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[Senate Executive Report 110-2]
[From the U.S. Government Publishing Office]

110th Congress                                              Exec. Rept.
                                 SENATE
 1st Session                                                      110-2

======================================================================

 
                      TAX CONVENTION WITH BELGIUM

                                _______
                                

                November 14, 2007.--Ordered to be printed

                                _______
                                

          Mr. Biden, from the Committee on Foreign Relations,
                        submitted the following

                                 REPORT

                    [To accompany Treaty Doc. 110-3]

    The Committee on Foreign Relations, to which was referred 
the Convention Between the Government of the United States of 
America and the Government of the Kingdom of Belgium for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income, and accompanying 
Protocol, signed at Brussels on November 27, 2006 (the 
``Treaty'') (Treaty Doc. 110-3), having considered the same, 
reports favorably thereon and recommends that the Senate give 
its advice and consent to ratification thereof, as set forth in 
this report and the accompanying resolution of advice and 
consent.

                                CONTENTS

                                                                   Page

  I. Purpose..........................................................1
 II. Background.......................................................2
III. Major Provisions.................................................2
 IV. Entry Into Force; Effective Dates................................5
  V. Implementing Legislation.........................................6
 VI. Committee Action.................................................6
VII. Committee Recommendation and Comments............................6
VIII.Resolution of Advice and Consent to Ratification.................7

 IX. Annex.--Technical Explanation....................................8

                               I. Purpose

    The proposed Treaty is intended to promote closer 
cooperation and further facilitate trade and investment between 
the United States and Belgium. The Treaty's principal 
objectives are to eliminate the withholding tax on dividends 
arising from certain direct investments and on certain 
dividends paid to pension funds; prevent the inappropriate use 
of the Treaty's benefits by third-country residents; provide 
for mandatory arbitration of disputes that have not been 
resolved by the competent authorities; significantly expand the 
circumstances under which the United States is able to obtain 
information from Belgium that is helpful in enforcing U.S. 
domestic tax rules; and generally modernize the existing tax 
treaty relationship with Belgium to bring it into closer 
conformity with U.S. tax treaty law and policy.

                             II. Background

    The Treaty replaces the existing income tax treaty with 
Belgium, which was concluded in 1970 and amended in 1987.

                         III. Major Provisions

    A detailed article-by-article analysis of the Treaty may be 
found in the Technical Explanation published by the Department 
of the Treasury on July 17, 2007, which is reprinted in Annex 
I. In addition, the staff of the Joint Committee on Taxation 
prepared an analysis of the Treaty, Document JCX-45-07 (July 
13, 2007), which has been of great assistance to the committee 
in reviewing the Treaty. A summary of the key provisions of the 
Treaty is set forth below.

1. Taxation of Cross-border Dividend Payments

    Article 10 (Dividends) of the Treaty provides rules for the 
taxation of dividends paid by a company that is a resident of 
one treaty country to a beneficial owner that is a resident of 
the other treaty country. Article 10 generally allows full 
residence-country taxation and limited source-country taxation 
of dividends.
    The Treaty contains both a generally applicable maximum 
rate of withholding at source of 15 percent and a reduced five-
percent maximum rate for dividends received by a company owning 
at least 10 percent of the dividend-paying company. 
Additionally, with some restrictions intended to prevent treaty 
shopping, dividends paid by a U.S. subsidiary to its Belgian 
parent company will be exempt from U.S. withholding tax if the 
Belgian parent company owns (directly or indirectly) at least 
80 percent of the voting power in the U.S. subsidiary for the 
12-month period ending on the date entitlement to the dividend 
is determined. The Treaty also provides, however, that the zero 
rate for dividends paid by U.S. resident companies under 
paragraph 3 of Article 10 may be terminated by the United 
States with written notice to Belgium on or before June 30th of 
any year, effective the following year, if the United States 
has determined that Belgium's actions with respect to the 
Articles of the Treaty regarding the exchange of information 
(Article 25) and the mutual agreement procedure (Article 24) 
have materially altered the balance of benefits of the Treaty. 
Alternatively, the zero rate for dividends paid by U.S. 
resident companies under paragraph 3 of Article 10 will be 
terminated on January 1st of the 6th year following the year in 
which the Treaty enters into force unless, by June 30th of the 
5th year, the Secretary of the Treasury, on the basis of a 
report of the Commissioner of Internal Revenue, certifies to 
the Senate that Belgium has satisfactorily complied with its 
obligations under Article 25.
    Under the Treaty, a dividend paid by a Belgian company to a 
U.S. company will be exempt from Belgian tax if the U.S. 
company directly owns at least 10 percent of the capital of the 
Belgian company for a 12-month period ending on the date the 
dividend is declared.
    The Treaty provides that dividends beneficially owned by a 
pension fund may not be taxed by the country in which the 
company paying the dividends is a resident, unless such 
dividends are derived from the carrying on of a business, 
directly by the pension fund, or indirectly, through an 
associated enterprise.
    The Treaty also includes special rules for dividends 
received from U.S. Regulated Investment Companies (RICs) and 
U.S. Real Estate Investment Trusts (REITs). These rules are 
similar to rules included in other recent treaties and 
protocols.

2. Interest and Royalties

    Articles 11 and 12 of the Treaty provide that, subject to 
certain rules and exceptions, interest and royalties 
beneficially owned by a resident of one treaty country arising 
from sources within the other treaty country may be taxed only 
by the residence country.

3. Binding Arbitration

    The Treaty, like the Protocol Amending the Tax Convention 
with Germany (the ``German Protocol'') (Treaty Doc. 109-20), 
includes a binding arbitration mechanism. The arbitration 
procedure is sometimes referred to as ``last best offer'' 
arbitration or ``baseball arbitration'' because each of the 
competent authorities proposes one and only one figure for 
settlement and the arbitration board must select one of those 
figures as the award. Under the Treaty, unless a taxpayer or 
other ``concerned person'' (in general, a person whose tax 
liability is affected by the arbitration determination) does 
not accept the arbitration determination, it is binding on the 
countries. There are two main differences, however, between the 
arbitration procedures included in this Treaty and in the 
German Protocol. First, the maximum length of the proceedings 
under the Treaty is 6 months, instead of 9 months under the 
German Protocol. Second, the arbitration procedure under the 
Treaty can be exercised with respect to a dispute regarding the 
application of any article in the Treaty, whereas the German 
Protocol's arbitration procedure applies only to specified 
articles.

4. Exchange of Information

    Article 25 of the Treaty would improve the ability of the 
United States to obtain information from Belgium when seeking 
to enforce U.S. tax law. In particular, Belgium would be 
obligated to provide information held by financial 
institutions, despite Belgian bank secrecy rules. Moreover, 
Belgium agreed to certain other provisions that override 
aspects of Belgian domestic law that currently restrict the 
ability of the United States to receive information from 
Belgium. As discussed previously, if Belgium has not 
satisfactorily complied with its obligations under Article 25 
or if Belgium's actions with respect Article 24 and 25 have 
materially altered the balance of benefits of the Treaty, the 
zero-rate provision for dividends paid by U.S. resident 
companies may be terminated as provided for in paragraph 12 of 
Article 10.

5. Scope

    Article 1 of the Treaty, entitled ``General Scope'' 
generally conforms with the 2006 U.S. Model Tax Treaty (the 
``U.S. Model'') and reflects changes in U.S. tax law made in 
the last few years.
    The Treaty generally provides that, with the exception of 
certain benefits, the United States may continue to tax its own 
citizens and residents as if the Treaty were not in force. In 
addition, notwithstanding any other provision in the Treaty, 
the United States may also tax, in accordance with its law, 
certain former citizens and long-term residents for ten years 
following the loss of such status. This change is consistent 
with section 877 of the Internal Revenue Code, which provides 
special rules for the imposition of U.S. income tax on former 
U.S. citizens and long-term residents for a period of ten years 
following the loss of citizenship or long-term resident status.
    The Treaty also includes an additional paragraph (Article 
1, paragraph 6), which is not in the existing tax treaty with 
Belgium. Paragraph 6 addresses special issues presented by 
fiscally transparent entities such as partnerships and certain 
estates and trusts. When there is a difference of views between 
the United States and Belgium on whether an entity is fiscally 
transparent, the entity in question may be subject to double 
taxation or double non-taxation. Paragraph 6 solves this 
problem by providing that an item of income, profit, or gain 
derived by or through an entity that is fiscally transparent 
under the laws of either treaty country is considered to be the 
income, profit, or gain of a resident of one of the treaty 
countries only to the extent that the item is subject to tax in 
that country as the income, profit, or gain of a resident.

6. Pension Plans

    The Treaty includes provisions related to cross-border 
pension contributions and earnings, which generally conform 
with the U.S. Model and prevent the taxation of pension 
contributions and earnings when an individual participates in a 
pension plan established in one country while performing 
services in the other, provided certain requirements are met. 
One such requirement is that the competent authority in the 
country where the services are performed must agree that the 
pension plan generally corresponds to a pension plan recognized 
as such for tax purposes by that country. The Treasury 
Department has indicated in its Technical Explanation and in 
response to questions for the record that there will be further 
discussions on this matter with Belgium, at which time it is 
expected that the competent authorities of each country will 
reach agreement on a list of types of pension plans that should 
be covered under this provision. Once an agreement is reached, 
the text of that agreement will be posted on the website of the 
IRS and published in the Internal Revenue Bulletin.
    The pension provisions also apply in certain circumstances 
when a pension fund is a resident of a ``comparable third 
state'' as defined in the Treaty.

7. Students, Trainees, Teachers and Researchers

    Article 19 of the Treaty provides that certain payments 
received by a student or business trainee who is a resident of 
a treaty country and is temporarily present in the other treaty 
country for the purpose of a full-time education or full-time 
training will be exempt from income tax in the host country on 
certain payments (in the case of a business trainee, for up to 
two years). Additionally, students and business trainees 
receive an annual exemption of up to $9000 (or its equivalent 
in euro) for income from personal services performed in the 
host country, with this amount adjusted every five years to 
reflect changes in the U.S. personal exemption and standard 
deduction and the Belgian basic allowance. Article 19 further 
provides that a teacher or researcher who is a resident of a 
treaty country and then visits the other treaty country for the 
purpose of teaching or doing research at a school, college, 
university or other educational or research institution, will 
be exempted from tax by the host country on any remuneration 
for such teaching or research for up to two years if such 
research is undertaken in the public interest and not primarily 
for private benefit.

8. Limitation on Benefits

    The existing treaty with Belgium contains a ``Limitation on 
Benefits'' provision, which is designed to avoid treaty-
shopping. The proposed Treaty's provision on this subject, 
Article 21, is stronger in protecting against abuse by third-
country residents and would bring the provision into line with 
the U.S. Model and other more recent U.S. tax treaties. Among 
other changes, the new provision provides that a treaty-country 
company whose shares are regularly traded on a recognized stock 
exchange may qualify for treaty benefits if the company 
satisfies one of two tests: either the company must be 
primarily traded on a recognized stock exchange in a specified 
region or the company's primary place of management and control 
must be in the country of residence. This new requirement is 
intended to ensure an adequate connection to the company's 
claimed country of residence.

                 IV. Entry Into Force; Effective Dates

    The United States and Belgium shall notify each other 
through the diplomatic channel, accompanied by an instrument of 
ratification, when each has completed its applicable procedures 
for entry into force. In accordance with Article 28, the Treaty 
will enter into force on the date on which the later of the 
notifications is received.
    The Treaty's provisions shall have effect with respect to 
taxes withheld at source, for amounts paid or credited on or 
after the first day of the second month next following the date 
on which the Treaty enters into force. The Treaty's provisions 
shall have effect with respect to other covered taxes for 
taxable periods beginning on or after the first day of January 
next following the date on which the Treaty enters into force. 
Article 21(5)(f) shall not have effect until January 1, 2011.
    If any person entitled to benefits under the existing 
treaty from 1970, as modified in 1987, would have been entitled 
to greater benefits under the older treaty than under this 
Treaty, the older 1970 treaty, as modified in 1987, shall, at 
the election of such person, continue to have effect in its 
entirety with respect to such person for a twelve-month period 
from the date on which the provisions of this Treaty would 
otherwise have effect.
    Notwithstanding other provisions, Article 25 shall have 
effect from the date of entry into force of the Treaty, without 
regard to the taxable period to which the matter relates. 
Article 24(7) and (8), which provide for binding arbitration, 
shall have effect with respect to cases that are under 
consideration by the competent authorities as of the date on 
which the Treaty enters into force, and cases that come under 
such consideration after that time.

                      V. Implementing Legislation

    As is the case generally with income tax treaties, the 
Protocol is self-executing and thus does not require 
implementing legislation for the United States.

                          VI. Committee Action

    The committee held a public hearing on the Treaty on July 
17, 2007 (a hearing print of this session will be forthcoming). 
Testimony was received by Mr. John Harrington, International 
Tax Counsel, Office of the International Tax Counsel at the 
Department of the Treasury; Thomas A. Barthold, Acting Chief of 
Staff of the Joint Committee on Taxation; the Honorable William 
A. Reinsch, President of the National Foreign Trade Council; 
and Ms. Janice Lucchesi, Chairwoman of the Board, Organization 
for International Development. On October 31, 2007, the 
Committee considered the Protocol, and ordered it favorably 
reported by voice vote, with a quorum present and without 
objection.

               VII. Committee Recommendation and Comments

    The Committee on Foreign Relations believes that the Treaty 
will stimulate increased investment, substantially deny 
``treaty-shoppers'' the benefits of this tax treaty, and 
promote closer cooperation and facilitate trade and investment 
between the United States and Belgium. The committee therefore 
urges the Senate to act promptly to give advice and consent to 
ratification of the Protocol, as set forth in this report and 
the accompanying resolution of advice and consent. The 
committee has taken note, however, of certain issues raised by 
the Protocol and has certain comments to offer the Executive 
Branch on these matters.
    The Treaty was considered by the Committee on October 31, 
2007, along with three other tax treaties: (1) The Protocol 
Amending Tax Convention with Finland (Treaty Doc. 109-18); (2) 
The Protocol Amending Tax Convention with Denmark (Treaty Doc. 
109-19); and (3) The Protocol Amending Tax Convention with 
Germany (Treaty Doc. 109-20). In the committee's reports 
regarding the Protocol Amending Tax Convention with Finland and 
the Protocol Amending Tax Convention with Germany, also filed 
this day, the committee set forth comments on several issues, 
all of which are relevant here.

             A. TECHNICAL EXPLANATIONS AND TREATY SHOPPING

    In the committee's report regarding the Protocol Amending 
Tax Convention with Finland, the committee suggested first that 
the Treasury Department consider sharing the Technical 
Explanation it develops with its treaty partners, prior to its 
public release. Second, the committee encouraged the Treasury 
Department to further strengthen anti-treaty-shopping 
provisions in tax treaties whenever possible, with a particular 
focus on closing the loophole created by those U.S. tax 
treaties currently in force that do not have an anti-treaty-
shopping provision. A detailed discussion regarding these 
issues can be found in Section VII of the committee's report 
regarding the Protocol Amending Tax Convention with Finland 
(Exec. Rept. 110-4).

                            B. PENSION FUNDS

    In the committee's report regarding the Protocol Amending 
Tax Convention with Germany, the committee welcomed the 
inclusion of provisions related to cross-border pension 
contributions and earnings, which generally conform to the U.S. 
Model and prevent the taxation of pension contributions and 
earnings when an individual participates in a pension plan 
established in one country while performing services in the 
other, provided certain requirements are met. Unlike the German 
Protocol, the Treaty does not identify pre-qualified plans in 
the Treaty. Nevertheless, the Treasury Department indicated in 
responses to questions for the record that the U.S. and Belgian 
tax authorities have exchanged lists of the types of plans that 
they believe should be covered and there is the expectation 
that a generally applicable authority agreement will be entered 
into under Article 24 of the Treaty shortly after the entry 
into force of the Treaty. The committee urges the Treasury 
Department to conclude the agreement as soon as possible, 
because the pre-approval of certain plans effectively 
streamlines what could otherwise be a cumbersome process.

                             C. ARBITRATION

    In the committee's report regarding the Protocol Amending 
Tax Convention with Germany, the committee provided a number of 
comments that relate to the binding arbitration mechanism that 
is included in both the Treaty and the German Protocol. Those 
comments are relevant here and can be found in Section VII of 
the committee's report regarding the Protocol Amending Tax 
Convention with Germany (Exec. Rept. 110-5).

     VIII. Text of Resolution of Advice and Consent to Ratification

    Resolved (two-thirds of the Senators present concurring 
therein), The Senate advises and consents to the ratification 
of the Convention between the Government of the United States 
of America and the Government of the Kingdom of Belgium for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income, and accompanying 
Protocol, signed at Brussels on November 27, 2006 (Treaty Doc. 
110-3)

                   IX. Annex.--Technical Explanation

  DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE CONVENTION 
    BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE 
   GOVERNMENT OF THE KINGDOM OF BELGIUM FOR THE AVOIDANCE OF DOUBLE 
TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON 
             INCOME SIGNED AT BRUSSELS ON NOVEMBER 27, 2006

    This is a technical explanation of the Convention between 
the Government of the United States of America and the 
Government of the Kingdom of Belgium for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
respect to Taxes on Income, signed at Brussels on November 27, 
2006 (the ``Convention''), and the Protocol also signed at 
Brussels on November 27, 2006, which forms an integral part 
thereto (the ``Protocol''). The Protocol is discussed below in 
connection with relevant provisions of the Convention.
    References are made to the Convention between the 
Government of the United States of America and the Government 
of the Kingdom of Belgium for the Avoidance of Double Taxation 
and the Prevention of Fiscal Evasion with respect to Taxes on 
Income, signed at Brussels on July 9, 1970, as amended by 
protocol signed December 31, 1987 (the ``prior Convention''). 
The Convention and Protocol replace the prior Convention.
    Negotiations took into account the U.S. Treasury 
Department's current tax treaty policy and the Treasury 
Department's Model Income Tax Convention, published on November 
15, 2006 (the ``U.S. Model''). Negotiations also took into 
account the Model Tax Convention on Income and on Capital, 
published by the Organisation for Economic Cooperation and 
Development (the ``OECD Model''), and recent tax treaties 
concluded by both countries.
    The Technical Explanation is an official guide to the 
Convention. It reflects the policies behind particular 
Convention provisions, as well as understandings reached with 
respect to the application and interpretation of the 
Convention. References in the Technical Explanation to ``he'' 
or ``his'' should be read to mean ``he or she'' or ``his and 
her.''

                       ARTICLE 1 (GENERAL SCOPE)

Paragraph 1

    Paragraph 1 of Article 1 provides that the Convention 
applies only to residents of the United States or Belgium 
except where the terms of the Convention provide otherwise. 
Under Article 4 (Resident) a person is generally treated as a 
resident of a Contracting State if that person is, under the 
laws of that State, liable to tax therein by reason of his 
domicile, citizenship, residence, or other similar criteria. 
However, if a person is considered a resident of both 
Contracting States, Article 4 provides rules for determining a 
State of residence (or no State of residence). This 
determination governs for all purposes of the Convention.
    Certain provisions are applicable to persons who may not be 
residents of either Contracting State. For example, paragraph 1 
of Article 23 (Non-Discrimination) applies to nationals of the 
Contracting States. Under Article 25 (Exchange of Information 
and Administrative Assistance), information may be exchanged 
with respect to residents of third states.

Paragraph 2

    Paragraph 2 states the generally accepted relationship both 
between the Convention and domestic law and between the 
Convention and other agreements between the Contracting States. 
That is, no provision in the Convention may restrict any 
exclusion, exemption, deduction, credit or other benefit 
accorded by the tax laws of the Contracting States, or by any 
other agreement between the Contracting States. The 
relationship between the non-discrimination provisions of the 
Convention and other agreements is addressed not in paragraph 2 
but in paragraph 3.
    Under paragraph 2, for example, if a deduction would be 
allowed under the U.S. Internal Revenue Code (the ``Code'') in 
computing the U.S. taxable income of a resident of Belgium, the 
deduction also is allowed to that person in computing taxable 
income under the Convention. Paragraph 2 also means that the 
Convention may not increase the tax burden on a resident of a 
Contracting State beyond the burden determined under domestic 
law. Thus, a right to tax given by the Convention cannot be 
exercised unless that right also exists under internal law.
    It follows that, under the principle of paragraph 2, a 
taxpayer's U.S. tax liability need not be determined under the 
Convention if the Code would produce a more favorable result. A 
taxpayer may not, however, choose among the provisions of the 
Code and the Convention in an inconsistent manner in order to 
minimize tax. For example, assume that a resident of Belgium 
has three separate businesses in the United States. One is a 
profitable permanent establishment and the other two are trades 
or businesses that would earn taxable income under the Code but 
that do not meet the permanent establishment threshold tests of 
the Convention. One is profitable and the other incurs a loss. 
Under the Convention, the income of the permanent establishment 
is taxable in the United States, and both the profit and loss 
of the other two businesses are ignored. Under the Code, all 
three would be subject to tax, but the loss would offset the 
profits of the two profitable ventures. The taxpayer may not 
invoke the Convention to exclude the profits of the profitable 
trade or business and invoke the Code to claim the loss of the 
loss trade or business against the profit of the permanent 
establishment. (See Rev. Rul. 84-17, 1984-1 C.B. 308.) If, 
however, the taxpayer invokes the Code for the taxation of all 
three ventures, he would not be precluded from invoking the 
Convention with respect, for example, to any dividend income he 
may receive from the United States that is not effectively 
connected with any of his business activities in the United 
States.
    Similarly, nothing in the Convention can be used to deny 
any benefit granted by any other agreement between the United 
States and Belgium. For example, if certain benefits are 
provided for military personnel or military contractors under a 
Status of Forces Agreement between the United States and 
Belgium, those benefits or protections will be available to 
residents of the Contracting States regardless of any 
provisions to the contrary (or silence) in the Convention.

Paragraph 3

    Paragraph 3 specifically relates to non-discrimination 
obligations of the Contracting States under the General 
Agreement on Trade in Services (the ``GATS'').
    The provisions of paragraph 3 are an exception to the rule 
provided in paragraph 2 of this Article under which the 
Convention shall not restrict in any manner any benefit now or 
hereafter accorded by any other agreement between the 
Contracting States.
    Subparagraph (a) of paragraph 3 provides that, unless the 
competent authorities determine that a taxation measure is not 
within the scope of the Convention, the national treatment 
obligations of the GATS shall not apply with respect to that 
measure. Further, any question arising as to the interpretation 
of the Convention, including in particular whether a measure is 
within the scope of the Convention shall be considered only by 
the competent authorities of the Contracting States, and the 
procedures under the Convention exclusively shall apply to the 
dispute. Thus, paragraph 3 of Article XXII (Consultation) of 
the GATS may not be used to bring a dispute before the World 
Trade Organization unless the competent authorities of both 
Contracting States have determined that the relevant taxation 
measure is not within the scope of Article 23 (Non-
Discrimination) of the Convention.
    The term ``measure'' for these purposes is defined broadly 
in subparagraph (b) of paragraph 3. It would include, for 
example, a law, regulation, rule, procedure, decision, 
administrative action or guidance, or any other form of 
measure.

Paragraph 4

    Paragraph 4 contains the traditional saving clause found in 
all U.S. treaties. The Contracting States reserve their rights, 
except as provided in paragraph 5, to tax their residents and 
citizens as provided in their internal laws, notwithstanding 
any provisions of the Convention to the contrary. For example, 
if a resident of Belgium performs professional services in the 
United States and the income from the services is not 
attributable to a permanent establishment in the United States, 
Article 7 (Business Profits) would by its terms prevent the 
United States from taxing the income. If, however, the resident 
of Belgium is also a citizen of the United States, the saving 
clause permits the United States to include the remuneration in 
the worldwide income of the citizen and subject it to tax under 
the normal Code rules (i.e., without regard to Code section 
894(a)). However, subparagraph 5(a) of Article 1 preserves the 
benefits of special foreign tax credit rules applicable to the 
U.S. taxation of certain U.S. income of its citizens resident 
in Belgium. See paragraph 4 of Article 22 (Relief from Double 
Taxation).
    For purposes of the saving clause, ``residence'' is 
determined under Article 4 (Resident). Thus, an individual who 
is a resident of the United States under the Code (but not a 
U.S. citizen) but who is determined to be a resident of Belgium 
under the tie breaker rules of Article 4 would be subject to 
U.S. tax only to the extent permitted by the Convention. The 
United States would not be permitted to apply its statutory 
rules to that person to the extent the rules are inconsistent 
with the treaty.
    However, the person would be treated as a U.S. resident for 
U.S. tax purposes other than determining the individual's U.S. 
tax liability. For example, in determining under Code section 
957 whether a foreign corporation is a controlled foreign 
corporation, shares in that corporation held by the individual 
would be considered to be held by a U.S. resident. As a result, 
other U.S. citizens or residents might be deemed to be United 
States shareholders of a controlled foreign corporation subject 
to current inclusion of Subpart F income recognized by the 
corporation. See, Treas. Reg. section 301.7701 (b)-7(a)(3).
    Under paragraph 4, each Contracting State also reserves its 
right to tax former citizens and former long-term residents for 
a period of ten years following the loss of such status. Thus, 
paragraph 4 allows the United States to tax former U.S. 
citizens and former U.S. long-term residents in accordance with 
Section 877 of the Code. Section 877 generally applies to a 
former citizen or long-term resident of the United States who 
relinquishes citizenship or terminates long-term residency if 
either of the following criteria exceed established thresholds: 
(a) the average annual net income tax of such individual for 
the period of 5 taxable years ending before the date of the 
loss of status, or (b) the net worth of such individual as of 
the date of the loss of status. The annual net income tax 
threshold is adjusted annually for inflation. The United States 
defines ``long-term resident'' as an individual (other than a 
U.S. citizen) who is a lawful permanent resident of the United 
States in at least 8 of the prior 15 taxable years. An 
individual is not treated as a lawful permanent resident for 
any taxable year if such individual is treated as a resident of 
a foreign country under the provisions of a tax treaty between 
the United States and the foreign country and the individual 
does not waive the benefits of such treaty applicable to 
residents of the foreign country.

Paragraph 5

    Paragraph 5 sets forth certain exceptions to the saving 
clause. The referenced provisions are intended to provide 
benefits to citizens and residents even if such benefits do not 
exist under internal law. Paragraph 5 thus preserves these 
benefits for citizens and residents of the Contracting States.
    Subparagraph (a) lists certain provisions of the Convention 
that are applicable to all citizens and residents of a 
Contracting State, despite the general saving clause rule of 
paragraph 4:
    (1) Paragraph 2 of Article 9 (Associated Enterprises) 
grants the right to a correlative adjustment with respect to 
income tax due on profits reallocated under Article 9.
    (2) Paragraphs 1 b), 2, and 5 of Article 17 (Pensions, 
Social Security, Annuities, Alimony and Child Support) provide 
exemptions from source or residence State taxation for certain 
pension distributions, social security payments and child 
support.
    (3) Paragraph 6 of Article 17 (Pensions, Social Security, 
Annuities, Alimony and Child Support) provides an exemption for 
certain investment income of pension funds located in Belgium, 
while paragraph 9 provides benefits for certain contributions 
by or on behalf of a U.S. citizen to certain pension funds 
established in Belgium.
    (4) Article 22 (Relief from Double Taxation) confirms to 
citizens and residents of one Contracting State the benefit of 
a credit for income taxes paid to the other or an exemption for 
income earned in the other State.
    (5) Article 23 (Non-Discrimination) protects residents and 
nationals of one Contracting State against the adoption of 
certain discriminatory practices in the other Contracting 
State.
    (6) Article 24 (Mutual Agreement Procedure) confers certain 
benefits on citizens and residents of the Contracting States in 
order to reach and implement solutions to disputes between the 
two Contracting States. For example, the competent authorities 
are permitted to use a definition of a term that differs from 
an internal law definition. The statute of limitations may be 
waived for refunds, so that the benefits of an agreement may be 
implemented.
    Subparagraph (b) of paragraph 5 provides a different set of 
exceptions to the saving clause. The benefits referred to are 
all intended to be granted to temporary residents of a 
Contracting State (for example, in the case of the United 
States, holders of non- immigrant visas), but not to citizens 
or to persons who have acquired permanent residence in that 
State. If beneficiaries of these provisions travel from one of 
the Contracting States to the other, and remain in the other 
long enough to become residents under its internal law, but do 
not acquire permanent residence status (i.e., in the U.S. 
context, they do not become ``green card'' holders) and are not 
citizens of that State, the host State will continue to grant 
these benefits even if they conflict with the statutory rules. 
The benefits preserved by this paragraph are: (1) the host 
country exemptions for government service salaries and pensions 
under Article 18 (Government Service), certain income of 
visiting students and trainees under Article 19 (Students and 
Trainees, Teachers and Researchers), and the income of 
diplomatic agents and consular officers under Article 27 
(Members of Diplomatic Missions and Consular Posts); and (2) 
the beneficial tax treatment of pension fund contributions 
under paragraph 7 of Article 17 (Pensions, Social Security, 
Annuities, Alimony and Child Support).

Paragraph 6

    Paragraph 6 addresses special issues presented by fiscally 
transparent entities such as partnerships and certain estates 
and trusts. Because different countries frequently take 
different views as to when an entity is fiscally transparent, 
the risk of both double taxation and double non-taxation are 
relatively high. The intention of paragraph 6 is to eliminate a 
number of technical problems that arguably would have prevented 
investors using such entities from claiming treaty benefits, 
even though such investors would be subject to tax on the 
income derived through such entities. The provision also 
prevents the use of such entities to claim treaty benefits in 
circumstances where the person investing through such an entity 
is not subject to tax on the income in its State of residence. 
The provision, and the corresponding requirements of the 
substantive rules of Articles 6 through 20, should be read with 
those two goals in mind.
    In general, paragraph 6 relates to entities that are not 
subject to tax at the entity level, as distinct from entities 
that are subject to tax, but with respect to which tax may be 
relieved under an integrated system. This paragraph applies to 
any resident of a Contracting State who is entitled to income 
derived through an entity that is treated as fiscally 
transparent under the laws of either Contracting State. 
Entities falling under this description in the United States 
include partnerships, common investment trusts under section 
584 and grantor trusts. This paragraph also applies to U.S. 
limited liability companies (``LLCs'') that are treated as 
partnerships or as disregarded entities for U.S. tax purposes.
    Under paragraph 6, an item of income, profit or gain 
derived by such a fiscally transparent entity will be 
considered to be derived by a resident of a Contracting State 
if a resident is treated under the taxation laws of that State 
as deriving the item of income. For example, if a company that 
is a resident of Belgium pays interest to an entity that is 
treated as fiscally transparent for U.S. tax purposes, the 
interest will be considered derived by a resident of the U.S. 
only to the extent that the taxation laws of the United States 
treats one or more U.S. residents (whose status as U.S. 
residents is determined, for this purpose, under U.S. tax law) 
as deriving the interest for U.S. tax purposes. In the case of 
a partnership, the persons who are, under U.S. tax laws, 
treated as partners of the entity would normally be the persons 
whom the U.S. tax laws would treat as deriving the interest 
income through the partnership. Also, it follows that persons 
whom the United States treats as partners but who are not U.S. 
residents for U.S. tax purposes may not claim a benefit for the 
interest paid to the entity under the Convention, because they 
are not residents of the United States for purposes of claiming 
this treaty benefit. (If, however, the country in which they 
are treated as resident for tax purposes, as determined under 
the laws of that country, has an income tax convention with 
Belgium, they may be entitled to claim a benefit under that 
convention.) In contrast, if, for example, an entity is 
organized under U.S. laws and is classified as a corporation 
for U.S. tax purposes, interest paid by a company that is a 
resident of Belgium to the U.S. entity will be considered 
derived by a resident of the United States since the U.S. 
corporation is treated under U.S. taxation laws as a resident 
of the United States and as deriving the income.
    The same result obtains even if the entity were viewed 
differently under the tax laws of Belgium (e.g., as not 
fiscally transparent in the first example above where the 
entity is treated as a partnership for U.S. tax purposes). 
Similarly, the characterization of the entity in a third 
country is also irrelevant, even if the entity is organized in 
that third country. The results follow regardless of whether 
the entity is disregarded as a separate entity under the laws 
of one jurisdiction but not the other, such as a single owner 
entity that is viewed as a branch for U.S. tax purposes and as 
a corporation for tax purposes under the laws of Belgium. These 
results also obtain regardless of where the entity is organized 
(i.e., in the United States, in Belgium or, as noted above, in 
a third country).
    For example, income from U.S. sources received by an entity 
organized under the laws of the United States, which is treated 
for tax purposes under the laws of Belgium as a corporation and 
is owned by a shareholder who is a resident of Belgium for its 
tax purposes, is not considered derived by the shareholder of 
that corporation even if, under the tax laws of the United 
States, the entity is treated as fiscally transparent. Rather, 
for purposes of the treaty, the income is treated as derived by 
the U.S. entity.
    These principles also apply to trusts to the extent that 
they are fiscally transparent in either Contracting State. For 
example, if X, a resident of Belgium, creates a revocable trust 
in the United States and names persons resident in a third 
country as the beneficiaries of the trust, the trust's income 
would be regarded as being derived by a resident of Belgium 
only to the extent that the laws of Belgium treat X as deriving 
the income for its tax purposes, perhaps through application of 
rules similar to the U.S. ``grantor trust'' rules.
    Paragraph 6 is not an exception to the saving clause of 
paragraph 4. Accordingly, paragraph 6 does not prevent a 
Contracting State from taxing an entity that is treated as a 
resident of that State under its tax law. For example, if a 
U.S. LLC with members who are residents of Belgium elects to be 
taxed as a corporation for U.S. tax purposes, the United States 
will tax that LLC on its worldwide income on a net basis, 
without regard to whether Belgium views the LLC as fiscally 
transparent.

