69–119 

110TH CONGRESS EXEC. REPT. " ! SENATE 1st Session 110–2 

TAX CONVENTION WITH BELGIUM 

NOVEMBER 14, 2007.—Ordered to be printed 

Mr. BIDEN, from the Committee on Foreign Relations, 

submitted the following 

REPORT

[To accompany Treaty Doc. 110–3] 

The Committee on Foreign Relations, to which was referred the 

Convention Between the Government of the United States of America and the Government of the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with 

Respect to Taxes on Income, and accompanying Protocol, signed at 

Brussels on November 27, 2006 (the ‘‘Treaty’’) (Treaty Doc. 110–3), 

having considered the same, reports favorably thereon and recommends that the Senate give its advice and consent to ratification 

thereof, as set forth in this report and the accompanying resolution 

of advice and consent. 

CONTENTS 

Page 

I. Purpose ........................................................................................................... 1 

II. Background .................................................................................................... 2 

III. Major Provisions ............................................................................................ 2 

IV. Entry Into Force; Effective Dates ................................................................. 5 

V. Implementing Legislation ............................................................................. 6 

VI. Committee Action .......................................................................................... 6 

VII. Committee Recommendation and Comments .............................................. 6 

VIII. Resolution of Advice and Consent to Ratification ....................................... 7 

IX. Annex.—Technical Explanation .................................................................... 8 

I. PURPOSE

The proposed Treaty is intended to promote closer cooperation 

and further facilitate trade and investment between the United 

States and Belgium. The Treaty’s principal objectives are to eliminate the withholding tax on dividends arising from certain direct 

investments and on certain dividends paid to pension funds; prevent the inappropriate use of the Treaty’s benefits by third-country 

residents; provide for mandatory arbitration of disputes that have 

not been resolved by the competent authorities; significantly exVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00001 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
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pand the circumstances under which the United States is able to 

obtain information from Belgium that is helpful in enforcing U.S. 

domestic tax rules; and generally modernize the existing tax treaty 

relationship with Belgium to bring it into closer conformity with 

U.S. tax treaty law and policy. 

II. BACKGROUND

The Treaty replaces the existing income tax treaty with Belgium, 

which was concluded in 1970 and amended in 1987. 

III. MAJOR PROVISIONS

A detailed article-by-article analysis of the Treaty may be found 

in the Technical Explanation published by the Department of the 

Treasury on July 17, 2007, which is reprinted in Annex I. In addition, the staff of the Joint Committee on Taxation prepared an 

analysis of the Treaty, Document JCX–45–07 (July 13, 2007), 

which has been of great assistance to the committee in reviewing 

the Treaty. A summary of the key provisions of the Treaty is set 

forth below. 

1. Taxation of Cross-border Dividend Payments 

Article 10 (Dividends) of the Treaty provides rules for the taxation of dividends paid by a company that is a resident of one treaty country to a beneficial owner that is a resident of the other treaty country. Article 10 generally allows full residence-country taxation and limited source-country taxation of dividends. 

The Treaty contains both a generally applicable maximum rate 

of withholding at source of 15 percent and a reduced five-percent 

maximum rate for dividends received by a company owning at least 

10 percent of the dividend-paying company. Additionally, with 

some restrictions intended to prevent treaty shopping, dividends 

paid by a U.S. subsidiary to its Belgian parent company will be exempt from U.S. withholding tax if the Belgian parent company 

owns (directly or indirectly) at least 80 percent of the voting power 

in the U.S. subsidiary for the 12-month period ending on the date 

entitlement to the dividend is determined. The Treaty also provides, however, that the zero rate for dividends paid by U.S. resident companies under paragraph 3 of Article 10 may be terminated 

by the United States with written notice to Belgium on or before 

June 30th of any year, effective the following year, if the United 

States has determined that Belgium’s actions with respect to the 

Articles of the Treaty regarding the exchange of information (Article 25) and the mutual agreement procedure (Article 24) have materially altered the balance of benefits of the Treaty. Alternatively, 

the zero rate for dividends paid by U.S. resident companies under 

paragraph 3 of Article 10 will be terminated on January 1st of the 

6th year following the year in which the Treaty enters into force 

unless, by June 30th of the 5th year, the Secretary of the Treasury, 

on the basis of a report of the Commissioner of Internal Revenue, 

certifies to the Senate that Belgium has satisfactorily complied 

with its obligations under Article 25. 

Under the Treaty, a dividend paid by a Belgian company to a 

U.S. company will be exempt from Belgian tax if the U.S. company 

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pany for a 12-month period ending on the date the dividend is declared. 

The Treaty provides that dividends beneficially owned by a pension fund may not be taxed by the country in which the company 

paying the dividends is a resident, unless such dividends are derived from the carrying on of a business, directly by the pension 

fund, or indirectly, through an associated enterprise. 

The Treaty also includes special rules for dividends received from 

U.S. Regulated Investment Companies (RICs) and U.S. Real Estate 

Investment Trusts (REITs). These rules are similar to rules included in other recent treaties and protocols. 

2. Interest and Royalties 

Articles 11 and 12 of the Treaty provide that, subject to certain 

rules and exceptions, interest and royalties beneficially owned by 

a resident of one treaty country arising from sources within the 

other treaty country may be taxed only by the residence country. 

3. Binding Arbitration 

The Treaty, like the Protocol Amending the Tax Convention with 

Germany (the ‘‘German Protocol’’) (Treaty Doc. 109–20), includes a 

binding arbitration mechanism. The arbitration procedure is sometimes referred to as ‘‘last best offer’’ arbitration or ‘‘baseball arbitration’’ because each of the competent authorities proposes one 

and only one figure for settlement and the arbitration board must 

select one of those figures as the award. Under the Treaty, unless 

a taxpayer or other ‘‘concerned person’’ (in general, a person whose 

tax liability is affected by the arbitration determination) does not 

accept the arbitration determination, it is binding on the countries. 

There are two main differences, however, between the arbitration 

procedures included in this Treaty and in the German Protocol. 

First, the maximum length of the proceedings under the Treaty is 

6 months, instead of 9 months under the German Protocol. Second, 

the arbitration procedure under the Treaty can be exercised with 

respect to a dispute regarding the application of any article in the 

Treaty, whereas the German Protocol’s arbitration procedure applies only to specified articles. 

4. Exchange of Information 

Article 25 of the Treaty would improve the ability of the United 

States to obtain information from Belgium when seeking to enforce 

U.S. tax law. In particular, Belgium would be obligated to provide 

information held by financial institutions, despite Belgian bank secrecy rules. Moreover, Belgium agreed to certain other provisions 

that override aspects of Belgian domestic law that currently restrict the ability of the United States to receive information from 

Belgium. As discussed previously, if Belgium has not satisfactorily 

complied with its obligations under Article 25 or if Belgium’s actions with respect Article 24 and 25 have materially altered the 

balance of benefits of the Treaty, the zero-rate provision for dividends paid by U.S. resident companies may be terminated as provided for in paragraph 12 of Article 10. 

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5. Scope 

Article 1 of the Treaty, entitled ‘‘General Scope’’ generally conforms with the 2006 U.S. Model Tax Treaty (the ‘‘U.S. Model’’) and 

reflects changes in U.S. tax law made in the last few years. 

The Treaty generally provides that, with the exception of certain 

benefits, the United States may continue to tax its own citizens 

and residents as if the Treaty were not in force. In addition, notwithstanding any other provision in the Treaty, the United States 

may also tax, in accordance with its law, certain former citizens 

and long-term residents for ten years following the loss of such status. This change is consistent with section 877 of the Internal Revenue Code, which provides special rules for the imposition of U.S. 

income tax on former U.S. citizens and long-term residents for a 

period of ten years following the loss of citizenship or long-term 

resident status. 

The Treaty also includes an additional paragraph (Article 1, 

paragraph 6), which is not in the existing tax treaty with Belgium. 

Paragraph 6 addresses special issues presented by fiscally transparent entities such as partnerships and certain estates and trusts. 

When there is a difference of views between the United States and 

Belgium on whether an entity is fiscally transparent, the entity in 

question may be subject to double taxation or double non-taxation. 

Paragraph 6 solves this problem by providing that an item of income, profit, or gain derived by or through an entity that is fiscally 

transparent under the laws of either treaty country is considered 

to be the income, profit, or gain of a resident of one of the treaty 

countries only to the extent that the item is subject to tax in that 

country as the income, profit, or gain of a resident. 

6. Pension Plans 

The Treaty includes provisions related to cross-border pension 

contributions and earnings, which generally conform with the U.S. 

Model and prevent the taxation of pension contributions and earnings when an individual participates in a pension plan established 

in one country while performing services in the other, provided certain requirements are met. One such requirement is that the competent authority in the country where the services are performed 

must agree that the pension plan generally corresponds to a pension plan recognized as such for tax purposes by that country. The 

Treasury Department has indicated in its Technical Explanation 

and in response to questions for the record that there will be further discussions on this matter with Belgium, at which time it is 

expected that the competent authorities of each country will reach 

agreement on a list of types of pension plans that should be covered under this provision. Once an agreement is reached, the text 

of that agreement will be posted on the website of the IRS and published in the Internal Revenue Bulletin. 

The pension provisions also apply in certain circumstances when 

a pension fund is a resident of a ‘‘comparable third state’’ as defined in the Treaty. 

7. Students, Trainees, Teachers and Researchers 

Article 19 of the Treaty provides that certain payments received 

by a student or business trainee who is a resident of a treaty country and is temporarily present in the other treaty country for the 

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purpose of a full-time education or full-time training will be exempt 

from income tax in the host country on certain payments (in the 

case of a business trainee, for up to two years). Additionally, students and business trainees receive an annual exemption of up to 

$9000 (or its equivalent in euro) for income from personal services 

performed in the host country, with this amount adjusted every 

five years to reflect changes in the U.S. personal exemption and 

standard deduction and the Belgian basic allowance. Article 19 further provides that a teacher or researcher who is a resident of a 

treaty country and then visits the other treaty country for the purpose of teaching or doing research at a school, college, university 

or other educational or research institution, will be exempted from 

tax by the host country on any remuneration for such teaching or 

research for up to two years if such research is undertaken in the 

public interest and not primarily for private benefit. 

8. Limitation on Benefits 

The existing treaty with Belgium contains a ‘‘Limitation on Benefits’’ provision, which is designed to avoid treaty-shopping. The proposed Treaty’s provision on this subject, Article 21, is stronger in 

protecting against abuse by third-country residents and would 

bring the provision into line with the U.S. Model and other more 

recent U.S. tax treaties. Among other changes, the new provision 

provides that a treaty-country company whose shares are regularly 

traded on a recognized stock exchange may qualify for treaty benefits if the company satisfies one of two tests: either the company 

must be primarily traded on a recognized stock exchange in a specified region or the company’s primary place of management and 

control must be in the country of residence. This new requirement 

is intended to ensure an adequate connection to the company’s 

claimed country of residence. 

IV. ENTRY INTO FORCE; EFFECTIVE DATES

The United States and Belgium shall notify each other through 

the diplomatic channel, accompanied by an instrument of ratification, when each has completed its applicable procedures for entry 

into force. In accordance with Article 28, the Treaty will enter into 

force on the date on which the later of the notifications is received. 

The Treaty’s provisions shall have effect with respect to taxes 

withheld at source, for amounts paid or credited on or after the 

first day of the second month next following the date on which the 

Treaty enters into force. The Treaty’s provisions shall have effect 

with respect to other covered taxes for taxable periods beginning on 

or after the first day of January next following the date on which 

the Treaty enters into force. Article 21(5)(f) shall not have effect 

until January 1, 2011. 

If any person entitled to benefits under the existing treaty from 

1970, as modified in 1987, would have been entitled to greater benefits under the older treaty than under this Treaty, the older 1970 

treaty, as modified in 1987, shall, at the election of such person, 

continue to have effect in its entirety with respect to such person 

for a twelve-month period from the date on which the provisions 

of this Treaty would otherwise have effect. 

Notwithstanding other provisions, Article 25 shall have effect 

from the date of entry into force of the Treaty, without regard to 

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the taxable period to which the matter relates. Article 24(7) and 

(8), which provide for binding arbitration, shall have effect with respect to cases that are under consideration by the competent authorities as of the date on which the Treaty enters into force, and 

cases that come under such consideration after that time. 

V. IMPLEMENTING LEGISLATION

As is the case generally with income tax treaties, the Protocol is 

self-executing and thus does not require implementing legislation 

for the United States. 

VI. COMMITTEE ACTION

The committee held a public hearing on the Treaty on July 17, 

2007 (a hearing print of this session will be forthcoming). Testimony was received by Mr. John Harrington, International Tax 

Counsel, Office of the International Tax Counsel at the Department 

of the Treasury; Thomas A. Barthold, Acting Chief of Staff of the 

Joint Committee on Taxation; the Honorable William A. Reinsch, 

President of the National Foreign Trade Council; and Ms. Janice 

Lucchesi, Chairwoman of the Board, Organization for International 

Development. On October 31, 2007, the Committee considered the 

Protocol, and ordered it favorably reported by voice vote, with a 

quorum present and without objection. 

VII. COMMITTEE RECOMMENDATION AND COMMENTS

The Committee on Foreign Relations believes that the Treaty 

will stimulate increased investment, substantially deny ‘‘treatyshoppers’’ the benefits of this tax treaty, and promote closer cooperation and facilitate trade and investment between the United 

States and Belgium. The committee therefore urges the Senate to 

act promptly to give advice and consent to ratification of the Protocol, as set forth in this report and the accompanying resolution 

of advice and consent. The committee has taken note, however, of 

certain issues raised by the Protocol and has certain comments to 

offer the Executive Branch on these matters. 

The Treaty was considered by the Committee on October 31, 

2007, along with three other tax treaties: (1) The Protocol Amending Tax Convention with Finland (Treaty Doc. 109–18); (2) The 

Protocol Amending Tax Convention with Denmark (Treaty Doc. 

109–19); and (3) The Protocol Amending Tax Convention with Germany (Treaty Doc. 109–20). In the committee’s reports regarding 

the Protocol Amending Tax Convention with Finland and the Protocol Amending Tax Convention with Germany, also filed this day, 

the committee set forth comments on several issues, all of which 

are relevant here. 

A. TECHNICAL EXPLANATIONS AND TREATY SHOPPING

In the committee’s report regarding the Protocol Amending Tax 

Convention with Finland, the committee suggested first that the 

Treasury Department consider sharing the Technical Explanation 

it develops with its treaty partners, prior to its public release. Second, the committee encouraged the Treasury Department to further 

strengthen anti-treaty-shopping provisions in tax treaties whenever 

possible, with a particular focus on closing the loophole created by 

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those U.S. tax treaties currently in force that do not have an antitreaty-shopping provision. A detailed discussion regarding these 

issues can be found in Section VII of the committee’s report regarding the Protocol Amending Tax Convention with Finland (Exec. 

Rept. 110–4). 

B. PENSION FUNDS

In the committee’s report regarding the Protocol Amending Tax 

Convention with Germany, the committee welcomed the inclusion 

of provisions related to cross-border pension contributions and 

earnings, which generally conform to the U.S. Model and prevent 

the taxation of pension contributions and earnings when an individual participates in a pension plan established in one country 

while performing services in the other, provided certain requirements are met. Unlike the German Protocol, the Treaty does not 

identify pre-qualified plans in the Treaty. Nevertheless, the Treasury Department indicated in responses to questions for the record 

that the U.S. and Belgian tax authorities have exchanged lists of 

the types of plans that they believe should be covered and there is 

the expectation that a generally applicable authority agreement 

will be entered into under Article 24 of the Treaty shortly after the 

entry into force of the Treaty. The committee urges the Treasury 

Department to conclude the agreement as soon as possible, because 

the pre-approval of certain plans effectively streamlines what could 

otherwise be a cumbersome process. 

C. ARBITRATION

In the committee’s report regarding the Protocol Amending Tax 

Convention with Germany, the committee provided a number of 

comments that relate to the binding arbitration mechanism that is 

included in both the Treaty and the German Protocol. Those comments are relevant here and can be found in Section VII of the 

committee’s report regarding the Protocol Amending Tax Convention with Germany (Exec. Rept. 110–5). 

VIII. TEXT OF RESOLUTION OF ADVICE AND CONSENT TO

RATIFICATION

Resolved (two-thirds of the Senators present concurring therein), 

The Senate advises and consents to the ratification of the Convention between the Government of the United States of America and 

the Government of the Kingdom of Belgium for the Avoidance of 

Double Taxation and the Prevention of Fiscal Evasion with Respect 

to Taxes on Income, and accompanying Protocol, signed at Brussels 

on November 27, 2006 (Treaty Doc. 110–3) 

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IX. ANNEX.—TECHNICAL EXPLANATION

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES

OF AMERICA AND THE GOVERNMENT OF THE KINGDOM OF BELGIUM

FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION

OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME SIGNED AT

BRUSSELS ON NOVEMBER 27, 2006

This is a technical explanation of the Convention between the 

Government of the United States of America and the Government 

of the Kingdom of Belgium for the Avoidance of Double Taxation 

and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed at Brussels on November 27, 2006 (the ‘‘Convention’’), 

and the Protocol also signed at Brussels on November 27, 2006, 

which forms an integral part thereto (the ‘‘Protocol’’). The Protocol 

is discussed below in connection with relevant provisions of the 

Convention. 

References are made to the Convention between the Government 

of the United States of America and the Government of the Kingdom of Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed 

at Brussels on July 9, 1970, as amended by protocol signed December 31, 1987 (the ‘‘prior Convention’’). The Convention and Protocol 

replace the prior Convention. 

Negotiations took into account the U.S. Treasury Department’s 

current tax treaty policy and the Treasury Department’s Model Income Tax Convention, published on November 15, 2006 (the ‘‘U.S. 

Model’’). Negotiations also took into account the Model Tax Convention on Income and on Capital, published by the Organisation 

for Economic Cooperation and Development (the ‘‘OECD Model’’), 

and recent tax treaties concluded by both countries. 

The Technical Explanation is an official guide to the Convention. 

It reflects the policies behind particular Convention provisions, as 

well as understandings reached with respect to the application and 

interpretation of the Convention. References in the Technical Explanation to ‘‘he’’ or ‘‘his’’ should be read to mean ‘‘he or she’’ or 

‘‘his and her.’’ 

ARTICLE 1 (GENERAL SCOPE)

Paragraph 1 

Paragraph 1 of Article 1 provides that the Convention applies 

only to residents of the United States or Belgium except where the 

terms of the Convention provide otherwise. Under Article 4 (Resident) a person is generally treated as a resident of a Contracting 

State if that person is, under the laws of that State, liable to tax 

therein by reason of his domicile, citizenship, residence, or other 

similar criteria. However, if a person is considered a resident of 

both Contracting States, Article 4 provides rules for determining a 

State of residence (or no State of residence). This determination 

governs for all purposes of the Convention. 

Certain provisions are applicable to persons who may not be residents of either Contracting State. For example, paragraph 1 of Article 23 (Non-Discrimination) applies to nationals of the Contracting States. Under Article 25 (Exchange of Information and AdVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00008 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
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ministrative Assistance), information may be exchanged with respect to residents of third states. 

Paragraph 2 

Paragraph 2 states the generally accepted relationship both between the Convention and domestic law and between the Convention and other agreements between the Contracting States. That is, 

no provision in the Convention may restrict any exclusion, exemption, deduction, credit or other benefit accorded by the tax laws of 

the Contracting States, or by any other agreement between the 

Contracting States. The relationship between the non-discrimination provisions of the Convention and other agreements is addressed not in paragraph 2 but in paragraph 3. 

Under paragraph 2, for example, if a deduction would be allowed 

under the U.S. Internal Revenue Code (the ‘‘Code’’) in computing 

the U.S. taxable income of a resident of Belgium, the deduction 

also is allowed to that person in computing taxable income under 

the Convention. Paragraph 2 also means that the Convention may 

not increase the tax burden on a resident of a Contracting State 

beyond the burden determined under domestic law. Thus, a right 

to tax given by the Convention cannot be exercised unless that 

right also exists under internal law. 

It follows that, under the principle of paragraph 2, a taxpayer’s 

U.S. tax liability need not be determined under the Convention if 

the Code would produce a more favorable result. A taxpayer may 

not, however, choose among the provisions of the Code and the 

Convention in an inconsistent manner in order to minimize tax. 

For example, assume that a resident of Belgium has three separate 

businesses in the United States. One is a profitable permanent establishment and the other two are trades or businesses that would 

earn taxable income under the Code but that do not meet the permanent establishment threshold tests of the Convention. One is 

profitable and the other incurs a loss. Under the Convention, the 

income of the permanent establishment is taxable in the United 

States, and both the profit and loss of the other two businesses are 

ignored. Under the Code, all three would be subject to tax, but the 

loss would offset the profits of the two profitable ventures. The taxpayer may not invoke the Convention to exclude the profits of the 

profitable trade or business and invoke the Code to claim the loss 

of the loss trade or business against the profit of the permanent establishment. (See Rev. Rul. 84–17, 1984–1 C.B. 308.) If, however, 

the taxpayer invokes the Code for the taxation of all three ventures, he would not be precluded from invoking the Convention 

with respect, for example, to any dividend income he may receive 

from the United States that is not effectively connected with any 

of his business activities in the United States. 

Similarly, nothing in the Convention can be used to deny any 

benefit granted by any other agreement between the United States 

and Belgium. For example, if certain benefits are provided for military personnel or military contractors under a Status of Forces 

Agreement between the United States and Belgium, those benefits 

or protections will be available to residents of the Contracting 

States regardless of any provisions to the contrary (or silence) in 

the Convention. 

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Paragraph 3 

Paragraph 3 specifically relates to non-discrimination obligations 

of the Contracting States under the General Agreement on Trade 

in Services (the ‘‘GATS’’). 

The provisions of paragraph 3 are an exception to the rule provided in paragraph 2 of this Article under which the Convention 

shall not restrict in any manner any benefit now or hereafter accorded by any other agreement between the Contracting States. 

Subparagraph (a) of paragraph 3 provides that, unless the competent authorities determine that a taxation measure is not within 

the scope of the Convention, the national treatment obligations of 

the GATS shall not apply with respect to that measure. Further, 

any question arising as to the interpretation of the Convention, including in particular whether a measure is within the scope of the 

Convention shall be considered only by the competent authorities 

of the Contracting States, and the procedures under the Convention exclusively shall apply to the dispute. Thus, paragraph 3 of Article XXII (Consultation) of the GATS may not be used to bring a 

dispute before the World Trade Organization unless the competent 

authorities of both Contracting States have determined that the 

relevant taxation measure is not within the scope of Article 23 

(Non-Discrimination) of the Convention. 

The term ‘‘measure’’ for these purposes is defined broadly in subparagraph (b) of paragraph 3. It would include, for example, a law, 

regulation, rule, procedure, decision, administrative action or guidance, or any other form of measure. 

Paragraph 4 

Paragraph 4 contains the traditional saving clause found in all 

U.S. treaties. The Contracting States reserve their rights, except as 

provided in paragraph 5, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the 

Convention to the contrary. For example, if a resident of Belgium 

performs professional services in the United States and the income 

from the services is not attributable to a permanent establishment 

in the United States, Article 7 (Business Profits) would by its terms 

prevent the United States from taxing the income. If, however, the 

resident of Belgium is also a citizen of the United States, the saving clause permits the United States to include the remuneration 

in the worldwide income of the citizen and subject it to tax under 

the normal Code rules (i.e., without regard to Code section 894(a)). 

However, subparagraph 5(a) of Article 1 preserves the benefits of 

special foreign tax credit rules applicable to the U.S. taxation of 

certain U.S. income of its citizens resident in Belgium. See paragraph 4 of Article 22 (Relief from Double Taxation). 

For purposes of the saving clause, ‘‘residence’’ is determined 

under Article 4 (Resident). Thus, an individual who is a resident 

of the United States under the Code (but not a U.S. citizen) but 

who is determined to be a resident of Belgium under the tie breaker rules of Article 4 would be subject to U.S. tax only to the extent 

permitted by the Convention. The United States would not be permitted to apply its statutory rules to that person to the extent the 

rules are inconsistent with the treaty. 

However, the person would be treated as a U.S. resident for U.S. 

tax purposes other than determining the individual’s U.S. tax liVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
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ability. For example, in determining under Code section 957 whether a foreign corporation is a controlled foreign corporation, shares 

in that corporation held by the individual would be considered to 

be held by a U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States shareholders of a controlled foreign corporation subject to current inclusion of Subpart 

F income recognized by the corporation. See, Treas. Reg. section 

301.7701 (b)–7(a)(3). 

Under paragraph 4, each Contracting State also reserves its 

right to tax former citizens and former long-term residents for a period of ten years following the loss of such status. Thus, paragraph 

4 allows the United States to tax former U.S. citizens and former 

U.S. long-term residents in accordance with Section 877 of the 

Code. Section 877 generally applies to a former citizen or long-term 

resident of the United States who relinquishes citizenship or terminates long-term residency if either of the following criteria exceed 

established thresholds: (a) the average annual net income tax of 

such individual for the period of 5 taxable years ending before the 

date of the loss of status, or (b) the net worth of such individual 

as of the date of the loss of status. The annual net income tax 

threshold is adjusted annually for inflation. The United States defines ‘‘long-term resident’’ as an individual (other than a U.S. citizen) who is a lawful permanent resident of the United States in 

at least 8 of the prior 15 taxable years. An individual is not treated 

as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign 

country and the individual does not waive the benefits of such treaty applicable to residents of the foreign country. 

Paragraph 5 

Paragraph 5 sets forth certain exceptions to the saving clause. 

The referenced provisions are intended to provide benefits to citizens and residents even if such benefits do not exist under internal 

law. Paragraph 5 thus preserves these benefits for citizens and 

residents of the Contracting States. 

Subparagraph (a) lists certain provisions of the Convention that 

are applicable to all citizens and residents of a Contracting State, 

despite the general saving clause rule of paragraph 4: 

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the 

right to a correlative adjustment with respect to income tax due on 

profits reallocated under Article 9. 

(2) Paragraphs 1 b), 2, and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony and Child Support) provide exemptions 

from source or residence State taxation for certain pension distributions, social security payments and child support. 

(3) Paragraph 6 of Article 17 (Pensions, Social Security, Annuities, Alimony and Child Support) provides an exemption for certain investment income of pension funds located in Belgium, while 

paragraph 9 provides benefits for certain contributions by or on behalf of a U.S. citizen to certain pension funds established in Belgium. 

(4) Article 22 (Relief from Double Taxation) confirms to citizens 

and residents of one Contracting State the benefit of a credit for 

12 

income taxes paid to the other or an exemption for income earned 

in the other State. 

(5) Article 23 (Non-Discrimination) protects residents and nationals of one Contracting State against the adoption of certain discriminatory practices in the other Contracting State. 

(6) Article 24 (Mutual Agreement Procedure) confers certain benefits on citizens and residents of the Contracting States in order to 

reach and implement solutions to disputes between the two Contracting States. For example, the competent authorities are permitted to use a definition of a term that differs from an internal 

law definition. The statute of limitations may be waived for refunds, so that the benefits of an agreement may be implemented. 

Subparagraph (b) of paragraph 5 provides a different set of exceptions to the saving clause. The benefits referred to are all intended to be granted to temporary residents of a Contracting State 

(for example, in the case of the United States, holders of non- immigrant visas), but not to citizens or to persons who have acquired 

permanent residence in that State. If beneficiaries of these provisions travel from one of the Contracting States to the other, and 

remain in the other long enough to become residents under its internal law, but do not acquire permanent residence status (i.e., in 

the U.S. context, they do not become ‘‘green card’’ holders) and are 

not citizens of that State, the host State will continue to grant 

these benefits even if they conflict with the statutory rules. The 

benefits preserved by this paragraph are: (1) the host country exemptions for government service salaries and pensions under Article 18 (Government Service), certain income of visiting students 

and trainees under Article 19 (Students and Trainees, Teachers 

and Researchers), and the income of diplomatic agents and consular officers under Article 27 (Members of Diplomatic Missions 

and Consular Posts); and (2) the beneficial tax treatment of pension fund contributions under paragraph 7 of Article 17 (Pensions, 

Social Security, Annuities, Alimony and Child Support). 

Paragraph 6 

Paragraph 6 addresses special issues presented by fiscally transparent entities such as partnerships and certain estates and trusts. 

Because different countries frequently take different views as to 

when an entity is fiscally transparent, the risk of both double taxation and double non-taxation are relatively high. The intention of 

paragraph 6 is to eliminate a number of technical problems that arguably would have prevented investors using such entities from 

claiming treaty benefits, even though such investors would be subject to tax on the income derived through such entities. The provision also prevents the use of such entities to claim treaty benefits 

in circumstances where the person investing through such an entity is not subject to tax on the income in its State of residence. The 

provision, and the corresponding requirements of the substantive 

rules of Articles 6 through 20, should be read with those two goals 

in mind. 

In general, paragraph 6 relates to entities that are not subject 

to tax at the entity level, as distinct from entities that are subject 

to tax, but with respect to which tax may be relieved under an integrated system. This paragraph applies to any resident of a Contracting State who is entitled to income derived through an entity 

13 

that is treated as fiscally transparent under the laws of either Contracting State. Entities falling under this description in the United 

States include partnerships, common investment trusts under section 584 and grantor trusts. This paragraph also applies to U.S. 

limited liability companies (‘‘LLCs’’) that are treated as partnerships or as disregarded entities for U.S. tax purposes. 

Under paragraph 6, an item of income, profit or gain derived by 

such a fiscally transparent entity will be considered to be derived 

by a resident of a Contracting State if a resident is treated under 

the taxation laws of that State as deriving the item of income. For 

example, if a company that is a resident of Belgium pays interest 

to an entity that is treated as fiscally transparent for U.S. tax purposes, the interest will be considered derived by a resident of the 

U.S. only to the extent that the taxation laws of the United States 

treats one or more U.S. residents (whose status as U.S. residents 

is determined, for this purpose, under U.S. tax law) as deriving the 

interest for U.S. tax purposes. In the case of a partnership, the persons who are, under U.S. tax laws, treated as partners of the entity 

would normally be the persons whom the U.S. tax laws would treat 

as deriving the interest income through the partnership. Also, it 

follows that persons whom the United States treats as partners but 

who are not U.S. residents for U.S. tax purposes may not claim a 

benefit for the interest paid to the entity under the Convention, because they are not residents of the United States for purposes of 

claiming this treaty benefit. (If, however, the country in which they 

are treated as resident for tax purposes, as determined under the 

laws of that country, has an income tax convention with Belgium, 

they may be entitled to claim a benefit under that convention.) In 

contrast, if, for example, an entity is organized under U.S. laws 

and is classified as a corporation for U.S. tax purposes, interest 

paid by a company that is a resident of Belgium to the U.S. entity 

will be considered derived by a resident of the United States since 

the U.S. corporation is treated under U.S. taxation laws as a resident of the United States and as deriving the income. 

