, where possible, to use tie-breaker rules to assign a
single State of residence to such a person for purposes of the
Convention.
Paragraph 1
The term ``resident of a Contracting State'' is defined in
paragraph 1. In general, this definition incorporates the
definitions of residence in U.S. law and that of Belgium by
referring to a resident as a person who, under the laws of a
Contracting State, is subject to tax there by reason of his
domicile, residence, citizenship, place of management, place of
incorporation or any other similar criterion. Thus, residents
of the United States include aliens who are considered U.S.
residents under Code section 7701(b). Paragraph 1 also
specifically includes the United States and Belgium, and
political subdivisions and local authorities of both States, as
residents for purposes of the Convention.
Certain entities that are nominally subject to tax but that
in practice are rarely required to pay tax also would generally
be treated as residents and therefore accorded treaty benefits.
For example, a U.S. Regulated Investment Company (RIC) and a
U.S. Real Estate Investment Trust (REIT) are residents of the
United States for purposes of the treaty. Although the income
earned by these entities normally is not subject to U.S. tax in
the hands of the entity, they are taxable to the extent that
they do not currently distribute their profits, and therefore
may be regarded as ``liable to tax.'' They also must satisfy a
number of requirements under the Code in order to be entitled
to special tax treatment.
A person who is liable to tax in a Contracting State only
in respect of income from sources within that State or of
profits attributable to a permanent establishment in that State
will not be treated as a resident of that Contracting State for
purposes of the Convention. Thus, a consular official of
Belgium who is posted in the United States, who may be subject
to U.S. tax on U.S. source investment income, but is not
taxable in the United States on non-U.S. source income (see
Code section 7701(b)(5)(B)), would not be considered a resident
of the United States for purposes of the Convention. Similarly,
an enterprise of Belgium with a permanent establishment in the
United States is not, by virtue of that permanent
establishment, a resident of the United States. The enterprise
generally is subject to U.S. tax only with respect to its
income that is attributable to the U.S. permanent
establishment, not with respect to its worldwide income, as it
would be if it were a U.S. resident.
Paragraph 2
Paragraph 2 contains an exception to the general rule of
paragraph 1 that residence under internal law also determines
residence under the Convention. The exception applies with
respect to a U.S. citizen or alien lawfully admitted for
permanent residence (i.e., a ``green card'' holder). Under
paragraph 1, a person is considered a resident of a Contracting
State for purposes of the Convention if he is liable to tax in
that Contracting State by reason of citizenship. Although this
rule applies to both Contracting States, only the United States
taxes its non-resident citizens in the same manner as its
residents. In addition, aliens admitted to the United States
for permanent residence (``green card'' holders) qualify as
U.S. residents under the first sentence of paragraph 1 because
they are taxed by the United States as residents, regardless of
where they physically reside.
Under the exception of paragraph 2, a U.S. citizen or green
card holder will be treated as a resident of the United States
for purposes of the Convention, and, thereby entitled to treaty
benefits, only if he meets two conditions. First, he must have
a substantial presence (see section 7701(b)(3)), permanent home
or habitual abode in the United States. This rule requires that
the U.S. citizen or green card holder have a reasonably strong
economic nexus with the United States. Second, he must not be
treated as a resident of a state other than Belgium under any
treaty between Belgium and a third state. This rule prevents a
U.S. citizen or green card holder who is a resident of a
country other than the United States or Belgium from choosing
the benefits of the Convention over those provided by the
treaty between Belgium and his country of residence. If the
U.S. citizen or green card holder's country of residence does
not have a treaty with the Belgium, however, then he will be
treated as a resident of the United States as long as he meets
the first requirement of an economic nexus. If such a person is
a resident of both the United States and Belgium, whether or
not he is to be treated as a resident of the United States for
purposes of the Convention is determined by the tie-breaker
rules of paragraph 4.
Thus, for example, an individual resident of the United
Kingdom who is a U.S. citizen by birth, or who is a United
Kingdom citizen and holds a U.S. green card, but who, in either
case, has never lived in the United States, would not be
entitled to benefits under the Convention. However, a U.S.
citizen who is transferred to the United Kingdom for two years
would be entitled to benefits under the Convention if he
maintains a permanent home or habitual abode in the United
States and is not a resident of the United Kingdom for purposes
of the Belgium-U.K. tax treaty. If he were treated as a
resident of the United Kingdom under the Belgium-U.K. tax
treaty, he could claim only the benefits of that treaty, even
if the Convention would provide greater benefits.
The fact that a U.S. citizen who does not have close ties
to the United States may not be treated as a U.S. resident
under the Convention does not alter the application of the
saving clause of paragraph 4 of Article 1 (General Scope) to
that citizen. For example, a U.S. citizen who pursuant to the
``citizen/green card holder'' exception in paragraph 2 is not
considered to be a resident of the United States still is
taxable in the United States on his worldwide income under the
generally applicable rules of the Code.
Paragraph 3
Paragraph 3 provides that certain tax-exempt entities such
as pension funds and charitable organizations will be regarded
as residents of a Contracting State regardless of whether they
are generally liable to income tax in the State where they are
established. The paragraph applies to legal persons organized
under the laws of a Contracting State and established and
maintained in that State to provide pensions or other similar
benefits pursuant to a plan, or exclusively for religious,
charitable, scientific, artistic, cultural, or educational
purposes. Thus, a section 501(c) organization organized in the
United States (such as a U.S. charity) that is generally exempt
from tax under U.S. law is a resident of the United States for
all purposes of the Convention.
Paragraph 4
If, under the laws of the two Contracting States, and,
thus, under paragraph 1, an individual is deemed to be a
resident of both Contracting States, a series of tie-breaker
rules are provided in paragraph 4 to determine a single State
of residence for that individual. These tests are to be applied
in the order in which they are stated. The first test is based
on where the individual has a permanent home. If that test is
inconclusive because the individual has a permanent home
available to him in both States, he will be considered to be a
resident of the Contracting State where his personal and
economic relations are closest (i.e., the location of his
``centre of vital interests''). If that test is also
inconclusive, or if he does not have a permanent home available
to him in either State, he will be treated as a resident of the
Contracting State where he maintains an habitual abode. If he
has an habitual abode in both States or in neither of them, he
will be treated as a resident of the Contracting State of which
he is a national. If he is a national of both States or of
neither, the matter will be considered by the competent
authorities, who will assign a single State of residence.
Paragraph 5
Paragraph 5 seeks to settle dual-residence issues for
persons other than individuals (e.g., companies, trusts, or
estates). For example, a dual-residence may arise in the case
of a company that is incorporated in the United States, and
therefore treated as a resident of the United States, but that
is also considered a resident of Belgium because it is managed
and controlled in Belgium, or perhaps, maintains a dual charter
of incorporation in Belgium. In such a case, if such a person
is, under the rules of paragraph 1, resident in both
Contracting States, the competent authorities shall seek to
determine a single State of residence for that person for
purposes of the Convention. If the competent authorities do not
reach an agreement on a single State of residence, that company
may not claim any benefit accorded to residents of a
Contracting State by the Convention, except those provided in
paragraph 1 of Article 22 (Relief From Double Taxation),
paragraph 1 of Article 23 (Non-Discrimination), and Article 24
(Mutual Agreement Procedure). Thus, for example, a State cannot
discriminate against a dual resident company.
ARTICLE 5 (PERMANENT ESTABLISHMENT)
This Article defines the term ``permanent establishment,''
a term that is significant for several articles of the
Convention. The existence of a permanent establishment in a
Contracting State is necessary under Article 7 (Business
Profits) for the taxation by that State of the business profits
of a resident of the other Contracting State. Articles 10, 11
and 12 (dealing with dividends, interest, and royalties,
respectively) provide for reduced rates of tax at source on
payments of these items of income to a resident of the other
State only when the income is not attributable to a permanent
establishment that the recipient has in the source State. The
concept is also relevant in determining which Contracting State
may tax certain gains under Article 13 (Gains) and certain
``other income'' under Article 20 (Other Income).
Paragraph 1
The basic definition of the term ``permanent
establishment'' is contained in paragraph 1. As used in the
Convention, the term means a fixed place of business through
which the business of an enterprise is wholly or partly carried
on. As indicated in the OECD Commentary to Article 5 (see
paragraphs 4 through 8), a general principle to be observed in
determining whether a permanent establishment exists is that
the place of business must be ``fixed'' in the sense that a
particular building or physical location is used by the
enterprise for the conduct of its business, and that it must be
foreseeable that the enterprise's use of this building or other
physical location will be more than temporary.
Paragraph 2
Paragraph 2 lists a number of types of fixed places of
business that constitute a permanent establishment. This list
is illustrative and non-exclusive. According to paragraph 2,
the term permanent establishment includes a place of
management, a branch, an office, a factory, a workshop, and a
mine, oil or gas well, quarry or other place of extraction of
natural resources.
Paragraph 3
This paragraph provides rules to determine whether a
building site or a construction, assembly or installation
project, or an installation used for the exploration of natural
resources constitutes a permanent establishment for the
contractor, explorer, etc. Such a site or activity does not
create a permanent establishment unless the site, project, etc.
lasts, or the exploration activity continues, for more than
twelve months. It is only necessary to refer to ``exploration''
and not ``exploitation'' in this context because exploitation
activities are defined to constitute a permanent establishment
under subparagraph (f) of paragraph 2. Thus, a drilling rig
does not constitute a permanent establishment if a well is
drilled in only six months, but if production begins in the
following month the well becomes a permanent establishment as
of that date.
The twelve-month test applies separately to each site or
project. The twelve-month period begins when work (including
preparatory work carried on by the enterprise) physically
begins in a Contracting State. A series of contracts or
projects by a contractor that are interdependent both
commercially and geographically are to be treated as a single
project for purposes of applying the twelve-month threshold
test. For example, the construction of a housing development
would be considered as a single project even if each house were
constructed for a different purchaser.
In applying this paragraph, time spent by a sub-contractor
on a building site is counted as time spent by the general
contractor at the site for purposes of determining whether the
general contractor has a permanent establishment. However, for
the sub-contractor itself to be treated as having a permanent
establishment, the sub-contractor's activities at the site must
last for more than 12 months. If a sub-contractor is on a site
intermittently, then, for purposes of applying the 12-month
rule, time is measured from the first day the sub-contractor is
on the site until the last day (i.e., intervening days that the
sub-contractor is not on the site are counted).
These interpretations of the Article are based on the
Commentary to paragraph 3 of Article 5 of the OECD Model, which
contains language that is substantially the same as that in the
Convention. These interpretations are consistent with the
generally accepted international interpretation of the relevant
language in paragraph 3 of Article 5 of the Convention.
If the twelve-month threshold is exceeded, the site or
project constitutes a permanent establishment from the first
day of activity.
Paragraph 4
This paragraph contains exceptions to the general rule of
paragraph 1, listing a number of activities that may be carried
on through a fixed place of business but which nevertheless do
not create a permanent establishment. The use of facilities
solely to store, display or deliver merchandise belonging to an
enterprise does not constitute a permanent establishment of
that enterprise. The maintenance of a stock of goods belonging
to an enterprise solely for the purpose of storage, display or
delivery, or solely for the purpose of processing by another
enterprise does not give rise to a permanent establishment of
the first-mentioned enterprise. The maintenance of a fixed
place of business solely for the purpose of purchasing goods or
merchandise, or for collecting information, for the enterprise,
or for other activities that have a preparatory or auxiliary
character for the enterprise, such as advertising, or the
supply of information, do not constitute a permanent
establishment of the enterprise. Moreover, subparagraph 4(f)
provides that a combination of the activities described in the
other subparagraphs of paragraph 4 will not give rise to a
permanent establishment if the combination results in an
overall activity that is of a preparatory or auxiliary
character.
Paragraph 5
Paragraphs 5 and 6 specify when activities carried on by an
agent or other person acting on behalf of an enterprise create
a permanent establishment of that enterprise. Under paragraph
5, a person is deemed to create a permanent establishment of
the enterprise if that person has and habitually exercises an
authority to conclude contracts that are binding on the
enterprise. If, however, for example, his activities are
limited to those activities specified in paragraph 4 which
would not constitute a permanent establishment if carried on by
the enterprise through a fixed place of business, the person
does not create a permanent establishment of the enterprise.
The OECD Model uses the term ``in the name of that
enterprise'' rather than ``binding on the enterprise.'' This
difference is intended to be a clarification rather than a
substantive difference. As indicated in paragraph 32 to the
OECD Commentaries on Article 5, paragraph 5 of the Article is
intended to encompass persons who have ``sufficient authority
to bind the enterprise's participation in the business activity
in the State concerned.''
The contracts referred to in paragraph 5 are those relating
to the essential business operations of the enterprise, rather
than ancillary activities. For example, if the person has no
authority to conclude contracts in the name of the enterprise
with its customers for, say, the sale of the goods produced by
the enterprise, but it can enter into service contracts in the
name of the enterprise for the enterprise's business equipment,
this contracting authority would not fall within the scope of
the paragraph, even if exercised regularly.
Paragraph 6
Under paragraph 6, an enterprise is not deemed to have a
permanent establishment in a Contracting State merely because
it carries on business in that State through an independent
agent, including a broker or general commission agent, if the
agent is acting in the ordinary course of his business as an
independent agent. Thus, there are two conditions that must be
satisfied: the agent must be both legally and economically
independent of the enterprise, and the agent must be acting in
the ordinary course of its business in carrying out activities
on behalf of the enterprise.
Whether the agent and the enterprise are independent is a
factual determination. Among the questions to be considered are
the extent to which the agent operates on the basis of
instructions from the enterprise. An agent that is subject to
detailed instructions regarding the conduct of its operations
or comprehensive control by the enterprise is not legally
independent.
In determining whether the agent is economically
independent, a relevant factor is the extent to which the agent
bears business risk. Business risk refers primarily to risk of
loss. An independent agent typically bears risk of loss from
its own activities. In the absence of other factors that would
establish dependence, an agent that shares business risk with
the enterprise, or has its own business risk, is economically
independent because its business activities are not integrated
with those of the principal. Conversely, an agent that bears
little or no risk from the activities it performs is not
economically independent and therefore is not described in
paragraph 6.
Another relevant factor in determining whether an agent is
economically independent is whether the agent acts exclusively
or nearly exclusively for the principal. Such a relationship
may indicate that the principal has economic control over the
agent. A number of principals acting in concert also may have
economic control over an agent. The limited scope of the
agent's activities and the agent's dependence on a single
source of income may indicate that the agent lacks economic
independence. It should be borne in mind, however, that
exclusivity is not in itself a conclusive test; an agent may be
economically independent notwithstanding an exclusive
relationship with the principal if it has the capacity to
diversify and acquire other clients without substantial
modifications to its current business and without substantial
harm to its business profits. Thus, exclusivity should be
viewed merely as a pointer to further investigation of the
relationship between the principal and the agent. Each case
must be addressed on the basis of its own facts and
circumstances.
Paragraph 7
This paragraph clarifies that a company that is a resident
of a Contracting State is not deemed to have a permanent
establishment in the other Contracting State merely because it
controls, or is controlled by, a company that is a resident of
that other Contracting State, or that carries on business in
that other Contracting State. The determination whether a
permanent establishment exists is made solely on the basis of
the factors described in paragraphs 1 through 6 of the Article.
Whether a company is a permanent establishment of a related
company, therefore, is based solely on those factors and not on
the ownership or control relationship between the companies.
ARTICLE 6 (INCOME FROM REAL PROPERTY)
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. Given
the availability of the net election in paragraph 5, 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.
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, except that,
as provided in paragraph 5, the situs State must allow the
taxpayer an election to be taxed on a net basis.
Paragraph 2
The term ``real property'' is defined in paragraph 2 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. Sec. 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 within the scope of
the term for purposes of the Convention. This expanded
definition conforms to that in the OECD Model. The definition
of ``real property'' for purposes of Article 6 is more limited
than the expansive definition of ``real property'' in paragraph
1 of Article 13 (Gains). The Article 13 term includes not only
real 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. This
includes 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. In the case of
a net lease of real property, if a net election has not been
made, the gross rental payment (before deductible expenses
incurred by the lessee) is treated as income from the property.
Other income closely associated with real property is
covered by other Articles of the Convention, however, and not
Article 6. For example, income from the disposition of an
interest in real property is not considered ``derived'' from
real property; taxation of that income is addressed in Article
13 (Gains). Interest paid on a mortgage on real property would
be covered by Article 11 (Interest). Distributions by a U.S.
Real Estate Investment Trust or certain regulated investment
companies would fall under Article 13 (Gains) in the case of
distributions of U.S. real property gain or Article 10
(Dividends) in the case of distributions treated as dividends.
Finally, distributions from 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 or 13.
Paragraph 4
This paragraph specifies that the basic rule of paragraph 1
(as elaborated in paragraph 3) applies to income from real
property of an enterprise. 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 in the
situs State. This provision represents an exception to the
general rule under Article 7 (Business Profits) that income
must be attributable to a permanent establishment in order to
be taxable in the situs state.
Paragraph 5
The 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. The election may
be terminated with the consent of the competent authority of
the situs State. In the United States, revocation will be
granted in accordance with the provisions of Treas. Reg.
section 1.871-10(d)(2).
ARTICLE 7 (BUSINESS PROFITS)
This Article provides rules for the taxation by a
Contracting State of the business profits of an enterprise of
the other Contracting State.
Paragraph 1
Paragraph 1 states the general rule that business profits
of an enterprise of one Contracting State may not be taxed by
the other Contracting State unless the enterprise carries on
business in that other Contracting State through a permanent
establishment (as defined in Article 5 (Permanent
Establishment)) situated there. When that condition is met, the
State in which the permanent establishment is situated may tax
the enterprise on the income that is attributable to the
permanent establishment.
Although the Convention does not include a definition of
``business profits,'' the term is intended to cover income
derived from any trade or business. In accordance with this
broad definition, the term ``business profits'' includes income
attributable to notional principal contracts and other
financial instruments to the extent that the income is
attributable to a trade or business of dealing in such
instruments or is otherwise related to a trade or business (as
in the case of a notional principal contract entered into for
the purpose of hedging currency risk arising from an active
trade or business). Any other income derived from such
instruments is, unless specifically covered in another article,
dealt with under Article 20 (Other Income).
The term ``business profits'' also includes income derived
by an enterprise from the rental of tangible personal property
(unless such tangible personal property consists of aircraft,
ships or containers, income from which is addressed by Article
8 (Shipping and Air Transport)). The inclusion of income
derived by an enterprise from the rental of tangible personal
property in business profits means that such income earned by a
resident of a Contracting State can be taxed by the other
Contracting State only if the income is attributable to a
permanent establishment maintained by the resident in that
other State, and, if the income is taxable, it can be taxed
only on a net basis. Income from the rental of tangible
personal property that is not derived in connection with a
trade or business is dealt with in Article 20 (Other Income).
In addition, as a result of the definitions of
``enterprise'' and ``business'' in Article 3 (General
Definitions), the term includes income derived from the
furnishing of personal services. Thus, a consulting firm
resident in one State whose employees or partners perform
services in the other State through a permanent establishment
may be taxed in that other State on a net basis under Article
7, and not under Article 14 (Income from Employment), which
applies only to income of employees. With respect to the
enterprise's employees themselves, however, their salary
remains subject to Article 14.
Because this article applies to income earned by an
enterprise from the furnishing of personal services, the
article also applies to income derived by a partner resident in
a Contracting State that is attributable to personal services
performed in the other Contracting State through a partnership
with a permanent establishment in that other State. Income
which may be taxed under this article includes all income
attributable to the permanent establishment in respect of the
performance of the personal services carried on by the
partnership (whether by the partner himself, other partners in
the partnership, or by employees assisting the partners) and
any income from activities ancillary to the performance of
those services (e.g., charges for facsimile services).
The application of Article 7 to a service partnership may
be illustrated by the following example: a partnership formed
in Belgium has five partners (who agree to split profits
equally), four of whom are resident and perform personal
services only in Belgium at Office A, and one of whom performs
personal services at Office B, a permanent establishment in the
United States. In this case, the four partners of the
partnership resident in Belgium may be taxed in the United
States in respect of their share of the income attributable to
the permanent establishment, Office B. The services giving rise
to income which may be attributed to the permanent
establishment would include not only the services performed by
the one resident partner, but also, for example, if one of the
four other partners came to the United States and worked on an
Office B matter there, the income in respect of those services.
Income from the services performed by the visiting partner
would be subject to tax in the United States regardless of
whether the visiting partner actually visited or used Office B
while performing services in the United States.
Paragraph 2
Paragraph 2 provides rules for the attribution of business
profits to a permanent establishment. The Contracting States
will attribute to a permanent establishment the profits that it
would have earned had it been a distinct and separate
enterprise engaged in the same or similar activities under the
same or similar conditions and dealing wholly independently
with the enterprise of which it is a permanent establishment.
The ``attributable to'' concept of paragraph 2 provides an
alternative to the analogous but somewhat different
``effectively connected'' concept in Code section 864(c). In
effect, paragraph 2 allows the United States to tax the lesser
of two amounts of income: the amount determined by applying
U.S. rules regarding the calculation of effectively connected
income and the amount determined under Article 7 of the
Convention. That is, a taxpayer may choose the set of rules
that results in the lowest amount of taxable income, but may
not mix and match.
In some cases, the amount of income ``attributable to'' a
permanent establishment under Article 7 may be greater than the
amount of income that would be treated as ``effectively
connected'' to a U.S. trade or business under section 864. For
example, a taxpayer that has a significant amount of foreign
source royalty income attributable to a U.S. branch may find
that it will pay less tax in the United States by applying
section 864(c) of the Code, rather than the rules of Article 7,
if the foreign source royalties are not derived in the active
conduct of a trade or business and thus would not be
effectively connected income. But, as described in the
Technical Explanation to Article 1(2), if it does so, it may
not then use Article 7 principles to exempt other income that
would be effectively connected to the U.S. trade or business.
Conversely, if it uses Article 7 principles to exempt other
effectively connected income that is not attributable to its
U.S. permanent establishment, then it must include the foreign
source royalties in its net taxable income even though such
royalties would not constitute effectively connected income.
In the case of financial institutions, the use of internal
dealings to allocate income within an enterprise may produce
results under Article 7 that are significantly different from
the results under the effectively connected income rules. For
example, income from interbranch notional principal contracts
may be taken into account under Article 7, notwithstanding that
such transactions may be ignored for purposes of U.S. domestic
law. Under the consistency rule described above, a financial
institution that conducts different lines of business through
its U.S. permanent establishment may not choose to apply the
rules of the Code with respect to some lines of business and
Article 7 of the Convention with respect to others. If it
chooses to use the rules of Article 7 to allocate its income
from its trading book, it may not then use U.S. domestic rules
to allocate income from its loan portfolio.
The profits attributable to a permanent establishment may
be from sources within or without a Contracting State. However,
as stated in the Protocol, the business profits attributable to
a permanent establishment include only those profits derived
from the assets used, risks assumed, and activities performed
by, the permanent establishment.
The language of paragraph 2, when combined with paragraph 3
dealing with the allowance of deductions for expenses incurred
for the purposes of earning the profits, and the Protocol to
Article 7, incorporates the arm's-length standard for purposes
of determining the profits attributable to a permanent
establishment. As noted below with respect to Article 9, the
United States generally interprets the arm's length standard in
a manner consistent with the OECD Transfer Pricing Guidelines.
The Protocol confirms that the arm's length method of
paragraphs 2 and 3 consists of applying the OECD Transfer
Pricing Guidelines, but taking into account the different
economic and legal circumstances of a single legal entity (as
opposed to separate but associated enterprises). Thus, any of
the methods used in the Transfer Pricing Guidelines, including
profits methods, may be used as appropriate and in accordance
with the Transfer Pricing Guidelines. However, the use of the
Transfer Pricing Guidelines applies only for purposes of
attributing profits within the legal entity. It does not create
legal obligations or other tax consequences that would result
from transactions having independent legal significance.
For example, an entity that operates through branches
rather than separate subsidiaries will have lower capital
requirements because all of the assets of the entity are
available to support all of the entity's liabilities (with some
exceptions attributable to local regulatory restrictions). This
is the reason that most commercial banks and some insurance
companies operate through branches rather than subsidiaries.
The benefit that comes from such lower capital costs must be
allocated among the branches in an appropriate manner. This
issue does not arise in the case of an enterprise that operates
through separate entities, since each entity will have to be
separately capitalized or will have to compensate another
entity for providing capital (usually through a guarantee).
Under U.S. domestic regulations, internal ``transactions''
generally are not recognized because they do not have legal
significance. In contrast, the rule provided by the Protocol is
that such internal dealings may be used to allocate income in
cases where the dealings accurately reflect the allocation of
risk within the enterprise. One example is that of global
trading in securities. In many cases, banks use internal swap
transactions to transfer risk from one branch to a central
location where traders have the expertise to manage that
particular type of risk. Under the Convention, such a bank may
also use such swap transactions as a means of allocating income
between the branches, if use of that method is the ``best
method'' within the meaning of regulation section 1.482-1(c).
The books of a branch will not be respected, however, when the
results are inconsistent with a functional analysis. So, for
example, income from a transaction that is booked in a
particular branch (or home office) will not be treated as
attributable to that location if the sales and risk management
functions that generate the income are performed in another
location.
Because the use of profits methods is permissible under
paragraph 2, it is not necessary for the Convention to include
a provision corresponding to paragraph 4 of Article 7 of the
OECD Model.
Paragraph 3
This paragraph is identical to the provision in the U.S.
Model. Paragraph 3 provides that in determining the business
profits of a permanent establishment, deductions shall be
allowed for the expenses incurred for the purposes of the
permanent establishment, ensuring that business profits will be
taxed on a net basis. This rule is not limited to expenses
incurred exclusively for the purposes of the permanent
establishment, but includes expenses incurred for the purposes
of the enterprise as a whole, or that part of the enterprise
that includes the permanent establishment. Deductions are to be
allowed regardless of which accounting unit of the enterprise
books the expenses, so long as they are incurred for the
purposes of the permanent establishment. For example, a portion
of the interest expense recorded on the books of the home
office in one State may be deducted by a permanent
establishment in the other if properly allocable thereto. The
amount of expense that must be allowed as a deduction is
determined by applying the arm's length principle.
As noted above, the Protocol provides that the OECD
Transfer Pricing Guidelines apply, by analogy, in determining
the profits attributable to a permanent establishment.
Accordingly, a permanent establishment may deduct payments made
to its head office or another branch in compensation for
services performed for the benefit of the branch. The method to
be used in calculating that amount will depend on the terms of
the arrangements between the branches and head office. For
example, the enterprise could have a policy, expressed in
writing, under which each business unit could use the services
of lawyers employed by the head office. At the end of each
year, the costs of employing the lawyers would be allocated to
each business unit according to the amount of services used by
that business unit during the year. Since this appears to be a
kind of cost-sharing arrangement and the allocation of costs is
based on the benefits received by each business unit, it would
be an acceptable means of determining a permanent
establishment's deduction for legal expenses. Alternatively,
the head office could agree to employ lawyers at its own risk,
and to charge an arm's length price for legal services
performed for a particular business unit. If the lawyers were
under-utilized, and the ``fees'' received from the business
units were less than the cost of employing the lawyers, then
the head office would bear the excess cost. If the ``fees''
exceeded the cost of employing the lawyers, then the head
office would keep the excess to compensate it for assuming the
risk of employing the lawyers. If the enterprise acted in
accordance with this agreement, this method would be an
acceptable alternative method for calculating a permanent
establishment's deduction for legal expenses.
The Protocol also specifies that a permanent establishment
cannot be funded entirely with debt, but must have sufficient
capital to carry on its activities as if it were a distinct and
separate enterprise. To the extent that the permanent
establishment does not have such capital, a Contracting State
may attribute such capital to the permanent establishment and
deny an interest deduction to the extent necessary to reflect
that capital attribution. The method prescribed by U.S.
domestic law for making this attribution is found in Treas.
Reg. Section 1.882-5. Both Section 1.882-5 and the method
prescribed in the Protocol start from the premise that all of
the capital of the enterprise supports all of the assets and
risks of the enterprise, and therefore the entire capital of
the enterprise must be allocated to its various businesses and
offices.
However, section 1.882-5 does not take into account the
fact that some assets create more risk for the enterprise than
do other assets. An independent enterprise would need less
capital to support a perfectly-hedged U.S. Treasury security
than it would need to support an equity security or other asset
with significant market and/or credit risk. Accordingly, in
some cases section 1.882 095 would require a taxpayer to
allocate more capital to the United States, and therefore would
reduce the taxpayer's interest deduction more, than is
appropriate. To address these cases, the Protocol allows a
taxpayer to apply a more flexible approach that takes into
account the relative risk of its assets in the various
jurisdictions in which it does business. In particular, in the
case of financial institutions other than insurance companies,
the amount of capital attributable to a permanent establishment
is determined by allocating the institution's total equity
between its various offices on the basis of the proportion of
the financial institution's risk-weighted assets attributable
to each of them. This recognizes the fact that financial
institutions are in many cases required to risk-weight their
assets for regulatory purposes and, in other cases, will do so
for business reasons even if not required to do so by
regulators. However, risk-weighting is more complicated than
the method prescribed by Section 1.882-5. Accordingly, to ease
this administrative burden, taxpayers may choose to apply the
principles of Treas. Reg. Section 1.882-5(c) to determine the
amount of capital allocable to its U.S. permanent
establishment, in lieu of determining its allocable capital
under the risk-weighed capital allocation method provided by
the Protocol, even if it has otherwise chosen to apply the
principles of Article 7 rather than the effectively connected
income rules of U.S. domestic law.