                       ARTICLE 2 (TAXES COVERED)

    This Article specifies the U.S. taxes and the taxes of 
Belgium to which the Convention applies. With two exceptions, 
the taxes specified in Article 2 are the covered taxes for all 
purposes of the Convention. A broader coverage applies, 
however, for purposes of Articles 23 (Non-Discrimination) and 
25 (Exchange of Information and Administrative Assistance). 
Article 23 (Non-Discrimination) applies with respect to all 
taxes, including those imposed by state and local governments. 
Article 25 (Exchange of Information and Administrative 
Assistance) applies with respect to all taxes imposed at the 
national level.

Paragraph 1

    Paragraph 1 identifies the category of taxes to which the 
Convention applies. Paragraph 1 is based on the OECD Model and 
defines the scope of application of the Convention. The 
convention applies to taxes on income, including gains, imposed 
on behalf of a Contracting State, irrespective of the manner in 
which they are levied. Except with respect to Article 23 (Non-
Discrimination), state and local taxes are not covered by the 
Convention.

Paragraph 2

    Paragraph 2 also is based on the OECD Model and provides a 
definition of taxes on income and on capital gains. The 
Convention covers taxes on total income or any part of income 
and includes tax on gains derived from the alienation of 
property. The Convention does not apply, however, to social 
security charges, or any other charges where there is a direct 
connection between the levy and individual benefits. Nor does 
it apply to property taxes, except with respect to Article 23 
(Non-Discrimination).

Paragraph 3

    Paragraph 3 lists the taxes in force at the time of 
signature of the Convention to which the Convention applies.
    Subparagraph 3 a) provides a list of income taxes imposed 
in Belgium that are covered taxes under the Convention. These 
taxes include: i) the individual income tax, ii) the corporate 
income tax, iii) the income tax on legal entities, and iv) the 
income tax on non-residents. All of these taxes include the 
prepayments and the surcharges on these taxes and prepayments.
    Subparagraph 3 b) provides that the existing U.S. taxes 
subject to the rules of the Convention are the Federal income 
taxes imposed by the Code, together with the excise taxes 
imposed with respect to private foundations (Code sections 4940 
through 4948). Social security and unemployment taxes (Code 
sections 1401, 3101, 3111 and 3301) are excluded from coverage.

Paragraph 4

    Under paragraph 4, the Convention will apply to any taxes 
that are identical, or substantially similar, to those 
enumerated in paragraph 3, and which are imposed in addition 
to, or in place of, the existing taxes after November 27, 2006, 
the date of signature of the Convention. The paragraph also 
provides that the competent authorities of the Contracting 
States will notify each other of any changes that have been 
made in their laws, whether tax laws or non-tax laws, that 
affect significantly their obligations under the Convention. 
Non-tax laws that may affect a Contracting State's obligations 
under the Convention may include, for example, laws affecting 
bank secrecy.

                    ARTICLE 3 (GENERAL DEFINITIONS)

    Article 3 provides general definitions and rules of 
interpretation applicable throughout the Convention. Certain 
other terms are defined in other articles of the Convention. 
For example, the term ``resident of a Contracting State'' is 
defined in Article 4 (Resident). The term ``permanent 
establishment'' is defined in Article 5 (Permanent 
Establishment). These definitions are used consistently 
throughout the Convention. Other terms, such as ``dividends,'' 
``interest'' and ``royalties'' are defined in specific articles 
for purposes only of those articles.

Paragraph 1

    Paragraph 1 defines a number of basic terms used in the 
Convention. The introduction to paragraph 1 makes clear that 
these definitions apply for all purposes of the Convention, 
unless the context requires otherwise. This latter condition 
allows flexibility in the interpretation of the treaty in order 
to avoid results not intended by the treaty's negotiators.
    Subparagraph 1(a) defines the term ``person'' to include an 
individual, an estate, a trust, a partnership, a company and 
any other body of persons. The definition is significant for a 
variety of reasons. For example, under Article 4, only a 
``person'' can be a ``resident'' and therefore eligible for 
most benefits under the treaty. Also, all ``persons'' are 
eligible to claim relief under Article 24 (Mutual Agreement 
Procedure).
    The term ``company'' is defined in subparagraph 1(b) as a 
body corporate or an entity treated as a body corporate for tax 
purposes in the state where it is organized. The definition 
refers to the law of the state in which an entity is organized 
in order to ensure that an entity that is treated as fiscally 
transparent in its country of residence will not get 
inappropriate benefits, such as the reduced withholding rate 
provided by subparagraph 2(b), or paragraphs 3 or 4 of Article 
10 (Dividends). It also ensures that the Limitation on Benefits 
provisions of Article 21 will be applied at the appropriate 
level.
    The terms ``enterprise of a Contracting State'' and 
``enterprise of the other Contracting State'' are defined in 
subparagraph 1(c) as an enterprise carried on by a resident of 
a Contracting State and an enterprise carried on by a resident 
of the other Contracting State. An enterprise of a Contracting 
State need not be carried on in that State. It may be carried 
on in the other Contracting State or a third state (e.g., a 
U.S. corporation doing all of its business in Belgium would 
still be a U.S. enterprise).
    Subparagraph 1(c) further provides that these terms also 
encompass an enterprise conducted through an entity (such as a 
partnership) that is treated as fiscally transparent in the 
Contracting State where the entity's owner is resident. The 
definition makes this point explicitly to ensure that the 
purpose of the Convention is not thwarted by an overly 
technical application of the term ``enterprise of a Contracting 
State'' to activities carried on through partnerships and 
similar entities. In accordance with Article 4 (Resident), 
entities that are fiscally transparent in the country in which 
their owners are resident are not considered to be residents of 
a Contracting State (although income derived by such entities 
may be taxed as the income of a resident, if taxed in the hands 
of resident partners or other owners). It could be argued that 
an enterprise conducted by such an entity is not conducted by a 
resident of a Contracting State, and therefore would not 
benefit from provisions applicable to enterprises of a 
Contracting State. The definition is intended to make clear 
that an enterprise conducted by such an entity will be treated 
as carried on by a resident of a Contracting State to the 
extent its partners or other owners are residents. This 
approach is consistent with the Code, which under section 875 
attributes a trade or business conducted by a partnership to 
its partners and a trade or business conducted by an estate or 
trust to its beneficiaries.
    Subparagraph (d) defines the term ``enterprise'' as any 
activity or set of activities that constitutes the carrying on 
of a business. The term ``business'' is not defined, but 
subparagraph (e) provides that it includes the performance of 
professional services and other activities of an independent 
character. Both subparagraphs are identical to definitions 
recently added to the OECD Model in connection with the 
deletion of Article 14 (Independent Personal Services) from the 
OECD Model. The inclusion of the two definitions is intended to 
clarify that income from the performance of professional 
services or other activities of an independent character is 
dealt with under Article 7 (Business Profits) and not Article 
20 (Other Income).
    Subparagraph 1(f) defines the term ``international 
traffic.'' The term means any transport by a ship or aircraft 
except when such transport is solely between places within a 
Contracting State. This definition is applicable principally in 
the context of Article 8 (Shipping and Air Transport). The 
definition combines with paragraphs 2 and 3 of Article 8 to 
exempt from tax by the source State income from the rental of 
ships or aircraft that is earned both by lessors that are 
operators of ships and aircraft and by those lessors that are 
not (e.g., a bank or a container leasing company).
    The exclusion from international traffic of transport 
solely between places within a Contracting State means, for 
example, that carriage of goods or passengers solely between 
New York and Chicago would not be treated as international 
traffic, whether carried by a U.S. or a foreign carrier. The 
substantive taxing rules of the Convention relating to the 
taxation of income from transport, principally Article 8 
(Shipping and Air Transport), therefore, would not apply to 
income from such carriage. Thus, if the carrier engaged in 
internal U.S. traffic were a resident of Belgium (assuming that 
were possible under U.S. law), the United States would not be 
required to exempt the income from that transport under Article 
8. The income would, however, be treated as business profits 
under Article 7 (Business Profits), and therefore would be 
taxable in the United States only if attributable to a U.S. 
permanent establishment of the foreign carrier, and then only 
on a net basis. The gross basis U.S. tax imposed by section 887 
would never apply under the circumstances described. If, 
however, goods or passengers are carried by a carrier resident 
in Belgium from a non-U.S. port to, for example, New York, and 
some of the goods or passengers continue on to Chicago, the 
entire transport would be international traffic. This would be 
true if the international carrier transferred the goods at the 
U.S. port of entry from a ship to a land vehicle, from a ship 
to a lighter, or even if the overland portion of the trip in 
the United States was handled by an independent carrier under 
contract with the original international carrier, so long as 
both parts of the trip were reflected in original bills of 
lading. For this reason, the Convention refers, in the 
definition of ``international traffic,'' to ``such transport'' 
being solely between places in the other Contracting State, 
while the OECD Model refers to the ship or aircraft being 
operated solely between such places. The Convention is 
consistent with the language in the U.S. Model and is intended 
to make clear that, as in the above example, even if the goods 
are carried on a different aircraft for the internal portion of 
the international voyage than is used for the overseas portion 
of the trip, the definition applies to that internal portion as 
well as the external portion.
    Finally, a ``cruise to nowhere,'' i.e., a cruise beginning 
and ending in a port in the same Contracting State with no 
stops in a foreign port, would not constitute international 
traffic.
    Subparagraph 1(g) designates the ``competent authorities'' 
for Belgium and the United States, respectively. The Belgium 
competent authority is the Minister of Finance or his 
authorized representative. The U.S. competent authority is the 
Secretary of the Treasury or his delegate. The Secretary of the 
Treasury has delegated the competent authority function to the 
Commissioner of Internal Revenue, who in turn has delegated the 
authority to the Deputy Commissioner (International) LMSB. With 
respect to interpretative issues, the Deputy Commissioner 
(International) LMSB acts with the concurrence of the Associate 
Chief Counsel (International) of the Internal Revenue Service.
    The geographical scope of the Convention with respect to 
Belgium is set out in subparagraph 1(h). It encompasses the 
territory of Belgium, including the territorial sea and the 
seabed and subsoil and the superjacent waters of the adjacent 
submarine areas beyond the territorial sea over which Belgium 
exercises sovereign rights in accordance with international 
law.
    The geographical scope of the Convention with respect to 
the United States is set out in subparagraph 1(i). It 
encompasses the United States of America, including the states, 
the District of Columbia and the territorial sea of the United 
States. The term does not include Puerto Rico, the Virgin 
Islands, Guam or any other U.S. possession or territory. For 
certain purposes, the term ``United States'' includes the sea 
bed and subsoil of undersea areas adjacent to the territorial 
sea of the United States. This extension applies to the extent 
that the United States exercises sovereignty in accordance with 
international law for the purpose of natural resource 
exploration and exploitation of such areas. This extension of 
the definition applies, however, only if the person, property 
or activity to which the Convention is being applied is 
connected with such natural resource exploration or 
exploitation. Thus, it would not include any activity involving 
the sea floor of an area over which the United States exercised 
sovereignty for natural resource purposes if that activity was 
unrelated to the exploration and exploitation of natural 
resources. This result is consistent with the result that would 
be obtained under Section 638, which treats the continental 
shelf as part of the United States for purposes of natural 
resource exploration and exploitation.
    The term ``national,'' as it relates to the United States 
and to Belgium, is defined in subparagraph 1(j). This term is 
relevant for purposes of Articles 18 (Government Service) and 
23 (Non-Discrimination). A national of one of the Contracting 
States is (1) an individual who is a citizen or national of 
that State, and (2) any legal person, partnership or 
association deriving its status, as such, from the law in force 
in the State where it is established.
    Subparagraph (k) defines the term ``pension fund'' to 
include any person established in a Contracting State that is 
operated principally to administer or provide pension or 
retirement benefits or to earn income for the benefit of one or 
more such arrangements and, in the case of Belgium, an entity 
organized under Belgian law and regulated by the Bank Finance 
and Insurance Commission or, in the case of the United States, 
generally exempt from income taxation with respect to such 
activities. In the case of the United States, the term 
``pension fund'' includes the following: a trust providing 
pension or retirement benefits under a Code section 401(a) 
qualified pension plan, profit sharing or stock bonus plan, a 
trust providing pension or retirement benefits under a Code 
section 403(b) plan, a trust that is an individual retirement 
account under Code section 408, a Roth individual retirement 
account under Code section 408A, or a simple retirement account 
under Code section 408(p), a trust providing pension or 
retirement benefits under a simplified employee pension plan 
under Code section 408(k), a trust described in section 457(g) 
providing pension or retirement benefits under a Code section 
457(b) plan, and the Thrift Savings Fund (section 770 1(j)). 
Section 401(k) plans and group trusts described in Revenue 
Ruling 8 1-100 and meeting the conditions of Revenue Ruling 
2004-67 qualify as pension funds because they are covered by 
Code section 40 1(a).

Paragraph 2

    Terms that are not defined in the Convention are dealt with 
in paragraph 2.
    Paragraph 2 provides that in the application of the 
Convention, any term used but not defined in the Convention 
will have the meaning that it has under the law of the 
Contracting State whose tax is being applied, unless the 
context requires otherwise, or the competent authorities have 
agreed on a different meaning pursuant to Article 24 (Mutual 
Agreement Procedure). If the term is defined under both the tax 
and non-tax laws of a Contracting State, the definition in the 
tax law will take precedence over the definition in the non-tax 
laws. Finally, there also may be cases where the tax laws of a 
State contain multiple definitions of the same term. In such a 
case, the definition used for purposes of the particular 
provision at issue, if any, should be used.
    If the meaning of a term cannot be readily determined under 
the law of a Contracting State, or if there is a conflict in 
meaning under the laws of the two States that creates 
difficulties in the application of the Convention, the 
competent authorities, as indicated in paragraph 3(d)(iv) of 
Article 24 (Mutual Agreement Procedure), may establish a common 
meaning in order to prevent double taxation or to further any 
other purpose of the Convention. This common meaning need not 
conform to the meaning of the term under the laws of either 
Contracting State.
    The reference in paragraph 2 to the internal law of a 
Contracting State means the law in effect at the time the 
treaty is being applied, not the law as in effect at the time 
the treaty was signed. The use of ``ambulatory'' definitions, 
however, may lead to results that are at variance with the 
intentions of the negotiators and of the Contracting States 
when the treaty was negotiated and ratified. The reference in 
both paragraphs 1 and 2 to the ``context otherwise 
requir[ing]'' a definition different from the treaty 
definition, in paragraph 1, or from the internal law definition 
of the Contracting State whose tax is being imposed, under 
paragraph 2, refers to a circumstance where the result intended 
by the Contracting States is different from the result that 
would obtain under either the paragraph 1 definition or the 
statutory definition. Thus, flexibility in defining terms is 
necessary and permitted.

                          ARTICLE 4 (RESIDENT)

    This Article sets forth rules for determining whether a 
person is a resident of a Contracting State for purposes of the 
Convention. As a general matter only residents of the 
Contracting States may claim the benefits of the Convention. 
The treaty definition of residence is to be used only for 
purposes of the Convention. The fact that a person is 
determined to be a resident of a Contracting State under 
Article 4 does not necessarily entitle that person to the 
benefits of the Convention. In addition to being a resident, a 
person also must qualify for benefits under Article 21 
(Limitation on Benefits) in order to receive benefits conferred 
on residents of a Contracting State.
    The determination of residence for treaty purposes looks 
first to a person's liability to tax as a resident under the 
respective taxation laws of the Contracting States. As a 
general matter, a person who, under those laws, is a resident 
of one Contracting State and not of the other need look no 
further. For purposes of the Convention, that person is a 
resident of the State in which he is resident under internal 
law. If, however, a person is resident in both Contracting 
States under their respective taxation laws, the Article 
proceeds, where possible, to use tie-breaker rules to assign a 
single State of residence to such a person for purposes of the 
Convention.

Paragraph 1

    The term ``resident of a Contracting State'' is defined in 
paragraph 1. In general, this definition incorporates the 
definitions of residence in U.S. law and that of Belgium by 
referring to a resident as a person who, under the laws of a 
Contracting State, is subject to tax there by reason of his 
domicile, residence, citizenship, place of management, place of 
incorporation or any other similar criterion. Thus, residents 
of the United States include aliens who are considered U.S. 
residents under Code section 7701(b). Paragraph 1 also 
specifically includes the United States and Belgium, and 
political subdivisions and local authorities of both States, as 
residents for purposes of the Convention.
    Certain entities that are nominally subject to tax but that 
in practice are rarely required to pay tax also would generally 
be treated as residents and therefore accorded treaty benefits. 
For example, a U.S. Regulated Investment Company (RIC) and a 
U.S. Real Estate Investment Trust (REIT) are residents of the 
United States for purposes of the treaty. Although the income 
earned by these entities normally is not subject to U.S. tax in 
the hands of the entity, they are taxable to the extent that 
they do not currently distribute their profits, and therefore 
may be regarded as ``liable to tax.'' They also must satisfy a 
number of requirements under the Code in order to be entitled 
to special tax treatment.
    A person who is liable to tax in a Contracting State only 
in respect of income from sources within that State or of 
profits attributable to a permanent establishment in that State 
will not be treated as a resident of that Contracting State for 
purposes of the Convention. Thus, a consular official of 
Belgium who is posted in the United States, who may be subject 
to U.S. tax on U.S. source investment income, but is not 
taxable in the United States on non-U.S. source income (see 
Code section 7701(b)(5)(B)), would not be considered a resident 
of the United States for purposes of the Convention. Similarly, 
an enterprise of Belgium with a permanent establishment in the 
United States is not, by virtue of that permanent 
establishment, a resident of the United States. The enterprise 
generally is subject to U.S. tax only with respect to its 
income that is attributable to the U.S. permanent 
establishment, not with respect to its worldwide income, as it 
would be if it were a U.S. resident.

Paragraph 2

    Paragraph 2 contains an exception to the general rule of 
paragraph 1 that residence under internal law also determines 
residence under the Convention. The exception applies with 
respect to a U.S. citizen or alien lawfully admitted for 
permanent residence (i.e., a ``green card'' holder). Under 
paragraph 1, a person is considered a resident of a Contracting 
State for purposes of the Convention if he is liable to tax in 
that Contracting State by reason of citizenship. Although this 
rule applies to both Contracting States, only the United States 
taxes its non-resident citizens in the same manner as its 
residents. In addition, aliens admitted to the United States 
for permanent residence (``green card'' holders) qualify as 
U.S. residents under the first sentence of paragraph 1 because 
they are taxed by the United States as residents, regardless of 
where they physically reside.
    Under the exception of paragraph 2, a U.S. citizen or green 
card holder will be treated as a resident of the United States 
for purposes of the Convention, and, thereby entitled to treaty 
benefits, only if he meets two conditions. First, he must have 
a substantial presence (see section 7701(b)(3)), permanent home 
or habitual abode in the United States. This rule requires that 
the U.S. citizen or green card holder have a reasonably strong 
economic nexus with the United States. Second, he must not be 
treated as a resident of a state other than Belgium under any 
treaty between Belgium and a third state. This rule prevents a 
U.S. citizen or green card holder who is a resident of a 
country other than the United States or Belgium from choosing 
the benefits of the Convention over those provided by the 
treaty between Belgium and his country of residence. If the 
U.S. citizen or green card holder's country of residence does 
not have a treaty with the Belgium, however, then he will be 
treated as a resident of the United States as long as he meets 
the first requirement of an economic nexus. If such a person is 
a resident of both the United States and Belgium, whether or 
not he is to be treated as a resident of the United States for 
purposes of the Convention is determined by the tie-breaker 
rules of paragraph 4.
    Thus, for example, an individual resident of the United 
Kingdom who is a U.S. citizen by birth, or who is a United 
Kingdom citizen and holds a U.S. green card, but who, in either 
case, has never lived in the United States, would not be 
entitled to benefits under the Convention. However, a U.S. 
citizen who is transferred to the United Kingdom for two years 
would be entitled to benefits under the Convention if he 
maintains a permanent home or habitual abode in the United 
States and is not a resident of the United Kingdom for purposes 
of the Belgium-U.K. tax treaty. If he were treated as a 
resident of the United Kingdom under the Belgium-U.K. tax 
treaty, he could claim only the benefits of that treaty, even 
if the Convention would provide greater benefits.
    The fact that a U.S. citizen who does not have close ties 
to the United States may not be treated as a U.S. resident 
under the Convention does not alter the application of the 
saving clause of paragraph 4 of Article 1 (General Scope) to 
that citizen. For example, a U.S. citizen who pursuant to the 
``citizen/green card holder'' exception in paragraph 2 is not 
considered to be a resident of the United States still is 
taxable in the United States on his worldwide income under the 
generally applicable rules of the Code.

Paragraph 3

    Paragraph 3 provides that certain tax-exempt entities such 
as pension funds and charitable organizations will be regarded 
as residents of a Contracting State regardless of whether they 
are generally liable to income tax in the State where they are 
established. The paragraph applies to legal persons organized 
under the laws of a Contracting State and established and 
maintained in that State to provide pensions or other similar 
benefits pursuant to a plan, or exclusively for religious, 
charitable, scientific, artistic, cultural, or educational 
purposes. Thus, a section 501(c) organization organized in the 
United States (such as a U.S. charity) that is generally exempt 
from tax under U.S. law is a resident of the United States for 
all purposes of the Convention.

Paragraph 4

    If, under the laws of the two Contracting States, and, 
thus, under paragraph 1, an individual is deemed to be a 
resident of both Contracting States, a series of tie-breaker 
rules are provided in paragraph 4 to determine a single State 
of residence for that individual. These tests are to be applied 
in the order in which they are stated. The first test is based 
on where the individual has a permanent home. If that test is 
inconclusive because the individual has a permanent home 
available to him in both States, he will be considered to be a 
resident of the Contracting State where his personal and 
economic relations are closest (i.e., the location of his 
``centre of vital interests''). If that test is also 
inconclusive, or if he does not have a permanent home available 
to him in either State, he will be treated as a resident of the 
Contracting State where he maintains an habitual abode. If he 
has an habitual abode in both States or in neither of them, he 
will be treated as a resident of the Contracting State of which 
he is a national. If he is a national of both States or of 
neither, the matter will be considered by the competent 
authorities, who will assign a single State of residence.

Paragraph 5

    Paragraph 5 seeks to settle dual-residence issues for 
persons other than individuals (e.g., companies, trusts, or 
estates). For example, a dual-residence may arise in the case 
of a company that is incorporated in the United States, and 
therefore treated as a resident of the United States, but that 
is also considered a resident of Belgium because it is managed 
and controlled in Belgium, or perhaps, maintains a dual charter 
of incorporation in Belgium. In such a case, if such a person 
is, under the rules of paragraph 1, resident in both 
Contracting States, the competent authorities shall seek to 
determine a single State of residence for that person for 
purposes of the Convention. If the competent authorities do not 
reach an agreement on a single State of residence, that company 
may not claim any benefit accorded to residents of a 
Contracting State by the Convention, except those provided in 
paragraph 1 of Article 22 (Relief From Double Taxation), 
paragraph 1 of Article 23 (Non-Discrimination), and Article 24 
(Mutual Agreement Procedure). Thus, for example, a State cannot 
discriminate against a dual resident company.

                  ARTICLE 5 (PERMANENT ESTABLISHMENT)

    This Article defines the term ``permanent establishment,'' 
a term that is significant for several articles of the 
Convention. The existence of a permanent establishment in a 
Contracting State is necessary under Article 7 (Business 
Profits) for the taxation by that State of the business profits 
of a resident of the other Contracting State. Articles 10, 11 
and 12 (dealing with dividends, interest, and royalties, 
respectively) provide for reduced rates of tax at source on 
payments of these items of income to a resident of the other 
State only when the income is not attributable to a permanent 
establishment that the recipient has in the source State. The 
concept is also relevant in determining which Contracting State 
may tax certain gains under Article 13 (Gains) and certain 
``other income'' under Article 20 (Other Income).

Paragraph 1

    The basic definition of the term ``permanent 
establishment'' is contained in paragraph 1. As used in the 
Convention, the term means a fixed place of business through 
which the business of an enterprise is wholly or partly carried 
on. As indicated in the OECD Commentary to Article 5 (see 
paragraphs 4 through 8), a general principle to be observed in 
determining whether a permanent establishment exists is that 
the place of business must be ``fixed'' in the sense that a 
particular building or physical location is used by the 
enterprise for the conduct of its business, and that it must be 
foreseeable that the enterprise's use of this building or other 
physical location will be more than temporary.

Paragraph 2

    Paragraph 2 lists a number of types of fixed places of 
business that constitute a permanent establishment. This list 
is illustrative and non-exclusive. According to paragraph 2, 
the term permanent establishment includes a place of 
management, a branch, an office, a factory, a workshop, and a 
mine, oil or gas well, quarry or other place of extraction of 
natural resources.

Paragraph 3

    This paragraph provides rules to determine whether a 
building site or a construction, assembly or installation 
project, or an installation used for the exploration of natural 
resources constitutes a permanent establishment for the 
contractor, explorer, etc. Such a site or activity does not 
create a permanent establishment unless the site, project, etc. 
lasts, or the exploration activity continues, for more than 
twelve months. It is only necessary to refer to ``exploration'' 
and not ``exploitation'' in this context because exploitation 
activities are defined to constitute a permanent establishment 
under subparagraph (f) of paragraph 2. Thus, a drilling rig 
does not constitute a permanent establishment if a well is 
drilled in only six months, but if production begins in the 
following month the well becomes a permanent establishment as 
of that date.
    The twelve-month test applies separately to each site or 
project. The twelve-month period begins when work (including 
preparatory work carried on by the enterprise) physically 
begins in a Contracting State. A series of contracts or 
projects by a contractor that are interdependent both 
commercially and geographically are to be treated as a single 
project for purposes of applying the twelve-month threshold 
test. For example, the construction of a housing development 
would be considered as a single project even if each house were 
constructed for a different purchaser.
    In applying this paragraph, time spent by a sub-contractor 
on a building site is counted as time spent by the general 
contractor at the site for purposes of determining whether the 
general contractor has a permanent establishment. However, for 
the sub-contractor itself to be treated as having a permanent 
establishment, the sub-contractor's activities at the site must 
last for more than 12 months. If a sub-contractor is on a site 
intermittently, then, for purposes of applying the 12-month 
rule, time is measured from the first day the sub-contractor is 
on the site until the last day (i.e., intervening days that the 
sub-contractor is not on the site are counted).
    These interpretations of the Article are based on the 
Commentary to paragraph 3 of Article 5 of the OECD Model, which 
contains language that is substantially the same as that in the 
Convention. These interpretations are consistent with the 
generally accepted international interpretation of the relevant 
language in paragraph 3 of Article 5 of the Convention.
    If the twelve-month threshold is exceeded, the site or 
project constitutes a permanent establishment from the first 
day of activity.

Paragraph 4

    This paragraph contains exceptions to the general rule of 
paragraph 1, listing a number of activities that may be carried 
on through a fixed place of business but which nevertheless do 
not create a permanent establishment. The use of facilities 
solely to store, display or deliver merchandise belonging to an 
enterprise does not constitute a permanent establishment of 
that enterprise. The maintenance of a stock of goods belonging 
to an enterprise solely for the purpose of storage, display or 
delivery, or solely for the purpose of processing by another 
enterprise does not give rise to a permanent establishment of 
the first-mentioned enterprise. The maintenance of a fixed 
place of business solely for the purpose of purchasing goods or 
merchandise, or for collecting information, for the enterprise, 
or for other activities that have a preparatory or auxiliary 
character for the enterprise, such as advertising, or the 
supply of information, do not constitute a permanent 
establishment of the enterprise. Moreover, subparagraph 4(f) 
provides that a combination of the activities described in the 
other subparagraphs of paragraph 4 will not give rise to a 
permanent establishment if the combination results in an 
overall activity that is of a preparatory or auxiliary 
character.

Paragraph 5

    Paragraphs 5 and 6 specify when activities carried on by an 
agent or other person acting on behalf of an enterprise create 
a permanent establishment of that enterprise. Under paragraph 
5, a person is deemed to create a permanent establishment of 
the enterprise if that person has and habitually exercises an 
authority to conclude contracts that are binding on the 
enterprise. If, however, for example, his activities are 
limited to those activities specified in paragraph 4 which 
would not constitute a permanent establishment if carried on by 
the enterprise through a fixed place of business, the person 
does not create a permanent establishment of the enterprise.
    The OECD Model uses the term ``in the name of that 
enterprise'' rather than ``binding on the enterprise.'' This 
difference is intended to be a clarification rather than a 
substantive difference. As indicated in paragraph 32 to the 
OECD Commentaries on Article 5, paragraph 5 of the Article is 
intended to encompass persons who have ``sufficient authority 
to bind the enterprise's participation in the business activity 
in the State concerned.''
    The contracts referred to in paragraph 5 are those relating 
to the essential business operations of the enterprise, rather 
than ancillary activities. For example, if the person has no 
authority to conclude contracts in the name of the enterprise 
with its customers for, say, the sale of the goods produced by 
the enterprise, but it can enter into service contracts in the 
name of the enterprise for the enterprise's business equipment, 
this contracting authority would not fall within the scope of 
the paragraph, even if exercised regularly.

Paragraph 6

    Under paragraph 6, an enterprise is not deemed to have a 
permanent establishment in a Contracting State merely because 
it carries on business in that State through an independent 
agent, including a broker or general commission agent, if the 
agent is acting in the ordinary course of his business as an 
independent agent. Thus, there are two conditions that must be 
satisfied: the agent must be both legally and economically 
independent of the enterprise, and the agent must be acting in 
the ordinary course of its business in carrying out activities 
on behalf of the enterprise.
    Whether the agent and the enterprise are independent is a 
factual determination. Among the questions to be considered are 
the extent to which the agent operates on the basis of 
instructions from the enterprise. An agent that is subject to 
detailed instructions regarding the conduct of its operations 
or comprehensive control by the enterprise is not legally 
independent.
    In determining whether the agent is economically 
independent, a relevant factor is the extent to which the agent 
bears business risk. Business risk refers primarily to risk of 
loss. An independent agent typically bears risk of loss from 
its own activities. In the absence of other factors that would 
establish dependence, an agent that shares business risk with 
the enterprise, or has its own business risk, is economically 
independent because its business activities are not integrated 
with those of the principal. Conversely, an agent that bears 
little or no risk from the activities it performs is not 
economically independent and therefore is not described in 
paragraph 6.
    Another relevant factor in determining whether an agent is 
economically independent is whether the agent acts exclusively 
or nearly exclusively for the principal. Such a relationship 
may indicate that the principal has economic control over the 
agent. A number of principals acting in concert also may have 
economic control over an agent. The limited scope of the 
agent's activities and the agent's dependence on a single 
source of income may indicate that the agent lacks economic 
independence. It should be borne in mind, however, that 
exclusivity is not in itself a conclusive test; an agent may be 
economically independent notwithstanding an exclusive 
relationship with the principal if it has the capacity to 
diversify and acquire other clients without substantial 
modifications to its current business and without substantial 
harm to its business profits. Thus, exclusivity should be 
viewed merely as a pointer to further investigation of the 
relationship between the principal and the agent. Each case 
must be addressed on the basis of its own facts and 
circumstances.

Paragraph 7

    This paragraph clarifies that a company that is a resident 
of a Contracting State is not deemed to have a permanent 
establishment in the other Contracting State merely because it 
controls, or is controlled by, a company that is a resident of 
that other Contracting State, or that carries on business in 
that other Contracting State. The determination whether a 
permanent establishment exists is made solely on the basis of 
the factors described in paragraphs 1 through 6 of the Article. 
Whether a company is a permanent establishment of a related 
company, therefore, is based solely on those factors and not on 
the ownership or control relationship between the companies.

                 ARTICLE 6 (INCOME FROM REAL PROPERTY)

Paragraph 1

    The first paragraph of Article 6 states the general rule 
that income of a resident of a Contracting State derived from 
real property situated in the other Contracting State may be 
taxed in the Contracting State in which the property is 
situated. The paragraph specifies that income from real 
property includes income from agriculture and forestry. Given 
the availability of the net election in paragraph 5, taxpayers 
generally should be able to obtain the same tax treatment in 
the situs country regardless of whether the income is treated 
as business profits or real property income.
    This Article does not grant an exclusive taxing right to 
the situs State; the situs State is merely given the primary 
right to tax. The Article does not impose any limitation in 
terms of rate or form of tax on the situs State, except that, 
as provided in paragraph 5, the situs State must allow the 
taxpayer an election to be taxed on a net basis.

Paragraph 2

    The term ``real property'' is defined in paragraph 2 by 
reference to the internal law definition in the situs State. In 
the case of the United States, the term has the meaning given 
to it by Reg. Sec. 1.897-1(b). In addition to the statutory 
definitions in the two Contracting States, the paragraph 
specifies certain additional classes of property that, 
regardless of internal law definitions, are within the scope of 
the term for purposes of the Convention. This expanded 
definition conforms to that in the OECD Model. The definition 
of ``real property'' for purposes of Article 6 is more limited 
than the expansive definition of ``real property'' in paragraph 
1 of Article 13 (Gains). The Article 13 term includes not only 
real property as defined in Article 6 but certain other 
interests in real property.