The same result obtains even if the entity were viewed differently under the tax laws of Belgium (e.g., as not fiscally transparent in the first example above where the entity is treated as a 

partnership for U.S. tax purposes). Similarly, the characterization 

of the entity in a third country is also irrelevant, even if the entity 

is organized in that third country. The results follow regardless of 

whether the entity is disregarded as a separate entity under the 

laws of one jurisdiction but not the other, such as a single owner 

entity that is viewed as a branch for U.S. tax purposes and as a 

corporation for tax purposes under the laws of Belgium. These results also obtain regardless of where the entity is organized (i.e., 

in the United States, in Belgium or, as noted above, in a third 

country). 

For example, income from U.S. sources received by an entity organized under the laws of the United States, which is treated for 

tax purposes under the laws of Belgium as a corporation and is 

owned by a shareholder who is a resident of Belgium for its tax 

purposes, is not considered derived by the shareholder of that corporation even if, under the tax laws of the United States, the entity 

is treated as fiscally transparent. Rather, for purposes of the treaty, the income is treated as derived by the U.S. entity. 

14 

These principles also apply to trusts to the extent that they are 

fiscally transparent in either Contracting State. For example, if X, 

a resident of Belgium, creates a revocable trust in the United 

States and names persons resident in a third country as the beneficiaries of the trust, the trust’s income would be regarded as being 

derived by a resident of Belgium only to the extent that the laws 

of Belgium treat X as deriving the income for its tax purposes, perhaps through application of rules similar to the U.S. ‘‘grantor trust’’ 

rules. 

Paragraph 6 is not an exception to the saving clause of paragraph 4. Accordingly, paragraph 6 does not prevent a Contracting 

State from taxing an entity that is treated as a resident of that 

State under its tax law. For example, if a U.S. LLC with members 

who are residents of Belgium elects to be taxed as a corporation for 

U.S. tax purposes, the United States will tax that LLC on its 

worldwide income on a net basis, without regard to whether Belgium views the LLC as fiscally transparent. 

ARTICLE 2 (TAXES COVERED)

This Article specifies the U.S. taxes and the taxes of Belgium to 

which the Convention applies. With two exceptions, the taxes specified in Article 2 are the covered taxes for all purposes of the Convention. A broader coverage applies, however, for purposes of Articles 23 (Non-Discrimination) and 25 (Exchange of Information and 

Administrative Assistance). Article 23 (Non-Discrimination) applies 

with respect to all taxes, including those imposed by state and local 

governments. Article 25 (Exchange of Information and Administrative Assistance) applies with respect to all taxes imposed at the national level. 

Paragraph 1 

Paragraph 1 identifies the category of taxes to which the Convention applies. Paragraph 1 is based on the OECD Model and defines 

the scope of application of the Convention. The convention applies 

to taxes on income, including gains, imposed on behalf of a Contracting State, irrespective of the manner in which they are levied. 

Except with respect to Article 23 (Non-Discrimination), state and 

local taxes are not covered by the Convention. 

Paragraph 2 

Paragraph 2 also is based on the OECD Model and provides a 

definition of taxes on income and on capital gains. The Convention 

covers taxes on total income or any part of income and includes tax 

on gains derived from the alienation of property. The Convention 

does not apply, however, to social security charges, or any other 

charges where there is a direct connection between the levy and individual benefits. Nor does it apply to property taxes, except with 

respect to Article 23 (Non-Discrimination). 

Paragraph 3 

Paragraph 3 lists the taxes in force at the time of signature of 

the Convention to which the Convention applies. 

Subparagraph 3 a) provides a list of income taxes imposed in 

Belgium that are covered taxes under the Convention. These taxes 

include: i) the individual income tax, ii) the corporate income tax, 

15 

iii) the income tax on legal entities, and iv) the income tax on nonresidents. All of these taxes include the prepayments and the surcharges on these taxes and prepayments. 

Subparagraph 3 b) provides that the existing U.S. taxes subject 

to the rules of the Convention are the Federal income taxes imposed by the Code, together with the excise taxes imposed with respect to private foundations (Code sections 4940 through 4948). Social security and unemployment taxes (Code sections 1401, 3101, 

3111 and 3301) are excluded from coverage. 

Paragraph 4 

Under paragraph 4, the Convention will apply to any taxes that 

are identical, or substantially similar, to those enumerated in paragraph 3, and which are imposed in addition to, or in place of, the 

existing taxes after November 27, 2006, the date of signature of the 

Convention. The paragraph also provides that the competent authorities of the Contracting States will notify each other of any 

changes that have been made in their laws, whether tax laws or 

non-tax laws, that affect significantly their obligations under the 

Convention. Non-tax laws that may affect a Contracting State’s obligations under the Convention may include, for example, laws affecting bank secrecy. 

ARTICLE 3 (GENERAL DEFINITIONS)

Article 3 provides general definitions and rules of interpretation 

applicable throughout the Convention. Certain other terms are defined in other articles of the Convention. For example, the term 

‘‘resident of a Contracting State’’ is defined in Article 4 (Resident). 

The term ‘‘permanent establishment’’ is defined in Article 5 (Permanent Establishment). These definitions are used consistently 

throughout the Convention. Other terms, such as ‘‘dividends,’’ ‘‘interest’’ and ‘‘royalties’’ are defined in specific articles for purposes 

only of those articles. 

Paragraph 1 

Paragraph 1 defines a number of basic terms used in the Convention. The introduction to paragraph 1 makes clear that these 

definitions apply for all purposes of the Convention, unless the context requires otherwise. This latter condition allows flexibility in 

the interpretation of the treaty in order to avoid results not intended by the treaty’s negotiators. 

Subparagraph 1(a) defines the term ‘‘person’’ to include an individual, an estate, a trust, a partnership, a company and any other 

body of persons. The definition is significant for a variety of reasons. For example, under Article 4, only a ‘‘person’’ can be a ‘‘resident’’ and therefore eligible for most benefits under the treaty. 

Also, all ‘‘persons’’ are eligible to claim relief under Article 24 (Mutual Agreement Procedure). 

The term ‘‘company’’ is defined in subparagraph 1(b) as a body 

corporate or an entity treated as a body corporate for tax purposes 

in the state where it is organized. The definition refers to the law 

of the state in which an entity is organized in order to ensure that 

an entity that is treated as fiscally transparent in its country of 

residence will not get inappropriate benefits, such as the reduced 

withholding rate provided by subparagraph 2(b), or paragraphs 3 

16 

or 4 of Article 10 (Dividends). It also ensures that the Limitation 

on Benefits provisions of Article 21 will be applied at the appropriate level. 

The terms ‘‘enterprise of a Contracting State’’ and ‘‘enterprise of 

the other Contracting State’’ are defined in subparagraph 1(c) as an 

enterprise carried on by a resident of a Contracting State and an 

enterprise carried on by a resident of the other Contracting State. 

An enterprise of a Contracting State need not be carried on in that 

State. It may be carried on in the other Contracting State or a 

third state (e.g., a U.S. corporation doing all of its business in Belgium would still be a U.S. enterprise). 

Subparagraph 1(c) further provides that these terms also encompass an enterprise conducted through an entity (such as a partnership) that is treated as fiscally transparent in the Contracting 

State where the entity’s owner is resident. The definition makes 

this point explicitly to ensure that the purpose of the Convention 

is not thwarted by an overly technical application of the term ‘‘enterprise of a Contracting State’’ to activities carried on through 

partnerships and similar entities. In accordance with Article 4 

(Resident), entities that are fiscally transparent in the country in 

which their owners are resident are not considered to be residents 

of a Contracting State (although income derived by such entities 

may be taxed as the income of a resident, if taxed in the hands of 

resident partners or other owners). It could be argued that an enterprise conducted by such an entity is not conducted by a resident 

of a Contracting State, and therefore would not benefit from provisions applicable to enterprises of a Contracting State. The definition is intended to make clear that an enterprise conducted by such 

an entity will be treated as carried on by a resident of a Contracting State to the extent its partners or other owners are residents. This approach is consistent with the Code, which under section 875 attributes a trade or business conducted by a partnership 

to its partners and a trade or business conducted by an estate or 

trust to its beneficiaries. 

Subparagraph (d) defines the term ‘‘enterprise’’ as any activity or 

set of activities that constitutes the carrying on of a business. The 

term ‘‘business’’ is not defined, but subparagraph (e) provides that 

it includes the performance of professional services and other activities of an independent character. Both subparagraphs are identical to definitions recently added to the OECD Model in connection 

with the deletion of Article 14 (Independent Personal Services) 

from the OECD Model. The inclusion of the two definitions is intended to clarify that income from the performance of professional 

services or other activities of an independent character is dealt 

with under Article 7 (Business Profits) and not Article 20 (Other 

Income). 

Subparagraph 1(f) defines the term ‘‘international traffic.’’ The 

term means any transport by a ship or aircraft except when such 

transport is solely between places within a Contracting State. This 

definition is applicable principally in the context of Article 8 (Shipping and Air Transport). The definition combines with paragraphs 

2 and 3 of Article 8 to exempt from tax by the source State income 

from the rental of ships or aircraft that is earned both by lessors 

that are operators of ships and aircraft and by those lessors that 

are not (e.g., a bank or a container leasing company). 

17 

The exclusion from international traffic of transport solely between places within a Contracting State means, for example, that 

carriage of goods or passengers solely between New York and Chicago would not be treated as international traffic, whether carried 

by a U.S. or a foreign carrier. The substantive taxing rules of the 

Convention relating to the taxation of income from transport, principally Article 8 (Shipping and Air Transport), therefore, would not 

apply to income from such carriage. Thus, if the carrier engaged in 

internal U.S. traffic were a resident of Belgium (assuming that 

were possible under U.S. law), the United States would not be required to exempt the income from that transport under Article 8. 

The income would, however, be treated as business profits under 

Article 7 (Business Profits), and therefore would be taxable in the 

United States only if attributable to a U.S. permanent establishment of the foreign carrier, and then only on a net basis. The gross 

basis U.S. tax imposed by section 887 would never apply under the 

circumstances described. If, however, goods or passengers are carried by a carrier resident in Belgium from a non-U.S. port to, for 

example, New York, and some of the goods or passengers continue 

on to Chicago, the entire transport would be international traffic. 

This would be true if the international carrier transferred the 

goods at the U.S. port of entry from a ship to a land vehicle, from 

a ship to a lighter, or even if the overland portion of the trip in 

the United States was handled by an independent carrier under 

contract with the original international carrier, so long as both 

parts of the trip were reflected in original bills of lading. For this 

reason, the Convention refers, in the definition of ‘‘international 

traffic,’’ to ‘‘such transport’’ being solely between places in the other 

Contracting State, while the OECD Model refers to the ship or aircraft being operated solely between such places. The Convention is 

consistent with the language in the U.S. Model and is intended to 

make clear that, as in the above example, even if the goods are carried on a different aircraft for the internal portion of the international voyage than is used for the overseas portion of the trip, 

the definition applies to that internal portion as well as the external portion. 

Finally, a ‘‘cruise to nowhere,’’ i.e., a cruise beginning and ending 

in a port in the same Contracting State with no stops in a foreign 

port, would not constitute international traffic. 

Subparagraph 1(g) designates the ‘‘competent authorities’’ for 

Belgium and the United States, respectively. The Belgium competent authority is the Minister of Finance or his authorized representative. The U.S. competent authority is the Secretary of the 

Treasury or his delegate. The Secretary of the Treasury has delegated the competent authority function to the Commissioner of Internal Revenue, who in turn has delegated the authority to the 

Deputy Commissioner (International) LMSB. With respect to interpretative issues, the Deputy Commissioner (International) LMSB 

acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue Service. 

The geographical scope of the Convention with respect to Belgium is set out in subparagraph 1(h). It encompasses the territory 

of Belgium, including the territorial sea and the seabed and subsoil 

and the superjacent waters of the adjacent submarine areas beyond 

18 

the territorial sea over which Belgium exercises sovereign rights in 

accordance with international law. 

The geographical scope of the Convention with respect to the 

United States is set out in subparagraph 1(i). It encompasses the 

United States of America, including the states, the District of Columbia and the territorial sea of the United States. The term does 

not include Puerto Rico, the Virgin Islands, Guam or any other 

U.S. possession or territory. For certain purposes, the term ‘‘United 

States’’ includes the sea bed and subsoil of undersea areas adjacent 

to the territorial sea of the United States. This extension applies 

to the extent that the United States exercises sovereignty in accordance with international law for the purpose of natural resource 

exploration and exploitation of such areas. This extension of the 

definition applies, however, only if the person, property or activity 

to which the Convention is being applied is connected with such 

natural resource exploration or exploitation. Thus, it would not include any activity involving the sea floor of an area over which the 

United States exercised sovereignty for natural resource purposes 

if that activity was unrelated to the exploration and exploitation of 

natural resources. This result is consistent with the result that 

would be obtained under Section 638, which treats the continental 

shelf as part of the United States for purposes of natural resource 

exploration and exploitation. 

The term ‘‘national,’’ as it relates to the United States and to 

Belgium, is defined in subparagraph 1(j). This term is relevant for 

purposes of Articles 18 (Government Service) and 23 (Non-Discrimination). A national of one of the Contracting States is (1) an 

individual who is a citizen or national of that State, and (2) any 

legal person, partnership or association deriving its status, as such, 

from the law in force in the State where it is established. 

Subparagraph (k) defines the term ‘‘pension fund’’ to include any 

person established in a Contracting State that is operated principally to administer or provide pension or retirement benefits or 

to earn income for the benefit of one or more such arrangements 

and, in the case of Belgium, an entity organized under Belgian law 

and regulated by the Bank Finance and Insurance Commission or, 

in the case of the United States, generally exempt from income taxation with respect to such activities. In the case of the United 

States, the term ‘‘pension fund’’ includes the following: a trust providing pension or retirement benefits under a Code section 401(a) 

qualified pension plan, profit sharing or stock bonus plan, a trust 

providing pension or retirement benefits under a Code section 

403(b) plan, a trust that is an individual retirement account under 

Code section 408, a Roth individual retirement account under Code 

section 408A, or a simple retirement account under Code section 

408(p), a trust providing pension or retirement benefits under a 

simplified employee pension plan under Code section 408(k), a 

trust described in section 457(g) providing pension or retirement 

benefits under a Code section 457(b) plan, and the Thrift Savings 

Fund (section 770 1(j)). Section 401(k) plans and group trusts described in Revenue Ruling 8 1–100 and meeting the conditions of 

Revenue Ruling 2004–67 qualify as pension funds because they are 

covered by Code section 40 1(a). 

19 

Paragraph 2 

Terms that are not defined in the Convention are dealt with in 

paragraph 2. 

Paragraph 2 provides that in the application of the Convention, 

any term used but not defined in the Convention will have the 

meaning that it has under the law of the Contracting State whose 

tax is being applied, unless the context requires otherwise, or the 

competent authorities have agreed on a different meaning pursuant 

to Article 24 (Mutual Agreement Procedure). If the term is defined 

under both the tax and non-tax laws of a Contracting State, the 

definition in the tax law will take precedence over the definition in 

the non-tax laws. Finally, there also may be cases where the tax 

laws of a State contain multiple definitions of the same term. In 

such a case, the definition used for purposes of the particular provision at issue, if any, should be used. 

If the meaning of a term cannot be readily determined under the 

law of a Contracting State, or if there is a conflict in meaning 

under the laws of the two States that creates difficulties in the application of the Convention, the competent authorities, as indicated 

in paragraph 3(d)(iv) of Article 24 (Mutual Agreement Procedure), 

may establish a common meaning in order to prevent double taxation or to further any other purpose of the Convention. This common meaning need not conform to the meaning of the term under 

the laws of either Contracting State. 

The reference in paragraph 2 to the internal law of a Contracting 

State means the law in effect at the time the treaty is being applied, not the law as in effect at the time the treaty was signed. 

The use of ‘‘ambulatory’’ definitions, however, may lead to results 

that are at variance with the intentions of the negotiators and of 

the Contracting States when the treaty was negotiated and ratified. The reference in both paragraphs 1 and 2 to the ‘‘context otherwise requir[ing]’’ a definition different from the treaty definition, 

in paragraph 1, or from the internal law definition of the Contracting State whose tax is being imposed, under paragraph 2, refers to a circumstance where the result intended by the Contracting States is different from the result that would obtain under 

either the paragraph 1 definition or the statutory definition. Thus, 

flexibility in defining terms is necessary and permitted. 

ARTICLE 4 (RESIDENT)

This Article sets forth rules for determining whether a person is 

a resident of a Contracting State for purposes of the Convention. 

As a general matter only residents of the Contracting States may 

claim the benefits of the Convention. The treaty definition of residence is to be used only for purposes of the Convention. The fact 

that a person is determined to be a resident of a Contracting State 

under Article 4 does not necessarily entitle that person to the benefits of the Convention. In addition to being a resident, a person also 

must qualify for benefits under Article 21 (Limitation on Benefits) 

in order to receive benefits conferred on residents of a Contracting 

State. 

The determination of residence for treaty purposes looks first to 

a person’s liability to tax as a resident under the respective taxation laws of the Contracting States. As a general matter, a person 

20 

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 nonU.S. source income (see Code section 7701(b)(5)(B)), would not be 

considered a resident of the United States for purposes of the Convention. Similarly, an enterprise of Belgium with a permanent establishment in the United States is not, by virtue of that permanent establishment, a resident of the United States. The enterprise 

generally is subject to U.S. tax only with respect to its income that 

is attributable to the U.S. permanent establishment, not with respect to its worldwide income, as it would be if it were a U.S. resident. 

Paragraph 2 

Paragraph 2 contains an exception to the general rule of paragraph 1 that residence under internal law also determines residence under the Convention. The exception applies with respect to 

a U.S. citizen or alien lawfully admitted for permanent residence 

(i.e., a ‘‘green card’’ holder). Under paragraph 1, a person is considered a resident of a Contracting State for purposes of the ConvenVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00020 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
21 

tion 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 BelgiumU.K. tax treaty, he could claim only the benefits of that treaty, 

even if the Convention would provide greater benefits. 

The fact that a U.S. citizen who does not have close ties to the 

United States may not be treated as a U.S. resident under the Convention does not alter the application of the saving clause of paragraph 4 of Article 1 (General Scope) to that citizen. For example, 

a U.S. citizen who pursuant to the ‘‘citizen/green card holder’’ exception in paragraph 2 is not considered to be a resident of the 

United States still is taxable in the United States on his worldwide 

income under the generally applicable rules of the Code. 

Paragraph 3 

Paragraph 3 provides that certain tax-exempt entities such as 

pension funds and charitable organizations will be regarded as 

residents of a Contracting State regardless of whether they are 

generally liable to income tax in the State where they are established. The paragraph applies to legal persons organized under the 

22 

laws of a Contracting State and established and maintained in that 

State to provide pensions or other similar benefits pursuant to a 

plan, or exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes. Thus, a section 501(c) organization 

organized in the United States (such as a U.S. charity) that is generally exempt from tax under U.S. law is a resident of the United 

States for all purposes of the Convention. 

Paragraph 4 

If, under the laws of the two Contracting States, and, thus, 

under paragraph 1, an individual is deemed to be a resident of both 

Contracting States, a series of tie-breaker rules are provided in 

paragraph 4 to determine a single State of residence for that individual. These tests are to be applied in the order in which they are 

stated. The first test is based on where the individual has a permanent home. If that test is inconclusive because the individual has 

a permanent home available to him in both States, he will be considered to be a resident of the Contracting State where his personal 

and economic relations are closest (i.e., the location of his ‘‘centre 

of vital interests’’). If that test is also inconclusive, or if he does not 

have a permanent home available to him in either State, he will 

be treated as a resident of the Contracting State where he maintains an habitual abode. If he has an habitual abode in both States 

or in neither of them, he will be treated as a resident of the Contracting State of which he is a national. If he is a national of both 

States or of neither, the matter will be considered by the competent 

authorities, who will assign a single State of residence. 

Paragraph 5 

Paragraph 5 seeks to settle dual-residence issues for persons 

other than individuals (e.g., companies, trusts, or estates). For example, a dual-residence may arise in the case of a company that 

is incorporated in the United States, and therefore treated as a 

resident of the United States, but that is also considered a resident 

of Belgium because it is managed and controlled in Belgium, or 

perhaps, maintains a dual charter of incorporation in Belgium. In 

such a case, if such a person is, under the rules of paragraph 1, 

resident in both Contracting States, the competent authorities shall 

seek to determine a single State of residence for that person for 

purposes of the Convention. If the competent authorities do not 

reach an agreement on a single State of residence, that company 

may not claim any benefit accorded to residents of a Contracting 

State by the Convention, except those provided in paragraph 1 of 

Article 22 (Relief From Double Taxation), paragraph 1 of Article 23 

(Non-Discrimination), and Article 24 (Mutual Agreement Procedure). Thus, for example, a State cannot discriminate against a 

dual resident company. 

ARTICLE 5 (PERMANENT ESTABLISHMENT)

This Article defines the term ‘‘permanent establishment,’’ a term 

that is significant for several articles of the Convention. The existence of a permanent establishment in a Contracting State is necessary under Article 7 (Business Profits) for the taxation by that 

State of the business profits of a resident of the other Contracting 

State. Articles 10, 11 and 12 (dealing with dividends, interest, and 

23 

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 twelvemonth threshold test. For example, the construction of a housing 

development would be considered as a single project even if each 

house were constructed for a different purchaser. 

In applying this paragraph, time spent by a sub-contractor on a 

building site is counted as time spent by the general contractor at 

the site for purposes of determining whether the general contractor 

24 

has a permanent establishment. However, for the sub-contractor 

itself to be treated as having a permanent establishment, the subcontractor’s activities at the site must last for more than 12 

months. If a sub-contractor is on a site intermittently, then, for 

purposes of applying the 12-month rule, time is measured from the 

first day the sub-contractor is on the site until the last day (i.e., 

intervening days that the sub-contractor is not on the site are 

counted). 

These interpretations of the Article are based on the Commentary to paragraph 3 of Article 5 of the OECD Model, which contains language that is substantially the same as that in the Convention. These interpretations are consistent with the generally accepted international interpretation of the relevant language in 

paragraph 3 of Article 5 of the Convention. 

If the twelve-month threshold is exceeded, the site or project constitutes a permanent establishment from the first day of activity. 

Paragraph 4 

This paragraph contains exceptions to the general rule of paragraph 1, listing a number of activities that may be carried on 

through a fixed place of business but which nevertheless do not create a permanent establishment. The use of facilities solely to store, 

display or deliver merchandise belonging to an enterprise does not 

constitute a permanent establishment of that enterprise. The maintenance of a stock of goods belonging to an enterprise solely for the 

purpose of storage, display or delivery, or solely for the purpose of 

processing by another enterprise does not give rise to a permanent 

establishment of the first-mentioned enterprise. The maintenance 

of a fixed place of business solely for the purpose of purchasing 

goods or merchandise, or for collecting information, for the enterprise, or for other activities that have a preparatory or auxiliary 

character for the enterprise, such as advertising, or the supply of 

information, do not constitute a permanent establishment of the 

enterprise. Moreover, subparagraph 4(f) provides that a combination of the activities described in the other subparagraphs of paragraph 4 will not give rise to a permanent establishment if the combination results in an overall activity that is of a preparatory or 

auxiliary character. 

Paragraph 5 

Paragraphs 5 and 6 specify when activities carried on by an 

agent or other person acting on behalf of an enterprise create a 

permanent establishment of that enterprise. Under paragraph 5, a 

person is deemed to create a permanent establishment of the enterprise if that person has and habitually exercises an authority to 

conclude contracts that are binding on the enterprise. If, however, 

for example, his activities are limited to those activities specified 

in paragraph 4 which would not constitute a permanent establishment if carried on by the enterprise through a fixed place of business, the person does not create a permanent establishment of the 

enterprise. 

The OECD Model uses the term ‘‘in the name of that enterprise’’ 

rather than ‘‘binding on the enterprise.’’ This difference is intended 

to be a clarification rather than a substantive difference. As indicated in paragraph 32 to the OECD Commentaries on Article 5, 

25 

paragraph 5 of the Article is intended to encompass persons who 

have ‘‘sufficient authority to bind the enterprise’s participation in 

the business activity in the State concerned.’’ 

The contracts referred to in paragraph 5 are those relating to the 

essential business operations of the enterprise, rather than ancillary activities. For example, if the person has no authority to conclude contracts in the name of the enterprise with its customers 

for, say, the sale of the goods produced by the enterprise, but it can 

enter into service contracts in the name of the enterprise for the 

enterprise’s business equipment, this contracting authority would 

not fall within the scope of the paragraph, even if exercised regularly. 

Paragraph 6 

Under paragraph 6, an enterprise is not deemed to have a permanent establishment in a Contracting State merely because it 

carries on business in that State through an independent agent, including a broker or general commission agent, if the agent is acting 

in the ordinary course of his business as an independent agent. 

Thus, there are two conditions that must be satisfied: the agent 

must be both legally and economically independent of the enterprise, and the agent must be acting in the ordinary course of its 

business in carrying out activities on behalf of the enterprise. 

Whether the agent and the enterprise are independent is a factual determination. Among the questions to be considered are the 

extent to which the agent operates on the basis of instructions from 

the enterprise. An agent that is subject to detailed instructions regarding the conduct of its operations or comprehensive control by 

the enterprise is not legally independent. 

In determining whether the agent is economically independent, 

a relevant factor is the extent to which the agent bears business 

risk. Business risk refers primarily to risk of loss. An independent 

agent typically bears risk of loss from its own activities. In the absence of other factors that would establish dependence, an agent 

that shares business risk with the enterprise, or has its own business risk, is economically independent because its business activities are not integrated with those of the principal. Conversely, an 

agent that bears little or no risk from the activities it performs is 

not economically independent and therefore is not described in 

paragraph 6. 

Another relevant factor in determining whether an agent is economically independent is whether the agent acts exclusively or 

nearly exclusively for the principal. Such a relationship may indicate that the principal has economic control over the agent. A number of principals acting in concert also may have economic control 

over an agent. The limited scope of the agent’s activities and the 

agent’s dependence on a single source of income may indicate that 

the agent lacks economic independence. It should be borne in mind, 

however, that exclusivity is not in itself a conclusive test; an agent 

may be economically independent notwithstanding an exclusive relationship with the principal if it has the capacity to diversify and 

acquire other clients without substantial modifications to its current business and without substantial harm to its business profits. 

Thus, exclusivity should be viewed merely as a pointer to further 

investigation of the relationship between the principal and the 

26 

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. 

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 

27 

direct use by the owner (in which case income may be imputed to 

the owner for tax purposes) and rental income from the letting of 

real property. In the case of a net lease of real property, if a net 

election has not been made, the gross rental payment (before deductible expenses incurred by the lessee) is treated as income from 

the property. 

Other income closely associated with real property is covered by 

other Articles of the Convention, however, and not Article 6. For 

example, income from the disposition of an interest in real property 

is not considered ‘‘derived’’ from real property; taxation of that income is addressed in Article 13 (Gains). Interest paid on a mortgage on real property would be covered by Article 11 (Interest). 

Distributions by a U.S. Real Estate Investment Trust or certain 

regulated investment companies would fall under Article 13 (Gains) 

in the case of distributions of U.S. real property gain or Article 10 

(Dividends) in the case of distributions treated as dividends. Finally, distributions from a United States Real Property Holding 

Corporation are not considered to be income from the exploitation 

of real property; such payments would fall under Article 10 or 13. 

Paragraph 4 

This paragraph specifies that the basic rule of paragraph 1 (as 

elaborated in paragraph 3) applies to income from real property of 

an enterprise. This clarifies that the situs country may tax the real 

property income (including rental income) of a resident of the other 

Contracting State in the absence of attribution to a permanent establishment in the situs State. This provision represents an exception to the general rule under Article 7 (Business Profits) that income must be attributable to a permanent establishment in order 

to be taxable in the situs state. 

Paragraph 5 

The paragraph provides that a resident of one Contracting State 

that derives real property income from the other may elect, for any 

taxable year, to be subject to tax in that other State on a net basis, 

as though the income were attributable to a permanent establishment in that other State. The election may be terminated with the 

consent of the competent authority of the situs State. In the United 

States, revocation will be granted in accordance with the provisions 

of Treas. Reg. section 1.871–10(d)(2). 

ARTICLE 7 (BUSINESS PROFITS)

This Article provides rules for the taxation by a Contracting 

State of the business profits of an enterprise of the other Contracting State. 

Paragraph 1 

Paragraph 1 states the general rule that business profits of an 

enterprise of one Contracting State may not be taxed by the other 

Contracting State unless the enterprise carries on business in that 

other Contracting State through a permanent establishment (as defined in Article 5 (Permanent Establishment)) situated there. When 

that condition is met, the State in which the permanent establishment is situated may tax the enterprise on the income that is attributable to the permanent establishment. 

28 

Although the Convention does not include a definition of ‘‘business profits,’’ the term is intended to cover income derived from 

any trade or business. In accordance with this broad definition, the 

term ‘‘business profits’’ includes income attributable to notional 

principal contracts and other financial instruments to the extent 

that the income is attributable to a trade or business of dealing in 

such instruments or is otherwise related to a trade or business (as 

in the case of a notional principal contract entered into for the purpose of hedging currency risk arising from an active trade or business). Any other income derived from such instruments is, unless 

specifically covered in another article, dealt with under Article 20 

(Other Income). 

The term ‘‘business profits’’ also includes income derived by an 

enterprise from the rental of tangible personal property (unless 

such tangible personal property consists of aircraft, ships or containers, income from which is addressed by Article 8 (Shipping and 

Air Transport)). The inclusion of income derived by an enterprise 

from the rental of tangible personal property in business profits 

means that such income earned by a resident of a Contracting 

State can be taxed by the other Contracting State only if the income is attributable to a permanent establishment maintained by 

the resident in that other State, and, if the income is taxable, it 

can be taxed only on a net basis. Income from the rental of tangible 

personal property that is not derived in connection with a trade or 

business is dealt with in Article 20 (Other Income). 

In addition, as a result of the definitions of ‘‘enterprise’’ and 

‘‘business’’ in Article 3 (General Definitions), the term includes income derived from the furnishing of personal services. Thus, a consulting firm resident in one State whose employees or partners perform services in the other State through a permanent establishment may be taxed in that other State on a net basis under Article 

7, and not under Article 14 (Income from Employment), which applies only to income of employees. With respect to the enterprise’s 

employees themselves, however, their salary remains subject to Article 14. 

Because this article applies to income earned by an enterprise 

from the furnishing of personal services, the article also applies to 

income derived by a partner resident in a Contracting State that 

is attributable to personal services performed in the other Contracting State through a partnership with a permanent establishment in that other State. Income which may be taxed under this 

article includes all income attributable to the permanent establishment in respect of the performance of the personal services carried 

on by the partnership (whether by the partner himself, other partners in the partnership, or by employees assisting the partners) 

and any income from activities ancillary to the performance of 

those services (e.g., charges for facsimile services). 

The application of Article 7 to a service partnership may be illustrated by the following example: a partnership formed in Belgium 

has five partners (who agree to split profits equally), four of whom 

are resident and perform personal services only in Belgium at Office A, and one of whom performs personal services at Office B, a 

permanent establishment in the United States. In this case, the 

four partners of the partnership resident in Belgium may be taxed 

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utable to the permanent establishment, Office B. The services giving rise to income which may be attributed to the permanent establishment would include not only the services performed by the one 

resident partner, but also, for example, if one of the four other 

partners came to the United States and worked on an Office B 

matter there, the income in respect of those services. Income from 

the services performed by the visiting partner would be subject to 

tax in the United States regardless of whether the visiting partner 

actually visited or used Office B while performing services in the 

United States. 