Paragraph 4
Paragraph 4 provides that no business profits can be
attributed to a permanent establishment merely because it
purchases goods or merchandise for the enterprise of which it
is a part. This paragraph is essentially identical to paragraph
5 of Article 7 of the U.S. and OECD Models. This rule applies
only to an office that performs functions for the enterprise in
addition to purchasing. The income attribution issue does not
arise if the sole activity of the office is the purchase of
goods or merchandise because such activity does not give rise
to a permanent establishment under Article 5 (Permanent
Establishment). A common situation in which paragraph 4 is
relevant is one in which a permanent establishment purchases
raw materials for the enterprise's manufacturing operation
conducted outside the United States and sells the manufactured
product. While business profits may be attributable to the
permanent establishment with respect to its sales activities,
no profits are attributable to it with respect to its
purchasing activities.
Paragraph 5
Paragraph 5 provides that profits shall be determined by
the same method each year, unless there is good reason to
change the method used. This rule assures consistent tax
treatment over time for permanent establishments. It limits the
ability of both the Contracting State and the enterprise to
change accounting methods to be applied to the permanent
establishment. It does not, however, restrict a Contracting
State from imposing additional requirements, such as the rules
under Code section 481, to prevent amounts from being
duplicated or omitted following a change in accounting method.
Such adjustments may be necessary, for example, if the taxpayer
switches from using the domestic rules under section 864 in one
year to using the rules of Article 7 in the next. Also, if the
taxpayer switches from Convention-based rules to U.S. domestic
rules, it may need to meet certain deadlines for making
elections that are not necessary when applying the rules of the
Convention.
Paragraph 6
Paragraph 6 coordinates the provisions of Article 7 and
other provisions of the Convention. Under this paragraph, when
business profits include items of income that are dealt with
separately under other articles of the Convention, the
provisions of those articles will, except when they
specifically provide to the contrary, take precedence over the
provisions of Article 7. For example, the taxation of dividends
will be determined by the rules of Article 10 (Dividends), and
not by Article 7, except where, as provided in paragraph 8 of
Article 10, the dividend is attributable to a permanent
establishment. In the latter case the provisions of Article 7
apply. Thus, an enterprise of one State deriving dividends from
the other State may not rely on Article 7 to exempt those
dividends from tax at source if they are not attributable to a
permanent establishment of the enterprise in the other State.
By the same token, if the dividends are attributable to a
permanent establishment in the other State, the dividends may
be taxed on a net income basis at the source State full
corporate tax rate, rather than on a gross basis under Article
10 (Dividends).
As provided in Article 8 (Shipping and Air Transport),
income derived from shipping and air transport activities in
international traffic described in that Article is taxable only
in the country of residence of the enterprise regardless of
whether it is attributable to a permanent establishment
situated in the source State.
Paragraph 7
Paragraph 7 incorporates into the Convention the rule of
Code section 864(c)(6). Like the Code section on which it is
based, paragraph 7 provides that any income or gain
attributable to a permanent establishment during its existence
is taxable in the Contracting State where the permanent
establishment is situated, even if the payment of that income
or gain is deferred until after the permanent establishment
ceases to exist. This rule applies with respect to paragraphs 1
and 2 of Article 7 (Business Profits),
paragraph 8 of Article 10 (Dividends), paragraph 4 of
Article 11 (Interest), paragraph 3 of Articles 12 (Royalties)
and 13 (Gains) and paragraph 2 of Article 20 (Other Income).
The effect of this rule can be illustrated by the following
example. Assume a company that is a resident of Belgium and
that maintains a permanent establishment in the United States
winds up the permanent establishment's business and sells the
permanent establishment's inventory and assets to a U.S. buyer
at the end of year 1 in exchange for an interest-bearing
installment obligation payable in full at the end of year 3.
Despite the fact that the company has no permanent
establishment in the United States in year 3, the United States
may tax the deferred income payment recognized by the company
in year 3.
Relationship to Other Articles
This Article is subject to the saving clause of paragraph 4
of Article 1 (General Scope) of the Convention. Thus, if a
citizen of the United States who is a resident of Belgium under
the treaty derives business profits from the United States that
are not attributable to a permanent establishment in the United
States, the United States may, subject to the special foreign
tax credit rules of paragraph 4 of Article 22 (Relief from
Double Taxation), tax those profits, notwithstanding the
provision of paragraph 1 of this Article which would exempt the
income from U.S. tax.
The benefits of this Article are also subject to Article 21
(Limitation on Benefits). Thus, an enterprise of Belgium and
that derives income effectively connected with a U.S. trade or
business may not claim the benefits of Article 7 unless the
resident carrying on the enterprise qualifies for such benefits
under Article 21.
ARTICLE 8 (SHIPPING AND AIR TRANSPORT)
This Article governs the taxation of profits from the
operation of ships and aircraft in international traffic. The
term ``international traffic'' is defined in subparagraph 1(f)
of Article 3 (General Definitions). The provisions of Article 8
are in all material respects identical to the provisions of
Article 8 of the U.S. Model.
Paragraph 1
Paragraph 1 provides that profits derived by an enterprise
of a Contracting State from the operation in international
traffic of ships or aircraft are taxable only in that
Contracting State. Because paragraph 6 of Article 7 (Business
Profits) defers to Article 8 with respect to shipping income,
such income derived by a resident of one of the Contracting
States may not be taxed in the other State even if the
enterprise has a permanent establishment in that other State.
Thus, if a U.S. airline has a ticket office in Belgium, Belgium
may not tax the airline's profits attributable to that office
under Article 7. Since entities engaged in international
transportation activities normally will have many permanent
establishments in a number of countries, the rule avoids
difficulties that would be encountered in attributing income to
multiple permanent establishments if the income were covered by
Article 7 (Business Profits).
Paragraph 2
The income from the operation of ships or aircraft in
international traffic that is exempt from tax under paragraph 1
is defined in paragraph 2.
In addition to income derived directly from the operation
of ships and aircraft in international traffic, this definition
also includes certain items of rental income. First, income of
an enterprise of a Contracting State from the rental of ships
or aircraft on a full basis (i.e., with crew) is income of the
lessor from the operation of ships and aircraft in
international traffic and, therefore, is exempt from tax in the
other Contracting State under paragraph 1. Also, paragraph 2
encompasses income from the lease of ships or aircraft on a
bareboat basis (i.e., without crew), either when the income is
incidental to other income of the lessor from the operation of
ships or aircraft in international traffic, or when the ships
or aircraft are operated in international traffic by the
lessee. If neither of those two conditions apply, income from
the bareboat rentals would constitute business profits. The
coverage of Article 8 is therefore broader than that of Article
8 of the OECD Model, which covers bareboat leasing only when it
is incidental to other income of the lessor from the operation
of ships or aircraft in international traffic.
Paragraph 2 also clarifies, consistent with the Commentary
to Article 8 of the OECD Model, that income earned by an
enterprise from the inland transport of property or passengers
within either Contracting State falls within Article 8 if the
transport is undertaken as part of the international transport
of property or passengers by the enterprise. Thus, if a U.S.
shipping company contracts to carry property from Belgium to a
U.S. city and, as part of that contract, it transports the
property by truck from its point of origin to an airport in
Belgium (or it contracts with a trucking company to carry the
property to the airport) the income earned by the U.S. shipping
company from the overland leg of the journey would be taxable
only in the United States. Similarly, Article 8 also would
apply to all of the income derived from a contract for the
international transport of goods, even if the goods were
transported to the port by a lighter, not by the vessel that
carried the goods in international waters.
Finally, certain non-transport activities that are an
integral part of the services performed by a transport company,
or are ancillary to the enterprise's operation of ships or
aircraft in international traffic, are understood to be covered
in paragraph 1, though they are not specified in paragraph 2.
These include, for example, the provision of goods and services
by engineers, ground and equipment maintenance and staff, cargo
handlers, catering staff and customer services personnel. Where
the enterprise provides such goods to, or performs services
for, other enterprises and such activities are directly
connected with or ancillary to the enterprise's operation of
ships or aircraft in international traffic, the profits from
the provision of such goods and services to other enterprises
will fall under this paragraph.
For example, enterprises engaged in the operation of ships
or aircraft in international traffic may enter into pooling
arrangements for the purposes of reducing the costs of
maintaining facilities needed for the operation of their ships
or aircraft in other countries. For instance, where an airline
enterprise agrees (for example, under an International Airlines
Technical Pool agreement) to provide spare parts or maintenance
services to other airlines landing at a particular location
(which allows it to benefit from these services at other
locations), activities carried on pursuant to that agreement
will be ancillary to the operation of aircraft in international
traffic by the enterprise.
Also, advertising that the enterprise may do for other
enterprises in magazines offered aboard ships or aircraft that
it operates in international traffic or at its business
locations, such as ticket offices, is ancillary to its
operation of these ships or aircraft. Profits generated by such
advertising fall within this paragraph. Income earned by
concessionaires, however, is not covered by Article 8. These
interpretations of paragraph 1 also are consistent with the
Commentary to Article 8 of the OECD Model.
Paragraph 3
Under this paragraph, profits of an enterprise of a
Contracting State from the use, maintenance or rental of
containers (including equipment for their transport) are exempt
from tax in the other Contracting State, unless those
containers are used for transport solely in the other
Contracting State. This result obtains under paragraph 3
regardless of whether the recipient of the income is engaged in
the operation of ships or aircraft in international traffic,
and regardless of whether the enterprise has a permanent
establishment in the other Contracting State. Only income from
the use, maintenance or rental of containers (including
equipment for their transport) that is incidental to other
income from international traffic is covered by Article 8 of
the OECD Model.
Paragraph 4
This paragraph clarifies that the provisions of paragraphs
1 and 3 also apply to profits derived by an enterprise of a
Contracting State from participation in a pool, joint business
or international operating agency. This refers to various
arrangements for international cooperation by carriers in
shipping and air transport. For example, airlines from two
countries may agree to share the transport of passengers
between the two countries. They each will fly the same number
of flights per week and share the revenues from that route
equally, regardless of the number of passengers that each
airline actually transports. Paragraph 4 makes clear that with
respect to each carrier the income dealt with in the Article is
that carrier's share of the total transport, not the income
derived from the passengers actually carried by the airline.
This paragraph corresponds to paragraph 4 of Article 8 of the
OECD Model.
Relationship to Other Articles
The taxation of gains from the alienation of ships,
aircraft or containers is not dealt with in this Article but in
paragraphs 4 and 5 of Article 13 (Gains).
As with other benefits of the Convention, the benefit of
exclusive residence country taxation under Article 8 is
available to an enterprise only if it is entitled to benefits
under Article 21 (Limitation on Benefits).
This Article also is subject to the saving clause of
paragraph 4 of Article 1 (General Scope) of the Convention.
Thus, if a citizen of the United States who is a resident of
Belgium derives profits from the operation of ships or aircraft
in international traffic, notwithstanding the exclusive
residence country taxation in paragraph 1 of Article 8, the
United States may, subject to the special foreign tax credit
rules of paragraph 4 of Article 22 (Relief from Double
Taxation), tax those profits as part of the worldwide income of
the citizen. (This is an unlikely situation, however, because
non-tax considerations (e.g., insurance) generally result in
shipping activities being carried on in corporate form.)
ARTICLE 9 (ASSOCIATED ENTERPRISES)
This Article incorporates in the Convention the arm's-
length principle reflected in the U.S. domestic transfer
pricing provisions, particularly Code section 482. It provides
that when related enterprises engage in a transaction on terms
that are not arm's-length, the Contracting States may make
appropriate adjustments to the taxable income and tax liability
of such related enterprises to reflect what the income and tax
of these enterprises with respect to the transaction would have
been had there been an arm's-length relationship between them.
The provisions of Article 9 are identical to the provisions of
Article 9 in the U.S. Model.
Paragraph 1
This paragraph is essentially the same as its counterpart
in the OECD Model. It addresses the situation where an
enterprise of a Contracting State is related to an enterprise
of the other Contracting State, and there are arrangements or
conditions imposed between the enterprises in their commercial
or financial relations that are different from those that would
have existed in the absence of the relationship. Under these
circumstances, the Contracting States may adjust the income (or
loss) of the enterprise to reflect what it would have been in
the absence of such a relationship.
The paragraph identifies the relationships between
enterprises that serve as a prerequisite to application of the
Article. As the Commentary to the OECD Model makes clear, the
necessary element in these relationships is effective control,
which is also the standard for purposes of section 482. Thus,
the Article applies if an enterprise of one State participates
directly or indirectly in the management, control, or capital
of the enterprise of the other State. Also, the Article applies
if any third person or persons participate directly or
indirectly in the management, control, or capital of
enterprises of different States. For this purpose, all types of
control are included, i.e., whether or not legally enforceable
and however exercised or exercisable.
The fact that a transaction is entered into between such
related enterprises does not, in and of itself, mean that a
Contracting State may adjust the income (or loss) of one or
both of the enterprises under the provisions of this Article.
If the conditions of the transaction are consistent with those
that would be made between independent persons, the income
arising from that transaction should not be subject to
adjustment under this Article.
Similarly, the fact that associated enterprises may have
concluded arrangements, such as cost sharing arrangements or
general services agreements, is not in itself an indication
that the two enterprises have entered into a non-arm's-length
transaction that should give rise to an adjustment under
paragraph 1. Both related and unrelated parties enter into such
arrangements (e.g., joint venturers may share some development
costs). As with any other kind of transaction, when related
parties enter into an arrangement, the specific arrangement
must be examined to see whether or not it meets the arm's-
length standard. In the event that it does not, an appropriate
adjustment may be made, which may include modifying the terms
of the agreement or re-characterizing the transaction to
reflect its substance.
It is understood that the ``commensurate with income''
standard for determining appropriate transfer prices for
intangibles, added to Code section 482 by the Tax Reform Act of
1986, was designed to operate consistently with the arm's-
length standard. The implementation of this standard in the
section 482 regulations is in accordance with the general
principles of paragraph 1 of Article 9 of the Convention, as
interpreted by the OECD Transfer Pricing Guidelines.
This Article also permits tax authorities to deal with thin
capitalization issues. They may, in the context of Article 9,
scrutinize more than the rate of interest charged on a loan
between related persons. They also may examine the capital
structure of an enterprise, whether a payment in respect of
that loan should be treated as interest, and, if it is treated
as interest, under what circumstances interest deductions
should be allowed to the payor. Paragraph 3 of the Commentary
to Article 9 of the OECD Model, together with the U.S.
observation set forth in paragraph 15, sets forth a similar
understanding of the scope of Article 9 in the context of thin
capitalization.
Paragraph 2
When a Contracting State has made an adjustment that is
consistent with the provisions of paragraph 1, and the other
Contracting State agrees that the adjustment was appropriate to
reflect arm's-length conditions, that other Contracting State
is obligated to make a correlative adjustment (sometimes
referred to as a ``corresponding adjustment'') to the tax
liability of the related person in that other Contracting
State. Although the OECD Model does not specify that the other
Contracting State must agree with the initial adjustment before
it is obligated to make the correlative adjustment, the
Commentary makes clear that the paragraph is to be read that
way.
As explained in the Commentary to Article 9 of the OECD
Model, Article 9 leaves the treatment of ``secondary
adjustments'' to the laws of the Contracting States. When an
adjustment under Article 9 has been made, one of the parties
will have in its possession funds that it would not have had at
arm's length. The question arises as to how to treat these
funds. In the United States the general practice is to treat
such funds as a dividend or contribution to capital, depending
on the relationship between the parties. Under certain
circumstances, the parties may be permitted to restore the
funds to the party that would have the funds had the
transactions been entered into on arm's length terms, and to
establish an account payable pending restoration of the funds.
See Rev. Proc. 99-32, 1999-2 C.B. 296.
The Contracting State making a secondary adjustment will
take the other provisions of the Convention, where relevant,
into account. For example, if the effect of a secondary
adjustment is to treat a U.S. corporation as having made a
distribution of profits to its parent corporation in Belgium,
the provisions of Article 10 (Dividends) will apply. Also, if
under Article 22 Belgium generally gives a credit for taxes
paid with respect to such dividends, it would also be required
to do so in this case.
The competent authorities are authorized by paragraph 3 of
Article 24 (Mutual Agreement Procedure) to consult, if
necessary, to resolve any differences in the application of
these provisions. For example, there may be a disagreement over
whether an adjustment made by a Contracting State under
paragraph 1 was appropriate.
If a correlative adjustment is made under paragraph 2, it
is to be implemented, pursuant to paragraph 2 of Article 24
(Mutual Agreement Procedure), notwithstanding any time limits
or other procedural limitations in the law of the Contacting
State making the adjustment. If a taxpayer has entered a
closing agreement (or other written settlement) with the United
States prior to bringing a case to the competent authorities,
the U.S. competent authority will endeavor only to obtain a
correlative adjustment from Belgium. See, Rev. Proc. 2006-54,
2006-49 I.R.B. 1035, Section 7.05.
Relationship to Other Articles
The saving clause of paragraph 4 of Article 1 (General
Scope) does not apply to paragraph 2 of Article 9 by virtue of
an exception to the saving clause in paragraph 5(a) of Article
1. Thus, even if the statute of limitations has run, a refund
of tax can be made in order to implement a correlative
adjustment. Statutory or procedural limitations, however,
cannot be overridden to impose additional tax, because
paragraph 2 of Article 1 provides that the Convention cannot
restrict any statutory benefit.
ARTICLE 10 (DIVIDENDS)
Article 10 provides rules for the taxation of dividends
paid by a company that is a resident of one Contracting State
to a beneficial owner that is a resident of the other
Contracting State. The article provides for full residence
country taxation of such dividends and a limited source-State
right to tax. Article 10 also provides rules for the imposition
of a tax on branch profits by the State of source.
Paragraph 1
The right of a shareholder's country of residence to tax
dividends arising in the source country is preserved by
paragraph 1, which permits a Contracting State to tax its
residents on dividends paid to them by a company that is a
resident of the other Contracting State. For dividends from any
other source paid to a resident, Article 20 (Other Income)
grants the residence country exclusive taxing jurisdiction
(other than for dividends attributable to a permanent
establishment in the other State).
Paragraph 2
The State of source also may tax dividends beneficially
owned by a resident of the other State, subject to the
limitations of paragraphs 2 through 4. Paragraph 2 generally
limits the rate of withholding tax in the State of source on
dividends paid by a company resident in that State to 15
percent of the gross amount of the dividend. If, however, the
beneficial owner of the dividend is a company resident in the
other State and owns directly shares representing at least 10
percent of the voting power of the company paying the dividend,
then the rate of withholding tax in the State of source is
limited to 5 percent of the gross amount of the dividend.
Shares are considered voting shares if they provide the power
to elect, appoint or replace any person vested with the powers
ordinarily exercised by the board of directors of a U.S.
corporation.
The benefits of paragraph 2 may be granted at the time of
payment by means of reduced rate of withholding tax at source.
It also is consistent with the paragraph for tax to be withheld
at the time of payment at full statutory rates, and the treaty
benefit to be granted by means of a subsequent refund so long
as such procedures are applied in a reasonable manner.
The determination of whether the ownership threshold for
subparagraph a) of paragraph 2 is met for purposes of the 5
percent maximum rate of withholding tax is made on the date on
which entitlement to the dividend is determined. Thus, in the
case of a dividend from a U.S. company, the determination of
whether the ownership threshold is met generally would be made
on the dividend record date.
The term ``beneficial owner'' is not defined in the
Convention, and is, therefore, defined as under the internal
law of the country imposing tax (i.e., the source country). The
beneficial owner of the dividend for purposes of Article 10 is
the person to which the dividend income is attributable for tax
purposes under the laws of the source State. Thus, if a
dividend paid by a corporation that is a resident of one of the
States (as determined under Article 4 (Residence)) is received
by a nominee or agent that is a resident of the other State on
behalf of a person that is not a resident of that other State,
the dividend is not entitled to the benefits of this Article.
However, a dividend received by a nominee on behalf of a
resident of that other State would be entitled to benefits.
These interpretations are confirmed by paragraph 12 of the
Commentary to Article 10 of the OECD Model.
Companies holding shares through fiscally transparent
entities such as partnerships are considered for purposes of
this paragraph to hold their proportionate interest in the
shares held by the intermediate entity. As a result, companies
holding shares through such entities may be able to claim the
benefits of subparagraph (a) under certain circumstances. The
lower rate applies when the company's proportionate share of
the shares held by the intermediate entity meets the 10 percent
threshold , and the company meets the requirements of Article
1(6) (i.e., the company's country of residence treats the
intermediate entity as fiscally transparent) with respect to
the dividend. Whether this ownership threshold is satisfied may
be difficult to determine and often will require an analysis of
the partnership or trust agreement.
Of note is the interaction of paragraph 2 and paragraph 4,
with respect to dividends paid by a Belgian company. Under
paragraph 2, the withholding tax imposed in Belgium may not
exceed 5 percent if the beneficial owner of the dividend is a
company resident in the United States and that U.S. resident
company owns directly at least 10 percent of the voting stock
of the Belgian company. However, under paragraph 4, no
withholding may be imposed on the dividend payment if the U.S.
resident company has owned directly at least 10 percent of the
Belgian company for the 12 month period ending on the date the
dividend is declared. Thus, although the ownership threshold is
the same under subparagraph 2 a) and paragraph 4, there is an
additional requirement in paragraph 4 that the U.S. resident
company have held the stock for a 12 month period ending on the
date the dividend is declared.
Paragraph 3
Paragraph 3 provides exclusive residence-country taxation
(i.e., an elimination of withholding tax) with respect to
certain dividends distributed by a company that is a resident
of the United States to a resident of Belgium. As described
further below, this elimination of withholding tax is available
with respect to certain inter-company dividends and with
respect to pension funds.
Subparagraph (a) of paragraph 3 provides for the
elimination of withholding tax on dividends beneficially owned
by a Belgian company that has owned, directly or indirectly, 80
percent or more of the voting power of the U.S. company paying
the dividend for the 12-month period ending on the date
entitlement to the dividend is determined.
Eligibility for the elimination of withholding tax provided
by subparagraph (a) is subject to additional restrictions based
on, but supplementing, the rules of Article 21 (Limitation on
Benefits). Accordingly, a company that meets the holding
requirements described above will qualify for the benefits of
paragraph 3 only if it also: (1) meets the ``publicly traded''
test of subparagraph 2(c) of Article 21 (Limitation on
Benefits), (2) meets the ``ownership-base erosion'' and
``active trade or business'' tests described in subparagraph
2(e) and paragraph 4 of Article 21 (Limitation on Benefits),
(3) meets the ``derivative benefits'' test of paragraph 3 of
Article 21 (Limitation on Benefits), or (4) is granted the
benefits of subparagraph 3(a) of Article 10 by the competent
authority of the source State pursuant to paragraph 7 of
Article 21 (Limitation on Benefits).
These restrictions are necessary because of the increased
pressure on the Limitation on Benefits tests resulting from the
fact that the United States has relatively few treaties that
provide for such elimination of withholding tax on inter-
company dividends. The additional restrictions are intended to
prevent companies from re-organizing in order to become
eligible for the elimination of withholding tax in
circumstances where the Limitation on Benefits provision does
not provide sufficient protection against treaty-shopping.
For example, assume that ThirdCo is a company resident in a
third country that does not have a tax treaty with the United
States providing for the elimination of withholding tax on
inter-company dividends. ThirdCo owns directly 100 percent of
the issued and outstanding voting stock of USCo, a U.S.
company, and of BelCo, a Belgian company. BelCo is a
substantial company that manufactures widgets; USCo distributes
those widgets in the United States. If ThirdCo contributes to
BelCo all the stock of USCo, dividends paid by USCo to BelCo
would qualify for treaty benefits under the active trade or
business test of paragraph 4 of Article 21. However, allowing
ThirdCo to qualify for the elimination of withholding tax,
which is not available to it under the third state's treaty
with the United States (if any), would encourage treaty-
shopping.
In order to prevent this type of treaty-shopping, paragraph
3 requires BelCo to meet the ownership-base erosion
requirements of subparagraph 2(e) of Article 21 in addition to
the active trade or business test of paragraph 4 of Article 16.
Thus, BelCo would not qualify for the exemption from
withholding tax unless (i) on at least half the days of the
taxable year, at least 50 percent of each class of its shares
was owned by persons that are residents of Belgium and eligible
for treaty benefits under certain specified tests and (ii) less
than 50 percent of BelCo's gross income is paid in deductible
payments to persons that are not residents of either
Contracting State eligible for benefits under those specified
tests. Because BelCo is wholly owned by a third country
resident, BelCo could not qualify for the elimination of
withholding tax on dividends from USCo under the ownership-base
erosion test and the active trade or business test.
Consequently, BelCo would need to qualify under another test or
obtain discretionary relief from the competent authority under
Article 21(7). For purposes of Article 10(3)(a)(ii), it is not
sufficient for a company to qualify for treaty benefits
generally under the active trade or business test or the
ownership-base erosion test unless it qualifies for treaty
benefits under both.
Alternatively, companies that are publicly traded or
subsidiaries of publicly-traded companies will generally
qualify for the elimination of withholding tax. Thus, a company
that is a resident of Belgium and that meets the requirements
of Article 21(2)(c)(i) or (ii) will be entitled to the
elimination of withholding tax, subject to the 12-month holding
period requirement of Article 10(3)(a).
In addition, under Article 10(3)(a)(iii), a company that is
a resident of Belgium may also qualify for the elimination of
withholding tax on dividends if it satisfies the derivative
benefits test of paragraph 3 of Article 21. Thus, a Belgian
company that owns all of the stock of a U.S. corporation may
qualify for the elimination of withholding tax if it is wholly-
owned, for example, by a U.K., Dutch, Swedish, or Mexican
publicly-traded company and the other requirements of the
derivative benefits test are met. At this time, ownership by
companies that are residents of other European Union, European
Economic Area or North American Free Trade Agreement countries
would not qualify the Belgian company for benefits under this
provision, as the United States does not have treaties that
eliminate the withholding tax on inter-company dividends with
any other of those countries. If the United States were to
enter into such treaties with more of those countries,
residents of those countries could then qualify as equivalent
beneficiaries for purposes of this provision.
A company also may qualify for the elimination of
withholding tax pursuant to Article 10(3)(a)(iii) if it is
owned by seven or fewer U.S. or Belgian residents who qualify
as an ``equivalent beneficiary'' and meet the other
requirements of the derivative benefits provision. This rule
may apply, for example, to certain Belgian corporate joint
venture vehicles that are closely-held by a few Belgian
resident individuals.
If a company does not qualify for the elimination of
withholding tax under any of the foregoing objective tests, it
may request a determination from the relevant competent
authority pursuant to paragraph 7 of Article 21. Benefits will
be granted with respect to an item of income if the competent
authority of the Contracting State in which the income arises
determines that the establishment, acquisition or maintenance
of such resident and the conduct of its operations did not have
as one of its principal purposes the obtaining of benefits
under the Convention.
Subparagraph (b) of paragraph 3 of Article 10 of the
Convention provides that dividends beneficially owned by a
pension fund (as defined in subparagraph (k) of paragraph 1 of
Article 3) may not be taxed in the Contracting State of which
the company paying the dividends is a resident, unless such
dividends are derived from the carrying on of a business,
directly by the pension fund or indirectly through an
associated enterprise.
This rule is necessary because pension funds normally do
not pay tax (either through a general exemption or because
reserves for future pension liabilities effectively offset all
of the fund's income), and therefore cannot benefit from a
foreign tax credit. Moreover, distributions from a pension fund
generally do not maintain the character of the underlying
income, so the beneficiaries of the pension are not in a
position to claim a foreign tax credit when they finally
receive the pension, in many cases years after the withholding
tax has been paid. Accordingly, in the absence of this rule,
the dividends would almost certainly be subject to unrelieved
double taxation.
Paragraph 4
Paragraph 4 provides for exclusive residence country
taxation on certain dividends paid by a company that is a
resident of Belgium to a company that is resident in the United
States.
Subparagraph a) provides that a where the company paying
the dividend is a resident of Belgium, and the beneficial owner
of such dividend is a company that is a resident in the United
States, no withholding tax will be collected in Belgium,
provided the United States company has owned directly shares
representing at least 10 percent of the capital of the Belgian
company for a 12-month period ending on the date the dividend
is declared.
Subparagraph b) provides a rule that corresponds to
subparagraph b) of paragraph 3 of this Article. Accordingly,
dividends paid by a company resident in Belgium to a pension
fund that is a resident of the United States may not be taxed
in Belgium, unless such dividends are derived from the carrying
on of a business, directly by the pension fund or indirectly
through an associated enterprise.
Paragraph 5
Paragraph 5 provides that paragraphs 2 through 4 do not
affect the taxation of the profits out of which the dividends
are paid. The taxation by a Contracting State of the income of
its resident companies is governed by the internal law of the
Contracting State, subject to the provisions of paragraph 4 of
Article 23 (Non-Discrimination).
Paragraph 6
Article 10 generally applies to distributions made by a RIC
or a REIT. However, distributions made by a REIT or certain
RICs that are attributable to gains derived from the alienation
of U.S. real property interests and treated as gain recognized
under section 897(h)( 1) are taxable under paragraph 1 of
Article 13 instead of Article 10. In the case of RIC or REIT
distributions to which Article 10 applies, paragraph 6 imposes
limitations on the rate reductions provided by paragraphs 2 and
3.