Paragraph 3

    Paragraph 3 makes clear that all forms of income derived 
from the exploitation of real property are taxable in the 
Contracting State in which the property is situated. This 
includes income from any use of real property, including, but 
not limited to, income from direct use by the owner (in which 
case income may be imputed to the owner for tax purposes) and 
rental income from the letting of real property. In the case of 
a net lease of real property, if a net election has not been 
made, the gross rental payment (before deductible expenses 
incurred by the lessee) is treated as income from the property.
    Other income closely associated with real property is 
covered by other Articles of the Convention, however, and not 
Article 6. For example, income from the disposition of an 
interest in real property is not considered ``derived'' from 
real property; taxation of that income is addressed in Article 
13 (Gains). Interest paid on a mortgage on real property would 
be covered by Article 11 (Interest). Distributions by a U.S. 
Real Estate Investment Trust or certain regulated investment 
companies would fall under Article 13 (Gains) in the case of 
distributions of U.S. real property gain or Article 10 
(Dividends) in the case of distributions treated as dividends. 
Finally, distributions from a United States Real Property 
Holding Corporation are not considered to be income from the 
exploitation of real property; such payments would fall under 
Article 10 or 13.

Paragraph 4

    This paragraph specifies that the basic rule of paragraph 1 
(as elaborated in paragraph 3) applies to income from real 
property of an enterprise. This clarifies that the situs 
country may tax the real property income (including rental 
income) of a resident of the other Contracting State in the 
absence of attribution to a permanent establishment in the 
situs State. This provision represents an exception to the 
general rule under Article 7 (Business Profits) that income 
must be attributable to a permanent establishment in order to 
be taxable in the situs state.

Paragraph 5

    The paragraph provides that a resident of one Contracting 
State that derives real property income from the other may 
elect, for any taxable year, to be subject to tax in that other 
State on a net basis, as though the income were attributable to 
a permanent establishment in that other State. The election may 
be terminated with the consent of the competent authority of 
the situs State. In the United States, revocation will be 
granted in accordance with the provisions of Treas. Reg. 
section 1.871-10(d)(2).

                      ARTICLE 7 (BUSINESS PROFITS)

    This Article provides rules for the taxation by a 
Contracting State of the business profits of an enterprise of 
the other Contracting State.

Paragraph 1

    Paragraph 1 states the general rule that business profits 
of an enterprise of one Contracting State may not be taxed by 
the other Contracting State unless the enterprise carries on 
business in that other Contracting State through a permanent 
establishment (as defined in Article 5 (Permanent 
Establishment)) situated there. When that condition is met, the 
State in which the permanent establishment is situated may tax 
the enterprise on the income that is attributable to the 
permanent establishment.
    Although the Convention does not include a definition of 
``business profits,'' the term is intended to cover income 
derived from any trade or business. In accordance with this 
broad definition, the term ``business profits'' includes income 
attributable to notional principal contracts and other 
financial instruments to the extent that the income is 
attributable to a trade or business of dealing in such 
instruments or is otherwise related to a trade or business (as 
in the case of a notional principal contract entered into for 
the purpose of hedging currency risk arising from an active 
trade or business). Any other income derived from such 
instruments is, unless specifically covered in another article, 
dealt with under Article 20 (Other Income).
    The term ``business profits'' also includes income derived 
by an enterprise from the rental of tangible personal property 
(unless such tangible personal property consists of aircraft, 
ships or containers, income from which is addressed by Article 
8 (Shipping and Air Transport)). The inclusion of income 
derived by an enterprise from the rental of tangible personal 
property in business profits means that such income earned by a 
resident of a Contracting State can be taxed by the other 
Contracting State only if the income is attributable to a 
permanent establishment maintained by the resident in that 
other State, and, if the income is taxable, it can be taxed 
only on a net basis. Income from the rental of tangible 
personal property that is not derived in connection with a 
trade or business is dealt with in Article 20 (Other Income).
    In addition, as a result of the definitions of 
``enterprise'' and ``business'' in Article 3 (General 
Definitions), the term includes income derived from the 
furnishing of personal services. Thus, a consulting firm 
resident in one State whose employees or partners perform 
services in the other State through a permanent establishment 
may be taxed in that other State on a net basis under Article 
7, and not under Article 14 (Income from Employment), which 
applies only to income of employees. With respect to the 
enterprise's employees themselves, however, their salary 
remains subject to Article 14.
    Because this article applies to income earned by an 
enterprise from the furnishing of personal services, the 
article also applies to income derived by a partner resident in 
a Contracting State that is attributable to personal services 
performed in the other Contracting State through a partnership 
with a permanent establishment in that other State. Income 
which may be taxed under this article includes all income 
attributable to the permanent establishment in respect of the 
performance of the personal services carried on by the 
partnership (whether by the partner himself, other partners in 
the partnership, or by employees assisting the partners) and 
any income from activities ancillary to the performance of 
those services (e.g., charges for facsimile services).
    The application of Article 7 to a service partnership may 
be illustrated by the following example: a partnership formed 
in Belgium has five partners (who agree to split profits 
equally), four of whom are resident and perform personal 
services only in Belgium at Office A, and one of whom performs 
personal services at Office B, a permanent establishment in the 
United States. In this case, the four partners of the 
partnership resident in Belgium may be taxed in the United 
States in respect of their share of the income attributable to 
the permanent establishment, Office B. The services giving rise 
to income which may be attributed to the permanent 
establishment would include not only the services performed by 
the one resident partner, but also, for example, if one of the 
four other partners came to the United States and worked on an 
Office B matter there, the income in respect of those services. 
Income from the services performed by the visiting partner 
would be subject to tax in the United States regardless of 
whether the visiting partner actually visited or used Office B 
while performing services in the United States.

Paragraph 2

    Paragraph 2 provides rules for the attribution of business 
profits to a permanent establishment. The Contracting States 
will attribute to a permanent establishment the profits that it 
would have earned had it been a distinct and separate 
enterprise engaged in the same or similar activities under the 
same or similar conditions and dealing wholly independently 
with the enterprise of which it is a permanent establishment.
    The ``attributable to'' concept of paragraph 2 provides an 
alternative to the analogous but somewhat different 
``effectively connected'' concept in Code section 864(c). In 
effect, paragraph 2 allows the United States to tax the lesser 
of two amounts of income: the amount determined by applying 
U.S. rules regarding the calculation of effectively connected 
income and the amount determined under Article 7 of the 
Convention. That is, a taxpayer may choose the set of rules 
that results in the lowest amount of taxable income, but may 
not mix and match.
    In some cases, the amount of income ``attributable to'' a 
permanent establishment under Article 7 may be greater than the 
amount of income that would be treated as ``effectively 
connected'' to a U.S. trade or business under section 864. For 
example, a taxpayer that has a significant amount of foreign 
source royalty income attributable to a U.S. branch may find 
that it will pay less tax in the United States by applying 
section 864(c) of the Code, rather than the rules of Article 7, 
if the foreign source royalties are not derived in the active 
conduct of a trade or business and thus would not be 
effectively connected income. But, as described in the 
Technical Explanation to Article 1(2), if it does so, it may 
not then use Article 7 principles to exempt other income that 
would be effectively connected to the U.S. trade or business. 
Conversely, if it uses Article 7 principles to exempt other 
effectively connected income that is not attributable to its 
U.S. permanent establishment, then it must include the foreign 
source royalties in its net taxable income even though such 
royalties would not constitute effectively connected income.
    In the case of financial institutions, the use of internal 
dealings to allocate income within an enterprise may produce 
results under Article 7 that are significantly different from 
the results under the effectively connected income rules. For 
example, income from interbranch notional principal contracts 
may be taken into account under Article 7, notwithstanding that 
such transactions may be ignored for purposes of U.S. domestic 
law. Under the consistency rule described above, a financial 
institution that conducts different lines of business through 
its U.S. permanent establishment may not choose to apply the 
rules of the Code with respect to some lines of business and 
Article 7 of the Convention with respect to others. If it 
chooses to use the rules of Article 7 to allocate its income 
from its trading book, it may not then use U.S. domestic rules 
to allocate income from its loan portfolio.
    The profits attributable to a permanent establishment may 
be from sources within or without a Contracting State. However, 
as stated in the Protocol, the business profits attributable to 
a permanent establishment include only those profits derived 
from the assets used, risks assumed, and activities performed 
by, the permanent establishment.
    The language of paragraph 2, when combined with paragraph 3 
dealing with the allowance of deductions for expenses incurred 
for the purposes of earning the profits, and the Protocol to 
Article 7, incorporates the arm's-length standard for purposes 
of determining the profits attributable to a permanent 
establishment. As noted below with respect to Article 9, the 
United States generally interprets the arm's length standard in 
a manner consistent with the OECD Transfer Pricing Guidelines.
    The Protocol confirms that the arm's length method of 
paragraphs 2 and 3 consists of applying the OECD Transfer 
Pricing Guidelines, but taking into account the different 
economic and legal circumstances of a single legal entity (as 
opposed to separate but associated enterprises). Thus, any of 
the methods used in the Transfer Pricing Guidelines, including 
profits methods, may be used as appropriate and in accordance 
with the Transfer Pricing Guidelines. However, the use of the 
Transfer Pricing Guidelines applies only for purposes of 
attributing profits within the legal entity. It does not create 
legal obligations or other tax consequences that would result 
from transactions having independent legal significance.
    For example, an entity that operates through branches 
rather than separate subsidiaries will have lower capital 
requirements because all of the assets of the entity are 
available to support all of the entity's liabilities (with some 
exceptions attributable to local regulatory restrictions). This 
is the reason that most commercial banks and some insurance 
companies operate through branches rather than subsidiaries. 
The benefit that comes from such lower capital costs must be 
allocated among the branches in an appropriate manner. This 
issue does not arise in the case of an enterprise that operates 
through separate entities, since each entity will have to be 
separately capitalized or will have to compensate another 
entity for providing capital (usually through a guarantee).
    Under U.S. domestic regulations, internal ``transactions'' 
generally are not recognized because they do not have legal 
significance. In contrast, the rule provided by the Protocol is 
that such internal dealings may be used to allocate income in 
cases where the dealings accurately reflect the allocation of 
risk within the enterprise. One example is that of global 
trading in securities. In many cases, banks use internal swap 
transactions to transfer risk from one branch to a central 
location where traders have the expertise to manage that 
particular type of risk. Under the Convention, such a bank may 
also use such swap transactions as a means of allocating income 
between the branches, if use of that method is the ``best 
method'' within the meaning of regulation section 1.482-1(c). 
The books of a branch will not be respected, however, when the 
results are inconsistent with a functional analysis. So, for 
example, income from a transaction that is booked in a 
particular branch (or home office) will not be treated as 
attributable to that location if the sales and risk management 
functions that generate the income are performed in another 
location.
    Because the use of profits methods is permissible under 
paragraph 2, it is not necessary for the Convention to include 
a provision corresponding to paragraph 4 of Article 7 of the 
OECD Model.

Paragraph 3

    This paragraph is identical to the provision in the U.S. 
Model. Paragraph 3 provides that in determining the business 
profits of a permanent establishment, deductions shall be 
allowed for the expenses incurred for the purposes of the 
permanent establishment, ensuring that business profits will be 
taxed on a net basis. This rule is not limited to expenses 
incurred exclusively for the purposes of the permanent 
establishment, but includes expenses incurred for the purposes 
of the enterprise as a whole, or that part of the enterprise 
that includes the permanent establishment. Deductions are to be 
allowed regardless of which accounting unit of the enterprise 
books the expenses, so long as they are incurred for the 
purposes of the permanent establishment. For example, a portion 
of the interest expense recorded on the books of the home 
office in one State may be deducted by a permanent 
establishment in the other if properly allocable thereto. The 
amount of expense that must be allowed as a deduction is 
determined by applying the arm's length principle.
    As noted above, the Protocol provides that the OECD 
Transfer Pricing Guidelines apply, by analogy, in determining 
the profits attributable to a permanent establishment. 
Accordingly, a permanent establishment may deduct payments made 
to its head office or another branch in compensation for 
services performed for the benefit of the branch. The method to 
be used in calculating that amount will depend on the terms of 
the arrangements between the branches and head office. For 
example, the enterprise could have a policy, expressed in 
writing, under which each business unit could use the services 
of lawyers employed by the head office. At the end of each 
year, the costs of employing the lawyers would be allocated to 
each business unit according to the amount of services used by 
that business unit during the year. Since this appears to be a 
kind of cost-sharing arrangement and the allocation of costs is 
based on the benefits received by each business unit, it would 
be an acceptable means of determining a permanent 
establishment's deduction for legal expenses. Alternatively, 
the head office could agree to employ lawyers at its own risk, 
and to charge an arm's length price for legal services 
performed for a particular business unit. If the lawyers were 
under-utilized, and the ``fees'' received from the business 
units were less than the cost of employing the lawyers, then 
the head office would bear the excess cost. If the ``fees'' 
exceeded the cost of employing the lawyers, then the head 
office would keep the excess to compensate it for assuming the 
risk of employing the lawyers. If the enterprise acted in 
accordance with this agreement, this method would be an 
acceptable alternative method for calculating a permanent 
establishment's deduction for legal expenses.
    The Protocol also specifies that a permanent establishment 
cannot be funded entirely with debt, but must have sufficient 
capital to carry on its activities as if it were a distinct and 
separate enterprise. To the extent that the permanent 
establishment does not have such capital, a Contracting State 
may attribute such capital to the permanent establishment and 
deny an interest deduction to the extent necessary to reflect 
that capital attribution. The method prescribed by U.S. 
domestic law for making this attribution is found in Treas. 
Reg. Section 1.882-5. Both Section 1.882-5 and the method 
prescribed in the Protocol start from the premise that all of 
the capital of the enterprise supports all of the assets and 
risks of the enterprise, and therefore the entire capital of 
the enterprise must be allocated to its various businesses and 
offices.
    However, section 1.882-5 does not take into account the 
fact that some assets create more risk for the enterprise than 
do other assets. An independent enterprise would need less 
capital to support a perfectly-hedged U.S. Treasury security 
than it would need to support an equity security or other asset 
with significant market and/or credit risk. Accordingly, in 
some cases section 1.882 095 would require a taxpayer to 
allocate more capital to the United States, and therefore would 
reduce the taxpayer's interest deduction more, than is 
appropriate. To address these cases, the Protocol allows a 
taxpayer to apply a more flexible approach that takes into 
account the relative risk of its assets in the various 
jurisdictions in which it does business. In particular, in the 
case of financial institutions other than insurance companies, 
the amount of capital attributable to a permanent establishment 
is determined by allocating the institution's total equity 
between its various offices on the basis of the proportion of 
the financial institution's risk-weighted assets attributable 
to each of them. This recognizes the fact that financial 
institutions are in many cases required to risk-weight their 
assets for regulatory purposes and, in other cases, will do so 
for business reasons even if not required to do so by 
regulators. However, risk-weighting is more complicated than 
the method prescribed by Section 1.882-5. Accordingly, to ease 
this administrative burden, taxpayers may choose to apply the 
principles of Treas. Reg. Section 1.882-5(c) to determine the 
amount of capital allocable to its U.S. permanent 
establishment, in lieu of determining its allocable capital 
under the risk-weighed capital allocation method provided by 
the Protocol, even if it has otherwise chosen to apply the 
principles of Article 7 rather than the effectively connected 
income rules of U.S. domestic law.

Paragraph 4

    Paragraph 4 provides that no business profits can be 
attributed to a permanent establishment merely because it 
purchases goods or merchandise for the enterprise of which it 
is a part. This paragraph is essentially identical to paragraph 
5 of Article 7 of the U.S. and OECD Models. This rule applies 
only to an office that performs functions for the enterprise in 
addition to purchasing. The income attribution issue does not 
arise if the sole activity of the office is the purchase of 
goods or merchandise because such activity does not give rise 
to a permanent establishment under Article 5 (Permanent 
Establishment). A common situation in which paragraph 4 is 
relevant is one in which a permanent establishment purchases 
raw materials for the enterprise's manufacturing operation 
conducted outside the United States and sells the manufactured 
product. While business profits may be attributable to the 
permanent establishment with respect to its sales activities, 
no profits are attributable to it with respect to its 
purchasing activities.

Paragraph 5

    Paragraph 5 provides that profits shall be determined by 
the same method each year, unless there is good reason to 
change the method used. This rule assures consistent tax 
treatment over time for permanent establishments. It limits the 
ability of both the Contracting State and the enterprise to 
change accounting methods to be applied to the permanent 
establishment. It does not, however, restrict a Contracting 
State from imposing additional requirements, such as the rules 
under Code section 481, to prevent amounts from being 
duplicated or omitted following a change in accounting method. 
Such adjustments may be necessary, for example, if the taxpayer 
switches from using the domestic rules under section 864 in one 
year to using the rules of Article 7 in the next. Also, if the 
taxpayer switches from Convention-based rules to U.S. domestic 
rules, it may need to meet certain deadlines for making 
elections that are not necessary when applying the rules of the 
Convention.

Paragraph 6

    Paragraph 6 coordinates the provisions of Article 7 and 
other provisions of the Convention. Under this paragraph, when 
business profits include items of income that are dealt with 
separately under other articles of the Convention, the 
provisions of those articles will, except when they 
specifically provide to the contrary, take precedence over the 
provisions of Article 7. For example, the taxation of dividends 
will be determined by the rules of Article 10 (Dividends), and 
not by Article 7, except where, as provided in paragraph 8 of 
Article 10, the dividend is attributable to a permanent 
establishment. In the latter case the provisions of Article 7 
apply. Thus, an enterprise of one State deriving dividends from 
the other State may not rely on Article 7 to exempt those 
dividends from tax at source if they are not attributable to a 
permanent establishment of the enterprise in the other State. 
By the same token, if the dividends are attributable to a 
permanent establishment in the other State, the dividends may 
be taxed on a net income basis at the source State full 
corporate tax rate, rather than on a gross basis under Article 
10 (Dividends).
    As provided in Article 8 (Shipping and Air Transport), 
income derived from shipping and air transport activities in 
international traffic described in that Article is taxable only 
in the country of residence of the enterprise regardless of 
whether it is attributable to a permanent establishment 
situated in the source State.

Paragraph 7

    Paragraph 7 incorporates into the Convention the rule of 
Code section 864(c)(6). Like the Code section on which it is 
based, paragraph 7 provides that any income or gain 
attributable to a permanent establishment during its existence 
is taxable in the Contracting State where the permanent 
establishment is situated, even if the payment of that income 
or gain is deferred until after the permanent establishment 
ceases to exist. This rule applies with respect to paragraphs 1 
and 2 of Article 7 (Business Profits),
    paragraph 8 of Article 10 (Dividends), paragraph 4 of 
Article 11 (Interest), paragraph 3 of Articles 12 (Royalties) 
and 13 (Gains) and paragraph 2 of Article 20 (Other Income).
    The effect of this rule can be illustrated by the following 
example. Assume a company that is a resident of Belgium and 
that maintains a permanent establishment in the United States 
winds up the permanent establishment's business and sells the 
permanent establishment's inventory and assets to a U.S. buyer 
at the end of year 1 in exchange for an interest-bearing 
installment obligation payable in full at the end of year 3. 
Despite the fact that the company has no permanent 
establishment in the United States in year 3, the United States 
may tax the deferred income payment recognized by the company 
in year 3.

Relationship to Other Articles

    This Article is subject to the saving clause of paragraph 4 
of Article 1 (General Scope) of the Convention. Thus, if a 
citizen of the United States who is a resident of Belgium under 
the treaty derives business profits from the United States that 
are not attributable to a permanent establishment in the United 
States, the United States may, subject to the special foreign 
tax credit rules of paragraph 4 of Article 22 (Relief from 
Double Taxation), tax those profits, notwithstanding the 
provision of paragraph 1 of this Article which would exempt the 
income from U.S. tax.
    The benefits of this Article are also subject to Article 21 
(Limitation on Benefits). Thus, an enterprise of Belgium and 
that derives income effectively connected with a U.S. trade or 
business may not claim the benefits of Article 7 unless the 
resident carrying on the enterprise qualifies for such benefits 
under Article 21.

                 ARTICLE 8 (SHIPPING AND AIR TRANSPORT)

    This Article governs the taxation of profits from the 
operation of ships and aircraft in international traffic. The 
term ``international traffic'' is defined in subparagraph 1(f) 
of Article 3 (General Definitions). The provisions of Article 8 
are in all material respects identical to the provisions of 
Article 8 of the U.S. Model.

Paragraph 1

    Paragraph 1 provides that profits derived by an enterprise 
of a Contracting State from the operation in international 
traffic of ships or aircraft are taxable only in that 
Contracting State. Because paragraph 6 of Article 7 (Business 
Profits) defers to Article 8 with respect to shipping income, 
such income derived by a resident of one of the Contracting 
States may not be taxed in the other State even if the 
enterprise has a permanent establishment in that other State. 
Thus, if a U.S. airline has a ticket office in Belgium, Belgium 
may not tax the airline's profits attributable to that office 
under Article 7. Since entities engaged in international 
transportation activities normally will have many permanent 
establishments in a number of countries, the rule avoids 
difficulties that would be encountered in attributing income to 
multiple permanent establishments if the income were covered by 
Article 7 (Business Profits).

Paragraph 2

    The income from the operation of ships or aircraft in 
international traffic that is exempt from tax under paragraph 1 
is defined in paragraph 2.
    In addition to income derived directly from the operation 
of ships and aircraft in international traffic, this definition 
also includes certain items of rental income. First, income of 
an enterprise of a Contracting State from the rental of ships 
or aircraft on a full basis (i.e., with crew) is income of the 
lessor from the operation of ships and aircraft in 
international traffic and, therefore, is exempt from tax in the 
other Contracting State under paragraph 1. Also, paragraph 2 
encompasses income from the lease of ships or aircraft on a 
bareboat basis (i.e., without crew), either when the income is 
incidental to other income of the lessor from the operation of 
ships or aircraft in international traffic, or when the ships 
or aircraft are operated in international traffic by the 
lessee. If neither of those two conditions apply, income from 
the bareboat rentals would constitute business profits. The 
coverage of Article 8 is therefore broader than that of Article 
8 of the OECD Model, which covers bareboat leasing only when it 
is incidental to other income of the lessor from the operation 
of ships or aircraft in international traffic.
    Paragraph 2 also clarifies, consistent with the Commentary 
to Article 8 of the OECD Model, that income earned by an 
enterprise from the inland transport of property or passengers 
within either Contracting State falls within Article 8 if the 
transport is undertaken as part of the international transport 
of property or passengers by the enterprise. Thus, if a U.S. 
shipping company contracts to carry property from Belgium to a 
U.S. city and, as part of that contract, it transports the 
property by truck from its point of origin to an airport in 
Belgium (or it contracts with a trucking company to carry the 
property to the airport) the income earned by the U.S. shipping 
company from the overland leg of the journey would be taxable 
only in the United States. Similarly, Article 8 also would 
apply to all of the income derived from a contract for the 
international transport of goods, even if the goods were 
transported to the port by a lighter, not by the vessel that 
carried the goods in international waters.
    Finally, certain non-transport activities that are an 
integral part of the services performed by a transport company, 
or are ancillary to the enterprise's operation of ships or 
aircraft in international traffic, are understood to be covered 
in paragraph 1, though they are not specified in paragraph 2. 
These include, for example, the provision of goods and services 
by engineers, ground and equipment maintenance and staff, cargo 
handlers, catering staff and customer services personnel. Where 
the enterprise provides such goods to, or performs services 
for, other enterprises and such activities are directly 
connected with or ancillary to the enterprise's operation of 
ships or aircraft in international traffic, the profits from 
the provision of such goods and services to other enterprises 
will fall under this paragraph.
    For example, enterprises engaged in the operation of ships 
or aircraft in international traffic may enter into pooling 
arrangements for the purposes of reducing the costs of 
maintaining facilities needed for the operation of their ships 
or aircraft in other countries. For instance, where an airline 
enterprise agrees (for example, under an International Airlines 
Technical Pool agreement) to provide spare parts or maintenance 
services to other airlines landing at a particular location 
(which allows it to benefit from these services at other 
locations), activities carried on pursuant to that agreement 
will be ancillary to the operation of aircraft in international 
traffic by the enterprise.
    Also, advertising that the enterprise may do for other 
enterprises in magazines offered aboard ships or aircraft that 
it operates in international traffic or at its business 
locations, such as ticket offices, is ancillary to its 
operation of these ships or aircraft. Profits generated by such 
advertising fall within this paragraph. Income earned by 
concessionaires, however, is not covered by Article 8. These 
interpretations of paragraph 1 also are consistent with the 
Commentary to Article 8 of the OECD Model.

Paragraph 3

    Under this paragraph, profits of an enterprise of a 
Contracting State from the use, maintenance or rental of 
containers (including equipment for their transport) are exempt 
from tax in the other Contracting State, unless those 
containers are used for transport solely in the other 
Contracting State. This result obtains under paragraph 3 
regardless of whether the recipient of the income is engaged in 
the operation of ships or aircraft in international traffic, 
and regardless of whether the enterprise has a permanent 
establishment in the other Contracting State. Only income from 
the use, maintenance or rental of containers (including 
equipment for their transport) that is incidental to other 
income from international traffic is covered by Article 8 of 
the OECD Model.

Paragraph 4

    This paragraph clarifies that the provisions of paragraphs 
1 and 3 also apply to profits derived by an enterprise of a 
Contracting State from participation in a pool, joint business 
or international operating agency. This refers to various 
arrangements for international cooperation by carriers in 
shipping and air transport. For example, airlines from two 
countries may agree to share the transport of passengers 
between the two countries. They each will fly the same number 
of flights per week and share the revenues from that route 
equally, regardless of the number of passengers that each 
airline actually transports. Paragraph 4 makes clear that with 
respect to each carrier the income dealt with in the Article is 
that carrier's share of the total transport, not the income 
derived from the passengers actually carried by the airline. 
This paragraph corresponds to paragraph 4 of Article 8 of the 
OECD Model.

Relationship to Other Articles

    The taxation of gains from the alienation of ships, 
aircraft or containers is not dealt with in this Article but in 
paragraphs 4 and 5 of Article 13 (Gains).
    As with other benefits of the Convention, the benefit of 
exclusive residence country taxation under Article 8 is 
available to an enterprise only if it is entitled to benefits 
under Article 21 (Limitation on Benefits).
    This Article also is subject to the saving clause of 
paragraph 4 of Article 1 (General Scope) of the Convention. 
Thus, if a citizen of the United States who is a resident of 
Belgium derives profits from the operation of ships or aircraft 
in international traffic, notwithstanding the exclusive 
residence country taxation in paragraph 1 of Article 8, the 
United States may, subject to the special foreign tax credit 
rules of paragraph 4 of Article 22 (Relief from Double 
Taxation), tax those profits as part of the worldwide income of 
the citizen. (This is an unlikely situation, however, because 
non-tax considerations (e.g., insurance) generally result in 
shipping activities being carried on in corporate form.)

                   ARTICLE 9 (ASSOCIATED ENTERPRISES)

    This Article incorporates in the Convention the arm's-
length principle reflected in the U.S. domestic transfer 
pricing provisions, particularly Code section 482. It provides 
that when related enterprises engage in a transaction on terms 
that are not arm's-length, the Contracting States may make 
appropriate adjustments to the taxable income and tax liability 
of such related enterprises to reflect what the income and tax 
of these enterprises with respect to the transaction would have 
been had there been an arm's-length relationship between them. 
The provisions of Article 9 are identical to the provisions of 
Article 9 in the U.S. Model.

Paragraph 1

    This paragraph is essentially the same as its counterpart 
in the OECD Model. It addresses the situation where an 
enterprise of a Contracting State is related to an enterprise 
of the other Contracting State, and there are arrangements or 
conditions imposed between the enterprises in their commercial 
or financial relations that are different from those that would 
have existed in the absence of the relationship. Under these 
circumstances, the Contracting States may adjust the income (or 
loss) of the enterprise to reflect what it would have been in 
the absence of such a relationship.
    The paragraph identifies the relationships between 
enterprises that serve as a prerequisite to application of the 
Article. As the Commentary to the OECD Model makes clear, the 
necessary element in these relationships is effective control, 
which is also the standard for purposes of section 482. Thus, 
the Article applies if an enterprise of one State participates 
directly or indirectly in the management, control, or capital 
of the enterprise of the other State. Also, the Article applies 
if any third person or persons participate directly or 
indirectly in the management, control, or capital of 
enterprises of different States. For this purpose, all types of 
control are included, i.e., whether or not legally enforceable 
and however exercised or exercisable.
    The fact that a transaction is entered into between such 
related enterprises does not, in and of itself, mean that a 
Contracting State may adjust the income (or loss) of one or 
both of the enterprises under the provisions of this Article. 
If the conditions of the transaction are consistent with those 
that would be made between independent persons, the income 
arising from that transaction should not be subject to 
adjustment under this Article.
    Similarly, the fact that associated enterprises may have 
concluded arrangements, such as cost sharing arrangements or 
general services agreements, is not in itself an indication 
that the two enterprises have entered into a non-arm's-length 
transaction that should give rise to an adjustment under 
paragraph 1. Both related and unrelated parties enter into such 
arrangements (e.g., joint venturers may share some development 
costs). As with any other kind of transaction, when related 
parties enter into an arrangement, the specific arrangement 
must be examined to see whether or not it meets the arm's-
length standard. In the event that it does not, an appropriate 
adjustment may be made, which may include modifying the terms 
of the agreement or re-characterizing the transaction to 
reflect its substance.
    It is understood that the ``commensurate with income'' 
standard for determining appropriate transfer prices for 
intangibles, added to Code section 482 by the Tax Reform Act of 
1986, was designed to operate consistently with the arm's-
length standard. The implementation of this standard in the 
section 482 regulations is in accordance with the general 
principles of paragraph 1 of Article 9 of the Convention, as 
interpreted by the OECD Transfer Pricing Guidelines.
    This Article also permits tax authorities to deal with thin 
capitalization issues. They may, in the context of Article 9, 
scrutinize more than the rate of interest charged on a loan 
between related persons. They also may examine the capital 
structure of an enterprise, whether a payment in respect of 
that loan should be treated as interest, and, if it is treated 
as interest, under what circumstances interest deductions 
should be allowed to the payor. Paragraph 3 of the Commentary 
to Article 9 of the OECD Model, together with the U.S. 
observation set forth in paragraph 15, sets forth a similar 
understanding of the scope of Article 9 in the context of thin 
capitalization.

Paragraph 2

    When a Contracting State has made an adjustment that is 
consistent with the provisions of paragraph 1, and the other 
Contracting State agrees that the adjustment was appropriate to 
reflect arm's-length conditions, that other Contracting State 
is obligated to make a correlative adjustment (sometimes 
referred to as a ``corresponding adjustment'') to the tax 
liability of the related person in that other Contracting 
State. Although the OECD Model does not specify that the other 
Contracting State must agree with the initial adjustment before 
it is obligated to make the correlative adjustment, the 
Commentary makes clear that the paragraph is to be read that 
way.
    As explained in the Commentary to Article 9 of the OECD 
Model, Article 9 leaves the treatment of ``secondary 
adjustments'' to the laws of the Contracting States. When an 
adjustment under Article 9 has been made, one of the parties 
will have in its possession funds that it would not have had at 
arm's length. The question arises as to how to treat these 
funds. In the United States the general practice is to treat 
such funds as a dividend or contribution to capital, depending 
on the relationship between the parties. Under certain 
circumstances, the parties may be permitted to restore the 
funds to the party that would have the funds had the 
transactions been entered into on arm's length terms, and to 
establish an account payable pending restoration of the funds. 
See Rev. Proc. 99-32, 1999-2 C.B. 296.
    The Contracting State making a secondary adjustment will 
take the other provisions of the Convention, where relevant, 
into account. For example, if the effect of a secondary 
adjustment is to treat a U.S. corporation as having made a 
distribution of profits to its parent corporation in Belgium, 
the provisions of Article 10 (Dividends) will apply. Also, if 
under Article 22 Belgium generally gives a credit for taxes 
paid with respect to such dividends, it would also be required 
to do so in this case.
    The competent authorities are authorized by paragraph 3 of 
Article 24 (Mutual Agreement Procedure) to consult, if 
necessary, to resolve any differences in the application of 
these provisions. For example, there may be a disagreement over 
whether an adjustment made by a Contracting State under 
paragraph 1 was appropriate.
    If a correlative adjustment is made under paragraph 2, it 
is to be implemented, pursuant to paragraph 2 of Article 24 
(Mutual Agreement Procedure), notwithstanding any time limits 
or other procedural limitations in the law of the Contacting 
State making the adjustment. If a taxpayer has entered a 
closing agreement (or other written settlement) with the United 
States prior to bringing a case to the competent authorities, 
the U.S. competent authority will endeavor only to obtain a 
correlative adjustment from Belgium. See, Rev. Proc. 2006-54, 
2006-49 I.R.B. 1035, Section 7.05.

Relationship to Other Articles

    The saving clause of paragraph 4 of Article 1 (General 
Scope) does not apply to paragraph 2 of Article 9 by virtue of 
an exception to the saving clause in paragraph 5(a) of Article 
1. Thus, even if the statute of limitations has run, a refund 
of tax can be made in order to implement a correlative 
adjustment. Statutory or procedural limitations, however, 
cannot be overridden to impose additional tax, because 
paragraph 2 of Article 1 provides that the Convention cannot 
restrict any statutory benefit.

                         ARTICLE 10 (DIVIDENDS)

    Article 10 provides rules for the taxation of dividends 
paid by a company that is a resident of one Contracting State 
to a beneficial owner that is a resident of the other 
Contracting State. The article provides for full residence 
country taxation of such dividends and a limited source-State 
right to tax. Article 10 also provides rules for the imposition 
of a tax on branch profits by the State of source.

Paragraph 1

    The right of a shareholder's country of residence to tax 
dividends arising in the source country is preserved by 
paragraph 1, which permits a Contracting State to tax its 
residents on dividends paid to them by a company that is a 
resident of the other Contracting State. For dividends from any 
other source paid to a resident, Article 20 (Other Income) 
grants the residence country exclusive taxing jurisdiction 
(other than for dividends attributable to a permanent 
establishment in the other State).