Paragraph 2 

Paragraph 2 provides rules for the attribution of business profits 

to a permanent establishment. The Contracting States will attribute to a permanent establishment the profits that it would have 

earned had it been a distinct and separate enterprise engaged in 

the same or similar activities under the same or similar conditions 

and dealing wholly independently with the enterprise of which it 

is a permanent establishment. 

The ‘‘attributable to’’ concept of paragraph 2 provides an alternative to the analogous but somewhat different ‘‘effectively connected’’ concept in Code section 864(c). In effect, paragraph 2 allows the United States to tax the lesser of two amounts of income: 

the amount determined by applying U.S. rules regarding the calculation of effectively connected income and the amount determined under Article 7 of the Convention. That is, a taxpayer may 

choose the set of rules that results in the lowest amount of taxable 

income, but may not mix and match. 

In some cases, the amount of income ‘‘attributable to’’ a permanent establishment under Article 7 may be greater than the 

amount of income that would be treated as ‘‘effectively connected’’ 

to a U.S. trade or business under section 864. For example, a taxpayer that has a significant amount of foreign source royalty income attributable to a U.S. branch may find that it will pay less 

tax in the United States by applying section 864(c) of the Code, 

rather than the rules of Article 7, if the foreign source royalties are 

not derived in the active conduct of a trade or business and thus 

would not be effectively connected income. But, as described in the 

Technical Explanation to Article 1(2), if it does so, it may not then 

use Article 7 principles to exempt other income that would be effectively connected to the U.S. trade or business. Conversely, if it uses 

Article 7 principles to exempt other effectively connected income 

that is not attributable to its U.S. permanent establishment, then 

it must include the foreign source royalties in its net taxable income even though such royalties would not constitute effectively 

connected income. 

In the case of financial institutions, the use of internal dealings 

to allocate income within an enterprise may produce results under 

Article 7 that are significantly different from the results under the 

effectively connected income rules. For example, income from interbranch notional principal contracts may be taken into account 

under Article 7, notwithstanding that such transactions may be ignored for purposes of U.S. domestic law. Under the consistency rule 

described above, a financial institution that conducts different lines 

of business through its U.S. permanent establishment may not 

30 

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– 

31 

1(c). The books of a branch will not be respected, however, when 

the results are inconsistent with a functional analysis. So, for example, income from a transaction that is booked in a particular 

branch (or home office) will not be treated as attributable to that 

location if the sales and risk management functions that generate 

the income are performed in another location. 

Because the use of profits methods is permissible under paragraph 2, it is not necessary for the Convention to include a provision corresponding to paragraph 4 of Article 7 of the OECD Model. 

Paragraph 3 

This paragraph is identical to the provision in the U.S. Model. 

Paragraph 3 provides that in determining the business profits of a 

permanent establishment, deductions shall be allowed for the expenses incurred for the purposes of the permanent establishment, 

ensuring that business profits will be taxed on a net basis. This 

rule is not limited to expenses incurred exclusively for the purposes 

of the permanent establishment, but includes expenses incurred for 

the purposes of the enterprise as a whole, or that part of the enterprise that includes the permanent establishment. Deductions are to 

be allowed regardless of which accounting unit of the enterprise 

books the expenses, so long as they are incurred for the purposes 

of the permanent establishment. For example, a portion of the interest expense recorded on the books of the home office in one State 

may be deducted by a permanent establishment in the other if 

properly allocable thereto. The amount of expense that must be allowed as a deduction is determined by applying the arm’s length 

principle. 

As noted above, the Protocol provides that the OECD Transfer 

Pricing Guidelines apply, by analogy, in determining the profits attributable to a permanent establishment. Accordingly, a permanent 

establishment may deduct payments made to its head office or another branch in compensation for services performed for the benefit 

of the branch. The method to be used in calculating that amount 

will depend on the terms of the arrangements between the 

branches and head office. For example, the enterprise could have 

a policy, expressed in writing, under which each business unit 

could use the services of lawyers employed by the head office. At 

the end of each year, the costs of employing the lawyers would be 

allocated to each business unit according to the amount of services 

used by that business unit during the year. Since this appears to 

be a kind of cost-sharing arrangement and the allocation of costs 

is based on the benefits received by each business unit, it would 

be an acceptable means of determining a permanent establishment’s deduction for legal expenses. Alternatively, the head office 

could agree to employ lawyers at its own risk, and to charge an 

arm’s length price for legal services performed for a particular business unit. If the lawyers were under-utilized, and the ‘‘fees’’ received from the business units were less than the cost of employing 

the lawyers, then the head office would bear the excess cost. If the 

‘‘fees’’ exceeded the cost of employing the lawyers, then the head 

office would keep the excess to compensate it for assuming the risk 

of employing the lawyers. If the enterprise acted in accordance 

with this agreement, this method would be an acceptable alterVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00031 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
32 

native method for calculating a permanent establishment’s deduction for legal expenses. 

The Protocol also specifies that a permanent establishment cannot be funded entirely with debt, but must have sufficient capital 

to carry on its activities as if it were a distinct and separate enterprise. To the extent that the permanent establishment does not 

have such capital, a Contracting State may attribute such capital 

to the permanent establishment and deny an interest deduction to 

the extent necessary to reflect that capital attribution. The method 

prescribed by U.S. domestic law for making this attribution is 

found in Treas. Reg. Section 1.882–5. Both Section 1.882–5 and the 

method prescribed in the Protocol start from the premise that all 

of the capital of the enterprise supports all of the assets and risks 

of the enterprise, and therefore the entire capital of the enterprise 

must be allocated to its various businesses and offices. 

However, section 1.882–5 does not take into account the fact that 

some assets create more risk for the enterprise than do other assets. An independent enterprise would need less capital to support 

a perfectly-hedged U.S. Treasury security than it would need to 

support an equity security or other asset with significant market 

and/or credit risk. Accordingly, in some cases section 1.882μ095 

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 (PermaVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00032 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
33 

nent Establishment). A common situation in which paragraph 4 is 

relevant is one in which a permanent establishment purchases raw 

materials for the enterprise’s manufacturing operation conducted 

outside the United States and sells the manufactured product. 

While business profits may be attributable to the permanent establishment with respect to its sales activities, no profits are attributable to it with respect to its purchasing activities. 

Paragraph 5 

Paragraph 5 provides that profits shall be determined by the 

same method each year, unless there is good reason to change the 

method used. This rule assures consistent tax treatment over time 

for permanent establishments. It limits the ability of both the Contracting State and the enterprise to change accounting methods to 

be applied to the permanent establishment. It does not, however, 

restrict a Contracting State from imposing additional requirements, such as the rules under Code section 481, to prevent 

amounts from being duplicated or omitted following a change in accounting method. Such adjustments may be necessary, for example, 

if the taxpayer switches from using the domestic rules under section 864 in one year to using the rules of Article 7 in the next. Also, 

if the taxpayer switches from Convention-based rules to U.S. domestic rules, it may need to meet certain deadlines for making 

elections that are not necessary when applying the rules of the 

Convention. 

Paragraph 6 

Paragraph 6 coordinates the provisions of Article 7 and other 

provisions of the Convention. Under this paragraph, when business 

profits include items of income that are dealt with separately under 

other articles of the Convention, the provisions of those articles 

will, except when they specifically provide to the contrary, take 

precedence over the provisions of Article 7. For example, the taxation of dividends will be determined by the rules of Article 10 

(Dividends), and not by Article 7, except where, as provided in 

paragraph 8 of Article 10, the dividend is attributable to a permanent establishment. In the latter case the provisions of Article 7 

apply. Thus, an enterprise of one State deriving dividends from the 

other State may not rely on Article 7 to exempt those dividends 

from tax at source if they are not attributable to a permanent establishment of the enterprise in the other State. By the same 

token, if the dividends are attributable to a permanent establishment in the other State, the dividends may be taxed on a net income basis at the source State full corporate tax rate, rather than 

on a gross basis under Article 10 (Dividends). 

As provided in Article 8 (Shipping and Air Transport), income derived from shipping and air transport activities in international 

traffic described in that Article is taxable only in the country of 

residence of the enterprise regardless of whether it is attributable 

to a permanent establishment situated in the source State. 

Paragraph 7 

Paragraph 7 incorporates into the Convention the rule of Code 

section 864(c)(6). Like the Code section on which it is based, paragraph 7 provides that any income or gain attributable to a permaVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00033 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
34 

nent establishment during its existence is taxable in the Contracting State where the permanent establishment is situated, even 

if the payment of that income or gain is deferred until after the 

permanent establishment ceases to exist. This rule applies with respect to paragraphs 1 and 2 of Article 7 (Business Profits), 

paragraph 8 of Article 10 (Dividends), paragraph 4 of Article 11 

(Interest), paragraph 3 of Articles 12 (Royalties) and 13 (Gains) 

and paragraph 2 of Article 20 (Other Income). 

The effect of this rule can be illustrated by the following example. Assume a company that is a resident of Belgium and that 

maintains a permanent establishment in the United States winds 

up the permanent establishment’s business and sells the permanent establishment’s inventory and assets to a U.S. buyer at the 

end of year 1 in exchange for an interest-bearing installment obligation payable in full at the end of year 3. Despite the fact that 

the company has no permanent establishment in the United States 

in year 3, the United States may tax the deferred income payment 

recognized by the company in year 3. 

Relationship to Other Articles 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope) of the Convention. Thus, if a citizen of the 

United States who is a resident of Belgium under the treaty derives business profits from the United States that are not attributable to a permanent establishment in the United States, the 

United States may, subject to the special foreign tax credit rules 

of paragraph 4 of Article 22 (Relief from Double Taxation), tax 

those profits, notwithstanding the provision of paragraph 1 of this 

Article which would exempt the income from U.S. tax. 

The benefits of this Article are also subject to Article 21 (Limitation on Benefits). Thus, an enterprise of Belgium and that derives 

income effectively connected with a U.S. trade or business may not 

claim the benefits of Article 7 unless the resident carrying on the 

enterprise qualifies for such benefits under Article 21. 

ARTICLE 8 (SHIPPING AND AIR TRANSPORT)

This Article governs the taxation of profits from the operation of 

ships and aircraft in international traffic. The term ‘‘international 

traffic’’ is defined in subparagraph 1(f) of Article 3 (General Definitions). The provisions of Article 8 are in all material respects identical to the provisions of Article 8 of the U.S. Model. 

Paragraph 1 

Paragraph 1 provides that profits derived by an enterprise of a 

Contracting State from the operation in international traffic of 

ships or aircraft are taxable only in that Contracting State. Because paragraph 6 of Article 7 (Business Profits) defers to Article 

8 with respect to shipping income, such income derived by a resident of one of the Contracting States may not be taxed in the other 

State even if the enterprise has a permanent establishment in that 

other State. Thus, if a U.S. airline has a ticket office in Belgium, 

Belgium may not tax the airline’s profits attributable to that office 

under Article 7. Since entities engaged in international transportation activities normally will have many permanent establishments in a number of countries, the rule avoids difficulties that 

35 

would be encountered in attributing income to multiple permanent 

establishments if the income were covered by Article 7 (Business 

Profits). 

Paragraph 2 

The income from the operation of ships or aircraft in international traffic that is exempt from tax under paragraph 1 is defined in paragraph 2. 

In addition to income derived directly from the operation of ships 

and aircraft in international traffic, this definition also includes 

certain items of rental income. First, income of an enterprise of a 

Contracting State from the rental of ships or aircraft on a full basis 

(i.e., with crew) is income of the lessor from the operation of ships 

and aircraft in international traffic and, therefore, is exempt from 

tax in the other Contracting State under paragraph 1. Also, paragraph 2 encompasses income from the lease of ships or aircraft on 

a bareboat basis (i.e., without crew), either when the income is incidental to other income of the lessor from the operation of ships or 

aircraft in international traffic, or when the ships or aircraft are 

operated in international traffic by the lessee. If neither of those 

two conditions apply, income from the bareboat rentals would constitute business profits. The coverage of Article 8 is therefore 

broader than that of Article 8 of the OECD Model, which covers 

bareboat leasing only when it is incidental to other income of the 

lessor from the operation of ships or aircraft in international traffic. 

Paragraph 2 also clarifies, consistent with the Commentary to 

Article 8 of the OECD Model, that income earned by an enterprise 

from the inland transport of property or passengers within either 

Contracting State falls within Article 8 if the transport is undertaken as part of the international transport of property or passengers by the enterprise. Thus, if a U.S. shipping company contracts to carry property from Belgium to a U.S. city and, as part 

of that contract, it transports the property by truck from its point 

of origin to an airport in Belgium (or it contracts with a trucking 

company to carry the property to the airport) the income earned by 

the U.S. shipping company from the overland leg of the journey 

would be taxable only in the United States. Similarly, Article 8 also 

would apply to all of the income derived from a contract for the 

international transport of goods, even if the goods were transported 

to the port by a lighter, not by the vessel that carried the goods 

in international waters. 

Finally, certain non-transport activities that are an integral part 

of the services performed by a transport company, or are ancillary 

to the enterprise’s operation of ships or aircraft in international 

traffic, are understood to be covered in paragraph 1, though they 

are not specified in paragraph 2. These include, for example, the 

provision of goods and services by engineers, ground and equipment maintenance and staff, cargo handlers, catering staff and customer services personnel. Where the enterprise provides such goods 

to, or performs services for, other enterprises and such activities 

are directly connected with or ancillary to the enterprise’s operation of ships or aircraft in international traffic, the profits from 

the provision of such goods and services to other enterprises will 

fall under this paragraph. 

36 

For example, enterprises engaged in the operation of ships or aircraft in international traffic may enter into pooling arrangements 

for the purposes of reducing the costs of maintaining facilities 

needed for the operation of their ships or aircraft in other countries. For instance, where an airline enterprise agrees (for example, 

under an International Airlines Technical Pool agreement) to provide spare parts or maintenance services to other airlines landing 

at a particular location (which allows it to benefit from these services at other locations), activities carried on pursuant to that agreement will be ancillary to the operation of aircraft in international 

traffic by the enterprise. 

Also, advertising that the enterprise may do for other enterprises 

in magazines offered aboard ships or aircraft that it operates in 

international traffic or at its business locations, such as ticket offices, is ancillary to its operation of these ships or aircraft. Profits 

generated by such advertising fall within this paragraph. Income 

earned by concessionaires, however, is not covered by Article 8. 

These interpretations of paragraph 1 also are consistent with the 

Commentary to Article 8 of the OECD Model. 

Paragraph 3 

Under this paragraph, profits of an enterprise of a Contracting 

State from the use, maintenance or rental of containers (including 

equipment for their transport) are exempt from tax in the other 

Contracting State, unless those containers are used for transport 

solely in the other Contracting State. This result obtains under 

paragraph 3 regardless of whether the recipient of the income is 

engaged in the operation of ships or aircraft in international traffic, 

and regardless of whether the enterprise has a permanent establishment in the other Contracting State. Only income from the use, 

maintenance or rental of containers (including equipment for their 

transport) that is incidental to other income from international 

traffic is covered by Article 8 of the OECD Model. 

Paragraph 4 

This paragraph clarifies that the provisions of paragraphs 1 and 

3 also apply to profits derived by an enterprise of a Contracting 

State from participation in a pool, joint business or international 

operating agency. This refers to various arrangements for international cooperation by carriers in shipping and air transport. For 

example, airlines from two countries may agree to share the transport of passengers between the two countries. They each will fly 

the same number of flights per week and share the revenues from 

that route equally, regardless of the number of passengers that 

each airline actually transports. Paragraph 4 makes clear that with 

respect to each carrier the income dealt with in the Article is that 

carrier’s share of the total transport, not the income derived from 

the passengers actually carried by the airline. This paragraph corresponds to paragraph 4 of Article 8 of the OECD Model. 

Relationship to Other Articles 

The taxation of gains from the alienation of ships, aircraft or containers is not dealt with in this Article but in paragraphs 4 and 

5 of Article 13 (Gains). 

37 

As with other benefits of the Convention, the benefit of exclusive 

residence country taxation under Article 8 is available to an enterprise only if it is entitled to benefits under Article 21 (Limitation 

on Benefits). 

This Article also is subject to the saving clause of paragraph 4 

of Article 1 (General Scope) of the Convention. Thus, if a citizen of 

the United States who is a resident of Belgium derives profits from 

the operation of ships or aircraft in international traffic, notwithstanding the exclusive residence country taxation in paragraph 1 

of Article 8, the United States may, subject to the special foreign 

tax credit rules of paragraph 4 of Article 22 (Relief from Double 

Taxation), tax those profits as part of the worldwide income of the 

citizen. (This is an unlikely situation, however, because non-tax 

considerations (e.g., insurance) generally result in shipping activities being carried on in corporate form.) 

ARTICLE 9 (ASSOCIATED ENTERPRISES)

This Article incorporates in the Convention the arm’s-length 

principle reflected in the U.S. domestic transfer pricing provisions, 

particularly Code section 482. It provides that when related enterprises engage in a transaction on terms that are not arm’s-length, 

the Contracting States may make appropriate adjustments to the 

taxable income and tax liability of such related enterprises to reflect what the income and tax of these enterprises with respect to 

the transaction would have been had there been an arm’s-length 

relationship between them. The provisions of Article 9 are identical 

to the provisions of Article 9 in the U.S. Model. 

Paragraph 1 

This paragraph is essentially the same as its counterpart in the 

OECD Model. It addresses the situation where an enterprise of a 

Contracting State is related to an enterprise of the other Contracting State, and there are arrangements or conditions imposed 

between the enterprises in their commercial or financial relations 

that are different from those that would have existed in the absence of the relationship. Under these circumstances, the Contracting States may adjust the income (or loss) of the enterprise to 

reflect what it would have been in the absence of such a relationship. 

The paragraph identifies the relationships between enterprises 

that serve as a prerequisite to application of the Article. As the 

Commentary to the OECD Model makes clear, the necessary element in these relationships is effective control, which is also the 

standard for purposes of section 482. Thus, the Article applies if an 

enterprise of one State participates directly or indirectly in the 

management, control, or capital of the enterprise of the other State. 

Also, the Article applies if any third person or persons participate 

directly or indirectly in the management, control, or capital of enterprises of different States. For this purpose, all types of control 

are included, i.e., whether or not legally enforceable and however 

exercised or exercisable. 

The fact that a transaction is entered into between such related 

enterprises does not, in and of itself, mean that a Contracting State 

may adjust the income (or loss) of one or both of the enterprises 

under the provisions of this Article. If the conditions of the transVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00037 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
38 

action are consistent with those that would be made between independent persons, the income arising from that transaction should 

not be subject to adjustment under this Article. 

Similarly, the fact that associated enterprises may have concluded arrangements, such as cost sharing arrangements or general services agreements, is not in itself an indication that the two 

enterprises have entered into a non-arm’s-length transaction that 

should give rise to an adjustment under paragraph 1. Both related 

and unrelated parties enter into such arrangements (e.g., joint venturers may share some development costs). As with any other kind 

of transaction, when related parties enter into an arrangement, the 

specific arrangement must be examined to see whether or not it 

meets the arm’s-length standard. In the event that it does not, an 

appropriate adjustment may be made, which may include modifying the terms of the agreement or re-characterizing the transaction to reflect its substance. 

It is understood that the ‘‘commensurate with income’’ standard 

for determining appropriate transfer prices for intangibles, added 

to Code section 482 by the Tax Reform Act of 1986, was designed 

to operate consistently with the arm’s-length standard. The implementation of this standard in the section 482 regulations is in accordance with the general principles of paragraph 1 of Article 9 of 

the Convention, as interpreted by the OECD Transfer Pricing 

Guidelines. 

This Article also permits tax authorities to deal with thin capitalization issues. They may, in the context of Article 9, scrutinize 

more than the rate of interest charged on a loan between related 

persons. They also may examine the capital structure of an enterprise, whether a payment in respect of that loan should be treated 

as interest, and, if it is treated as interest, under what circumstances interest deductions should be allowed to the payor. 

Paragraph 3 of the Commentary to Article 9 of the OECD Model, 

together with the U.S. observation set forth in paragraph 15, sets 

forth a similar understanding of the scope of Article 9 in the context of thin capitalization. 

Paragraph 2 

When a Contracting State has made an adjustment that is consistent with the provisions of paragraph 1, and the other Contracting State agrees that the adjustment was appropriate to reflect arm’s-length conditions, that other Contracting State is obligated to make a correlative adjustment (sometimes referred to as 

a ‘‘corresponding adjustment’’) to the tax liability of the related person in that other Contracting State. Although the OECD Model 

does not specify that the other Contracting State must agree with 

the initial adjustment before it is obligated to make the correlative 

adjustment, the Commentary makes clear that the paragraph is to 

be read that way. 

As explained in the Commentary to Article 9 of the OECD Model, 

Article 9 leaves the treatment of ‘‘secondary adjustments’’ to the 

laws of the Contracting States. When an adjustment under Article 

9 has been made, one of the parties will have in its possession 

funds that it would not have had at arm’s length. The question 

arises as to how to treat these funds. In the United States the general practice is to treat such funds as a dividend or contribution to 

39 

capital, depending on the relationship between the parties. Under 

certain circumstances, the parties may be permitted to restore the 

funds to the party that would have the funds had the transactions 

been entered into on arm’s length terms, and to establish an account payable pending restoration of the funds. See Rev. Proc. 99– 

32, 1999–2 C.B. 296. 

The Contracting State making a secondary adjustment will take 

the other provisions of the Convention, where relevant, into account. For example, if the effect of a secondary adjustment is to 

treat a U.S. corporation as having made a distribution of profits to 

its parent corporation in Belgium, the provisions of Article 10 

(Dividends) will apply. Also, if under Article 22 Belgium generally 

gives a credit for taxes paid with respect to such dividends, it 

would also be required to do so in this case. 

The competent authorities are authorized by paragraph 3 of Article 24 (Mutual Agreement Procedure) to consult, if necessary, to resolve any differences in the application of these provisions. For example, there may be a disagreement over whether an adjustment 

made by a Contracting State under paragraph 1 was appropriate. 

If a correlative adjustment is made under paragraph 2, it is to 

be implemented, pursuant to paragraph 2 of Article 24 (Mutual 

Agreement Procedure), notwithstanding any time limits or other 

procedural limitations in the law of the Contacting State making 

the adjustment. If a taxpayer has entered a closing agreement (or 

other written settlement) with the United States prior to bringing 

a case to the competent authorities, the U.S. competent authority 

will endeavor only to obtain a correlative adjustment from Belgium. 

See, Rev. Proc. 2006–54, 2006–49 I.R.B. 1035, Section 7.05. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) 

does not apply to paragraph 2 of Article 9 by virtue of an exception 

to the saving clause in paragraph 5(a) of Article 1. Thus, even if 

the statute of limitations has run, a refund of tax can be made in 

order to implement a correlative adjustment. Statutory or procedural limitations, however, cannot be overridden to impose additional tax, because paragraph 2 of Article 1 provides that the Convention cannot restrict any statutory benefit. 

ARTICLE 10 (DIVIDENDS)

Article 10 provides rules for the taxation of dividends paid by a 

company that is a resident of one Contracting State to a beneficial 

owner that is a resident of the other Contracting State. The article 

provides for full residence country taxation of such dividends and 

a limited source-State right to tax. Article 10 also provides rules 

for the imposition of a tax on branch profits by the State of source. 

Paragraph 1 

The right of a shareholder’s country of residence to tax dividends 

arising in the source country is preserved by paragraph 1, which 

permits a Contracting State to tax its residents on dividends paid 

to them by a company that is a resident of the other Contracting 

State. For dividends from any other source paid to a resident, Article 20 (Other Income) grants the residence country exclusive taxing 

40 

jurisdiction (other than for dividends attributable to a permanent 

establishment in the other State). 

Paragraph 2 

The State of source also may tax dividends beneficially owned by 

a resident of the other State, subject to the limitations of paragraphs 2 through 4. Paragraph 2 generally limits the rate of withholding tax in the State of source on dividends paid by a company 

resident in that State to 15 percent of the gross amount of the dividend. If, however, the beneficial owner of the dividend is a company resident in the other State and owns directly shares representing at least 10 percent of the voting power of the company 

paying the dividend, then the rate of withholding tax in the State 

of source is limited to 5 percent of the gross amount of the dividend. Shares are considered voting shares if they provide the 

power to elect, appoint or replace any person vested with the powers ordinarily exercised by the board of directors of a U.S. corporation. 

The benefits of paragraph 2 may be granted at the time of payment by means of reduced rate of withholding tax at source. It also 

is consistent with the paragraph for tax to be withheld at the time 

of payment at full statutory rates, and the treaty benefit to be 

granted by means of a subsequent refund so long as such procedures are applied in a reasonable manner. 

The determination of whether the ownership threshold for subparagraph a) of paragraph 2 is met for purposes of the 5 percent 

maximum rate of withholding tax is made on the date on which entitlement to the dividend is determined. Thus, in the case of a dividend from a U.S. company, the determination of whether the ownership threshold is met generally would be made on the dividend 

record date. 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined as under the internal law of the country 

imposing tax (i.e., the source country). The beneficial owner of the 

dividend for purposes of Article 10 is the person to which the dividend income is attributable for tax purposes under the laws of the 

source State. Thus, if a dividend paid by a corporation that is a 

resident of one of the States (as determined under Article 4 (Residence)) is received by a nominee or agent that is a resident of the 

other State on behalf of a person that is not a resident of that other 

State, the dividend is not entitled to the benefits of this Article. 

However, a dividend received by a nominee on behalf of a resident 

of that other State would be entitled to benefits. These interpretations are confirmed by paragraph 12 of the Commentary to Article 

10 of the OECD Model. 

Companies holding shares through fiscally transparent entities 

such as partnerships are considered for purposes of this paragraph 

to hold their proportionate interest in the shares held by the intermediate entity. As a result, companies holding shares through such 

entities may be able to claim the benefits of subparagraph (a) 

under certain circumstances. The lower rate applies when the company’s proportionate share of the shares held by the intermediate 

entity meets the 10 percent threshold , and the company meets the 

requirements of Article 1(6) (i.e., the company’s country of residence treats the intermediate entity as fiscally transparent) with 

41 

respect to the dividend. Whether this ownership threshold is satisfied may be difficult to determine and often will require an analysis 

of the partnership or trust agreement. 

Of note is the interaction of paragraph 2 and paragraph 4, with 

respect to dividends paid by a Belgian company. Under paragraph 

2, the withholding tax imposed in Belgium may not exceed 5 percent if the beneficial owner of the dividend is a company resident 

in the United States and that U.S. resident company owns directly 

at least 10 percent of the voting stock of the Belgian company. 

However, under paragraph 4, no withholding may be imposed on 

the dividend payment if the U.S. resident company has owned directly at least 10 percent of the Belgian company for the 12 month 

period ending on the date the dividend is declared. Thus, although 

the ownership threshold is the same under subparagraph 2 a) and 

paragraph 4, there is an additional requirement in paragraph 4 

that the U.S. resident company have held the stock for a 12 month 

period ending on the date the dividend is declared. 

Paragraph 3 

Paragraph 3 provides exclusive residence-country taxation (i.e., 

an elimination of withholding tax) with respect to certain dividends 

distributed by a company that is a resident of the United States 

to a resident of Belgium. As described further below, this elimination of withholding tax is available with respect to certain intercompany 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. 

42 

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 intercompany dividends. ThirdCo owns directly 100 percent of the 

issued and outstanding voting stock of USCo, a U.S. company, and 

of BelCo, a Belgian company. BelCo is a substantial company that 

manufactures widgets; USCo distributes those widgets in the 

United States. If ThirdCo contributes to BelCo all the stock of 

USCo, dividends paid by USCo to BelCo would qualify for treaty 

benefits under the active trade or business test of paragraph 4 of 

Article 21. However, allowing ThirdCo to qualify for the elimination of withholding tax, which is not available to it under the 

third state’s treaty with the United States (if any), would encourage treaty-shopping. 

In order to prevent this type of treaty-shopping, paragraph 3 requires BelCo to meet the ownership-base erosion requirements of 

subparagraph 2(e) of Article 21 in addition to the active trade or 

business test of paragraph 4 of Article 16. Thus, BelCo would not 

qualify for the exemption from withholding tax unless (i) on at 

least half the days of the taxable year, at least 50 percent of each 

class of its shares was owned by persons that are residents of Belgium and eligible for treaty benefits under certain specified tests 

and (ii) less than 50 percent of BelCo’s gross income is paid in deductible payments to persons that are not residents of either Contracting State eligible for benefits under those specified tests. Because BelCo is wholly owned by a third country resident, BelCo 

could not qualify for the elimination of withholding tax on dividends from USCo under the ownership-base erosion test and the 

active trade or business test. Consequently, BelCo would need to 

qualify under another test or obtain discretionary relief from the 

competent authority under Article 21(7). For purposes of Article 

10(3)(a)(ii), it is not sufficient for a company to qualify for treaty 

benefits generally under the active trade or business test or the 

ownership-base erosion test unless it qualifies for treaty benefits 

under both. 

Alternatively, companies that are publicly traded or subsidiaries 

of publicly-traded companies will generally qualify for the elimination of withholding tax. Thus, a company that is a resident of 

Belgium and that meets the requirements of Article 21(2)(c)(i) or 

(ii) will be entitled to the elimination of withholding tax, subject to 

the 12-month holding period requirement of Article 10(3)(a). 

In addition, under Article 10(3)(a)(iii), a company that is a resident of Belgium may also qualify for the elimination of withholding 

tax on dividends if it satisfies the derivative benefits test of paragraph 3 of Article 21. Thus, a Belgian company that owns all of the 

stock of a U.S. corporation may qualify for the elimination of withholding tax if it is wholly-owned, for example, by a U.K., Dutch, 

Swedish, or Mexican publicly-traded company and the other requirements of the derivative benefits test are met. At this time, 

ownership by companies that are residents of other European 

Union, European Economic Area or North American Free Trade 

Agreement countries would not qualify the Belgian company for 

benefits under this provision, as the United States does not have 

treaties that eliminate the withholding tax on inter-company dividends with any other of those countries. If the United States were 

43 

to enter into such treaties with more of those countries, residents 

of those countries could then qualify as equivalent beneficiaries for 

purposes of this provision. 

A company also may qualify for the elimination of withholding 

tax pursuant to Article 10(3)(a)(iii) if it is owned by seven or fewer 

U.S. or Belgian residents who qualify as an ‘‘equivalent beneficiary’’ and meet the other requirements of the derivative benefits 

provision. This rule may apply, for example, to certain Belgian corporate joint venture vehicles that are closely-held by a few Belgian 

resident individuals. 

If a company does not qualify for the elimination of withholding 

tax under any of the foregoing objective tests, it may request a determination from the relevant competent authority pursuant to 

paragraph 7 of Article 21. Benefits will be granted with respect to 

an item of income if the competent authority of the Contracting 

State in which the income arises determines that the establishment, acquisition or maintenance of such resident and the conduct 

of its operations did not have as one of its principal purposes the 

obtaining of benefits under the Convention. 

