Technical Explanation PDF

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
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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
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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
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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.
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(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
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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
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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).
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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
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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
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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.
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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 7701(j)). Section 401(k) plans and
group trusts described in Revenue Ruling 81-100 and meeting the conditions of Revenue
11

Ruling 2004-67 qualify as pension funds because they are covered by Code section
401(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.
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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
13

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
14

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
15

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.
16

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.
17

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
18

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. § 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.
19

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
20

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
21

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
22

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
23

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.
24

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 1.882-5 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
25

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),
26

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).
27

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
28

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
29

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
30

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
31

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
32

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
33

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
34

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.
35

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).
36

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.
37

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
38

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.
39

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 6
th
year following the year in which
the Convention enters into force, unless by June 30 of the 5
th
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
40

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
41

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).
42

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
43

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.
44

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.
64-56, 1964-1 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
45

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.
46

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).
47

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).
48

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),
49

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.)
50

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.
51

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.
52

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
53

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
54

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
55

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.
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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.
57

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").
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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,
59

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 408(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
60

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.
61

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.
62

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
63

(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
64

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
65

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.
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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.
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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.
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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.
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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
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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
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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
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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
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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.
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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.
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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.
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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
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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.
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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:
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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
$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.
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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
$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).
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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
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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
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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
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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
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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,
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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
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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 tax 15.00 15.00
Net post-credit tax paid to Belgium 10.00 25.00
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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 below) 28.57 57.14
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.
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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
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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.
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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
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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 367(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
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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
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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
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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
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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, § 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.
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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) §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,
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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
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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
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(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
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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
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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.
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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 (procédure en référé/procedure in kortgeding) in the
case of Belgium. Further, such person may be compelled to provide such information
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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 effective 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
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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.
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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
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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.
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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.
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