Paragraph 2

    The State of source also may tax dividends beneficially 
owned by a resident of the other State, subject to the 
limitations of paragraphs 2 through 4. Paragraph 2 generally 
limits the rate of withholding tax in the State of source on 
dividends paid by a company resident in that State to 15 
percent of the gross amount of the dividend. If, however, the 
beneficial owner of the dividend is a company resident in the 
other State and owns directly shares representing at least 10 
percent of the voting power of the company paying the dividend, 
then the rate of withholding tax in the State of source is 
limited to 5 percent of the gross amount of the dividend. 
Shares are considered voting shares if they provide the power 
to elect, appoint or replace any person vested with the powers 
ordinarily exercised by the board of directors of a U.S. 
corporation.
    The benefits of paragraph 2 may be granted at the time of 
payment by means of reduced rate of withholding tax at source. 
It also is consistent with the paragraph for tax to be withheld 
at the time of payment at full statutory rates, and the treaty 
benefit to be granted by means of a subsequent refund so long 
as such procedures are applied in a reasonable manner.
    The determination of whether the ownership threshold for 
subparagraph a) of paragraph 2 is met for purposes of the 5 
percent maximum rate of withholding tax is made on the date on 
which entitlement to the dividend is determined. Thus, in the 
case of a dividend from a U.S. company, the determination of 
whether the ownership threshold is met generally would be made 
on the dividend record date.
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, defined as under the internal 
law of the country imposing tax (i.e., the source country). The 
beneficial owner of the dividend for purposes of Article 10 is 
the person to which the dividend income is attributable for tax 
purposes under the laws of the source State. Thus, if a 
dividend paid by a corporation that is a resident of one of the 
States (as determined under Article 4 (Residence)) is received 
by a nominee or agent that is a resident of the other State on 
behalf of a person that is not a resident of that other State, 
the dividend is not entitled to the benefits of this Article. 
However, a dividend received by a nominee on behalf of a 
resident of that other State would be entitled to benefits. 
These interpretations are confirmed by paragraph 12 of the 
Commentary to Article 10 of the OECD Model.
    Companies holding shares through fiscally transparent 
entities such as partnerships are considered for purposes of 
this paragraph to hold their proportionate interest in the 
shares held by the intermediate entity. As a result, companies 
holding shares through such entities may be able to claim the 
benefits of subparagraph (a) under certain circumstances. The 
lower rate applies when the company's proportionate share of 
the shares held by the intermediate entity meets the 10 percent 
threshold , and the company meets the requirements of Article 
1(6) (i.e., the company's country of residence treats the 
intermediate entity as fiscally transparent) with respect to 
the dividend. Whether this ownership threshold is satisfied may 
be difficult to determine and often will require an analysis of 
the partnership or trust agreement.
    Of note is the interaction of paragraph 2 and paragraph 4, 
with respect to dividends paid by a Belgian company. Under 
paragraph 2, the withholding tax imposed in Belgium may not 
exceed 5 percent if the beneficial owner of the dividend is a 
company resident in the United States and that U.S. resident 
company owns directly at least 10 percent of the voting stock 
of the Belgian company. However, under paragraph 4, no 
withholding may be imposed on the dividend payment if the U.S. 
resident company has owned directly at least 10 percent of the 
Belgian company for the 12 month period ending on the date the 
dividend is declared. Thus, although the ownership threshold is 
the same under subparagraph 2 a) and paragraph 4, there is an 
additional requirement in paragraph 4 that the U.S. resident 
company have held the stock for a 12 month period ending on the 
date the dividend is declared.

Paragraph 3

    Paragraph 3 provides exclusive residence-country taxation 
(i.e., an elimination of withholding tax) with respect to 
certain dividends distributed by a company that is a resident 
of the United States to a resident of Belgium. As described 
further below, this elimination of withholding tax is available 
with respect to certain inter-company dividends and with 
respect to pension funds.
    Subparagraph (a) of paragraph 3 provides for the 
elimination of withholding tax on dividends beneficially owned 
by a Belgian company that has owned, directly or indirectly, 80 
percent or more of the voting power of the U.S. company paying 
the dividend for the 12-month period ending on the date 
entitlement to the dividend is determined.
    Eligibility for the elimination of withholding tax provided 
by subparagraph (a) is subject to additional restrictions based 
on, but supplementing, the rules of Article 21 (Limitation on 
Benefits). Accordingly, a company that meets the holding 
requirements described above will qualify for the benefits of 
paragraph 3 only if it also: (1) meets the ``publicly traded'' 
test of subparagraph 2(c) of Article 21 (Limitation on 
Benefits), (2) meets the ``ownership-base erosion'' and 
``active trade or business'' tests described in subparagraph 
2(e) and paragraph 4 of Article 21 (Limitation on Benefits), 
(3) meets the ``derivative benefits'' test of paragraph 3 of 
Article 21 (Limitation on Benefits), or (4) is granted the 
benefits of subparagraph 3(a) of Article 10 by the competent 
authority of the source State pursuant to paragraph 7 of 
Article 21 (Limitation on Benefits).
    These restrictions are necessary because of the increased 
pressure on the Limitation on Benefits tests resulting from the 
fact that the United States has relatively few treaties that 
provide for such elimination of withholding tax on inter-
company dividends. The additional restrictions are intended to 
prevent companies from re-organizing in order to become 
eligible for the elimination of withholding tax in 
circumstances where the Limitation on Benefits provision does 
not provide sufficient protection against treaty-shopping.
    For example, assume that ThirdCo is a company resident in a 
third country that does not have a tax treaty with the United 
States providing for the elimination of withholding tax on 
inter-company dividends. ThirdCo owns directly 100 percent of 
the issued and outstanding voting stock of USCo, a U.S. 
company, and of BelCo, a Belgian company. BelCo is a 
substantial company that manufactures widgets; USCo distributes 
those widgets in the United States. If ThirdCo contributes to 
BelCo all the stock of USCo, dividends paid by USCo to BelCo 
would qualify for treaty benefits under the active trade or 
business test of paragraph 4 of Article 21. However, allowing 
ThirdCo to qualify for the elimination of withholding tax, 
which is not available to it under the third state's treaty 
with the United States (if any), would encourage treaty-
shopping.
    In order to prevent this type of treaty-shopping, paragraph 
3 requires BelCo to meet the ownership-base erosion 
requirements of subparagraph 2(e) of Article 21 in addition to 
the active trade or business test of paragraph 4 of Article 16. 
Thus, BelCo would not qualify for the exemption from 
withholding tax unless (i) on at least half the days of the 
taxable year, at least 50 percent of each class of its shares 
was owned by persons that are residents of Belgium and eligible 
for treaty benefits under certain specified tests and (ii) less 
than 50 percent of BelCo's gross income is paid in deductible 
payments to persons that are not residents of either 
Contracting State eligible for benefits under those specified 
tests. Because BelCo is wholly owned by a third country 
resident, BelCo could not qualify for the elimination of 
withholding tax on dividends from USCo under the ownership-base 
erosion test and the active trade or business test. 
Consequently, BelCo would need to qualify under another test or 
obtain discretionary relief from the competent authority under 
Article 21(7). For purposes of Article 10(3)(a)(ii), it is not 
sufficient for a company to qualify for treaty benefits 
generally under the active trade or business test or the 
ownership-base erosion test unless it qualifies for treaty 
benefits under both.
    Alternatively, companies that are publicly traded or 
subsidiaries of publicly-traded companies will generally 
qualify for the elimination of withholding tax. Thus, a company 
that is a resident of Belgium and that meets the requirements 
of Article 21(2)(c)(i) or (ii) will be entitled to the 
elimination of withholding tax, subject to the 12-month holding 
period requirement of Article 10(3)(a).
    In addition, under Article 10(3)(a)(iii), a company that is 
a resident of Belgium may also qualify for the elimination of 
withholding tax on dividends if it satisfies the derivative 
benefits test of paragraph 3 of Article 21. Thus, a Belgian 
company that owns all of the stock of a U.S. corporation may 
qualify for the elimination of withholding tax if it is wholly-
owned, for example, by a U.K., Dutch, Swedish, or Mexican 
publicly-traded company and the other requirements of the 
derivative benefits test are met. At this time, ownership by 
companies that are residents of other European Union, European 
Economic Area or North American Free Trade Agreement countries 
would not qualify the Belgian company for benefits under this 
provision, as the United States does not have treaties that 
eliminate the withholding tax on inter-company dividends with 
any other of those countries. If the United States were to 
enter into such treaties with more of those countries, 
residents of those countries could then qualify as equivalent 
beneficiaries for purposes of this provision.
    A company also may qualify for the elimination of 
withholding tax pursuant to Article 10(3)(a)(iii) if it is 
owned by seven or fewer U.S. or Belgian residents who qualify 
as an ``equivalent beneficiary'' and meet the other 
requirements of the derivative benefits provision. This rule 
may apply, for example, to certain Belgian corporate joint 
venture vehicles that are closely-held by a few Belgian 
resident individuals.
    If a company does not qualify for the elimination of 
withholding tax under any of the foregoing objective tests, it 
may request a determination from the relevant competent 
authority pursuant to paragraph 7 of Article 21. Benefits will 
be granted with respect to an item of income if the competent 
authority of the Contracting State in which the income arises 
determines that the establishment, acquisition or maintenance 
of such resident and the conduct of its operations did not have 
as one of its principal purposes the obtaining of benefits 
under the Convention.
    Subparagraph (b) of paragraph 3 of Article 10 of the 
Convention provides that dividends beneficially owned by a 
pension fund (as defined in subparagraph (k) of paragraph 1 of 
Article 3) may not be taxed in the Contracting State of which 
the company paying the dividends is a resident, unless such 
dividends are derived from the carrying on of a business, 
directly by the pension fund or indirectly through an 
associated enterprise.
    This rule is necessary because pension funds normally do 
not pay tax (either through a general exemption or because 
reserves for future pension liabilities effectively offset all 
of the fund's income), and therefore cannot benefit from a 
foreign tax credit. Moreover, distributions from a pension fund 
generally do not maintain the character of the underlying 
income, so the beneficiaries of the pension are not in a 
position to claim a foreign tax credit when they finally 
receive the pension, in many cases years after the withholding 
tax has been paid. Accordingly, in the absence of this rule, 
the dividends would almost certainly be subject to unrelieved 
double taxation.

Paragraph 4

    Paragraph 4 provides for exclusive residence country 
taxation on certain dividends paid by a company that is a 
resident of Belgium to a company that is resident in the United 
States.
    Subparagraph a) provides that a where the company paying 
the dividend is a resident of Belgium, and the beneficial owner 
of such dividend is a company that is a resident in the United 
States, no withholding tax will be collected in Belgium, 
provided the United States company has owned directly shares 
representing at least 10 percent of the capital of the Belgian 
company for a 12-month period ending on the date the dividend 
is declared.
    Subparagraph b) provides a rule that corresponds to 
subparagraph b) of paragraph 3 of this Article. Accordingly, 
dividends paid by a company resident in Belgium to a pension 
fund that is a resident of the United States may not be taxed 
in Belgium, unless such dividends are derived from the carrying 
on of a business, directly by the pension fund or indirectly 
through an associated enterprise.

Paragraph 5

    Paragraph 5 provides that paragraphs 2 through 4 do not 
affect the taxation of the profits out of which the dividends 
are paid. The taxation by a Contracting State of the income of 
its resident companies is governed by the internal law of the 
Contracting State, subject to the provisions of paragraph 4 of 
Article 23 (Non-Discrimination).

Paragraph 6

    Article 10 generally applies to distributions made by a RIC 
or a REIT. However, distributions made by a REIT or certain 
RICs that are attributable to gains derived from the alienation 
of U.S. real property interests and treated as gain recognized 
under section 897(h)( 1) are taxable under paragraph 1 of 
Article 13 instead of Article 10. In the case of RIC or REIT 
distributions to which Article 10 applies, paragraph 6 imposes 
limitations on the rate reductions provided by paragraphs 2 and 
3.
    The first sentence of subparagraph 6(a) provides that 
dividends paid by a RIC or REIT are not eligible for the 5 
percent rate of withholding tax of subparagraph 2(a) or the 
elimination of source country withholding tax under 
subparagraph 3(a).
    The second sentence of subparagraph 6(a) provides that the 
15 percent maximum rate of withholding tax of subparagraph 2(b) 
applies to dividends paid by RICs and that the elimination of 
source-country withholding tax of subparagraph 3(b) applies to 
dividends paid by RICs and beneficially owned by a pension 
fund.
    The third sentence of subparagraph 6(a) provides that the 
15 percent rate under subparagraph 2(b) for dividends paid by a 
REIT and the exemption from source State withholding under 
subparagraph 3(b) for dividends paid by REITs and beneficially 
owned by a pension fund, apply only if one of the three 
following conditions is met. First, the beneficial owner of the 
dividend is an individual or a pension fund, in either case 
holding an interest of not more than 10 percent in the REIT. 
Second, the dividend is paid with respect to a class of stock 
that is publicly traded and the beneficial owner of the 
dividend is a person holding an interest of not more than 5 
percent of any class of the REIT's shares. Third, the 
beneficial owner of the dividend holds an interest in the REIT 
of not more than 10 percent and the REIT is ``diversified.''
    Subparagraph (b) provides a definition of the term 
``diversified,'' which is necessary because the term is not 
defined in the Code. A REIT is diversified if the gross value 
of no single interest in real property held by the REIT exceeds 
10 percent of the gross value of the REIT's total interest in 
real property. Foreclosure property is not considered an 
interest in real property, and a REIT holding a partnership 
interest is treated as owning its proportionate share of any 
interest in real property held by the partnership.
    The restrictions set out above are intended to prevent the 
use of these entities to gain inappropriate U.S. tax benefits. 
For example, a company resident in Belgium that wishes to hold 
a diversified portfolio of U.S. corporate shares could hold the 
portfolio directly and would bear a U.S. withholding tax of 15 
percent on all of the dividends that it receives. 
Alternatively, it could hold the same diversified portfolio by 
purchasing 10 percent or more of the interests in a RIC. If the 
RIC is a pure conduit, there may be no U.S. tax cost to 
interposing the RIC in the chain of ownership. Absent the 
special rule in paragraph 6, such use of the RIC could 
transform portfolio dividends, taxable in the United States 
under the Convention at a 15 percent maximum rate of 
withholding tax, into direct investment dividends taxable at a 
5 percent maximum rate of withholding tax or eligible for the 
elimination of source-country withholding tax.
    Similarly, a resident of Belgium directly holding U.S. real 
property would pay U.S. tax on rental income at either a 30 
percent rate of withholding tax on the gross income or at 
graduated rates on the net income. As in the preceding example, 
by placing the real property in a REIT, the investor could, 
absent a special rule, transform rental income into dividend 
income from the REIT, taxable at the rates provided in Article 
10, significantly reducing the U.S. tax that otherwise would be 
imposed. Paragraph 6 prevents this result and thereby avoids a 
disparity between the taxation of direct real estate 
investments and real estate investments made through REIT 
conduits. In the cases in which paragraph 6 allows a dividend 
from a REIT to be eligible for the 15 percent rate of 
withholding tax, the holding in the REIT is not considered the 
equivalent of a direct holding in the underlying real property.

Paragraph 7

    Paragraph 7 defines the term dividends broadly and 
flexibly. The definition is intended to cover all arrangements 
that yield a return on an equity investment in a corporation as 
determined under the tax law of the State of source, as well as 
arrangements that might be developed in the future.
    The term includes income from shares, or other corporate 
rights that are not treated as debt under the law of the source 
State, that participate in the profits of the company. The term 
also includes income that is subjected to the same tax 
treatment as income from shares by the law of the State of 
source. Thus, a constructive dividend that results from a non-
arm's length transaction between a corporation and a related 
party is a dividend. In the case of the United States the term 
dividend includes amounts treated as a dividend under U.S. law 
upon the sale or redemption of shares or upon a transfer of 
shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-2 
C.B. 69 (sale of foreign subsidiary's stock to U.S. sister 
company is a deemed dividend to extent of the subsidiary's and 
sister company's earnings and profits). Further, a distribution 
from a U.S. publicly traded limited partnership, which is taxed 
as a corporation under U.S. law, is a dividend for purposes of 
Article 10. However, a distribution by a limited liability 
company is not taxable by the United States under Article 10, 
provided the limited liability company is not characterized as 
an association taxable as a corporation under U.S. law.
    Finally, a payment denominated as interest that is made by 
a thinly capitalized corporation may be treated as a dividend 
to the extent that the debt is recharacterized as equity under 
the laws of the source State.

Paragraph 8

    Paragraph 8 excludes from the general source country 
limitations under paragraphs 1 through 6 dividends that are 
business profits attributable to a permanent establishment in 
the source country. In such case, the rules of Article 7 
(Business Profits) shall apply. Accordingly, the dividends will 
be taxed on a net basis using the rates and rules of taxation 
generally applicable to residents of the State in which the 
permanent establishment is located, as such rules may be 
modified by the Convention. An example of dividends that are 
business profits attributable to a permanent establishment 
would be dividends derived by a dealer in stock or securities 
from stock or securities that the dealer held for sale to 
customers.

Paragraph 9

    The right of a Contracting State to tax dividends paid by a 
company that is a resident of the other Contracting State is 
restricted by paragraph 9 to cases in which the dividends are 
paid to a resident of that Contracting State or are 
attributable to a permanent establishment in that Contracting 
State. Thus, a Contracting State may not impose a ``secondary'' 
withholding tax on dividends paid by a nonresident company out 
of earnings and profits from that Contracting State. In the 
case of the United States, the secondary withholding tax was 
eliminated for payments made after December 31, 2004 in the 
American Jobs Creation Act of 2004.
    The paragraph also restricts the right of a Contracting 
State to impose corporate level taxes on undistributed profits, 
other than a branch profits tax. The paragraph does not 
restrict a State's right to tax its resident shareholders on 
undistributed earnings of a corporation resident in the other 
State. Thus, the authority of the United States to impose taxes 
on subpart F income and on earnings deemed invested in U.S. 
property, and its tax on income of a passive foreign investment 
company that is a qualified electing fund is in no way 
restricted by this provision.

Paragraph 10

    Paragraph 10 permits a Contracting State to impose a branch 
profits tax on a company resident in the other Contracting 
State. The tax is in addition to other taxes permitted by the 
Convention. The term ``company'' is defined in subparagraph 
1(b) of Article 3 (General Definitions).
    A Contracting State may impose a branch profits tax on a 
company if the company has income attributable to a permanent 
establishment in that Contracting State, derives income from 
real property in that Contracting State that is taxed on a net 
basis under Article 6 (Income from Real Property), or realizes 
gains taxable in that State under paragraph 1 of Article 13 
(Gains). The imposition of such tax is limited, however, to the 
portion of the aforementioned items of income that represents, 
in the case of the United States, the amount of such income 
that is the ``dividend equivalent amount,'' and, in the case of 
Belgium, an amount that is analogous to the dividend equivalent 
amount. This is consistent with the relevant rules under the 
U.S. branch profits tax, and the term dividend equivalent 
amount is defined under U.S. law. Section 884 defines the 
dividend equivalent amount as an amount for a particular year 
that is equivalent to the income described above that is 
included in the corporation's effectively connected earnings 
and profits for that year, after payment of the corporate tax 
under Articles 6 (Income from Real Property), 7 (Business 
Profits) or 13 (Gains), reduced for any increase in the 
branch's U.S. net equity during the year or increased for any 
reduction in its U.S. net equity during the year. U.S. net 
equity is U.S. assets less U.S. liabilities. See Treas. Reg. 
section 1.884-1. The dividend equivalent amount for any year 
approximates the dividend that a U.S. branch office would have 
paid during the year if the branch had been operated as a 
separate U.S. subsidiary company.
    As discussed in the Technical Explanations to Articles 1(2) 
and 7(2), consistency principles require that a taxpayer may 
not mix and match the rules of the Code and the Convention in 
an inconsistent manner. In the context of the branch profits 
tax, the consistency requirement means that an enterprise that 
uses the principles of Article 7 to determine its net taxable 
income also must use those principles in determining the 
dividend equivalent amount. Similarly, an enterprise that uses 
U.S. domestic law to determine its net taxable income must also 
use U.S. domestic law in complying with the branch profits tax. 
As in the case of Article 7, if an enterprise switches between 
domestic law and treaty principles from year to year, it will 
need to make appropriate adjustments or recapture amounts that 
otherwise might go untaxed.

Paragraph 11

    Paragraph 11 provides that the branch profits tax shall not 
be imposed at a rate exceeding the direct investment dividend 
withholding rate of five percent.
    The branch profits tax will not be imposed at all, however, 
if certain requirements are met. In general, these requirements 
provide rules for a branch that parallel the rules for when a 
dividend paid by a subsidiary will be subject to exclusive 
residence-country taxation (i.e., the elimination of source-
country withholding tax). Accordingly, the branch profits tax 
may not be imposed in the case of a company that (1) meets the 
``publicly traded'' test or subsidiary of a publicly traded 
company under subparagraph 2(c) of Article 21 (Limitation on 
Benefits), (2) meets the ``ownership-base erosion'' and 
``active trade or business'' tests described in subparagraph 
2(e) and paragraph 4 of Article 21, (3) meets the ``derivative 
benefits'' test described in paragraph 3 of Article 21, or (4) 
is granted such benefit with respect to the branch profits tax 
by the relevant competent authority pursuant to paragraph 7 of 
Article 21.
    Thus, for example, if a Belgian company would be subject to 
the branch profits tax with respect to profits attributable to 
a U.S. branch and not reinvested in that branch, paragraph 11 
may apply to eliminate the branch profits tax if the company 
meets the ``publicly traded'' test, subsidiary of a publicly 
traded company, the combined ``ownership-base erosion and 
active trade or business'' test, or the ``derivative benefits'' 
test. If, by contrast, the Belgian company did not meet any of 
those tests, but met the ownership-base erosion test (and thus 
qualified for treaty benefits under subparagraph 2(a)), then 
the branch profits tax would apply at a rate of 5 percent, 
unless the Belgian company is granted benefits with respect to 
the elimination of the branch profits tax by the U.S. competent 
authority pursuant to paragraph 7 of Article 21.

Paragraph 12

    Paragraph 12 contains two provisions that may operate to 
terminate the zero rate of withholding tax that may apply for 
dividends paid by a U.S. resident company under paragraph 3. 
Subparagraph (a)(i) provides that paragraph 3 shall cease to be 
effective for amounts paid or credited on or after January 1 of 
the 6th year following the year in which the Convention enters 
into force, unless by June 30 of the 5th year following entry 
into force, the United States Secretary of the Treasury, based 
on a report from the Commissioner of the Internal Revenue 
Service, certifies to the Senate of the United States that 
Belgium has satisfactorily complied with its obligations under 
Article 25 (Exchange of Information and Administrative 
Assistance).
    Subparagraph (a)(ii) provides an additional method by which 
the United States may terminate paragraph 3. This additional 
method provides that the United States may terminate paragraph 
3 at any time by providing written notice to Belgium, through 
the diplomatic channel, on or before June 30 in any year. In 
such a case, paragraph 3 shall cease to be effective for 
amounts paid or credited on or after January 1 of the year next 
following that in which such notice is given. Further, 
subparagraph (a)(ii) provides that the United States will not 
provide notice of termination under subparagraph (a)(ii) unless 
it has determined that Belgium's actions with respect to 
Article 24 (Mutual Agreement Procedure) and 25 have materially 
altered the balance of benefits of the Convention.
    Subparagraph b) provides that the United States and Belgian 
competent authorities shall consult at least annually regarding 
any issues that otherwise might trigger a termination under 
subparagraph (a).
    As discussed in Article 25 (Exchange of Information and 
Administrative Assistance), if the provisions of this paragraph 
are used to terminate paragraph 3 of Article 10, then Belgium 
will be relieved of its obligations under paragraph 5 of 
Article 25 to provide certain information, including bank 
information.

Relationship to Other Articles

    Notwithstanding the foregoing limitations on source country 
taxation of dividends, the saving clause of paragraph 4 of 
Article 1 (General Scope) permits the United States to tax 
dividends received by its residents and citizens, subject to 
the special foreign tax credit rules of paragraph 4 of Article 
22 (Relief from Double Taxation), as if the Convention had not 
come into effect.
    The benefits of this Article are also subject to the 
provisions of Article 21 (Limitation on Benefits). Thus, if a 
resident of Belgium is the beneficial owner of dividends paid 
by a U.S. corporation, the shareholder must qualify for treaty 
benefits under at least one of the tests of Article 21 in order 
to receive the benefits of this Article.

                         ARTICLE 11 (INTEREST)

    Article 11 specifies the taxing jurisdictions over interest 
income of the States of source and residence and defines the 
terms necessary to apply the article.

Paragraph 1

    Paragraph 1 generally grants to the State of residence the 
exclusive right to tax interest beneficially owned by its 
residents and arising in the other Contracting State.
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, defined under the internal law 
of the State of source. The beneficial owner of the interest 
for purposes of Article 11 is the person to which the income is 
attributable under the laws of the source State. Thus, if 
interest arising in a Contracting State is received by a 
nominee or agent that is a resident of the other State on 
behalf of a person that is not a resident of that other State, 
the interest is not entitled to the benefits of Article 11. 
However, interest received by a nominee on behalf of a resident 
of that other State would be entitled to benefits. These 
limitations are confirmed by paragraph 8 of the OECD Commentary 
to Article 11.

Paragraph 2

    Paragraph 2 provides anti-abuse exceptions to the source-
country exemption in paragraph 1 for two classes of interest 
payments.
    The first class of interest, dealt with in subparagraphs 
(a) and (b) is so-called ``contingent interest.'' With respect 
to interest arising in the United States, subparagraph (a) 
refers to contingent interest of a type that does not qualify 
as portfolio interest under U.S. domestic law. The cross-
reference to the U.S. definition of contingent interest, which 
is found in section 871 (h)(4) of the Code, is intended to 
ensure that the exceptions of section 871 (h)(4)(C) will be 
applicable. With respect to Belgium, such interest is defined 
in subparagraph (b) as any interest arising in Belgium that is 
determined by reference to the receipts, sales, income, profits 
or other cash flow of the debtor or a related person, to any 
change in the value of any property of the debtor or a related 
person or to any dividend, partnership distribution or similar 
payment made by the debtor or a related person. Any such 
interest may be taxed in Belgium according to the laws of 
Belgium.
    Under subparagraphs (a) or (b), the gross amount of the 
``contingent interest'' may be taxed at a rate not exceeding 15 
percent.
    The second class of interest is dealt with in subparagraph 
(c) of paragraph 2. This exception is consistent with the 
policy of Code sections 860E(e) and 860G(b) that excess 
inclusions with respect to a real estate mortgage investment 
conduit (REMIC) should bear full U.S. tax in all cases. Without 
a full tax at source foreign purchasers of residual interests 
would have a competitive advantage over U.S. purchasers at the 
time these interests are initially offered. Also, absent this 
rule, the U.S. fisc would suffer a revenue loss with respect to 
mortgages held in a REMIC because of opportunities for tax 
avoidance created by differences in the timing of taxable and 
economic income produced by these interests.

Paragraph 3

    The term ``interest'' as used in Article 11 is defined in 
paragraph 2 to include, inter alia, income from debt claims of 
every kind, whether or not secured by a mortgage. Penalty 
charges for late payment are excluded from the definition of 
interest. Interest that is paid or accrued subject to a 
contingency is within the ambit of Article 11. This includes 
income from a debt obligation carrying the right to participate 
in profits. The term does not, however, include amounts that 
are treated as dividends under Article 10 (Dividends).
    The term interest also includes amounts subject to the same 
tax treatment as income from money lent under the law of the 
State in which the income arises. Thus, for purposes of the 
Convention, amounts that the United States will treat as 
interest include (i) the difference between the issue price and 
the stated redemption price at maturity of a debt instrument 
(i.e., original issue discount (``OID'')), which may be wholly 
or partially realized on the disposition of a debt instrument 
(section 1273), (ii) amounts that are imputed interest on a 
deferred sales contract (section 483), (iii) amounts treated as 
interest or OID under the stripped bond rules (section 1286), 
(iv) amounts treated as original issue discount under the 
below-market interest rate rules (section 7872), (v) a 
partner's distributive share of a partnership's interest income 
(section 702), (vi) the interest portion of periodic payments 
made under a ``finance lease'' or similar contractual 
arrangement that in substance is a borrowing by the nominal 
lessee to finance the acquisition of property, (vii) amounts 
included in the income of a holder of a residual interest in a 
REMIC (section 860E), because these amounts generally are 
subject to the same taxation treatment as interest under U.S. 
tax law, and (viii) interest with respect to notional principal 
contracts that are re-characterized as loans because of a 
``substantial non-periodic payment.''

Paragraph 4

    Paragraph 4 provides an exception to the exclusive 
residence taxation rule of paragraph 1 and the source-country 
gross taxation rule of paragraph 2 in cases where the 
beneficial owner of the interest carries on business through a 
permanent establishment in the State of source and the interest 
is attributable to that permanent establishment. In such cases 
the provisions of Article 7 (Business Profits) will apply and 
the State of source will retain the right to impose tax on such 
interest income.
    In the case of a permanent establishment that once existed 
in the State but that no longer exists, the provisions of 
paragraph 4 also apply, by virtue of paragraph 7 of Article 7 
(Business Profits), to interest that would be attributable to 
such a permanent establishment if it did exist in the year of 
payment or accrual. See the Technical Explanation of paragraph 
7 of Article 7.

Paragraph 5

    Paragraph 5 establishes the source of interest for purposes 
of Article 11. The paragraph is identical to paragraph 5 of 
Article 11 of the OECD Model. Interest is considered to arise 
in a Contracting State if paid by a resident of that State. As 
an exception, interest that is borne by a permanent 
establishment in one of the States is considered to arise in 
that State. For this purpose, ``borne by'' means allowable as a 
deduction in computing taxable income.

Paragraph 6

    Paragraph 6 provides that in cases involving special 
relationships between the payor and the beneficial owner of 
interest income, Article 11 applies only to that portion of the 
total interest payments that would have been made absent such 
special relationships (i.e., an arm's-length interest payment). 
Any excess amount of interest paid remains taxable according to 
the laws of the United States and the other Contracting State, 
respectively, with due regard to the other provisions of the 
Convention. Thus, if the excess amount would be treated under 
the source country's law as a distribution of profits by a 
corporation, such amount could be taxed as a dividend rather 
than as interest, but the tax would be subject, if appropriate, 
to the rate limitations of paragraphs 2 through 4 of Article 10 
(Dividends).
    The term ``special relationship'' is not defined in the 
Convention. In applying this paragraph the United States 
considers the term to include the relationships described in 
Article 9, which in turn corresponds to the definition of 
``control'' for purposes of section 482 of the Code.
    This paragraph does not address cases where, owing to a 
special relationship between the payer and the beneficial owner 
or between both of them and some other person, the amount of 
the interest is less than an arm's-length amount. In those 
cases a transaction may be characterized to reflect its 
substance and interest may be imputed consistent with the 
definition of interest in paragraph 3. The United States would 
apply section 482 or 7872 of the Code to determine the amount 
of imputed interest in those cases.

Relationship to Other Articles

    Notwithstanding the foregoing limitations on source country 
taxation of interest, the saving clause of paragraph 4 of 
Article 1 permits the United States to tax its residents and 
citizens, subject to the special foreign tax credit rules of 
paragraph 4 of Article 22 (Relief from Double Taxation), as if 
the Convention had not come into force.
    As with other benefits of the Convention, the benefits of 
exclusive residence State taxation of interest under paragraph 
1 of Article 11, or limited source taxation under subparagraphs 
2(a) and (b), are available to a resident of the other State 
only if that resident is entitled to those benefits under the 
provisions of Article 21 (Limitation on Benefits).

                         ARTICLE 12 (ROYALTIES)

    Article 12 provides rules for the taxation of royalties 
arising in one Contracting State and paid to a beneficial owner 
that is a resident of the other Contracting State.

Paragraph 1

    Paragraph 1 generally grants to the State of residence the 
exclusive right to tax royalties beneficially owned by its 
residents and arising in the other Contracting State.
    The term ``beneficial owner'' is not defined in the 
Convention, and is, therefore, defined under the internal law 
of the State of source. The beneficial owner of the royalty for 
purposes of Article 12 is the person to which the income is 
attributable under the laws of the source State. Thus, if a 
royalty arising in a Contracting State is received by a nominee 
or agent that is a resident of the other State on behalf of a 
person that is not a resident of that other State, the royalty 
is not entitled to the benefits of Article 12.
    However, a royalty received by a nominee on behalf of a 
resident of that other State would be entitled to benefits. 
These limitations are confirmed by paragraph 4 of the OECD 
Commentary to Article 12.