Subparagraph (b) of paragraph 3 of Article 10 of the Convention 

provides that dividends beneficially owned by a pension fund (as 

defined in subparagraph (k) of paragraph 1 of Article 3) may not 

be taxed in the Contracting State of which the company paying the 

dividends is a resident, unless such dividends are derived from the 

carrying on of a business, directly by the pension fund or indirectly 

through an associated enterprise. 

This rule is necessary because pension funds normally do not pay 

tax (either through a general exemption or because reserves for future pension liabilities effectively offset all of the fund’s income), 

and therefore cannot benefit from a foreign tax credit. Moreover, 

distributions from a pension fund generally do not maintain the 

character of the underlying income, so the beneficiaries of the pension are not in a position to claim a foreign tax credit when they 

finally receive the pension, in many cases years after the withholding tax has been paid. Accordingly, in the absence of this rule, 

the dividends would almost certainly be subject to unrelieved double taxation. 

Paragraph 4 

Paragraph 4 provides for exclusive residence country taxation on 

certain dividends paid by a company that is a resident of Belgium 

to a company that is resident in the United States. 

Subparagraph a) provides that a where the company paying the 

dividend is a resident of Belgium, and the beneficial owner of such 

dividend is a company that is a resident in the United States, no 

withholding tax will be collected in Belgium, provided the United 

States company has owned directly shares representing at least 10 

percent of the capital of the Belgian company for a 12-month period 

ending on the date the dividend is declared. 

Subparagraph b) provides a rule that corresponds to subparagraph b) of paragraph 3 of this Article. Accordingly, dividends paid 

by a company resident in Belgium to a pension fund that is a resident of the United States may not be taxed in Belgium, unless such 

dividends are derived from the carrying on of a business, directly 

by the pension fund or indirectly through an associated enterprise. 

44 

Paragraph 5 

Paragraph 5 provides that paragraphs 2 through 4 do not affect 

the taxation of the profits out of which the dividends are paid. The 

taxation by a Contracting State of the income of its resident companies is governed by the internal law of the Contracting State, subject to the provisions of paragraph 4 of Article 23 (Non-Discrimination). 

Paragraph 6 

Article 10 generally applies to distributions made by a RIC or a 

REIT. However, distributions made by a REIT or certain RICs that 

are attributable to gains derived from the alienation of U.S. real 

property interests and treated as gain recognized under section 

897(h)( 1) are taxable under paragraph 1 of Article 13 instead of 

Article 10. In the case of RIC or REIT distributions to which Article 10 applies, paragraph 6 imposes limitations on the rate reductions provided by paragraphs 2 and 3. 

The first sentence of subparagraph 6(a) provides that dividends 

paid by a RIC or REIT are not eligible for the 5 percent rate of 

withholding tax of subparagraph 2(a) or the elimination of source 

country withholding tax under subparagraph 3(a). 

The second sentence of subparagraph 6(a) provides that the 15 

percent maximum rate of withholding tax of subparagraph 2(b) applies to dividends paid by RICs and that the elimination of sourcecountry 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 

45 

cost to interposing the RIC in the chain of ownership. Absent the 

special rule in paragraph 6, such use of the RIC could transform 

portfolio dividends, taxable in the United States under the Convention at a 15 percent maximum rate of withholding tax, into direct 

investment dividends taxable at a 5 percent maximum rate of withholding tax or eligible for the elimination of source-country withholding tax. 

Similarly, a resident of Belgium directly holding U.S. real property would pay U.S. tax on rental income at either a 30 percent 

rate of withholding tax on the gross income or at graduated rates 

on the net income. As in the preceding example, by placing the real 

property in a REIT, the investor could, absent a special rule, transform rental income into dividend income from the REIT, taxable at 

the rates provided in Article 10, significantly reducing the U.S. tax 

that otherwise would be imposed. Paragraph 6 prevents this result 

and thereby avoids a disparity between the taxation of direct real 

estate investments and real estate investments made through 

REIT conduits. In the cases in which paragraph 6 allows a dividend from a REIT to be eligible for the 15 percent rate of withholding tax, the holding in the REIT is not considered the equivalent of a direct holding in the underlying real property. 

Paragraph 7 

Paragraph 7 defines the term dividends broadly and flexibly. The 

definition is intended to cover all arrangements that yield a return 

on an equity investment in a corporation as determined under the 

tax law of the State of source, as well as arrangements that might 

be developed in the future. 

The term includes income from shares, or other corporate rights 

that are not treated as debt under the law of the source State, that 

participate in the profits of the company. The term also includes 

income that is subjected to the same tax treatment as income from 

shares by the law of the State of source. Thus, a constructive dividend that results from a non-arm’s length transaction between a 

corporation and a related party is a dividend. In the case of the 

United States the term dividend includes amounts treated as a dividend under U.S. law upon the sale or redemption of shares or 

upon a transfer of shares in a reorganization. See, e.g., Rev. Rul. 

92–85, 1992–2 C.B. 69 (sale of foreign subsidiary’s stock to U.S. sister company is a deemed dividend to extent of the subsidiary’s and 

sister company’s earnings and profits). Further, a distribution from 

a U.S. publicly traded limited partnership, which is taxed as a corporation under U.S. law, is a dividend for purposes of Article 10. 

However, a distribution by a limited liability company is not taxable by the United States under Article 10, provided the limited liability company is not characterized as an association taxable as a 

corporation under U.S. law. 

Finally, a payment denominated as interest that is made by a 

thinly capitalized corporation may be treated as a dividend to the 

extent that the debt is recharacterized as equity under the laws of 

the source State. 

Paragraph 8 

Paragraph 8 excludes from the general source country limitations 

under paragraphs 1 through 6 dividends that are business profits 

46 

attributable to a permanent establishment in the source country. 

In such case, the rules of Article 7 (Business Profits) shall apply. 

Accordingly, the dividends will be taxed on a net basis using the 

rates and rules of taxation generally applicable to residents of the 

State in which the permanent establishment is located, as such 

rules may be modified by the Convention. An example of dividends 

that are business profits attributable to a permanent establishment 

would be dividends derived by a dealer in stock or securities from 

stock or securities that the dealer held for sale to customers. 

Paragraph 9 

The right of a Contracting State to tax dividends paid by a company that is a resident of the other Contracting State is restricted 

by paragraph 9 to cases in which the dividends are paid to a resident of that Contracting State or are attributable to a permanent 

establishment in that Contracting State. Thus, a Contracting State 

may not impose a ‘‘secondary’’ withholding tax on dividends paid by 

a nonresident company out of earnings and profits from that Contracting State. In the case of the United States, the secondary 

withholding tax was eliminated for payments made after December 

31, 2004 in the American Jobs Creation Act of 2004. 

The paragraph also restricts the right of a Contracting State to 

impose corporate level taxes on undistributed profits, other than a 

branch profits tax. The paragraph does not restrict a State’s right 

to tax its resident shareholders on undistributed earnings of a corporation resident in the other State. Thus, the authority of the 

United States to impose taxes on subpart F income and on earnings deemed invested in U.S. property, and its tax on income of a 

passive foreign investment company that is a qualified electing 

fund is in no way restricted by this provision. 

Paragraph 10 

Paragraph 10 permits a Contracting State to impose a branch 

profits tax on a company resident in the other Contracting State. 

The tax is in addition to other taxes permitted by the Convention. 

The term ‘‘company’’ is defined in subparagraph 1(b) of Article 3 

(General Definitions). 

A Contracting State may impose a branch profits tax on a company if the company has income attributable to a permanent establishment in that Contracting State, derives income from real property in that Contracting State that is taxed on a net basis under 

Article 6 (Income from Real Property), or realizes gains taxable in 

that State under paragraph 1 of Article 13 (Gains). The imposition 

of such tax is limited, however, to the portion of the aforementioned items of income that represents, in the case of the United 

States, the amount of such income that is the ‘‘dividend equivalent 

amount,’’ and, in the case of Belgium, an amount that is analogous 

to the dividend equivalent amount. This is consistent with the relevant rules under the U.S. branch profits tax, and the term dividend equivalent amount is defined under U.S. law. Section 884 defines the dividend equivalent amount as an amount for a particular 

year that is equivalent to the income described above that is included in the corporation’s effectively connected earnings and profits for that year, after payment of the corporate tax under Articles 

6 (Income from Real Property), 7 (Business Profits) or 13 (Gains), 

47 

reduced for any increase in the branch’s U.S. net equity during the 

year or increased for any reduction in its U.S. net equity during 

the year. U.S. net equity is U.S. assets less U.S. liabilities. See 

Treas. Reg. section 1.884–1. The dividend equivalent amount for 

any year approximates the dividend that a U.S. branch office would 

have paid during the year if the branch had been operated as a 

separate U.S. subsidiary company. 

As discussed in the Technical Explanations to Articles 1(2) and 

7(2), consistency principles require that a taxpayer may not mix 

and match the rules of the Code and the Convention in an inconsistent manner. In the context of the branch profits tax, the consistency requirement means that an enterprise that uses the principles of Article 7 to determine its net taxable income also must use 

those principles in determining the dividend equivalent amount. 

Similarly, an enterprise that uses U.S. domestic law to determine 

its net taxable income must also use U.S. domestic law in complying with the branch profits tax. As in the case of Article 7, if 

an enterprise switches between domestic law and treaty principles 

from year to year, it will need to make appropriate adjustments or 

recapture amounts that otherwise might go untaxed. 

Paragraph 11 

Paragraph 11 provides that the branch profits tax shall not be 

imposed at a rate exceeding the direct investment dividend withholding rate of five percent. 

The branch profits tax will not be imposed at all, however, if certain requirements are met. In general, these requirements provide 

rules for a branch that parallel the rules for when a dividend paid 

by a subsidiary will be subject to exclusive residence-country taxation (i.e., the elimination of source-country withholding tax). Accordingly, the branch profits tax may not be imposed in the case 

of a company that (1) meets the ‘‘publicly traded’’ test or subsidiary 

of a publicly traded company under subparagraph 2(c) of Article 21 

(Limitation on Benefits), (2) meets the ‘‘ownership-base erosion’’ 

and ‘‘active trade or business’’ tests described in subparagraph 2(e) 

and paragraph 4 of Article 21, (3) meets the ‘‘derivative benefits’’ 

test described in paragraph 3 of Article 21, or (4) is granted such 

benefit with respect to the branch profits tax by the relevant competent authority pursuant to paragraph 7 of Article 21. 

Thus, for example, if a Belgian company would be subject to the 

branch profits tax with respect to profits attributable to a U.S. 

branch and not reinvested in that branch, paragraph 11 may apply 

to eliminate the branch profits tax if the company meets the ‘‘publicly traded’’ test, subsidiary of a publicly traded company, the combined ‘‘ownership-base erosion and active trade or business’’ test, or 

the ‘‘derivative benefits’’ test. If, by contrast, the Belgian company 

did not meet any of those tests, but met the ownership-base erosion 

test (and thus qualified for treaty benefits under subparagraph 

2(a)), then the branch profits tax would apply at a rate of 5 percent, unless the Belgian company is granted benefits with respect 

to the elimination of the branch profits tax by the U.S. competent 

authority pursuant to paragraph 7 of Article 21. 

48 

Paragraph 12 

Paragraph 12 contains two provisions that may operate to terminate the zero rate of withholding tax that may apply for dividends 

paid by a U.S. resident company under paragraph 3. Subparagraph 

(a)(i) provides that paragraph 3 shall cease to be effective for 

amounts paid or credited on or after January 1 of the 6th year following the year in which the Convention enters into force, unless 

by June 30 of the 5th year following entry into force, the United 

States Secretary of the Treasury, based on a report from the Commissioner of the Internal Revenue Service, certifies to the Senate 

of the United States that Belgium has satisfactorily complied with 

its obligations under Article 25 (Exchange of Information and Administrative Assistance). 

Subparagraph (a)(ii) provides an additional method by which the 

United States may terminate paragraph 3. This additional method 

provides that the United States may terminate paragraph 3 at any 

time by providing written notice to Belgium, through the diplomatic channel, on or before June 30 in any year. In such a case, 

paragraph 3 shall cease to be effective for amounts paid or credited 

on or after January 1 of the year next following that in which such 

notice is given. Further, subparagraph (a)(ii) provides that the 

United States will not provide notice of termination under subparagraph (a)(ii) unless it has determined that Belgium’s actions with 

respect to Article 24 (Mutual Agreement Procedure) and 25 have 

materially altered the balance of benefits of the Convention. 

Subparagraph b) provides that the United States and Belgian 

competent authorities shall consult at least annually regarding any 

issues that otherwise might trigger a termination under subparagraph (a). 

As discussed in Article 25 (Exchange of Information and Administrative Assistance), if the provisions of this paragraph are used 

to terminate paragraph 3 of Article 10, then Belgium will be relieved of its obligations under paragraph 5 of Article 25 to provide 

certain information, including bank information. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 4 of Article 1 

(General Scope) permits the United States to tax dividends received by its residents and citizens, subject to the special foreign 

tax credit rules of paragraph 4 of Article 22 (Relief from Double 

Taxation), as if the Convention had not come into effect. 

The benefits of this Article are also subject to the provisions of 

Article 21 (Limitation on Benefits). Thus, if a resident of Belgium 

is the beneficial owner of dividends paid by a U.S. corporation, the 

shareholder must qualify for treaty benefits under at least one of 

the tests of Article 21 in order to receive the benefits of this Article. 

ARTICLE 11 (INTEREST)

Article 11 specifies the taxing jurisdictions over interest income 

of the States of source and residence and defines the terms necessary to apply the article. 

49 

Paragraph 1 

Paragraph 1 generally grants to the State of residence the exclusive right to tax interest beneficially owned by its residents and 

arising in the other Contracting State. 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined under the internal law of the State of 

source. The beneficial owner of the interest for purposes of Article 

11 is the person to which the income is attributable under the laws 

of the source State. Thus, if interest arising in a Contracting State 

is received by a nominee or agent that is a resident of the other 

State on behalf of a person that is not a resident of that other 

State, the interest is not entitled to the benefits of Article 11. However, interest received by a nominee on behalf of a resident of that 

other State would be entitled to benefits. These limitations are confirmed by paragraph 8 of the OECD Commentary to Article 11. 

Paragraph 2 

Paragraph 2 provides anti-abuse exceptions to the source-country 

exemption in paragraph 1 for two classes of interest payments. 

The first class of interest, dealt with in subparagraphs (a) and 

(b) is so-called ‘‘contingent interest.’’ With respect to interest arising in the United States, subparagraph (a) refers to contingent interest of a type that does not qualify as portfolio interest under 

U.S. domestic law. The cross-reference to the U.S. definition of contingent interest, which is found in section 871 (h)(4) of the Code, 

is intended to ensure that the exceptions of section 871 (h)(4)(C) 

will be applicable. With respect to Belgium, such interest is defined 

in subparagraph (b) as any interest arising in Belgium that is determined by reference to the receipts, sales, income, profits or other 

cash flow of the debtor or a related person, to any change in the 

value of any property of the debtor or a related person or to any 

dividend, partnership distribution or similar payment made by the 

debtor or a related person. Any such interest may be taxed in Belgium according to the laws of Belgium. 

Under subparagraphs (a) or (b), the gross amount of the ‘‘contingent interest’’ may be taxed at a rate not exceeding 15 percent. 

The second class of interest is dealt with in subparagraph (c) of 

paragraph 2. This exception is consistent with the policy of Code 

sections 860E(e) and 860G(b) that excess inclusions with respect to 

a real estate mortgage investment conduit (REMIC) should bear 

full U.S. tax in all cases. Without a full tax at source foreign purchasers of residual interests would have a competitive advantage 

over U.S. purchasers at the time these interests are initially offered. Also, absent this rule, the U.S. fisc would suffer a revenue 

loss with respect to mortgages held in a REMIC because of opportunities for tax avoidance created by differences in the timing of 

taxable and economic income produced by these interests. 

Paragraph 3 

The term ‘‘interest’’ as used in Article 11 is defined in paragraph 

2 to include, inter alia, income from debt claims of every kind, 

whether or not secured by a mortgage. Penalty charges for late 

payment are excluded from the definition of interest. Interest that 

is paid or accrued subject to a contingency is within the ambit of 

Article 11. This includes income from a debt obligation carrying the 

50 

right to participate in profits. The term does not, however, include 

amounts that are treated as dividends under Article 10 (Dividends). 

The term interest also includes amounts subject to the same tax 

treatment as income from money lent under the law of the State 

in which the income arises. Thus, for purposes of the Convention, 

amounts that the United States will treat as interest include (i) the 

difference between the issue price and the stated redemption price 

at maturity of a debt instrument (i.e., original issue discount 

(‘‘OID’’)), which may be wholly or partially realized on the disposition of a debt instrument (section 1273), (ii) amounts that are imputed interest on a deferred sales contract (section 483), (iii) 

amounts treated as interest or OID under the stripped bond rules 

(section 1286), (iv) amounts treated as original issue discount 

under the below-market interest rate rules (section 7872), (v) a 

partner’s distributive share of a partnership’s interest income (section 702), (vi) the interest portion of periodic payments made under 

a ‘‘finance lease’’ or similar contractual arrangement that in substance is a borrowing by the nominal lessee to finance the acquisition of property, (vii) amounts included in the income of a holder 

of a residual interest in a REMIC (section 860E), because these 

amounts generally are subject to the same taxation treatment as 

interest under U.S. tax law, and (viii) interest with respect to notional principal contracts that are re-characterized as loans because 

of a ‘‘substantial non-periodic payment.’’ 

Paragraph 4 

Paragraph 4 provides an exception to the exclusive residence taxation rule of paragraph 1 and the source-country gross taxation 

rule of paragraph 2 in cases where the beneficial owner of the interest carries on business through a permanent establishment in 

the State of source and the interest is attributable to that permanent establishment. In such cases the provisions of Article 7 (Business Profits) will apply and the State of source will retain the right 

to impose tax on such interest income. 

In the case of a permanent establishment that once existed in 

the State but that no longer exists, the provisions of paragraph 4 

also apply, by virtue of paragraph 7 of Article 7 (Business Profits), 

to interest that would be attributable to such a permanent establishment if it did exist in the year of payment or accrual. See the 

Technical Explanation of paragraph 7 of Article 7. 

Paragraph 5 

Paragraph 5 establishes the source of interest for purposes of Article 11. The paragraph is identical to paragraph 5 of Article 11 of 

the OECD Model. Interest is considered to arise in a Contracting 

State if paid by a resident of that State. As an exception, interest 

that is borne by a permanent establishment in one of the States 

is considered to arise in that State. For this purpose, ‘‘borne by’’ 

means allowable as a deduction in computing taxable income. 

Paragraph 6 

Paragraph 6 provides that in cases involving special relationships between the payor and the beneficial owner of interest income, Article 11 applies only to that portion of the total interest 

51 

payments that would have been made absent such special relationships (i.e., an arm’s-length interest payment). Any excess amount 

of interest paid remains taxable according to the laws of the United 

States and the other Contracting State, respectively, with due regard to the other provisions of the Convention. Thus, if the excess 

amount would be treated under the source country’s law as a distribution of profits by a corporation, such amount could be taxed 

as a dividend rather than as interest, but the tax would be subject, 

if appropriate, to the rate limitations of paragraphs 2 through 4 of 

Article 10 (Dividends). 

The term ‘‘special relationship’’ is not defined in the Convention. 

In applying this paragraph the United States considers the term to 

include the relationships described in Article 9, which in turn corresponds to the definition of ‘‘control’’ for purposes of section 482 

of the Code. 

This paragraph does not address cases where, owing to a special 

relationship between the payer and the beneficial owner or between 

both of them and some other person, the amount of the interest is 

less than an arm’s-length amount. In those cases a transaction may 

be characterized to reflect its substance and interest may be imputed consistent with the definition of interest in paragraph 3. The 

United States would apply section 482 or 7872 of the Code to determine the amount of imputed interest in those cases. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of interest, the saving clause of paragraph 4 of Article 1 permits the United States to tax its residents and citizens, subject to 

the special foreign tax credit rules of paragraph 4 of Article 22 (Relief from Double Taxation), as if the Convention had not come into 

force. 

As with other benefits of the Convention, the benefits of exclusive residence State taxation of interest under paragraph 1 of Article 11, or limited source taxation under subparagraphs 2(a) and (b), 

are available to a resident of the other State only if that resident 

is entitled to those benefits under the provisions of Article 21 (Limitation on Benefits). 

ARTICLE 12 (ROYALTIES)

Article 12 provides rules for the taxation of royalties arising in 

one Contracting State and paid to a beneficial owner that is a resident of the other Contracting State. 

Paragraph 1 

Paragraph 1 generally grants to the State of residence the exclusive right to tax royalties beneficially owned by its residents and 

arising in the other Contracting State. 

The term ‘‘beneficial owner’’ is not defined in the Convention, 

and is, therefore, defined under the internal law of the State of 

source. The beneficial owner of the royalty for purposes of Article 

12 is the person to which the income is attributable under the laws 

of the source State. Thus, if a royalty arising in a Contracting 

State is received by a nominee or agent that is a resident of the 

other State on behalf of a person that is not a resident of that other 

State, the royalty is not entitled to the benefits of Article 12. 

52 

However, a royalty received by a nominee on behalf of a resident 

of that other State would be entitled to benefits. These limitations 

are confirmed by paragraph 4 of the OECD Commentary to Article 

12. 

Paragraph 2 

Paragraph 2 defines the term ‘‘royalties,’’ as used in Article 12, 

to include any consideration for the use of, or the right to use, any 

copyright of literary, artistic, or scientific work (including cinematographic films and software), any patent, trademark, design or 

model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience. The term 

‘‘royalties,’’ however, does not include income from leasing personal 

property. 

The term royalties is defined in the Convention and therefore is 

generally independent of domestic law. Certain terms used in the 

definition are not defined in the Convention, but these may be defined under domestic tax law. For example, the term ‘‘secret process or formulas’’ is found in the Code, and its meaning has been 

elaborated in the context of sections 351 and 367. See Rev. Rul. 55– 

17, 1955–1 C.B. 388; Rev. Rul. 6–45 1 1964–2 C.B. 133; Rev. Proc. 

69–19, 1969–2 C.B. 301. 

Consideration for the use or right to use cinematographic films 

and software, or works on film, tape, or other means of reproduction in radio or television broadcasting is included in the definition 

of royalties. It is intended that, with respect to any subsequent 

technological advances in the field of radio or television broadcasting, consideration received for the use of such technology will 

also be included in the definition of royalties. 

If an artist who is resident in one Contracting State records a 

performance in the other Contracting State, retains a copyrighted 

interest in a recording, and receives payments for the right to use 

the recording based on the sale or public playing of the recording, 

then the right of such other Contracting State to tax those payments is governed by Article 12. See Boulez v. Commissioner, 83 

T.C. 584 (1984), aff’d, 810 F.2d 209 (D.C. Cir. 1986). By contrast, 

if the artist earns in the other Contracting State income covered 

by Article 16 (Entertainers and Sportsmen), for example, endorsement income from the artist’s attendance at a film screening, and 

if such income also is attributable to one of the rights described in 

Article 12 (e.g., the use of the artist’s photograph in promoting the 

screening), Article 16 and not Article 12 is applicable to such income. 

Computer software generally is protected by copyright laws 

around the world. Under the Convention, consideration received for 

the use, or the right to use, computer software is treated either as 

royalties or as business profits, depending on the facts and circumstances of the transaction giving rise to the payment. 

The primary factor in determining whether consideration received for the use, or the right to use, computer software is treated 

as royalties or as business profits is the nature of the rights transferred. See Treas. Reg. section 1.861–18. The fact that the transaction is characterized as a license for copyright law purposes is 

not dispositive. For example, a typical retail sale of ‘‘shrink wrap’’ 

software generally will not be considered to give rise to royalty inVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00052 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
53 

come, even though for copyright law purposes it may be characterized as a license. 

The means by which the computer software is transferred are not 

relevant for purposes of the analysis. Consequently, if software is 

electronically transferred but the rights obtained by the transferee 

are substantially equivalent to rights in a program copy, the payment will be considered business profits. 

The term ‘‘industrial, commercial, or scientific experience’’ (sometimes referred to as ‘‘know-how’’) has the meaning ascribed to it in 

paragraph 11 et seq. of the Commentary to Article 12 of the OECD 

Model. Consistent with that meaning, the term may include information that is ancillary to a right otherwise giving rise to royalties, 

such as a patent or secret process. 

Know-how also may include, in limited cases, technical information that is conveyed through technical or consultancy services. It 

does not include general educational training of the user’s employees, nor does it include information developed especially for the 

user, such as a technical plan or design developed according to the 

user’s specifications. Thus, as provided in paragraph 11.4 of the 

Commentary to Article 12 of the OECD Model, the term ‘‘royalties’’ 

does not include payments received as consideration for after-sales 

service, for services rendered by a seller to a purchaser under a 

warranty, or for pure technical assistance. 

The term ‘‘royalties’’ also does not include payments for professional services (such as architectural, engineering, legal, managerial, medical, software development services). For example, income 

from the design of a refinery by an engineer (even if the engineer 

employed know-how in the process of rendering the design) or the 

production of a legal brief by a lawyer is not income from the transfer of know-how taxable under Article 12, but is income from services taxable under either Article 7 (Business Profits) or Article 14 

(Income from Employment). Professional services may be embodied 

in property that gives rise to royalties, however. Thus, if a professional contracts to develop patentable property and retains rights 

in the resulting property under the development contract, subsequent license payments made for those rights would be royalties. 

Paragraph 3 

This paragraph provides an exception to the rule of paragraph 1 

that gives the state of residence exclusive taxing jurisdiction in 

cases where the beneficial owner of the royalties carries on business through a permanent establishment in the state of source and 

the royalties are attributable to that permanent establishment. In 

such cases the provisions of Article 7 (Business Profits) will apply. 

The provisions of paragraph 7 of Article 7 (Business Profits) 

apply to this paragraph. For example, royalty income that is attributable to a permanent establishment and that accrues during the 

existence of the permanent establishment, but is received after the 

permanent establishment no longer exists, remains taxable under 

the provisions of Article 7 (Business Profits), and not under this 

Article. 

Paragraph 4 

Paragraph 4 provides that in cases involving special relationships between the payor and beneficial owner of royalties, Article 

54 

12 applies only to the extent the royalties would have been paid 

absent such special relationships (i.e., an arm’s-length royalty). 

Any excess amount of royalties paid remains taxable according to 

the laws of the two Contracting States, with due regard to the 

other provisions of the Convention. If, for example, the excess 

amount is treated as a distribution of corporate profits under domestic law, such excess amount will be taxed as a dividend rather 

than as royalties, but the tax imposed on the dividend payment 

will be subject to the rate limitations of Article 10 (Dividends). 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of royalties, the saving clause of paragraph 4 of Article 1 

(General Scope) permits the United States to tax its residents and 

citizens, subject to the special foreign tax credit rules of paragraph 

4 of Article 22 (Relief from Double Taxation), as if the Convention 

had not come into force. 

As with other benefits of the Convention, the benefits of exclusive residence State taxation of royalties under paragraph 1 of Article 12 are available to a resident of the other State only if that 

resident is entitled to those benefits under Article 21 (Limitation 

on Benefits). 

ARTICLE 13 (GAINS)

Article 13 assigns either primary or exclusive taxing jurisdiction 

over gains from the alienation of property to the State of residence 

or the State of source. 

Paragraph 1 

Paragraph 1 of Article 13 preserves the non-exclusive right of the 

State of source to tax gains attributable to the alienation of real 

property situated in that State. The paragraph therefore permits 

the United States to apply section 897 of the Code to tax gains derived by a resident of Belgium that are attributable to the alienation of real property situated in the United States (as defined in 

paragraph 2). Gains attributable to the alienation of real property 

include gains from any other property that is treated as a real 

property interest within the meaning of paragraph 2. 

Paragraph 1 refers to gains ‘‘attributable to the alienation of real 

property’’ rather than the OECD Model phrase ‘‘gains from the 

alienation’’ to clarify that the United States will look through distributions made by a REIT and certain RICs. Accordingly, 

distribu≥tions made by a REIT or certain RICs are taxable under 

paragraph 1 of Article 13 (not under Article 10 (Dividends)) when 

they are attributable to gains derived from the alienation (disposition) of U.S. real property interests and treated as gain recognized 

under section 897(h)(1). 

Paragraph 2 

This paragraph defines the term ‘‘real property situated in the 

other Contracting State.’’ The term includes real property referred 

to in Article 6 (i.e., an interest in the real property itself), and, in 

the case of the United States, a ‘‘United States real property interest.’’ 

55 

Under section 897(c) of the Code the term ‘‘United States real 

property interest’’ includes shares in a U.S. corporation that owns 

sufficient U.S. real property interests to satisfy an asset-ratio test 

on certain testing dates. The term also includes certain foreign corporations that have elected to be treated as U.S. corporations for 

this purpose. Section 897(i). 

Paragraph 3 

Paragraph 3 of Article 13 deals with the taxation of certain gains 

from the alienation of movable property forming part of the business property of a permanent establishment that an enterprise of 

a Contracting State has in the other Contracting State. This also 

includes gains from the alienation of such a permanent establishment (alone or with the whole enterprise). Such gains may be taxed 

in the State in which the permanent establishment is located. 

A resident of the other Contracting State that is a partner in a 

partnership doing business in the United States generally will have 

a permanent establishment in the United States as a result of the 

activities of the partnership, assuming that the activities of the 

partnership rise to the level of a permanent establishment. Rev. 

Rul. 91–32, 1991–1 C.B. 107. Further, under paragraph 3, the 

United States generally may tax a partner’s distributive share of 

income realized by a partnership on the disposition of movable 

property forming part of the business property of the partnership 

in the United States. 

The gains subject to paragraph 3 may be taxed in the State in 

which the permanent establishment is located, regardless of whether the permanent establishment exists at the time of the alienation. This rule incorporates the rule of section 864(c)(6) of the 

Code. Accordingly, income that is attributable to a permanent establishment, but that is deferred and received after the permanent 

establishment no longer exists, may nevertheless be taxed by the 

State in which the permanent establishment was located. 

Paragraph 4 

This paragraph limits the taxing jurisdiction of the State of 

source with respect to gains from the alienation of ships or aircraft 

operated in international traffic by the enterprise alienating the 

ship or aircraft and from property (other than real property) pertaining to the operation of such ships, aircraft, or containers. 

Under paragraph 4, such income is taxable only in the Contracting State in which the alienator is resident. Notwithstanding 

paragraph 3, the rules of this paragraph apply even if the income 

is attributable to a permanent establishment maintained by the enterprise in the other Contracting State. This result is consistent 

with the allocation of taxing rights under Article 8 (Shipping and 

Air Transport). 

Paragraph 5 

Paragraph 5 provides a rule similar to paragraph 4 with respect 

to gains from the alienation of containers and related personal 

property. Such gains derived by an enterprise of a Contracting 

State shall be taxable only in that Contracting State unless the 

containers were used for the transport of goods or merchandise 

solely within the other Contracting State. The other Contracting 

56 

State may not tax even if the gain is attributable to a permanent 

establishment maintained by the enterprise in that other Contracting State. 