The first sentence of subparagraph 6(a) provides that
dividends paid by a RIC or REIT are not eligible for the 5
percent rate of withholding tax of subparagraph 2(a) or the
elimination of source country withholding tax under
subparagraph 3(a).
The second sentence of subparagraph 6(a) provides that the
15 percent maximum rate of withholding tax of subparagraph 2(b)
applies to dividends paid by RICs and that the elimination of
source-country withholding tax of subparagraph 3(b) applies to
dividends paid by RICs and beneficially owned by a pension
fund.
The third sentence of subparagraph 6(a) provides that the
15 percent rate under subparagraph 2(b) for dividends paid by a
REIT and the exemption from source State withholding under
subparagraph 3(b) for dividends paid by REITs and beneficially
owned by a pension fund, apply only if one of the three
following conditions is met. First, the beneficial owner of the
dividend is an individual or a pension fund, in either case
holding an interest of not more than 10 percent in the REIT.
Second, the dividend is paid with respect to a class of stock
that is publicly traded and the beneficial owner of the
dividend is a person holding an interest of not more than 5
percent of any class of the REIT's shares. Third, the
beneficial owner of the dividend holds an interest in the REIT
of not more than 10 percent and the REIT is ``diversified.''
Subparagraph (b) provides a definition of the term
``diversified,'' which is necessary because the term is not
defined in the Code. A REIT is diversified if the gross value
of no single interest in real property held by the REIT exceeds
10 percent of the gross value of the REIT's total interest in
real property. Foreclosure property is not considered an
interest in real property, and a REIT holding a partnership
interest is treated as owning its proportionate share of any
interest in real property held by the partnership.
The restrictions set out above are intended to prevent the
use of these entities to gain inappropriate U.S. tax benefits.
For example, a company resident in Belgium that wishes to hold
a diversified portfolio of U.S. corporate shares could hold the
portfolio directly and would bear a U.S. withholding tax of 15
percent on all of the dividends that it receives.
Alternatively, it could hold the same diversified portfolio by
purchasing 10 percent or more of the interests in a RIC. If the
RIC is a pure conduit, there may be no U.S. tax cost to
interposing the RIC in the chain of ownership. Absent the
special rule in paragraph 6, such use of the RIC could
transform portfolio dividends, taxable in the United States
under the Convention at a 15 percent maximum rate of
withholding tax, into direct investment dividends taxable at a
5 percent maximum rate of withholding tax or eligible for the
elimination of source-country withholding tax.
Similarly, a resident of Belgium directly holding U.S. real
property would pay U.S. tax on rental income at either a 30
percent rate of withholding tax on the gross income or at
graduated rates on the net income. As in the preceding example,
by placing the real property in a REIT, the investor could,
absent a special rule, transform rental income into dividend
income from the REIT, taxable at the rates provided in Article
10, significantly reducing the U.S. tax that otherwise would be
imposed. Paragraph 6 prevents this result and thereby avoids a
disparity between the taxation of direct real estate
investments and real estate investments made through REIT
conduits. In the cases in which paragraph 6 allows a dividend
from a REIT to be eligible for the 15 percent rate of
withholding tax, the holding in the REIT is not considered the
equivalent of a direct holding in the underlying real property.
Paragraph 7
Paragraph 7 defines the term dividends broadly and
flexibly. The definition is intended to cover all arrangements
that yield a return on an equity investment in a corporation as
determined under the tax law of the State of source, as well as
arrangements that might be developed in the future.
The term includes income from shares, or other corporate
rights that are not treated as debt under the law of the source
State, that participate in the profits of the company. The term
also includes income that is subjected to the same tax
treatment as income from shares by the law of the State of
source. Thus, a constructive dividend that results from a non-
arm's length transaction between a corporation and a related
party is a dividend. In the case of the United States the term
dividend includes amounts treated as a dividend under U.S. law
upon the sale or redemption of shares or upon a transfer of
shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-2
C.B. 69 (sale of foreign subsidiary's stock to U.S. sister
company is a deemed dividend to extent of the subsidiary's and
sister company's earnings and profits). Further, a distribution
from a U.S. publicly traded limited partnership, which is taxed
as a corporation under U.S. law, is a dividend for purposes of
Article 10. However, a distribution by a limited liability
company is not taxable by the United States under Article 10,
provided the limited liability company is not characterized as
an association taxable as a corporation under U.S. law.
Finally, a payment denominated as interest that is made by
a thinly capitalized corporation may be treated as a dividend
to the extent that the debt is recharacterized as equity under
the laws of the source State.
Paragraph 8
Paragraph 8 excludes from the general source country
limitations under paragraphs 1 through 6 dividends that are
business profits attributable to a permanent establishment in
the source country. In such case, the rules of Article 7
(Business Profits) shall apply. Accordingly, the dividends will
be taxed on a net basis using the rates and rules of taxation
generally applicable to residents of the State in which the
permanent establishment is located, as such rules may be
modified by the Convention. An example of dividends that are
business profits attributable to a permanent establishment
would be dividends derived by a dealer in stock or securities
from stock or securities that the dealer held for sale to
customers.
Paragraph 9
The right of a Contracting State to tax dividends paid by a
company that is a resident of the other Contracting State is
restricted by paragraph 9 to cases in which the dividends are
paid to a resident of that Contracting State or are
attributable to a permanent establishment in that Contracting
State. Thus, a Contracting State may not impose a ``secondary''
withholding tax on dividends paid by a nonresident company out
of earnings and profits from that Contracting State. In the
case of the United States, the secondary withholding tax was
eliminated for payments made after December 31, 2004 in the
American Jobs Creation Act of 2004.
The paragraph also restricts the right of a Contracting
State to impose corporate level taxes on undistributed profits,
other than a branch profits tax. The paragraph does not
restrict a State's right to tax its resident shareholders on
undistributed earnings of a corporation resident in the other
State. Thus, the authority of the United States to impose taxes
on subpart F income and on earnings deemed invested in U.S.
property, and its tax on income of a passive foreign investment
company that is a qualified electing fund is in no way
restricted by this provision.
Paragraph 10
Paragraph 10 permits a Contracting State to impose a branch
profits tax on a company resident in the other Contracting
State. The tax is in addition to other taxes permitted by the
Convention. The term ``company'' is defined in subparagraph
1(b) of Article 3 (General Definitions).
A Contracting State may impose a branch profits tax on a
company if the company has income attributable to a permanent
establishment in that Contracting State, derives income from
real property in that Contracting State that is taxed on a net
basis under Article 6 (Income from Real Property), or realizes
gains taxable in that State under paragraph 1 of Article 13
(Gains). The imposition of such tax is limited, however, to the
portion of the aforementioned items of income that represents,
in the case of the United States, the amount of such income
that is the ``dividend equivalent amount,'' and, in the case of
Belgium, an amount that is analogous to the dividend equivalent
amount. This is consistent with the relevant rules under the
U.S. branch profits tax, and the term dividend equivalent
amount is defined under U.S. law. Section 884 defines the
dividend equivalent amount as an amount for a particular year
that is equivalent to the income described above that is
included in the corporation's effectively connected earnings
and profits for that year, after payment of the corporate tax
under Articles 6 (Income from Real Property), 7 (Business
Profits) or 13 (Gains), reduced for any increase in the
branch's U.S. net equity during the year or increased for any
reduction in its U.S. net equity during the year. U.S. net
equity is U.S. assets less U.S. liabilities. See Treas. Reg.
section 1.884-1. The dividend equivalent amount for any year
approximates the dividend that a U.S. branch office would have
paid during the year if the branch had been operated as a
separate U.S. subsidiary company.
As discussed in the Technical Explanations to Articles 1(2)
and 7(2), consistency principles require that a taxpayer may
not mix and match the rules of the Code and the Convention in
an inconsistent manner. In the context of the branch profits
tax, the consistency requirement means that an enterprise that
uses the principles of Article 7 to determine its net taxable
income also must use those principles in determining the
dividend equivalent amount. Similarly, an enterprise that uses
U.S. domestic law to determine its net taxable income must also
use U.S. domestic law in complying with the branch profits tax.
As in the case of Article 7, if an enterprise switches between
domestic law and treaty principles from year to year, it will
need to make appropriate adjustments or recapture amounts that
otherwise might go untaxed.
Paragraph 11
Paragraph 11 provides that the branch profits tax shall not
be imposed at a rate exceeding the direct investment dividend
withholding rate of five percent.
The branch profits tax will not be imposed at all, however,
if certain requirements are met. In general, these requirements
provide rules for a branch that parallel the rules for when a
dividend paid by a subsidiary will be subject to exclusive
residence-country taxation (i.e., the elimination of source-
country withholding tax). Accordingly, the branch profits tax
may not be imposed in the case of a company that (1) meets the
``publicly traded'' test or subsidiary of a publicly traded
company under subparagraph 2(c) of Article 21 (Limitation on
Benefits), (2) meets the ``ownership-base erosion'' and
``active trade or business'' tests described in subparagraph
2(e) and paragraph 4 of Article 21, (3) meets the ``derivative
benefits'' test described in paragraph 3 of Article 21, or (4)
is granted such benefit with respect to the branch profits tax
by the relevant competent authority pursuant to paragraph 7 of
Article 21.
Thus, for example, if a Belgian company would be subject to
the branch profits tax with respect to profits attributable to
a U.S. branch and not reinvested in that branch, paragraph 11
may apply to eliminate the branch profits tax if the company
meets the ``publicly traded'' test, subsidiary of a publicly
traded company, the combined ``ownership-base erosion and
active trade or business'' test, or the ``derivative benefits''
test. If, by contrast, the Belgian company did not meet any of
those tests, but met the ownership-base erosion test (and thus
qualified for treaty benefits under subparagraph 2(a)), then
the branch profits tax would apply at a rate of 5 percent,
unless the Belgian company is granted benefits with respect to
the elimination of the branch profits tax by the U.S. competent
authority pursuant to paragraph 7 of Article 21.
Paragraph 12
Paragraph 12 contains two provisions that may operate to
terminate the zero rate of withholding tax that may apply for
dividends paid by a U.S. resident company under paragraph 3.
Subparagraph (a)(i) provides that paragraph 3 shall cease to be
effective for amounts paid or credited on or after January 1 of
the 6th year following the year in which the Convention enters
into force, unless by June 30 of the 5th year following entry
into force, the United States Secretary of the Treasury, based
on a report from the Commissioner of the Internal Revenue
Service, certifies to the Senate of the United States that
Belgium has satisfactorily complied with its obligations under
Article 25 (Exchange of Information and Administrative
Assistance).
Subparagraph (a)(ii) provides an additional method by which
the United States may terminate paragraph 3. This additional
method provides that the United States may terminate paragraph
3 at any time by providing written notice to Belgium, through
the diplomatic channel, on or before June 30 in any year. In
such a case, paragraph 3 shall cease to be effective for
amounts paid or credited on or after January 1 of the year next
following that in which such notice is given. Further,
subparagraph (a)(ii) provides that the United States will not
provide notice of termination under subparagraph (a)(ii) unless
it has determined that Belgium's actions with respect to
Article 24 (Mutual Agreement Procedure) and 25 have materially
altered the balance of benefits of the Convention.
Subparagraph b) provides that the United States and Belgian
competent authorities shall consult at least annually regarding
any issues that otherwise might trigger a termination under
subparagraph (a).
As discussed in Article 25 (Exchange of Information and
Administrative Assistance), if the provisions of this paragraph
are used to terminate paragraph 3 of Article 10, then Belgium
will be relieved of its obligations under paragraph 5 of
Article 25 to provide certain information, including bank
information.
Relationship to Other Articles
Notwithstanding the foregoing limitations on source country
taxation of dividends, the saving clause of paragraph 4 of
Article 1 (General Scope) permits the United States to tax
dividends received by its residents and citizens, subject to
the special foreign tax credit rules of paragraph 4 of Article
22 (Relief from Double Taxation), as if the Convention had not
come into effect.
The benefits of this Article are also subject to the
provisions of Article 21 (Limitation on Benefits). Thus, if a
resident of Belgium is the beneficial owner of dividends paid
by a U.S. corporation, the shareholder must qualify for treaty
benefits under at least one of the tests of Article 21 in order
to receive the benefits of this Article.
ARTICLE 11 (INTEREST)
Article 11 specifies the taxing jurisdictions over interest
income of the States of source and residence and defines the
terms necessary to apply the article.
Paragraph 1
Paragraph 1 generally grants to the State of residence the
exclusive right to tax interest beneficially owned by its
residents and arising in the other Contracting State.
The term ``beneficial owner'' is not defined in the
Convention, and is, therefore, defined under the internal law
of the State of source. The beneficial owner of the interest
for purposes of Article 11 is the person to which the income is
attributable under the laws of the source State. Thus, if
interest arising in a Contracting State is received by a
nominee or agent that is a resident of the other State on
behalf of a person that is not a resident of that other State,
the interest is not entitled to the benefits of Article 11.
However, interest received by a nominee on behalf of a resident
of that other State would be entitled to benefits. These
limitations are confirmed by paragraph 8 of the OECD Commentary
to Article 11.
Paragraph 2
Paragraph 2 provides anti-abuse exceptions to the source-
country exemption in paragraph 1 for two classes of interest
payments.
The first class of interest, dealt with in subparagraphs
(a) and (b) is so-called ``contingent interest.'' With respect
to interest arising in the United States, subparagraph (a)
refers to contingent interest of a type that does not qualify
as portfolio interest under U.S. domestic law. The cross-
reference to the U.S. definition of contingent interest, which
is found in section 871 (h)(4) of the Code, is intended to
ensure that the exceptions of section 871 (h)(4)(C) will be
applicable. With respect to Belgium, such interest is defined
in subparagraph (b) as any interest arising in Belgium that is
determined by reference to the receipts, sales, income, profits
or other cash flow of the debtor or a related person, to any
change in the value of any property of the debtor or a related
person or to any dividend, partnership distribution or similar
payment made by the debtor or a related person. Any such
interest may be taxed in Belgium according to the laws of
Belgium.
Under subparagraphs (a) or (b), the gross amount of the
``contingent interest'' may be taxed at a rate not exceeding 15
percent.
The second class of interest is dealt with in subparagraph
(c) of paragraph 2. This exception is consistent with the
policy of Code sections 860E(e) and 860G(b) that excess
inclusions with respect to a real estate mortgage investment
conduit (REMIC) should bear full U.S. tax in all cases. Without
a full tax at source foreign purchasers of residual interests
would have a competitive advantage over U.S. purchasers at the
time these interests are initially offered. Also, absent this
rule, the U.S. fisc would suffer a revenue loss with respect to
mortgages held in a REMIC because of opportunities for tax
avoidance created by differences in the timing of taxable and
economic income produced by these interests.
Paragraph 3
The term ``interest'' as used in Article 11 is defined in
paragraph 2 to include, inter alia, income from debt claims of
every kind, whether or not secured by a mortgage. Penalty
charges for late payment are excluded from the definition of
interest. Interest that is paid or accrued subject to a
contingency is within the ambit of Article 11. This includes
income from a debt obligation carrying the right to participate
in profits. The term does not, however, include amounts that
are treated as dividends under Article 10 (Dividends).
The term interest also includes amounts subject to the same
tax treatment as income from money lent under the law of the
State in which the income arises. Thus, for purposes of the
Convention, amounts that the United States will treat as
interest include (i) the difference between the issue price and
the stated redemption price at maturity of a debt instrument
(i.e., original issue discount (``OID'')), which may be wholly
or partially realized on the disposition of a debt instrument
(section 1273), (ii) amounts that are imputed interest on a
deferred sales contract (section 483), (iii) amounts treated as
interest or OID under the stripped bond rules (section 1286),
(iv) amounts treated as original issue discount under the
below-market interest rate rules (section 7872), (v) a
partner's distributive share of a partnership's interest income
(section 702), (vi) the interest portion of periodic payments
made under a ``finance lease'' or similar contractual
arrangement that in substance is a borrowing by the nominal
lessee to finance the acquisition of property, (vii) amounts
included in the income of a holder of a residual interest in a
REMIC (section 860E), because these amounts generally are
subject to the same taxation treatment as interest under U.S.
tax law, and (viii) interest with respect to notional principal
contracts that are re-characterized as loans because of a
``substantial non-periodic payment.''
Paragraph 4
Paragraph 4 provides an exception to the exclusive
residence taxation rule of paragraph 1 and the source-country
gross taxation rule of paragraph 2 in cases where the
beneficial owner of the interest carries on business through a
permanent establishment in the State of source and the interest
is attributable to that permanent establishment. In such cases
the provisions of Article 7 (Business Profits) will apply and
the State of source will retain the right to impose tax on such
interest income.
In the case of a permanent establishment that once existed
in the State but that no longer exists, the provisions of
paragraph 4 also apply, by virtue of paragraph 7 of Article 7
(Business Profits), to interest that would be attributable to
such a permanent establishment if it did exist in the year of
payment or accrual. See the Technical Explanation of paragraph
7 of Article 7.
Paragraph 5
Paragraph 5 establishes the source of interest for purposes
of Article 11. The paragraph is identical to paragraph 5 of
Article 11 of the OECD Model. Interest is considered to arise
in a Contracting State if paid by a resident of that State. As
an exception, interest that is borne by a permanent
establishment in one of the States is considered to arise in
that State. For this purpose, ``borne by'' means allowable as a
deduction in computing taxable income.
Paragraph 6
Paragraph 6 provides that in cases involving special
relationships between the payor and the beneficial owner of
interest income, Article 11 applies only to that portion of the
total interest payments that would have been made absent such
special relationships (i.e., an arm's-length interest payment).
Any excess amount of interest paid remains taxable according to
the laws of the United States and the other Contracting State,
respectively, with due regard to the other provisions of the
Convention. Thus, if the excess amount would be treated under
the source country's law as a distribution of profits by a
corporation, such amount could be taxed as a dividend rather
than as interest, but the tax would be subject, if appropriate,
to the rate limitations of paragraphs 2 through 4 of Article 10
(Dividends).
The term ``special relationship'' is not defined in the
Convention. In applying this paragraph the United States
considers the term to include the relationships described in
Article 9, which in turn corresponds to the definition of
``control'' for purposes of section 482 of the Code.
This paragraph does not address cases where, owing to a
special relationship between the payer and the beneficial owner
or between both of them and some other person, the amount of
the interest is less than an arm's-length amount. In those
cases a transaction may be characterized to reflect its
substance and interest may be imputed consistent with the
definition of interest in paragraph 3. The United States would
apply section 482 or 7872 of the Code to determine the amount
of imputed interest in those cases.
Relationship to Other Articles
Notwithstanding the foregoing limitations on source country
taxation of interest, the saving clause of paragraph 4 of
Article 1 permits the United States to tax its residents and
citizens, subject to the special foreign tax credit rules of
paragraph 4 of Article 22 (Relief from Double Taxation), as if
the Convention had not come into force.
As with other benefits of the Convention, the benefits of
exclusive residence State taxation of interest under paragraph
1 of Article 11, or limited source taxation under subparagraphs
2(a) and (b), are available to a resident of the other State
only if that resident is entitled to those benefits under the
provisions of Article 21 (Limitation on Benefits).
ARTICLE 12 (ROYALTIES)
Article 12 provides rules for the taxation of royalties
arising in one Contracting State and paid to a beneficial owner
that is a resident of the other Contracting State.
Paragraph 1
Paragraph 1 generally grants to the State of residence the
exclusive right to tax royalties beneficially owned by its
residents and arising in the other Contracting State.
The term ``beneficial owner'' is not defined in the
Convention, and is, therefore, defined under the internal law
of the State of source. The beneficial owner of the royalty for
purposes of Article 12 is the person to which the income is
attributable under the laws of the source State. Thus, if a
royalty arising in a Contracting State is received by a nominee
or agent that is a resident of the other State on behalf of a
person that is not a resident of that other State, the royalty
is not entitled to the benefits of Article 12.
However, a royalty received by a nominee on behalf of a
resident of that other State would be entitled to benefits.
These limitations are confirmed by paragraph 4 of the OECD
Commentary to Article 12.
Paragraph 2
Paragraph 2 defines the term ``royalties,'' as used in
Article 12, to include any consideration for the use of, or the
right to use, any copyright of literary, artistic, or
scientific work (including cinematographic films and software),
any patent, trademark, design or model, plan, secret formula or
process, or for information concerning industrial, commercial,
or scientific experience. The term ``royalties,'' however, does
not include income from leasing personal property.
The term royalties is defined in the Convention and
therefore is generally independent of domestic law. Certain
terms used in the definition are not defined in the Convention,
but these may be defined under domestic tax law. For example,
the term ``secret process or formulas'' is found in the Code,
and its meaning has been elaborated in the context of sections
351 and 367. See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 6-
45 1 1964-2 C.B. 133; Rev. Proc. 69-19, 1969-2 C.B. 301.
Consideration for the use or right to use cinematographic
films and software, or works on film, tape, or other means of
reproduction in radio or television broadcasting is included in
the definition of royalties. It is intended that, with respect
to any subsequent technological advances in the field of radio
or television broadcasting, consideration received for the use
of such technology will also be included in the definition of
royalties.
If an artist who is resident in one Contracting State
records a performance in the other Contracting State, retains a
copyrighted interest in a recording, and receives payments for
the right to use the recording based on the sale or public
playing of the recording, then the right of such other
Contracting State to tax those payments is governed by Article
12. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810
F.2d 209 (D.C. Cir. 1986). By contrast, if the artist earns in
the other Contracting State income covered by Article 16
(Entertainers and Sportsmen), for example, endorsement income
from the artist's attendance at a film screening, and if such
income also is attributable to one of the rights described in
Article 12 (e.g., the use of the artist's photograph in
promoting the screening), Article 16 and not Article 12 is
applicable to such income.
Computer software generally is protected by copyright laws
around the world. Under the Convention, consideration received
for the use, or the right to use, computer software is treated
either as royalties or as business profits, depending on the
facts and circumstances of the transaction giving rise to the
payment.
The primary factor in determining whether consideration
received for the use, or the right to use, computer software is
treated as royalties or as business profits is the nature of
the rights transferred. See Treas. Reg. section 1.861-18. The
fact that the transaction is characterized as a license for
copyright law purposes is not dispositive. For example, a
typical retail sale of ``shrink wrap'' software generally will
not be considered to give rise to royalty income, even though
for copyright law purposes it may be characterized as a
license.
The means by which the computer software is transferred are
not relevant for purposes of the analysis. Consequently, if
software is electronically transferred but the rights obtained
by the transferee are substantially equivalent to rights in a
program copy, the payment will be considered business profits.
The term ``industrial, commercial, or scientific
experience'' (sometimes referred to as ``know-how'') has the
meaning ascribed to it in paragraph 11 et seq. of the
Commentary to Article 12 of the OECD Model. Consistent with
that meaning, the term may include information that is
ancillary to a right otherwise giving rise to royalties, such
as a patent or secret process.
Know-how also may include, in limited cases, technical
information that is conveyed through technical or consultancy
services. It does not include general educational training of
the user's employees, nor does it include information developed
especially for the user, such as a technical plan or design
developed according to the user's specifications. Thus, as
provided in paragraph 11.4 of the Commentary to Article 12 of
the OECD Model, the term ``royalties'' does not include
payments received as consideration for after-sales service, for
services rendered by a seller to a purchaser under a warranty,
or for pure technical assistance.
The term ``royalties'' also does not include payments for
professional services (such as architectural, engineering,
legal, managerial, medical, software development services). For
example, income from the design of a refinery by an engineer
(even if the engineer employed know-how in the process of
rendering the design) or the production of a legal brief by a
lawyer is not income from the transfer of know-how taxable
under Article 12, but is income from services taxable under
either Article 7 (Business Profits) or Article 14 (Income from
Employment). Professional services may be embodied in property
that gives rise to royalties, however. Thus, if a professional
contracts to develop patentable property and retains rights in
the resulting property under the development contract,
subsequent license payments made for those rights would be
royalties.
Paragraph 3
This paragraph provides an exception to the rule of
paragraph 1 that gives the state of residence exclusive taxing
jurisdiction in cases where the beneficial owner of the
royalties carries on business through a permanent establishment
in the state of source and the royalties are attributable to
that permanent establishment. In such cases the provisions of
Article 7 (Business Profits) will apply.
The provisions of paragraph 7 of Article 7 (Business
Profits) apply to this paragraph. For example, royalty income
that is attributable to a permanent establishment and that
accrues during the existence of the permanent establishment,
but is received after the permanent establishment no longer
exists, remains taxable under the provisions of Article 7
(Business Profits), and not under this Article.
Paragraph 4
Paragraph 4 provides that in cases involving special
relationships between the payor and beneficial owner of
royalties, Article 12 applies only to the extent the royalties
would have been paid absent such special relationships (i.e.,
an arm's-length royalty). Any excess amount of royalties paid
remains taxable according to the laws of the two Contracting
States, with due regard to the other provisions of the
Convention. If, for example, the excess amount is treated as a
distribution of corporate profits under domestic law, such
excess amount will be taxed as a dividend rather than as
royalties, but the tax imposed on the dividend payment will be
subject to the rate limitations of Article 10 (Dividends).
Relationship to Other Articles
Notwithstanding the foregoing limitations on source country
taxation of royalties, the saving clause of paragraph 4 of
Article 1 (General Scope) permits the United States to tax its
residents and citizens, subject to the special foreign tax
credit rules of paragraph 4 of Article 22 (Relief from Double
Taxation), as if the Convention had not come into force.
As with other benefits of the Convention, the benefits of
exclusive residence State taxation of royalties under paragraph
1 of Article 12 are available to a resident of the other State
only if that resident is entitled to those benefits under
Article 21 (Limitation on Benefits).
ARTICLE 13 (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.
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 Belgium
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
gains from any other property that is treated as a real
property interest within the meaning of paragraph 2.
Paragraph 1 refers to gains ``attributable to the
alienation of real property'' rather than the OECD Model phrase
``gains from the alienation'' to clarify that the United States
will look through distributions made by a REIT and certain
RICs. Accordingly, distribu*tions made by a REIT or certain
RICs are taxable under paragraph 1 of Article 13 (not under
Article 10 (Dividends)) when they are attributable to gains
derived from the alienation (disposition) of U.S. real property
interests and treated as gain recognized under section
897(h)(1).
Paragraph 2
This paragraph defines the term ``real property situated in
the other Contracting State.'' The term includes real property
referred to in Article 6 (i.e., an interest in the real
property itself), and, in the case of the United States, a
``United States real property interest.''
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).
Paragraph 3
Paragraph 3 of Article 13 deals with the taxation of
certain gains from the alienation of 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. This also includes gains from the alienation
of such a permanent establishment (alone or with the whole
enterprise). Such gains may be taxed in the State in which the
permanent establishment is located.
A resident of the other Contracting State 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.
The gains subject to paragraph 3 may be taxed in the State
in which the permanent establishment is located, regardless of
whether the permanent establishment exists at the time of the
alienation. This rule incorporates the rule of section
864(c)(6) of the Code. Accordingly, income that is attributable
to a permanent establishment, but that is deferred and received
after the permanent establishment no longer exists, may
nevertheless be taxed by the State in which the permanent
establishment was located.
Paragraph 4
This paragraph limits the taxing jurisdiction of the State
of source with respect to gains from the alienation of ships or
aircraft operated in international traffic by the enterprise
alienating the ship or aircraft and from property (other than
real property) pertaining to the operation of such ships,
aircraft, or containers.
Under paragraph 4, such income is taxable only in the
Contracting State in which the alienator is resident.
Notwithstanding paragraph 3, the rules of this paragraph apply
even if the income is attributable to a permanent establishment
maintained by the enterprise in the other Contracting State.
This result is consistent with the allocation of taxing rights
under Article 8 (Shipping and Air Transport).
Paragraph 5
Paragraph 5 provides a rule similar to paragraph 4 with
respect to gains from the alienation of containers and related
personal property. Such gains derived by an enterprise of a
Contracting State shall be taxable only in that Contracting
State unless the containers were used for the transport of
goods or merchandise solely within the other Contracting State.
The other Contracting State may not tax even if the gain is
attributable to a permanent establishment maintained by the
enterprise in that other Contracting State.
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 tangible personal property,
other than tangible personal property described in paragraph 3,
may be taxed only in the State of residence of the alienator.
Gains derived by a resident of a Contracting State from
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.
Relationship 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. citizen or resident.
The benefits of this Article are also subject to the
provisions of Article 21 (Limitation on Benefits). Thus, only a
resident of a Contracting State that satisfies one of the
conditions in Article 21 is entitled to the benefits of this
Article.
ARTICLE 14 (INCOME FROM EMPLOYMENT)
Article 14 apportions taxing jurisdiction over remuneration
derived by a resident of a Contracting State as an employee
between the States of source and residence.
Paragraph 1
The general rule of Article 14 is contained in paragraph 1.
Remuneration derived by a resident of a Contracting State as an
employee may be taxed by the State of residence, and the
remuneration also may be taxed by the other Contracting State
to the extent derived from employment exercised (i.e., services
performed) in that other Contracting State. Paragraph 1 also
provides that the more specific rules of Articles 15
(Directors' Fees), 17 (Pensions, Social Security, Annuities,
Alimony and Child Support),
18 (Government Service), and 19 (Students, Trainees,
Teachers and Researchers) apply in the case of employment
income described in one of those articles. Thus, even though
the State of source has a right to tax employment income under
Article 14, it may not have the right to tax that income under
the Convention if the income is described, for example, in
Article 17 (Pensions, Social Security, Annuities, Alimony and
Child Support) and is not taxable in the State of source under
the provisions of that article.