Paragraph 2

    Paragraph 2 defines the term ``royalties,'' as used in 
Article 12, to include any consideration for the use of, or the 
right to use, any copyright of literary, artistic, or 
scientific work (including cinematographic films and software), 
any patent, trademark, design or model, plan, secret formula or 
process, or for information concerning industrial, commercial, 
or scientific experience. The term ``royalties,'' however, does 
not include income from leasing personal property.
    The term royalties is defined in the Convention and 
therefore is generally independent of domestic law. Certain 
terms used in the definition are not defined in the Convention, 
but these may be defined under domestic tax law. For example, 
the term ``secret process or formulas'' is found in the Code, 
and its meaning has been elaborated in the context of sections 
351 and 367. See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 6-
45 1 1964-2 C.B. 133; Rev. Proc. 69-19, 1969-2 C.B. 301.
    Consideration for the use or right to use cinematographic 
films and software, or works on film, tape, or other means of 
reproduction in radio or television broadcasting is included in 
the definition of royalties. It is intended that, with respect 
to any subsequent technological advances in the field of radio 
or television broadcasting, consideration received for the use 
of such technology will also be included in the definition of 
royalties.
    If an artist who is resident in one Contracting State 
records a performance in the other Contracting State, retains a 
copyrighted interest in a recording, and receives payments for 
the right to use the recording based on the sale or public 
playing of the recording, then the right of such other 
Contracting State to tax those payments is governed by Article 
12. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810 
F.2d 209 (D.C. Cir. 1986). By contrast, if the artist earns in 
the other Contracting State income covered by Article 16 
(Entertainers and Sportsmen), for example, endorsement income 
from the artist's attendance at a film screening, and if such 
income also is attributable to one of the rights described in 
Article 12 (e.g., the use of the artist's photograph in 
promoting the screening), Article 16 and not Article 12 is 
applicable to such income.
    Computer software generally is protected by copyright laws 
around the world. Under the Convention, consideration received 
for the use, or the right to use, computer software is treated 
either as royalties or as business profits, depending on the 
facts and circumstances of the transaction giving rise to the 
payment.
    The primary factor in determining whether consideration 
received for the use, or the right to use, computer software is 
treated as royalties or as business profits is the nature of 
the rights transferred. See Treas. Reg. section 1.861-18. The 
fact that the transaction is characterized as a license for 
copyright law purposes is not dispositive. For example, a 
typical retail sale of ``shrink wrap'' software generally will 
not be considered to give rise to royalty income, even though 
for copyright law purposes it may be characterized as a 
license.
    The means by which the computer software is transferred are 
not relevant for purposes of the analysis. Consequently, if 
software is electronically transferred but the rights obtained 
by the transferee are substantially equivalent to rights in a 
program copy, the payment will be considered business profits.
    The term ``industrial, commercial, or scientific 
experience'' (sometimes referred to as ``know-how'') has the 
meaning ascribed to it in paragraph 11 et seq. of the 
Commentary to Article 12 of the OECD Model. Consistent with 
that meaning, the term may include information that is 
ancillary to a right otherwise giving rise to royalties, such 
as a patent or secret process.
    Know-how also may include, in limited cases, technical 
information that is conveyed through technical or consultancy 
services. It does not include general educational training of 
the user's employees, nor does it include information developed 
especially for the user, such as a technical plan or design 
developed according to the user's specifications. Thus, as 
provided in paragraph 11.4 of the Commentary to Article 12 of 
the OECD Model, the term ``royalties'' does not include 
payments received as consideration for after-sales service, for 
services rendered by a seller to a purchaser under a warranty, 
or for pure technical assistance.
    The term ``royalties'' also does not include payments for 
professional services (such as architectural, engineering, 
legal, managerial, medical, software development services). For 
example, income from the design of a refinery by an engineer 
(even if the engineer employed know-how in the process of 
rendering the design) or the production of a legal brief by a 
lawyer is not income from the transfer of know-how taxable 
under Article 12, but is income from services taxable under 
either Article 7 (Business Profits) or Article 14 (Income from 
Employment). Professional services may be embodied in property 
that gives rise to royalties, however. Thus, if a professional 
contracts to develop patentable property and retains rights in 
the resulting property under the development contract, 
subsequent license payments made for those rights would be 
royalties.

Paragraph 3

    This paragraph provides an exception to the rule of 
paragraph 1 that gives the state of residence exclusive taxing 
jurisdiction in cases where the beneficial owner of the 
royalties carries on business through a permanent establishment 
in the state of source and the royalties are attributable to 
that permanent establishment. In such cases the provisions of 
Article 7 (Business Profits) will apply.
    The provisions of paragraph 7 of Article 7 (Business 
Profits) apply to this paragraph. For example, royalty income 
that is attributable to a permanent establishment and that 
accrues during the existence of the permanent establishment, 
but is received after the permanent establishment no longer 
exists, remains taxable under the provisions of Article 7 
(Business Profits), and not under this Article.

Paragraph 4

    Paragraph 4 provides that in cases involving special 
relationships between the payor and beneficial owner of 
royalties, Article 12 applies only to the extent the royalties 
would have been paid absent such special relationships (i.e., 
an arm's-length royalty). Any excess amount of royalties paid 
remains taxable according to the laws of the two Contracting 
States, with due regard to the other provisions of the 
Convention. If, for example, the excess amount is treated as a 
distribution of corporate profits under domestic law, such 
excess amount will be taxed as a dividend rather than as 
royalties, but the tax imposed on the dividend payment will be 
subject to the rate limitations of Article 10 (Dividends).

Relationship to Other Articles

    Notwithstanding the foregoing limitations on source country 
taxation of royalties, the saving clause of paragraph 4 of 
Article 1 (General Scope) permits the United States to tax its 
residents and citizens, subject to the special foreign tax 
credit rules of paragraph 4 of Article 22 (Relief from Double 
Taxation), as if the Convention had not come into force.
    As with other benefits of the Convention, the benefits of 
exclusive residence State taxation of royalties under paragraph 
1 of Article 12 are available to a resident of the other State 
only if that resident is entitled to those benefits under 
Article 21 (Limitation on Benefits).

                           ARTICLE 13 (GAINS)

    Article 13 assigns either primary or exclusive taxing 
jurisdiction over gains from the alienation of property to the 
State of residence or the State of source.

Paragraph 1

    Paragraph 1 of Article 13 preserves the non-exclusive right 
of the State of source to tax gains attributable to the 
alienation of real property situated in that State. The 
paragraph therefore permits the United States to apply section 
897 of the Code to tax gains derived by a resident of Belgium 
that are attributable to the alienation of real property 
situated in the United States (as defined in paragraph 2). 
Gains attributable to the alienation of real property include 
gains from any other property that is treated as a real 
property interest within the meaning of paragraph 2.
    Paragraph 1 refers to gains ``attributable to the 
alienation of real property'' rather than the OECD Model phrase 
``gains from the alienation'' to clarify that the United States 
will look through distributions made by a REIT and certain 
RICs. Accordingly, distribu*tions made by a REIT or certain 
RICs are taxable under paragraph 1 of Article 13 (not under 
Article 10 (Dividends)) when they are attributable to gains 
derived from the alienation (disposition) of U.S. real property 
interests and treated as gain recognized under section 
897(h)(1).

Paragraph 2

    This paragraph defines the term ``real property situated in 
the other Contracting State.'' The term includes real property 
referred to in Article 6 (i.e., an interest in the real 
property itself), and, in the case of the United States, a 
``United States real property interest.''
    Under section 897(c) of the Code the term ``United States 
real property interest'' includes shares in a U.S. corporation 
that owns sufficient U.S. real property interests to satisfy an 
asset-ratio test on certain testing dates. The term also 
includes certain foreign corporations that have elected to be 
treated as U.S. corporations for this purpose. Section 897(i).

Paragraph 3

    Paragraph 3 of Article 13 deals with the taxation of 
certain gains from the alienation of movable property forming 
part of the business property of a permanent establishment that 
an enterprise of a Contracting State has in the other 
Contracting State. This also includes gains from the alienation 
of such a permanent establishment (alone or with the whole 
enterprise). Such gains may be taxed in the State in which the 
permanent establishment is located.
    A resident of the other Contracting State that is a partner 
in a partnership doing business in the United States generally 
will have a permanent establishment in the United States as a 
result of the activities of the partnership, assuming that the 
activities of the partnership rise to the level of a permanent 
establishment. Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under 
paragraph 3, the United States generally may tax a partner's 
distributive share of income realized by a partnership on the 
disposition of movable property forming part of the business 
property of the partnership in the United States.
    The gains subject to paragraph 3 may be taxed in the State 
in which the permanent establishment is located, regardless of 
whether the permanent establishment exists at the time of the 
alienation. This rule incorporates the rule of section 
864(c)(6) of the Code. Accordingly, income that is attributable 
to a permanent establishment, but that is deferred and received 
after the permanent establishment no longer exists, may 
nevertheless be taxed by the State in which the permanent 
establishment was located.

Paragraph 4

    This paragraph limits the taxing jurisdiction of the State 
of source with respect to gains from the alienation of ships or 
aircraft operated in international traffic by the enterprise 
alienating the ship or aircraft and from property (other than 
real property) pertaining to the operation of such ships, 
aircraft, or containers.
    Under paragraph 4, such income is taxable only in the 
Contracting State in which the alienator is resident. 
Notwithstanding paragraph 3, the rules of this paragraph apply 
even if the income is attributable to a permanent establishment 
maintained by the enterprise in the other Contracting State. 
This result is consistent with the allocation of taxing rights 
under Article 8 (Shipping and Air Transport).

Paragraph 5

    Paragraph 5 provides a rule similar to paragraph 4 with 
respect to gains from the alienation of containers and related 
personal property. Such gains derived by an enterprise of a 
Contracting State shall be taxable only in that Contracting 
State unless the containers were used for the transport of 
goods or merchandise solely within the other Contracting State. 
The other Contracting State may not tax even if the gain is 
attributable to a permanent establishment maintained by the 
enterprise in that other Contracting State.

Paragraph 6

    Paragraph 6 grants to the State of residence of the 
alienator the exclusive right to tax gains from the alienation 
of property other than property referred to in paragraphs 1 
through 5. For example, gain derived from shares, other than 
shares described in paragraphs 2 or 3, debt instruments and 
various financial instruments, may be taxed only in the State 
of residence, to the extent such income is not otherwise 
characterized as income taxable under another article (e.g., 
Article 10 (Dividends) or Article 11 (Interest)). Similarly 
gain derived from the alienation of tangible personal property, 
other than tangible personal property described in paragraph 3, 
may be taxed only in the State of residence of the alienator.
    Gains derived by a resident of a Contracting State from 
real property located in a third state are not taxable in the 
other Contracting State, even if the sale is attributable to a 
permanent establishment located in the other Contracting State.

Relationship to Other Articles

    Notwithstanding the foregoing limitations on taxation of 
certain gains by the State of source, the saving clause of 
paragraph 4 of Article 1 (General Scope) permits the United 
States to tax its citizens and residents as if the Convention 
had not come into effect. Thus, any limitation in this Article 
on the right of the United States to tax gains does not apply 
to gains of a U.S. citizen or resident.
    The benefits of this Article are also subject to the 
provisions of Article 21 (Limitation on Benefits). Thus, only a 
resident of a Contracting State that satisfies one of the 
conditions in Article 21 is entitled to the benefits of this 
Article.

                  ARTICLE 14 (INCOME FROM EMPLOYMENT)

    Article 14 apportions taxing jurisdiction over remuneration 
derived by a resident of a Contracting State as an employee 
between the States of source and residence.

Paragraph 1

    The general rule of Article 14 is contained in paragraph 1. 
Remuneration derived by a resident of a Contracting State as an 
employee may be taxed by the State of residence, and the 
remuneration also may be taxed by the other Contracting State 
to the extent derived from employment exercised (i.e., services 
performed) in that other Contracting State. Paragraph 1 also 
provides that the more specific rules of Articles 15 
(Directors' Fees), 17 (Pensions, Social Security, Annuities, 
Alimony and Child Support),
    18 (Government Service), and 19 (Students, Trainees, 
Teachers and Researchers) apply in the case of employment 
income described in one of those articles. Thus, even though 
the State of source has a right to tax employment income under 
Article 14, it may not have the right to tax that income under 
the Convention if the income is described, for example, in 
Article 17 (Pensions, Social Security, Annuities, Alimony and 
Child Support) and is not taxable in the State of source under 
the provisions of that article.
    Article 14 applies to any form of compensation for 
employment, including payments in kind. Paragraph 1.1 of the 
Commentary to Article 16 of the OECD Model now confirms that 
interpretation.
    Consistent with section 864(c)(6) of the Code, Article 14 
also applies regardless of the timing of actual payment for 
services. Consequently, a person who receives the right to a 
future payment in consideration for services rendered in a 
Contracting State would be taxable in that State even if the 
payment is received at a time when the recipient is a resident 
of the other Contracting State. Thus, a bonus paid to a 
resident of a Contracting State with respect to services 
performed in the other Contracting State with respect to a 
particular taxable year would be subject to Article 14 even if 
it was paid after the close of the year. An annuity received 
for services performed in a taxable year could be subject to 
Article 14 despite the fact that it was paid in subsequent 
years. In that case, it would be necessary to determine whether 
the payment constitutes deferred compensation, taxable under 
Article 14, or a qualified pension subject to the rules of 
Article 17 (Pensions, Social Security, Annuities, Alimony, and 
Child Support). Article 14 also applies to income derived from 
the exercise of stock options granted with respect to services 
performed in the host State, even if those stock options are 
exercised after the employee has left the source country. If 
Article 14 is found to apply, whether such payments were 
taxable in the State where the employment was exercised would 
depend on whether the tests of paragraph 2 were satisfied in 
the year in which the services to which the payment relates 
were performed.

Paragraph 2

    Paragraph 2 sets forth an exception to the general rule 
that employment income may be taxed in the State where it is 
exercised. Under paragraph 2, the State where the employment is 
exercised may not tax the income from the employment if three 
conditions are satisfied: (a) the individual is present in the 
other Contracting State for a period or periods not exceeding 
183 days in any 12-month period that begins or ends during the 
relevant taxable year (i.e., in the United States, the calendar 
year in which the services are performed); (b) the remuneration 
is paid by, or on behalf of, an employer who is not a resident 
of that other Contracting State; and (c) the remuneration is 
not borne as a deductible expense by a permanent establishment 
that the employer has in that other State. In order for the 
remuneration to be exempt from tax in the source State, all 
three conditions must be satisfied. This exception is identical 
to that set forth in the OECD Model.
    The 183-day period in condition (a) is to be measured using 
the ``days of physical presence'' method. Under this method, 
the days that are counted include any day in which a part of 
the day is spent in the host country. (Rev. Rul. 56-24, 1956-1 
C.B. 851.)
    Thus, days that are counted include the days of arrival and 
departure; weekends and holidays on which the employee does not 
work but is present within the country; vacation days spent in 
the country before, during or after the employment period, 
unless the individual's presence before or after the employment 
can be shown to be independent of his presence there for 
employment purposes; and time during periods of sickness, 
training periods, strikes, etc., when the individual is present 
but not working. If illness prevented the individual from 
leaving the country in sufficient time to qualify for the 
benefit, those days will not count. Also, any part of a day 
spent in the host country while in transit between two points 
outside the host country is not counted. If the individual is a 
resident of the host country for part of the taxable year 
concerned and a non-resident for the remainder of the year, the 
individual's days of presence as a resident do not count for 
purposes of determining whether the 183-day period is exceeded.
    Conditions (b) and (c) are intended to ensure that a 
Contracting State will not be required to allow a deduction to 
the payor for compensation paid and at the same time to exempt 
the employee on the amount received. Accordingly, if a foreign 
person pays the salary of an employee who is employed in the 
host State, but a host State corporation or permanent 
establishment reimburses the payor with a payment that can be 
identified as a reimbursement, neither condition (b) nor (c), 
as the case may be, will be considered to have been fulfilled.
    The reference to remuneration ``borne by'' a permanent 
establishment is understood to encompass all expenses that 
economically are incurred and not merely expenses that are 
currently deductible for tax purposes. Accordingly, the 
expenses referred to include expenses that are capitalizable as 
well as those that are currently deductible. Further, salaries 
paid by residents that are exempt from income taxation may be 
considered to be borne by a permanent establishment 
notwithstanding the fact that the expenses will be neither 
deductible nor capitalizable since the payor is exempt from 
tax.
    The Protocol clarifies that with respect to paragraphs 1 
and 2, where remuneration is derived by a resident of one of 
the States in respect of an employment, employment is exercised 
in the place where the employee is physically present when 
performing the activities for which the remuneration is paid, 
irrespective of the residence of the payer, the place in which 
the contract of employment was made, the residence of the 
employer, the place or time of payment, or the place where the 
results of the work were exploited.

Paragraph 3

    Paragraph 3 contains a special rule applicable to 
remuneration for services performed by a resident of a 
Contracting State as an employee aboard a ship or aircraft 
operated in international traffic. Such remuneration may be 
taxed only in the State of residence of the employee if the 
services are performed as a member of the regular complement of 
the ship or aircraft. The ``regular complement'' includes the 
crew. In the case of a cruise ship, for example, it may also 
include others, such as entertainers, lecturers, etc., employed 
by the shipping company to serve on the ship throughout its 
voyage. The use of the term ``regular complement'' is intended 
to clarify that a person who exercises his employment as, for 
example, an insurance salesman while aboard a ship or aircraft 
is not covered by this paragraph.
    If a U.S. citizen who is resident in Belgium performs 
services as an employee in the United States and meets the 
conditions of paragraph 2 for source country exemption, he 
nevertheless is taxable in the United States by virtue of the 
saving clause of paragraph 4 of Article 1 (General Scope), 
subject to the special foreign tax credit rule of paragraph 4 
of Article 22 (Relief from Double Taxation).

                      ARTICLE 15 (DIRECTORS' FEES)

    This Article provides that a Contracting State may tax the 
fees and other compensation paid by a company that is a 
resident of that State for services performed in that State by 
a resident of the other Contracting State in his capacity as a 
director of the company. This rule is an exception to the more 
general rules of Articles 7 (Business Profits) and 14 (Income 
from Employment). Thus, for example, in determining whether a 
director's fee paid to a non-employee director is subject to 
tax in the country of residence of the corporation, it is not 
relevant to establish whether the fee is attributable to a 
permanent establishment in that State.
    The analogous OECD provision reaches different results in 
certain cases. Under the OECD Model provision, a resident of 
one Contracting State who is a director of a corporation that 
is resident in the other Contracting State is subject to tax in 
that other State in respect of his directors' fees regardless 
of where the services are performed. The United States has 
entered a reservation with respect to the OECD provision. Under 
the provision in the Convention, the State of residence of the 
corporation may tax nonresident directors with no time or 
dollar threshold, but only with respect to remuneration for 
services performed in that State.
    The Protocol elaborates on the provisions of Article 15. 
Specifically, the Protocol provides that Article 15 shall also 
apply to fees received by a ``gerant''/``zaakvoerder'' of a 
company, other than a company with share capital, in his 
capacity as such. Further, remuneration derived by a person 
referred to in Article 15 from a company which is a resident of 
a Contracting State in respect of the discharge of day-to-day 
functions of a managerial or technical, commercial or financial 
nature shall be taxable in accordance with the provisions of 
Article 14 (Income from Employment), and not Article 15. In 
such a case, to the extent that the company is a Belgian 
company, Article 14 shall be applied as if such remuneration 
were remuneration derived by an employee in respect of an 
employment and as if references to the ``employer'' were 
references to the company.
    Remuneration received by a resident of a Contracting State 
in respect of his day-to-day activity as a partner of a company 
that is a resident of Belgium, other than a company with share 
capital, shall be taxable in accordance with the provisions of 
Article 14, as if such remuneration were remuneration derived 
by an employee in respect of an employment and as if references 
to the ``employer'' were references to the company.
    Article 7 (Business Profits), and not Article 14 or 15, 
shall apply to a partner's distributive share of the income of 
an entity that is treated as fiscally transparent, such as a 
U.S. partnership.
    This Article is subject to the saving clause of paragraph 4 
of Article 1 (General Scope). Thus, if a U.S. citizen who is a 
resident of Belgium is a director of a U.S. corporation, the 
United States may tax his full remuneration regardless of where 
he performs his services.

                ARTICLE 16 (ENTERTAINERS AND SPORTSMEN)

    This Article deals with the taxation in a Contracting State 
of entertainers and sportsmen resident in the other Contracting 
State from the performance of their services as such. The 
Article applies both to the income of an entertainer or 
sportsman who performs services on his own behalf and one who 
performs services on behalf of another person, either as an 
employee of that person, or pursuant to any other arrangement. 
The rules of this Article take precedence, in some 
circumstances, over those of Articles 7 (Business Profits) and 
14 (Income from Employment).
    This Article applies only with respect to the income of 
entertainers and sportsmen. Others involved in a performance or 
athletic event, such as producers, directors, technicians, 
managers, coaches, etc., remain subject to the provisions of 
Articles 7 and 14. In addition, except as provided in paragraph 
2, income earned by juridical persons is not covered by Article 
16.

Paragraph 1

    Paragraph 1 describes the circumstances in which a 
Contracting State may tax the performance income of an 
entertainer or sportsman who is a resident of the other 
Contracting State. Under the paragraph, income derived by an 
individual resident of a Contracting State from activities as 
an entertainer or sportsman exercised in the other Contracting 
State may be taxed in that other State if the amount of the 
gross receipts derived by the performer exceeds $20,000 (or its 
equivalent in euro) for the taxable year. The $20,000 includes 
expenses reimbursed to the individual or borne on his behalf. 
If the gross receipts exceed $20,000, the full amount, not just 
the excess, may be taxed in the State of performance.
    This Convention introduces the monetary threshold to 
distinguish between two groups of entertainers and athletes--
those who are paid relatively large sums of money for very 
short periods of service, and who would, therefore, normally be 
exempt from host country tax under the standard personal 
services income rules, and those who earn relatively modest 
amounts and are, therefore, not easily distinguishable from 
those who earn other types of personal service income.
    Tax may be imposed under paragraph 1 even if the performer 
would have been exempt from tax under Article 7 (Business 
Profits) or 14 (Income from Employment). On the other hand. if 
the performer would be exempt from host-country tax under 
Article 16, but would be taxable under either Article 7 or 14, 
tax may be imposed under either of those Articles. Thus, for 
example, if a performer derives remuneration from his 
activities in an independent capacity, and the performer does 
not have a permanent establishment in the host State, he may be 
taxed by the host State in accordance with Article 16 if his 
remuneration exceeds $20,000 annually, despite the fact that he 
generally would be exempt from host State taxation under 
Article 7. However, a performer who receives less than the 
$20,000 threshold amount and therefore is not taxable under 
Article 16 nevertheless may be subject to tax in the host 
country under Article 7 or 14 if the tests for host-country 
taxability under the relevant Article are met. For example, if 
an entertainer who is an independent contractor earns $14,000 
of income in a State for the calendar year, but the income is 
attributable to his permanent establishment in the State of 
performance, that State may tax his income under Article 7.
    Since it frequently is not possible to know until year-end 
whether the income an entertainer or sportsman derived from 
performances in a Contracting State will exceed $20,000, 
nothing in the Convention precludes that Contracting State from 
withholding tax during the year and refunding it after the 
close of the year if the taxability threshold has not been met.
    As explained in paragraph 9 of the Commentary to Article 17 
of the OECD Model, Article 16 of the Convention applies to all 
income connected with a performance by the entertainer, such as 
appearance fees, award or prize money, and a share of the gate 
receipts. Income derived from a Contracting State by a 
performer who is a resident of the other Contracting State from 
other than actual performance, such as royalties from record 
sales and payments for product endorsements, is not covered by 
this Article, but by other articles of the Convention, such as 
Article 12 (Royalties) or Article 7 (Business Profits). For 
example, if an entertainer receives royalty income from the 
sale of live recordings, the royalty income would be exempt 
from source state tax under Article 12, even if the performance 
was conducted in the source country, although the entertainer 
could be taxed in the source country with respect to income 
from the performance itself under Article 16 if the dollar 
threshold is exceeded.
    In determining whether income falls under Article 16 or 
another article, the controlling factor will be whether the 
income in question is predominantly attributable to the 
performance itself or to other activities or property rights. 
For instance, a fee paid to a performer for endorsement of a 
performance in which the performer will participate would be 
considered to be so closely associated with the performance 
itself that it normally would fall within Article 16. 
Similarly, a sponsorship fee paid by a business in return for 
the right to attach its name to the performance would be so 
closely associated with the performance that it would fall 
under Article 16 as well. As indicated in paragraph 9 of the 
Commentary to Article 17 of the OECD Model, however, a 
cancellation fee would not be considered to fall within Article 
16 but would be dealt with under Article 7 (Business Profits) 
or 14 (Income from Employment).
    As indicated in paragraph 4 of the Commentary to Article 17 
of the OECD Model, where an individual fulfills a dual role as 
performer and non-performer (such as a player-coach or an 
actor-director), but his role in one of the two capacities is 
negligible, the predominant character of the individual's 
activities should control the characterization of those 
activities. In other cases there should be an apportionment 
between the performance-related compensation and other 
compensation.
    Consistent with Article 14 (Income from Employment), 
Article 16 also applies regardless of the timing of actual 
payment for services. Thus, a bonus paid to a resident of a 
Contracting State with respect to a performance in the other 
Contracting State during a particular taxable year would be 
subject to Article 16 even if it was paid after the close of 
the year. The determination as to whether the $20,000 threshold 
has been exceeded is determined separately with respect to each 
year of payment. Accordingly, if an actor who is a resident of 
one Contracting State receives residual payments over time with 
respect to a movie that was filmed in the other Contracting 
State, the payments do not have to be aggregated from one year 
to another to determine whether the total payments have finally 
exceeded $20,000. Otherwise, residual payments received many 
years later could retroactively subject all earlier payments to 
tax by the other Contracting State.

Paragraph 2

    Paragraph 2 is intended to address the potential for 
circumvention of the rule in paragraph 1 when a performer's 
income does not accrue directly to the performer himself, but 
to another person. Foreign performers frequently perform in the 
United States as employees of, or under contract with, a 
company or other person.
    The relationship may truly be one of employee and employer, 
with no circumvention of paragraph 1 either intended or 
realized. On the other hand, the ``employer'' may, for example, 
be a company established and owned by the performer, which is 
merely acting as the nominal income recipient in respect of the 
remuneration for the performance (a ``star company''). The 
performer may act as an ``employee,'' receive a modest salary, 
and arrange to receive the remainder of the income from his 
performance from the company in another form or at a later 
time. In such case, absent the provisions of paragraph 2, the 
income arguably could escape host-country tax because the 
company earns business profits but has no permanent 
establishment in that country. The performer may largely or 
entirely escape host-country tax by receiving only a small 
salary, perhaps small enough to place him below the dollar 
threshold in paragraph 1. The performer might arrange to 
receive further payments in a later year, when he is not 
subject to host-country tax, perhaps as dividends or 
liquidating distributions.
    Paragraph 2 seeks to prevent this type of abuse while at 
the same time protecting the taxpayers' rights to the benefits 
of the Convention when there is a legitimate employee-employer 
relationship between the performer and the person providing his 
services. Under paragraph 2, when the income accrues to a 
person other than the performer, the income may be taxed in the 
Contracting State where the performer's services are exercised, 
without regard to the provisions of the Convention concerning 
business profits (Article 7) or income from employment (Article 
14), but only in cases in which the contract pursuant to which 
the personal activities are performed designates the 
entertainer or sportsman or allows a person other than the 
performer or the person to whom the income accrues to designate 
the individual who is to perform the personal activities. This 
rule is based on the U.S. domestic law provision characterizing 
income from certain personal service contracts as foreign 
personal holding company income in the context of the foreign 
personal holding company provisions. See Code section 
954(c)(1)(I). The premise of this rule is that, in a case where 
a performer is using another person in an attempt to circumvent 
the provisions of paragraph 1, the recipient of the services of 
the performer would contract with a person other than that 
performer (i.e., a company employing the performer) only if the 
recipient of the services were certain that the performer 
himself would perform the services. If instead the person is 
allowed to designate the individual who is to perform the 
services, then likely the person is a service company not 
formed to circumvent the provisions of paragraph 1. The 
following example illustrates the operation of this rule.

    Example.  Company O, a resident of Belgium, is engaged in 
the business of operating an orchestra. Company O enters into a 
contract with Company A pursuant to which Company O agrees to 
carry out two performances in the United States in 
consideration of which Company A will pay Company O $200,000. 
The contract designates two individuals, a conductor and a 
flutist, that must perform as part of the orchestra, and allows 
Company O to designate the other members of the orchestra. 
Because the contract does not give Company O any discretion to 
determine whether the conductor or the flutist perform personal 
services under the contract, the portion of the $200,000 which 
is attributable to the personal services of the conductor and 
the flutist may be taxed by the United States pursuant to 
paragraph 2. The remaining portion of the $200,000, which is 
attributable to the personal services of performers that 
Company O may designate, is not subject to tax by the United 
States pursuant to paragraph 2.
    In cases where paragraph 2 is applicable, the income of the 
``employer'' may be subject to tax in the host Contracting 
State even if it has no permanent establishment in the host 
country. Taxation under paragraph 2 is on the person providing 
the services of the performer. This paragraph does not affect 
the rules of paragraph 1, which apply to the performer himself. 
The income taxable by virtue of paragraph 2 is reduced to the 
extent of salary payments to the performer, which fall under 
paragraph 1.
    For purposes of paragraph 2, income is deemed to accrue to 
another person (i.e., the person providing the services of the 
performer) if that other person has control over, or the right 
to receive, gross income in respect of the services of the 
performer.
    Since pursuant to Article 1 (General Scope) the Convention 
only applies to persons who are residents of one of the 
Contracting States, income of the star company would not be 
eligible for benefits of the Convention if the company is not a 
resident of one of the Contracting States.

Relationship to Other Articles

    This Article is subject to the provisions of the saving 
clause of paragraph 4 of Article 1 (General Scope). Thus, if an 
entertainer or a sportsman who is resident in Belgium is a 
citizen of the United States, the United States may tax all of 
his income from performances in the United States without 
regard to the provisions of this Article, subject, however, to 
the special foreign tax credit provisions of paragraph 4 of 
Article 22 (Relief from Double Taxation). In addition, benefits 
of this Article are subject to the provisions of Article 21 
(Limitation on Benefits).

 ARTICLE 17 (PENSIONS, SOCIAL SECURITY, ANNUITIES, ALIMONY, AND CHILD 
                                SUPPORT)

    This Article deals with the taxation of private (i.e., non-
government service) pensions and annuities, social security 
benefits, alimony and child support payments.

Paragraph 1

    Paragraph 1 provides that distributions from pensions and 
other similar remuneration beneficially owned by a resident of 
a Contracting State in consideration of past employment are 
taxable only in the State of residence of the beneficiary. This 
paragraph is subject to the provisions of paragraph 2 of 
Article 18 (Government Service), which generally provides for 
exclusive source state taxation for such payment when paid by, 
or out of funds created by, a Contracting State. The term 
``pensions and other similar remuneration'' includes both 
periodic and single sum payments.
    The phrase ``pensions and other similar remuneration'' is 
intended to encompass payments made by qualified private 
retirement plans. In the United States, the plans encompassed 
by Paragraph 1 include: qualified plans under section 401(a), 
individual retirement plans (including individual retirement 
plans that are part of a simplified employee pension plan that 
satisfies section 408(k), individual retirement accounts and 
section 408(p) accounts), section 403(a) qualified annuity 
plans, and section 403(b) plans. Distributions from section 457 
plans may also fall under Paragraph 1 if they are not paid with 
respect to government services covered by Article 18.
    Pensions in respect of government services covered by 
Article 18 are not covered by this paragraph. They are covered 
either by paragraph 2 of this Article, if they are in the form 
of social security benefits, or by paragraph 2 of Article 18 
(Government Service). Thus, Article 18 generally covers section 
457, 401(a), 403(b) plans established for government employees, 
and the Thrift Savings Plan (section 7701(j)).
    However, the State of residence, under subparagraph (b), 
must exempt from tax any amount of such pensions or other 
similar remuneration that would be exempt from tax in the 
Contracting State in which the pension fund is established if 
the recipient were a resident of that State. Thus, for example, 
a distribution from a U.S. ``Roth IRA'' to a resident of 
Belgium would be exempt from tax in Belgium to the same extent 
the distribution would be exempt from tax in the United States 
if it were distributed to a U.S. resident. The same is true 
with respect to distributions from a traditional IRA to the 
extent that the distribution represents a return of non-
deductible contributions. Similarly, if the distribution were 
not subject to tax when it was ``rolled over'' into another 
U.S. IRA (but not, for example, to a pension fund in Belgium), 
then the distribution would be exempt from tax in Belgium.

Paragraph 2

    The treatment of social security benefits is dealt with in 
paragraph 2. This paragraph provides that, notwithstanding the 
provision of paragraph 1 under which private pensions are 
taxable exclusively in the State of residence of the beneficial 
owner, payments made by one of the Contracting States under the 
provisions of its social security or similar legislation to a 
resident of the other Contracting State or to a citizen of the 
United States will be taxable only in the Contracting State 
making the payment. The reference to U.S. citizens is necessary 
to ensure that a social security payment by Belgium to a U.S. 
citizen who is not resident in the United States will not be 
taxable by the United States.
    This paragraph applies to social security beneficiaries 
whether they have contributed to the system as private sector 
or Government employees. The Protocol provides that the phrase 
``similar legislation'' is intended to refer to United States 
tier 1 Railroad Retirement benefits.

Paragraph 3

    Under paragraph 3, annuities that are derived and 
beneficially owned by a resident of a Contracting State are 
taxable only in that State. An annuity, as the term is used in 
this paragraph, means a stated sum paid periodically at stated 
times during a specified number of years, under an obligation 
to make the payment in return for adequate and full 
consideration (other than for services rendered). An annuity 
received in consideration for services rendered would be 
treated as either deferred compensation that is taxable in 
accordance with Article 14 (Income from Employment) or a 
pension that is subject to the rules of Article 17 (Pensions, 
Social Security, Annuities, Alimony, and Child Support).
    Paragraphs 4 and 5
    Paragraphs 4 and 5 deal with alimony and child support 
payments. Both alimony, under paragraph 4, and child support 
payments, under paragraph 5, are defined as periodic payments 
made pursuant to a written separation agreement or a decree of 
divorce, separate maintenance, or compulsory support. Paragraph 
4, however, deals only with payments of that type that are 
taxable to the payee. Under that paragraph, alimony paid by a 
resident of a Contracting State to a resident of the other 
Contracting State is taxable under the Convention only in the 
State of residence of the recipient. Paragraph 5 deals with 
those periodic payments that are for the support of a child and 
that are not covered by paragraph 4. These types of payments by 
a resident of a Contracting State to a resident of the other 
Contracting State are taxable only in the Contracting State 
where the payor is a resident.