Paragraph 6 

Paragraph 6 grants to the State of residence of the alienator the 

exclusive right to tax gains from the alienation of property other 

than property referred to in paragraphs 1 through 5. For example, 

gain derived from shares, other than shares described in paragraphs 2 or 3, debt instruments and various financial instruments, 

may be taxed only in the State of residence, to the extent such income is not otherwise characterized as income taxable under another article (e.g., Article 10 (Dividends) or Article 11 (Interest)). 

Similarly gain derived from the alienation of tangible personal 

property, other than tangible personal property described in paragraph 3, may be taxed only in the State of residence of the alienator. 

Gains derived by a resident of a Contracting State from real 

property located in a third state are not taxable in the other Contracting State, even if the sale is attributable to a permanent establishment located in the other Contracting State. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on taxation of certain 

gains by the State of source, the saving clause of paragraph 4 of 

Article 1 (General Scope) permits the United States to tax its citizens and residents as if the Convention had not come into effect. 

Thus, any limitation in this Article on the right of the United 

States to tax gains does not apply to gains of a U.S. citizen or resident. 

The benefits of this Article are also subject to the provisions of 

Article 21 (Limitation on Benefits). Thus, only a resident of a Contracting State that satisfies one of the conditions in Article 21 is 

entitled to the benefits of this Article. 

ARTICLE 14 (INCOME FROM EMPLOYMENT)

Article 14 apportions taxing jurisdiction over remuneration derived by a resident of a Contracting State as an employee between 

the States of source and residence. 

Paragraph 1 

The general rule of Article 14 is contained in paragraph 1. Remuneration derived by a resident of a Contracting State as an employee may be taxed by the State of residence, and the remuneration also may be taxed by the other Contracting State to the extent 

derived from employment exercised (i.e., services performed) in 

that other Contracting State. Paragraph 1 also provides that the 

more specific rules of Articles 15 (Directors’ Fees), 17 (Pensions, Social Security, Annuities, Alimony and Child Support), 

18 (Government Service), and 19 (Students, Trainees, Teachers 

and Researchers) apply in the case of employment income described 

in one of those articles. Thus, even though the State of source has 

a right to tax employment income under Article 14, it may not have 

the right to tax that income under the Convention if the income is 

described, for example, in Article 17 (Pensions, Social Security, AnVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00056 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
57 

nuities, Alimony and Child Support) and is not taxable in the State 

of source under the provisions of that article. 

Article 14 applies to any form of compensation for employment, 

including payments in kind. Paragraph 1.1 of the Commentary to 

Article 16 of the OECD Model now confirms that interpretation. 

Consistent with section 864(c)(6) of the Code, Article 14 also applies regardless of the timing of actual payment for services. Consequently, a person who receives the right to a future payment in 

consideration for services rendered in a Contracting State would be 

taxable in that State even if the payment is received at a time 

when the recipient is a resident of the other Contracting State. 

Thus, a bonus paid to a resident of a Contracting State with respect to services performed in the other Contracting State with respect to a particular taxable year would be subject to Article 14 

even if it was paid after the close of the year. An annuity received 

for services performed in a taxable year could be subject to Article 

14 despite the fact that it was paid in subsequent years. In that 

case, it would be necessary to determine whether the payment constitutes deferred compensation, taxable under Article 14, or a 

qualified pension subject to the rules of Article 17 (Pensions, Social 

Security, Annuities, Alimony, and Child Support). Article 14 also 

applies to income derived from the exercise of stock options granted 

with respect to services performed in the host State, even if those 

stock options are exercised after the employee has left the source 

country. If Article 14 is found to apply, whether such payments 

were taxable in the State where the employment was exercised 

would depend on whether the tests of paragraph 2 were satisfied 

in the year in which the services to which the payment relates 

were performed. 

Paragraph 2 

Paragraph 2 sets forth an exception to the general rule that employment income may be taxed in the State where it is exercised. 

Under paragraph 2, the State where the employment is exercised 

may not tax the income from the employment if three conditions 

are satisfied: (a) the individual is present in the other Contracting 

State for a period or periods not exceeding 183 days in any 12- 

month period that begins or ends during the relevant taxable year 

(i.e., in the United States, the calendar year in which the services 

are performed); (b) the remuneration is paid by, or on behalf of, an 

employer who is not a resident of that other Contracting State; and 

(c) the remuneration is not borne as a deductible expense by a permanent establishment that the employer has in that other State. 

In order for the remuneration to be exempt from tax in the source 

State, all three conditions must be satisfied. This exception is identical to that set forth in the OECD Model. 

The 183-day period in condition (a) is to be measured using the 

‘‘days of physical presence’’ method. Under this method, the days 

that are counted include any day in which a part of the day is 

spent in the host country. (Rev. Rul. 56–24, 1956–1 C.B. 851.) 

Thus, days that are counted include the days of arrival and departure; weekends and holidays on which the employee does not 

work but is present within the country; vacation days spent in the 

country before, during or after the employment period, unless the 

individual’s presence before or after the employment can be shown 

58 

to be independent of his presence there for employment purposes; 

and time during periods of sickness, training periods, strikes, etc., 

when the individual is present but not working. If illness prevented 

the individual from leaving the country in sufficient time to qualify 

for the benefit, those days will not count. Also, any part of a day 

spent in the host country while in transit between two points outside the host country is not counted. If the individual is a resident 

of the host country for part of the taxable year concerned and a 

non-resident for the remainder of the year, the individual’s days of 

presence as a resident do not count for purposes of determining 

whether the 183-day period is exceeded. 

Conditions (b) and (c) are intended to ensure that a Contracting 

State will not be required to allow a deduction to the payor for 

compensation paid and at the same time to exempt the employee 

on the amount received. Accordingly, if a foreign person pays the 

salary of an employee who is employed in the host State, but a host 

State corporation or permanent establishment reimburses the 

payor with a payment that can be identified as a reimbursement, 

neither condition (b) nor (c), as the case may be, will be considered 

to have been fulfilled. 

The reference to remuneration ‘‘borne by’’ a permanent establishment is understood to encompass all expenses that economically 

are incurred and not merely expenses that are currently deductible 

for tax purposes. Accordingly, the expenses referred to include expenses that are capitalizable as well as those that are currently deductible. Further, salaries paid by residents that are exempt from 

income taxation may be considered to be borne by a permanent establishment notwithstanding the fact that the expenses will be neither deductible nor capitalizable since the payor is exempt from 

tax. 

The Protocol clarifies that with respect to paragraphs 1 and 2, 

where remuneration is derived by a resident of one of the States 

in respect of an employment, employment is exercised in the place 

where the employee is physically present when performing the activities for which the remuneration is paid, irrespective of the residence of the payer, the place in which the contract of employment 

was made, the residence of the employer, the place or time of payment, or the place where the results of the work were exploited. 

Paragraph 3 

Paragraph 3 contains a special rule applicable to remuneration 

for services performed by a resident of a Contracting State as an 

employee aboard a ship or aircraft operated in international traffic. 

Such remuneration may be taxed only in the State of residence of 

the employee if the services are performed as a member of the regular complement of the ship or aircraft. The ‘‘regular complement’’ 

includes the crew. In the case of a cruise ship, for example, it may 

also include others, such as entertainers, lecturers, etc., employed 

by the shipping company to serve on the ship throughout its voyage. The use of the term ‘‘regular complement’’ is intended to clarify that a person who exercises his employment as, for example, an 

insurance salesman while aboard a ship or aircraft is not covered 

by this paragraph. 

If a U.S. citizen who is resident in Belgium performs services as 

an employee in the United States and meets the conditions of paraVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00058 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
59 

graph 2 for source country exemption, he nevertheless is taxable in 

the United States by virtue of the saving clause of paragraph 4 of 

Article 1 (General Scope), subject to the special foreign tax credit 

rule of paragraph 4 of Article 22 (Relief from Double Taxation). 

ARTICLE 15 (DIRECTORS’ FEES)

This Article provides that a Contracting State may tax the fees 

and other compensation paid by a company that is a resident of 

that State for services performed in that State by a resident of the 

other Contracting State in his capacity as a director of the company. This rule is an exception to the more general rules of Articles 

7 (Business Profits) and 14 (Income from Employment). Thus, for 

example, in determining whether a director’s fee paid to a non-employee director is subject to tax in the country of residence of the 

corporation, it is not relevant to establish whether the fee is attributable to a permanent establishment in that State. 

The analogous OECD provision reaches different results in certain cases. Under the OECD Model provision, a resident of one 

Contracting State who is a director of a corporation that is resident 

in the other Contracting State is subject to tax in that other State 

in respect of his directors’ fees regardless of where the services are 

performed. The United States has entered a reservation with respect to the OECD provision. Under the provision in the Convention, the State of residence of the corporation may tax nonresident 

directors with no time or dollar threshold, but only with respect to 

remuneration for services performed in that State. 

The Protocol elaborates on the provisions of Article 15. Specifically, the Protocol provides that Article 15 shall also apply to fees 

received by a ‘‘gerant’’/‘‘zaakvoerder’’ of a company, other than a 

company with share capital, in his capacity as such. Further, remuneration derived by a person referred to in Article 15 from a company which is a resident of a Contracting State in respect of the 

discharge of day-to-day functions of a managerial or technical, commercial or financial nature shall be taxable in accordance with the 

provisions of Article 14 (Income from Employment), and not Article 

15. In such a case, to the extent that the company is a Belgian 

company, Article 14 shall be applied as if such remuneration were 

remuneration derived by an employee in respect of an employment 

and as if references to the ‘‘employer’’ were references to the company. 

Remuneration received by a resident of a Contracting State in respect of his day-to-day activity as a partner of a company that is 

a resident of Belgium, other than a company with share capital, 

shall be taxable in accordance with the provisions of Article 14, as 

if such remuneration were remuneration derived by an employee in 

respect of an employment and as if references to the ‘‘employer’’ 

were references to the company. 

Article 7 (Business Profits), and not Article 14 or 15, shall apply 

to a partner’s distributive share of the income of an entity that is 

treated as fiscally transparent, such as a U.S. partnership. 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, if a U.S. citizen who is a resident of 

Belgium is a director of a U.S. corporation, the United States may 

tax his full remuneration regardless of where he performs his services. 

60 

ARTICLE 16 (ENTERTAINERS AND SPORTSMEN)

This Article deals with the taxation in a Contracting State of entertainers and sportsmen resident in the other Contracting State 

from the performance of their services as such. The Article applies 

both to the income of an entertainer or sportsman who performs 

services on his own behalf and one who performs services on behalf 

of another person, either as an employee of that person, or pursuant to any other arrangement. The rules of this Article take precedence, in some circumstances, over those of Articles 7 (Business 

Profits) and 14 (Income from Employment). 

This Article applies only with respect to the income of entertainers and sportsmen. Others involved in a performance or athletic event, such as producers, directors, technicians, managers, 

coaches, etc., remain subject to the provisions of Articles 7 and 14. 

In addition, except as provided in paragraph 2, income earned by 

juridical persons is not covered by Article 16. 

Paragraph 1 

Paragraph 1 describes the circumstances in which a Contracting 

State may tax the performance income of an entertainer or sportsman who is a resident of the other Contracting State. Under the 

paragraph, income derived by an individual resident of a Contracting State from activities as an entertainer or sportsman exercised in the other Contracting State may be taxed in that other 

State if the amount of the gross receipts derived by the performer 

exceeds $20,000 (or its equivalent in euro) for the taxable year. The 

$20,000 includes expenses reimbursed to the individual or borne on 

his behalf. If the gross receipts exceed $20,000, the full amount, not 

just the excess, may be taxed in the State of performance. 

This Convention introduces the monetary threshold to distinguish between two groups of entertainers and athletes—those who 

are paid relatively large sums of money for very short periods of 

service, and who would, therefore, normally be exempt from host 

country tax under the standard personal services income rules, and 

those who earn relatively modest amounts and are, therefore, not 

easily distinguishable from those who earn other types of personal 

service income. 

Tax may be imposed under paragraph 1 even if the performer 

would have been exempt from tax under Article 7 (Business Profits) or 14 (Income from Employment). On the other hand. if the 

performer would be exempt from host-country tax under Article 16, 

but would be taxable under either Article 7 or 14, tax may be imposed under either of those Articles. Thus, for example, if a performer derives remuneration from his activities in an independent 

capacity, and the performer does not have a permanent establishment in the host State, he may be taxed by the host State in accordance with Article 16 if his remuneration exceeds $20,000 annually, despite the fact that he generally would be exempt from host 

State taxation under Article 7. However, a performer who receives 

less than the $20,000 threshold amount and therefore is not taxable under Article 16 nevertheless may be subject to tax in the host 

country under Article 7 or 14 if the tests for host-country taxability 

under the relevant Article are met. For example, if an entertainer 

who is an independent contractor earns $14,000 of income in a 

61 

State for the calendar year, but the income is attributable to his 

permanent establishment in the State of performance, that State 

may tax his income under Article 7. 

Since it frequently is not possible to know until year-end whether 

the income an entertainer or sportsman derived from performances 

in a Contracting State will exceed $20,000, nothing in the Convention precludes that Contracting State from withholding tax during 

the year and refunding it after the close of the year if the taxability 

threshold has not been met. 

As explained in paragraph 9 of the Commentary to Article 17 of 

the OECD Model, Article 16 of the Convention applies to all income 

connected with a performance by the entertainer, such as appearance fees, award or prize money, and a share of the gate receipts. 

Income derived from a Contracting State by a performer who is a 

resident of the other Contracting State from other than actual performance, such as royalties from record sales and payments for 

product endorsements, is not covered by this Article, but by other 

articles of the Convention, such as Article 12 (Royalties) or Article 

7 (Business Profits). For example, if an entertainer receives royalty 

income from the sale of live recordings, the royalty income would 

be exempt from source state tax under Article 12, even if the performance was conducted in the source country, although the entertainer could be taxed in the source country with respect to income 

from the performance itself under Article 16 if the dollar threshold 

is exceeded. 

In determining whether income falls under Article 16 or another 

article, the controlling factor will be whether the income in question is predominantly attributable to the performance itself or to 

other activities or property rights. For instance, a fee paid to a performer for endorsement of a performance in which the performer 

will participate would be considered to be so closely associated with 

the performance itself that it normally would fall within Article 16. 

Similarly, a sponsorship fee paid by a business in return for the 

right to attach its name to the performance would be so closely associated with the performance that it would fall under Article 16 

as well. As indicated in paragraph 9 of the Commentary to Article 

17 of the OECD Model, however, a cancellation fee would not be 

considered to fall within Article 16 but would be dealt with under 

Article 7 (Business Profits) or 14 (Income from Employment). 

As indicated in paragraph 4 of the Commentary to Article 17 of 

the OECD Model, where an individual fulfills a dual role as performer and non-performer (such as a player-coach or an actor-director), but his role in one of the two capacities is negligible, the predominant character of the individual’s activities should control the 

characterization of those activities. In other cases there should be 

an apportionment between the performance-related compensation 

and other compensation. 

Consistent with Article 14 (Income from Employment), Article 16 

also applies regardless of the timing of actual payment for services. 

Thus, a bonus paid to a resident of a Contracting State with respect to a performance in the other Contracting State during a particular taxable year would be subject to Article 16 even if it was 

paid after the close of the year. The determination as to whether 

the $20,000 threshold has been exceeded is determined separately 

with respect to each year of payment. Accordingly, if an actor who 

62 

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 

63 

perform the services, then likely the person is a service company 

not formed to circumvent the provisions of paragraph 1. The following example illustrates the operation of this rule. 

Example. Company O, a resident of Belgium, is engaged in the 

business of operating an orchestra. Company O enters into a contract with Company A pursuant to which Company O agrees to 

carry out two performances in the United States in consideration 

of which Company A will pay Company O $200,000. The contract 

designates two individuals, a conductor and a flutist, that must 

perform as part of the orchestra, and allows Company O to designate the other members of the orchestra. Because the contract 

does not give Company O any discretion to determine whether the 

conductor or the flutist perform personal services under the contract, the portion of the $200,000 which is attributable to the personal services of the conductor and the flutist may be taxed by the 

United States pursuant to paragraph 2. The remaining portion of 

the $200,000, which is attributable to the personal services of performers that Company O may designate, is not subject to tax by 

the United States pursuant to paragraph 2. 

In cases where paragraph 2 is applicable, the income of the ‘‘employer’’ may be subject to tax in the host Contracting State even 

if it has no permanent establishment in the host country. Taxation 

under paragraph 2 is on the person providing the services of the 

performer. This paragraph does not affect the rules of paragraph 

1, which apply to the performer himself. The income taxable by virtue of paragraph 2 is reduced to the extent of salary payments to 

the performer, which fall under paragraph 1. 

For purposes of paragraph 2, income is deemed to accrue to another person (i.e., the person providing the services of the performer) if that other person has control over, or the right to receive, 

gross income in respect of the services of the performer. 

Since pursuant to Article 1 (General Scope) the Convention only 

applies to persons who are residents of one of the Contracting 

States, income of the star company would not be eligible for benefits of the Convention if the company is not a resident of one of the 

Contracting States. 

Relationship to Other Articles 

This Article is subject to the provisions of the saving clause of 

paragraph 4 of Article 1 (General Scope). Thus, if an entertainer 

or a sportsman who is resident in Belgium is a citizen of the 

United States, the United States may tax all of his income from 

performances in the United States without regard to the provisions 

of this Article, subject, however, to the special foreign tax credit 

provisions of paragraph 4 of Article 22 (Relief from Double Taxation). In addition, benefits of this Article are subject to the provisions of Article 21 (Limitation on Benefits). 

ARTICLE 17 (PENSIONS, SOCIAL SECURITY, ANNUITIES, ALIMONY, AND

CHILD SUPPORT)

This Article deals with the taxation of private (i.e., non-government service) pensions and annuities, social security benefits, alimony and child support payments. 

64 

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. 

65 

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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66 

duct 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 

67 

is contributing. The rule regarding successor funds would apply if, 

for example, 

the employer has been taken over by a company that replaces 

the existing fund with its own fund, rolling membership in the old 

fund over into the new fund. 

In addition, under subparagraph (b), the participant must not 

have performed personal services in the host State for a cumulative 

period that exceeds ten years. 

Further, under subparagraph (c) of paragraph 8, the competent 

authority of the host State must determine that the pension plan 

to which a contribution is made generally corresponds to a pension 

plan recognized for tax purposes in the host State. Generally, for 

this purpose, the U.S. pension plans eligible for the benefits of 

paragraph 7 would include qualified plans under section 401(a), individual retirement plans (including individual retirement plans 

that are part of a simplified employee pension plan that satisfies 

section 40 8(k)), individual retirement accounts, individual retirement annuities, section 408(p) accounts and Roth IRAs under section 408A, section 403(a) qualified annuity plans, section 403(b) 

plans, section 457(b) plans and the Thrift Savings Plan (section 

7701(j)). However, the competent authorities shall agree upon the 

list of pension plans that are acceptable under this paragraph. 

Paragraph 9 

Paragraph 9 generally provides U.S. tax treatment for certain 

contributions by or on behalf of U. S. citizens resident in Belgium 

to pension funds established in Belgium (or a similar fund that is 

a resident of a comparable third State) that is comparable to the 

treatment that would be provided for contributions to U.S. funds. 

Under subparagraph (a), a U.S. citizen resident in Belgium may exclude or deduct for U.S. tax purposes certain contributions to a 

pension fund established in Belgium. Qualifying contributions generally include contributions made during the period the U.S. citizen 

exercises an employment in Belgium if expenses of the employment 

are borne by an employer or permanent establishment in Belgium. 

Similarly, with respect to the U.S. citizen’s participation in the 

pension fund in Belgium, accrued benefits and contributions during 

that period generally are not treated as taxable income in the 

United States. 

The U.S. tax benefit allowed by paragraph 9, however, is limited 

under subparagraph (b) to the lesser of the amount of relief allowed for contributions and benefits that qualify for relief in Belgium and the amount of relief that would be allowed for contributions and benefits under a generally corresponding pension fund established in the United States. 

Subparagraph (c) provides that the benefits an individual obtains 

under paragraph 9 are counted when determining that individual’s 

eligibility for benefits under a pension fund established in the 

United States. Thus, for example, contributions to a pension fund 

recognized for tax purposes in Belgium may be counted in determining whether the individual has exceeded the annual limitation 

on contributions to an individual retirement account. 

Under subparagraph (d), paragraph 9 does not apply to pension 

contributions and benefits unless the competent authority of the 

United States has agreed that the pension fund recognized for tax 

68 

purposes in Belgium generally corresponds to a pension fund established in the United States. Since paragraph 9 applies only with 

respect to employees, however, the relevant plans are those that 

correspond to employer plans in the United States. The competent 

authorities shall agree upon the list of pension plans that are acceptable under this paragraph. 

Paragraph 10 

Paragraph 10 provides guidance for the application of paragraphs 7 and 9 by delineating when a similar fund that is a resident of a State other than a Contracting State will be considered 

to be a resident of a ‘‘comparable third State.’’ The paragraph requires that such a state will be considered a comparable third 

State only if the following three requirements are met: 1) the third 

State is a member state of the European Union or any other European Economic Area state or any party to the North American Free 

Trade Agreement or Switzerland, 2) the third State provides, under 

a tax treaty or otherwise, comparable favorable treatment for contributions to a pension fund that is a resident of the Contracting 

State that is providing benefits under paragraph 7 (i.e., host state) 

or paragraph 9 (i.e., the United States), and 3) the third State has 

an information exchange provision in a tax treaty or other arrangement with the Contracting State that is providing benefits under 

paragraph 7 or paragraph 9 that is satisfactory to that Contracting 

State. 

Subparagraph (b) provides that a pension plan is recognized for 

tax purposes in a Contacting State if contributions to the plan 

would qualify for tax relief in that Contracting State. 

Relationship to Other Articles 

Paragraphs 1 (a), 3 and 4 of Article 17 are subject to the saving 

clause of paragraph 4 of Article 1 (General Scope). Thus, a U.S. citizen who is resident in the other Contracting State, and receives 

either a pension, annuity or alimony payment from the United 

States, may be subject to U.S. tax on the payment, notwithstanding 

the rules in those three paragraphs that give the State of residence 

of the recipient the exclusive taxing right. Paragraphs 1(b), 2 and 

5 are excepted from the saving clause by virtue of subparagraph 

5(a) of Article 1. Thus, the United States will not tax U.S. citizens 

and residents on the income described in those paragraphs even if 

such amounts otherwise would be subject to tax under U.S. law. 

Paragraphs 6 and 9 of Article 17 are excepted from the saving 

clause of paragraph 4 of Article 1 by virtue of paragraph 5(a) of Article 1. Thus, the United States will allow U.S. citizens and residents the benefits of paragraphs 6 and 9. Paragraph 7 is excepted 

from the saving clause by subparagraph 5(b) of Article 1 with respect only to persons who are not admitted for permanent residence or citizens. Accordingly, a person who becomes a U.S. permanent resident or citizen will no longer receive a deduction for contributions to a pension fund established in the other Contracting 

State. 

69 

ARTICLE 18 (GOVERNMENT SERVICE)

Paragraph 1 

Subparagraphs (a) and (b) of paragraph 1 deal with the taxation 

of government compensation (other than a pension addressed in 

paragraph 2). Subparagraph (a) provides that remuneration paid to 

any individual who is rendering services to a State, or a political 

subdivision or a local authority thereof, is exempt from tax by the 

other State. Under subparagraph (b), such payments are, however, 

taxable exclusively in the other State (i.e., the host State) if the 

services are rendered in that other State and the individual is a 

resident of that State who is either a national of that State or a 

person who did not become resident of that State solely for purposes of rendering the services. The paragraph applies to anyone 

performing services for a government, whether as a government 

employee, an independent contractor, or an employee of an independent contractor. 

Paragraph 2 

Paragraph 2 deals with the taxation of pensions and other similar remuneration paid by, or out of funds created by, one of the 

States, or a political subdivision or a local authority thereof, to an 

individual in respect of services rendered to that State or subdivision or authority. Subparagraph (a) provides that such pensions 

and other similar remuneration are taxable only in that State. Subparagraph (b) provides an exception under which such pensions 

and other similar remuneration are taxable only in the other State 

if the individual is a resident of, and a national of, that other State. 

Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When benefits paid by a State in respect of services rendered to that State or a subdivision or authority are in the form 

of social security benefits, however, those payments are covered by 

paragraph 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support). As a general matter, the result will be 

the same whether Article 17 or 18 applies, since social security 

benefits are taxable exclusively by the source country and so are 

government pensions. The result will differ only when the payment 

is made to a citizen and resident of the other Contracting State, 

who is not also a citizen of the paying State. In such a case, social 

security benefits continue to be taxable at source while government 

pensions become taxable only in the residence country. 

Paragraph 3 

Paragraph 3 provides that the remuneration described in paragraph 1 will be subject to the rules of Articles 14 (Income from Employment), 15 (Directors’ Fees), 16 (Entertainers and Sportsmen) or 

17 (Pensions, Social Security, Annuities, Alimony, and Child Support) if the recipient of the income is employed by a business conducted by a government. 

Relationship to Other Articles 

Under paragraph 5(b) of Article 1 (General Scope), the saving 

clause (paragraph 4 of Article 1) does not apply to the benefits conferred by one of the States under Article 18 if the recipient of the 

70 

benefits is neither a citizen of that State, nor a person who has 

been admitted for permanent residence there (i.e., in the United 

States, a ‘‘green card’’ holder). Thus, a resident of a Contracting 

State who in the course of performing functions of a governmental 

nature becomes a resident of the other State (but not a permanent 

resident), would be entitled to the benefits of this Article. However, 

an individual who receives a pension paid by the Government of 

Belgium in respect of services rendered to that Government shall 

be taxable on this pension only in Belgium unless the individual 

is a U.S. citizen or acquires a U.S. green card. 

ARTICLE 19 (STUDENTS, TRAINEES, TEACHERS AND RESEARCHERS)

This Article provides rules for host-country taxation of visiting 

students, business trainees, teachers and researchers. Persons who 

meet the tests of the Article will be exempt from tax in the State 

that they are visiting with respect to designated classes of income. 

Paragraph 1 addresses payments received by a student or business 

trainee, while paragraph 2 addresses teachers and researchers 

temporarily present in the host country. 

Paragraph 1 

Subparagraph (a) addresses the situation where a student or 

business trainee that is a resident of a Contracting State receives 

certain payments other than for personal services, while present in 

the host State. Several conditions must be satisfied for such an individual to be exempt from host country taxation. 

First, the student or business trainee must have been, either at 

the time of his arrival in the host State or immediately before, a 

resident of the other Contracting State. 

Second, the purpose of the visit must be the full-time education 

or full-time training of the visitor. Thus, if the visitor comes principally to work in the host State but also is a part-time student, 

he would not be entitled to the benefits of this Article, even with 

respect to any payments he may receive from abroad for his maintenance or education, and regardless of whether or not he is in a 

degree program. Whether a student is to be considered full-time 

will be determined by the rules of the educational institution at 

which he is studying. 

The host-country exemption in subparagraph (a) applies to payments received by the student or business trainee for the purpose 

of his maintenance, education or training that arise outside the 

host State. A payment will be considered to arise outside the host 

State if the payer is located outside the host State. Thus, if an employer from one of the Contracting States sends an employee to the 

other Contracting State for training, the payments the trainee receives from abroad from his employer for his maintenance or training while he is present in the host State will be exempt from tax 

in the host State. Where appropriate, substance prevails over form 

in determining the identity of the payer. Thus, for example, payments made directly or indirectly by a U.S. person with whom the 

visitor is training, but which have been routed through a source 

outside the United States (e.g., a foreign subsidiary), are not treated as arising outside the United States for this purpose. 

Subparagraph (1) (b) also provides a limited exemption for remuneration from personal services rendered in the host State with a 

71 

view to supplementing the resources available to him for such purposes to the extent of $9,000 United States dollars (or its equivalent in euro) per taxable year. The competent authorities are instructed to adjust this amount every five years, if necessary, to 

take into account changes in the amount of the U.S. standard deduction and personal exemption and the Belgian basic allowance. 

In the case of a business trainee, the benefits of paragraph 1 will 

extend only for a period of two years from the time that the visitor 

first arrives in the host country. If, however, a trainee remains in 

the host country for a third year, thus losing the benefits of the Article, he would not retroactively lose the benefits of the Article for 

the first two years. Supbaragraph 1(c) defines the term ‘‘business 

trainee’’ as a person who is in the country temporarily for the purpose of securing training that is necessary to qualify to pursue a 

profession or professional specialty. Moreover, a business trainee 

also includes an individual who is employed or under contract with 

a resident of the other Contracting State and is temporarily 

present in the host State for the primary purpose of receiving technical, professional, or business experience from a person other than 

his employer or a person related to its employer. Thus, a business 

trainee might include a lawyer employed by a law firm in one Contracting State who works for two years as a stagiare in an unrelated law firm in the other Contracting State. However, the term 

would not include a manager who normally is employed by a parent company in one Contracting State who is sent to the other Contracting State to run a factory owned by a subsidiary of the parent 

company. 

Paragraph 2 

Paragraph 2 provides an exemption from host State taxation for 

teachers and researchers. Under paragraph 2 an individual who is 

a resident of a Contracting State at the beginning of his visit to 

the other Contracting State (i.e., host State), and who is temporarily present in the host State for the purpose of teaching or carrying on research at a school, college, university or other educational or research institution is exempt from host Sate taxation 

for a period not exceeding 2 years from the person’s arrival in the 

host State on the person’s remuneration received in consideration 

of teaching or carrying on research. However, the benefits of paragraph 2 do not apply to income from research if such research is 

undertaken primarily for the private benefit of a specific person or 

persons. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) 

does not apply to this Article with respect to an individual who is 

neither a citizen of the host State nor has been admitted for permanent residence there. The saving clause, however, does apply 

with respect to citizens and permanent residents of the host State. 

Thus, a U.S. citizen who is a resident of Belgium and who visits 

the United States as a full-time student at an accredited university 

will not be exempt from U.S. tax on remittances from abroad that 

otherwise constitute U.S. taxable income. A person, however, who 

is not a U.S. citizen, and who visits the United States as a student 

and remains long enough to become a resident under U.S. law, but 

72 

does not become a permanent resident (i.e., does not acquire a 

green card), will be entitled to the full benefits of the Article. 

ARTICLE 20 (OTHER INCOME)

Article 20 generally assigns taxing jurisdiction over income not 

dealt with in the other articles (Articles 6 through 19) of the Convention to the State of residence of the beneficial owner of the income. In order for an item of income to be ‘‘dealt with’’ in another 

article it must be the type of income described in the article and, 

in most cases, it must have its source in a Contracting State. For 

example, all royalty income that arises in a Contracting State and 

that is beneficially owned by a resident of the other Contracting 

State is ‘‘dealt with’’ in Article 12 (Royalties). However, profits derived in the conduct of a business are ‘‘dealt with’’ in Article 7 

(Business Profits) whether or not they have their source in one of 

the Contracting States. 