Article 14 applies to any form of compensation for
employment, including payments in kind. Paragraph 1.1 of the
Commentary to Article 16 of the OECD Model now confirms that
interpretation.
Consistent with section 864(c)(6) of the Code, Article 14
also applies regardless of the timing of actual payment for
services. Consequently, a person who receives the right to a
future payment in consideration for services rendered in a
Contracting State would be taxable in that State even if the
payment is received at a time when the recipient is a resident
of the other Contracting State. Thus, a bonus paid to a
resident of a Contracting State with respect to services
performed in the other Contracting State with respect to a
particular taxable year would be subject to Article 14 even if
it was paid after the close of the year. An annuity received
for services performed in a taxable year could be subject to
Article 14 despite the fact that it was paid in subsequent
years. In that case, it would be necessary to determine whether
the payment constitutes deferred compensation, taxable under
Article 14, or a qualified pension subject to the rules of
Article 17 (Pensions, Social Security, Annuities, Alimony, and
Child Support). Article 14 also applies to income derived from
the exercise of stock options granted with respect to services
performed in the host State, even if those stock options are
exercised after the employee has left the source country. If
Article 14 is found to apply, whether such payments were
taxable in the State where the employment was exercised would
depend on whether the tests of paragraph 2 were satisfied in
the year in which the services to which the payment relates
were performed.
Paragraph 2
Paragraph 2 sets forth an exception to the general rule
that employment income may be taxed in the State where it is
exercised. Under paragraph 2, the State where the employment is
exercised may not tax the income from the employment if three
conditions are satisfied: (a) the individual is present in the
other Contracting State for a period or periods not exceeding
183 days in any 12-month period that begins or ends during the
relevant taxable year (i.e., in the United States, the calendar
year in which the services are performed); (b) the remuneration
is paid by, or on behalf of, an employer who is not a resident
of that other Contracting State; and (c) the remuneration is
not borne as a deductible expense by a permanent establishment
that the employer has in that other State. In order for the
remuneration to be exempt from tax in the source State, all
three conditions must be satisfied. This exception is identical
to that set forth in the OECD Model.
The 183-day period in condition (a) is to be measured using
the ``days of physical presence'' method. Under this method,
the days that are counted include any day in which a part of
the day is spent in the host country. (Rev. Rul. 56-24, 1956-1
C.B. 851.)
Thus, days that are counted include the days of arrival and
departure; weekends and holidays on which the employee does not
work but is present within the country; vacation days spent in
the country before, during or after the employment period,
unless the individual's presence before or after the employment
can be shown to be independent of his presence there for
employment purposes; and time during periods of sickness,
training periods, strikes, etc., when the individual is present
but not working. If illness prevented the individual from
leaving the country in sufficient time to qualify for the
benefit, those days will not count. Also, any part of a day
spent in the host country while in transit between two points
outside the host country is not counted. If the individual is a
resident of the host country for part of the taxable year
concerned and a non-resident for the remainder of the year, the
individual's days of presence as a resident do not count for
purposes of determining whether the 183-day period is exceeded.
Conditions (b) and (c) are intended to ensure that a
Contracting State will not be required to allow a deduction to
the payor for compensation paid and at the same time to exempt
the employee on the amount received. Accordingly, if a foreign
person pays the salary of an employee who is employed in the
host State, but a host State corporation or permanent
establishment reimburses the payor with a payment that can be
identified as a reimbursement, neither condition (b) nor (c),
as the case may be, will be considered to have been fulfilled.
The reference to remuneration ``borne by'' a permanent
establishment is understood to encompass all expenses that
economically are incurred and not merely expenses that are
currently deductible for tax purposes. Accordingly, the
expenses referred to include expenses that are capitalizable as
well as those that are currently deductible. Further, salaries
paid by residents that are exempt from income taxation may be
considered to be borne by a permanent establishment
notwithstanding the fact that the expenses will be neither
deductible nor capitalizable since the payor is exempt from
tax.
The Protocol clarifies that with respect to paragraphs 1
and 2, where remuneration is derived by a resident of one of
the States in respect of an employment, employment is exercised
in the place where the employee is physically present when
performing the activities for which the remuneration is paid,
irrespective of the residence of the payer, the place in which
the contract of employment was made, the residence of the
employer, the place or time of payment, or the place where the
results of the work were exploited.
Paragraph 3
Paragraph 3 contains a special rule applicable to
remuneration for services performed by a resident of a
Contracting State as an employee aboard a ship or aircraft
operated in international traffic. Such remuneration may be
taxed only in the State of residence of the employee if the
services are performed as a member of the regular complement of
the ship or aircraft. The ``regular complement'' includes the
crew. In the case of a cruise ship, for example, it may also
include others, such as entertainers, lecturers, etc., employed
by the shipping company to serve on the ship throughout its
voyage. The use of the term ``regular complement'' is intended
to clarify that a person who exercises his employment as, for
example, an insurance salesman while aboard a ship or aircraft
is not covered by this paragraph.
If a U.S. citizen who is resident in Belgium performs
services as an employee in the United States and meets the
conditions of paragraph 2 for source country exemption, he
nevertheless is taxable in the United States by virtue of the
saving clause of paragraph 4 of Article 1 (General Scope),
subject to the special foreign tax credit rule of paragraph 4
of Article 22 (Relief from Double Taxation).
ARTICLE 15 (DIRECTORS' FEES)
This Article provides that a Contracting State may tax the
fees and other compensation paid by a company that is a
resident of that State for services performed in that State by
a resident of the other Contracting State in his capacity as a
director of the company. This rule is an exception to the more
general rules of Articles 7 (Business Profits) and 14 (Income
from Employment). Thus, for example, in determining whether a
director's fee paid to a non-employee director is subject to
tax in the country of residence of the corporation, it is not
relevant to establish whether the fee is attributable to a
permanent establishment in that State.
The analogous OECD provision reaches different results in
certain cases. Under the OECD Model provision, a resident of
one Contracting State who is a director of a corporation that
is resident in the other Contracting State is subject to tax in
that other State in respect of his directors' fees regardless
of where the services are performed. The United States has
entered a reservation with respect to the OECD provision. Under
the provision in the Convention, the State of residence of the
corporation may tax nonresident directors with no time or
dollar threshold, but only with respect to remuneration for
services performed in that State.
The Protocol elaborates on the provisions of Article 15.
Specifically, the Protocol provides that Article 15 shall also
apply to fees received by a ``gerant''/``zaakvoerder'' of a
company, other than a company with share capital, in his
capacity as such. Further, remuneration derived by a person
referred to in Article 15 from a company which is a resident of
a Contracting State in respect of the discharge of day-to-day
functions of a managerial or technical, commercial or financial
nature shall be taxable in accordance with the provisions of
Article 14 (Income from Employment), and not Article 15. In
such a case, to the extent that the company is a Belgian
company, Article 14 shall be applied as if such remuneration
were remuneration derived by an employee in respect of an
employment and as if references to the ``employer'' were
references to the company.
Remuneration received by a resident of a Contracting State
in respect of his day-to-day activity as a partner of a company
that is a resident of Belgium, other than a company with share
capital, shall be taxable in accordance with the provisions of
Article 14, as if such remuneration were remuneration derived
by an employee in respect of an employment and as if references
to the ``employer'' were references to the company.
Article 7 (Business Profits), and not Article 14 or 15,
shall apply to a partner's distributive share of the income of
an entity that is treated as fiscally transparent, such as a
U.S. partnership.
This Article is subject to the saving clause of paragraph 4
of Article 1 (General Scope). Thus, if a U.S. citizen who is a
resident of Belgium is a director of a U.S. corporation, the
United States may tax his full remuneration regardless of where
he performs his services.
ARTICLE 16 (ENTERTAINERS AND SPORTSMEN)
This Article deals with the taxation in a Contracting State
of entertainers and sportsmen resident in the other Contracting
State from the performance of their services as such. The
Article applies both to the income of an entertainer or
sportsman who performs services on his own behalf and one who
performs services on behalf of another person, either as an
employee of that person, or pursuant to any other arrangement.
The rules of this Article take precedence, in some
circumstances, over those of Articles 7 (Business Profits) and
14 (Income from Employment).
This Article applies only with respect to the income of
entertainers and sportsmen. Others involved in a performance or
athletic event, such as producers, directors, technicians,
managers, coaches, etc., remain subject to the provisions of
Articles 7 and 14. In addition, except as provided in paragraph
2, income earned by juridical persons is not covered by Article
16.
Paragraph 1
Paragraph 1 describes the circumstances in which a
Contracting State may tax the performance income of an
entertainer or sportsman who is a resident of the other
Contracting State. Under the paragraph, income derived by an
individual resident of a Contracting State from activities as
an entertainer or sportsman exercised in the other Contracting
State may be taxed in that other State if the amount of the
gross receipts derived by the performer exceeds $20,000 (or its
equivalent in euro) for the taxable year. The $20,000 includes
expenses reimbursed to the individual or borne on his behalf.
If the gross receipts exceed $20,000, the full amount, not just
the excess, may be taxed in the State of performance.
This Convention introduces the monetary threshold to
distinguish between two groups of entertainers and athletes--
those who are paid relatively large sums of money for very
short periods of service, and who would, therefore, normally be
exempt from host country tax under the standard personal
services income rules, and those who earn relatively modest
amounts and are, therefore, not easily distinguishable from
those who earn other types of personal service income.
Tax may be imposed under paragraph 1 even if the performer
would have been exempt from tax under Article 7 (Business
Profits) or 14 (Income from Employment). On the other hand. if
the performer would be exempt from host-country tax under
Article 16, but would be taxable under either Article 7 or 14,
tax may be imposed under either of those Articles. Thus, for
example, if a performer derives remuneration from his
activities in an independent capacity, and the performer does
not have a permanent establishment in the host State, he may be
taxed by the host State in accordance with Article 16 if his
remuneration exceeds $20,000 annually, despite the fact that he
generally would be exempt from host State taxation under
Article 7. However, a performer who receives less than the
$20,000 threshold amount and therefore is not taxable under
Article 16 nevertheless may be subject to tax in the host
country under Article 7 or 14 if the tests for host-country
taxability under the relevant Article are met. For example, if
an entertainer who is an independent contractor earns $14,000
of income in a State for the calendar year, but the income is
attributable to his permanent establishment in the State of
performance, that State may tax his income under Article 7.
Since it frequently is not possible to know until year-end
whether the income an entertainer or sportsman derived from
performances in a Contracting State will exceed $20,000,
nothing in the Convention precludes that Contracting State from
withholding tax during the year and refunding it after the
close of the year if the taxability threshold has not been met.
As explained in paragraph 9 of the Commentary to Article 17
of the OECD Model, Article 16 of the Convention applies to all
income connected with a performance by the entertainer, such as
appearance fees, award or prize money, and a share of the gate
receipts. Income derived from a Contracting State by a
performer who is a resident of the other Contracting State from
other than actual performance, such as royalties from record
sales and payments for product endorsements, is not covered by
this Article, but by other articles of the Convention, such as
Article 12 (Royalties) or Article 7 (Business Profits). For
example, if an entertainer receives royalty income from the
sale of live recordings, the royalty income would be exempt
from source state tax under Article 12, even if the performance
was conducted in the source country, although the entertainer
could be taxed in the source country with respect to income
from the performance itself under Article 16 if the dollar
threshold is exceeded.
In determining whether income falls under Article 16 or
another article, the controlling factor will be whether the
income in question is predominantly attributable to the
performance itself or to other activities or property rights.
For instance, a fee paid to a performer for endorsement of a
performance in which the performer will participate would be
considered to be so closely associated with the performance
itself that it normally would fall within Article 16.
Similarly, a sponsorship fee paid by a business in return for
the right to attach its name to the performance would be so
closely associated with the performance that it would fall
under Article 16 as well. As indicated in paragraph 9 of the
Commentary to Article 17 of the OECD Model, however, a
cancellation fee would not be considered to fall within Article
16 but would be dealt with under Article 7 (Business Profits)
or 14 (Income from Employment).
As indicated in paragraph 4 of the Commentary to Article 17
of the OECD Model, where an individual fulfills a dual role as
performer and non-performer (such as a player-coach or an
actor-director), but his role in one of the two capacities is
negligible, the predominant character of the individual's
activities should control the characterization of those
activities. In other cases there should be an apportionment
between the performance-related compensation and other
compensation.
Consistent with Article 14 (Income from Employment),
Article 16 also applies regardless of the timing of actual
payment for services. Thus, a bonus paid to a resident of a
Contracting State with respect to a performance in the other
Contracting State during a particular taxable year would be
subject to Article 16 even if it was paid after the close of
the year. The determination as to whether the $20,000 threshold
has been exceeded is determined separately with respect to each
year of payment. Accordingly, if an actor who is a resident of
one Contracting State receives residual payments over time with
respect to a movie that was filmed in the other Contracting
State, the payments do not have to be aggregated from one year
to another to determine whether the total payments have finally
exceeded $20,000. Otherwise, residual payments received many
years later could retroactively subject all earlier payments to
tax by the other Contracting State.
Paragraph 2
Paragraph 2 is intended to address the potential for
circumvention of the rule in paragraph 1 when a performer's
income does not accrue directly to the performer himself, but
to another person. Foreign performers frequently perform in the
United States as employees of, or under contract with, a
company or other person.
The relationship may truly be one of employee and employer,
with no circumvention of paragraph 1 either intended or
realized. On the other hand, the ``employer'' may, for example,
be a company established and owned by the performer, which is
merely acting as the nominal income recipient in respect of the
remuneration for the performance (a ``star company''). The
performer may act as an ``employee,'' receive a modest salary,
and arrange to receive the remainder of the income from his
performance from the company in another form or at a later
time. In such case, absent the provisions of paragraph 2, the
income arguably could escape host-country tax because the
company earns business profits but has no permanent
establishment in that country. The performer may largely or
entirely escape host-country tax by receiving only a small
salary, perhaps small enough to place him below the dollar
threshold in paragraph 1. The performer might arrange to
receive further payments in a later year, when he is not
subject to host-country tax, perhaps as dividends or
liquidating distributions.
Paragraph 2 seeks to prevent this type of abuse while at
the same time protecting the taxpayers' rights to the benefits
of the Convention when there is a legitimate employee-employer
relationship between the performer and the person providing his
services. Under paragraph 2, when the income accrues to a
person other than the performer, the income may be taxed in the
Contracting State where the performer's services are exercised,
without regard to the provisions of the Convention concerning
business profits (Article 7) or income from employment (Article
14), but only in cases in which the contract pursuant to which
the personal activities are performed designates the
entertainer or sportsman or allows a person other than the
performer or the person to whom the income accrues to designate
the individual who is to perform the personal activities. This
rule is based on the U.S. domestic law provision characterizing
income from certain personal service contracts as foreign
personal holding company income in the context of the foreign
personal holding company provisions. See Code section
954(c)(1)(I). The premise of this rule is that, in a case where
a performer is using another person in an attempt to circumvent
the provisions of paragraph 1, the recipient of the services of
the performer would contract with a person other than that
performer (i.e., a company employing the performer) only if the
recipient of the services were certain that the performer
himself would perform the services. If instead the person is
allowed to designate the individual who is to perform the
services, then likely the person is a service company not
formed to circumvent the provisions of paragraph 1. The
following example illustrates the operation of this rule.
Example. Company O, a resident of Belgium, is engaged in
the business of operating an orchestra. Company O enters into a
contract with Company A pursuant to which Company O agrees to
carry out two performances in the United States in
consideration of which Company A will pay Company O $200,000.
The contract designates two individuals, a conductor and a
flutist, that must perform as part of the orchestra, and allows
Company O to designate the other members of the orchestra.
Because the contract does not give Company O any discretion to
determine whether the conductor or the flutist perform personal
services under the contract, the portion of the $200,000 which
is attributable to the personal services of the conductor and
the flutist may be taxed by the United States pursuant to
paragraph 2. The remaining portion of the $200,000, which is
attributable to the personal services of performers that
Company O may designate, is not subject to tax by the United
States pursuant to paragraph 2.
In cases where paragraph 2 is applicable, the income of the
``employer'' may be subject to tax in the host Contracting
State even if it has no permanent establishment in the host
country. Taxation under paragraph 2 is on the person providing
the services of the performer. This paragraph does not affect
the rules of paragraph 1, which apply to the performer himself.
The income taxable by virtue of paragraph 2 is reduced to the
extent of salary payments to the performer, which fall under
paragraph 1.
For purposes of paragraph 2, income is deemed to accrue to
another person (i.e., the person providing the services of the
performer) if that other person has control over, or the right
to receive, gross income in respect of the services of the
performer.
Since pursuant to Article 1 (General Scope) the Convention
only applies to persons who are residents of one of the
Contracting States, income of the star company would not be
eligible for benefits of the Convention if the company is not a
resident of one of the Contracting States.
Relationship to Other Articles
This Article is subject to the provisions of the saving
clause of paragraph 4 of Article 1 (General Scope). Thus, if an
entertainer or a sportsman who is resident in Belgium is a
citizen of the United States, the United States may tax all of
his income from performances in the United States without
regard to the provisions of this Article, subject, however, to
the special foreign tax credit provisions of paragraph 4 of
Article 22 (Relief from Double Taxation). In addition, benefits
of this Article are subject to the provisions of Article 21
(Limitation on Benefits).
ARTICLE 17 (PENSIONS, SOCIAL SECURITY, ANNUITIES, ALIMONY, AND CHILD
SUPPORT)
This Article deals with the taxation of private (i.e., non-
government service) pensions and annuities, social security
benefits, alimony and child support payments.
Paragraph 1
Paragraph 1 provides that distributions from pensions and
other similar remuneration beneficially owned by a resident of
a Contracting State in consideration of past employment are
taxable only in the State of residence of the beneficiary. This
paragraph is subject to the provisions of paragraph 2 of
Article 18 (Government Service), which generally provides for
exclusive source state taxation for such payment when paid by,
or out of funds created by, a Contracting State. The term
``pensions and other similar remuneration'' includes both
periodic and single sum payments.
The phrase ``pensions and other similar remuneration'' is
intended to encompass payments made by qualified private
retirement plans. In the United States, the plans encompassed
by Paragraph 1 include: qualified plans under section 401(a),
individual retirement plans (including individual retirement
plans that are part of a simplified employee pension plan that
satisfies section 408(k), individual retirement accounts and
section 408(p) accounts), section 403(a) qualified annuity
plans, and section 403(b) plans. Distributions from section 457
plans may also fall under Paragraph 1 if they are not paid with
respect to government services covered by Article 18.
Pensions in respect of government services covered by
Article 18 are not covered by this paragraph. They are covered
either by paragraph 2 of this Article, if they are in the form
of social security benefits, or by paragraph 2 of Article 18
(Government Service). Thus, Article 18 generally covers section
457, 401(a), 403(b) plans established for government employees,
and the Thrift Savings Plan (section 7701(j)).
However, the State of residence, under subparagraph (b),
must exempt from tax any amount of such pensions or other
similar remuneration that would be exempt from tax in the
Contracting State in which the pension fund is established if
the recipient were a resident of that State. Thus, for example,
a distribution from a U.S. ``Roth IRA'' to a resident of
Belgium would be exempt from tax in Belgium to the same extent
the distribution would be exempt from tax in the United States
if it were distributed to a U.S. resident. The same is true
with respect to distributions from a traditional IRA to the
extent that the distribution represents a return of non-
deductible contributions. Similarly, if the distribution were
not subject to tax when it was ``rolled over'' into another
U.S. IRA (but not, for example, to a pension fund in Belgium),
then the distribution would be exempt from tax in Belgium.
Paragraph 2
The treatment of social security benefits is dealt with in
paragraph 2. This paragraph provides that, notwithstanding the
provision of paragraph 1 under which private pensions are
taxable exclusively in the State of residence of the beneficial
owner, payments made by one of the Contracting States under the
provisions of its social security or similar legislation to a
resident of the other Contracting State or to a citizen of the
United States will be taxable only in the Contracting State
making the payment. The reference to U.S. citizens is necessary
to ensure that a social security payment by Belgium to a U.S.
citizen who is not resident in the United States will not be
taxable by the United States.
This paragraph applies to social security beneficiaries
whether they have contributed to the system as private sector
or Government employees. The Protocol provides that the phrase
``similar legislation'' is intended to refer to United States
tier 1 Railroad Retirement benefits.
Paragraph 3
Under paragraph 3, annuities that are derived and
beneficially owned by a resident of a Contracting State are
taxable only in that State. An annuity, as the term is used in
this paragraph, means a stated sum paid periodically at stated
times during a specified number of years, under an obligation
to make the payment in return for adequate and full
consideration (other than for services rendered). An annuity
received in consideration for services rendered would be
treated as either deferred compensation that is taxable in
accordance with Article 14 (Income from Employment) or a
pension that is subject to the rules of Article 17 (Pensions,
Social Security, Annuities, Alimony, and Child Support).
Paragraphs 4 and 5
Paragraphs 4 and 5 deal with alimony and child support
payments. Both alimony, under paragraph 4, and child support
payments, under paragraph 5, are defined as periodic payments
made pursuant to a written separation agreement or a decree of
divorce, separate maintenance, or compulsory support. Paragraph
4, however, deals only with payments of that type that are
taxable to the payee. Under that paragraph, alimony paid by a
resident of a Contracting State to a resident of the other
Contracting State is taxable under the Convention only in the
State of residence of the recipient. Paragraph 5 deals with
those periodic payments that are for the support of a child and
that are not covered by paragraph 4. These types of payments by
a resident of a Contracting State to a resident of the other
Contracting State are taxable only in the Contracting State
where the payor is a resident.
Paragraph 6
Paragraph 6 provides that, if a resident of a Contracting
State participates in a pension fund established in the other
Contracting State, the State of residence will not tax the
income of the pension fund with respect to that resident until
a distribution is made from the pension fund. Thus, for
example, if a U.S. citizen contributes to a U.S. qualified plan
while working in the United States and then establishes
residence in Belgium, paragraph 6 prevents Belgium from taxing
currently the plan's earnings and accretions with respect to
that individual. When the resident receives a distribution from
the pension fund, that distribution may be subject to tax in
the State of residence, subject to paragraph 1.
Paragraph 7
Paragraph 7 provides certain benefits with respect to
cross- border contributions to a pension fund, subject to the
limitations of paragraphs 8 and 9 of the Article. It is
irrelevant for purposes of paragraph 7 whether the participant
establishes residence in the State where the individual renders
services (the ``host State'').
Subparagraph (a) of paragraph 7 allows an individual who
exercises employment or self-employment in a Contracting State
to deduct or exclude from income in that Contracting State
contributions made by or on behalf of the individual during the
period of employment or self-employment to a pension fund
established in the other Contracting State (or in a similar
fund that is a resident of a comparable third state). Thus, for
example, if a participant in a U.S. qualified plan goes to work
in Belgium, the participant may deduct or exclude from income
in Belgium contributions to the U.S. qualified plan made while
the participant works in Belgium. The benefits provided under
subparagraph (a) by the host State are limited. In the case
where the United States is the host State, the benefits granted
by subparagraph (a) apply only to the extent the United States
would provide relief if the plan were established in the United
States. In the case where Belgium is the host State, the
benefits granted by subparagraph (a) apply only to the extent
that Belgium would provide relief if the plan was recognized
for Belgian tax purposes. A ``similar fund that is a resident
of comparable third State'' is discussed with respect to
paragraph 10, below, and is applicable for paragraphs 7 through
9 of this Article.
Subparagraph (b) of paragraph 7 provides that, in the case
of employment, accrued benefits and contributions by or on
behalf of the individual's employer, during the period of
employment in the host State, will not be treated as taxable
income to the employee in that State. Subparagraph (b) also
allows the employer a deduction in computing its taxable income
in the host State for contributions to the plan. For example,
if a participant in a U.S. qualified plan goes to work in
Belgium, the participant's employer may deduct from its taxable
income in Belgium contributions to the U.S. qualified plan for
the benefit of the employee while the employee renders services
in Belgium.
As in the case of subparagraph (a), the benefits of
subparagraph (b) are limited.
In the case where the United States is the host State, the
benefits granted by subparagraph (b) apply only to the extent
that the United States would provide relief if the plan were
established in the United States. In the case where Belgium is
the host State, the benefits of subparagraph (b) apply only to
the extent that Belgium would provide relief if the plan were
recognized for Belgian tax purposes. Therefore, where the
United States is the host State, the exclusion of employee
contributions from the employee's income under this paragraph
is limited to contributions not in excess of the amount
specified in section 402(g) for elective contributions.
Deduction of employer contributions is subject to the
limitations of sections 415 and 404. The section 404 limitation
on deductions is calculated as if the individual were the only
employee covered by the plan.
Paragraph 8
Paragraph 8 limits the availability of benefits under
paragraph 7. Under subparagraph (a) of paragraph 8, paragraph 7
does not apply to contributions to a pension fund unless the
participant already was contributing to the fund, or his
employer already was contributing to the fund with respect to
that individual, before the individual began exercising
employment in the host State. This condition would be met if
either the employee or the employer was contributing to a fund
that was replaced by the fund to which he is contributing. The
rule regarding successor funds would apply if, for example,
the employer has been taken over by a company that replaces
the existing fund with its own fund, rolling membership in the
old fund over into the new fund.
In addition, under subparagraph (b), the participant must
not have performed personal services in the host State for a
cumulative period that exceeds ten years.
Further, under subparagraph (c) of paragraph 8, the
competent authority of the host State must determine that the
pension plan to which a contribution is made generally
corresponds to a pension plan recognized for tax purposes in
the host State. Generally, for this purpose, the U.S. pension
plans eligible for the benefits of paragraph 7 would include
qualified plans under section 401(a), individual retirement
plans (including individual retirement plans that are part of a
simplified employee pension plan that satisfies section 40
8(k)), individual retirement accounts, individual retirement
annuities, section 408(p) accounts and Roth IRAs under section
408A, section 403(a) qualified annuity plans, section 403(b)
plans, section 457(b) plans and the Thrift Savings Plan
(section 7701(j)). However, the competent authorities shall
agree upon the list of pension plans that are acceptable under
this paragraph.
Paragraph 9
Paragraph 9 generally provides U.S. tax treatment for
certain contributions by or on behalf of U. S. citizens
resident in Belgium to pension funds established in Belgium (or
a similar fund that is a resident of a comparable third State)
that is comparable to the treatment that would be provided for
contributions to U.S. funds. Under subparagraph (a), a U.S.
citizen resident in Belgium may exclude or deduct for U.S. tax
purposes certain contributions to a pension fund established in
Belgium. Qualifying contributions generally include
contributions made during the period the U.S. citizen exercises
an employment in Belgium if expenses of the employment are
borne by an employer or permanent establishment in Belgium.
Similarly, with respect to the U.S. citizen's participation in
the pension fund in Belgium, accrued benefits and contributions
during that period generally are not treated as taxable income
in the United States.
The U.S. tax benefit allowed by paragraph 9, however, is
limited under subparagraph (b) to the lesser of the amount of
relief allowed for contributions and benefits that qualify for
relief in Belgium and the amount of relief that would be
allowed for contributions and benefits under a generally
corresponding pension fund established in the United States.
Subparagraph (c) provides that the benefits an individual
obtains under paragraph 9 are counted when determining that
individual's eligibility for benefits under a pension fund
established in the United States. Thus, for example,
contributions to a pension fund recognized for tax purposes in
Belgium may be counted in determining whether the individual
has exceeded the annual limitation on contributions to an
individual retirement account.
Under subparagraph (d), paragraph 9 does not apply to
pension contributions and benefits unless the competent
authority of the United States has agreed that the pension fund
recognized for tax purposes in Belgium generally corresponds to
a pension fund established in the United States. Since
paragraph 9 applies only with respect to employees, however,
the relevant plans are those that correspond to employer plans
in the United States. The competent authorities shall agree
upon the list of pension plans that are acceptable under this
paragraph.
Paragraph 10
Paragraph 10 provides guidance for the application of
paragraphs 7 and 9 by delineating when a similar fund that is a
resident of a State other than a Contracting State will be
considered to be a resident of a ``comparable third State.''
The paragraph requires that such a state will be considered a
comparable third State only if the following three requirements
are met: 1) the third State is a member state of the European
Union or any other European Economic Area state or any party to
the North American Free Trade Agreement or Switzerland, 2) the
third State provides, under a tax treaty or otherwise,
comparable favorable treatment for contributions to a pension
fund that is a resident of the Contracting State that is
providing benefits under paragraph 7 (i.e., host state) or
paragraph 9 (i.e., the United States), and 3) the third State
has an information exchange provision in a tax treaty or other
arrangement with the Contracting State that is providing
benefits under paragraph 7 or paragraph 9 that is satisfactory
to that Contracting State.
Subparagraph (b) provides that a pension plan is recognized
for tax purposes in a Contacting State if contributions to the
plan would qualify for tax relief in that Contracting State.
Relationship to Other Articles
Paragraphs 1 (a), 3 and 4 of Article 17 are subject to the
saving clause of paragraph 4 of Article 1 (General Scope).
Thus, a U.S. citizen who is resident in the other Contracting
State, and receives either a pension, annuity or alimony
payment from the United States, may be subject to U.S. tax on
the payment, notwithstanding the rules in those three
paragraphs that give the State of residence of the recipient
the exclusive taxing right. Paragraphs 1(b), 2 and 5 are
excepted from the saving clause by virtue of subparagraph 5(a)
of Article 1. Thus, the United States will not tax U.S.
citizens and residents on the income described in those
paragraphs even if such amounts otherwise would be subject to
tax under U.S. law.