Paragraph 6

    Paragraph 6 provides that, if a resident of a Contracting 
State participates in a pension fund established in the other 
Contracting State, the State of residence will not tax the 
income of the pension fund with respect to that resident until 
a distribution is made from the pension fund. Thus, for 
example, if a U.S. citizen contributes to a U.S. qualified plan 
while working in the United States and then establishes 
residence in Belgium, paragraph 6 prevents Belgium from taxing 
currently the plan's earnings and accretions with respect to 
that individual. When the resident receives a distribution from 
the pension fund, that distribution may be subject to tax in 
the State of residence, subject to paragraph 1.

Paragraph 7

    Paragraph 7 provides certain benefits with respect to 
cross- border contributions to a pension fund, subject to the 
limitations of paragraphs 8 and 9 of the Article. It is 
irrelevant for purposes of paragraph 7 whether the participant 
establishes residence in the State where the individual renders 
services (the ``host State'').
    Subparagraph (a) of paragraph 7 allows an individual who 
exercises employment or self-employment in a Contracting State 
to deduct or exclude from income in that Contracting State 
contributions made by or on behalf of the individual during the 
period of employment or self-employment to a pension fund 
established in the other Contracting State (or in a similar 
fund that is a resident of a comparable third state). Thus, for 
example, if a participant in a U.S. qualified plan goes to work 
in Belgium, the participant may deduct or exclude from income 
in Belgium contributions to the U.S. qualified plan made while 
the participant works in Belgium. The benefits provided under 
subparagraph (a) by the host State are limited. In the case 
where the United States is the host State, the benefits granted 
by subparagraph (a) apply only to the extent the United States 
would provide relief if the plan were established in the United 
States. In the case where Belgium is the host State, the 
benefits granted by subparagraph (a) apply only to the extent 
that Belgium would provide relief if the plan was recognized 
for Belgian tax purposes. A ``similar fund that is a resident 
of comparable third State'' is discussed with respect to 
paragraph 10, below, and is applicable for paragraphs 7 through 
9 of this Article.
    Subparagraph (b) of paragraph 7 provides that, in the case 
of employment, accrued benefits and contributions by or on 
behalf of the individual's employer, during the period of 
employment in the host State, will not be treated as taxable 
income to the employee in that State. Subparagraph (b) also 
allows the employer a deduction in computing its taxable income 
in the host State for contributions to the plan. For example, 
if a participant in a U.S. qualified plan goes to work in 
Belgium, the participant's employer may deduct from its taxable 
income in Belgium contributions to the U.S. qualified plan for 
the benefit of the employee while the employee renders services 
in Belgium.
    As in the case of subparagraph (a), the benefits of 
subparagraph (b) are limited.
    In the case where the United States is the host State, the 
benefits granted by subparagraph (b) apply only to the extent 
that the United States would provide relief if the plan were 
established in the United States. In the case where Belgium is 
the host State, the benefits of subparagraph (b) apply only to 
the extent that Belgium would provide relief if the plan were 
recognized for Belgian tax purposes. Therefore, where the 
United States is the host State, the exclusion of employee 
contributions from the employee's income under this paragraph 
is limited to contributions not in excess of the amount 
specified in section 402(g) for elective contributions. 
Deduction of employer contributions is subject to the 
limitations of sections 415 and 404. The section 404 limitation 
on deductions is calculated as if the individual were the only 
employee covered by the plan.

Paragraph 8

    Paragraph 8 limits the availability of benefits under 
paragraph 7. Under subparagraph (a) of paragraph 8, paragraph 7 
does not apply to contributions to a pension fund unless the 
participant already was contributing to the fund, or his 
employer already was contributing to the fund with respect to 
that individual, before the individual began exercising 
employment in the host State. This condition would be met if 
either the employee or the employer was contributing to a fund 
that was replaced by the fund to which he is contributing. The 
rule regarding successor funds would apply if, for example,
    the employer has been taken over by a company that replaces 
the existing fund with its own fund, rolling membership in the 
old fund over into the new fund.
    In addition, under subparagraph (b), the participant must 
not have performed personal services in the host State for a 
cumulative period that exceeds ten years.
    Further, under subparagraph (c) of paragraph 8, the 
competent authority of the host State must determine that the 
pension plan to which a contribution is made generally 
corresponds to a pension plan recognized for tax purposes in 
the host State. Generally, for this purpose, the U.S. pension 
plans eligible for the benefits of paragraph 7 would include 
qualified plans under section 401(a), individual retirement 
plans (including individual retirement plans that are part of a 
simplified employee pension plan that satisfies section 40 
8(k)), individual retirement accounts, individual retirement 
annuities, section 408(p) accounts and Roth IRAs under section 
408A, section 403(a) qualified annuity plans, section 403(b) 
plans, section 457(b) plans and the Thrift Savings Plan 
(section 7701(j)). However, the competent authorities shall 
agree upon the list of pension plans that are acceptable under 
this paragraph.

Paragraph 9

    Paragraph 9 generally provides U.S. tax treatment for 
certain contributions by or on behalf of U. S. citizens 
resident in Belgium to pension funds established in Belgium (or 
a similar fund that is a resident of a comparable third State) 
that is comparable to the treatment that would be provided for 
contributions to U.S. funds. Under subparagraph (a), a U.S. 
citizen resident in Belgium may exclude or deduct for U.S. tax 
purposes certain contributions to a pension fund established in 
Belgium. Qualifying contributions generally include 
contributions made during the period the U.S. citizen exercises 
an employment in Belgium if expenses of the employment are 
borne by an employer or permanent establishment in Belgium. 
Similarly, with respect to the U.S. citizen's participation in 
the pension fund in Belgium, accrued benefits and contributions 
during that period generally are not treated as taxable income 
in the United States.
    The U.S. tax benefit allowed by paragraph 9, however, is 
limited under subparagraph (b) to the lesser of the amount of 
relief allowed for contributions and benefits that qualify for 
relief in Belgium and the amount of relief that would be 
allowed for contributions and benefits under a generally 
corresponding pension fund established in the United States.
    Subparagraph (c) provides that the benefits an individual 
obtains under paragraph 9 are counted when determining that 
individual's eligibility for benefits under a pension fund 
established in the United States. Thus, for example, 
contributions to a pension fund recognized for tax purposes in 
Belgium may be counted in determining whether the individual 
has exceeded the annual limitation on contributions to an 
individual retirement account.
    Under subparagraph (d), paragraph 9 does not apply to 
pension contributions and benefits unless the competent 
authority of the United States has agreed that the pension fund 
recognized for tax purposes in Belgium generally corresponds to 
a pension fund established in the United States. Since 
paragraph 9 applies only with respect to employees, however, 
the relevant plans are those that correspond to employer plans 
in the United States. The competent authorities shall agree 
upon the list of pension plans that are acceptable under this 
paragraph.

Paragraph 10

    Paragraph 10 provides guidance for the application of 
paragraphs 7 and 9 by delineating when a similar fund that is a 
resident of a State other than a Contracting State will be 
considered to be a resident of a ``comparable third State.'' 
The paragraph requires that such a state will be considered a 
comparable third State only if the following three requirements 
are met: 1) the third State is a member state of the European 
Union or any other European Economic Area state or any party to 
the North American Free Trade Agreement or Switzerland, 2) the 
third State provides, under a tax treaty or otherwise, 
comparable favorable treatment for contributions to a pension 
fund that is a resident of the Contracting State that is 
providing benefits under paragraph 7 (i.e., host state) or 
paragraph 9 (i.e., the United States), and 3) the third State 
has an information exchange provision in a tax treaty or other 
arrangement with the Contracting State that is providing 
benefits under paragraph 7 or paragraph 9 that is satisfactory 
to that Contracting State.
    Subparagraph (b) provides that a pension plan is recognized 
for tax purposes in a Contacting State if contributions to the 
plan would qualify for tax relief in that Contracting State.

Relationship to Other Articles

    Paragraphs 1 (a), 3 and 4 of Article 17 are subject to the 
saving clause of paragraph 4 of Article 1 (General Scope). 
Thus, a U.S. citizen who is resident in the other Contracting 
State, and receives either a pension, annuity or alimony 
payment from the United States, may be subject to U.S. tax on 
the payment, notwithstanding the rules in those three 
paragraphs that give the State of residence of the recipient 
the exclusive taxing right. Paragraphs 1(b), 2 and 5 are 
excepted from the saving clause by virtue of subparagraph 5(a) 
of Article 1. Thus, the United States will not tax U.S. 
citizens and residents on the income described in those 
paragraphs even if such amounts otherwise would be subject to 
tax under U.S. law.
    Paragraphs 6 and 9 of Article 17 are excepted from the 
saving clause of paragraph 4 of Article 1 by virtue of 
paragraph 5(a) of Article 1. Thus, the United States will allow 
U.S. citizens and residents the benefits of paragraphs 6 and 9. 
Paragraph 7 is excepted from the saving clause by subparagraph 
5(b) of Article 1 with respect only to persons who are not 
admitted for permanent residence or citizens. Accordingly, a 
person who becomes a U.S. permanent resident or citizen will no 
longer receive a deduction for contributions to a pension fund 
established in the other Contracting State.

                    ARTICLE 18 (GOVERNMENT SERVICE)

Paragraph 1

    Subparagraphs (a) and (b) of paragraph 1 deal with the 
taxation of government compensation (other than a pension 
addressed in paragraph 2). Subparagraph (a) provides that 
remuneration paid to any individual who is rendering services 
to a State, or a political subdivision or a local authority 
thereof, is exempt from tax by the other State. Under 
subparagraph (b), such payments are, however, taxable 
exclusively in the other State (i.e., the host State) if the 
services are rendered in that other State and the individual is 
a resident of that State who is either a national of that State 
or a person who did not become resident of that State solely 
for purposes of rendering the services. The paragraph applies 
to anyone performing services for a government, whether as a 
government employee, an independent contractor, or an employee 
of an independent contractor.

Paragraph 2

    Paragraph 2 deals with the taxation of pensions and other 
similar remuneration paid by, or out of funds created by, one 
of the States, or a political subdivision or a local authority 
thereof, to an individual in respect of services rendered to 
that State or subdivision or authority. Subparagraph (a) 
provides that such pensions and other similar remuneration are 
taxable only in that State. Subparagraph (b) provides an 
exception under which such pensions and other similar 
remuneration are taxable only in the other State if the 
individual is a resident of, and a national of, that other 
State.
    Pensions paid to retired civilian and military employees of 
a Government of either State are intended to be covered under 
paragraph 2. When benefits paid by a State in respect of 
services rendered to that State or a subdivision or authority 
are in the form of social security benefits, however, those 
payments are covered by paragraph 2 of Article 17 (Pensions, 
Social Security, Annuities, Alimony, and Child Support). As a 
general matter, the result will be the same whether Article 17 
or 18 applies, since social security benefits are taxable 
exclusively by the source country and so are government 
pensions. The result will differ only when the payment is made 
to a citizen and resident of the other Contracting State, who 
is not also a citizen of the paying State. In such a case, 
social security benefits continue to be taxable at source while 
government pensions become taxable only in the residence 
country.

Paragraph 3

    Paragraph 3 provides that the remuneration described in 
paragraph 1 will be subject to the rules of Articles 14 (Income 
from Employment), 15 (Directors' Fees), 16 (Entertainers and 
Sportsmen) or 17 (Pensions, Social Security, Annuities, 
Alimony, and Child Support) if the recipient of the income is 
employed by a business conducted by a government.

Relationship to Other Articles

    Under paragraph 5(b) of Article 1 (General Scope), the 
saving clause (paragraph 4 of Article 1) does not apply to the 
benefits conferred by one of the States under Article 18 if the 
recipient of the benefits is neither a citizen of that State, 
nor a person who has been admitted for permanent residence 
there (i.e., in the United States, a ``green card'' holder). 
Thus, a resident of a Contracting State who in the course of 
performing functions of a governmental nature becomes a 
resident of the other State (but not a permanent resident), 
would be entitled to the benefits of this Article. However, an 
individual who receives a pension paid by the Government of 
Belgium in respect of services rendered to that Government 
shall be taxable on this pension only in Belgium unless the 
individual is a U.S. citizen or acquires a U.S. green card.

       ARTICLE 19 (STUDENTS, TRAINEES, TEACHERS AND RESEARCHERS)

    This Article provides rules for host-country taxation of 
visiting students, business trainees, teachers and researchers. 
Persons who meet the tests of the Article will be exempt from 
tax in the State that they are visiting with respect to 
designated classes of income. Paragraph 1 addresses payments 
received by a student or business trainee, while paragraph 2 
addresses teachers and researchers temporarily present in the 
host country.

Paragraph 1

    Subparagraph (a) addresses the situation where a student or 
business trainee that is a resident of a Contracting State 
receives certain payments other than for personal services, 
while present in the host State. Several conditions must be 
satisfied for such an individual to be exempt from host country 
taxation.
    First, the student or business trainee must have been, 
either at the time of his arrival in the host State or 
immediately before, a resident of the other Contracting State.
    Second, the purpose of the visit must be the full-time 
education or full-time training of the visitor. Thus, if the 
visitor comes principally to work in the host State but also is 
a part-time student, he would not be entitled to the benefits 
of this Article, even with respect to any payments he may 
receive from abroad for his maintenance or education, and 
regardless of whether or not he is in a degree program. Whether 
a student is to be considered full-time will be determined by 
the rules of the educational institution at which he is 
studying.
    The host-country exemption in subparagraph (a) applies to 
payments received by the student or business trainee for the 
purpose of his maintenance, education or training that arise 
outside the host State. A payment will be considered to arise 
outside the host State if the payer is located outside the host 
State. Thus, if an employer from one of the Contracting States 
sends an employee to the other Contracting State for training, 
the payments the trainee receives from abroad from his employer 
for his maintenance or training while he is present in the host 
State will be exempt from tax in the host State. Where 
appropriate, substance prevails over form in determining the 
identity of the payer. Thus, for example, payments made 
directly or indirectly by a U.S. person with whom the visitor 
is training, but which have been routed through a source 
outside the United States (e.g., a foreign subsidiary), are not 
treated as arising outside the United States for this purpose.
    Subparagraph (1) (b) also provides a limited exemption for 
remuneration from personal services rendered in the host State 
with a view to supplementing the resources available to him for 
such purposes to the extent of $9,000 United States dollars (or 
its equivalent in euro) per taxable year. The competent 
authorities are instructed to adjust this amount every five 
years, if necessary, to take into account changes in the amount 
of the U.S. standard deduction and personal exemption and the 
Belgian basic allowance.
    In the case of a business trainee, the benefits of 
paragraph 1 will extend only for a period of two years from the 
time that the visitor first arrives in the host country. If, 
however, a trainee remains in the host country for a third 
year, thus losing the benefits of the Article, he would not 
retroactively lose the benefits of the Article for the first 
two years. Supbaragraph 1(c) defines the term ``business 
trainee'' as a person who is in the country temporarily for the 
purpose of securing training that is necessary to qualify to 
pursue a profession or professional specialty. Moreover, a 
business trainee also includes an individual who is employed or 
under contract with a resident of the other Contracting State 
and is temporarily present in the host State for the primary 
purpose of receiving technical, professional, or business 
experience from a person other than his employer or a person 
related to its employer. Thus, a business trainee might include 
a lawyer employed by a law firm in one Contracting State who 
works for two years as a stagiare in an unrelated law firm in 
the other Contracting State. However, the term would not 
include a manager who normally is employed by a parent company 
in one Contracting State who is sent to the other Contracting 
State to run a factory owned by a subsidiary of the parent 
company.

Paragraph 2

    Paragraph 2 provides an exemption from host State taxation 
for teachers and researchers. Under paragraph 2 an individual 
who is a resident of a Contracting State at the beginning of 
his visit to the other Contracting State (i.e., host State), 
and who is temporarily present in the host State for the 
purpose of teaching or carrying on research at a school, 
college, university or other educational or research 
institution is exempt from host Sate taxation for a period not 
exceeding 2 years from the person's arrival in the host State 
on the person's remuneration received in consideration of 
teaching or carrying on research. However, the benefits of 
paragraph 2 do not apply to income from research if such 
research is undertaken primarily for the private benefit of a 
specific person or persons.

Relationship to Other Articles

    The saving clause of paragraph 4 of Article 1 (General 
Scope) does not apply to this Article with respect to an 
individual who is neither a citizen of the host State nor has 
been admitted for permanent residence there. The saving clause, 
however, does apply with respect to citizens and permanent 
residents of the host State. Thus, a U.S. citizen who is a 
resident of Belgium and who visits the United States as a full-
time student at an accredited university will not be exempt 
from U.S. tax on remittances from abroad that otherwise 
constitute U.S. taxable income. A person, however, who is not a 
U.S. citizen, and who visits the United States as a student and 
remains long enough to become a resident under U.S. law, but 
does not become a permanent resident (i.e., does not acquire a 
green card), will be entitled to the full benefits of the 
Article.

                       ARTICLE 20 (OTHER INCOME)

    Article 20 generally assigns taxing jurisdiction over 
income not dealt with in the other articles (Articles 6 through 
19) of the Convention to the State of residence of the 
beneficial owner of the income. In order for an item of income 
to be ``dealt with'' in another article it must be the type of 
income described in the article and, in most cases, it must 
have its source in a Contracting State. For example, all 
royalty income that arises in a Contracting State and that is 
beneficially owned by a resident of the other Contracting State 
is ``dealt with'' in Article 12 (Royalties). However, profits 
derived in the conduct of a business are ``dealt with'' in 
Article 7 (Business Profits) whether or not they have their 
source in one of the Contracting States.
    Examples of items of income covered by Article 20 include 
income from gambling, punitive (but not compensatory) damages 
and covenants not to compete. The article would also apply to 
income from a variety of financial transactions, where such 
income does not arise in the course of the conduct of a trade 
or business. For example, income from notional principal 
contracts and other derivatives would fall within Article 20 if 
derived by persons not engaged in the trade or business of 
dealing in such instruments, unless such instruments were being 
used to hedge risks arising in a trade or business. It would 
also apply to securities lending fees derived by an 
institutional investor. Further, in most cases guarantee fees 
paid within an intercompany group would be covered by Article 
20, unless the guarantor were engaged in the business of 
providing such guarantees to unrelated parties.
    Article 20 also applies to items of income that are not 
dealt with in the other articles because of their source or 
some other characteristic. For example, Article 11 (Interest) 
addresses only the taxation of interest arising in a 
Contracting State. Interest arising in a third State that is 
not attributable to a permanent establishment, therefore, is 
subject to Article 20.
    Distributions from partnerships are not generally dealt 
with under Article 20 because partnership distributions 
generally do not constitute income. Under the Code, partners 
include in income their distributive share of partnership 
income annually, and partnership distributions themselves 
generally do not give rise to income. This would also be the 
case under U.S. law with respect to distributions from trusts. 
Trust income and distributions that, under the Code, have the 
character of the associated distributable net income would 
generally be covered by another article of the Convention. See 
Code section 641 et seq.

Paragraph 1

    The general rule of Article 20 is contained in paragraph 1. 
Items of income not dealt with in other articles and 
beneficially owned by a resident of a Contracting State will be 
taxable only in the State of residence. This exclusive right of 
taxation applies whether or not the residence State exercises 
its right to tax the income covered by the Article.
    The reference in this paragraph to ``items of income 
beneficially owned by a resident of a Contracting State'' 
rather than simply ``items of income of a resident of a 
Contracting State,'' as in the OECD Model, is intended merely 
to make explicit the implicit understanding in other treaties 
that the exclusive residence taxation provided by paragraph 1 
applies only when a resident of a Contracting State is the 
beneficial owner of the income. Thus, source taxation of income 
not dealt with in other articles of the Convention is not 
limited by paragraph 1 if it is nominally paid to a resident of 
the other Contracting State, but is beneficially owned by a 
resident of a third State. However, income received by a 
nominee on behalf of a resident of that other State would be 
entitled to benefits.
    The term ``beneficially owned'' is not defined in the 
Convention, and is, therefore, defined under the internal law 
of the country imposing tax (i.e., the source country). The 
person who beneficially owns the income for purposes of Article 
20 is the person to which the income is attributable for tax 
purposes under the laws of the source State.

Paragraph 2

    This paragraph provides an exception to the general rule of 
paragraph 1 for income that is attributable to a permanent 
establishment maintained in a Contracting State by a resident 
of the other Contracting State. The taxation of such income is 
governed by the provisions of Article 7 (Business Profits). 
Therefore, income arising outside the United States that is 
attributable to a permanent establishment maintained in the 
United States by a resident of Belgium generally would be 
taxable by the United States under the provisions of Article 7. 
This would be true even if the income is sourced in a third 
State.

Relationship to Other Articles

    This Article is subject to the saving clause of paragraph 4 
of Article 1 (General Scope). Thus, the United States may tax 
the income of a resident of Belgium that is not dealt with 
elsewhere in the Convention, if that resident is a citizen of 
the United States. The Article is also subject to the 
provisions of Article 21 (Limitation on Benefits). Thus, if a 
resident of Belgium earns income that falls within the scope of 
paragraph 1 of Article 20, but that is taxable by the United 
States under U.S. law, the income would be exempt from U.S. tax 
under the provisions of Article 20 only if the resident 
satisfies one of the tests of Article 21 for entitlement to 
benefits.

                  ARTICLE 21 (LIMITATION ON BENEFITS)

    Article 21 contains anti-treaty-shopping provisions that 
are intended to prevent residents of third countries from 
benefiting from what is intended to be a reciprocal agreement 
between two countries. In general, the provision does not rely 
on a determination of purpose or intention but instead sets 
forth a series of objective tests. A resident of a Contracting 
State that satisfies one of the tests will receive benefits 
regardless of its motivations in choosing its particular 
business structure.
    The structure of the Article is as follows: Paragraph 1 
states the general rule that residents are entitled to benefits 
otherwise accorded to residents only to the extent provided in 
the Article. Paragraph 2 lists a series of attributes of a 
resident of a Contracting State, the presence of any one of 
which will entitle that person to all the benefits of the 
Convention. Paragraph 3 provides that, regardless of whether a 
person qualifies for benefits under paragraph 2, benefits may 
be granted to a company if it meets a ``derivative benefits'' 
test that generally considers whether the owners of the company 
would qualify for benefits under Article 21, and whether the 
company makes significant payments to certain persons that 
erode the taxable base of the country where the company is a 
resident.. Paragraph 4 provides that, regardless of whether a 
person qualifies for benefits under paragraph 2, benefits may 
be granted to that person with regard to certain income earned 
in the conduct of an active trade or business. Paragraph 5 
provides that a so called headquarters company resident in a 
Contracting State may qualify for benefits if certain 
conditions are met. Paragraph 6 generally provides rules that 
deny the benefit of a reduced rate of source country tax with 
respect to interest or royalties in certain cases where the 
beneficial owner of the payments derives the income through a 
permanent establishment in a third State and such third State 
does not impose a significant tax on such income. Paragraph 7 
provides that benefits also may be granted if the competent 
authority of the State from which benefits are claimed 
determines that it is appropriate to provide benefits in that 
case. Paragraph 8 defines certain terms used in the Article.

Paragraph 1

    Paragraph 1 provides that a resident of a Contracting State 
will be entitled to the benefits otherwise accorded to 
residents of a Contracting State under the Convention only to 
the extent provided in the Article. The benefits otherwise 
accorded to residents under the Convention include all 
limitations on source-based taxation under Articles 6 through 
20, the treaty-based relief from double taxation provided by 
Article 22, and the protection against discrimination afforded 
to residents of a Contracting State under Article 23. Some 
provisions do not require that a person be a resident in order 
to enjoy the benefits of those provisions. The mutual agreement 
procedure of Article 24 is not limited to residents of the 
Contracting States, and Article 27 applies to diplomatic agents 
or consular officials regardless of residence. Article 21 
accordingly does not limit the availability of treaty benefits 
under these provisions.
    Article 21 and the anti-abuse provisions of domestic law 
complement each other, as Article 21 effectively determines 
whether an entity has a sufficient nexus to the Contracting 
State to be treated as a resident for treaty purposes, while 
domestic anti-abuse provisions (e.g., business purpose, 
substance-over-form, step transaction or conduit principles) 
determine whether a particular transaction should be recast in 
accordance with its substance. Thus, internal law principles of 
the source Contracting State may be applied to identify the 
beneficial owner of an item of income, and Article 21 then will 
be applied to the beneficial owner to determine if that person 
is entitled to the benefits of the Convention with respect to 
such income.

Paragraph 2

    Paragraph 2 has five subparagraphs, each of which describes 
a category of residents that are entitled to all benefits of 
the Convention.
    It is intended that the provisions of paragraph 2 will be 
self executing. Unlike the provisions of paragraph 7, discussed 
below, claiming benefits under paragraph 2 does not require an 
advance competent authority ruling or approval. The tax 
authorities may, of course, on review, determine that the 
taxpayer has improperly interpreted the paragraph and is not 
entitled to the benefits claimed.

    Individuals--Subparagraph 2(a).--Subparagraph (a) provides 
that individual residents of a Contracting State will be 
entitled to all treaty benefits. If such an individual receives 
income as a nominee on behalf of a third country resident, 
benefits may be denied under the respective articles of the 
Convention by the requirement that the beneficial owner of the 
income be a resident of a Contracting State.

    Governments--Subparagraph 2(b).--Subparagraph (b) provides 
that the Contracting States and any political subdivision or 
local authority thereof will be entitled to all benefits of the 
Convention.

    Publicly-Traded Corporations--Subparagraph 2(c)(i).--
Subparagraph (c) applies to two categories of companies: 
publicly traded companies and subsidiaries of publicly traded 
companies. A company resident in a Contracting State is 
entitled to all the benefits of the Convention under clause (i) 
of subparagraph (c) if the principal class of its shares, and 
any disproportionate class of shares, is regularly traded on 
one or more recognized stock exchanges and the company 
satisfies at least one of the following additional 
requirements: first, the company's principal class of shares is 
primarily traded on a recognized stock exchange located in the 
Contracting State of which the company is a resident (or, in 
the case of a company resident in Belgium, on a recognized 
stock exchange located within the European Union or in any 
other European Economic Area state, or in the case of a company 
resident in the United States, on a recognized stock exchange 
located in another state that is a party to the North American 
Free Trade Agreement); or, second, the company's primary place 
of management and control is in its State of residence.
    The term ``recognized stock exchange'' is defined in 
subparagraph (d) of paragraph 8. It includes (i) the NASDAQ 
System and any stock exchange registered with the Securities 
and Exchange Commission as a national securities exchange for 
purposes of the Securities Exchange Act of 1934; (ii) the 
Brussels stock exchange, the Irish Stock exchange and the stock 
exchanges of Amsterdam, Frankfurt, Hamburg, Lisbon, London, 
Madrid, Milan, Paris, Toronto, and Zurich; and (iii) any other 
stock exchange agreed upon by the competent authorities of the 
Contracting States.
    If a company has only one class of shares, it is only 
necessary to consider whether the shares of that class meet the 
relevant trading requirements. If the company has more than one 
class of shares, it is necessary as an initial matter to 
determine which class or classes constitute the ``principal 
class of shares.'' The term ``principal class of shares'' is 
defined in subparagraph (a) of paragraph 8 to mean the ordinary 
or common shares of the company representing the majority of 
the aggregate voting power and value of the company. If the 
company does not have a class of ordinary or common shares 
representing the majority of the aggregate voting power and 
value of the company, then the ``principal class of shares'' is 
that class or any combination of classes of shares that 
represents, in the aggregate, a majority of the voting power 
and value of the company. Subparagraph (c) of paragraph 8 
defines the term ``shares'' to include depository receipts for 
shares. Although in a particular case involving a company with 
several classes of shares it is conceivable that more than one 
group of classes could be identified that account for more than 
50 percent of the shares, it is only necessary for one such 
group to satisfy the requirements of this subparagraph in order 
for the company to be entitled to benefits. Benefits would not 
be denied to the company even if a second, non-qualifying, 
group of shares with more than half of the company's voting 
power and value could be identified.
    A company whose principal class of shares is regularly 
traded on a recognized stock exchange will nevertheless not 
qualify for benefits under subparagraph (c) of paragraph 2 if 
it has a disproportionate class of shares that is not regularly 
traded on a recognized stock exchange. The term 
``disproportionate class of shares'' is defined in subparagraph 
(b) of paragraph 8. A company has a disproportionate class of 
shares if it has outstanding a class of shares which is subject 
to terms or other arrangements that entitle the holder to a 
larger portion of the company's income, profit, or gain in the 
other Contracting State than that to which the holder would be 
entitled in the absence of such terms or arrangements. Thus, 
for example, a company resident in Belgium has a 
disproportionate class of shares if it has outstanding a class 
of ``tracking stock'' that pays dividends based upon a formula 
that approximates the company's return on its assets employed 
in the United States.
    The following example illustrates this result.

    Example. BCo is a corporation resident in Belgium. BCo has 
two classes of shares: Common and Preferred. The Common shares 
are listed and regularly traded on the Brussels stock exchange. 
The Preferred shares have no voting rights and are entitled to 
receive dividends equal in amount to interest payments that BCo 
receives from unrelated borrowers in the United States. The 
Preferred shares are owned entirely by a single investor that 
is a resident of a country with which the United States does 
not have a tax treaty. The Common shares account for more than 
50 percent of the value of BCo and for 100 percent of the 
voting power. Because the owner of the Preferred shares is 
entitled to receive payments corresponding to the U.S. source 
interest income earned by BCo, the Preferred shares are a 
disproportionate class of shares. Because the Preferred shares 
are not regularly traded on a recognized stock exchange, BCo 
will not qualify for benefits under subparagraph (c) of 
paragraph 2.
    The term ``regularly traded'' is defined in subparagraph 
(e) of paragraph 8. Under that subparagraph a class of shares 
is considered to be regularly traded on one or more recognized 
stock exchanges if the aggregate number of shares of that class 
traded on such stock exchange or exchanges during the preceding 
taxable year is at least 6 percent of the average number of 
shares outstanding in that class during that preceding taxable 
year.
    The regular trading requirement can be met by trading on 
any recognized exchange or exchanges. Trading on one or more 
recognized stock exchanges may be aggregated for purposes of 
this requirement. Thus, a U.S. company could satisfy the 
regularly traded requirement through trading, in whole or in 
part, on a recognized stock exchange located in Belgium. 
Authorized but unissued shares are not considered for purposes 
of this test.
    The term ``primarily traded'' is not defined in the 
Convention. In accordance with paragraph 2 of Article 3 
(General Definitions), this term will have the meaning it has 
under the laws of the State concerning the taxes to which the 
Convention applies, generally the source State. In the case of 
the United States, this term is understood to have the meaning 
it has under Treas. Reg. section 1.884-5(d)(3), relating to the 
branch tax provisions of the Code. Accordingly, stock of a 
corporation is ``primarily traded'' if the number of shares in 
the company's principal class of shares that are traded during 
the taxable year on all recognized stock exchanges in the 
Contracting State of which the company is a resident exceeds 
the number of shares in the company's principal class of shares 
that are traded during that year on established securities 
markets in any other single foreign country.
    A company whose principal class of shares is regularly 
traded on a recognized exchange but cannot meet the primarily 
traded test may claim treaty benefits if its primary place of 
management and control is in its country of residence. This 
test should be distinguished from the ``place of effective 
management'' test which is used in the OECD Model and by many 
other countries to establish residence. In some cases, the 
place of effective management test has been interpreted to mean 
the place where the board of directors meets. By contrast, the 
primary place of management and control test looks to where 
day-to-day responsibility for the management of the company 
(and its subsidiaries) is exercised. The company's primary 
place of management and control will be located in the State in 
which the company is a resident only if the executive officers 
and senior management employees exercise day-to-day 
responsibility for more of the strategic, financial and 
operational policy decision making for the company (including 
direct and indirect subsidiaries) in that State than in the 
other State or any third state, and the staff that support the 
management in making those decisions are also based in that 
State. Thus, the test looks to the overall activities of the 
relevant persons to see where those activities are conducted. 
In most cases, it will be a necessary, but not a sufficient, 
condition that the headquarters of the company (that is, the 
place at which the CEO and other top executives normally are 
based) be located in the Contracting State of which the company 
is a resident.
    To apply the test, it will be necessary to determine which 
persons are to be considered ``executive officers and senior 
management employees.'' In most cases, it will not be necessary 
to look beyond the executives who are members of the Board of 
Directors (the ``inside directors'') in the case of a U.S. 
company. That will not always be the case, however; in fact, 
the relevant persons may be employees of subsidiaries if those 
persons make the strategic, financial and operational policy 
decisions. Moreover, it would be necessary to take into account 
any special voting arrangements that result in certain board 
members making certain decisions without the participation of 
other board members.

    Subsidiaries of Publicly-Traded Corporations--Subparagraph 
2(c)(ii).--A company resident in a Contracting State is 
entitled to all the benefits of the Convention under clause 
(ii) of subparagraph (c) of paragraph 2 if five or fewer 
publicly traded companies described in clause (i) are the 
direct or indirect owners of at least 50 percent of the 
aggregate vote and value of the company's shares (and at least 
50 percent of any disproportionate class of shares). If the 
publicly-traded companies are indirect owners, however, each of 
the intermediate companies must be a resident of one of the 
Contracting States.
    Thus, for example, a company that is a resident of Belgium, 
all the shares of which are owned by another company that is a 
resident of Belgium, would qualify for benefits under the 
Convention if the principal class of shares (and any 
disproportionate classes of shares) of the parent company are 
regularly and primarily traded on the Brussels stock exchange. 
However, such a subsidiary would not qualify for benefits under 
clause (ii) if the publicly traded parent company were a 
resident of a third state, for example, and not a resident of 
the United States or Belgium. Furthermore, if a parent company 
in Belgium indirectly owned the bottom-tier company through a 
chain of subsidiaries, each such subsidiary in the chain, as an 
intermediate owner, must be a resident of the United States or 
Belgium in order for the subsidiary to meet the test in clause 
(ii).