Examples of items of income covered by Article 20 include income 

from gambling, punitive (but not compensatory) damages and covenants not to compete. The article would also apply to income from 

a variety of financial transactions, where such income does not 

arise in the course of the conduct of a trade or business. For example, income from notional principal contracts and other derivatives 

would fall within Article 20 if derived by persons not engaged in 

the trade or business of dealing in such instruments, unless such 

instruments were being used to hedge risks arising in a trade or 

business. It would also apply to securities lending fees derived by 

an institutional investor. Further, in most cases guarantee fees 

paid within an intercompany group would be covered by Article 20, 

unless the guarantor were engaged in the business of providing 

such guarantees to unrelated parties. 

Article 20 also applies to items of income that are not dealt with 

in the other articles because of their source or some other characteristic. For example, Article 11 (Interest) addresses only the taxation of interest arising in a Contracting State. Interest arising in 

a third State that is not attributable to a permanent establishment, therefore, is subject to Article 20. 

Distributions from partnerships are not generally dealt with 

under Article 20 because partnership distributions generally do not 

constitute income. Under the Code, partners include in income 

their distributive share of partnership income annually, and partnership distributions themselves generally do not give rise to income. This would also be the case under U.S. law with respect to 

distributions from trusts. Trust income and distributions that, 

under the Code, have the character of the associated distributable 

net income would generally be covered by another article of the 

Convention. See Code section 641 et seq. 

Paragraph 1 

The general rule of Article 20 is contained in paragraph 1. Items 

of income not dealt with in other articles and beneficially owned by 

a resident of a Contracting State will be taxable only in the State 

of residence. This exclusive right of taxation applies whether or not 

the residence State exercises its right to tax the income covered by 

the Article. 

73 

The reference in this paragraph to ‘‘items of income beneficially 

owned by a resident of a Contracting State’’ rather than simply 

‘‘items of income of a resident of a Contracting State,’’ as in the 

OECD Model, is intended merely to make explicit the implicit understanding in other treaties that the exclusive residence taxation 

provided by paragraph 1 applies only when a resident of a Contracting State is the beneficial owner of the income. Thus, source 

taxation of income not dealt with in other articles of the Convention is not limited by paragraph 1 if it is nominally paid to a resident of the other Contracting State, but is beneficially owned by a 

resident of a third State. However, income received by a nominee 

on behalf of a resident of that other State would be entitled to benefits. 

The term ‘‘beneficially owned’’ is not defined in the Convention, 

and is, therefore, defined under the internal law of the country imposing tax (i.e., the source country). The person who beneficially 

owns the income for purposes of Article 20 is the person to which 

the income is attributable for tax purposes under the laws of the 

source State. 

Paragraph 2 

This paragraph provides an exception to the general rule of paragraph 1 for income that is attributable to a permanent establishment maintained in a Contracting State by a resident of the other 

Contracting State. The taxation of such income is governed by the 

provisions of Article 7 (Business Profits). Therefore, income arising 

outside the United States that is attributable to a permanent establishment maintained in the United States by a resident of Belgium generally would be taxable by the United States under the 

provisions of Article 7. This would be true even if the income is 

sourced in a third State. 

Relationship to Other Articles 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, the United States may tax the income 

of a resident of Belgium that is not dealt with elsewhere in the 

Convention, if that resident is a citizen of the United States. The 

Article is also subject to the provisions of Article 21 (Limitation on 

Benefits). Thus, if a resident of Belgium earns income that falls 

within the scope of paragraph 1 of Article 20, but that is taxable 

by the United States under U.S. law, the income would be exempt 

from U.S. tax under the provisions of Article 20 only if the resident 

satisfies one of the tests of Article 21 for entitlement to benefits. 

ARTICLE 21 (LIMITATION ON BENEFITS)

Article 21 contains anti-treaty-shopping provisions that are intended to prevent residents of third countries from benefiting from 

what is intended to be a reciprocal agreement between two countries. In general, the provision does not rely on a determination of 

purpose or intention but instead sets forth a series of objective 

tests. A resident of a Contracting State that satisfies one of the 

tests will receive benefits regardless of its motivations in choosing 

its particular business structure. 

The structure of the Article is as follows: Paragraph 1 states the 

general rule that residents are entitled to benefits otherwise acVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00073 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
74 

corded 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. 

75 

Paragraph 2 

Paragraph 2 has five subparagraphs, each of which describes a 

category of residents that are entitled to all benefits of the Convention. 

It is intended that the provisions of paragraph 2 will be self executing. Unlike the provisions of paragraph 7, discussed below, 

claiming benefits under paragraph 2 does not require an advance 

competent authority ruling or approval. The tax authorities may, 

of course, on review, determine that the taxpayer has improperly 

interpreted the paragraph and is not entitled to the benefits 

claimed. 

Individuals—Subparagraph 2(a).—Subparagraph (a) provides 

that individual residents of a Contracting State will be entitled to 

all treaty benefits. If such an individual receives income as a nominee on behalf of a third country resident, benefits may be denied 

under the respective articles of the Convention by the requirement 

that the beneficial owner of the income be a resident of a Contracting State. 

Governments—Subparagraph 2(b).—Subparagraph (b) provides 

that the Contracting States and any political subdivision or local 

authority thereof will be entitled to all benefits of the Convention. 

Publicly-Traded Corporations—Subparagraph 2(c)(i).—Subparagraph (c) applies to two categories of companies: publicly traded 

companies and subsidiaries of publicly traded companies. A company resident in a Contracting State is entitled to all the benefits 

of the Convention under clause (i) of subparagraph (c) if the principal class of its shares, and any disproportionate class of shares, 

is regularly traded on one or more recognized stock exchanges and 

the company satisfies at least one of the following additional requirements: first, the company’s principal class of shares is primarily traded on a recognized stock exchange located in the Contracting State of which the company is a resident (or, in the case 

of a company resident in Belgium, on a recognized stock exchange 

located within the European Union or in any other European Economic Area state, or in the case of a company resident in the 

United States, on a recognized stock exchange located in another 

state that is a party to the North American Free Trade Agreement); or, second, the company’s primary place of management and 

control is in its State of residence. 

The term ‘‘recognized stock exchange’’ is defined in subparagraph 

(d) of paragraph 8. It includes (i) the NASDAQ System and any 

stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934; (ii) the Brussels stock exchange, the 

Irish Stock exchange and the stock exchanges of Amsterdam, 

Frankfurt, Hamburg, Lisbon, London, Madrid, Milan, Paris, Toronto, and Zurich; and (iii) any other stock exchange agreed upon 

by the competent authorities of the Contracting States. 

If a company has only one class of shares, it is only necessary 

to consider whether the shares of that class meet the relevant trading requirements. If the company has more than one class of 

shares, it is necessary as an initial matter to determine which class 

or classes constitute the ‘‘principal class of shares.’’ The term ‘‘principal class of shares’’ is defined in subparagraph (a) of paragraph 

76 

8 to mean the ordinary or common shares of the company representing the majority of the aggregate voting power and value of 

the company. If the company does not have a class of ordinary or 

common shares representing the majority of the aggregate voting 

power and value of the company, then the ‘‘principal class of 

shares’’ is that class or any combination of classes of shares that 

represents, in the aggregate, a majority of the voting power and 

value of the company. Subparagraph (c) of paragraph 8 defines the 

term ‘‘shares’’ to include depository receipts for shares. Although in 

a particular case involving a company with several classes of 

shares it is conceivable that more than one group of classes could 

be identified that account for more than 50 percent of the shares, 

it is only necessary for one such group to satisfy the requirements 

of this subparagraph in order for the company to be entitled to benefits. Benefits would not be denied to the company even if a second, 

non-qualifying, group of shares with more than half of the company’s voting power and value could be identified. 

A company whose principal class of shares is regularly traded on 

a recognized stock exchange will nevertheless not qualify for benefits under subparagraph (c) of paragraph 2 if it has a disproportionate class of shares that is not regularly traded on a recognized 

stock exchange. The term ‘‘disproportionate class of shares’’ is defined in subparagraph (b) of paragraph 8. A company has a disproportionate class of shares if it has outstanding a class of shares 

which is subject to terms or other arrangements that entitle the 

holder to a larger portion of the company’s income, profit, or gain 

in the other Contracting State than that to which the holder would 

be entitled in the absence of such terms or arrangements. Thus, for 

example, a company resident in Belgium has a disproportionate 

class of shares if it has outstanding a class of ‘‘tracking stock’’ that 

pays dividends based upon a formula that approximates the company’s return on its assets employed in the United States. 

The following example illustrates this result. 

Example. BCo is a corporation resident in Belgium. BCo has two 

classes of shares: Common and Preferred. The Common shares are 

listed and regularly traded on the Brussels stock exchange. The 

Preferred shares have no voting rights and are entitled to receive 

dividends equal in amount to interest payments that BCo receives 

from unrelated borrowers in the United States. The Preferred 

shares are owned entirely by a single investor that is a resident of 

a country with which the United States does not have a tax treaty. 

The Common shares account for more than 50 percent of the value 

of BCo and for 100 percent of the voting power. Because the owner 

of the Preferred shares is entitled to receive payments corresponding to the U.S. source interest income earned by BCo, the 

Preferred shares are a disproportionate class of shares. Because the 

Preferred shares are not regularly traded on a recognized stock exchange, BCo will not qualify for benefits under subparagraph (c) of 

paragraph 2. 

The term ‘‘regularly traded’’ is defined in subparagraph (e) of 

paragraph 8. Under that subparagraph a class of shares is considered to be regularly traded on one or more recognized stock exchanges if the aggregate number of shares of that class traded on 

such stock exchange or exchanges during the preceding taxable 

77 

year is at least 6 percent of the average number of shares outstanding in that class during that preceding taxable year. 

The regular trading requirement can be met by trading on any 

recognized exchange or exchanges. Trading on one or more recognized stock exchanges may be aggregated for purposes of this requirement. Thus, a U.S. company could satisfy the regularly traded 

requirement through trading, in whole or in part, on a recognized 

stock exchange located in Belgium. Authorized but unissued shares 

are not considered for purposes of this test. 

The term ‘‘primarily traded’’ is not defined in the Convention. In 

accordance with paragraph 2 of Article 3 (General Definitions), this 

term will have the meaning it has under the laws of the State concerning the taxes to which the Convention applies, generally the 

source State. In the case of the United States, this term is understood to have the meaning it has under Treas. Reg. section 1.884– 

5(d)(3), relating to the branch tax provisions of the Code. Accordingly, stock of a corporation is ‘‘primarily traded’’ if the number of 

shares in the company’s principal class of shares that are traded 

during the taxable year on all recognized stock exchanges in the 

Contracting State of which the company is a resident exceeds the 

number of shares in the company’s principal class of shares that 

are traded during that year on established securities markets in 

any other single foreign country. 

A company whose principal class of shares is regularly traded on 

a recognized exchange but cannot meet the primarily traded test 

may claim treaty benefits if its primary place of management and 

control is in its country of residence. This test should be distinguished from the ‘‘place of effective management’’ test which is 

used in the OECD Model and by many other countries to establish 

residence. In some cases, the place of effective management test 

has been interpreted to mean the place where the board of directors meets. By contrast, the primary place of management and control test looks to where day-to-day responsibility for the management of the company (and its subsidiaries) is exercised. The company’s primary place of management and control will be located in 

the State in which the company is a resident only if the executive 

officers and senior management employees exercise day-to-day responsibility for more of the strategic, financial and operational policy decision making for the company (including direct and indirect 

subsidiaries) in that State than in the other State or any third 

state, and the staff that support the management in making those 

decisions are also based in that State. Thus, the test looks to the 

overall activities of the relevant persons to see where those activities are conducted. In most cases, it will be a necessary, but not 

a sufficient, condition that the headquarters of the company (that 

is, the place at which the CEO and other top executives normally 

are based) be located in the Contracting State of which the company is a resident. 

To apply the test, it will be necessary to determine which persons 

are to be considered ‘‘executive officers and senior management employees.’’ In most cases, it will not be necessary to look beyond the 

executives who are members of the Board of Directors (the ‘‘inside 

directors’’) in the case of a U.S. company. That will not always be 

the case, however; in fact, the relevant persons may be employees 

of subsidiaries if those persons make the strategic, financial and 

78 

operational policy decisions. Moreover, it would be necessary to 

take into account any special voting arrangements that result in 

certain board members making certain decisions without the participation of other board members. 

Subsidiaries of Publicly-Traded Corporations—Subparagraph 

2(c)(ii).—A company resident in a Contracting State is entitled to 

all the benefits of the Convention under clause (ii) of subparagraph 

(c) of paragraph 2 if five or fewer publicly traded companies described in clause (i) are the direct or indirect owners of at least 50 

percent of the aggregate vote and value of the company’s shares 

(and at least 50 percent of any disproportionate class of shares). If 

the publicly-traded companies are indirect owners, however, each of 

the intermediate companies must be a resident of one of the Contracting States. 

Thus, for example, a company that is a resident of Belgium, all 

the shares of which are owned by another company that is a resident of Belgium, would qualify for benefits under the Convention 

if the principal class of shares (and any disproportionate classes of 

shares) of the parent company are regularly and primarily traded 

on the Brussels stock exchange. However, such a subsidiary would 

not qualify for benefits under clause (ii) if the publicly traded parent company were a resident of a third state, for example, and not 

a resident of the United States or Belgium. Furthermore, if a parent company in Belgium indirectly owned the bottom-tier company 

through a chain of subsidiaries, each such subsidiary in the chain, 

as an intermediate owner, must be a resident of the United States 

or Belgium in order for the subsidiary to meet the test in clause 

(ii). 

Tax Exempt Organizations—Subparagraph 2(d).—Subparagraph 

2(d) provides rules by which the tax exempt organizations described in paragraph 3 of Article 4 (Resident) will be entitled to all 

the benefits of the Convention. A pension fund will qualify for benefits if more than fifty percent of the beneficiaries, members or participants are individuals resident in either Contracting State or the 

organization sponsoring such pension fund is entitled to benefits 

under the Convention (i.e., meets the limitations on benefits provisions of Article 21). For purposes of this provision, the term ‘‘beneficiaries’’ should be understood to refer to the persons receiving 

benefits from the pension fund. On the other hand, a tax-exempt 

organization other than a pension fund automatically qualifies for 

benefits, without regard to the residence of its beneficiaries or 

members. Entities qualifying under this rule are those that are 

generally exempt from tax in their State of residence and that are 

established and maintained exclusively to fulfill religious, charitable, scientific, artistic, cultural, or educational purposes. 

Ownership/Base Erosion—Subparagraph 2(e).—Subparagraph 

2(e) provides an additional method to qualify for treaty benefits 

that applies to any form of legal entity that is a resident of a Contracting State. The test provided in subparagraph (e), the so-called 

ownership and base erosion test, is a two-part test. Both prongs of 

the test must be satisfied for the resident to be entitled to treaty 

benefits under subparagraph 2(e). 

The ownership prong of the test, under clause (i), requires that 

50 percent or more of each class of shares or other beneficial interVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00078 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
79 

ests in the person is owned, directly or indirectly, on at least half 

the days of the person’s taxable year by persons who are residents 

of the Contracting State of which that person is a resident and that 

are themselves entitled to treaty benefits under subparagraphs (a), 

(b), (d) or clause (i) of subparagraph (c) of paragraph 2 

Trusts may be entitled to benefits under this provision if they 

are treated as residents under Article 4 (Residence) and they otherwise satisfy the requirements of this subparagraph. For purposes 

of this subparagraph, the beneficial interests in a trust will be considered to be owned by its beneficiaries in proportion to each beneficiary’s actuarial interest in the trust. The interest of a remainder 

beneficiary will be equal to 100 percent less the aggregate percentages held by income beneficiaries. A beneficiary’s interest in a trust 

will not be considered to be owned by a person entitled to benefits 

under the other provisions of paragraph 2 if it is not possible to determine the beneficiary’s actuarial interest. Consequently, if it is 

not possible to determine the actuarial interest of the beneficiaries 

in a trust, the ownership test under clause i) cannot be satisfied, 

unless all possible beneficiaries are persons entitled to benefits 

under the other subparagraphs of paragraph 2. 

The base erosion prong of clause (ii) of subparagraph (e) is satisfied with respect to a person if less than 50 percent of the person’s 

gross income for the taxable year, as determined under the tax law 

in the person’s State of residence, is paid or accrued, directly or indirectly, to persons who are not residents of either Contracting 

State entitled to benefits under subparagraphs (a), (b), (d) or clause 

(i) of subparagraph (c) of paragraph 2, in the form of payments deductible for tax purposes in the payor’s State of residence. These 

amounts do not include arm’s-length payments in the ordinary 

course of business for services or tangible property or payments in 

respect of financial obligations to a bank that is not related to the 

payor. To the extent they are deductible from the taxable base, 

trust distributions are deductible payments. However, depreciation 

and amortization deductions, which do not represent payments or 

accruals to other persons, are disregarded for this purpose. 

Paragraph 3 

Paragraph 3 sets forth a derivative benefits test that is potentially applicable to all treaty benefits, although the test is applied 

to individual items of income. In general, a derivative benefits test 

entitles the resident of a Contracting State to treaty benefits if the 

owner of the resident would have been entitled to the same benefit 

had the income in question flowed directly to that owner. To qualify under this paragraph, the company must meet an ownership 

test and a base erosion test. 

Subparagraph (a) sets forth the ownership test. Under this test, 

seven or fewer equivalent beneficiaries must own shares representing at least 95 percent of the aggregate voting power and 

value of the company and at least 50 percent of any disproportionate class of shares. Ownership may be direct or indirect. The 

term ‘‘equivalent beneficiary’’ is defined in subparagraph (g) of 

paragraph 8. This definition may be met in two alternative ways, 

the first of which has two requirements. 

Under the first alternative, a person may be an equivalent beneficiary because it is entitled to equivalent benefits under a treaty 

80 

between the country of source and the country in which the person 

is a resident. This alternative has two requirements. 

The first requirement is that the person must be a resident of 

a Member State of the European Union or any other European Economic Area state, or Switzerland, or a party to the North American 

Free Trade Agreement (collectively, ‘‘qualifying States’’). 

The second requirement of the definition of ‘‘equivalent beneficiary’’ is that the person must be entitled to equivalent benefits 

under an applicable treaty. To satisfy the second requirement, the 

person must be entitled to all the benefits of a comprehensive treaty between the Contracting State from which benefits of the Convention are claimed and a qualifying State under provisions analogous to subparagraphs 2(a), (b), (d) or clause i) of subparagraph (c). 

For this purpose, however, if the treaty in question does not have 

a comprehensive limitation on benefits article, this requirement is 

met only if the person is entitled to benefits under the aforementioned provisions of paragraph 2. 

In addition, to satisfy the second requirement by virtue of clause 

(B) of subparagraph (g)(i) with respect to dividends, interest, royalties, or branch tax, the person must be entitled to a rate of tax that 

is at least as low as the rate that would apply under the Convention to such income. Thus, the rates to be compared are: (1) the 

rate of withholding or branch tax that the source State would have 

imposed if a qualified resident of the other Contracting State was 

the beneficial owner of the income; and (2) the rate of withholding 

or branch tax that the source State would have imposed if the third 

State resident received the income directly from the source State. 

For example, USCo is a wholly owned subsidiary of BelgiumCo, a 

company resident in Belgium. BelgiumCo is wholly owned by FCo, 

a corporation resident in Italy. Assuming BelgiumCo satisfies the 

requirements of paragraph 3(a) of Article 10 (Dividends), 

BelgiumCo would be eligible for the elimination of dividend withholding tax. The dividend withholding rate in the treaty between 

the United States and Italy is 5 percent. Thus, if FCo received the 

dividend directly from USCo, FCo would have been subject to a 5 

percent rate of withholding tax on the dividend. Because FCo 

would not be entitled to a rate of withholding tax that is at least 

as low as the rate that would apply under the Convention to such 

income (i.e., zero), FCo is not an equivalent beneficiary within the 

meaning of paragraph 8(g)(i) of Article 21 with respect to the elimination of withholding tax on dividends. 

Subparagraph 8(h) provides a special rule to take account of the 

fact that withholding taxes on many inter-company dividends, interest and royalties are exempt within the European Union by reason of various EU directives, rather than by tax treaty. If a U.S. 

company receives such payments from a Belgian company, and the 

U.S. company is owned by a company resident in a member state 

of the European Union that would have qualified for an exemption 

from withholding tax if it had received the income directly, the parent company will be treated as an equivalent beneficiary. This rule 

is necessary because many European Union member countries have 

not re-negotiated their tax treaties to reflect the exemptions available under the directives. 

The requirement that a person be entitled to ‘‘all the benefits’’ of 

a comprehensive tax treaty eliminates those persons that qualify 

81 

for benefits with respect to only certain types of income. Accordingly, the fact that a French parent of a Belgium company is engaged in the active conduct of a trade or business in France and 

therefore would be entitled to the benefits of the U.S.-France treaty 

if it received dividends directly from a U.S. subsidiary of the Belgian company is not sufficient for purposes of this paragraph. Further, the French company cannot be an equivalent beneficiary if it 

qualifies for benefits only with respect to certain income as a result 

of a ‘‘derivative benefits’’ provision in the U.S.-France treaty. However, it would be possible to look through the French company to 

its parent company to determine whether the parent company is an 

equivalent beneficiary. 

The second alternative for satisfying the ‘‘equivalent beneficiary’’ 

test is available only to residents of one of the two Contracting 

States. U.S. or Belgian residents who are eligible for treaty benefits 

by reason of subparagraphs (a), (b), (d) or clause i) of subparagraph 

(c) of paragraph 2 are equivalent beneficiaries under the second alternative. Thus, a Belgian individual will be an equivalent beneficiary without regard to whether the individual would have been 

entitled to receive the same benefits if it received the income directly. A resident of a third country could not qualify for treaty 

benefits under any of those subparagraphs or any other rule of the 

treaty, and therefore does not qualify as an equivalent beneficiary 

under this alternative. Thus, any resident of a third country can 

be an equivalent beneficiary only if it would have been entitled to 

equivalent benefits had it received the income directly. 

The second alternative was included in order to clarify that ownership by certain residents of a Contracting State would not disqualify a U.S. or Belgian company under this paragraph. Thus, for 

example, if 90 percent of a Belgian company is owned by five companies that are resident in member states of the European Union 

who satisfy the requirements of clause (i) of subparagraph (g) of 

paragraph 8, and 10 percent of the Belgian company is owned by 

a U.S. or Belgian individual, then the Belgian company still can 

satisfy the requirements of subparagraph (a) of paragraph 3. 

Subparagraph (b) sets forth the base erosion test. A company 

meets this base erosion test if less than 50 percent of its gross income for the taxable period (as determined in the company’s State 

of residence) is paid or accrued, directly or indirectly, to a person 

or persons who are not equivalent beneficiaries in the form of payments deductible for tax purposes in company’s State of residence. 

This test is the same as the base erosion test in clause (ii) of subparagraph (e) of paragraph 2, except that the test in subparagraph 

3(b) focuses on base-eroding payments to persons who are not 

equivalent beneficiaries. 

As in the case of base erosion test in subparagraph (e) of paragraph 2, deductible payments in subparagraph (b) of paragraph 3 

also do not include arm’s length payments in the ordinary course 

of business for services or tangible property and payments in respect of financial obligations to a bank that is not related to the 

payor. 

Paragraph 4 

Paragraph 4 sets forth an alternative test under which a resident 

of a Contracting State may receive treaty benefits with respect to 

82 

certain items of income that are connected to an active trade or 

business conducted in its State of residence. A resident of a Contracting State may qualify for benefits under paragraph 4 whether 

or not it also qualifies under paragraph 2 or 3. 

Subparagraph (a) sets forth the general rule that a resident of 

a Contracting State engaged in the active conduct of a trade or 

business in that State may obtain the benefits of the Convention 

with respect to an item of income derived from the other Contracting State. The item of income, however, must be derived in 

connection with or incidental to that trade or business. 

The term ‘‘trade or business’’ is not defined in the Convention. 

Pursuant to paragraph 2 of Article 3 (General Definitions), when 

determining whether a resident of Belgium is entitled to the benefits of the Convention under paragraph 4 of this Article with respect to an item of income derived from sources within the United 

States, the United States will ascribe to this term the meaning 

that it has under the law of the United States. Accordingly, the 

U.S. competent authority will refer to the regulations issued under 

section 367(a) for the definition of the term ‘‘trade or business.’’ In 

general, therefore, a trade or business will be considered to be a 

specific unified group of activities that constitute or could constitute an independent economic enterprise carried on for profit. 

Furthermore, a corporation generally will be considered to carry on 

a trade or business only if the officers and employees of the corporation conduct substantial managerial and operational activities. 

The business of making or managing investments for the resident’s own account will be considered to be a trade or business only 

when part of banking, insurance or securities activities conducted 

by a bank, an insurance company, or a registered securities dealer. 

Such activities conducted by a person other than a bank, insurance 

company or registered securities dealer will not be considered to be 

the conduct of an active trade or business, nor would they be considered to be the conduct of an active trade or business if conducted 

by a bank, insurance company or registered securities dealer but 

not as part of the company’s banking, insurance or dealer business. 

Because a headquarters operation is in the business of managing 

investments, a company that functions solely as a headquarters 

company will not be considered to be engaged in an active trade or 

business for purposes of paragraph 3. 

An item of income is ‘‘derived in connection with’’ a trade or business if the income-producing activity in the State of source is a line 

of business that ‘‘forms a part of’’ or is ‘‘complementary’’ to the 

trade or business conducted in the State of residence by the income 

recipient. 

A business activity generally will be considered to form part of 

a business activity conducted in the State of source if the two activities involve the design, manufacture or sale of the same products or type of products, or the provision of similar services. The 

line of business in the State of residence may be upstream, downstream, or parallel to the activity conducted in the State of source. 

Thus, the line of business may provide inputs for a manufacturing 

process that occurs in the State of source, may sell the output of 

that manufacturing process, or simply may sell the same sorts of 

products that are being sold by the trade or business carried on in 

the State of source. 

83 

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 USCodesigned 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 whollyowned subsidiary of Americair resident in Belgium. BelSub operates a chain of hotels in Belgium that are located near airports 

served by Americair flights. Americair frequently sells tour packages that include air travel to Belgium and lodging at BelSub hotels. Although both companies are engaged in the active conduct of 

a trade or business, the businesses of operating a chain of hotels 

and operating an airline are distinct trades or businesses. Therefore BelSub’s business does not form a part of Americair’s business. 

However, BelSub’s business is considered to be complementary to 

Americair’s business because they are part of the same overall industry (travel) and the links between their operations tend to make 

them interdependent. 

Example 4. The facts are the same as in Example 3, except that 

BelSub owns an office building in Belgium instead of a hotel chain. 

No part of Americair’s business is conducted through the office 

building. BelSub’s business is not considered to form a part of or 

to be complementary to Americair’s business. They are engaged in 

distinct trades or businesses in separate industries, and there is no 

economic dependence between the two operations. 

84 

Example 5. USFlower is a corporation resident in the United 

States. USFlower produces and sells flowers in the United States 

and other countries. USFlower owns all the shares of BelHolding, 

a corporation resident in Belgium. BelHolding is a holding company that is not engaged in a trade or business. BelHolding owns 

all the shares of three corporations that are resident in Belgium: 

BelFlower, BelLawn, and BelFish. BelFlower distributes USFlower 

flowers under the USFlower trademark in Belgium. BelLawn markets a line of lawn care products in Belgium under the USFlower 

trademark. In addition to being sold under the same trademark, 

BelLawn and BelFlower products are sold in the same stores and 

sales of each company’s products tend to generate increased sales 

of the other’s products. BelFish imports fish from the United States 

and distributes it to fish wholesalers in Belgium. For purposes of 

paragraph 4, the business of BelFlower forms a part of the business of USFlower, the business of BelLawn is complementary to 

the business of USFlower, and the business of BelFish is neither 

part of nor complementary to that of USFlower. 

An item of income derived from the State of source is ‘‘incidental 

to’’ the trade or business carried on in the State of residence if production of the item facilitates the conduct of the trade or business 

in the State of residence. An example of incidental income is the 

temporary investment of working capital of a person in the State 

of residence in securities issued by persons in the State of source. 

Subparagraph (b) of paragraph 4 states a further condition to the 

general rule in subparagraph (a) in cases where the trade or business generating the item of income in question is carried on either 

by the person deriving the income or by any associated enterprises. 

Subparagraph (b) states that the trade or business carried on in 

the State of residence, under these circumstances, must be substantial in relation to the activity in the State of source. The substantiality requirement is intended to prevent a narrow case of 

treaty-shopping abuses in which a company attempts to qualify for 

benefits by engaging in de minimis connected business activities in 

the treaty country in which it is resident (i.e., activities that have 

little economic cost or effect with respect to the company business 

as a whole). 

The determination of substantiality is made based upon all the 

facts and circumstances and takes into account the comparative 

sizes of the trades or businesses in each Contracting State, the nature of the activities performed in each Contracting State, and the 

relative contributions made to that trade or business in each Contracting State. In any case, in making each determination or comparison, due regard will be given to the relative sizes of the economies in the two Contracting States. 

The determination in subparagraph (b) also is made separately 

for each item of income derived from the State of source. It therefore is possible that a person would be entitled to the benefits of 

the Convention with respect to one item of income but not with respect to another. If a resident of a Contracting State is entitled to 

treaty benefits with respect to a particular item of income under 

paragraph 4, the resident is entitled to all benefits of the Convention insofar as they affect the taxation of that item of income in 

the State of source. 

85 

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. 

86 

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 subparagraph 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: 

87 

Country 2008 2009 

United States $ 40 $ 45 

Canada 25 15 

New Zealand 10 20 

United Kingdom 30 35 

Malaysia 10 12 

Philippines 7 10 

Singapore 10 8 

Indonesia 5 10 

Total $137 $155 

For 2008, 10 percent of the gross income of this group is equal 

to $13.70. Only the United States, Canada, and the United Kingdom satisfy this requirement for that year. The other companies in 

the group may be aggregated to meet this requirement. Because 

New Zealand and Malaysia have a total gross income of $20, and 

the Philippines, Singapore, and Indonesia have a total gross income 

of $22, these two groupings of countries may be treated as the 

fourth and fifth members of the group for purposes of subparagraph (b). 

In the following year, 10 percent of the gross income is $15.50. 

Only the United States, New Zealand, and the United Kingdom 

satisfy this requirement. Because Canada and Malaysia have a 

total gross income of $27, and the Philippines, Singapore, and Indonesia have a total gross income of $28, these two groupings of 

countries may be treated as the fourth and fifth members of the 

group for purposes of subparagraph (b). The fact that Canada replaced New Zealand in a group is not relevant for this purpose. The 

composition of the grouping may change from year to year. 

Single Country Limitation 

Subparagraph (c) provides that the business activities carried on 

in any one country other than the headquarters company’s state of 

residence must generate less than 50 percent of the gross income 

of the group. If the gross income requirement under this subparagraph is not met for a taxable year, the taxpayer may satisfy this 

requirement applying the 50 percent gross income test to the average of the gross incomes for the four years preceding the taxable 

year. The following example illustrates the application of this subparagraph. 

Example. BHQ is a corporation resident in Belgium. BHQ functions as a headquarters company for a group of companies. BHQ 

derives dividend income from a United States subsidiary in the 

2008 taxable year. The state of residence of each of these companies, the situs of their activities and the amounts of gross income 

attributable to each for the years 2008 through 2012 are set forth 

below. 