Paragraphs 6 and 9 of Article 17 are excepted from the
saving clause of paragraph 4 of Article 1 by virtue of
paragraph 5(a) of Article 1. Thus, the United States will allow
U.S. citizens and residents the benefits of paragraphs 6 and 9.
Paragraph 7 is excepted from the saving clause by subparagraph
5(b) of Article 1 with respect only to persons who are not
admitted for permanent residence or citizens. Accordingly, a
person who becomes a U.S. permanent resident or citizen will no
longer receive a deduction for contributions to a pension fund
established in the other Contracting State.
ARTICLE 18 (GOVERNMENT SERVICE)
Paragraph 1
Subparagraphs (a) and (b) of paragraph 1 deal with the
taxation of government compensation (other than a pension
addressed in paragraph 2). Subparagraph (a) provides that
remuneration paid to any individual who is rendering services
to a State, or a political subdivision or a local authority
thereof, is exempt from tax by the other State. Under
subparagraph (b), such payments are, however, taxable
exclusively in the other State (i.e., the host State) if the
services are rendered in that other State and the individual is
a resident of that State who is either a national of that State
or a person who did not become resident of that State solely
for purposes of rendering the services. The paragraph applies
to anyone performing services for a government, whether as a
government employee, an independent contractor, or an employee
of an independent contractor.
Paragraph 2
Paragraph 2 deals with the taxation of pensions and other
similar remuneration paid by, or out of funds created by, one
of the States, or a political subdivision or a local authority
thereof, to an individual in respect of services rendered to
that State or subdivision or authority. Subparagraph (a)
provides that such pensions and other similar remuneration are
taxable only in that State. Subparagraph (b) provides an
exception under which such pensions and other similar
remuneration are taxable only in the other State if the
individual is a resident of, and a national of, that other
State.
Pensions paid to retired civilian and military employees of
a Government of either State are intended to be covered under
paragraph 2. When benefits paid by a State in respect of
services rendered to that State or a subdivision or authority
are in the form of social security benefits, however, those
payments are covered by paragraph 2 of Article 17 (Pensions,
Social Security, Annuities, Alimony, and Child Support). As a
general matter, the result will be the same whether Article 17
or 18 applies, since social security benefits are taxable
exclusively by the source country and so are government
pensions. The result will differ only when the payment is made
to a citizen and resident of the other Contracting State, who
is not also a citizen of the paying State. In such a case,
social security benefits continue to be taxable at source while
government pensions become taxable only in the residence
country.
Paragraph 3
Paragraph 3 provides that the remuneration described in
paragraph 1 will be subject to the rules of Articles 14 (Income
from Employment), 15 (Directors' Fees), 16 (Entertainers and
Sportsmen) or 17 (Pensions, Social Security, Annuities,
Alimony, and Child Support) if the recipient of the income is
employed by a business conducted by a government.
Relationship to Other Articles
Under paragraph 5(b) of Article 1 (General Scope), the
saving clause (paragraph 4 of Article 1) does not apply to the
benefits conferred by one of the States under Article 18 if the
recipient of the benefits is neither a citizen of that State,
nor a person who has been admitted for permanent residence
there (i.e., in the United States, a ``green card'' holder).
Thus, a resident of a Contracting State who in the course of
performing functions of a governmental nature becomes a
resident of the other State (but not a permanent resident),
would be entitled to the benefits of this Article. However, an
individual who receives a pension paid by the Government of
Belgium in respect of services rendered to that Government
shall be taxable on this pension only in Belgium unless the
individual is a U.S. citizen or acquires a U.S. green card.
ARTICLE 19 (STUDENTS, TRAINEES, TEACHERS AND RESEARCHERS)
This Article provides rules for host-country taxation of
visiting students, business trainees, teachers and researchers.
Persons who meet the tests of the Article will be exempt from
tax in the State that they are visiting with respect to
designated classes of income. Paragraph 1 addresses payments
received by a student or business trainee, while paragraph 2
addresses teachers and researchers temporarily present in the
host country.
Paragraph 1
Subparagraph (a) addresses the situation where a student or
business trainee that is a resident of a Contracting State
receives certain payments other than for personal services,
while present in the host State. Several conditions must be
satisfied for such an individual to be exempt from host country
taxation.
First, the student or business trainee must have been,
either at the time of his arrival in the host State or
immediately before, a resident of the other Contracting State.
Second, the purpose of the visit must be the full-time
education or full-time training of the visitor. Thus, if the
visitor comes principally to work in the host State but also is
a part-time student, he would not be entitled to the benefits
of this Article, even with respect to any payments he may
receive from abroad for his maintenance or education, and
regardless of whether or not he is in a degree program. Whether
a student is to be considered full-time will be determined by
the rules of the educational institution at which he is
studying.
The host-country exemption in subparagraph (a) applies to
payments received by the student or business trainee for the
purpose of his maintenance, education or training that arise
outside the host State. A payment will be considered to arise
outside the host State if the payer is located outside the host
State. Thus, if an employer from one of the Contracting States
sends an employee to the other Contracting State for training,
the payments the trainee receives from abroad from his employer
for his maintenance or training while he is present in the host
State will be exempt from tax in the host State. Where
appropriate, substance prevails over form in determining the
identity of the payer. Thus, for example, payments made
directly or indirectly by a U.S. person with whom the visitor
is training, but which have been routed through a source
outside the United States (e.g., a foreign subsidiary), are not
treated as arising outside the United States for this purpose.
Subparagraph (1) (b) also provides a limited exemption for
remuneration from personal services rendered in the host State
with a view to supplementing the resources available to him for
such purposes to the extent of $9,000 United States dollars (or
its equivalent in euro) per taxable year. The competent
authorities are instructed to adjust this amount every five
years, if necessary, to take into account changes in the amount
of the U.S. standard deduction and personal exemption and the
Belgian basic allowance.
In the case of a business trainee, the benefits of
paragraph 1 will extend only for a period of two years from the
time that the visitor first arrives in the host country. If,
however, a trainee remains in the host country for a third
year, thus losing the benefits of the Article, he would not
retroactively lose the benefits of the Article for the first
two years. Supbaragraph 1(c) defines the term ``business
trainee'' as a person who is in the country temporarily for the
purpose of securing training that is necessary to qualify to
pursue a profession or professional specialty. Moreover, a
business trainee also includes an individual who is employed or
under contract with a resident of the other Contracting State
and is temporarily present in the host State for the primary
purpose of receiving technical, professional, or business
experience from a person other than his employer or a person
related to its employer. Thus, a business trainee might include
a lawyer employed by a law firm in one Contracting State who
works for two years as a stagiare in an unrelated law firm in
the other Contracting State. However, the term would not
include a manager who normally is employed by a parent company
in one Contracting State who is sent to the other Contracting
State to run a factory owned by a subsidiary of the parent
company.
Paragraph 2
Paragraph 2 provides an exemption from host State taxation
for teachers and researchers. Under paragraph 2 an individual
who is a resident of a Contracting State at the beginning of
his visit to the other Contracting State (i.e., host State),
and who is temporarily present in the host State for the
purpose of teaching or carrying on research at a school,
college, university or other educational or research
institution is exempt from host Sate taxation for a period not
exceeding 2 years from the person's arrival in the host State
on the person's remuneration received in consideration of
teaching or carrying on research. However, the benefits of
paragraph 2 do not apply to income from research if such
research is undertaken primarily for the private benefit of a
specific person or persons.
Relationship to Other Articles
The saving clause of paragraph 4 of Article 1 (General
Scope) does not apply to this Article with respect to an
individual who is neither a citizen of the host State nor has
been admitted for permanent residence there. The saving clause,
however, does apply with respect to citizens and permanent
residents of the host State. Thus, a U.S. citizen who is a
resident of Belgium and who visits the United States as a full-
time student at an accredited university will not be exempt
from U.S. tax on remittances from abroad that otherwise
constitute U.S. taxable income. A person, however, who is not a
U.S. citizen, and who visits the United States as a student and
remains long enough to become a resident under U.S. law, but
does not become a permanent resident (i.e., does not acquire a
green card), will be entitled to the full benefits of the
Article.
ARTICLE 20 (OTHER INCOME)
Article 20 generally assigns taxing jurisdiction over
income not dealt with in the other articles (Articles 6 through
19) of the Convention to the State of residence of the
beneficial owner of the income. In order for an item of income
to be ``dealt with'' in another article it must be the type of
income described in the article and, in most cases, it must
have its source in a Contracting State. For example, all
royalty income that arises in a Contracting State and that is
beneficially owned by a resident of the other Contracting State
is ``dealt with'' in Article 12 (Royalties). However, profits
derived in the conduct of a business are ``dealt with'' in
Article 7 (Business Profits) whether or not they have their
source in one of the Contracting States.
Examples of items of income covered by Article 20 include
income from gambling, punitive (but not compensatory) damages
and covenants not to compete. The article would also apply to
income from a variety of financial transactions, where such
income does not arise in the course of the conduct of a trade
or business. For example, income from notional principal
contracts and other derivatives would fall within Article 20 if
derived by persons not engaged in the trade or business of
dealing in such instruments, unless such instruments were being
used to hedge risks arising in a trade or business. It would
also apply to securities lending fees derived by an
institutional investor. Further, in most cases guarantee fees
paid within an intercompany group would be covered by Article
20, unless the guarantor were engaged in the business of
providing such guarantees to unrelated parties.
Article 20 also applies to items of income that are not
dealt with in the other articles because of their source or
some other characteristic. For example, Article 11 (Interest)
addresses only the taxation of interest arising in a
Contracting State. Interest arising in a third State that is
not attributable to a permanent establishment, therefore, is
subject to Article 20.
Distributions from partnerships are not generally dealt
with under Article 20 because partnership distributions
generally do not constitute income. Under the Code, partners
include in income their distributive share of partnership
income annually, and partnership distributions themselves
generally do not give rise to income. This would also be the
case under U.S. law with respect to distributions from trusts.
Trust income and distributions that, under the Code, have the
character of the associated distributable net income would
generally be covered by another article of the Convention. See
Code section 641 et seq.
Paragraph 1
The general rule of Article 20 is contained in paragraph 1.
Items of income not dealt with in other articles and
beneficially owned by a resident of a Contracting State will be
taxable only in the State of residence. This exclusive right of
taxation applies whether or not the residence State exercises
its right to tax the income covered by the Article.
The reference in this paragraph to ``items of income
beneficially owned by a resident of a Contracting State''
rather than simply ``items of income of a resident of a
Contracting State,'' as in the OECD Model, is intended merely
to make explicit the implicit understanding in other treaties
that the exclusive residence taxation provided by paragraph 1
applies only when a resident of a Contracting State is the
beneficial owner of the income. Thus, source taxation of income
not dealt with in other articles of the Convention is not
limited by paragraph 1 if it is nominally paid to a resident of
the other Contracting State, but is beneficially owned by a
resident of a third State. However, income received by a
nominee on behalf of a resident of that other State would be
entitled to benefits.
The term ``beneficially owned'' is not defined in the
Convention, and is, therefore, defined under the internal law
of the country imposing tax (i.e., the source country). The
person who beneficially owns the income for purposes of Article
20 is the person to which the income is attributable for tax
purposes under the laws of the source State.
Paragraph 2
This paragraph provides an exception to the general rule of
paragraph 1 for income that is attributable to a permanent
establishment maintained in a Contracting State by a resident
of the other Contracting State. The taxation of such income is
governed by the provisions of Article 7 (Business Profits).
Therefore, income arising outside the United States that is
attributable to a permanent establishment maintained in the
United States by a resident of Belgium generally would be
taxable by the United States under the provisions of Article 7.
This would be true even if the income is sourced in a third
State.
Relationship to Other Articles
This Article is subject to the saving clause of paragraph 4
of Article 1 (General Scope). Thus, the United States may tax
the income of a resident of Belgium that is not dealt with
elsewhere in the Convention, if that resident is a citizen of
the United States. The Article is also subject to the
provisions of Article 21 (Limitation on Benefits). Thus, if a
resident of Belgium earns income that falls within the scope of
paragraph 1 of Article 20, but that is taxable by the United
States under U.S. law, the income would be exempt from U.S. tax
under the provisions of Article 20 only if the resident
satisfies one of the tests of Article 21 for entitlement to
benefits.
ARTICLE 21 (LIMITATION ON BENEFITS)
Article 21 contains anti-treaty-shopping provisions that
are intended to prevent residents of third countries from
benefiting from what is intended to be a reciprocal agreement
between two countries. In general, the provision does not rely
on a determination of purpose or intention but instead sets
forth a series of objective tests. A resident of a Contracting
State that satisfies one of the tests will receive benefits
regardless of its motivations in choosing its particular
business structure.
The structure of the Article is as follows: Paragraph 1
states the general rule that residents are entitled to benefits
otherwise accorded to residents only to the extent provided in
the Article. Paragraph 2 lists a series of attributes of a
resident of a Contracting State, the presence of any one of
which will entitle that person to all the benefits of the
Convention. Paragraph 3 provides that, regardless of whether a
person qualifies for benefits under paragraph 2, benefits may
be granted to a company if it meets a ``derivative benefits''
test that generally considers whether the owners of the company
would qualify for benefits under Article 21, and whether the
company makes significant payments to certain persons that
erode the taxable base of the country where the company is a
resident.. Paragraph 4 provides that, regardless of whether a
person qualifies for benefits under paragraph 2, benefits may
be granted to that person with regard to certain income earned
in the conduct of an active trade or business. Paragraph 5
provides that a so called headquarters company resident in a
Contracting State may qualify for benefits if certain
conditions are met. Paragraph 6 generally provides rules that
deny the benefit of a reduced rate of source country tax with
respect to interest or royalties in certain cases where the
beneficial owner of the payments derives the income through a
permanent establishment in a third State and such third State
does not impose a significant tax on such income. Paragraph 7
provides that benefits also may be granted if the competent
authority of the State from which benefits are claimed
determines that it is appropriate to provide benefits in that
case. Paragraph 8 defines certain terms used in the Article.
Paragraph 1
Paragraph 1 provides that a resident of a Contracting State
will be entitled to the benefits otherwise accorded to
residents of a Contracting State under the Convention only to
the extent provided in the Article. The benefits otherwise
accorded to residents under the Convention include all
limitations on source-based taxation under Articles 6 through
20, the treaty-based relief from double taxation provided by
Article 22, and the protection against discrimination afforded
to residents of a Contracting State under Article 23. Some
provisions do not require that a person be a resident in order
to enjoy the benefits of those provisions. The mutual agreement
procedure of Article 24 is not limited to residents of the
Contracting States, and Article 27 applies to diplomatic agents
or consular officials regardless of residence. Article 21
accordingly does not limit the availability of treaty benefits
under these provisions.
Article 21 and the anti-abuse provisions of domestic law
complement each other, as Article 21 effectively determines
whether an entity has a sufficient nexus to the Contracting
State to be treated as a resident for treaty purposes, while
domestic anti-abuse provisions (e.g., business purpose,
substance-over-form, step transaction or conduit principles)
determine whether a particular transaction should be recast in
accordance with its substance. Thus, internal law principles of
the source Contracting State may be applied to identify the
beneficial owner of an item of income, and Article 21 then will
be applied to the beneficial owner to determine if that person
is entitled to the benefits of the Convention with respect to
such income.
Paragraph 2
Paragraph 2 has five subparagraphs, each of which describes
a category of residents that are entitled to all benefits of
the Convention.
It is intended that the provisions of paragraph 2 will be
self executing. Unlike the provisions of paragraph 7, discussed
below, claiming benefits under paragraph 2 does not require an
advance competent authority ruling or approval. The tax
authorities may, of course, on review, determine that the
taxpayer has improperly interpreted the paragraph and is not
entitled to the benefits claimed.
Individuals--Subparagraph 2(a).--Subparagraph (a) provides
that individual residents of a Contracting State will be
entitled to all treaty benefits. If such an individual receives
income as a nominee on behalf of a third country resident,
benefits may be denied under the respective articles of the
Convention by the requirement that the beneficial owner of the
income be a resident of a Contracting State.
Governments--Subparagraph 2(b).--Subparagraph (b) provides
that the Contracting States and any political subdivision or
local authority thereof will be entitled to all benefits of the
Convention.
Publicly-Traded Corporations--Subparagraph 2(c)(i).--
Subparagraph (c) applies to two categories of companies:
publicly traded companies and subsidiaries of publicly traded
companies. A company resident in a Contracting State is
entitled to all the benefits of the Convention under clause (i)
of subparagraph (c) if the principal class of its shares, and
any disproportionate class of shares, is regularly traded on
one or more recognized stock exchanges and the company
satisfies at least one of the following additional
requirements: first, the company's principal class of shares is
primarily traded on a recognized stock exchange located in the
Contracting State of which the company is a resident (or, in
the case of a company resident in Belgium, on a recognized
stock exchange located within the European Union or in any
other European Economic Area state, or in the case of a company
resident in the United States, on a recognized stock exchange
located in another state that is a party to the North American
Free Trade Agreement); or, second, the company's primary place
of management and control is in its State of residence.
The term ``recognized stock exchange'' is defined in
subparagraph (d) of paragraph 8. It includes (i) the NASDAQ
System and any stock exchange registered with the Securities
and Exchange Commission as a national securities exchange for
purposes of the Securities Exchange Act of 1934; (ii) the
Brussels stock exchange, the Irish Stock exchange and the stock
exchanges of Amsterdam, Frankfurt, Hamburg, Lisbon, London,
Madrid, Milan, Paris, Toronto, and Zurich; and (iii) any other
stock exchange agreed upon by the competent authorities of the
Contracting States.
If a company has only one class of shares, it is only
necessary to consider whether the shares of that class meet the
relevant trading requirements. If the company has more than one
class of shares, it is necessary as an initial matter to
determine which class or classes constitute the ``principal
class of shares.'' The term ``principal class of shares'' is
defined in subparagraph (a) of paragraph 8 to mean the ordinary
or common shares of the company representing the majority of
the aggregate voting power and value of the company. If the
company does not have a class of ordinary or common shares
representing the majority of the aggregate voting power and
value of the company, then the ``principal class of shares'' is
that class or any combination of classes of shares that
represents, in the aggregate, a majority of the voting power
and value of the company. Subparagraph (c) of paragraph 8
defines the term ``shares'' to include depository receipts for
shares. Although in a particular case involving a company with
several classes of shares it is conceivable that more than one
group of classes could be identified that account for more than
50 percent of the shares, it is only necessary for one such
group to satisfy the requirements of this subparagraph in order
for the company to be entitled to benefits. Benefits would not
be denied to the company even if a second, non-qualifying,
group of shares with more than half of the company's voting
power and value could be identified.
A company whose principal class of shares is regularly
traded on a recognized stock exchange will nevertheless not
qualify for benefits under subparagraph (c) of paragraph 2 if
it has a disproportionate class of shares that is not regularly
traded on a recognized stock exchange. The term
``disproportionate class of shares'' is defined in subparagraph
(b) of paragraph 8. A company has a disproportionate class of
shares if it has outstanding a class of shares which is subject
to terms or other arrangements that entitle the holder to a
larger portion of the company's income, profit, or gain in the
other Contracting State than that to which the holder would be
entitled in the absence of such terms or arrangements. Thus,
for example, a company resident in Belgium has a
disproportionate class of shares if it has outstanding a class
of ``tracking stock'' that pays dividends based upon a formula
that approximates the company's return on its assets employed
in the United States.
The following example illustrates this result.
Example. BCo is a corporation resident in Belgium. BCo has
two classes of shares: Common and Preferred. The Common shares
are listed and regularly traded on the Brussels stock exchange.
The Preferred shares have no voting rights and are entitled to
receive dividends equal in amount to interest payments that BCo
receives from unrelated borrowers in the United States. The
Preferred shares are owned entirely by a single investor that
is a resident of a country with which the United States does
not have a tax treaty. The Common shares account for more than
50 percent of the value of BCo and for 100 percent of the
voting power. Because the owner of the Preferred shares is
entitled to receive payments corresponding to the U.S. source
interest income earned by BCo, the Preferred shares are a
disproportionate class of shares. Because the Preferred shares
are not regularly traded on a recognized stock exchange, BCo
will not qualify for benefits under subparagraph (c) of
paragraph 2.
The term ``regularly traded'' is defined in subparagraph
(e) of paragraph 8. Under that subparagraph a class of shares
is considered to be regularly traded on one or more recognized
stock exchanges if the aggregate number of shares of that class
traded on such stock exchange or exchanges during the preceding
taxable year is at least 6 percent of the average number of
shares outstanding in that class during that preceding taxable
year.
The regular trading requirement can be met by trading on
any recognized exchange or exchanges. Trading on one or more
recognized stock exchanges may be aggregated for purposes of
this requirement. Thus, a U.S. company could satisfy the
regularly traded requirement through trading, in whole or in
part, on a recognized stock exchange located in Belgium.
Authorized but unissued shares are not considered for purposes
of this test.
The term ``primarily traded'' is not defined in the
Convention. In accordance with paragraph 2 of Article 3
(General Definitions), this term will have the meaning it has
under the laws of the State concerning the taxes to which the
Convention applies, generally the source State. In the case of
the United States, this term is understood to have the meaning
it has under Treas. Reg. section 1.884-5(d)(3), relating to the
branch tax provisions of the Code. Accordingly, stock of a
corporation is ``primarily traded'' if the number of shares in
the company's principal class of shares that are traded during
the taxable year on all recognized stock exchanges in the
Contracting State of which the company is a resident exceeds
the number of shares in the company's principal class of shares
that are traded during that year on established securities
markets in any other single foreign country.
A company whose principal class of shares is regularly
traded on a recognized exchange but cannot meet the primarily
traded test may claim treaty benefits if its primary place of
management and control is in its country of residence. This
test should be distinguished from the ``place of effective
management'' test which is used in the OECD Model and by many
other countries to establish residence. In some cases, the
place of effective management test has been interpreted to mean
the place where the board of directors meets. By contrast, the
primary place of management and control test looks to where
day-to-day responsibility for the management of the company
(and its subsidiaries) is exercised. The company's primary
place of management and control will be located in the State in
which the company is a resident only if the executive officers
and senior management employees exercise day-to-day
responsibility for more of the strategic, financial and
operational policy decision making for the company (including
direct and indirect subsidiaries) in that State than in the
other State or any third state, and the staff that support the
management in making those decisions are also based in that
State. Thus, the test looks to the overall activities of the
relevant persons to see where those activities are conducted.
In most cases, it will be a necessary, but not a sufficient,
condition that the headquarters of the company (that is, the
place at which the CEO and other top executives normally are
based) be located in the Contracting State of which the company
is a resident.
To apply the test, it will be necessary to determine which
persons are to be considered ``executive officers and senior
management employees.'' In most cases, it will not be necessary
to look beyond the executives who are members of the Board of
Directors (the ``inside directors'') in the case of a U.S.
company. That will not always be the case, however; in fact,
the relevant persons may be employees of subsidiaries if those
persons make the strategic, financial and operational policy
decisions. Moreover, it would be necessary to take into account
any special voting arrangements that result in certain board
members making certain decisions without the participation of
other board members.
Subsidiaries of Publicly-Traded Corporations--Subparagraph
2(c)(ii).--A company resident in a Contracting State is
entitled to all the benefits of the Convention under clause
(ii) of subparagraph (c) of paragraph 2 if five or fewer
publicly traded companies described in clause (i) are the
direct or indirect owners of at least 50 percent of the
aggregate vote and value of the company's shares (and at least
50 percent of any disproportionate class of shares). If the
publicly-traded companies are indirect owners, however, each of
the intermediate companies must be a resident of one of the
Contracting States.
Thus, for example, a company that is a resident of Belgium,
all the shares of which are owned by another company that is a
resident of Belgium, would qualify for benefits under the
Convention if the principal class of shares (and any
disproportionate classes of shares) of the parent company are
regularly and primarily traded on the Brussels stock exchange.
However, such a subsidiary would not qualify for benefits under
clause (ii) if the publicly traded parent company were a
resident of a third state, for example, and not a resident of
the United States or Belgium. Furthermore, if a parent company
in Belgium indirectly owned the bottom-tier company through a
chain of subsidiaries, each such subsidiary in the chain, as an
intermediate owner, must be a resident of the United States or
Belgium in order for the subsidiary to meet the test in clause
(ii).
Tax Exempt Organizations--Subparagraph 2(d).--Subparagraph
2(d) provides rules by which the tax exempt organizations
described in paragraph 3 of Article 4 (Resident) will be
entitled to all the benefits of the Convention. A pension fund
will qualify for benefits if more than fifty percent of the
beneficiaries, members or participants are individuals resident
in either Contracting State or the organization sponsoring such
pension fund is entitled to benefits under the Convention
(i.e., meets the limitations on benefits provisions of Article
21). For purposes of this provision, the term ``beneficiaries''
should be understood to refer to the persons receiving benefits
from the pension fund. On the other hand, a tax-exempt
organization other than a pension fund automatically qualifies
for benefits, without regard to the residence of its
beneficiaries or members. Entities qualifying under this rule
are those that are generally exempt from tax in their State of
residence and that are established and maintained exclusively
to fulfill religious, charitable, scientific, artistic,
cultural, or educational purposes.
Ownership/Base Erosion--Subparagraph 2(e).--Subparagraph
2(e) provides an additional method to qualify for treaty
benefits that applies to any form of legal entity that is a
resident of a Contracting State. The test provided in
subparagraph (e), the so-called ownership and base erosion
test, is a two-part test. Both prongs of the test must be
satisfied for the resident to be entitled to treaty benefits
under subparagraph 2(e).
The ownership prong of the test, under clause (i), requires
that 50 percent or more of each class of shares or other
beneficial interests in the person is owned, directly or
indirectly, on at least half the days of the person's taxable
year by persons who are residents of the Contracting State of
which that person is a resident and that are themselves
entitled to treaty benefits under subparagraphs (a), (b), (d)
or clause (i) of subparagraph (c) of paragraph 2
Trusts may be entitled to benefits under this provision if
they are treated as residents under Article 4 (Residence) and
they otherwise satisfy the requirements of this subparagraph.
For purposes of this subparagraph, the beneficial interests in
a trust will be considered to be owned by its beneficiaries in
proportion to each beneficiary's actuarial interest in the
trust. The interest of a remainder beneficiary will be equal to
100 percent less the aggregate percentages held by income
beneficiaries. A beneficiary's interest in a trust will not be
considered to be owned by a person entitled to benefits under
the other provisions of paragraph 2 if it is not possible to
determine the beneficiary's actuarial interest. Consequently,
if it is not possible to determine the actuarial interest of
the beneficiaries in a trust, the ownership test under clause
i) cannot be satisfied, unless all possible beneficiaries are
persons entitled to benefits under the other subparagraphs of
paragraph 2.
The base erosion prong of clause (ii) of subparagraph (e)
is satisfied with respect to a person if less than 50 percent
of the person's gross income for the taxable year, as
determined under the tax law in the person's State of
residence, is paid or accrued, directly or indirectly, to
persons who are not residents of either Contracting State
entitled to benefits under subparagraphs (a), (b), (d) or
clause (i) of subparagraph (c) of paragraph 2, in the form of
payments deductible for tax purposes in the payor's State of
residence. These amounts do not include arm's-length payments
in the ordinary course of business for services or tangible
property or payments in respect of financial obligations to a
bank that is not related to the payor. To the extent they are
deductible from the taxable base, trust distributions are
deductible payments. However, depreciation and amortization
deductions, which do not represent payments or accruals to
other persons, are disregarded for this purpose.
Paragraph 3
Paragraph 3 sets forth a derivative benefits test that is
potentially applicable to all treaty benefits, although the
test is applied to individual items of income. In general, a
derivative benefits test entitles the resident of a Contracting
State to treaty benefits if the owner of the resident would
have been entitled to the same benefit had the income in
question flowed directly to that owner. To qualify under this
paragraph, the company must meet an ownership test and a base
erosion test.
Subparagraph (a) sets forth the ownership test. Under this
test, seven or fewer equivalent beneficiaries must own shares
representing at least 95 percent of the aggregate voting power
and value of the company and at least 50 percent of any
disproportionate class of shares. Ownership may be direct or
indirect. The term ``equivalent beneficiary'' is defined in
subparagraph (g) of paragraph 8. This definition may be met in
two alternative ways, the first of which has two requirements.
Under the first alternative, a person may be an equivalent
beneficiary because it is entitled to equivalent benefits under
a treaty between the country of source and the country in which
the person is a resident. This alternative has two
requirements.
The first requirement is that the person must be a resident
of a Member State of the European Union or any other European
Economic Area state, or Switzerland, or a party to the North
American Free Trade Agreement (collectively, ``qualifying
States'').
The second requirement of the definition of ``equivalent
beneficiary'' is that the person must be entitled to equivalent
benefits under an applicable treaty. To satisfy the second
requirement, the person must be entitled to all the benefits of
a comprehensive treaty between the Contracting State from which
benefits of the Convention are claimed and a qualifying State
under provisions analogous to subparagraphs 2(a), (b), (d) or
clause i) of subparagraph (c). For this purpose, however, if
the treaty in question does not have a comprehensive limitation
on benefits article, this requirement is met only if the person
is entitled to benefits under the aforementioned provisions of
paragraph 2.