    Tax Exempt Organizations--Subparagraph 2(d).--Subparagraph 
2(d) provides rules by which the tax exempt organizations 
described in paragraph 3 of Article 4 (Resident) will be 
entitled to all the benefits of the Convention. A pension fund 
will qualify for benefits if more than fifty percent of the 
beneficiaries, members or participants are individuals resident 
in either Contracting State or the organization sponsoring such 
pension fund is entitled to benefits under the Convention 
(i.e., meets the limitations on benefits provisions of Article 
21). For purposes of this provision, the term ``beneficiaries'' 
should be understood to refer to the persons receiving benefits 
from the pension fund. On the other hand, a tax-exempt 
organization other than a pension fund automatically qualifies 
for benefits, without regard to the residence of its 
beneficiaries or members. Entities qualifying under this rule 
are those that are generally exempt from tax in their State of 
residence and that are established and maintained exclusively 
to fulfill religious, charitable, scientific, artistic, 
cultural, or educational purposes.

    Ownership/Base Erosion--Subparagraph 2(e).--Subparagraph 
2(e) provides an additional method to qualify for treaty 
benefits that applies to any form of legal entity that is a 
resident of a Contracting State. The test provided in 
subparagraph (e), the so-called ownership and base erosion 
test, is a two-part test. Both prongs of the test must be 
satisfied for the resident to be entitled to treaty benefits 
under subparagraph 2(e).
    The ownership prong of the test, under clause (i), requires 
that 50 percent or more of each class of shares or other 
beneficial interests in the person is owned, directly or 
indirectly, on at least half the days of the person's taxable 
year by persons who are residents of the Contracting State of 
which that person is a resident and that are themselves 
entitled to treaty benefits under subparagraphs (a), (b), (d) 
or clause (i) of subparagraph (c) of paragraph 2
    Trusts may be entitled to benefits under this provision if 
they are treated as residents under Article 4 (Residence) and 
they otherwise satisfy the requirements of this subparagraph. 
For purposes of this subparagraph, the beneficial interests in 
a trust will be considered to be owned by its beneficiaries in 
proportion to each beneficiary's actuarial interest in the 
trust. The interest of a remainder beneficiary will be equal to 
100 percent less the aggregate percentages held by income 
beneficiaries. A beneficiary's interest in a trust will not be 
considered to be owned by a person entitled to benefits under 
the other provisions of paragraph 2 if it is not possible to 
determine the beneficiary's actuarial interest. Consequently, 
if it is not possible to determine the actuarial interest of 
the beneficiaries in a trust, the ownership test under clause 
i) cannot be satisfied, unless all possible beneficiaries are 
persons entitled to benefits under the other subparagraphs of 
paragraph 2.
    The base erosion prong of clause (ii) of subparagraph (e) 
is satisfied with respect to a person if less than 50 percent 
of the person's gross income for the taxable year, as 
determined under the tax law in the person's State of 
residence, is paid or accrued, directly or indirectly, to 
persons who are not residents of either Contracting State 
entitled to benefits under subparagraphs (a), (b), (d) or 
clause (i) of subparagraph (c) of paragraph 2, in the form of 
payments deductible for tax purposes in the payor's State of 
residence. These amounts do not include arm's-length payments 
in the ordinary course of business for services or tangible 
property or payments in respect of financial obligations to a 
bank that is not related to the payor. To the extent they are 
deductible from the taxable base, trust distributions are 
deductible payments. However, depreciation and amortization 
deductions, which do not represent payments or accruals to 
other persons, are disregarded for this purpose.

Paragraph 3

    Paragraph 3 sets forth a derivative benefits test that is 
potentially applicable to all treaty benefits, although the 
test is applied to individual items of income. In general, a 
derivative benefits test entitles the resident of a Contracting 
State to treaty benefits if the owner of the resident would 
have been entitled to the same benefit had the income in 
question flowed directly to that owner. To qualify under this 
paragraph, the company must meet an ownership test and a base 
erosion test.
    Subparagraph (a) sets forth the ownership test. Under this 
test, seven or fewer equivalent beneficiaries must own shares 
representing at least 95 percent of the aggregate voting power 
and value of the company and at least 50 percent of any 
disproportionate class of shares. Ownership may be direct or 
indirect. The term ``equivalent beneficiary'' is defined in 
subparagraph (g) of paragraph 8. This definition may be met in 
two alternative ways, the first of which has two requirements.
    Under the first alternative, a person may be an equivalent 
beneficiary because it is entitled to equivalent benefits under 
a treaty between the country of source and the country in which 
the person is a resident. This alternative has two 
requirements.
    The first requirement is that the person must be a resident 
of a Member State of the European Union or any other European 
Economic Area state, or Switzerland, or a party to the North 
American Free Trade Agreement (collectively, ``qualifying 
States'').
    The second requirement of the definition of ``equivalent 
beneficiary'' is that the person must be entitled to equivalent 
benefits under an applicable treaty. To satisfy the second 
requirement, the person must be entitled to all the benefits of 
a comprehensive treaty between the Contracting State from which 
benefits of the Convention are claimed and a qualifying State 
under provisions analogous to subparagraphs 2(a), (b), (d) or 
clause i) of subparagraph (c). For this purpose, however, if 
the treaty in question does not have a comprehensive limitation 
on benefits article, this requirement is met only if the person 
is entitled to benefits under the aforementioned provisions of 
paragraph 2.
    In addition, to satisfy the second requirement by virtue of 
clause (B) of subparagraph (g)(i) with respect to dividends, 
interest, royalties, or branch tax, the person must be entitled 
to a rate of tax that is at least as low as the rate that would 
apply under the Convention to such income. Thus, the rates to 
be compared are: (1) the rate of withholding or branch tax that 
the source State would have imposed if a qualified resident of 
the other Contracting State was the beneficial owner of the 
income; and (2) the rate of withholding or branch tax that the 
source State would have imposed if the third State resident 
received the income directly from the source State. For 
example, USCo is a wholly owned subsidiary of BelgiumCo, a 
company resident in Belgium. BelgiumCo is wholly owned by FCo, 
a corporation resident in Italy. Assuming BelgiumCo satisfies 
the requirements of paragraph 3(a) of Article 10 (Dividends), 
BelgiumCo would be eligible for the elimination of dividend 
withholding tax. The dividend withholding rate in the treaty 
between the United States and Italy is 5 percent. Thus, if FCo 
received the dividend directly from USCo, FCo would have been 
subject to a 5 percent rate of withholding tax on the dividend. 
Because FCo would not be entitled to a rate of withholding tax 
that is at least as low as the rate that would apply under the 
Convention to such income (i.e., zero), FCo is not an 
equivalent beneficiary within the meaning of paragraph 8(g)(i) 
of Article 21 with respect to the elimination of withholding 
tax on dividends.
    Subparagraph 8(h) provides a special rule to take account 
of the fact that withholding taxes on many inter-company 
dividends, interest and royalties are exempt within the 
European Union by reason of various EU directives, rather than 
by tax treaty. If a U.S. company receives such payments from a 
Belgian company, and the U.S. company is owned by a company 
resident in a member state of the European Union that would 
have qualified for an exemption from withholding tax if it had 
received the income directly, the parent company will be 
treated as an equivalent beneficiary. This rule is necessary 
because many European Union member countries have not re-
negotiated their tax treaties to reflect the exemptions 
available under the directives.
    The requirement that a person be entitled to ``all the 
benefits'' of a comprehensive tax treaty eliminates those 
persons that qualify for benefits with respect to only certain 
types of income. Accordingly, the fact that a French parent of 
a Belgium company is engaged in the active conduct of a trade 
or business in France and therefore would be entitled to the 
benefits of the U.S.-France treaty if it received dividends 
directly from a U.S. subsidiary of the Belgian company is not 
sufficient for purposes of this paragraph. Further, the French 
company cannot be an equivalent beneficiary if it qualifies for 
benefits only with respect to certain income as a result of a 
``derivative benefits'' provision in the U.S.-France treaty. 
However, it would be possible to look through the French 
company to its parent company to determine whether the parent 
company is an equivalent beneficiary.
    The second alternative for satisfying the ``equivalent 
beneficiary'' test is available only to residents of one of the 
two Contracting States. U.S. or Belgian residents who are 
eligible for treaty benefits by reason of subparagraphs (a), 
(b), (d) or clause i) of subparagraph (c) of paragraph 2 are 
equivalent beneficiaries under the second alternative. Thus, a 
Belgian individual will be an equivalent beneficiary without 
regard to whether the individual would have been entitled to 
receive the same benefits if it received the income directly. A 
resident of a third country could not qualify for treaty 
benefits under any of those subparagraphs or any other rule of 
the treaty, and therefore does not qualify as an equivalent 
beneficiary under this alternative. Thus, any resident of a 
third country can be an equivalent beneficiary only if it would 
have been entitled to equivalent benefits had it received the 
income directly.
    The second alternative was included in order to clarify 
that ownership by certain residents of a Contracting State 
would not disqualify a U.S. or Belgian company under this 
paragraph. Thus, for example, if 90 percent of a Belgian 
company is owned by five companies that are resident in member 
states of the European Union who satisfy the requirements of 
clause (i) of subparagraph (g) of paragraph 8, and 10 percent 
of the Belgian company is owned by a U.S. or Belgian 
individual, then the Belgian company still can satisfy the 
requirements of subparagraph (a) of paragraph 3.
    Subparagraph (b) sets forth the base erosion test. A 
company meets this base erosion test if less than 50 percent of 
its gross income for the taxable period (as determined in the 
company's State of residence) is paid or accrued, directly or 
indirectly, to a person or persons who are not equivalent 
beneficiaries in the form of payments deductible for tax 
purposes in company's State of residence. This test is the same 
as the base erosion test in clause (ii) of subparagraph (e) of 
paragraph 2, except that the test in subparagraph 3(b) focuses 
on base-eroding payments to persons who are not equivalent 
beneficiaries.
    As in the case of base erosion test in subparagraph (e) of 
paragraph 2, deductible payments in subparagraph (b) of 
paragraph 3 also do not include arm's length payments in the 
ordinary course of business for services or tangible property 
and payments in respect of financial obligations to a bank that 
is not related to the payor.

Paragraph 4

    Paragraph 4 sets forth an alternative test under which a 
resident of a Contracting State may receive treaty benefits 
with respect to certain items of income that are connected to 
an active trade or business conducted in its State of 
residence. A resident of a Contracting State may qualify for 
benefits under paragraph 4 whether or not it also qualifies 
under paragraph 2 or 3.
    Subparagraph (a) sets forth the general rule that a 
resident of a Contracting State engaged in the active conduct 
of a trade or business in that State may obtain the benefits of 
the Convention with respect to an item of income derived from 
the other Contracting State. The item of income, however, must 
be derived in connection with or incidental to that trade or 
business.
    The term ``trade or business'' is not defined in the 
Convention. Pursuant to paragraph 2 of Article 3 (General 
Definitions), when determining whether a resident of Belgium is 
entitled to the benefits of the Convention under paragraph 4 of 
this Article with respect to an item of income derived from 
sources within the United States, the United States will 
ascribe to this term the meaning that it has under the law of 
the United States. Accordingly, the U.S. competent authority 
will refer to the regulations issued under section 367(a) for 
the definition of the term ``trade or business.'' In general, 
therefore, a trade or business will be considered to be a 
specific unified group of activities that constitute or could 
constitute an independent economic enterprise carried on for 
profit. Furthermore, a corporation generally will be considered 
to carry on a trade or business only if the officers and 
employees of the corporation conduct substantial managerial and 
operational activities.
    The business of making or managing investments for the 
resident's own account will be considered to be a trade or 
business only when part of banking, insurance or securities 
activities conducted by a bank, an insurance company, or a 
registered securities dealer. Such activities conducted by a 
person other than a bank, insurance company or registered 
securities dealer will not be considered to be the conduct of 
an active trade or business, nor would they be considered to be 
the conduct of an active trade or business if conducted by a 
bank, insurance company or registered securities dealer but not 
as part of the company's banking, insurance or dealer business. 
Because a headquarters operation is in the business of managing 
investments, a company that functions solely as a headquarters 
company will not be considered to be engaged in an active trade 
or business for purposes of paragraph 3.
    An item of income is ``derived in connection with'' a trade 
or business if the income-producing activity in the State of 
source is a line of business that ``forms a part of'' or is 
``complementary'' to the trade or business conducted in the 
State of residence by the income recipient.
    A business activity generally will be considered to form 
part of a business activity conducted in the State of source if 
the two activities involve the design, manufacture or sale of 
the same products or type of products, or the provision of 
similar services. The line of business in the State of 
residence may be upstream, downstream, or parallel to the 
activity conducted in the State of source. Thus, the line of 
business may provide inputs for a manufacturing process that 
occurs in the State of source, may sell the output of that 
manufacturing process, or simply may sell the same sorts of 
products that are being sold by the trade or business carried 
on in the State of source.

    Example 1. USCo is a corporation resident in the United 
States. USCo is engaged in an active manufacturing business in 
the United States. USCo owns 100 percent of the shares of 
BelCo, a corporation resident Belgium. BelCo distributes USCo 
products in Belgium. Since the business activities conducted by 
the two corporations involve the same products, BelCo's 
distribution business is considered to form a part of USCo's 
manufacturing business.

    Example 2.  The facts are the same as in Example 1, except 
that USCo does not manufacture. Rather, USCo operates a large 
research and development facility in the United States that 
licenses intellectual property to affiliates worldwide, 
including BelCo. BelCo and other USCo affiliates then 
manufacture and market the USCo-designed products in their 
respective markets. Since the activities conducted by BelCo and 
USCo involve the same product lines, these activities are 
considered to form a part of the same trade or business.
    For two activities to be considered to be 
``complementary,'' the activities need not relate to the same 
types of products or services, but they should be part of the 
same overall industry and be related in the sense that the 
success or failure of one activity will tend to result in 
success or failure for the other. Where more than one trade or 
business is conducted in the State of source and only one of 
the trades or businesses forms a part of or is complementary to 
a trade or business conducted in the State of residence, it is 
necessary to identify the trade or business to which an item of 
income is attributable. Royalties generally will be considered 
to be derived in connection with the trade or business to which 
the underlying intangible property is attributable. Dividends 
will be deemed to be derived first out of earnings and profits 
of the treaty-benefited trade or business, and then out of 
other earnings and profits. Interest income may be allocated 
under any reasonable method consistently applied. A method that 
conforms to U.S. principles for expense allocation will be 
considered a reasonable method.

    Example 3.  Americair is a corporation resident in the 
United States that operates an international airline. BelSub is 
a wholly-owned subsidiary of Americair resident in Belgium. 
BelSub operates a chain of hotels in Belgium that are located 
near airports served by Americair flights. Americair frequently 
sells tour packages that include air travel to Belgium and 
lodging at BelSub hotels. Although both companies are engaged 
in the active conduct of a trade or business, the businesses of 
operating a chain of hotels and operating an airline are 
distinct trades or businesses. Therefore BelSub's business does 
not form a part of Americair's business. However, BelSub's 
business is considered to be complementary to Americair's 
business because they are part of the same overall industry 
(travel) and the links between their operations tend to make 
them interdependent.

    Example 4.  The facts are the same as in Example 3, except 
that BelSub owns an office building in Belgium instead of a 
hotel chain. No part of Americair's business is conducted 
through the office building. BelSub's business is not 
considered to form a part of or to be complementary to 
Americair's business. They are engaged in distinct trades or 
businesses in separate industries, and there is no economic 
dependence between the two operations.
    Example 5. USFlower is a corporation resident in the United 
States. USFlower produces and sells flowers in the United 
States and other countries. USFlower owns all the shares of 
BelHolding, a corporation resident in Belgium. BelHolding is a 
holding company that is not engaged in a trade or business. 
BelHolding owns all the shares of three corporations that are 
resident in Belgium: BelFlower, BelLawn, and BelFish. BelFlower 
distributes USFlower flowers under the USFlower trademark in 
Belgium. BelLawn markets a line of lawn care products in 
Belgium under the USFlower trademark. In addition to being sold 
under the same trademark, BelLawn and BelFlower products are 
sold in the same stores and sales of each company's products 
tend to generate increased sales of the other's products. 
BelFish imports fish from the United States and distributes it 
to fish wholesalers in Belgium. For purposes of paragraph 4, 
the business of BelFlower forms a part of the business of 
USFlower, the business of BelLawn is complementary to the 
business of USFlower, and the business of BelFish is neither 
part of nor complementary to that of USFlower.
    An item of income derived from the State of source is 
``incidental to'' the trade or business carried on in the State 
of residence if production of the item facilitates the conduct 
of the trade or business in the State of residence. An example 
of incidental income is the temporary investment of working 
capital of a person in the State of residence in securities 
issued by persons in the State of source.
    Subparagraph (b) of paragraph 4 states a further condition 
to the general rule in subparagraph (a) in cases where the 
trade or business generating the item of income in question is 
carried on either by the person deriving the income or by any 
associated enterprises. Subparagraph (b) states that the trade 
or business carried on in the State of residence, under these 
circumstances, must be substantial in relation to the activity 
in the State of source. The substantiality requirement is 
intended to prevent a narrow case of treaty-shopping abuses in 
which a company attempts to qualify for benefits by engaging in 
de minimis connected business activities in the treaty country 
in which it is resident (i.e., activities that have little 
economic cost or effect with respect to the company business as 
a whole).
    The determination of substantiality is made based upon all 
the facts and circumstances and takes into account the 
comparative sizes of the trades or businesses in each 
Contracting State, the nature of the activities performed in 
each Contracting State, and the relative contributions made to 
that trade or business in each Contracting State. In any case, 
in making each determination or comparison, due regard will be 
given to the relative sizes of the economies in the two 
Contracting States.
    The determination in subparagraph (b) also is made 
separately for each item of income derived from the State of 
source. It therefore is possible that a person would be 
entitled to the benefits of the Convention with respect to one 
item of income but not with respect to another. If a resident 
of a Contracting State is entitled to treaty benefits with 
respect to a particular item of income under paragraph 4, the 
resident is entitled to all benefits of the Convention insofar 
as they affect the taxation of that item of income in the State 
of source.
    The application of the substantiality requirement only to 
income from related parties focuses only on potential abuse 
cases, and does not hamper certain other kinds of non-abusive 
activities, even though the income recipient resident in a 
Contracting State may be very small in relation to the entity 
generating income in the other Contracting State. For example, 
if a small U.S. research firm develops a process that it 
licenses to a very large, unrelated, pharmaceutical 
manufacturer in Belgium, the size of the U.S. research firm 
would not have to be tested against the size of the Belgian 
manufacturer. Similarly, a small U.S. bank that makes a loan to 
a very large unrelated company operating a business in Belgium 
would not have to pass a substantiality test to receive treaty 
benefits under Paragraph 4.
    Subparagraph (c) of paragraph 4 provides special 
attribution rules for purposes of applying the substantive 
rules of subparagraphs (a) and (b). Thus, these rules apply for 
purposes of determining whether a person meets the requirement 
in subparagraph (a) that it be engaged in the active conduct of 
a trade or business and that the item of income is derived in 
connection with that active trade or business, and for making 
the comparison required by the ``substantiality'' requirement 
in subparagraph (b). Subparagraph (c) attributes to a person 
activities conducted by persons ``connected'' to such person. A 
person (``X'') is connected to another person (``Y'') if X 
possesses 50 percent or more of the beneficial interest in Y 
(or if Y possesses 50 percent or more of the beneficial 
interest in X). For this purpose, X is connected to a company 
if X owns shares representing fifty percent or more of the 
aggregate voting power and value of the company or fifty 
percent or more of the beneficial equity interest in the 
company. X also is connected to Y if a third person possesses 
fifty percent or more of the beneficial interest in both X and 
Y. For this purpose, if X or Y is a company, the threshold 
relationship with respect to such company or companies is fifty 
percent or more of the aggregate voting power and value or 
fifty percent or more of the beneficial equity interest. 
Finally, X is connected to Y if, based upon all the facts and 
circumstances, X controls Y, Y controls X, or X and Y are 
controlled by the same person or persons.

Paragraph 5

    Paragraph 5 provides that a resident of one of the 
Contracting States is entitled to all the benefits of the 
Convention if that person functions as a recognized 
headquarters company for a multinational corporate group. The 
provisions of this paragraph are consistent with the other U.S. 
treaties where this provision has been adopted. For this 
purpose, the multinational corporate group includes all 
corporations that the headquarters company supervises and 
excludes affiliated corporations not supervised by the 
headquarters company. The headquarters company does not have to 
own shares in the companies that it supervises. In order to be 
considered a headquarters company, the person must meet several 
requirements that are enumerated in Paragraph 5. These 
requirements are discussed below.
            Overall Supervision and Administration
    Subparagraph (a) provides that the person must provide a 
substantial portion of the overall supervision and 
administration of the group. This activity may include group 
financing, but group financing may not be the principal 
activity of the person functioning as the headquarters company. 
A person only will be considered to engage in supervision and 
administration if it engages in a number of the following 
activities: group financing, pricing, marketing, internal 
auditing, internal communications, and management. Other 
activities also could be part of the function of supervision 
and administration.
    In determining whether a ``substantial portion'' of the 
overall supervision and administration of the group is provided 
by the headquarters company, its headquarters-related 
activities must be substantial in relation to the same 
activities for the same group performed by other entities.
    Subparagraph (a) does not require that the group that is 
supervised include persons in the other State. However, it is 
anticipated that in most cases the group will include such 
persons, due to the requirement discussed below that the income 
derived by the headquarters company be derived in connection 
with or be incidental to an active trade or business supervised 
by the headquarters company.
            Active Trade or Business
    Subparagraph (b) is the first of several requirements 
intended to ensure that the relevant group is truly 
``multinational.'' This sub-paragraph provides that the 
corporate group supervised by the headquarters company must 
consist of corporations resident in, and engaged in active 
trades or businesses in, at least five countries. Furthermore, 
at least five countries must contribute substantially to the 
income generated by the group, as the rule requires that the 
business activities carried on in each of the five countries 
(or groupings of countries) generate at least 10 percent of the 
gross income of the group. For purposes of the 10 percent gross 
income requirement, the income from multiple countries may be 
aggregated into non-overlapping groupings, as long as there are 
at least five individual countries or groupings that each 
satisfy the 10 percent requirement. If the gross income 
requirement under this subparagraph is not met for a taxable 
year, the taxpayer may satisfy this requirement by applying the 
10 percent gross income test to the average of the gross 
incomes for the four years preceding the taxable year.

    Example 1. BHQ is a corporation resident in Belgium. BHQ 
functions as a headquarters company for a group of companies. 
These companies are resident in the United States, Canada, New 
Zealand, the United Kingdom, Malaysia, the Philippines, 
Singapore, and Indonesia. The gross income generated by each of 
these companies for 2008 and 2009 is as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       Country                                                                 2008                        2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
United States                                                                                                   $ 40                        $ 45
Canada                                                                                                            25                          15
New Zealand                                                                                                       10                          20
United Kingdom                                                                                                    30                          35
Malaysia                                                                                                          10                          12
Philippines                                                                                                        7                          10
Singapore                                                                                                         10                           8
Indonesia                                                                                                          5                          10
--------------------------------------------------------------------------------------------------------------------------------------------------------
  Total                                                                                                         $137                        $155
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For 2008, 10 percent of the gross income of this group is 
equal to $13.70. Only the United States, Canada, and the United 
Kingdom satisfy this requirement for that year. The other 
companies in the group may be aggregated to meet this 
requirement. Because New Zealand and Malaysia have a total 
gross income of $20, and the Philippines, Singapore, and 
Indonesia have a total gross income of $22, these two groupings 
of countries may be treated as the fourth and fifth members of 
the group for purposes of subparagraph (b).
    In the following year, 10 percent of the gross income is 
$15.50. Only the United States, New Zealand, and the United 
Kingdom satisfy this requirement. Because Canada and Malaysia 
have a total gross income of $27, and the Philippines, 
Singapore, and Indonesia have a total gross income of $28, 
these two groupings of countries may be treated as the fourth 
and fifth members of the group for purposes of subparagraph 
(b). The fact that Canada replaced New Zealand in a group is 
not relevant for this purpose. The composition of the grouping 
may change from year to year.

Single Country Limitation

    Subparagraph (c) provides that the business activities 
carried on in any one country other than the headquarters 
company's state of residence must generate less than 50 percent 
of the gross income of the group. If the gross income 
requirement under this subparagraph is not met for a taxable 
year, the taxpayer may satisfy this requirement applying the 50 
percent gross income test to the average of the gross incomes 
for the four years preceding the taxable year. The following 
example illustrates the application of this subparagraph.

    Example. BHQ is a corporation resident in Belgium. BHQ 
functions as a headquarters company for a group of companies. 
BHQ derives dividend income from a United States subsidiary in 
the 2008 taxable year. The state of residence of each of these 
companies, the situs of their activities and the amounts of 
gross income attributable to each for the years 2008 through 
2012 are set forth below.

----------------------------------------------------------------------------------------------------------------
                 Company                        Situs         2012       2011       2010       2009       2008
----------------------------------------------------------------------------------------------------------------
United States                                       U.S.        $100       $100        $95       $ 90      $  85
Mexico                                              U.S.          10          8          5          0          0
Canada                                              U.S.          20         18         16         15         12
United Kingdom                                       U.K          30         32         30         28         27
New Zealand                                         N.Z.          40         42         38         36         35
Japan                                              Japan          35         32         30         30         28
Singapore                                      Singapore          25         25         24         22         20
----------------------------------------------------------------------------------------------------------------
  Total                                                         $260       $257       $238       $221       $207
----------------------------------------------------------------------------------------------------------------

    Because the United States' total gross income of $130 in 
2012 is not less than 50 percent of the gross income of the 
group, subparagraph (c) is not satisfied with respect to 
dividends derived in 2012. However, the United States' average 
gross income for the preceding four years may be used in lieu 
of the preceding year's average. The United States' average 
gross income for the years 2008-11 is $111.00 ($444/4). The 
group's total average gross income for these years is $230.75 
($923/4). Because $111.00 represents 48.1 percent of the 
group's average gross income for the years 2008 through 2011, 
the requirement under subparagraph (c) is satisfied.

Other State Gross Income Limitation

    Subparagraph (d) provides that no more than 25 percent of 
the headquarters company's gross income may be derived from the 
other Contracting State. Thus, if the headquarters company's 
gross income for the taxable year is $200, no more than $50 of 
this amount may be derived from the other Contracting State. If 
the gross income requirement under this subparagraph is not met 
for a taxable year, the taxpayer may satisfy this requirement 
by applying the 25 percent gross income test to the average of 
the gross incomes for the four years preceding the taxable 
year.

Independent Discretionary Authority

    Subparagraph (e) requires that the headquarters company 
have and exercise independent discretionary authority to carry 
out the functions referred to in subparagraph (a). Thus, if the 
headquarters company was nominally responsible for group 
financing, pricing, marketing and other management functions, 
but merely implemented instructions received from another 
entity, the headquarters company would not be considered to 
have and exercise independent discretionary authority with 
respect to these functions. This determination is made 
individually for each function. For instance, a headquarters 
company could be nominally responsible for group financing, 
pricing, marketing and internal auditing functions, but another 
entity could be actually directing the headquarters company as 
to the group financing function. In such a case, the 
headquarters company would not be deemed to have independent 
discretionary authority for group financing, but it might have 
such authority for the other functions. Functions for which the 
headquarters company does not have and exercise independent 
discretionary authority are considered to be conducted by an 
entity other than the headquarters company for purposes of 
subparagraph (a).

Income Taxation Rules

    Subparagraph (f) requires that the headquarters company be 
subject to the generally applicable income taxation rules in 
its country of residence. This reference should be understood 
to mean that the company must be subject to the income taxation 
rules to which a company engaged in the active conduct of a 
trade or business would be subject. Thus, if one of the 
Contracting States has or introduces special taxation 
legislation that impose a lower rate of income tax on 
headquarters companies than is imposed on companies engaged in 
the active conduct of a trade or business, or provides for an 
artificially low taxable base for such companies, a 
headquarters company subject to these rules is not entitled to 
the benefits of the Convention under Paragraph 5.
    In accordance with paragraph 3 of Article 28 (Entry Into 
Force), subparagraph (f) shall not have effect until January 1, 
2011.
    In Connection With or Incidental to Trade or Business 
Subparagraph (g) requires that the income derived in the other 
Contracting State be derived in connection with or be 
incidental to the active business activities referred to in 
subparagraph (b). This determination is made under the 
principles set forth in paragraph 4. For instance, assume that 
a Belgian company satisfies the other requirements in paragraph 
5 and acts as a headquarters company for a group that includes 
a United States corporation. If the group is engaged in the 
design and manufacture of computer software, but the U.S. 
company is also engaged in the design and manufacture of 
photocopying machines, the income that the Belgian company 
derives from the United States would have to be derived in 
connection with or be incidental to the income generated by the 
computer business in order to be entitled to the benefits of 
the Convention under paragraph 5. Interest income received from 
the U.S. company also would be entitled to the benefits of the 
Convention under this paragraph as long as the interest was 
attributable to the computer business supervised by the 
headquarters company Interest income derived from an unrelated 
party would normally not, however, satisfy the requirements of 
this clause.

Paragraph 6

    Paragraph 6 deals with the treatment of interest or royalty 
income in the context of a so-called ``triangular case.'' The 
paragraph provides special rules applicable to U.S. source 
interest or royalties that are attributable to permanent 
establishment that a Belgian company has in a third state, and 
that are otherwise exempt from taxation in Belgium. The 
paragraph is intended to authorize the United States to collect 
a tax at source when there is not a significant level of double 
taxation.
    The term ``triangular case'' refers to the use of the 
structure described below by a resident of Belgium to earn, in 
this example, interest income from the United States. The 
Belgian resident, who is assumed to qualify for benefits under 
one or more of the provisions of Article 21 (Limitation on 
Benefits), sets up a permanent establishment in a third 
jurisdiction that imposes only a low rate of tax on the income 
of the permanent establishment. The Belgian resident then lends 
funds into the United States through the permanent 
establishment. The permanent establishment, despite its third-
jurisdiction location, is an integral part of a Belgian 
resident. Therefore the income that it earns on those loans, 
absent the provisions of paragraph 6, is entitled to exemption 
from U.S. withholding tax under the Convention. However, assume 
the income of the permanent establishment is exempt from 
Belgian tax. Thus, the interest income is exempt from U.S. tax, 
is subject to little tax in the host jurisdiction of the 
permanent establishment, and is exempt from Belgian tax.
    Because the United States does not exempt the profits of a 
third-jurisdiction permanent establishment of a U.S. resident 
from U.S. tax, either by statute or by treaty, this paragraph 
only applies with respect to U.S. source interest, or royalties 
that are attributable to a third-jurisdiction of a Belgian 
resident. Paragraph 6 replaces the otherwise applicable rules 
in the Convention for interest and royalties with a 15 percent 
withholding tax for these amounts, if the actual tax paid on 
the income in the country where the permanent establishment is 
located is less than 60 percent of the tax that would have been 
payable in Belgium if the income were earned in Belgium by the 
enterprise and were not attributable to the permanent 
establishment in the third state.
    In general, the principles employed under Code section 
954(b)(4) will be employed to determine whether the profits are 
subject to an effective rate of taxation that is above the 
specified threshold.
    Notwithstanding the level of tax on income of the permanent 
establishment, paragraph 6 does not apply under certain 
circumstances.
    Subparagraph a) provides that in the case of interest as 
defined in Article 11 (Interest), the paragraph does not apply 
if the interest is derived in connection with, or is incidental 
to, the active conduct of a trade or business carried on by the 
permanent establishment in the third state. The business of 
making, managing or simply holding investments for the person's 
own account is not considered to be an active trade or 
business, unless these are banking or securities activities 
carried on by a bank or registered securities dealer.
    Subparagraph b) provides that in the case of royalties 
defined in Article 12 (Royalties), the paragraph does not apply 
if the royalties are received as compensation for the use of, 
or the right to use, intangible property produced or developed 
by the permanent establishment.

Paragraph 7

    Paragraph 7 provides that a resident of one of the States 
that is not entitled to the benefits of the Convention as a 
result of paragraphs 1 through 6 still may be granted benefits 
under the Convention at the discretion of the competent 
authority of the State from which benefits are claimed. In 
making determinations under paragraph 7, that competent 
authority will take into account as its guideline whether the 
establishment, acquisition, or maintenance of the person 
seeking benefits under the Convention, or the conduct of such 
person's operations, has or had as one of its principal 
purposes the obtaining of benefits under the Convention. 
Benefits will not be granted, however, solely because a company 
was established prior to the effective date of a treaty or 
protocol. In that case a company would still be required to 
establish to the satisfaction of the Competent Authority clear 
non-tax business reasons for its formation in a Contracting 
State, or that the allowance of benefits would not otherwise be 
contrary to the purposes of the treaty. Thus, persons that 
establish operations in one of the States with a principal 
purpose of obtaining the benefits of the Convention ordinarily 
will not be granted relief under paragraph 7.
    The competent authority's discretion is quite broad. It may 
grant all of the benefits of the Convention to the taxpayer 
making the request, or it may grant only certain benefits. For 
instance, it may grant benefits only with respect to a 
particular item of income in a manner similar to paragraph 4. 
Further, the competent authority may establish conditions, such 
as setting time limits on the duration of any relief granted.
    For purposes of implementing paragraph 7, a taxpayer will 
be permitted to present his case to the relevant competent 
authority for an advance determination based on the facts. In 
these circumstances, it is also expected that, if the competent 
authority determines that benefits are to be allowed, they will 
be allowed retroactively to the time of entry into force of the 
relevant treaty provision or the establishment of the structure 
in question, whichever is later.
    Finally, there may be cases in which a resident of a 
Contracting State may apply for discretionary relief to the 
competent authority of his State of residence. This would 
arise, for example, if the benefit it is claiming is provided 
by the residence country, and not by the source country. So, 
for example, if a company that is a resident of the United 
States would like to claim the benefit of the re-sourcing rule 
of paragraph 3 of Article 22, but it does not meet any of the 
objective tests of paragraphs 2 through 6, it may apply to the 
U.S. competent authority for discretionary relief.