88 

Company Situs 2012 2011 2010 2009 2008 

United States U.S. $100 $100 $95 $ 90 $ 85 

Mexico U.S. 10 8 5 0 0 

Canada U.S. 20 18 16 15 12 

United Kingdom U.K 30 32 30 28 27 

New Zealand N.Z. 40 42 38 36 35 

Japan Japan 35 32 30 30 28 

Singapore Singapore 25 25 24 22 20 

Total $260 $257 $238 $221 $207 

Because the United States’ total gross income of $130 in 2012 is 

not less than 50 percent of the gross income of the group, subparagraph (c) is not satisfied with respect to dividends derived in 2012. 

However, the United States’ average gross income for the preceding 

four years may be used in lieu of the preceding year’s average. The 

United States’ average gross income for the years 2008–11 is 

$111.00 ($444/4). The group’s total average gross income for these 

years is $230.75 ($923/4). Because $111.00 represents 48.1 percent 

of the group’s average gross income for the years 2008 through 

2011, the requirement under subparagraph (c) is satisfied. 

Other State Gross Income Limitation 

Subparagraph (d) provides that no more than 25 percent of the 

headquarters company’s gross income may be derived from the 

other Contracting State. Thus, if the headquarters company’s gross 

income for the taxable year is $200, no more than $50 of this 

amount may be derived from the other Contracting State. If the 

gross income requirement under this subparagraph is not met for 

a taxable year, the taxpayer may satisfy this requirement by applying the 25 percent gross income test to the average of the gross incomes for the four years preceding the taxable year. 

Independent Discretionary Authority 

Subparagraph (e) requires that the headquarters company have 

and exercise independent discretionary authority to carry out the 

functions referred to in subparagraph (a). Thus, if the headquarters 

company was nominally responsible for group financing, pricing, 

marketing and other management functions, but merely implemented instructions received from another entity, the headquarters 

company would not be considered to have and exercise independent 

discretionary authority with respect to these functions. This determination is made individually for each function. For instance, a 

headquarters company could be nominally responsible for group financing, pricing, marketing and internal auditing functions, but 

another entity could be actually directing the headquarters company as to the group financing function. In such a case, the headquarters company would not be deemed to have independent discretionary authority for group financing, but it might have such authority for the other functions. Functions for which the headquarters company does not have and exercise independent discretionary authority are considered to be conducted by an entity other 

than the headquarters company for purposes of subparagraph (a). 

89 

Income Taxation Rules 

Subparagraph (f) requires that the headquarters company be 

subject to the generally applicable income taxation rules in its 

country of residence. This reference should be understood to mean 

that the company must be subject to the income taxation rules to 

which a company engaged in the active conduct of a trade or business would be subject. Thus, if one of the Contracting States has 

or introduces special taxation legislation that impose a lower rate 

of income tax on headquarters companies than is imposed on companies engaged in the active conduct of a trade or business, or provides for an artificially low taxable base for such companies, a 

headquarters company subject to these rules is not entitled to the 

benefits of the Convention under Paragraph 5. 

In accordance with paragraph 3 of Article 28 (Entry Into Force), 

subparagraph (f) shall not have effect until January 1, 2011. 

In Connection With or Incidental to Trade or Business Subparagraph (g) requires that the income derived in the other Contracting 

State be derived in connection with or be incidental to the active 

business activities referred to in subparagraph (b). This determination is made under the principles set forth in paragraph 4. For instance, assume that a Belgian company satisfies the other requirements in paragraph 5 and acts as a headquarters company for a 

group that includes a United States corporation. If the group is engaged in the design and manufacture of computer software, but the 

U.S. company is also engaged in the design and manufacture of 

photocopying machines, the income that the Belgian company derives from the United States would have to be derived in connection with or be incidental to the income generated by the computer 

business in order to be entitled to the benefits of the Convention 

under paragraph 5. Interest income received from the U.S. company also would be entitled to the benefits of the Convention under 

this paragraph as long as the interest was attributable to the computer business supervised by the headquarters company Interest 

income derived from an unrelated party would normally not, however, satisfy the requirements of this clause. 

Paragraph 6 

Paragraph 6 deals with the treatment of interest or royalty income in the context of a so-called ‘‘triangular case.’’ The paragraph 

provides special rules applicable to U.S. source interest or royalties 

that are attributable to permanent establishment that a Belgian 

company has in a third state, and that are otherwise exempt from 

taxation in Belgium. The paragraph is intended to authorize the 

United States to collect a tax at source when there is not a significant level of double taxation. 

The term ‘‘triangular case’’ refers to the use of the structure described below by a resident of Belgium to earn, in this example, interest income from the United States. The Belgian resident, who is 

assumed to qualify for benefits under one or more of the provisions 

of Article 21 (Limitation on Benefits), sets up a permanent establishment in a third jurisdiction that imposes only a low rate of tax 

on the income of the permanent establishment. The Belgian resident then lends funds into the United States through the permanent establishment. The permanent establishment, despite its 

third-jurisdiction location, is an integral part of a Belgian resident. 

90 

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 thirdjurisdiction permanent establishment of a U.S. resident from U.S. 

tax, either by statute or by treaty, this paragraph only applies with 

respect to U.S. source interest, or royalties that are attributable to 

a third-jurisdiction of a Belgian resident. Paragraph 6 replaces the 

otherwise applicable rules in the Convention for interest and royalties with a 15 percent withholding tax for these amounts, if the actual tax paid on the income in the country where the permanent 

establishment is located is less than 60 percent of the tax that 

would have been payable in Belgium if the income were earned in 

Belgium by the enterprise and were not attributable to the permanent establishment in the third state. 

In general, the principles employed under Code section 954(b)(4) 

will be employed to determine whether the profits are subject to an 

effective rate of taxation that is above the specified threshold. 

Notwithstanding the level of tax on income of the permanent establishment, paragraph 6 does not apply under certain circumstances. 

Subparagraph a) provides that in the case of interest as defined 

in Article 11 (Interest), the paragraph does not apply if the interest 

is derived in connection with, or is incidental to, the active conduct 

of a trade or business carried on by the permanent establishment 

in the third state. The business of making, managing or simply 

holding investments for the person’s own account is not considered 

to be an active trade or business, unless these are banking or securities activities carried on by a bank or registered securities dealer. 

Subparagraph b) provides that in the case of royalties defined in 

Article 12 (Royalties), the paragraph does not apply if the royalties 

are received as compensation for the use of, or the right to use, intangible property produced or developed by the permanent establishment. 

Paragraph 7 

Paragraph 7 provides that a resident of one of the States that is 

not entitled to the benefits of the Convention as a result of paragraphs 1 through 6 still may be granted benefits under the Convention at the discretion of the competent authority of the State from 

which benefits are claimed. In making determinations under paragraph 7, that competent authority will take into account as its 

guideline whether the establishment, acquisition, or maintenance 

of the person seeking benefits under the Convention, or the conduct 

of such person’s operations, has or had as one of its principal purposes the obtaining of benefits under the Convention. Benefits will 

not be granted, however, solely because a company was established 

prior to the effective date of a treaty or protocol. In that case a 

company would still be required to establish to the satisfaction of 

the Competent Authority clear non-tax business reasons for its formation in a Contracting State, or that the allowance of benefits 

91 

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 resourcing rule of paragraph 3 of Article 22, but it does not meet any 

of the objective tests of paragraphs 2 through 6, it may apply to 

the U.S. competent authority for discretionary relief. 

Paragraph 8 

Paragraph 8 defines several key terms for purposes of Article 21. 

Each of the defined terms is discussed above in the context in 

which it is used. 

ARTICLE 22 (RELIEF FROM DOUBLE TAXATION)

This Article describes the manner in which each Contracting 

State undertakes to relieve double taxation. The United States 

uses the foreign tax credit method under its internal law, and by 

treaty. 

Paragraph 1 

Paragraph 1 provides that Belgium will provide relief from double taxation through a mixture of the credit and exemption methods. 

Under subparagraph a) Belgium generally adopts the exemption 

with progression method of relieving double taxation with respect 

to certain income that is taxed by the United States. The income 

subject to exemption is income derived by a resident of Belgium 

and taxed by the United States in accordance with the Convention, 

other than dividend, interest and royalty income. Under subparagraph a), Belgium exempts such income from taxation, but takes 

the income into account in determining rate of Belgian tax applicable to the remainder of the resident’s income. The exemption provided under subparagraph (a) is subject to the provisions of subparagraph (f), discussed below, in certain cases where a Belgian 

92 

resident derives income through a permanent establishment in the 

United States. 

Subparagraph b) provides relief from double taxation for residents of Belgium deriving income described in subparagraph a) 

through certain entities that are created in the United States. The 

subparagraph seeks to coordinate the use of United States entities 

that are so called hybrid entities, in that they are fiscally transparent for United States tax purposes (the income of such entities 

is subject to tax in the hands of the investors of the entity), but 

such entities are viewed as companies under Belgian law. Where 

a resident of Belgium derives income from participation in such entity, the income from such entity will generally have been subject 

to taxation in the United States in the hands of the Belgian investor. That is, the investor will be subject to tax in the United States 

on his proportional share of the income of such entity. However, 

since Belgium views the entity as non-fiscally transparent, Belgian 

tax law will not see income at the investor level until there is a 

distribution of the earnings of such entity. Under Belgian tax law, 

this distribution is viewed as a dividend. Without the relief under 

this subparagraph, the Belgian investor would be double taxed 

with respect to such income: once in the United States when the 

income was earned and taxed in the hands of the investor, and 

once in Belgium when the earnings are distributed to the investor 

and Belgium sees a dividend. As a consequence, subparagraph (b) 

provides the Belgian investor an exemption with respect to the dividend, provided that the investor has been taxed by the United 

States proportionally to his participation in the entity on the income out of which the income treated as dividends under Belgian 

law is paid. 

Subparagraph (b) also provides that the exempted income is the 

income received after deduction of the costs incurred in Belgium or 

elsewhere in relation to the management of the participation in the 

entity. 

Subparagraph (c) provides that dividends that derived by a Belgian company from a company resident in the United States, are 

exempt from the Belgian corporate income tax to the extent that 

such a dividend would have been exempt from Belgian tax if the 

two companies were both residents of Belgium. 

If subparagraph (c) does not apply to exempt dividends derived 

by a Belgian resident company from a U.S. resident company, subparagraph d) provides protection from double taxation in the form 

of a credit against Belgian corporate tax. In such cases, the Belgian 

company shall be entitled to credit against its Belgian corporate income tax the United States tax levied on the dividends under Article 10 (Dividends). The credit is limited to that part of the corporate income tax that is proportionally related to the relevant 

dividends. 

Subparagraph (e) generally provides that Belgium will permit a 

Belgian resident a credit against Belgian tax for United States 

taxes levied on interest or royalties. The credit of such tax is subject to the provisions of Belgian law concerning foreign tax credits. 

Subparagraph (f) provides that if a Belgian resident has a permanent establishment in the United States, and the losses from 

such activity have been effectively deducted from profits for its taxation in Belgium, then the exemption of subparagraph a) does not 

93 

apply to profits of other taxable periods attributable to the permanent establishment to the extent that those profits were exempted 

from United States tax by reason of the use of such losses in the 

United States. 

Paragraph 2 

The United States agrees, in paragraph 2, to allow to its citizens 

and residents a credit against U.S. tax for income taxes paid or accrued to Belgium. Paragraph 2 also provides that Belgium’s covered taxes are income taxes for U.S. purposes. This provision is 

based on the Department of the Treasury’s review of Belgium’s 

laws. 

Subparagraph (b) provides for a deemed-paid credit, consistent 

with section 902 of the Code, to a U.S. corporation in respect of 

dividends received from a corporation resident in Belgium of which 

the U.S. corporation owns at least 10 percent of the voting stock. 

This credit is for the tax paid by the corporation to Belgium on the 

profits out of which the dividends are considered paid. 

The credits allowed under paragraph 2 are allowed in accordance 

with the provisions and subject to the limitations of U.S. law, as 

that law may be amended over time, so long as the general principle of the Article, that is, the allowance of a credit, is retained. 

Thus, although the Convention provides for a foreign tax credit, the 

terms of the credit are determined by the provisions, at the time 

a credit is given, of the U.S. statutory credit. 

Therefore, the U.S. credit under the Convention is subject to the 

various limitations of U.S. law (see, e.g., Code sections 901–908). 

For example, the credit against U.S. tax generally is limited to the 

amount of U.S. tax due with respect to net foreign source income 

within the relevant foreign tax credit limitation category (see Code 

section 904(a) and (d)), and the dollar amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g., 

Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits and other inter-year adjustments. 

Paragraph 3 

Paragraph 3 provides a re-sourcing rule for gross income covered 

by paragraph 2. Paragraph 3 is intended to ensure that a U.S. resident can obtain an appropriate amount of U.S. foreign tax credit 

for income taxes paid to Belgium when the Convention assigns to 

Belgium primary taxing rights over an item of gross income. 

Accordingly, if the Convention allows Belgium to tax an item of 

gross income (as defined under U.S. law) derived by a resident of 

the United States, the United States will treat that item of gross 

income as gross income from sources within Belgium for U.S. foreign tax credit purposes. In the case of a U.S.-owned foreign corporation, however, 

section 904(h)(10) may apply for purposes of determining the 

U.S. foreign tax credit with respect to income subject to this resourcing 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. 

94 

Paragraph 4 

Paragraph 4 provides special rules for the tax treatment in both 

States of certain types of income. Subparagraph (a) addresses income arising in a State other than the United States or Belgium 

that is derived by U.S. citizens, former citizens or former long-term 

residents who are residents of Belgium. The remaining subparagraphs address income derived from U.S. sources by such persons. 

U.S. citizens, regardless of residence, are subject to U.S. tax at 

ordinary progressive rates on their worldwide income. In certain 

cases, the United States may impose taxation on former U.S. citizens or former long-term residents of the United States (referred 

to in this paragraph as ‘‘section 877 taxpayers’’). Because of these 

rules, the U.S. tax on income of U.S. citizens or section 877 taxpayers who are resident in Belgium may exceed the U.S. tax that 

may be imposed under the Convention on income derived by a resident of Belgium who is not a U.S. citizen. In general, the provisions 

of paragraph 4 ensure that Belgium does not bear the cost of U.S. 

taxation of U.S. citizens or section 877 taxpayers who are residents 

of Belgium. 

Subparagraph (a) provides that where a U.S. citizen or section 

877 taxpayer that is a resident of Belgium derives income from 

sources arising in third countries, as determined under the laws of 

Belgium, the taxation of such amounts by the United States shall 

not affect the taxation in Belgium of such income. Thus, no agreement is reached under Article 22 of the Convention for relieving 

double taxation with respect to such income. The provisions of Article 24 (Mutual Agreement Procedure) may be used to alleviate double taxation in such cases. 

Subparagraph (b) provides special credit rules for Belgium with 

respect to U.S. source income or income treated as U.S. source income under section 877 of the Code (referred to in the following explanation as U.S. source income). These rules apply to items of 

U.S. source income that would be either exempt from U.S. tax or 

subject to reduced rates of U.S. tax under the provisions of the 

Convention if they had been received by a resident of Belgium who 

is not a U.S. citizen or section 877 taxpayer. The tax credit allowed 

in Belgium under subparagraph 4(b) with respect to such items 

need not exceed the U.S. tax that may be imposed under the Convention, other than tax imposed solely by reason of the U.S. citizenship of the taxpayer or application of section 877 of the Code under 

the provisions of the saving clause of paragraph 4 of Article 1 (General Scope). 

For example, if a U.S. citizen resident in Belgium receives portfolio dividends from sources within the United States, the foreign 

tax credit granted by Belgium would be limited to 15 percent of the 

dividend—the U.S. tax that may be imposed under subparagraph 

(b) of paragraph 2 of Article 10 (Dividends)—even if the shareholder is subject to U.S. net income tax because of his U.S. citizenship. With respect to royalty or interest income, Belgium would 

allow no foreign tax credit, because its residents are exempt from 

U.S. tax on these classes of income under the provisions of Articles 

11 (Interest) and 12 (Royalties). 

Paragraph 4(c) eliminates the potential for double taxation that 

can arise because subparagraph 4(b) provides that Belgium need 

not provide full relief for the U.S. tax imposed on its citizens or secVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00094 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
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tion 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 

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 

96 

due before credit of $35.00, the United States subtracts the amount 

of the U.S. source tax of $15.00, against which no U.S. foreign tax 

credit is allowed. This subtraction ensures that the United States 

collects the tax that it is due under the Convention as the State 

of source. 

In both examples, given the 35 percent U.S. tax rate, the maximum amount of U.S. tax against which credit for the tax paid to 

Belgium may be claimed is $20 ($35 U.S. tax minus $15 U.S. withholding tax). Initially, all of the income in both examples was from 

sources within the United States. For a U.S. foreign tax credit to 

be allowed for the full amount of the tax paid to Belgium, an appropriate amount of the income must be resourced to Belgium 

under subparagraph (d). 

The amount that must be re-sourced depends on the amount of 

tax for which the U.S. citizen is claiming a U.S. foreign tax credit. 

In example 1, the tax paid to Belgium was $10. For this amount 

to be creditable against U.S. tax, $28.57 ($10 tax divided by 35 percent U.S. tax rate) must be resourced to Belgium. When the tax is 

credited against the $10 of U.S. tax on this resourced income, there 

is a net U.S. tax of $10 due after credit ($20 U.S. tax eligible to 

be offset by credit, minus $10 tax paid to Belgium). Thus, in example 1, there is a total of $25 in U.S. tax ($15 U.S. withholding tax 

plus $10 residual U.S. tax). 

In example 2, the tax paid to Belgium was $25, but, because the 

United States subtracts the U.S. withholding tax of $15 from the 

total U.S. tax of $35, only $20 of U.S. taxes may be offset by taxes 

paid to Belgium. Accordingly, the amount that must be resourced 

to Belgium is limited to the amount necessary to ensure a U.S. foreign tax credit for $20 of tax paid to Belgium, or $57.14 ($20 tax 

paid to Belgium divided by 35 percent U.S. tax rate). When the tax 

paid to Belgium is credited against the U.S. tax on this re-sourced 

income, there is no residual U.S. tax ($20 U.S. tax minus $25 tax 

paid to Belgium, subject to the U.S. limit of $20). Thus, in example 

2, there is a total of $15 in U.S. tax ($15 U.S. withholding tax plus 

$0 residual U.S. tax). Because the tax paid to Belgium was $25 and 

the U.S. tax eligible to be offset by credit was $20, there is $5 of 

excess foreign tax credit available for carryover. 

Relationship to Other Articles 

By virtue of subparagraph (a) of paragraph 5 of Article 1 (General Scope), Article 22 is not subject to the saving clause of paragraph 4 of Article 1. Thus, the United States will allow a credit to 

its citizens and residents in accordance with the Article, even if 

such credit were to provide a benefit not available under the Code 

(such as the re-sourcing provided by paragraph 3 and subparagraph 4(d)). 

ARTICLE 23 (NON-DISCRIMINATION)

This Article ensures that nationals of a Contracting State, in the 

case of paragraph 1, and residents of a Contracting State, in the 

case of paragraphs 2 through 5, will not be subject, directly or indirectly, to discriminatory taxation in the other Contracting State. 

Not all differences in tax treatment, either as between nationals of 

the two States, or between residents of the two States, are violations of the prohibition against discrimination. Rather, the nonVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00096 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
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discrimination obligations of this Article apply only if the nationals 

or residents of the two States are comparably situated. 

Each of the relevant paragraphs of the Article provides that two 

persons that are comparably situated must be treated similarly. Although the actual words differ from paragraph to paragraph (e.g., 

paragraph 1 refers to two nationals ‘‘in the same circumstances,’’ 

and paragraph 2 refers to two enterprises ‘‘carrying on the same 

activities’’), the common underlying premise is that if the difference 

in treatment is directly related to a tax-relevant difference in the 

situations of the domestic and foreign persons being compared, that 

difference is not to be treated as discriminatory (i.e., if one person 

is taxable in a Contracting State on worldwide income and the 

other is not, or tax may be collectible from one person at a later 

stage, but not from the other, distinctions in treatment would be 

justified under paragraph 1). Other examples of such factors that 

can lead to nondiscriminatory differences in treatment are noted in 

the discussions of each paragraph. 

The operative paragraphs of the Article also use different language to identify the kinds of differences in taxation treatment that 

will be considered discriminatory. For example, paragraph 1 speaks 

of ‘‘any taxation or any requirement connected therewith that is 

more burdensome,’’ while paragraph 2 specifies that a tax ‘‘shall 

not be less favorably levied.’’ Regardless of these differences in language, only differences in tax treatment that materially disadvantage the foreign person relative to the domestic person are properly 

the subject of the Article. 

Paragraph 1 

Paragraph 1 provides that a national of one Contracting State 

may not be subject to taxation or connected requirements in the 

other Contracting State that are more burdensome than the taxes 

and connected requirements imposed upon a national of that other 

State in the same circumstances. The OECD Model prohibits taxation that is ‘‘other than or more burdensome’’ than that imposed 

on U.S. persons. This Convention omits the reference to taxation 

that is ‘‘other than’’ that imposed on U.S. persons because the only 

relevant question under this provision should be whether the requirement imposed on a national of the other Contracting State is 

more burdensome. A requirement may be different from the requirements imposed on U.S. nationals without being more burdensome. 

The term ‘‘national’’ in relation to a Contracting State is defined 

in subparagraph 1(j) of Article 3 (General Definitions). The term includes both individuals and juridical persons. A national of a Contracting State is afforded protection under this paragraph even if 

the national is not a resident of either Contracting State. Thus, a 

U.S. citizen who is resident in a third country is entitled, under 

this paragraph, to the same treatment in Belgium as a national of 

Belgium who is in similar circumstances (i.e., presumably one who 

is resident in a third State). 

As noted above, whether or not the two persons are both taxable 

on worldwide income is a significant circumstance for this purpose. 

For this reason, paragraph 1 specifically states that the United 

States is not obligated to apply the same taxing regime to a national of Belgium who is not resident in the United States as it apVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00097 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
98 

plies to a U.S. national who is subject to tax on a worldwide basis 

but who is not resident in the United States. U.S. citizens who are 

not resident in the United States but who are, nevertheless, subject 

to U.S. tax on their worldwide income are not in the same circumstances with respect to U.S. taxation as citizens of Belgium 

who are not U.S. residents. Thus, for example, Article 23 would not 

entitle a national of Belgium residing in a third country to taxation 

at graduated rates on U.S. source dividends or other investment income that applies to a U.S. citizen residing in the same third country. 

Paragraph 2 

Paragraph 2 of the Article, provides that a Contracting State 

may not tax a permanent establishment of an enterprise of the 

other Contracting State less favorably than an enterprise of that 

first-mentioned State that is carrying on the same activities. 

The fact that a U.S. permanent establishment of an enterprise 

of Belgium is subject to U.S. tax only on income that is attributable 

to the permanent establishment, while a U.S. corporation engaged 

in the same activities is taxable on its worldwide income is not, in 

itself, a sufficient difference to provide different treatment for the 

permanent establishment. There are cases, however, where the two 

enterprises would not be similarly situated and differences in treatment may be warranted. For instance, it would not be a violation 

of the non-discrimination protection of paragraph 2 to require the 

foreign enterprise to provide information in a reasonable manner 

that may be different from the information requirements imposed 

on a resident enterprise, because information may not be as readily 

available to the Internal Revenue Service from a foreign as from 

a domestic enterprise. Similarly, it would not be a violation of paragraph 2 to impose penalties on persons who fail to comply with 

such a requirement (see, e.g., sections 874(a) and 882(c)(2)). Further, a determination that income and expenses have been attributed or allocated to a permanent establishment in conformity with 

the principles of Article 7 (Business Profits) implies that the attribution or allocation was not discriminatory. 

Section 1446 of the Code imposes on any partnership with income that is effectively connected with a U.S. trade or business the 

obligation to withhold tax on amounts allocable to a foreign partner. In the context of the Convention, this obligation applies with 

respect to a share of the partnership income of a partner resident 

in Belgium, and attributable to a U.S. permanent establishment. 

There is no similar obligation with respect to the distributive 

shares of U.S. resident partners. It is understood, however, that 

this distinction is not a form of discrimination within the meaning 

of paragraph 2 of the Article. No distinction is made between U.S. 

and non-U.S. partnerships, since the law requires that partnerships of both U.S. and non-U.S. domicile withhold tax in respect of 

the partnership shares of non-U.S. partners. Furthermore, in distinguishing between U.S. and non-U.S. partners, the requirement 

to withhold on the non-U.S. but not the U.S. partner’s share is not 

discriminatory taxation, but, like other withholding on nonresident 

aliens, is merely a reasonable method for the collection of tax from 

persons who are not continually present in the United States, and 

as to whom it otherwise may be difficult for the United States to 

99 

enforce its tax jurisdiction. If tax has been over-withheld, the partner can, as in other cases of over-withholding, file for a refund. 

Paragraph 3 

Paragraph 3 makes clear that the provisions of paragraphs 1 and 

2 do not obligate a Contracting State to grant to a resident of the 

other Contracting State any tax allowances, reliefs, etc., that it 

grants to its own residents on account of their civil status or family 

responsibilities. Thus, if a sole proprietor who is a resident of Belgium has a permanent establishment in the United States, in assessing income tax on the profits attributable to the permanent establishment, the United States is not obligated to allow to the resident of Belgium the personal allowances for himself and his family 

that he would be permitted to take if the permanent establishment 

were a sole proprietorship owned and operated by a U.S. resident, 

despite the fact that the individual income tax rates would apply. 

Paragraph 4 

Paragraph 4 prohibits discrimination in the allowance of deductions. When a resident or an enterprise of a Contracting State pays 

interest, royalties or other disbursements to a resident of the other 

Contracting State, the first-mentioned Contracting State must 

allow a deduction for those payments in computing the taxable 

profits of the resident or enterprise as if the payment had been 

made under the same conditions to a resident of the first-mentioned Contracting State. Paragraph 4, however, does not require 

a Contracting State to give non-residents more favorable treatment 

than it gives to its own residents. Consequently, a Contracting 

State does not have to allow non-residents a deduction for items 

that are not deductible under its domestic law (for example, expenses of a capital nature). 

An exception to the rule of paragraph 4 is provided for cases 

where the provisions of paragraph 1 of Article 9 (Associated Enterprises), paragraph 6 of Article 11 (Interest) or paragraph 4 of Article 12 (Royalties) apply. All of these provisions permit the denial 

of deductions in certain circumstances in respect of transactions between related persons. Neither State is forced to apply the non-discrimination principle in such cases. The exception with respect to 

paragraph 6 of Article 11 would include the denial or deferral of 

certain interest deductions under Code section 163(j). 

Paragraph 4 also provides that any debts of a resident of a Contracting State to a resident of the other Contracting State are deductible in the first-mentioned Contracting State for purposes of 

computing the taxable capital of the enterprise under the same 

conditions as if the debt had been contracted to a resident of the 

first-mentioned Contracting State. Even though, for general purposes, the Convention covers only income taxes, under paragraph 

7 of this Article, the nondiscrimination provisions apply to all taxes 

levied in both Contracting States, at all levels of government. Thus, 

this provision may be relevant for both States. Belgium may have 

capital taxes and in the United States such taxes frequently are 

imposed by local governments. 

100 

Paragraph 5 

Paragraph 5 requires that a Contracting State not impose more 

burdensome taxation or connected requirements on an enterprise of 

that State that is wholly or partly owned or controlled, directly or 

indirectly, by one or more residents of the other Contracting State 

than the taxation or connected requirements that it imposes on 

other similar enterprises of that first-mentioned Contracting State. 

For this purpose it is understood that ‘‘similar’’ refers to similar activities or ownership of the enterprise. 

This rule, like all non-discrimination provisions, does not prohibit 

differing treatment of entities that are in differing circumstances. 

Rather, a protected enterprise is only required to be treated in the 

same manner as other enterprises that, from the point of view of 

the application of the tax law, are in substantially similar circumstances both in law and in fact. The taxation of a distributing 

corporation under section 3 67(e) on an applicable distribution to 

foreign shareholders does not violate paragraph 5 of the Article because a foreign-owned corporation is not similar to a domesticallyowned corporation that is accorded non-recognition treatment 

under sections 337 and 355. 

For the reasons given above in connection with the discussion of 

paragraph 2 of the Article, it is also understood that the provision 

in section 1446 of the Code for withholding of tax on non-U.S. partners does not violate paragraph 5 of the Article. 

It is further understood that the ineligibility of a U.S. corporation with nonresident alien shareholders to make an election to be 

an ‘‘S’’ corporation does not violate paragraph 5 of the Article. If 

a corporation elects to be an S corporation, it is generally not subject to income tax and the shareholders take into account their pro 

rata shares of the corporation’s items of income, loss, deduction or 

credit. (The purpose of the provision is to allow an individual or 

small group of individuals the protections of conducting business in 

corporate form while paying taxes at individual rates as if the business were conducted directly.) A nonresident alien does not pay 

U.S. tax on a net basis, and, thus, does not generally take into account items of loss, deduction or credit. Thus, the S corporation 

provisions do not exclude corporations with nonresident alien 

shareholders because such shareholders are foreign, but only because they are not net-basis taxpayers. Similarly, the provisions exclude corporations with other types of shareholders where the purpose of the provisions cannot be fulfilled or their mechanics implemented. For example, corporations with corporate shareholders are 

excluded because the purpose of the provision to permit individuals 

to conduct a business in corporate form at individual tax rates 

would not be furthered by their inclusion. 

Finally, it is understood that paragraph 5 does not require a 

Contracting State to allow foreign corporations to join in filing a 

consolidated return with a domestic corporation or to allow similar 

benefits between domestic and foreign enterprises. 

Paragraph 6 

Paragraph 6 of the Article confirms that no provision of the Article will prevent either Contracting State from imposing the branch 

profits tax described in paragraph 10 of Article 10 (Dividends). 

101 

Paragraph 7 

As noted above, notwithstanding the specification of taxes covered by the Convention in Article 2 (Taxes Covered) for general 

purposes, for purposes of providing nondiscrimination protection 

this Article applies to taxes of every kind and description imposed 

by a Contracting State or a political subdivision or local authority 

thereof. Customs duties are not considered to be taxes for this purpose. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) 

does not apply to this Article by virtue of the exceptions in paragraph 5(a) of Article 1. Thus, for example, a U.S. citizen who is a 

resident of Belgium may claim benefits in the United States under 

this Article. 

Nationals of a Contracting State may claim the benefits of paragraph 1 regardless of whether they are entitled to benefits under 

Article 21 (Limitation on Benefits), because that paragraph applies 

to nationals and not residents. They may not claim the benefits of 

the other paragraphs of this Article with respect to an item of income unless they are generally entitled to treaty benefits with respect to that income under a provision of Article 21. 

ARTICLE 24 (MUTUAL AGREEMENT PROCEDURE)

This Article provides the mechanism for taxpayers to bring to the 

attention of competent authorities issues and problems that may 

arise under the Convention. It also provides the authority for cooperation between the competent authorities of the Contracting 

States to resolve disputes and clarify issues that may arise under 

the Convention. The competent authorities of the two Contracting 

States are identified in paragraph 1(g) of Article 3 (General Definitions). 