In addition, to satisfy the second requirement by virtue of
clause (B) of subparagraph (g)(i) with respect to dividends,
interest, royalties, or branch tax, the person must be entitled
to a rate of tax that is at least as low as the rate that would
apply under the Convention to such income. Thus, the rates to
be compared are: (1) the rate of withholding or branch tax that
the source State would have imposed if a qualified resident of
the other Contracting State was the beneficial owner of the
income; and (2) the rate of withholding or branch tax that the
source State would have imposed if the third State resident
received the income directly from the source State. For
example, USCo is a wholly owned subsidiary of BelgiumCo, a
company resident in Belgium. BelgiumCo is wholly owned by FCo,
a corporation resident in Italy. Assuming BelgiumCo satisfies
the requirements of paragraph 3(a) of Article 10 (Dividends),
BelgiumCo would be eligible for the elimination of dividend
withholding tax. The dividend withholding rate in the treaty
between the United States and Italy is 5 percent. Thus, if FCo
received the dividend directly from USCo, FCo would have been
subject to a 5 percent rate of withholding tax on the dividend.
Because FCo would not be entitled to a rate of withholding tax
that is at least as low as the rate that would apply under the
Convention to such income (i.e., zero), FCo is not an
equivalent beneficiary within the meaning of paragraph 8(g)(i)
of Article 21 with respect to the elimination of withholding
tax on dividends.
Subparagraph 8(h) provides a special rule to take account
of the fact that withholding taxes on many inter-company
dividends, interest and royalties are exempt within the
European Union by reason of various EU directives, rather than
by tax treaty. If a U.S. company receives such payments from a
Belgian company, and the U.S. company is owned by a company
resident in a member state of the European Union that would
have qualified for an exemption from withholding tax if it had
received the income directly, the parent company will be
treated as an equivalent beneficiary. This rule is necessary
because many European Union member countries have not re-
negotiated their tax treaties to reflect the exemptions
available under the directives.
The requirement that a person be entitled to ``all the
benefits'' of a comprehensive tax treaty eliminates those
persons that qualify for benefits with respect to only certain
types of income. Accordingly, the fact that a French parent of
a Belgium company is engaged in the active conduct of a trade
or business in France and therefore would be entitled to the
benefits of the U.S.-France treaty if it received dividends
directly from a U.S. subsidiary of the Belgian company is not
sufficient for purposes of this paragraph. Further, the French
company cannot be an equivalent beneficiary if it qualifies for
benefits only with respect to certain income as a result of a
``derivative benefits'' provision in the U.S.-France treaty.
However, it would be possible to look through the French
company to its parent company to determine whether the parent
company is an equivalent beneficiary.
The second alternative for satisfying the ``equivalent
beneficiary'' test is available only to residents of one of the
two Contracting States. U.S. or Belgian residents who are
eligible for treaty benefits by reason of subparagraphs (a),
(b), (d) or clause i) of subparagraph (c) of paragraph 2 are
equivalent beneficiaries under the second alternative. Thus, a
Belgian individual will be an equivalent beneficiary without
regard to whether the individual would have been entitled to
receive the same benefits if it received the income directly. A
resident of a third country could not qualify for treaty
benefits under any of those subparagraphs or any other rule of
the treaty, and therefore does not qualify as an equivalent
beneficiary under this alternative. Thus, any resident of a
third country can be an equivalent beneficiary only if it would
have been entitled to equivalent benefits had it received the
income directly.
The second alternative was included in order to clarify
that ownership by certain residents of a Contracting State
would not disqualify a U.S. or Belgian company under this
paragraph. Thus, for example, if 90 percent of a Belgian
company is owned by five companies that are resident in member
states of the European Union who satisfy the requirements of
clause (i) of subparagraph (g) of paragraph 8, and 10 percent
of the Belgian company is owned by a U.S. or Belgian
individual, then the Belgian company still can satisfy the
requirements of subparagraph (a) of paragraph 3.
Subparagraph (b) sets forth the base erosion test. A
company meets this base erosion test if less than 50 percent of
its gross income for the taxable period (as determined in the
company's State of residence) is paid or accrued, directly or
indirectly, to a person or persons who are not equivalent
beneficiaries in the form of payments deductible for tax
purposes in company's State of residence. This test is the same
as the base erosion test in clause (ii) of subparagraph (e) of
paragraph 2, except that the test in subparagraph 3(b) focuses
on base-eroding payments to persons who are not equivalent
beneficiaries.
As in the case of base erosion test in subparagraph (e) of
paragraph 2, deductible payments in subparagraph (b) of
paragraph 3 also do not include arm's length payments in the
ordinary course of business for services or tangible property
and payments in respect of financial obligations to a bank that
is not related to the payor.
Paragraph 4
Paragraph 4 sets forth an alternative test under which a
resident of a Contracting State may receive treaty benefits
with respect to certain items of income that are connected to
an active trade or business conducted in its State of
residence. A resident of a Contracting State may qualify for
benefits under paragraph 4 whether or not it also qualifies
under paragraph 2 or 3.
Subparagraph (a) sets forth the general rule that a
resident of a Contracting State engaged in the active conduct
of a trade or business in that State may obtain the benefits of
the Convention with respect to an item of income derived from
the other Contracting State. The item of income, however, must
be derived in connection with or incidental to that trade or
business.
The term ``trade or business'' is not defined in the
Convention. Pursuant to paragraph 2 of Article 3 (General
Definitions), when determining whether a resident of Belgium is
entitled to the benefits of the Convention under paragraph 4 of
this Article with respect to an item of income derived from
sources within the United States, the United States will
ascribe to this term the meaning that it has under the law of
the United States. Accordingly, the U.S. competent authority
will refer to the regulations issued under section 367(a) for
the definition of the term ``trade or business.'' In general,
therefore, a trade or business will be considered to be a
specific unified group of activities that constitute or could
constitute an independent economic enterprise carried on for
profit. Furthermore, a corporation generally will be considered
to carry on a trade or business only if the officers and
employees of the corporation conduct substantial managerial and
operational activities.
The business of making or managing investments for the
resident's own account will be considered to be a trade or
business only when part of banking, insurance or securities
activities conducted by a bank, an insurance company, or a
registered securities dealer. Such activities conducted by a
person other than a bank, insurance company or registered
securities dealer will not be considered to be the conduct of
an active trade or business, nor would they be considered to be
the conduct of an active trade or business if conducted by a
bank, insurance company or registered securities dealer but not
as part of the company's banking, insurance or dealer business.
Because a headquarters operation is in the business of managing
investments, a company that functions solely as a headquarters
company will not be considered to be engaged in an active trade
or business for purposes of paragraph 3.
An item of income is ``derived in connection with'' a trade
or business if the income-producing activity in the State of
source is a line of business that ``forms a part of'' or is
``complementary'' to the trade or business conducted in the
State of residence by the income recipient.
A business activity generally will be considered to form
part of a business activity conducted in the State of source if
the two activities involve the design, manufacture or sale of
the same products or type of products, or the provision of
similar services. The line of business in the State of
residence may be upstream, downstream, or parallel to the
activity conducted in the State of source. Thus, the line of
business may provide inputs for a manufacturing process that
occurs in the State of source, may sell the output of that
manufacturing process, or simply may sell the same sorts of
products that are being sold by the trade or business carried
on in the State of source.
Example 1. USCo is a corporation resident in the United
States. USCo is engaged in an active manufacturing business in
the United States. USCo owns 100 percent of the shares of
BelCo, a corporation resident Belgium. BelCo distributes USCo
products in Belgium. Since the business activities conducted by
the two corporations involve the same products, BelCo's
distribution business is considered to form a part of USCo's
manufacturing business.
Example 2. The facts are the same as in Example 1, except
that USCo does not manufacture. Rather, USCo operates a large
research and development facility in the United States that
licenses intellectual property to affiliates worldwide,
including BelCo. BelCo and other USCo affiliates then
manufacture and market the USCo-designed products in their
respective markets. Since the activities conducted by BelCo and
USCo involve the same product lines, these activities are
considered to form a part of the same trade or business.
For two activities to be considered to be
``complementary,'' the activities need not relate to the same
types of products or services, but they should be part of the
same overall industry and be related in the sense that the
success or failure of one activity will tend to result in
success or failure for the other. Where more than one trade or
business is conducted in the State of source and only one of
the trades or businesses forms a part of or is complementary to
a trade or business conducted in the State of residence, it is
necessary to identify the trade or business to which an item of
income is attributable. Royalties generally will be considered
to be derived in connection with the trade or business to which
the underlying intangible property is attributable. Dividends
will be deemed to be derived first out of earnings and profits
of the treaty-benefited trade or business, and then out of
other earnings and profits. Interest income may be allocated
under any reasonable method consistently applied. A method that
conforms to U.S. principles for expense allocation will be
considered a reasonable method.
Example 3. Americair is a corporation resident in the
United States that operates an international airline. BelSub is
a wholly-owned subsidiary of Americair resident in Belgium.
BelSub operates a chain of hotels in Belgium that are located
near airports served by Americair flights. Americair frequently
sells tour packages that include air travel to Belgium and
lodging at BelSub hotels. Although both companies are engaged
in the active conduct of a trade or business, the businesses of
operating a chain of hotels and operating an airline are
distinct trades or businesses. Therefore BelSub's business does
not form a part of Americair's business. However, BelSub's
business is considered to be complementary to Americair's
business because they are part of the same overall industry
(travel) and the links between their operations tend to make
them interdependent.
Example 4. The facts are the same as in Example 3, except
that BelSub owns an office building in Belgium instead of a
hotel chain. No part of Americair's business is conducted
through the office building. BelSub's business is not
considered to form a part of or to be complementary to
Americair's business. They are engaged in distinct trades or
businesses in separate industries, and there is no economic
dependence between the two operations.
Example 5. USFlower is a corporation resident in the United
States. USFlower produces and sells flowers in the United
States and other countries. USFlower owns all the shares of
BelHolding, a corporation resident in Belgium. BelHolding is a
holding company that is not engaged in a trade or business.
BelHolding owns all the shares of three corporations that are
resident in Belgium: BelFlower, BelLawn, and BelFish. BelFlower
distributes USFlower flowers under the USFlower trademark in
Belgium. BelLawn markets a line of lawn care products in
Belgium under the USFlower trademark. In addition to being sold
under the same trademark, BelLawn and BelFlower products are
sold in the same stores and sales of each company's products
tend to generate increased sales of the other's products.
BelFish imports fish from the United States and distributes it
to fish wholesalers in Belgium. For purposes of paragraph 4,
the business of BelFlower forms a part of the business of
USFlower, the business of BelLawn is complementary to the
business of USFlower, and the business of BelFish is neither
part of nor complementary to that of USFlower.
An item of income derived from the State of source is
``incidental to'' the trade or business carried on in the State
of residence if production of the item facilitates the conduct
of the trade or business in the State of residence. An example
of incidental income is the temporary investment of working
capital of a person in the State of residence in securities
issued by persons in the State of source.
Subparagraph (b) of paragraph 4 states a further condition
to the general rule in subparagraph (a) in cases where the
trade or business generating the item of income in question is
carried on either by the person deriving the income or by any
associated enterprises. Subparagraph (b) states that the trade
or business carried on in the State of residence, under these
circumstances, must be substantial in relation to the activity
in the State of source. The substantiality requirement is
intended to prevent a narrow case of treaty-shopping abuses in
which a company attempts to qualify for benefits by engaging in
de minimis connected business activities in the treaty country
in which it is resident (i.e., activities that have little
economic cost or effect with respect to the company business as
a whole).
The determination of substantiality is made based upon all
the facts and circumstances and takes into account the
comparative sizes of the trades or businesses in each
Contracting State, the nature of the activities performed in
each Contracting State, and the relative contributions made to
that trade or business in each Contracting State. In any case,
in making each determination or comparison, due regard will be
given to the relative sizes of the economies in the two
Contracting States.
The determination in subparagraph (b) also is made
separately for each item of income derived from the State of
source. It therefore is possible that a person would be
entitled to the benefits of the Convention with respect to one
item of income but not with respect to another. If a resident
of a Contracting State is entitled to treaty benefits with
respect to a particular item of income under paragraph 4, the
resident is entitled to all benefits of the Convention insofar
as they affect the taxation of that item of income in the State
of source.
The application of the substantiality requirement only to
income from related parties focuses only on potential abuse
cases, and does not hamper certain other kinds of non-abusive
activities, even though the income recipient resident in a
Contracting State may be very small in relation to the entity
generating income in the other Contracting State. For example,
if a small U.S. research firm develops a process that it
licenses to a very large, unrelated, pharmaceutical
manufacturer in Belgium, the size of the U.S. research firm
would not have to be tested against the size of the Belgian
manufacturer. Similarly, a small U.S. bank that makes a loan to
a very large unrelated company operating a business in Belgium
would not have to pass a substantiality test to receive treaty
benefits under Paragraph 4.
Subparagraph (c) of paragraph 4 provides special
attribution rules for purposes of applying the substantive
rules of subparagraphs (a) and (b). Thus, these rules apply for
purposes of determining whether a person meets the requirement
in subparagraph (a) that it be engaged in the active conduct of
a trade or business and that the item of income is derived in
connection with that active trade or business, and for making
the comparison required by the ``substantiality'' requirement
in subparagraph (b). Subparagraph (c) attributes to a person
activities conducted by persons ``connected'' to such person. A
person (``X'') is connected to another person (``Y'') if X
possesses 50 percent or more of the beneficial interest in Y
(or if Y possesses 50 percent or more of the beneficial
interest in X). For this purpose, X is connected to a company
if X owns shares representing fifty percent or more of the
aggregate voting power and value of the company or fifty
percent or more of the beneficial equity interest in the
company. X also is connected to Y if a third person possesses
fifty percent or more of the beneficial interest in both X and
Y. For this purpose, if X or Y is a company, the threshold
relationship with respect to such company or companies is fifty
percent or more of the aggregate voting power and value or
fifty percent or more of the beneficial equity interest.
Finally, X is connected to Y if, based upon all the facts and
circumstances, X controls Y, Y controls X, or X and Y are
controlled by the same person or persons.
Paragraph 5
Paragraph 5 provides that a resident of one of the
Contracting States is entitled to all the benefits of the
Convention if that person functions as a recognized
headquarters company for a multinational corporate group. The
provisions of this paragraph are consistent with the other U.S.
treaties where this provision has been adopted. For this
purpose, the multinational corporate group includes all
corporations that the headquarters company supervises and
excludes affiliated corporations not supervised by the
headquarters company. The headquarters company does not have to
own shares in the companies that it supervises. In order to be
considered a headquarters company, the person must meet several
requirements that are enumerated in Paragraph 5. These
requirements are discussed below.
Overall Supervision and Administration
Subparagraph (a) provides that the person must provide a
substantial portion of the overall supervision and
administration of the group. This activity may include group
financing, but group financing may not be the principal
activity of the person functioning as the headquarters company.
A person only will be considered to engage in supervision and
administration if it engages in a number of the following
activities: group financing, pricing, marketing, internal
auditing, internal communications, and management. Other
activities also could be part of the function of supervision
and administration.
In determining whether a ``substantial portion'' of the
overall supervision and administration of the group is provided
by the headquarters company, its headquarters-related
activities must be substantial in relation to the same
activities for the same group performed by other entities.
Subparagraph (a) does not require that the group that is
supervised include persons in the other State. However, it is
anticipated that in most cases the group will include such
persons, due to the requirement discussed below that the income
derived by the headquarters company be derived in connection
with or be incidental to an active trade or business supervised
by the headquarters company.
Active Trade or Business
Subparagraph (b) is the first of several requirements
intended to ensure that the relevant group is truly
``multinational.'' This sub-paragraph provides that the
corporate group supervised by the headquarters company must
consist of corporations resident in, and engaged in active
trades or businesses in, at least five countries. Furthermore,
at least five countries must contribute substantially to the
income generated by the group, as the rule requires that the
business activities carried on in each of the five countries
(or groupings of countries) generate at least 10 percent of the
gross income of the group. For purposes of the 10 percent gross
income requirement, the income from multiple countries may be
aggregated into non-overlapping groupings, as long as there are
at least five individual countries or groupings that each
satisfy the 10 percent requirement. If the gross income
requirement under this subparagraph is not met for a taxable
year, the taxpayer may satisfy this requirement by applying the
10 percent gross income test to the average of the gross
incomes for the four years preceding the taxable year.
Example 1. BHQ is a corporation resident in Belgium. BHQ
functions as a headquarters company for a group of companies.
These companies are resident in the United States, Canada, New
Zealand, the United Kingdom, Malaysia, the Philippines,
Singapore, and Indonesia. The gross income generated by each of
these companies for 2008 and 2009 is as follows:
--------------------------------------------------------------------------------------------------------------------------------------------------------
Country 2008 2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
United States $ 40 $ 45
Canada 25 15
New Zealand 10 20
United Kingdom 30 35
Malaysia 10 12
Philippines 7 10
Singapore 10 8
Indonesia 5 10
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total $137 $155
--------------------------------------------------------------------------------------------------------------------------------------------------------
For 2008, 10 percent of the gross income of this group is
equal to $13.70. Only the United States, Canada, and the United
Kingdom satisfy this requirement for that year. The other
companies in the group may be aggregated to meet this
requirement. Because New Zealand and Malaysia have a total
gross income of $20, and the Philippines, Singapore, and
Indonesia have a total gross income of $22, these two groupings
of countries may be treated as the fourth and fifth members of
the group for purposes of subparagraph (b).
In the following year, 10 percent of the gross income is
$15.50. Only the United States, New Zealand, and the United
Kingdom satisfy this requirement. Because Canada and Malaysia
have a total gross income of $27, and the Philippines,
Singapore, and Indonesia have a total gross income of $28,
these two groupings of countries may be treated as the fourth
and fifth members of the group for purposes of subparagraph
(b). The fact that Canada replaced New Zealand in a group is
not relevant for this purpose. The composition of the grouping
may change from year to year.
Single Country Limitation
Subparagraph (c) provides that the business activities
carried on in any one country other than the headquarters
company's state of residence must generate less than 50 percent
of the gross income of the group. If the gross income
requirement under this subparagraph is not met for a taxable
year, the taxpayer may satisfy this requirement applying the 50
percent gross income test to the average of the gross incomes
for the four years preceding the taxable year. The following
example illustrates the application of this subparagraph.
Example. BHQ is a corporation resident in Belgium. BHQ
functions as a headquarters company for a group of companies.
BHQ derives dividend income from a United States subsidiary in
the 2008 taxable year. The state of residence of each of these
companies, the situs of their activities and the amounts of
gross income attributable to each for the years 2008 through
2012 are set forth below.
----------------------------------------------------------------------------------------------------------------
Company Situs 2012 2011 2010 2009 2008
----------------------------------------------------------------------------------------------------------------
United States U.S. $100 $100 $95 $ 90 $ 85
Mexico U.S. 10 8 5 0 0
Canada U.S. 20 18 16 15 12
United Kingdom U.K 30 32 30 28 27
New Zealand N.Z. 40 42 38 36 35
Japan Japan 35 32 30 30 28
Singapore Singapore 25 25 24 22 20
----------------------------------------------------------------------------------------------------------------
Total $260 $257 $238 $221 $207
----------------------------------------------------------------------------------------------------------------
Because the United States' total gross income of $130 in
2012 is not less than 50 percent of the gross income of the
group, subparagraph (c) is not satisfied with respect to
dividends derived in 2012. However, the United States' average
gross income for the preceding four years may be used in lieu
of the preceding year's average. The United States' average
gross income for the years 2008-11 is $111.00 ($444/4). The
group's total average gross income for these years is $230.75
($923/4). Because $111.00 represents 48.1 percent of the
group's average gross income for the years 2008 through 2011,
the requirement under subparagraph (c) is satisfied.
Other State Gross Income Limitation
Subparagraph (d) provides that no more than 25 percent of
the headquarters company's gross income may be derived from the
other Contracting State. Thus, if the headquarters company's
gross income for the taxable year is $200, no more than $50 of
this amount may be derived from the other Contracting State. If
the gross income requirement under this subparagraph is not met
for a taxable year, the taxpayer may satisfy this requirement
by applying the 25 percent gross income test to the average of
the gross incomes for the four years preceding the taxable
year.
Independent Discretionary Authority
Subparagraph (e) requires that the headquarters company
have and exercise independent discretionary authority to carry
out the functions referred to in subparagraph (a). Thus, if the
headquarters company was nominally responsible for group
financing, pricing, marketing and other management functions,
but merely implemented instructions received from another
entity, the headquarters company would not be considered to
have and exercise independent discretionary authority with
respect to these functions. This determination is made
individually for each function. For instance, a headquarters
company could be nominally responsible for group financing,
pricing, marketing and internal auditing functions, but another
entity could be actually directing the headquarters company as
to the group financing function. In such a case, the
headquarters company would not be deemed to have independent
discretionary authority for group financing, but it might have
such authority for the other functions. Functions for which the
headquarters company does not have and exercise independent
discretionary authority are considered to be conducted by an
entity other than the headquarters company for purposes of
subparagraph (a).
Income Taxation Rules
Subparagraph (f) requires that the headquarters company be
subject to the generally applicable income taxation rules in
its country of residence. This reference should be understood
to mean that the company must be subject to the income taxation
rules to which a company engaged in the active conduct of a
trade or business would be subject. Thus, if one of the
Contracting States has or introduces special taxation
legislation that impose a lower rate of income tax on
headquarters companies than is imposed on companies engaged in
the active conduct of a trade or business, or provides for an
artificially low taxable base for such companies, a
headquarters company subject to these rules is not entitled to
the benefits of the Convention under Paragraph 5.
In accordance with paragraph 3 of Article 28 (Entry Into
Force), subparagraph (f) shall not have effect until January 1,
2011.
In Connection With or Incidental to Trade or Business
Subparagraph (g) requires that the income derived in the other
Contracting State be derived in connection with or be
incidental to the active business activities referred to in
subparagraph (b). This determination is made under the
principles set forth in paragraph 4. For instance, assume that
a Belgian company satisfies the other requirements in paragraph
5 and acts as a headquarters company for a group that includes
a United States corporation. If the group is engaged in the
design and manufacture of computer software, but the U.S.
company is also engaged in the design and manufacture of
photocopying machines, the income that the Belgian company
derives from the United States would have to be derived in
connection with or be incidental to the income generated by the
computer business in order to be entitled to the benefits of
the Convention under paragraph 5. Interest income received from
the U.S. company also would be entitled to the benefits of the
Convention under this paragraph as long as the interest was
attributable to the computer business supervised by the
headquarters company Interest income derived from an unrelated
party would normally not, however, satisfy the requirements of
this clause.
Paragraph 6
Paragraph 6 deals with the treatment of interest or royalty
income in the context of a so-called ``triangular case.'' The
paragraph provides special rules applicable to U.S. source
interest or royalties that are attributable to permanent
establishment that a Belgian company has in a third state, and
that are otherwise exempt from taxation in Belgium. The
paragraph is intended to authorize the United States to collect
a tax at source when there is not a significant level of double
taxation.
The term ``triangular case'' refers to the use of the
structure described below by a resident of Belgium to earn, in
this example, interest income from the United States. The
Belgian resident, who is assumed to qualify for benefits under
one or more of the provisions of Article 21 (Limitation on
Benefits), sets up a permanent establishment in a third
jurisdiction that imposes only a low rate of tax on the income
of the permanent establishment. The Belgian resident then lends
funds into the United States through the permanent
establishment. The permanent establishment, despite its third-
jurisdiction location, is an integral part of a Belgian
resident. Therefore the income that it earns on those loans,
absent the provisions of paragraph 6, is entitled to exemption
from U.S. withholding tax under the Convention. However, assume
the income of the permanent establishment is exempt from
Belgian tax. Thus, the interest income is exempt from U.S. tax,
is subject to little tax in the host jurisdiction of the
permanent establishment, and is exempt from Belgian tax.
Because the United States does not exempt the profits of a
third-jurisdiction permanent establishment of a U.S. resident
from U.S. tax, either by statute or by treaty, this paragraph
only applies with respect to U.S. source interest, or royalties
that are attributable to a third-jurisdiction of a Belgian
resident. Paragraph 6 replaces the otherwise applicable rules
in the Convention for interest and royalties with a 15 percent
withholding tax for these amounts, if the actual tax paid on
the income in the country where the permanent establishment is
located is less than 60 percent of the tax that would have been
payable in Belgium if the income were earned in Belgium by the
enterprise and were not attributable to the permanent
establishment in the third state.
In general, the principles employed under Code section
954(b)(4) will be employed to determine whether the profits are
subject to an effective rate of taxation that is above the
specified threshold.
Notwithstanding the level of tax on income of the permanent
establishment, paragraph 6 does not apply under certain
circumstances.
Subparagraph a) provides that in the case of interest as
defined in Article 11 (Interest), the paragraph does not apply
if the interest is derived in connection with, or is incidental
to, the active conduct of a trade or business carried on by the
permanent establishment in the third state. The business of
making, managing or simply holding investments for the person's
own account is not considered to be an active trade or
business, unless these are banking or securities activities
carried on by a bank or registered securities dealer.
Subparagraph b) provides that in the case of royalties
defined in Article 12 (Royalties), the paragraph does not apply
if the royalties are received as compensation for the use of,
or the right to use, intangible property produced or developed
by the permanent establishment.
Paragraph 7
Paragraph 7 provides that a resident of one of the States
that is not entitled to the benefits of the Convention as a
result of paragraphs 1 through 6 still may be granted benefits
under the Convention at the discretion of the competent
authority of the State from which benefits are claimed. In
making determinations under paragraph 7, that competent
authority will take into account as its guideline whether the
establishment, acquisition, or maintenance of the person
seeking benefits under the Convention, or the conduct of such
person's operations, has or had as one of its principal
purposes the obtaining of benefits under the Convention.
Benefits will not be granted, however, solely because a company
was established prior to the effective date of a treaty or
protocol. In that case a company would still be required to
establish to the satisfaction of the Competent Authority clear
non-tax business reasons for its formation in a Contracting
State, or that the allowance of benefits would not otherwise be
contrary to the purposes of the treaty. Thus, persons that
establish operations in one of the States with a principal
purpose of obtaining the benefits of the Convention ordinarily
will not be granted relief under paragraph 7.
The competent authority's discretion is quite broad. It may
grant all of the benefits of the Convention to the taxpayer
making the request, or it may grant only certain benefits. For
instance, it may grant benefits only with respect to a
particular item of income in a manner similar to paragraph 4.
Further, the competent authority may establish conditions, such
as setting time limits on the duration of any relief granted.
For purposes of implementing paragraph 7, a taxpayer will
be permitted to present his case to the relevant competent
authority for an advance determination based on the facts. In
these circumstances, it is also expected that, if the competent
authority determines that benefits are to be allowed, they will
be allowed retroactively to the time of entry into force of the
relevant treaty provision or the establishment of the structure
in question, whichever is later.
Finally, there may be cases in which a resident of a
Contracting State may apply for discretionary relief to the
competent authority of his State of residence. This would
arise, for example, if the benefit it is claiming is provided
by the residence country, and not by the source country. So,
for example, if a company that is a resident of the United
States would like to claim the benefit of the re-sourcing rule
of paragraph 3 of Article 22, but it does not meet any of the
objective tests of paragraphs 2 through 6, it may apply to the
U.S. competent authority for discretionary relief.
Paragraph 8
Paragraph 8 defines several key terms for purposes of
Article 21. Each of the defined terms is discussed above in the
context in which it is used.
ARTICLE 22 (RELIEF FROM DOUBLE TAXATION)
This Article describes the manner in which each Contracting
State undertakes to relieve double taxation. The United States
uses the foreign tax credit method under its internal law, and
by treaty.
Paragraph 1
Paragraph 1 provides that Belgium will provide relief from
double taxation through a mixture of the credit and exemption
methods.
Under subparagraph a) Belgium generally adopts the
exemption with progression method of relieving double taxation
with respect to certain income that is taxed by the United
States. The income subject to exemption is income derived by a
resident of Belgium and taxed by the United States in
accordance with the Convention, other than dividend, interest
and royalty income. Under subparagraph a), Belgium exempts such
income from taxation, but takes the income into account in
determining rate of Belgian tax applicable to the remainder of
the resident's income. The exemption provided under
subparagraph (a) is subject to the provisions of subparagraph
(f), discussed below, in certain cases where a Belgian resident
derives income through a permanent establishment in the United
States.
Subparagraph b) provides relief from double taxation for
residents of Belgium deriving income described in subparagraph
a) through certain entities that are created in the United
States. The subparagraph seeks to coordinate the use of United
States entities that are so called hybrid entities, in that
they are fiscally transparent for United States tax purposes
(the income of such entities is subject to tax in the hands of
the investors of the entity), but such entities are viewed as
companies under Belgian law. Where a resident of Belgium
derives income from participation in such entity, the income
from such entity will generally have been subject to taxation
in the United States in the hands of the Belgian investor. That
is, the investor will be subject to tax in the United States on
his proportional share of the income of such entity. However,
since Belgium views the entity as non-fiscally transparent,
Belgian tax law will not see income at the investor level until
there is a distribution of the earnings of such entity. Under
Belgian tax law, this distribution is viewed as a dividend.
Without the relief under this subparagraph, the Belgian
investor would be double taxed with respect to such income:
once in the United States when the income was earned and taxed
in the hands of the investor, and once in Belgium when the
earnings are distributed to the investor and Belgium sees a
dividend. As a consequence, subparagraph (b) provides the
Belgian investor an exemption with respect to the dividend,
provided that the investor has been taxed by the United States
proportionally to his participation in the entity on the income
out of which the income treated as dividends under Belgian law
is paid.
Subparagraph (b) also provides that the exempted income is
the income received after deduction of the costs incurred in
Belgium or elsewhere in relation to the management of the
participation in the entity.
Subparagraph (c) provides that dividends that derived by a
Belgian company from a company resident in the United States,
are exempt from the Belgian corporate income tax to the extent
that such a dividend would have been exempt from Belgian tax if
the two companies were both residents of Belgium.
If subparagraph (c) does not apply to exempt dividends
derived by a Belgian resident company from a U.S. resident
company, subparagraph d) provides protection from double
taxation in the form of a credit against Belgian corporate tax.
In such cases, the Belgian company shall be entitled to credit
against its Belgian corporate income tax the United States tax
levied on the dividends under Article 10 (Dividends). The
credit is limited to that part of the corporate income tax that
is proportionally related to the relevant dividends.
Subparagraph (e) generally provides that Belgium will
permit a Belgian resident a credit against Belgian tax for
United States taxes levied on interest or royalties. The credit
of such tax is subject to the provisions of Belgian law
concerning foreign tax credits.
Subparagraph (f) provides that if a Belgian resident has a
permanent establishment in the United States, and the losses
from such activity have been effectively deducted from profits
for its taxation in Belgium, then the exemption of subparagraph
a) does not apply to profits of other taxable periods
attributable to the permanent establishment to the extent that
those profits were exempted from United States tax by reason of
the use of such losses in the United States.
Paragraph 2
The United States agrees, in paragraph 2, to allow to its
citizens and residents a credit against U.S. tax for income
taxes paid or accrued to Belgium. Paragraph 2 also provides
that Belgium's covered taxes are income taxes for U.S.
purposes. This provision is based on the Department of the
Treasury's review of Belgium's laws.
Subparagraph (b) provides for a deemed-paid credit,
consistent with section 902 of the Code, to a U.S. corporation
in respect of dividends received from a corporation resident in
Belgium of which the U.S. corporation owns at least 10 percent
of the voting stock. This credit is for the tax paid by the
corporation to Belgium on the profits out of which the
dividends are considered paid.
The credits allowed under paragraph 2 are allowed in
accordance with the provisions and subject to the limitations
of U.S. law, as that law may be amended over time, so long as
the general principle of the Article, that is, the allowance of
a credit, is retained. Thus, although the Convention provides
for a foreign tax credit, the terms of the credit are
determined by the provisions, at the time a credit is given, of
the U.S. statutory credit.
Therefore, the U.S. credit under the Convention is subject
to the various limitations of U.S. law (see, e.g., Code
sections 901-908). For example, the credit against U.S. tax
generally is limited to the amount of U.S. tax due with respect
to net foreign source income within the relevant foreign tax
credit limitation category (see Code section 904(a) and (d)),
and the dollar amount of the credit is determined in accordance
with U.S. currency translation rules (see, e.g., Code section
986). Similarly, U.S. law applies to determine carryover
periods for excess credits and other inter-year adjustments.
Paragraph 3
Paragraph 3 provides a re-sourcing rule for gross income
covered by paragraph 2. Paragraph 3 is intended to ensure that
a U.S. resident can obtain an appropriate amount of U.S.
foreign tax credit for income taxes paid to Belgium when the
Convention assigns to Belgium primary taxing rights over an
item of gross income.
Accordingly, if the Convention allows Belgium to tax an
item of gross income (as defined under U.S. law) derived by a
resident of the United States, the United States will treat
that item of gross income as gross income from sources within
Belgium for U.S. foreign tax credit purposes. In the case of a
U.S.-owned foreign corporation, however,
section 904(h)(10) may apply for purposes of determining
the U.S. foreign tax credit with respect to income subject to
this re-sourcing rule. Section 904(h)(10) generally applies the
foreign tax credit limitation separately to re-sourced income.
Furthermore, the paragraph 3 resourcing rule applies to gross
income, not net income. Accordingly, U.S. expense allocation
and apportionment rules, see, e.g., Treas. Reg. section 1.861-
9, continue to apply to income resourced under paragraph 3.
Paragraph 4
Paragraph 4 provides special rules for the tax treatment in
both States of certain types of income. Subparagraph (a)
addresses income arising in a State other than the United
States or Belgium that is derived by U.S. citizens, former
citizens or former long-term residents who are residents of
Belgium. The remaining subparagraphs address income derived
from U.S. sources by such persons.
U.S. citizens, regardless of residence, are subject to U.S.
tax at ordinary progressive rates on their worldwide income. In
certain cases, the United States may impose taxation on former
U.S. citizens or former long-term residents of the United
States (referred to in this paragraph as ``section 877
taxpayers''). Because of these rules, the U.S. tax on income of
U.S. citizens or section 877 taxpayers who are resident in
Belgium may exceed the U.S. tax that may be imposed under the
Convention on income derived by a resident of Belgium who is
not a U.S. citizen. In general, the provisions of paragraph 4
ensure that Belgium does not bear the cost of U.S. taxation of
U.S. citizens or section 877 taxpayers who are residents of
Belgium.
Subparagraph (a) provides that where a U.S. citizen or
section 877 taxpayer that is a resident of Belgium derives
income from sources arising in third countries, as determined
under the laws of Belgium, the taxation of such amounts by the
United States shall not affect the taxation in Belgium of such
income. Thus, no agreement is reached under Article 22 of the
Convention for relieving double taxation with respect to such
income. The provisions of Article 24 (Mutual Agreement
Procedure) may be used to alleviate double taxation in such
cases.
Subparagraph (b) provides special credit rules for Belgium
with respect to U.S. source income or income treated as U.S.
source income under section 877 of the Code (referred to in the
following explanation as U.S. source income). These rules apply
to items of U.S. source income that would be either exempt from
U.S. tax or subject to reduced rates of U.S. tax under the
provisions of the Convention if they had been received by a
resident of Belgium who is not a U.S. citizen or section 877
taxpayer. The tax credit allowed in Belgium under subparagraph
4(b) with respect to such items need not exceed the U.S. tax
that may be imposed under the Convention, other than tax
imposed solely by reason of the U.S. citizenship of the
taxpayer or application of section 877 of the Code under the
provisions of the saving clause of paragraph 4 of Article 1
(General Scope).
For example, if a U.S. citizen resident in Belgium receives
portfolio dividends from sources within the United States, the
foreign tax credit granted by Belgium would be limited to 15
percent of the dividend--the U.S. tax that may be imposed under
subparagraph (b) of paragraph 2 of Article 10 (Dividends)--even
if the shareholder is subject to U.S. net income tax because of
his U.S. citizenship. With respect to royalty or interest
income, Belgium would allow no foreign tax credit, because its
residents are exempt from U.S. tax on these classes of income
under the provisions of Articles 11 (Interest) and 12
(Royalties).
Paragraph 4(c) eliminates the potential for double taxation
that can arise because subparagraph 4(b) provides that Belgium
need not provide full relief for the U.S. tax imposed on its
citizens or section 877 taxpayers resident in Belgium. The
subparagraph provides that the United States will credit the
income tax paid or accrued to Belgium, after the application of
subparagraph 4(b). It further provides that in allowing the
credit, the United States will not reduce its tax below the
amount that is taken into account in Belgium in applying
subparagraph 4(b). That is, at a minimum, the United States
will preserve its ability to tax the U.S. citizen or section
877 taxpayer to the extent that it would be entitled to impose
source country taxation if the income was earned by a Belgian
resident that is not a U.S. citizen or section 877 taxpayer.
Since the income described in paragraph 4(b) generally will
be U.S. source income, or so treated under section 877 of the
Code, special rules are required to re-source some of the
income to Belgium in order for the United States to be able to
credit the tax paid to Belgium. This resourcing is provided for
in subparagraph 4(d), which deems the items of income referred
to in subparagraph 4(b) to be from foreign sources to the
extent necessary to avoid double taxation under paragraph 4(c).
Subparagraph 3(d)(iii) of Article 24 (Mutual Agreement
Procedure) provides a mechanism by which the competent
authorities can resolve any disputes regarding whether income
is from sources within the United States.
The following two examples illustrate the application of
paragraph 4 in the case of a U.S.-source portfolio dividend
received by a U.S. citizen resident in Belgium. In both
examples, the U.S. rate of tax on residents of Belgium, under
subparagraph (b) of paragraph 2 of Article 10 (Dividends) of
the Convention, is 15 percent. In both examples, the U.S.
income tax rate on the U.S. citizen is 35 percent. In example
1, the rate of income tax imposed in Belgium on its resident
(the U.S. citizen) is 25 percent (below the U.S. rate), and in
example 2, the rate imposed on its resident is 40 percent
(above the U.S. rate). The assumptions with respect to the rate
of Belgium tax are intended only for illustrative purposes.
------------------------------------------------------------------------
Example 1 Example 2
------------------------------------------------------------------------
Subparagraph (b)
U.S. dividend declared $100.00 $100.00
Notional U.S. withholding tax (Article 10(2)(b)) 15.00 15.00
Taxable income in Belgium 100.00 100.00
Belgium tax before credit 25.00 40.00
Less: tax credit for notional U.S. withholding 15.00 15.00
tax
Net post-credit tax paid to Belgium $ 10.00 $ 25.00
========================================================================
Subparagraphs (c) and (d)
U.S. pre-tax income $100.00 $100.00
U.S. pre-credit citizenship tax 35.00 35.00
Notional U.S. withholding tax 15.00 15.00
U.S. tax eligible to be offset by credit 20.00 20.00
Tax paid to Belgium 10.00 25.00
Income re-sourced from U.S. to Belgium (see 28.57 57.14
below)
U.S. pre-credit tax on re-sourced income 10.00 20.00
U.S. credit for tax paid to Belgium 10.00 20.00
Net post-credit U.S. tax 10.00 0.00
Total U.S. tax $ 25.00 $ 15.00
------------------------------------------------------------------------
In both examples, in the application of subparagraph (b),
Belgium credits a 15 percent U.S. tax against its residence tax
on the U.S. citizen. In the first example, the net tax paid to
Belgium after the foreign tax credit is $10.00; in the second
example, it is $25.00. In the application of subparagraphs (c)
and (d), from the U.S. tax due before credit of $35.00, the
United States subtracts the amount of the U.S. source tax of
$15.00, against which no U.S. foreign tax credit is allowed.
This subtraction ensures that the United States collects the
tax that it is due under the Convention as the State of source.
In both examples, given the 35 percent U.S. tax rate, the
maximum amount of U.S. tax against which credit for the tax
paid to Belgium may be claimed is $20 ($35 U.S. tax minus $15
U.S. withholding tax). Initially, all of the income in both
examples was from sources within the United States. For a U.S.
foreign tax credit to be allowed for the full amount of the tax
paid to Belgium, an appropriate amount of the income must be
resourced to Belgium under subparagraph (d).
The amount that must be re-sourced depends on the amount of
tax for which the U.S. citizen is claiming a U.S. foreign tax
credit. In example 1, the tax paid to Belgium was $10. For this
amount to be creditable against U.S. tax, $28.57 ($10 tax
divided by 35 percent U.S. tax rate) must be resourced to
Belgium. When the tax is credited against the $10 of U.S. tax
on this resourced income, there is a net U.S. tax of $10 due
after credit ($20 U.S. tax eligible to be offset by credit,
minus $10 tax paid to Belgium). Thus, in example 1, there is a
total of $25 in U.S. tax ($15 U.S. withholding tax plus $10
residual U.S. tax).
In example 2, the tax paid to Belgium was $25, but, because
the United States subtracts the U.S. withholding tax of $15
from the total U.S. tax of $35, only $20 of U.S. taxes may be
offset by taxes paid to Belgium. Accordingly, the amount that
must be resourced to Belgium is limited to the amount necessary
to ensure a U.S. foreign tax credit for $20 of tax paid to
Belgium, or $57.14 ($20 tax paid to Belgium divided by 35
percent U.S. tax rate). When the tax paid to Belgium is
credited against the U.S. tax on this re-sourced income, there
is no residual U.S. tax ($20 U.S. tax minus $25 tax paid to
Belgium, subject to the U.S. limit of $20). Thus, in example 2,
there is a total of $15 in U.S. tax ($15 U.S. withholding tax
plus $0 residual U.S. tax). Because the tax paid to Belgium was
$25 and the U.S. tax eligible to be offset by credit was $20,
there is $5 of excess foreign tax credit available for
carryover.
Relationship to Other Articles
By virtue of subparagraph (a) of paragraph 5 of Article 1
(General Scope), Article 22 is not subject to the saving clause
of paragraph 4 of Article 1. Thus, the United States will allow
a credit to its citizens and residents in accordance with the
Article, even if such credit were to provide a benefit not
available under the Code (such as the re-sourcing provided by
paragraph 3 and subparagraph 4(d)).
ARTICLE 23 (NON-DISCRIMINATION)
This Article ensures that nationals of a Contracting State,
in the case of paragraph 1, and residents of a Contracting
State, in the case of paragraphs 2 through 5, will not be
subject, directly or indirectly, to discriminatory taxation in
the other Contracting State. Not all differences in tax
treatment, either as between nationals of the two States, or
between residents of the two States, are violations of the
prohibition against discrimination. Rather, the
nondiscrimination obligations of this Article apply only if the
nationals or residents of the two States are comparably
situated.
Each of the relevant paragraphs of the Article provides
that two persons that are comparably situated must be treated
similarly. Although the actual words differ from paragraph to
paragraph (e.g., paragraph 1 refers to two nationals ``in the
same circumstances,'' and paragraph 2 refers to two enterprises
``carrying on the same activities''), the common underlying
premise is that if the difference in treatment is directly
related to a tax-relevant difference in the situations of the
domestic and foreign persons being compared, that difference is
not to be treated as discriminatory (i.e., if one person is
taxable in a Contracting State on worldwide income and the
other is not, or tax may be collectible from one person at a
later stage, but not from the other, distinctions in treatment
would be justified under paragraph 1). Other examples of such
factors that can lead to nondiscriminatory differences in
treatment are noted in the discussions of each paragraph.
The operative paragraphs of the Article also use different
language to identify the kinds of differences in taxation
treatment that will be considered discriminatory. For example,
paragraph 1 speaks of ``any taxation or any requirement
connected therewith that is more burdensome,'' while paragraph
2 specifies that a tax ``shall not be less favorably levied.''
Regardless of these differences in language, only differences
in tax treatment that materially disadvantage the foreign
person relative to the domestic person are properly the subject
of the Article.
Paragraph 1
Paragraph 1 provides that a national of one Contracting
State may not be subject to taxation or connected requirements
in the other Contracting State that are more burdensome than
the taxes and connected requirements imposed upon a national of
that other State in the same circumstances. The OECD Model
prohibits taxation that is ``other than or more burdensome''
than that imposed on U.S. persons. This Convention omits the
reference to taxation that is ``other than'' that imposed on
U.S. persons because the only relevant question under this
provision should be whether the requirement imposed on a
national of the other Contracting State is more burdensome. A
requirement may be different from the requirements imposed on
U.S. nationals without being more burdensome.
The term ``national'' in relation to a Contracting State is
defined in subparagraph 1(j) of Article 3 (General
Definitions). The term includes both individuals and juridical
persons. A national of a Contracting State is afforded
protection under this paragraph even if the national is not a
resident of either Contracting State. Thus, a U.S. citizen who
is resident in a third country is entitled, under this
paragraph, to the same treatment in Belgium as a national of
Belgium who is in similar circumstances (i.e., presumably one
who is resident in a third State).
As noted above, whether or not the two persons are both
taxable on worldwide income is a significant circumstance for
this purpose. For this reason, paragraph 1 specifically states
that the United States is not obligated to apply the same
taxing regime to a national of Belgium who is not resident in
the United States as it applies to a U.S. national who is
subject to tax on a worldwide basis but who is not resident in
the United States. U.S. citizens who are not resident in the
United States but who are, nevertheless, subject to U.S. tax on
their worldwide income are not in the same circumstances with
respect to U.S. taxation as citizens of Belgium who are not
U.S. residents. Thus, for example, Article 23 would not entitle
a national of Belgium residing in a third country to taxation
at graduated rates on U.S. source dividends or other investment
income that applies to a U.S. citizen residing in the same
third country.
Paragraph 2
Paragraph 2 of the Article, provides that a Contracting
State may not tax a permanent establishment of an enterprise of
the other Contracting State less favorably than an enterprise
of that first-mentioned State that is carrying on the same
activities.
The fact that a U.S. permanent establishment of an
enterprise of Belgium is subject to U.S. tax only on income
that is attributable to the permanent establishment, while a
U.S. corporation engaged in the same activities is taxable on
its worldwide income is not, in itself, a sufficient difference
to provide different treatment for the permanent establishment.
There are cases, however, where the two enterprises would not
be similarly situated and differences in treatment may be
warranted. For instance, it would not be a violation of the
non-discrimination protection of paragraph 2 to require the
foreign enterprise to provide information in a reasonable
manner that may be different from the information requirements
imposed on a resident enterprise, because information may not
be as readily available to the Internal Revenue Service from a
foreign as from a domestic enterprise. Similarly, it would not
be a violation of paragraph 2 to impose penalties on persons
who fail to comply with such a requirement (see, e.g., sections
874(a) and 882(c)(2)). Further, a determination that income and
expenses have been attributed or allocated to a permanent
establishment in conformity with the principles of Article 7
(Business Profits) implies that the attribution or allocation
was not discriminatory.
Section 1446 of the Code imposes on any partnership with
income that is effectively connected with a U.S. trade or
business the obligation to withhold tax on amounts allocable to
a foreign partner. In the context of the Convention, this
obligation applies with respect to a share of the partnership
income of a partner resident in Belgium, and attributable to a
U.S. permanent establishment. There is no similar obligation
with respect to the distributive shares of U.S. resident
partners. It is understood, however, that this distinction is
not a form of discrimination within the meaning of paragraph 2
of the Article. No distinction is made between U.S. and non-
U.S. partnerships, since the law requires that partnerships of
both U.S. and non-U.S. domicile withhold tax in respect of the
partnership shares of non-U.S. partners. Furthermore, in
distinguishing between U.S. and non-U.S. partners, the
requirement to withhold on the non-U.S. but not the U.S.
partner's share is not discriminatory taxation, but, like other
withholding on nonresident aliens, is merely a reasonable
method for the collection of tax from persons who are not
continually present in the United States, and as to whom it
otherwise may be difficult for the United States to enforce its
tax jurisdiction. If tax has been over-withheld, the partner
can, as in other cases of over-withholding, file for a refund.
Paragraph 3
Paragraph 3 makes clear that the provisions of paragraphs 1
and 2 do not obligate a Contracting State to grant to a
resident of the other Contracting State any tax allowances,
reliefs, etc., that it grants to its own residents on account
of their civil status or family responsibilities. Thus, if a
sole proprietor who is a resident of Belgium has a permanent
establishment in the United States, in assessing income tax on
the profits attributable to the permanent establishment, the
United States is not obligated to allow to the resident of
Belgium the personal allowances for himself and his family that
he would be permitted to take if the permanent establishment
were a sole proprietorship owned and operated by a U.S.
resident, despite the fact that the individual income tax rates
would apply.
Paragraph 4
Paragraph 4 prohibits discrimination in the allowance of
deductions. When a resident or an enterprise of a Contracting
State pays interest, royalties or other disbursements to a
resident of the other Contracting State, the first-mentioned
Contracting State must allow a deduction for those payments in
computing the taxable profits of the resident or enterprise as
if the payment had been made under the same conditions to a
resident of the first-mentioned Contracting State. Paragraph 4,
however, does not require a Contracting State to give non-
residents more favorable treatment than it gives to its own
residents. Consequently, a Contracting State does not have to
allow non-residents a deduction for items that are not
deductible under its domestic law (for example, expenses of a
capital nature).
An exception to the rule of paragraph 4 is provided for
cases where the provisions of paragraph 1 of Article 9
(Associated Enterprises), paragraph 6 of Article 11 (Interest)
or paragraph 4 of Article 12 (Royalties) apply. All of these
provisions permit the denial of deductions in certain
circumstances in respect of transactions between related
persons. Neither State is forced to apply the non-
discrimination principle in such cases. The exception with
respect to paragraph 6 of Article 11 would include the denial
or deferral of certain interest deductions under Code section
163(j).
Paragraph 4 also provides that any debts of a resident of a
Contracting State to a resident of the other Contracting State
are deductible in the first-mentioned Contracting State for
purposes of computing the taxable capital of the enterprise
under the same conditions as if the debt had been contracted to
a resident of the first-mentioned Contracting State. Even
though, for general purposes, the Convention covers only income
taxes, under paragraph 7 of this Article, the nondiscrimination
provisions apply to all taxes levied in both Contracting
States, at all levels of government. Thus, this provision may
be relevant for both States. Belgium may have capital taxes and
in the United States such taxes frequently are imposed by local
governments.
Paragraph 5
Paragraph 5 requires that a Contracting State not impose
more burdensome taxation or connected requirements on an
enterprise of that State that is wholly or partly owned or
controlled, directly or indirectly, by one or more residents of
the other Contracting State than the taxation or connected
requirements that it imposes on other similar enterprises of
that first-mentioned Contracting State. For this purpose it is
understood that ``similar'' refers to similar activities or
ownership of the enterprise.
This rule, like all non-discrimination provisions, does not
prohibit differing treatment of entities that are in differing
circumstances. Rather, a protected enterprise is only required
to be treated in the same manner as other enterprises that,
from the point of view of the application of the tax law, are
in substantially similar circumstances both in law and in fact.
The taxation of a distributing corporation under section 3
67(e) on an applicable distribution to foreign shareholders
does not violate paragraph 5 of the Article because a foreign-
owned corporation is not similar to a domestically-owned
corporation that is accorded non-recognition treatment under
sections 337 and 355.
For the reasons given above in connection with the
discussion of paragraph 2 of the Article, it is also understood
that the provision in section 1446 of the Code for withholding
of tax on non-U.S. partners does not violate paragraph 5 of the
Article.
It is further understood that the ineligibility of a U.S.
corporation with nonresident alien shareholders to make an
election to be an ``S'' corporation does not violate paragraph
5 of the Article. If a corporation elects to be an S
corporation, it is generally not subject to income tax and the
shareholders take into account their pro rata shares of the
corporation's items of income, loss, deduction or credit. (The
purpose of the provision is to allow an individual or small
group of individuals the protections of conducting business in
corporate form while paying taxes at individual rates as if the
business were conducted directly.) A nonresident alien does not
pay U.S. tax on a net basis, and, thus, does not generally take
into account items of loss, deduction or credit. Thus, the S
corporation provisions do not exclude corporations with
nonresident alien shareholders because such shareholders are
foreign, but only because they are not net-basis taxpayers.
Similarly, the provisions exclude corporations with other types
of shareholders where the purpose of the provisions cannot be
fulfilled or their mechanics implemented. For example,
corporations with corporate shareholders are excluded because
the purpose of the provision to permit individuals to conduct a
business in corporate form at individual tax rates would not be
furthered by their inclusion.
Finally, it is understood that paragraph 5 does not require
a Contracting State to allow foreign corporations to join in
filing a consolidated return with a domestic corporation or to
allow similar benefits between domestic and foreign
enterprises.
Paragraph 6
Paragraph 6 of the Article confirms that no provision of
the Article will prevent either Contracting State from imposing
the branch profits tax described in paragraph 10 of Article 10
(Dividends).
Paragraph 7
As noted above, notwithstanding the specification of taxes
covered by the Convention in Article 2 (Taxes Covered) for
general purposes, for purposes of providing nondiscrimination
protection this Article applies to taxes of every kind and
description imposed by a Contracting State or a political
subdivision or local authority thereof. Customs duties are not
considered to be taxes for this purpose.
Relationship to Other Articles
The saving clause of paragraph 4 of Article 1 (General
Scope) does not apply to this Article by virtue of the
exceptions in paragraph 5(a) of Article 1. Thus, for example, a
U.S. citizen who is a resident of Belgium may claim benefits in
the United States under this Article.
Nationals of a Contracting State may claim the benefits of
paragraph 1 regardless of whether they are entitled to benefits
under Article 21 (Limitation on Benefits), because that
paragraph applies to nationals and not residents. They may not
claim the benefits of the other paragraphs of this Article with
respect to an item of income unless they are generally entitled
to treaty benefits with respect to that income under a
provision of Article 21.
ARTICLE 24 (MUTUAL AGREEMENT PROCEDURE)
This Article provides the mechanism for taxpayers to bring
to the attention of competent authorities issues and problems
that may arise under the Convention. It also provides the
authority for cooperation between the competent authorities of
the Contracting States to resolve disputes and clarify issues
that may arise under the Convention. The competent authorities
of the two Contracting States are identified in paragraph 1(g)
of Article 3 (General Definitions).
Paragraph 1
This paragraph provides that where a resident of a
Contracting State considers that the actions of one or both
Contracting States will result in taxation that is not in
accordance with the Convention he may present his case to the
competent authority of either Contracting State. This rule is
more generous than in most treaties, which generally allow
taxpayers to bring competent authority cases only to the
competent authority of their country of residence, or
citizenship/nationality. Under this more generous rule, a U.S.
permanent establishment of a corporation resident in Belgium
that faces inconsistent treatment in the two countries would be
able to bring its complaint to the U.S. competent authority. If
the U.S. competent authority can resolve the issue on its own,
then the taxpayer need never involve the Belgian competent
authority. Thus, the rule provides flexibility that might
result in greater efficiency.
Although the typical cases brought under this paragraph
will involve economic double taxation arising from transfer
pricing adjustments, the scope of this paragraph is not limited
to such cases. For example, a taxpayer could request assistance
from the competent authority if one Contracting State
determines that the taxpayer has received deferred compensation
taxable at source under Article 14 (Income from Employment),
while the taxpayer believes that such income should be treated
as a pension that is taxable only in his country of residence
pursuant to Article 17 (Pensions, Social Security, Annuities,
Alimony, and Child Support).
It is not necessary for a person bringing a complaint first
to have exhausted the remedies provided under the national laws
of the Contracting States before presenting a case to the
competent authorities, nor does the fact that the statute of
limitations may have passed for seeking a refund preclude
bringing a case to the competent authority. Paragraph 1
provides that a case must be presented within three years from
the first notification of the action resulting in double
taxation not in accordance with the provisions of the
Convention.
The Protocol provides that the term ``first notification of
the action resulting in taxation not in accordance with the
provisions of the Convention'' means in the case of Belgium,
the date on which the notice of assessment containing an
assessment or supplementary assessment is sent to the person
who considers that the taxation provided for in such assessment
or supplementary assessment is contrary to the provisions of
the Convention; and in the case of the United States, the date
on which the taxpayer receives a notice of proposed adjustment
or of assessment, whichever is earlier.
Paragraph 2
Paragraph 2 sets out the framework within which the
competent authorities will deal with cases brought by taxpayers
under paragraph 1. It provides that, if the competent authority
of the Contracting State to which the case is presented judges
the case to have merit, and cannot reach a unilateral solution,
it shall seek an agreement with the competent authority of the
other Contracting State pursuant to which taxation not in
accordance with the Convention will be avoided. During the
period that a proceeding under this Article is pending, any
collection procedures shall be suspended.
Paragraph 3
Paragraph 3 authorizes the competent authorities to resolve
difficulties or doubts that may arise as to the application or
interpretation of the Convention. The paragraph includes a non-
exhaustive list of examples of the kinds of matters about which
the competent authorities may reach agreement. This list is
purely illustrative; it does not grant any authority that is
not implicitly present as a result of the introductory sentence
of paragraph 3.
The competent authorities may, for example, agree to the
same allocation of income, deductions, credits or allowances
between an enterprise in one Contracting State and its
permanent establishment in the other (or between permanent
establishments of a third country enterprise that are situated
in the Contracting States) or between related persons. These
allocations are to be made in accordance with the arm's length
principle underlying Article 7 (Business Profits) and Article 9
(Associated Enterprises). Agreements reached under these
subparagraphs may include agreement on a methodology for
determining an appropriate transfer price, common treatment of
a taxpayer's cost sharing arrangement, or upon an acceptable
range of results under that methodology.
As indicated in subparagraph (d), the competent authorities
also may agree to settle a variety of conflicting applications
of the Convention. They may agree to settle conflicts regarding
the characterization of particular items of income, the
characterization of persons, the application of source rules to
particular items of income, the meaning of a term.
They also may agree as to advance pricing arrangements.
They also may agree as to the application of the provisions of
domestic law regarding penalties, fines, and interest in a
manner consistent with the purposes of the Convention.
Since the list under paragraph 3 is not exhaustive, the
competent authorities may reach agreement on issues not
enumerated in paragraph 3 if necessary to avoid double
taxation. For example, the competent authorities may seek
agreement on a uniform set of standards for the use of exchange
rates. Agreements reached by the competent authorities under
paragraph 3 need not conform to the internal law provisions of
either Contracting State.
Finally, paragraph 3 authorizes the competent authorities
to consult for the purpose of resolving any difficulties or
doubts arising as to the interpretation or application of the
Convention. This provision is intended to permit the competent
authorities to implement the treaty in particular cases in a
manner that is consistent with its expressed general purposes.
Paragraph 4
Paragraph 4 authorizes the competent authorities to request
the disclosure of information from any person who may have such
information relevant to the MAP proceeding to the extent
necessary to facilitate the resolution of the case. The
paragraph provides that a competent authority may conduct
investigations and hearings notwithstanding any time limits in
their domestic laws that would otherwise bar such requests for
information. Finally, paragraph 4 provides, consistent with
paragraph 2 of the U.S. Model, that any agreement is to be
implemented even if such implementation otherwise would be
barred by the statute of limitations or by some other
procedural limitation, such as a closing agreement. Paragraph
4, however, does not prevent the application of domestic-law
procedural limitations that give effect to the agreement (e.g.,
a domestic-law requirement that the taxpayer file a return
reflecting the agreement within one year of the date of the
agreement).