Paragraph 1 

This paragraph provides that where a resident of a Contracting 

State considers that the actions of one or both Contracting States 

will result in taxation that is not in accordance with the Convention he may present his case to the competent authority of either 

Contracting State. This rule is more generous than in most treaties, which generally allow taxpayers to bring competent authority 

cases only to the competent authority of their country of residence, 

or citizenship/nationality. Under this more generous rule, a U.S. 

permanent establishment of a corporation resident in Belgium that 

faces inconsistent treatment in the two countries would be able to 

bring its complaint to the U.S. competent authority. If the U.S. 

competent authority can resolve the issue on its own, then the taxpayer need never involve the Belgian competent authority. Thus, 

the rule provides flexibility that might result in greater efficiency. 

Although the typical cases brought under this paragraph will involve economic double taxation arising from transfer pricing adjustments, the scope of this paragraph is not limited to such cases. For 

example, a taxpayer could request assistance from the competent 

authority if one Contracting State determines that the taxpayer 

has received deferred compensation taxable at source under Article 

102 

14 (Income from Employment), while the taxpayer believes that 

such income should be treated as a pension that is taxable only in 

his country of residence pursuant to Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support). 

It is not necessary for a person bringing a complaint first to have 

exhausted the remedies provided under the national laws of the 

Contracting States before presenting a case to the competent authorities, nor does the fact that the statute of limitations may have 

passed for seeking a refund preclude bringing a case to the competent authority. Paragraph 1 provides that a case must be presented within three years from the first notification of the action 

resulting in double taxation not in accordance with the provisions 

of the Convention. 

The Protocol provides that the term ‘‘first notification of the action resulting in taxation not in accordance with the provisions of 

the Convention’’ means in the case of Belgium, the date on which 

the notice of assessment containing an assessment or supplementary assessment is sent to the person who considers that the 

taxation provided for in such assessment or supplementary assessment is contrary to the provisions of the Convention; and in the 

case of the United States, the date on which the taxpayer receives 

a notice of proposed adjustment or of assessment, whichever is earlier. 

Paragraph 2 

Paragraph 2 sets out the framework within which the competent 

authorities will deal with cases brought by taxpayers under paragraph 1. It provides that, if the competent authority of the Contracting State to which the case is presented judges the case to 

have merit, and cannot reach a unilateral solution, it shall seek an 

agreement with the competent authority of the other Contracting 

State pursuant to which taxation not in accordance with the Convention will be avoided. During the period that a proceeding under 

this Article is pending, any collection procedures shall be suspended. 

Paragraph 3 

Paragraph 3 authorizes the competent authorities to resolve difficulties or doubts that may arise as to the application or interpretation of the Convention. The paragraph includes a non-exhaustive 

list of examples of the kinds of matters about which the competent 

authorities may reach agreement. This list is purely illustrative; it 

does not grant any authority that is not implicitly present as a result of the introductory sentence of paragraph 3. 

The competent authorities may, for example, agree to the same 

allocation of income, deductions, credits or allowances between an 

enterprise in one Contracting State and its permanent establishment in the other (or between permanent establishments of a third 

country enterprise that are situated in the Contracting States) or 

between related persons. These allocations are to be made in accordance with the arm’s length principle underlying Article 7 (Business Profits) and Article 9 (Associated Enterprises). Agreements 

reached under these subparagraphs may include agreement on a 

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mon treatment of a taxpayer’s cost sharing arrangement, or upon 

an acceptable range of results under that methodology. 

As indicated in subparagraph (d), the competent authorities also 

may agree to settle a variety of conflicting applications of the Convention. They may agree to settle conflicts regarding the characterization of particular items of income, the characterization of persons, the application of source rules to particular items of income, 

the meaning of a term. 

They also may agree as to advance pricing arrangements. They 

also may agree as to the application of the provisions of domestic 

law regarding penalties, fines, and interest in a manner consistent 

with the purposes of the Convention. 

Since the list under paragraph 3 is not exhaustive, the competent 

authorities may reach agreement on issues not enumerated in 

paragraph 3 if necessary to avoid double taxation. For example, the 

competent authorities may seek agreement on a uniform set of 

standards for the use of exchange rates. Agreements reached by 

the competent authorities under paragraph 3 need not conform to 

the internal law provisions of either Contracting State. 

Finally, paragraph 3 authorizes the competent authorities to consult for the purpose of resolving any difficulties or doubts arising 

as to the interpretation or application of the Convention. This provision is intended to permit the competent authorities to implement the treaty in particular cases in a manner that is consistent 

with its expressed general purposes. 

Paragraph 4 

Paragraph 4 authorizes the competent authorities to request the 

disclosure of information from any person who may have such information relevant to the MAP proceeding to the extent necessary 

to facilitate the resolution of the case. The paragraph provides that 

a competent authority may conduct investigations and hearings 

notwithstanding any time limits in their domestic laws that would 

otherwise bar such requests for information. Finally, paragraph 4 

provides, consistent with paragraph 2 of the U.S. Model, that any 

agreement is to be implemented even if such implementation otherwise would be barred by the statute of limitations or by some other 

procedural limitation, such as a closing agreement. Paragraph 4, 

however, does not prevent the application of domestic-law procedural limitations that give effect to the agreement (e.g., a domesticlaw 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 

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vention, particularly with respect to documentation to be furnished 

by a resident to support a claim for reduced tax under the Convention. 

Paragraph 6 

Paragraph 6 provides that the competent authorities may communicate with each other directly for the purpose of reaching an 

agreement. This makes clear that the competent authorities of the 

two Contracting States may communicate without going through 

diplomatic channels. Such communication may be in various forms, 

including, where appropriate, through face-to-face meetings of representatives of the competent authorities. 

Triangular competent authority solutions.—International tax 

cases may involve more than two taxing jurisdictions (e.g., transactions among a parent corporation resident in country A and its 

subsidiaries resident in countries B and C). As long as there is a 

complete network of treaties among the three countries, it should 

be possible, under the full combination of bilateral authorities, for 

the competent authorities of the three States to work together on 

a three-sided solution. Although country A may not be able to give 

information received under Article 24 (Exchange of Information) 

from country B to the authorities of country C, if the competent authorities of the three countries are working together, it should not 

be a problem for them to arrange for the authorities of country B 

to give the necessary information directly to the tax authorities of 

country C, as well as to those of country A. Each bilateral part of 

the trilateral solution must, of course, not exceed the scope of the 

authority of the competent authorities under the relevant bilateral 

treaty. 

Paragraph 7 

Paragraphs 7 and 8 of the Convention and paragraph 6 of the 

Protocol provide a mandatory binding arbitration procedure. 

A case shall be resolved through arbitration when the competent 

authorities have endeavored but are unable to reach a complete 

agreement regarding a case through negotiation and the following 

three conditions are satisfied. First, tax returns have been filed 

with at least one of the Contracting States with respect to the taxable years at issue in the case. Second, the case is not a case that 

the competent authorities agree before the date on which arbitration proceedings would otherwise have begun, is not suitable for 

determination by arbitration. Third, all concerned persons and 

their authorized representatives agree, according to the provisions 

of subparagraph d) of paragraph 8, not to disclose to any other person any information received during the course of the arbitration 

proceeding from either the Contracting States or the arbitration 

board, other than the determination of the board (confidentiality 

agreement). The confidentiality agreement may also be executed by 

any concerned person that has the legal authority to bind any other 

concerned person on the matter. 

Paragraph 8 

Subparagraph a) of paragraph 8 provides that the term ‘‘concerned person’’ means the person that brought the case to competent authority for consideration under Article 24 and includes all 

105 

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, 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 

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tration board. Each competent authority has 60 days from the date 

of appointment of the chair to submit a Proposed Resolution describing the proposed disposition of the specific monetary amounts 

of income, expense or taxation at issue in the case, and a supporting Position Paper. Copies of each State’s submissions are to be 

provided by the board to the other Contracting State on the date 

the later of the submissions is submitted to the board. Each of the 

Contracting States may submit a Reply Submission to the board 

within 120 days of the appointment of the chair to address points 

raised in the other State’s Proposed Resolution or Position Paper. 

If one Contracting State fails to submit a Proposed Resolution 

within the requisite time, the Proposed Resolution of the other 

Contracting State is deemed to be the determination of the arbitration board. No other information may be supplied to the arbitration 

board, unless it requests additional information. Copies of any such 

requested information, along with the board’s request, must be provided to the other Contracting State on the date the request or response is submitted. 

All communication with the board is to be in writing between the 

chair of the board and the designated competent authorities with 

the exception of communication regarding logistical matters. 

In making its determination the arbitration board will apply the 

following authorities as necessary and in descending order of relevance: (i) the provisions of the Convention, (ii) any agreed commentaries or explanation of the Contracting States concerning the 

Convention, (iii) the laws of the Contracting States to the extent 

they are not inconsistent with each other, and (iv) any OECD Commentary, Guidelines or Reports regarding relevant analogous portions of the OECD Model Tax Convention. 

The arbitration board must deliver a determination in writing to 

the Contracting States within 6 months of the appointment of the 

chair. The determination must be one of the two Proposed Resolutions submitted by the Contracting States. The determination may 

only provide a determination regarding the amount of income, expense or tax reportable to the Contracting States. The determination has no precedential value and consequently the rationale behind a board’s determination would not be beneficial and may not 

be provided by the board. 

Clause (k) of paragraph 6 of the Protocol provides that, unless 

any concerned person does not accept the decision of the arbitration 

board, the determination of the board constitutes a resolution by 

mutual agreement under Article 24 and, consequently, is binding 

on both Contracting States. Each concerned person must, within 30 

days of receiving the determination from the competent authority 

to which the case was first presented, advise that competent authority whether the person accepts the determination. In addition, 

if the case is in litigation, the concerned persons must advise the 

relevant court of their acceptance of the arbitration determination, 

and withdraw from the litigation the issues resolved by the MAP 

arbitration. The failure to advise the competent authority or the 

relevant court within the requisite time is considered a rejection of 

the determination. If a determination is rejected the case cannot be 

the subject of a subsequent Proceeding. After the commencement of 

the Proceeding but before a decision of the board has been accepted 

by all concerned persons, the competent authorities may reach a 

107 

mutual agreement to resolve the case and terminate the Proceeding. 

For purposes of the arbitration proceeding, the members of the 

arbitration board and their staffs shall be considered ‘‘persons or 

authorities’’ to whom information may be disclosed under Article 25 

(Exchange of Information and Administrative Assistance). Paragraph 6 of the Protocol provides that all materials prepared in the 

course of, or relating to, the Proceeding are considered information 

exchanged between the Contracting States. No information relating 

to the Proceeding or the board’s determination may be disclosed by 

members of the arbitration board or their staffs or by either competent authority, except as permitted by the Convention and the 

domestic laws of the Contracting States. Members of the arbitration board and their staffs must agree in statements sent to each 

of the Contracting States in confirmation of their appointment to 

the arbitration board to abide by and be subject to the confidentiality and nondisclosure provisions of Article 25 of the Convention 

and the applicable domestic laws of the Contracting States, with 

the most restrictive of the provisions applying. 

The applicable domestic law of the Contracting States determines the treatment of any interest or penalties associated with a 

competent authority agreement achieved through arbitration. 

In general, fees and expenses are borne equally by the Contracting States, including the cost of translation services. However, 

meeting facilities, related resources, financial management, other 

logistical support, and general and administrative coordination of 

the Proceeding will be provided, at its own cost, by the Contracting 

State whose competent authority initiated the mutual agreement 

proceedings. In general, the fees of members of the arbitration 

board will be set at the fixed amount of $2,000 per day (or the 

equivalent amount in euro). The expenses of members of the board 

will be set in accordance with the International Centre for Settlement of Investment Disputes (ICSID) Schedule of Fees for arbitrators (in effect on the date on which the arbitration board proceedings begin). The competent authorities may amend the set fees 

and expenses of members of the board. All other costs are to be 

borne by the Contracting State that incurs them. 

Treaty termination in relation to competent authority dispute resolution.—A case may be raised by a taxpayer under a treaty with 

respect to a year for which a treaty was in force after the treaty 

has been terminated. In such a case the ability of the competent 

authorities to act is limited. They may not exchange confidential 

information, nor may they reach a solution that varies from that 

specified in its law. 

Relationship to Other Articles 

This Article is not subject to the saving clause of paragraph 4 of 

Article 1 (General Scope) by virtue of the exceptions in paragraph 

5(a) of that Article. Thus, rules, definitions, procedures, etc. that 

are agreed upon by the competent authorities under this Article 

may be applied by the United States with respect to its citizens 

and residents even if they differ from the comparable Code provisions. Similarly, as indicated above, U.S. law may be overridden to 

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108 

er he is generally entitled to benefits under Article 21 (Limitation 

on Benefits). As in all other cases, the competent authority is vested with the discretion to decide whether the claim for relief is justified. 

ARTICLE 25 (EXCHANGE OF INFORMATION AND ADMINISTRATIVE

ASSISTANCE)

This Article provides for the exchange of information and administrative assistance between the competent authorities of the Contracting States. 

Paragraph 1 

The obligation to obtain and provide information to the other 

Contracting State is set out in Paragraph 1. The information to be 

exchanged is that which may be relevant for carrying out the provisions of the Convention or the domestic laws of the United States 

or of Belgium concerning taxes covered by the Convention. This 

language incorporates the standard in 26 U.S.C. Section 7602 

which authorizes the IRS to examine ‘‘any books, papers, records, 

or other data which may be relevant or material.’’ (Emphasis 

added.) In United States v. Arthur Young & Co., 465 U.S. 805, 814 

(1984), the Supreme Court stated that the language ‘‘may be’’ reflects Congress’s express intention to allow the IRS to obtain ‘‘items 

of even potential relevance to an ongoing investigation, without reference to its admissibility.’’ (Emphasis in original.) However, the 

language ‘‘may be’’ would not support a request in which a Contracting State simply asked for information regarding all bank accounts maintained by residents of that Contracting State in the 

other Contracting State, or even all accounts maintained by its 

residents with respect to a particular bank. 

Exchange of information with respect to each State’s domestic 

law is authorized to the extent that taxation under domestic law 

is not contrary to the Convention. Thus, for example, information 

may be exchanged with respect to a covered tax, even if the transaction to which the information relates is a purely domestic transaction in the requesting State and, therefore, the exchange is not 

made to carry out the Convention. An example of such a case is 

provided in the OECD Commentary: a company resident in the 

United States and a company resident in Belgium transact business between themselves through a third-country resident company. Neither Contracting State has a treaty with the third State. 

To enforce their internal laws with respect to transactions of their 

residents with the third-country company (since there is no relevant treaty in force), the Contracting States may exchange information regarding the prices that their residents paid in their transactions with the third-country resident. 

Paragraph 1 clarifies that information may be exchanged that relates to the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the 

taxes covered by the Convention. Thus, the competent authorities 

may request and provide information for cases under examination 

or criminal investigation, in collection, on appeals, or under prosecution. 

Information exchange is not restricted by paragraph 1 of Article 

1 (General Scope). Accordingly, information may be requested and 

109 

provided under this article with respect to persons who are not 

residents of either Contracting State. For example, if a third- country resident has a permanent establishment in Belgium, and that 

permanent establishment engages in transactions with a U.S. enterprise, the United States could request information with respect 

to that permanent establishment, even though the third-country 

resident is not a resident of the United States or Belgium. Similarly, if a third-country resident maintains a bank account in Belgium, and the Internal Revenue Service has reason to believe that 

funds in that account should have been reported for U.S. tax purposes but have not been so reported, information can be requested 

from Belgium with respect to that person’s account, even though 

that person is not the taxpayer under examination. 

Although the term ‘‘United States’’ does not encompass U.S. possessions for most purposes of the Convention, Section 7651 of the 

Code authorizes the Internal Revenue Service to utilize the provisions of the Internal Revenue Code to obtain information from the 

U.S. possessions pursuant to a proper request made under Article 

25. If necessary to obtain requested information, the Internal Revenue Service could issue and enforce an administrative summons 

to the taxpayer, a tax authority (or a government agency in a U.S. 

possession), or a third party located in a U.S. possession. 

Paragraph 2 

Paragraph 2 also provides assurances that any information exchanged will be treated as secret, subject to the same disclosure 

constraints as information obtained under the laws of the requesting State. Furthermore, information received may be disclosed only 

to persons, including courts and administrative bodies, involved in 

the assessment, collection, or administration of, the enforcement or 

prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the Convention. The information must 

be used by these persons in connection with the specified functions. 

Information may also be disclosed to legislative bodies, such as the 

tax-writing committees of Congress and the Government Accountability Office, engaged in the oversight of the preceding activities. 

Information received by these bodies must be for use in the performance of their role in overseeing the administration of U.S. tax 

laws. Information received may be disclosed in public court proceedings or in judicial decisions. 

Paragraph 3 

Paragraph 3 provides that the obligations undertaken in paragraphs 1 and 2 to exchange information do not require a Contracting State to carry out administrative measures that are at 

variance with the laws or administrative practice of either State. 

Nor is a Contracting State required to supply information not obtainable under the laws or administrative practice of either State, 

or to disclose trade secrets or other information, the disclosure of 

which would be contrary to public policy. 

Thus, a requesting State may be denied information from the 

other State if the information would be obtained pursuant to procedures or measures that are broader than those available in the requesting State. However, the statute of limitations of the Contracting State making the request for information should govern a 

110 

request for information. Thus, the Contracting State of which the 

request is made should attempt to obtain the information even if 

its own statute of limitations has passed. In many cases, relevant 

information will still exist in the business records of the taxpayer 

or a third party, even though it is no longer required to be kept 

for domestic tax purposes. 

While paragraph 3 states conditions under which a Contracting 

State is not obligated to comply with a request from the other Contracting State for information, the requested State is not precluded 

from providing such information, and may, at its discretion, do so 

subject to the limitations of its internal law. 

Paragraph 4 

Paragraph 4 provides that when information is requested by a 

Contracting State in accordance with this Article, the other Contracting State is obligated to obtain the requested information as 

if the tax in question were the tax of the requested State, even if 

that State has no direct tax interest in the case to which the request relates. In the absence of such a paragraph, some taxpayers 

have argued that paragraph 3(a) prevents a Contracting State from 

requesting information from a bank or fiduciary that the Contracting State does not need for its own tax purposes. This paragraph clarifies that paragraph 3 does not impose such a restriction 

and that a Contracting State is not limited to providing only the 

information that it already has in its own files. 

Paragraph 5 

Paragraph 5 provides that a Contracting State may not decline 

to provide information because that information is held by financial 

institutions, nominees or persons acting in an agency or fiduciary 

capacity. Thus, paragraph 5 would effectively prevent a Contracting State from relying on paragraph 3 to argue that its domestic bank secrecy laws (or similar legislation relating to disclosure 

of financial information by financial institutions or intermediaries) 

override its obligation to provide information under paragraph 1. 

This paragraph also requires the disclosure of information regarding the beneficial owner of an interest in a person, such as the 

identity of a beneficial owner of bearer shares. Consistent with 

paragraph 6, discussed below, to obtain such information, the tax 

administration of the requested State has the power to ask for the 

disclosure of information and to conduct investigations and hearings notwithstanding any contrary provisions in its domestic tax 

laws. 

Paragraph 7 of the Protocol provides that banking records will be 

exchanged only upon request. Further, a request for bank information must identify both a specific taxpayer and a specific bank or 

financial institution, or the competent authority of the requested 

State may decline to obtain any information that it does not already possess. 

Paragraph 6 

Paragraph 6 provides that in order to obtain information requested under this Article, the requested State has the power to 

ask for the disclosure of information and to conduct investigations 

and hearings despite any time limits required in the domestic tax 

111 

laws of the requested State. Therefore, the requested State will 

have such powers in order to meet its obligations under Article 25 

of the Convention, even though it may not have such powers for 

purposes of enforcing its own tax laws due, for example to the expiration of its statute of limitations on tax audits. 

Paragraph 7 

Paragraph 7 provides that penalties under the domestic law of 

the requested State shall apply to any person that fails to provide 

information to the requested State seeking to fulfill its obligations 

under the Article, as if the request for the information and the obligation to provide such information was an obligation provided in 

the domestic tax laws of the requested State. 

Paragraph 8 

Paragraph 8 further expands on the consequences of failing to 

provide information to the requested State seeking to fulfill its obligations under the Article, including a failure to provide the requested information in the manner and within the time limits required. The paragraph provides that the requested State may bring 

appropriate enforcement proceedings against the person failing to 

provide the information, including (but not limited to) summary 

summons enforcement proceedings in the case of the United States 

and summary proceedings (procedure en refere/procedure in 

kortgeding) in the case of Belgium. Further, such person may be 

compelled to provide such information under such civil or criminal 

penalties that may be available under the laws of the requested 

State. 

Paragraph 9 

Paragraph 9 provides that the requesting State may specify the 

form in which information is to be provided (e.g., depositions of witnesses and authenticated copies of original documents). The intention is to ensure that the information may be introduced as evidence in the judicial proceedings of the requesting State. The requested State should, if possible, provide the information in the 

form requested to the same extent that it can obtain information 

in that form under its own laws and administrative practices with 

respect to its own taxes. 

Paragraph 10 

Paragraph 10 provides that the requested State shall allow representatives of the requesting State to enter the requested State to 

interview individuals and examine books and records. However, 

such interview or examination must take place under the conditions and limits agreed upon by the competent authorities. 

Paragraph 11 

Paragraph 11 states that the competent authorities of the Contracting States shall agree upon the mode of application of the Article. The article authorizes the competent authorities to exchange 

information on a routine basis, on request in relation to a specific 

case, or spontaneously. It is contemplated that the Contracting 

States will utilize this authority to engage in all of these forms of 

information exchange, as appropriate. 

112 

The competent authorities may also agree on specific procedures 

and timetables for the exchange of information. In particular, the 

competent authorities may agree on minimum thresholds regarding 

tax at stake or take other measures aimed at ensuring some measure of reciprocity with respect to the overall exchange of information between the Contracting States. 

Treaty efective dates and termination in relation to exchange of 

information.—Once the Convention is in force, the competent authority may seek information under the Convention with respect to 

a year prior to the entry into force of the Convention. Even if an 

earlier Convention with more restrictive provisions, or even no 

Convention, was in effect during the years in which the transaction 

at issue occurred, the exchange of information provisions of the 

Convention apply. In that case, the competent authorities have 

available to them the full range of information exchange provisions 

afforded under this Article. Paragraph 6 of Article 28 (Entry into 

Force) confirms this understanding with respect to the effective 

date of the Article. 

A tax administration may also seek information with respect to 

a year for which a treaty was in force after the treaty has been terminated. In such a case the ability of the other tax administration 

to act is limited. The treaty no longer provides authority for the tax 

administrations to exchange confidential information. They may 

only exchange information pursuant to domestic law or other international agreement or arrangement. 

Paragraph 12 

Paragraph 12 provides that if the United States terminates the 

provisions of paragraph 3 of Article 10 (Dividends), then, from the 

date such provision no longer applies to eliminate dividend withholding tax, Belgium will not be required to provide information 

pursuant to paragraph 5 of this Article. 

ARTICLE 26 (ASSISTANCE IN COLLECTION)

This Article provides for assistance in collection of taxes to the 

extent necessary to ensure that treaty benefits are enjoyed only by 

persons entitled to those benefits under the terms of the Convention. 

Paragraph 1 

Under paragraph 1, a Contracting State will endeavor to collect 

on behalf of the other State only those amounts necessary to ensure that any exemption or reduced rate of tax at source granted 

under the Convention by that other State is not enjoyed by persons 

not entitled to those benefits. For example, if the payer of a U.S.- 

source portfolio dividend receives a Form W-8BEN or other appropriate documentation from the payee, the withholding agent is permitted to withhold at the portfolio dividend rate of 15 percent. If, 

however, the addressee is merely acting as a nominee on behalf of 

a third-country resident, paragraph 1 would obligate the other Contracting State to withhold and remit to the United States the additional tax that should have been collected by the U.S. withholding 

agent. 

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Paragraph 2 

Paragraph 2 makes clear that the Contracting State asked to collect the tax is not obligated, in the process of providing collection 

assistance, to carry out administrative measures that are different 

from those used in the collection of its own taxes, or that would be 

contrary to its sovereignty, security or public policy. 

ARTICLE 27 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR

POSTS)

This Article confirms that any fiscal privileges to which diplomatic or consular officials are entitled under general provisions of 

international law or under special agreements will apply notwithstanding any provisions to the contrary in the Convention. The 

agreements referred to include any bilateral agreements, such as 

consular conventions, that affect the taxation of diplomats and consular officials and any multilateral agreements dealing with these 

issues, such as the Vienna Convention on Diplomatic Relations and 

the Vienna Convention on Consular Relations. The U.S. generally 

adheres to the latter because its terms are consistent with customary international law. 

The Article does not independently provide any benefits to diplomatic agents and consular officers. Article 19 (Government Service) 

does so, as do Code section 893 and a number of bilateral and multilateral agreements. In the event that there is a conflict between 

the Convention and international law or such other treaties, under 

which the diplomatic agent or consular official is entitled to greater 

benefits under the latter, the latter laws or agreements shall have 

precedence. Conversely, if the Convention confers a greater benefit 

than another agreement, the affected person could claim the benefit of the tax treaty. 

Pursuant to subparagraph 5(b) of Article 1, the saving clause of 

paragraph 4 of Article 1 (General Scope) does not apply to override 

any benefits of this Article available to an individual who is neither 

a citizen of the United States nor has immigrant status in the 

United States. 

ARTICLE 28 (ENTRY INTO FORCE)

This Article contains the rules for bringing the Convention into 

force and giving effect to its provisions. 

Paragraph 1 

Paragraph 1 provides for the ratification of the Convention by 

both Contracting States according to their constitutional and statutory procedures. Each Contracting State will use the diplomatic 

channel to notify the other when it has completed the required procedures. The notification will be accompanied by an instrument of 

ratification. 

In the United States, the process leading to ratification and entry 

into force is as follows: Once a treaty has been signed by authorized representatives of the two Contracting States, the Department 

of State sends the treaty to the President who formally transmits 

it to the Senate for its advice and consent to ratification, which requires approval by two-thirds of the Senators present and voting. 

Prior to this vote, however, it generally has been the practice for 

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the Senate Committee on Foreign Relations to hold hearings on the 

treaty and make a recommendation regarding its approval to the 

full Senate. Both Government and private sector witnesses may 

testify at these hearings. After the Senate gives its advice and consent to ratification of the protocol or treaty, an instrument of ratification is drafted for the President’s signature. The President’s signature completes the process in the United States. 

Paragraph 2 

Paragraph 2 provides that the Convention will enter into force 

upon the exchange of instruments of ratification. The date on 

which a treaty enters into force is not necessarily the date on 

which its provisions take effect. Paragraph 2, therefore, also contains rules that determine when the provisions of the treaty will 

have effect. 

Under subparagraph 2(a), the Convention will have effect with 

respect to taxes withheld at source (principally dividends, interest 

and royalties) for amounts paid or credited on or after the first day 

of the second month following the date on which the Convention 

enters into force. For example, if instruments of ratification are exchanged on April 25 of a given year, the withholding rates specified 

in paragraph 2 of Article 10 (Dividends) would be applicable to any 

dividends paid or credited on or after June 1 of that year. This rule 

allows the benefits of the withholding reductions to be put into effect as soon as possible, without waiting until the following year. 

The delay of one to two months is required to allow sufficient time 

for withholding agents to be informed about the change in withholding rates. If for some reason a withholding agent withholds at 

a higher rate than that provided by the Convention (perhaps because it was not able to re-program its computers before the payment is made), a beneficial owner of the income that is a resident 

of the other Contracting State may make a claim for refund pursuant to section 1464 of the Code. 

For all other taxes, paragraph 2(b) specifies that the Convention 

will have effect for any taxable period beginning on or after January 1 of the year following entry into force. 

Paragraph 3 

Paragraph 3 provides that subparagraph (f) of paragraph 5 of Article 21 (Limitation on Benefits) is not effective until January 1, 

2011. That subparagraph requires that a headquarters company be 

subject to the same income tax rules in its state of residence as a 

resident company engaged in the active conduct of a trade or business in such state. Belgian law is in transition and as of January 

1, 2011, this subparagraph will met. 

Paragraph 4 

Paragraph 4 provides that the prior Convention generally ceases 

to have effect with respect to any tax as of the date this Convention takes effect with respect to that tax in accordance with paragraphs 2 and 6. 

Paragraph 5 

As in many recent U.S. treaties, however, paragraph 5 provides 

an exception to the general rule of paragraph 4. Under paragraph 

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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 twelvemonth period from the date on which this Convention otherwise 

would have had effect with respect to such person. 

Thus, a taxpayer may elect to extend the benefits of the prior 

Convention for one year from the date on which the relevant provision of the new Convention would first take effect. During the period in which the election is in effect, the provisions of the prior 

Convention will continue to apply only insofar as they applied before the entry into force of the Convention. If the grace period is 

elected, all of the provisions of the prior Convention must be applied for that additional year. The taxpayer may not apply certain, 

more favorable provisions of the prior Convention and, at the same 

time, apply other, more favorable provisions of this Convention. 

The taxpayer must choose one regime or the other. 

The prior Convention shall terminate on the last date on which 

it has effect with respect to any tax in accordance with the provisions of paragraphs 4 and 5 of Article 28. 

Paragraph 6 

Paragraph 6 provides that the provisions of Article 25 (Exchange 

of Information), have effect from the date of entry into force, without regard to the taxable period to which a particular matter relates. Accordingly, the powers afforded the competent authority 

under these articles apply retroactively to taxable periods preceding entry into force. 

Paragraph 7 

Paragraph 7 provides a specific effective date for purposes of the 

binding arbitration provisions of Article 24 (Mutual Agreement 

Procedure). Paragraph 7 provides that paragraph 7 and 8 of Article 

24 are effective for cases (i) that are under consideration by the 

competent authorities as of the date on which the Convention enters into force and (ii) cases that come under such consideration 

after the Convention enters into force. In addition, paragraph 7 

provides that the commencement date for cases that are under consideration by the competent authorities as of the date on which the 

Convention enters into force is the date the Convention enters into 

force. As a result, cases that are unresolved as of the entry into 

force of the Convention will go into binding arbitration no later 

than two years after the entry into force of the Convention, if the 

cases are not otherwise resolved through the competent authority 

procedure. 

ARTICLE 29 (TERMINATION)

The Convention is to remain in effect indefinitely, unless terminated by one of the Contracting States in accordance with the provisions of Article 29. The Convention may be terminated at any 

time after five years from the date on which the Convention enters 

into force. If notice of termination is given, the provisions of the 

Convention with respect to withholding at source will cease to have 

effect after the expiration of a period of 6 months beginning with 

the delivery of notice of termination. For other taxes, the ConvenVerDate Aug 31 2005 11:35 Nov 15, 2007 Jkt 000000 PO 00000 Frm 00115 Fmt 6659 Sfmt 6602 H:\DOCS\110-2.TXT sfrela2 PsN: MIKEB
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tion 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 sixmonth 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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