Where the taxpayer has entered a closing agreement (or
other written settlement) with the United States before
bringing a case to the competent authorities, the U.S.
competent authority will endeavor only to obtain a correlative
adjustment from the other Contracting State. See Rev. Proc.
2006-54, 2006-49 I.R.B. 1035, Sec. 7.05. Because, as specified
in paragraph 2 of Article 1 (General Scope), the Convention
cannot operate to increase a taxpayer's liability, temporal or
other procedural limitations can be overridden only for the
purpose of making refunds and not to impose additional tax.
Paragraph 5
Paragraph 5 provides that the competent authorities may
agree on administrative measures to carry out the provisions of
the Convention, particularly with respect to documentation to
be furnished by a resident to support a claim for reduced tax
under the Convention.
Paragraph 6
Paragraph 6 provides that the competent authorities may
communicate with each other directly for the purpose of
reaching an agreement. This makes clear that the competent
authorities of the two Contracting States may communicate
without going through diplomatic channels. Such communication
may be in various forms, including, where appropriate, through
face-to-face meetings of representatives of the competent
authorities.
Triangular competent authority solutions.--International
tax cases may involve more than two taxing jurisdictions (e.g.,
transactions among a parent corporation resident in country A
and its subsidiaries resident in countries B and C). As long as
there is a complete network of treaties among the three
countries, it should be possible, under the full combination of
bilateral authorities, for the competent authorities of the
three States to work together on a three-sided solution.
Although country A may not be able to give information received
under Article 24 (Exchange of Information) from country B to
the authorities of country C, if the competent authorities of
the three countries are working together, it should not be a
problem for them to arrange for the authorities of country B to
give the necessary information directly to the tax authorities
of country C, as well as to those of country A. Each bilateral
part of the trilateral solution must, of course, not exceed the
scope of the authority of the competent authorities under the
relevant bilateral treaty.
Paragraph 7
Paragraphs 7 and 8 of the Convention and paragraph 6 of the
Protocol provide a mandatory binding arbitration procedure.
A case shall be resolved through arbitration when the
competent authorities have endeavored but are unable to reach a
complete agreement regarding a case through negotiation and the
following three conditions are satisfied. First, tax returns
have been filed with at least one of the Contracting States
with respect to the taxable years at issue in the case. Second,
the case is not a case that the competent authorities agree
before the date on which arbitration proceedings would
otherwise have begun, is not suitable for determination by
arbitration. Third, all concerned persons and their authorized
representatives agree, according to the provisions of
subparagraph d) of paragraph 8, not to disclose to any other
person any information received during the course of the
arbitration proceeding from either the Contracting States or
the arbitration board, other than the determination of the
board (confidentiality agreement). The confidentiality
agreement may also be executed by any concerned person that has
the legal authority to bind any other concerned person on the
matter.
Paragraph 8
Subparagraph a) of paragraph 8 provides that the term
``concerned person'' means the person that brought the case to
competent authority for consideration under Article 24 and
includes all other persons, if any, whose tax liability to
either Contracting State may be directly affected by a mutual
agreement arising from that consideration. For example, a
concerned person does not only include a U.S. corporation that
brings a transfer pricing case with respect to a transaction
entered into with its Belgian subsidiary for resolution to the
U.S. competent authority, but also the Belgian subsidiary,
which may have a correlative adjustment as a result of the
resolution of the case.
Subparagraph c) provides that an arbitration proceeding
begins on the later of two dates: two years from the
information necessary to undertake substantive consideration
for mutual agreement has been received by both competent
authorities.
Clause (p) of paragraph 6 of the Protocol provides that
each competent authority will confirm in writing to the other
competent authority and to the concerned persons the date of
its receipt of the information necessary to undertake
substantive consideration for a mutual agreement. In the case
of the United States, this information is (i) the information
that must be submitted to the U.S. competent authority under
Section 4.05 of Rev. Proc. 2002-52, 2002-2 C.B. 242 (since
updated to Rev. Proc. 2006-54, 2006-49 I.R.B. 1035) Sec. 7.05,
and (ii) for cases initially submitted as a request for an
Advance Pricing Agreement, the information that must be
submitted to the Internal Revenue Service under Rev. Proc.
2006-9, 2006-2 I.R.B. 278, as it might be amended from time to
time. In the case of Belgium, this information is any
information that would be required under instructions or
commentaries published by the Federal Public Service Finance.
The information will not be considered received until both
competent authorities receive copies of all materials submitted
by concerned persons in connection with the mutual agreement
procedure.
Paragraph 6 of the Protocol provides for a several
procedural rules once an arbitration proceeding under paragraph
7 of Article 24 (``Proceeding'') has commenced, but the
competent authorities may modify or supplement these rules as
necessary. In addition, the arbitration board may adopt any
procedures necessary for the conduct of its business, provided
the procedures are not inconsistent with any provision of
Article 24 of the Convention.
Subparagraph (e) of paragraph 6 of the Protocol provides
that each Contracting State has 60 days from the date on which
the Proceeding begins to send a written communication to the
other Contracting State appointing one member of the
arbitration board. Within 60 days of the date the second of
such communications is sent, these two board members will
appoint a third member to serve as the chair of the board. The
chair may not be a citizen of either Contracting State. In the
event that any members of the board are not appointed
(including as a result of the failure of the two members
appointed by the Contracting States to agree on a third member)
by the requisite date, the remaining members are appointed by
the highest ranking member of the Secretariat at the Centre for
Tax Policy and Administration of the Organisation for Economic
Co-operation and Development (OECD) who is not a citizen of
either Contracting State, by written notice to both Contracting
States within 60 days of the date of such failure.
Clause (g) of paragraph 6 of the Protocol establishes
deadlines for submission of materials by the Contracting States
to the arbitration board. Each competent authority has 60 days
from the date of appointment of the chair to submit a Proposed
Resolution describing the proposed disposition of the specific
monetary amounts of income, expense or taxation at issue in the
case, and a supporting Position Paper. Copies of each State's
submissions are to be provided by the board to the other
Contracting State on the date the later of the submissions is
submitted to the board. Each of the Contracting States may
submit a Reply Submission to the board within 120 days of the
appointment of the chair to address points raised in the other
State's Proposed Resolution or Position Paper. If one
Contracting State fails to submit a Proposed Resolution within
the requisite time, the Proposed Resolution of the other
Contracting State is deemed to be the determination of the
arbitration board. No other information may be supplied to the
arbitration board, unless it requests additional information.
Copies of any such requested information, along with the
board's request, must be provided to the other Contracting
State on the date the request or response is submitted.
All communication with the board is to be in writing
between the chair of the board and the designated competent
authorities with the exception of communication regarding
logistical matters.
In making its determination the arbitration board will
apply the following authorities as necessary and in descending
order of relevance: (i) the provisions of the Convention, (ii)
any agreed commentaries or explanation of the Contracting
States concerning the Convention, (iii) the laws of the
Contracting States to the extent they are not inconsistent with
each other, and (iv) any OECD Commentary, Guidelines or Reports
regarding relevant analogous portions of the OECD Model Tax
Convention.
The arbitration board must deliver a determination in
writing to the Contracting States within 6 months of the
appointment of the chair. The determination must be one of the
two Proposed Resolutions submitted by the Contracting States.
The determination may only provide a determination regarding
the amount of income, expense or tax reportable to the
Contracting States. The determination has no precedential value
and consequently the rationale behind a board's determination
would not be beneficial and may not be provided by the board.
Clause (k) of paragraph 6 of the Protocol provides that,
unless any concerned person does not accept the decision of the
arbitration board, the determination of the board constitutes a
resolution by mutual agreement under Article 24 and,
consequently, is binding on both Contracting States. Each
concerned person must, within 30 days of receiving the
determination from the competent authority to which the case
was first presented, advise that competent authority whether
the person accepts the determination. In addition, if the case
is in litigation, the concerned persons must advise the
relevant court of their acceptance of the arbitration
determination, and withdraw from the litigation the issues
resolved by the MAP arbitration. The failure to advise the
competent authority or the relevant court within the requisite
time is considered a rejection of the determination. If a
determination is rejected the case cannot be the subject of a
subsequent Proceeding. After the commencement of the Proceeding
but before a decision of the board has been accepted by all
concerned persons, the competent authorities may reach a mutual
agreement to resolve the case and terminate the Proceeding.
For purposes of the arbitration proceeding, the members of
the arbitration board and their staffs shall be considered
``persons or authorities'' to whom information may be disclosed
under Article 25 (Exchange of Information and Administrative
Assistance). Paragraph 6 of the Protocol provides that all
materials prepared in the course of, or relating to, the
Proceeding are considered information exchanged between the
Contracting States. No information relating to the Proceeding
or the board's determination may be disclosed by members of the
arbitration board or their staffs or by either competent
authority, except as permitted by the Convention and the
domestic laws of the Contracting States. Members of the
arbitration board and their staffs must agree in statements
sent to each of the Contracting States in confirmation of their
appointment to the arbitration board to abide by and be subject
to the confidentiality and nondisclosure provisions of Article
25 of the Convention and the applicable domestic laws of the
Contracting States, with the most restrictive of the provisions
applying.
The applicable domestic law of the Contracting States
determines the treatment of any interest or penalties
associated with a competent authority agreement achieved
through arbitration.
In general, fees and expenses are borne equally by the
Contracting States, including the cost of translation services.
However, meeting facilities, related resources, financial
management, other logistical support, and general and
administrative coordination of the Proceeding will be provided,
at its own cost, by the Contracting State whose competent
authority initiated the mutual agreement proceedings. In
general, the fees of members of the arbitration board will be
set at the fixed amount of $2,000 per day (or the equivalent
amount in euro). The expenses of members of the board will be
set in accordance with the International Centre for Settlement
of Investment Disputes (ICSID) Schedule of Fees for arbitrators
(in effect on the date on which the arbitration board
proceedings begin). The competent authorities may amend the set
fees and expenses of members of the board. All other costs are
to be borne by the Contracting State that incurs them.
Treaty termination in relation to competent authority
dispute resolution.--A case may be raised by a taxpayer under a
treaty with respect to a year for which a treaty was in force
after the treaty has been terminated. In such a case the
ability of the competent authorities to act is limited. They
may not exchange confidential information, nor may they reach a
solution that varies from that specified in its law.
Relationship to Other Articles
This Article is not subject to the saving clause of
paragraph 4 of Article 1 (General Scope) by virtue of the
exceptions in paragraph 5(a) of that Article. Thus, rules,
definitions, procedures, etc. that are agreed upon by the
competent authorities under this Article may be applied by the
United States with respect to its citizens and residents even
if they differ from the comparable Code provisions. Similarly,
as indicated above, U.S. law may be overridden to provide
refunds of tax to a U.S. citizen or resident under this
Article. A person may seek relief under Article 24 regardless
of whether he is generally entitled to benefits under Article
21 (Limitation on Benefits). As in all other cases, the
competent authority is vested with the discretion to decide
whether the claim for relief is justified.
ARTICLE 25 (EXCHANGE OF INFORMATION AND ADMINISTRATIVE ASSISTANCE)
This Article provides for the exchange of information and
administrative assistance between the competent authorities of
the Contracting States.
Paragraph 1
The obligation to obtain and provide information to the
other Contracting State is set out in Paragraph 1. The
information to be exchanged is that which may be relevant for
carrying out the provisions of the Convention or the domestic
laws of the United States or of Belgium concerning taxes
covered by the Convention. This language incorporates the
standard in 26 U.S.C. Section 7602 which authorizes the IRS to
examine ``any books, papers, records, or other data which may
be relevant or material.'' (Emphasis added.) In United States
v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the Supreme
Court stated that the language ``may be'' reflects Congress's
express intention to allow the IRS to obtain ``items of even
potential relevance to an ongoing investigation, without
reference to its admissibility.'' (Emphasis in original.)
However, the language ``may be'' would not support a request in
which a Contracting State simply asked for information
regarding all bank accounts maintained by residents of that
Contracting State in the other Contracting State, or even all
accounts maintained by its residents with respect to a
particular bank.
Exchange of information with respect to each State's
domestic law is authorized to the extent that taxation under
domestic law is not contrary to the Convention. Thus, for
example, information may be exchanged with respect to a covered
tax, even if the transaction to which the information relates
is a purely domestic transaction in the requesting State and,
therefore, the exchange is not made to carry out the
Convention. An example of such a case is provided in the OECD
Commentary: a company resident in the United States and a
company resident in Belgium transact business between
themselves through a third-country resident company. Neither
Contracting State has a treaty with the third State. To enforce
their internal laws with respect to transactions of their
residents with the third-country company (since there is no
relevant treaty in force), the Contracting States may exchange
information regarding the prices that their residents paid in
their transactions with the third-country resident.
Paragraph 1 clarifies that information may be exchanged
that relates to the assessment or collection of, the
enforcement or prosecution in respect of, or the determination
of appeals in relation to, the taxes covered by the Convention.
Thus, the competent authorities may request and provide
information for cases under examination or criminal
investigation, in collection, on appeals, or under prosecution.
Information exchange is not restricted by paragraph 1 of
Article 1 (General Scope). Accordingly, information may be
requested and provided under this article with respect to
persons who are not residents of either Contracting State. For
example, if a third- country resident has a permanent
establishment in Belgium, and that permanent establishment
engages in transactions with a U.S. enterprise, the United
States could request information with respect to that permanent
establishment, even though the third-country resident is not a
resident of the United States or Belgium. Similarly, if a
third-country resident maintains a bank account in Belgium, and
the Internal Revenue Service has reason to believe that funds
in that account should have been reported for U.S. tax purposes
but have not been so reported, information can be requested
from Belgium with respect to that person's account, even though
that person is not the taxpayer under examination.
Although the term ``United States'' does not encompass U.S.
possessions for most purposes of the Convention, Section 7651
of the Code authorizes the Internal Revenue Service to utilize
the provisions of the Internal Revenue Code to obtain
information from the U.S. possessions pursuant to a proper
request made under Article 25. If necessary to obtain requested
information, the Internal Revenue Service could issue and
enforce an administrative summons to the taxpayer, a tax
authority (or a government agency in a U.S. possession), or a
third party located in a U.S. possession.
Paragraph 2
Paragraph 2 also provides assurances that any information
exchanged will be treated as secret, subject to the same
disclosure constraints as information obtained under the laws
of the requesting State. Furthermore, information received may
be disclosed only to persons, including courts and
administrative bodies, involved in the assessment, collection,
or administration of, the enforcement or prosecution in respect
of, or the determination of appeals in relation to, the taxes
covered by the Convention. The information must be used by
these persons in connection with the specified functions.
Information may also be disclosed to legislative bodies, such
as the tax-writing committees of Congress and the Government
Accountability Office, engaged in the oversight of the
preceding activities. Information received by these bodies must
be for use in the performance of their role in overseeing the
administration of U.S. tax laws. Information received may be
disclosed in public court proceedings or in judicial decisions.
Paragraph 3
Paragraph 3 provides that the obligations undertaken in
paragraphs 1 and 2 to exchange information do not require a
Contracting State to carry out administrative measures that are
at variance with the laws or administrative practice of either
State. Nor is a Contracting State required to supply
information not obtainable under the laws or administrative
practice of either State, or to disclose trade secrets or other
information, the disclosure of which would be contrary to
public policy.
Thus, a requesting State may be denied information from the
other State if the information would be obtained pursuant to
procedures or measures that are broader than those available in
the requesting State. However, the statute of limitations of
the Contracting State making the request for information should
govern a request for information. Thus, the Contracting State
of which the request is made should attempt to obtain the
information even if its own statute of limitations has passed.
In many cases, relevant information will still exist in the
business records of the taxpayer or a third party, even though
it is no longer required to be kept for domestic tax purposes.
While paragraph 3 states conditions under which a
Contracting State is not obligated to comply with a request
from the other Contracting State for information, the requested
State is not precluded from providing such information, and
may, at its discretion, do so subject to the limitations of its
internal law.
Paragraph 4
Paragraph 4 provides that when information is requested by
a Contracting State in accordance with this Article, the other
Contracting State is obligated to obtain the requested
information as if the tax in question were the tax of the
requested State, even if that State has no direct tax interest
in the case to which the request relates. In the absence of
such a paragraph, some taxpayers have argued that paragraph
3(a) prevents a Contracting State from requesting information
from a bank or fiduciary that the Contracting State does not
need for its own tax purposes. This paragraph clarifies that
paragraph 3 does not impose such a restriction and that a
Contracting State is not limited to providing only the
information that it already has in its own files.
Paragraph 5
Paragraph 5 provides that a Contracting State may not
decline to provide information because that information is held
by financial institutions, nominees or persons acting in an
agency or fiduciary capacity. Thus, paragraph 5 would
effectively prevent a Contracting State from relying on
paragraph 3 to argue that its domestic bank secrecy laws (or
similar legislation relating to disclosure of financial
information by financial institutions or intermediaries)
override its obligation to provide information under paragraph
1. This paragraph also requires the disclosure of information
regarding the beneficial owner of an interest in a person, such
as the identity of a beneficial owner of bearer shares.
Consistent with paragraph 6, discussed below, to obtain such
information, the tax administration of the requested State has
the power to ask for the disclosure of information and to
conduct investigations and hearings notwithstanding any
contrary provisions in its domestic tax laws.
Paragraph 7 of the Protocol provides that banking records
will be exchanged only upon request. Further, a request for
bank information must identify both a specific taxpayer and a
specific bank or financial institution, or the competent
authority of the requested State may decline to obtain any
information that it does not already possess.
Paragraph 6
Paragraph 6 provides that in order to obtain information
requested under this Article, the requested State has the power
to ask for the disclosure of information and to conduct
investigations and hearings despite any time limits required in
the domestic tax laws of the requested State. Therefore, the
requested State will have such powers in order to meet its
obligations under Article 25 of the Convention, even though it
may not have such powers for purposes of enforcing its own tax
laws due, for example to the expiration of its statute of
limitations on tax audits.
Paragraph 7
Paragraph 7 provides that penalties under the domestic law
of the requested State shall apply to any person that fails to
provide information to the requested State seeking to fulfill
its obligations under the Article, as if the request for the
information and the obligation to provide such information was
an obligation provided in the domestic tax laws of the
requested State.
Paragraph 8
Paragraph 8 further expands on the consequences of failing
to provide information to the requested State seeking to
fulfill its obligations under the Article, including a failure
to provide the requested information in the manner and within
the time limits required. The paragraph provides that the
requested State may bring appropriate enforcement proceedings
against the person failing to provide the information,
including (but not limited to) summary summons enforcement
proceedings in the case of the United States and summary
proceedings (procedure en refere/procedure in kortgeding) in
the case of Belgium. Further, such person may be compelled to
provide such information under such civil or criminal penalties
that may be available under the laws of the requested State.
Paragraph 9
Paragraph 9 provides that the requesting State may specify
the form in which information is to be provided (e.g.,
depositions of witnesses and authenticated copies of original
documents). The intention is to ensure that the information may
be introduced as evidence in the judicial proceedings of the
requesting State. The requested State should, if possible,
provide the information in the form requested to the same
extent that it can obtain information in that form under its
own laws and administrative practices with respect to its own
taxes.
Paragraph 10
Paragraph 10 provides that the requested State shall allow
representatives of the requesting State to enter the requested
State to interview individuals and examine books and records.
However, such interview or examination must take place under
the conditions and limits agreed upon by the competent
authorities.
Paragraph 11
Paragraph 11 states that the competent authorities of the
Contracting States shall agree upon the mode of application of
the Article. The article authorizes the competent authorities
to exchange information on a routine basis, on request in
relation to a specific case, or spontaneously. It is
contemplated that the Contracting States will utilize this
authority to engage in all of these forms of information
exchange, as appropriate.
The competent authorities may also agree on specific
procedures and timetables for the exchange of information. In
particular, the competent authorities may agree on minimum
thresholds regarding tax at stake or take other measures aimed
at ensuring some measure of reciprocity with respect to the
overall exchange of information between the Contracting States.
Treaty efective dates and termination in relation to
exchange of information.--Once the Convention is in force, the
competent authority may seek information under the Convention
with respect to a year prior to the entry into force of the
Convention. Even if an earlier Convention with more restrictive
provisions, or even no Convention, was in effect during the
years in which the transaction at issue occurred, the exchange
of information provisions of the Convention apply. In that
case, the competent authorities have available to them the full
range of information exchange provisions afforded under this
Article. Paragraph 6 of Article 28 (Entry into Force) confirms
this understanding with respect to the effective date of the
Article.
A tax administration may also seek information with respect
to a year for which a treaty was in force after the treaty has
been terminated. In such a case the ability of the other tax
administration to act is limited. The treaty no longer provides
authority for the tax administrations to exchange confidential
information. They may only exchange information pursuant to
domestic law or other international agreement or arrangement.
Paragraph 12
Paragraph 12 provides that if the United States terminates
the provisions of paragraph 3 of Article 10 (Dividends), then,
from the date such provision no longer applies to eliminate
dividend withholding tax, Belgium will not be required to
provide information pursuant to paragraph 5 of this Article.
ARTICLE 26 (ASSISTANCE IN COLLECTION)
This Article provides for assistance in collection of taxes
to the extent necessary to ensure that treaty benefits are
enjoyed only by persons entitled to those benefits under the
terms of the Convention.
Paragraph 1
Under paragraph 1, a Contracting State will endeavor to
collect on behalf of the other State only those amounts
necessary to ensure that any exemption or reduced rate of tax
at source granted under the Convention by that other State is
not enjoyed by persons not entitled to those benefits. For
example, if the payer of a U.S.-source portfolio dividend
receives a Form W-8BEN or other appropriate documentation from
the payee, the withholding agent is permitted to withhold at
the portfolio dividend rate of 15 percent. If, however, the
addressee is merely acting as a nominee on behalf of a third-
country resident, paragraph 1 would obligate the other
Contracting State to withhold and remit to the United States
the additional tax that should have been collected by the U.S.
withholding agent.
Paragraph 2
Paragraph 2 makes clear that the Contracting State asked to
collect the tax is not obligated, in the process of providing
collection assistance, to carry out administrative measures
that are different from those used in the collection of its own
taxes, or that would be contrary to its sovereignty, security
or public policy.
ARTICLE 27 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS)
This Article confirms that any fiscal privileges to which
diplomatic or consular officials are entitled under general
provisions of international law or under special agreements
will apply notwithstanding any provisions to the contrary in
the Convention. The agreements referred to include any
bilateral agreements, such as consular conventions, that affect
the taxation of diplomats and consular officials and any
multilateral agreements dealing with these issues, such as the
Vienna Convention on Diplomatic Relations and the Vienna
Convention on Consular Relations. The U.S. generally adheres to
the latter because its terms are consistent with customary
international law.
The Article does not independently provide any benefits to
diplomatic agents and consular officers. Article 19 (Government
Service) does so, as do Code section 893 and a number of
bilateral and multilateral agreements. In the event that there
is a conflict between the Convention and international law or
such other treaties, under which the diplomatic agent or
consular official is entitled to greater benefits under the
latter, the latter laws or agreements shall have precedence.
Conversely, if the Convention confers a greater benefit than
another agreement, the affected person could claim the benefit
of the tax treaty.
Pursuant to subparagraph 5(b) of Article 1, the saving
clause of paragraph 4 of Article 1 (General Scope) does not
apply to override any benefits of this Article available to an
individual who is neither a citizen of the United States nor
has immigrant status in the United States.
ARTICLE 28 (ENTRY INTO FORCE)
This Article contains the rules for bringing the Convention
into force and giving effect to its provisions.
Paragraph 1
Paragraph 1 provides for the ratification of the Convention
by both Contracting States according to their constitutional
and statutory procedures. Each Contracting State will use the
diplomatic channel to notify the other when it has completed
the required procedures. The notification will be accompanied
by an instrument of ratification.
In the United States, the process leading to ratification
and entry into force is as follows: Once a treaty has been
signed by authorized representatives of the two Contracting
States, the Department of State sends the treaty to the
President who formally transmits it to the Senate for its
advice and consent to ratification, which requires approval by
two-thirds of the Senators present and voting. Prior to this
vote, however, it generally has been the practice for the
Senate Committee on Foreign Relations to hold hearings on the
treaty and make a recommendation regarding its approval to the
full Senate. Both Government and private sector witnesses may
testify at these hearings. After the Senate gives its advice
and consent to ratification of the protocol or treaty, an
instrument of ratification is drafted for the President's
signature. The President's signature completes the process in
the United States.
Paragraph 2
Paragraph 2 provides that the Convention will enter into
force upon the exchange of instruments of ratification. The
date on which a treaty enters into force is not necessarily the
date on which its provisions take effect. Paragraph 2,
therefore, also contains rules that determine when the
provisions of the treaty will have effect.
Under subparagraph 2(a), the Convention will have effect
with respect to taxes withheld at source (principally
dividends, interest and royalties) for amounts paid or credited
on or after the first day of the second month following the
date on which the Convention enters into force. For example, if
instruments of ratification are exchanged on April 25 of a
given year, the withholding rates specified in paragraph 2 of
Article 10 (Dividends) would be applicable to any dividends
paid or credited on or after June 1 of that year. This rule
allows the benefits of the withholding reductions to be put
into effect as soon as possible, without waiting until the
following year. The delay of one to two months is required to
allow sufficient time for withholding agents to be informed
about the change in withholding rates. If for some reason a
withholding agent withholds at a higher rate than that provided
by the Convention (perhaps because it was not able to re-
program its computers before the payment is made), a beneficial
owner of the income that is a resident of the other Contracting
State may make a claim for refund pursuant to section 1464 of
the Code.
For all other taxes, paragraph 2(b) specifies that the
Convention will have effect for any taxable period beginning on
or after January 1 of the year following entry into force.
Paragraph 3
Paragraph 3 provides that subparagraph (f) of paragraph 5
of Article 21 (Limitation on Benefits) is not effective until
January 1, 2011. That subparagraph requires that a headquarters
company be subject to the same income tax rules in its state of
residence as a resident company engaged in the active conduct
of a trade or business in such state. Belgian law is in
transition and as of January 1, 2011, this subparagraph will
met.
Paragraph 4
Paragraph 4 provides that the prior Convention generally
ceases to have effect with respect to any tax as of the date
this Convention takes effect with respect to that tax in
accordance with paragraphs 2 and 6.
Paragraph 5
As in many recent U.S. treaties, however, paragraph 5
provides an exception to the general rule of paragraph 4. Under
paragraph 5, if the prior Convention would have afforded
greater relief from tax than this Convention, the prior
Convention shall, at the election of any person that was
entitled to benefits under the prior Convention, continue to
have effect in its entirety for a twelve-month period from the
date on which this Convention otherwise would have had effect
with respect to such person.
Thus, a taxpayer may elect to extend the benefits of the
prior Convention for one year from the date on which the
relevant provision of the new Convention would first take
effect. During the period in which the election is in effect,
the provisions of the prior Convention will continue to apply
only insofar as they applied before the entry into force of the
Convention. If the grace period is elected, all of the
provisions of the prior Convention must be applied for that
additional year. The taxpayer may not apply certain, more
favorable provisions of the prior Convention and, at the same
time, apply other, more favorable provisions of this
Convention. The taxpayer must choose one regime or the other.
The prior Convention shall terminate on the last date on
which it has effect with respect to any tax in accordance with
the provisions of paragraphs 4 and 5 of Article 28.
Paragraph 6
Paragraph 6 provides that the provisions of Article 25
(Exchange of Information), have effect from the date of entry
into force, without regard to the taxable period to which a
particular matter relates. Accordingly, the powers afforded the
competent authority under these articles apply retroactively to
taxable periods preceding entry into force.
Paragraph 7
Paragraph 7 provides a specific effective date for purposes
of the binding arbitration provisions of Article 24 (Mutual
Agreement Procedure). Paragraph 7 provides that paragraph 7 and
8 of Article 24 are effective for cases (i) that are under
consideration by the competent authorities as of the date on
which the Convention enters into force and (ii) cases that come
under such consideration after the Convention enters into
force. In addition, paragraph 7 provides that the commencement
date for cases that are under consideration by the competent
authorities as of the date on which the Convention enters into
force is the date the Convention enters into force. As a
result, cases that are unresolved as of the entry into force of
the Convention will go into binding arbitration no later than
two years after the entry into force of the Convention, if the
cases are not otherwise resolved through the competent
authority procedure.
ARTICLE 29 (TERMINATION)
The Convention is to remain in effect indefinitely, unless
terminated by one of the Contracting States in accordance with
the provisions of Article 29. The Convention may be terminated
at any time after five years from the date on which the
Convention enters into force. If notice of termination is
given, the provisions of the Convention with respect to
withholding at source will cease to have effect after the
expiration of a period of 6 months beginning with the delivery
of notice of termination. For other taxes, the Convention will
cease to have effect as of taxable periods beginning after the
expiration of this 6 month period.
Article 29 relates only to unilateral termination of the
Convention by a Contracting State. Nothing in that Article
should be construed as preventing the Contracting States from
concluding a new bilateral agreement, subject to ratification,
that supersedes, amends or terminates provisions of the
Convention without the six-month notification period.
Customary international law observed by the United States
and other countries, as reflected in the Vienna Convention on
Treaties, allows termination by one Contracting State at any
time in the event of a ``material breach'' of the agreement by
the other Contracting State.