Paragraph 8

    Paragraph 8 defines several key terms for purposes of 
Article 21. Each of the defined terms is discussed above in the 
context in which it is used.

                ARTICLE 22 (RELIEF FROM DOUBLE TAXATION)

    This Article describes the manner in which each Contracting 
State undertakes to relieve double taxation. The United States 
uses the foreign tax credit method under its internal law, and 
by treaty.

Paragraph 1

    Paragraph 1 provides that Belgium will provide relief from 
double taxation through a mixture of the credit and exemption 
methods.
    Under subparagraph a) Belgium generally adopts the 
exemption with progression method of relieving double taxation 
with respect to certain income that is taxed by the United 
States. The income subject to exemption is income derived by a 
resident of Belgium and taxed by the United States in 
accordance with the Convention, other than dividend, interest 
and royalty income. Under subparagraph a), Belgium exempts such 
income from taxation, but takes the income into account in 
determining rate of Belgian tax applicable to the remainder of 
the resident's income. The exemption provided under 
subparagraph (a) is subject to the provisions of subparagraph 
(f), discussed below, in certain cases where a Belgian resident 
derives income through a permanent establishment in the United 
States.
    Subparagraph b) provides relief from double taxation for 
residents of Belgium deriving income described in subparagraph 
a) through certain entities that are created in the United 
States. The subparagraph seeks to coordinate the use of United 
States entities that are so called hybrid entities, in that 
they are fiscally transparent for United States tax purposes 
(the income of such entities is subject to tax in the hands of 
the investors of the entity), but such entities are viewed as 
companies under Belgian law. Where a resident of Belgium 
derives income from participation in such entity, the income 
from such entity will generally have been subject to taxation 
in the United States in the hands of the Belgian investor. That 
is, the investor will be subject to tax in the United States on 
his proportional share of the income of such entity. However, 
since Belgium views the entity as non-fiscally transparent, 
Belgian tax law will not see income at the investor level until 
there is a distribution of the earnings of such entity. Under 
Belgian tax law, this distribution is viewed as a dividend. 
Without the relief under this subparagraph, the Belgian 
investor would be double taxed with respect to such income: 
once in the United States when the income was earned and taxed 
in the hands of the investor, and once in Belgium when the 
earnings are distributed to the investor and Belgium sees a 
dividend. As a consequence, subparagraph (b) provides the 
Belgian investor an exemption with respect to the dividend, 
provided that the investor has been taxed by the United States 
proportionally to his participation in the entity on the income 
out of which the income treated as dividends under Belgian law 
is paid.
    Subparagraph (b) also provides that the exempted income is 
the income received after deduction of the costs incurred in 
Belgium or elsewhere in relation to the management of the 
participation in the entity.
    Subparagraph (c) provides that dividends that derived by a 
Belgian company from a company resident in the United States, 
are exempt from the Belgian corporate income tax to the extent 
that such a dividend would have been exempt from Belgian tax if 
the two companies were both residents of Belgium.
    If subparagraph (c) does not apply to exempt dividends 
derived by a Belgian resident company from a U.S. resident 
company, subparagraph d) provides protection from double 
taxation in the form of a credit against Belgian corporate tax. 
In such cases, the Belgian company shall be entitled to credit 
against its Belgian corporate income tax the United States tax 
levied on the dividends under Article 10 (Dividends). The 
credit is limited to that part of the corporate income tax that 
is proportionally related to the relevant dividends.
    Subparagraph (e) generally provides that Belgium will 
permit a Belgian resident a credit against Belgian tax for 
United States taxes levied on interest or royalties. The credit 
of such tax is subject to the provisions of Belgian law 
concerning foreign tax credits.
    Subparagraph (f) provides that if a Belgian resident has a 
permanent establishment in the United States, and the losses 
from such activity have been effectively deducted from profits 
for its taxation in Belgium, then the exemption of subparagraph 
a) does not apply to profits of other taxable periods 
attributable to the permanent establishment to the extent that 
those profits were exempted from United States tax by reason of 
the use of such losses in the United States.

Paragraph 2

    The United States agrees, in paragraph 2, to allow to its 
citizens and residents a credit against U.S. tax for income 
taxes paid or accrued to Belgium. Paragraph 2 also provides 
that Belgium's covered taxes are income taxes for U.S. 
purposes. This provision is based on the Department of the 
Treasury's review of Belgium's laws.
    Subparagraph (b) provides for a deemed-paid credit, 
consistent with section 902 of the Code, to a U.S. corporation 
in respect of dividends received from a corporation resident in 
Belgium of which the U.S. corporation owns at least 10 percent 
of the voting stock. This credit is for the tax paid by the 
corporation to Belgium on the profits out of which the 
dividends are considered paid.
    The credits allowed under paragraph 2 are allowed in 
accordance with the provisions and subject to the limitations 
of U.S. law, as that law may be amended over time, so long as 
the general principle of the Article, that is, the allowance of 
a credit, is retained. Thus, although the Convention provides 
for a foreign tax credit, the terms of the credit are 
determined by the provisions, at the time a credit is given, of 
the U.S. statutory credit.
    Therefore, the U.S. credit under the Convention is subject 
to the various limitations of U.S. law (see, e.g., Code 
sections 901-908). For example, the credit against U.S. tax 
generally is limited to the amount of U.S. tax due with respect 
to net foreign source income within the relevant foreign tax 
credit limitation category (see Code section 904(a) and (d)), 
and the dollar amount of the credit is determined in accordance 
with U.S. currency translation rules (see, e.g., Code section 
986). Similarly, U.S. law applies to determine carryover 
periods for excess credits and other inter-year adjustments.

Paragraph 3

    Paragraph 3 provides a re-sourcing rule for gross income 
covered by paragraph 2. Paragraph 3 is intended to ensure that 
a U.S. resident can obtain an appropriate amount of U.S. 
foreign tax credit for income taxes paid to Belgium when the 
Convention assigns to Belgium primary taxing rights over an 
item of gross income.
    Accordingly, if the Convention allows Belgium to tax an 
item of gross income (as defined under U.S. law) derived by a 
resident of the United States, the United States will treat 
that item of gross income as gross income from sources within 
Belgium for U.S. foreign tax credit purposes. In the case of a 
U.S.-owned foreign corporation, however,
    section 904(h)(10) may apply for purposes of determining 
the U.S. foreign tax credit with respect to income subject to 
this re-sourcing rule. Section 904(h)(10) generally applies the 
foreign tax credit limitation separately to re-sourced income. 
Furthermore, the paragraph 3 resourcing rule applies to gross 
income, not net income. Accordingly, U.S. expense allocation 
and apportionment rules, see, e.g., Treas. Reg. section 1.861-
9, continue to apply to income resourced under paragraph 3.

Paragraph 4

    Paragraph 4 provides special rules for the tax treatment in 
both States of certain types of income. Subparagraph (a) 
addresses income arising in a State other than the United 
States or Belgium that is derived by U.S. citizens, former 
citizens or former long-term residents who are residents of 
Belgium. The remaining subparagraphs address income derived 
from U.S. sources by such persons.
    U.S. citizens, regardless of residence, are subject to U.S. 
tax at ordinary progressive rates on their worldwide income. In 
certain cases, the United States may impose taxation on former 
U.S. citizens or former long-term residents of the United 
States (referred to in this paragraph as ``section 877 
taxpayers''). Because of these rules, the U.S. tax on income of 
U.S. citizens or section 877 taxpayers who are resident in 
Belgium may exceed the U.S. tax that may be imposed under the 
Convention on income derived by a resident of Belgium who is 
not a U.S. citizen. In general, the provisions of paragraph 4 
ensure that Belgium does not bear the cost of U.S. taxation of 
U.S. citizens or section 877 taxpayers who are residents of 
Belgium.
    Subparagraph (a) provides that where a U.S. citizen or 
section 877 taxpayer that is a resident of Belgium derives 
income from sources arising in third countries, as determined 
under the laws of Belgium, the taxation of such amounts by the 
United States shall not affect the taxation in Belgium of such 
income. Thus, no agreement is reached under Article 22 of the 
Convention for relieving double taxation with respect to such 
income. The provisions of Article 24 (Mutual Agreement 
Procedure) may be used to alleviate double taxation in such 
cases.
    Subparagraph (b) provides special credit rules for Belgium 
with respect to U.S. source income or income treated as U.S. 
source income under section 877 of the Code (referred to in the 
following explanation as U.S. source income). These rules apply 
to items of U.S. source income that would be either exempt from 
U.S. tax or subject to reduced rates of U.S. tax under the 
provisions of the Convention if they had been received by a 
resident of Belgium who is not a U.S. citizen or section 877 
taxpayer. The tax credit allowed in Belgium under subparagraph 
4(b) with respect to such items need not exceed the U.S. tax 
that may be imposed under the Convention, other than tax 
imposed solely by reason of the U.S. citizenship of the 
taxpayer or application of section 877 of the Code under the 
provisions of the saving clause of paragraph 4 of Article 1 
(General Scope).
    For example, if a U.S. citizen resident in Belgium receives 
portfolio dividends from sources within the United States, the 
foreign tax credit granted by Belgium would be limited to 15 
percent of the dividend--the U.S. tax that may be imposed under 
subparagraph (b) of paragraph 2 of Article 10 (Dividends)--even 
if the shareholder is subject to U.S. net income tax because of 
his U.S. citizenship. With respect to royalty or interest 
income, Belgium would allow no foreign tax credit, because its 
residents are exempt from U.S. tax on these classes of income 
under the provisions of Articles 11 (Interest) and 12 
(Royalties).
    Paragraph 4(c) eliminates the potential for double taxation 
that can arise because subparagraph 4(b) provides that Belgium 
need not provide full relief for the U.S. tax imposed on its 
citizens or section 877 taxpayers resident in Belgium. The 
subparagraph provides that the United States will credit the 
income tax paid or accrued to Belgium, after the application of 
subparagraph 4(b). It further provides that in allowing the 
credit, the United States will not reduce its tax below the 
amount that is taken into account in Belgium in applying 
subparagraph 4(b). That is, at a minimum, the United States 
will preserve its ability to tax the U.S. citizen or section 
877 taxpayer to the extent that it would be entitled to impose 
source country taxation if the income was earned by a Belgian 
resident that is not a U.S. citizen or section 877 taxpayer.
    Since the income described in paragraph 4(b) generally will 
be U.S. source income, or so treated under section 877 of the 
Code, special rules are required to re-source some of the 
income to Belgium in order for the United States to be able to 
credit the tax paid to Belgium. This resourcing is provided for 
in subparagraph 4(d), which deems the items of income referred 
to in subparagraph 4(b) to be from foreign sources to the 
extent necessary to avoid double taxation under paragraph 4(c). 
Subparagraph 3(d)(iii) of Article 24 (Mutual Agreement 
Procedure) provides a mechanism by which the competent 
authorities can resolve any disputes regarding whether income 
is from sources within the United States.
    The following two examples illustrate the application of 
paragraph 4 in the case of a U.S.-source portfolio dividend 
received by a U.S. citizen resident in Belgium. In both 
examples, the U.S. rate of tax on residents of Belgium, under 
subparagraph (b) of paragraph 2 of Article 10 (Dividends) of 
the Convention, is 15 percent. In both examples, the U.S. 
income tax rate on the U.S. citizen is 35 percent. In example 
1, the rate of income tax imposed in Belgium on its resident 
(the U.S. citizen) is 25 percent (below the U.S. rate), and in 
example 2, the rate imposed on its resident is 40 percent 
(above the U.S. rate). The assumptions with respect to the rate 
of Belgium tax are intended only for illustrative purposes.

------------------------------------------------------------------------
                                                    Example 1  Example 2
------------------------------------------------------------------------
Subparagraph (b)
  U.S. dividend declared                              $100.00    $100.00
  Notional U.S. withholding tax (Article 10(2)(b))      15.00      15.00
  Taxable income in Belgium                            100.00     100.00
  Belgium tax before credit                             25.00      40.00
  Less: tax credit for notional U.S. withholding        15.00      15.00
   tax
  Net post-credit tax paid to Belgium                 $ 10.00    $ 25.00
========================================================================
Subparagraphs (c) and (d)
  U.S. pre-tax income                                 $100.00    $100.00
  U.S. pre-credit citizenship tax                       35.00      35.00
  Notional U.S. withholding tax                         15.00      15.00
  U.S. tax eligible to be offset by credit              20.00      20.00
  Tax paid to Belgium                                   10.00      25.00
  Income re-sourced from U.S. to Belgium (see           28.57      57.14
   below)
  U.S. pre-credit tax on re-sourced income              10.00      20.00
  U.S. credit for tax paid to Belgium                   10.00      20.00
  Net post-credit U.S. tax                              10.00       0.00
    Total U.S. tax                                    $ 25.00    $ 15.00
------------------------------------------------------------------------

    In both examples, in the application of subparagraph (b), 
Belgium credits a 15 percent U.S. tax against its residence tax 
on the U.S. citizen. In the first example, the net tax paid to 
Belgium after the foreign tax credit is $10.00; in the second 
example, it is $25.00. In the application of subparagraphs (c) 
and (d), from the U.S. tax due before credit of $35.00, the 
United States subtracts the amount of the U.S. source tax of 
$15.00, against which no U.S. foreign tax credit is allowed. 
This subtraction ensures that the United States collects the 
tax that it is due under the Convention as the State of source.
    In both examples, given the 35 percent U.S. tax rate, the 
maximum amount of U.S. tax against which credit for the tax 
paid to Belgium may be claimed is $20 ($35 U.S. tax minus $15 
U.S. withholding tax). Initially, all of the income in both 
examples was from sources within the United States. For a U.S. 
foreign tax credit to be allowed for the full amount of the tax 
paid to Belgium, an appropriate amount of the income must be 
resourced to Belgium under subparagraph (d).
    The amount that must be re-sourced depends on the amount of 
tax for which the U.S. citizen is claiming a U.S. foreign tax 
credit. In example 1, the tax paid to Belgium was $10. For this 
amount to be creditable against U.S. tax, $28.57 ($10 tax 
divided by 35 percent U.S. tax rate) must be resourced to 
Belgium. When the tax is credited against the $10 of U.S. tax 
on this resourced income, there is a net U.S. tax of $10 due 
after credit ($20 U.S. tax eligible to be offset by credit, 
minus $10 tax paid to Belgium). Thus, in example 1, there is a 
total of $25 in U.S. tax ($15 U.S. withholding tax plus $10 
residual U.S. tax).
    In example 2, the tax paid to Belgium was $25, but, because 
the United States subtracts the U.S. withholding tax of $15 
from the total U.S. tax of $35, only $20 of U.S. taxes may be 
offset by taxes paid to Belgium. Accordingly, the amount that 
must be resourced to Belgium is limited to the amount necessary 
to ensure a U.S. foreign tax credit for $20 of tax paid to 
Belgium, or $57.14 ($20 tax paid to Belgium divided by 35 
percent U.S. tax rate). When the tax paid to Belgium is 
credited against the U.S. tax on this re-sourced income, there 
is no residual U.S. tax ($20 U.S. tax minus $25 tax paid to 
Belgium, subject to the U.S. limit of $20). Thus, in example 2, 
there is a total of $15 in U.S. tax ($15 U.S. withholding tax 
plus $0 residual U.S. tax). Because the tax paid to Belgium was 
$25 and the U.S. tax eligible to be offset by credit was $20, 
there is $5 of excess foreign tax credit available for 
carryover.

Relationship to Other Articles

    By virtue of subparagraph (a) of paragraph 5 of Article 1 
(General Scope), Article 22 is not subject to the saving clause 
of paragraph 4 of Article 1. Thus, the United States will allow 
a credit to its citizens and residents in accordance with the 
Article, even if such credit were to provide a benefit not 
available under the Code (such as the re-sourcing provided by 
paragraph 3 and subparagraph 4(d)).

                    ARTICLE 23 (NON-DISCRIMINATION)

    This Article ensures that nationals of a Contracting State, 
in the case of paragraph 1, and residents of a Contracting 
State, in the case of paragraphs 2 through 5, will not be 
subject, directly or indirectly, to discriminatory taxation in 
the other Contracting State. Not all differences in tax 
treatment, either as between nationals of the two States, or 
between residents of the two States, are violations of the 
prohibition against discrimination. Rather, the 
nondiscrimination obligations of this Article apply only if the 
nationals or residents of the two States are comparably 
situated.
    Each of the relevant paragraphs of the Article provides 
that two persons that are comparably situated must be treated 
similarly. Although the actual words differ from paragraph to 
paragraph (e.g., paragraph 1 refers to two nationals ``in the 
same circumstances,'' and paragraph 2 refers to two enterprises 
``carrying on the same activities''), the common underlying 
premise is that if the difference in treatment is directly 
related to a tax-relevant difference in the situations of the 
domestic and foreign persons being compared, that difference is 
not to be treated as discriminatory (i.e., if one person is 
taxable in a Contracting State on worldwide income and the 
other is not, or tax may be collectible from one person at a 
later stage, but not from the other, distinctions in treatment 
would be justified under paragraph 1). Other examples of such 
factors that can lead to nondiscriminatory differences in 
treatment are noted in the discussions of each paragraph.
    The operative paragraphs of the Article also use different 
language to identify the kinds of differences in taxation 
treatment that will be considered discriminatory. For example, 
paragraph 1 speaks of ``any taxation or any requirement 
connected therewith that is more burdensome,'' while paragraph 
2 specifies that a tax ``shall not be less favorably levied.'' 
Regardless of these differences in language, only differences 
in tax treatment that materially disadvantage the foreign 
person relative to the domestic person are properly the subject 
of the Article.

Paragraph 1

    Paragraph 1 provides that a national of one Contracting 
State may not be subject to taxation or connected requirements 
in the other Contracting State that are more burdensome than 
the taxes and connected requirements imposed upon a national of 
that other State in the same circumstances. The OECD Model 
prohibits taxation that is ``other than or more burdensome'' 
than that imposed on U.S. persons. This Convention omits the 
reference to taxation that is ``other than'' that imposed on 
U.S. persons because the only relevant question under this 
provision should be whether the requirement imposed on a 
national of the other Contracting State is more burdensome. A 
requirement may be different from the requirements imposed on 
U.S. nationals without being more burdensome.
    The term ``national'' in relation to a Contracting State is 
defined in subparagraph 1(j) of Article 3 (General 
Definitions). The term includes both individuals and juridical 
persons. A national of a Contracting State is afforded 
protection under this paragraph even if the national is not a 
resident of either Contracting State. Thus, a U.S. citizen who 
is resident in a third country is entitled, under this 
paragraph, to the same treatment in Belgium as a national of 
Belgium who is in similar circumstances (i.e., presumably one 
who is resident in a third State).
    As noted above, whether or not the two persons are both 
taxable on worldwide income is a significant circumstance for 
this purpose. For this reason, paragraph 1 specifically states 
that the United States is not obligated to apply the same 
taxing regime to a national of Belgium who is not resident in 
the United States as it applies to a U.S. national who is 
subject to tax on a worldwide basis but who is not resident in 
the United States. U.S. citizens who are not resident in the 
United States but who are, nevertheless, subject to U.S. tax on 
their worldwide income are not in the same circumstances with 
respect to U.S. taxation as citizens of Belgium who are not 
U.S. residents. Thus, for example, Article 23 would not entitle 
a national of Belgium residing in a third country to taxation 
at graduated rates on U.S. source dividends or other investment 
income that applies to a U.S. citizen residing in the same 
third country.

Paragraph 2

    Paragraph 2 of the Article, provides that a Contracting 
State may not tax a permanent establishment of an enterprise of 
the other Contracting State less favorably than an enterprise 
of that first-mentioned State that is carrying on the same 
activities.
    The fact that a U.S. permanent establishment of an 
enterprise of Belgium is subject to U.S. tax only on income 
that is attributable to the permanent establishment, while a 
U.S. corporation engaged in the same activities is taxable on 
its worldwide income is not, in itself, a sufficient difference 
to provide different treatment for the permanent establishment. 
There are cases, however, where the two enterprises would not 
be similarly situated and differences in treatment may be 
warranted. For instance, it would not be a violation of the 
non-discrimination protection of paragraph 2 to require the 
foreign enterprise to provide information in a reasonable 
manner that may be different from the information requirements 
imposed on a resident enterprise, because information may not 
be as readily available to the Internal Revenue Service from a 
foreign as from a domestic enterprise. Similarly, it would not 
be a violation of paragraph 2 to impose penalties on persons 
who fail to comply with such a requirement (see, e.g., sections 
874(a) and 882(c)(2)). Further, a determination that income and 
expenses have been attributed or allocated to a permanent 
establishment in conformity with the principles of Article 7 
(Business Profits) implies that the attribution or allocation 
was not discriminatory.
    Section 1446 of the Code imposes on any partnership with 
income that is effectively connected with a U.S. trade or 
business the obligation to withhold tax on amounts allocable to 
a foreign partner. In the context of the Convention, this 
obligation applies with respect to a share of the partnership 
income of a partner resident in Belgium, and attributable to a 
U.S. permanent establishment. There is no similar obligation 
with respect to the distributive shares of U.S. resident 
partners. It is understood, however, that this distinction is 
not a form of discrimination within the meaning of paragraph 2 
of the Article. No distinction is made between U.S. and non-
U.S. partnerships, since the law requires that partnerships of 
both U.S. and non-U.S. domicile withhold tax in respect of the 
partnership shares of non-U.S. partners. Furthermore, in 
distinguishing between U.S. and non-U.S. partners, the 
requirement to withhold on the non-U.S. but not the U.S. 
partner's share is not discriminatory taxation, but, like other 
withholding on nonresident aliens, is merely a reasonable 
method for the collection of tax from persons who are not 
continually present in the United States, and as to whom it 
otherwise may be difficult for the United States to enforce its 
tax jurisdiction. If tax has been over-withheld, the partner 
can, as in other cases of over-withholding, file for a refund.

Paragraph 3

    Paragraph 3 makes clear that the provisions of paragraphs 1 
and 2 do not obligate a Contracting State to grant to a 
resident of the other Contracting State any tax allowances, 
reliefs, etc., that it grants to its own residents on account 
of their civil status or family responsibilities. Thus, if a 
sole proprietor who is a resident of Belgium has a permanent 
establishment in the United States, in assessing income tax on 
the profits attributable to the permanent establishment, the 
United States is not obligated to allow to the resident of 
Belgium the personal allowances for himself and his family that 
he would be permitted to take if the permanent establishment 
were a sole proprietorship owned and operated by a U.S. 
resident, despite the fact that the individual income tax rates 
would apply.

Paragraph 4

    Paragraph 4 prohibits discrimination in the allowance of 
deductions. When a resident or an enterprise of a Contracting 
State pays interest, royalties or other disbursements to a 
resident of the other Contracting State, the first-mentioned 
Contracting State must allow a deduction for those payments in 
computing the taxable profits of the resident or enterprise as 
if the payment had been made under the same conditions to a 
resident of the first-mentioned Contracting State. Paragraph 4, 
however, does not require a Contracting State to give non-
residents more favorable treatment than it gives to its own 
residents. Consequently, a Contracting State does not have to 
allow non-residents a deduction for items that are not 
deductible under its domestic law (for example, expenses of a 
capital nature).
    An exception to the rule of paragraph 4 is provided for 
cases where the provisions of paragraph 1 of Article 9 
(Associated Enterprises), paragraph 6 of Article 11 (Interest) 
or paragraph 4 of Article 12 (Royalties) apply. All of these 
provisions permit the denial of deductions in certain 
circumstances in respect of transactions between related 
persons. Neither State is forced to apply the non-
discrimination principle in such cases. The exception with 
respect to paragraph 6 of Article 11 would include the denial 
or deferral of certain interest deductions under Code section 
163(j).
    Paragraph 4 also provides that any debts of a resident of a 
Contracting State to a resident of the other Contracting State 
are deductible in the first-mentioned Contracting State for 
purposes of computing the taxable capital of the enterprise 
under the same conditions as if the debt had been contracted to 
a resident of the first-mentioned Contracting State. Even 
though, for general purposes, the Convention covers only income 
taxes, under paragraph 7 of this Article, the nondiscrimination 
provisions apply to all taxes levied in both Contracting 
States, at all levels of government. Thus, this provision may 
be relevant for both States. Belgium may have capital taxes and 
in the United States such taxes frequently are imposed by local 
governments.

Paragraph 5

    Paragraph 5 requires that a Contracting State not impose 
more burdensome taxation or connected requirements on an 
enterprise of that State that is wholly or partly owned or 
controlled, directly or indirectly, by one or more residents of 
the other Contracting State than the taxation or connected 
requirements that it imposes on other similar enterprises of 
that first-mentioned Contracting State. For this purpose it is 
understood that ``similar'' refers to similar activities or 
ownership of the enterprise.
    This rule, like all non-discrimination provisions, does not 
prohibit differing treatment of entities that are in differing 
circumstances. Rather, a protected enterprise is only required 
to be treated in the same manner as other enterprises that, 
from the point of view of the application of the tax law, are 
in substantially similar circumstances both in law and in fact. 
The taxation of a distributing corporation under section 3 
67(e) on an applicable distribution to foreign shareholders 
does not violate paragraph 5 of the Article because a foreign-
owned corporation is not similar to a domestically-owned 
corporation that is accorded non-recognition treatment under 
sections 337 and 355.
    For the reasons given above in connection with the 
discussion of paragraph 2 of the Article, it is also understood 
that the provision in section 1446 of the Code for withholding 
of tax on non-U.S. partners does not violate paragraph 5 of the 
Article.
    It is further understood that the ineligibility of a U.S. 
corporation with nonresident alien shareholders to make an 
election to be an ``S'' corporation does not violate paragraph 
5 of the Article. If a corporation elects to be an S 
corporation, it is generally not subject to income tax and the 
shareholders take into account their pro rata shares of the 
corporation's items of income, loss, deduction or credit. (The 
purpose of the provision is to allow an individual or small 
group of individuals the protections of conducting business in 
corporate form while paying taxes at individual rates as if the 
business were conducted directly.) A nonresident alien does not 
pay U.S. tax on a net basis, and, thus, does not generally take 
into account items of loss, deduction or credit. Thus, the S 
corporation provisions do not exclude corporations with 
nonresident alien shareholders because such shareholders are 
foreign, but only because they are not net-basis taxpayers. 
Similarly, the provisions exclude corporations with other types 
of shareholders where the purpose of the provisions cannot be 
fulfilled or their mechanics implemented. For example, 
corporations with corporate shareholders are excluded because 
the purpose of the provision to permit individuals to conduct a 
business in corporate form at individual tax rates would not be 
furthered by their inclusion.
    Finally, it is understood that paragraph 5 does not require 
a Contracting State to allow foreign corporations to join in 
filing a consolidated return with a domestic corporation or to 
allow similar benefits between domestic and foreign 
enterprises.

Paragraph 6

    Paragraph 6 of the Article confirms that no provision of 
the Article will prevent either Contracting State from imposing 
the branch profits tax described in paragraph 10 of Article 10 
(Dividends).

Paragraph 7

    As noted above, notwithstanding the specification of taxes 
covered by the Convention in Article 2 (Taxes Covered) for 
general purposes, for purposes of providing nondiscrimination 
protection this Article applies to taxes of every kind and 
description imposed by a Contracting State or a political 
subdivision or local authority thereof. Customs duties are not 
considered to be taxes for this purpose.

Relationship to Other Articles

    The saving clause of paragraph 4 of Article 1 (General 
Scope) does not apply to this Article by virtue of the 
exceptions in paragraph 5(a) of Article 1. Thus, for example, a 
U.S. citizen who is a resident of Belgium may claim benefits in 
the United States under this Article.
    Nationals of a Contracting State may claim the benefits of 
paragraph 1 regardless of whether they are entitled to benefits 
under Article 21 (Limitation on Benefits), because that 
paragraph applies to nationals and not residents. They may not 
claim the benefits of the other paragraphs of this Article with 
respect to an item of income unless they are generally entitled 
to treaty benefits with respect to that income under a 
provision of Article 21.

                ARTICLE 24 (MUTUAL AGREEMENT PROCEDURE)

    This Article provides the mechanism for taxpayers to bring 
to the attention of competent authorities issues and problems 
that may arise under the Convention. It also provides the 
authority for cooperation between the competent authorities of 
the Contracting States to resolve disputes and clarify issues 
that may arise under the Convention. The competent authorities 
of the two Contracting States are identified in paragraph 1(g) 
of Article 3 (General Definitions).

Paragraph 1

    This paragraph provides that where a resident of a 
Contracting State considers that the actions of one or both 
Contracting States will result in taxation that is not in 
accordance with the Convention he may present his case to the 
competent authority of either Contracting State. This rule is 
more generous than in most treaties, which generally allow 
taxpayers to bring competent authority cases only to the 
competent authority of their country of residence, or 
citizenship/nationality. Under this more generous rule, a U.S. 
permanent establishment of a corporation resident in Belgium 
that faces inconsistent treatment in the two countries would be 
able to bring its complaint to the U.S. competent authority. If 
the U.S. competent authority can resolve the issue on its own, 
then the taxpayer need never involve the Belgian competent 
authority. Thus, the rule provides flexibility that might 
result in greater efficiency.
    Although the typical cases brought under this paragraph 
will involve economic double taxation arising from transfer 
pricing adjustments, the scope of this paragraph is not limited 
to such cases. For example, a taxpayer could request assistance 
from the competent authority if one Contracting State 
determines that the taxpayer has received deferred compensation 
taxable at source under Article 14 (Income from Employment), 
while the taxpayer believes that such income should be treated 
as a pension that is taxable only in his country of residence 
pursuant to Article 17 (Pensions, Social Security, Annuities, 
Alimony, and Child Support).
    It is not necessary for a person bringing a complaint first 
to have exhausted the remedies provided under the national laws 
of the Contracting States before presenting a case to the 
competent authorities, nor does the fact that the statute of 
limitations may have passed for seeking a refund preclude 
bringing a case to the competent authority. Paragraph 1 
provides that a case must be presented within three years from 
the first notification of the action resulting in double 
taxation not in accordance with the provisions of the 
Convention.
    The Protocol provides that the term ``first notification of 
the action resulting in taxation not in accordance with the 
provisions of the Convention'' means in the case of Belgium, 
the date on which the notice of assessment containing an 
assessment or supplementary assessment is sent to the person 
who considers that the taxation provided for in such assessment 
or supplementary assessment is contrary to the provisions of 
the Convention; and in the case of the United States, the date 
on which the taxpayer receives a notice of proposed adjustment 
or of assessment, whichever is earlier.

Paragraph 2

    Paragraph 2 sets out the framework within which the 
competent authorities will deal with cases brought by taxpayers 
under paragraph 1. It provides that, if the competent authority 
of the Contracting State to which the case is presented judges 
the case to have merit, and cannot reach a unilateral solution, 
it shall seek an agreement with the competent authority of the 
other Contracting State pursuant to which taxation not in 
accordance with the Convention will be avoided. During the 
period that a proceeding under this Article is pending, any 
collection procedures shall be suspended.

Paragraph 3

    Paragraph 3 authorizes the competent authorities to resolve 
difficulties or doubts that may arise as to the application or 
interpretation of the Convention. The paragraph includes a non-
exhaustive list of examples of the kinds of matters about which 
the competent authorities may reach agreement. This list is 
purely illustrative; it does not grant any authority that is 
not implicitly present as a result of the introductory sentence 
of paragraph 3.
    The competent authorities may, for example, agree to the 
same allocation of income, deductions, credits or allowances 
between an enterprise in one Contracting State and its 
permanent establishment in the other (or between permanent 
establishments of a third country enterprise that are situated 
in the Contracting States) or between related persons. These 
allocations are to be made in accordance with the arm's length 
principle underlying Article 7 (Business Profits) and Article 9 
(Associated Enterprises). Agreements reached under these 
subparagraphs may include agreement on a methodology for 
determining an appropriate transfer price, common treatment of 
a taxpayer's cost sharing arrangement, or upon an acceptable 
range of results under that methodology.
    As indicated in subparagraph (d), the competent authorities 
also may agree to settle a variety of conflicting applications 
of the Convention. They may agree to settle conflicts regarding 
the characterization of particular items of income, the 
characterization of persons, the application of source rules to 
particular items of income, the meaning of a term.
    They also may agree as to advance pricing arrangements. 
They also may agree as to the application of the provisions of 
domestic law regarding penalties, fines, and interest in a 
manner consistent with the purposes of the Convention.
    Since the list under paragraph 3 is not exhaustive, the 
competent authorities may reach agreement on issues not 
enumerated in paragraph 3 if necessary to avoid double 
taxation. For example, the competent authorities may seek 
agreement on a uniform set of standards for the use of exchange 
rates. Agreements reached by the competent authorities under 
paragraph 3 need not conform to the internal law provisions of 
either Contracting State.
    Finally, paragraph 3 authorizes the competent authorities 
to consult for the purpose of resolving any difficulties or 
doubts arising as to the interpretation or application of the 
Convention. This provision is intended to permit the competent 
authorities to implement the treaty in particular cases in a 
manner that is consistent with its expressed general purposes.

Paragraph 4

    Paragraph 4 authorizes the competent authorities to request 
the disclosure of information from any person who may have such 
information relevant to the MAP proceeding to the extent 
necessary to facilitate the resolution of the case. The 
paragraph provides that a competent authority may conduct 
investigations and hearings notwithstanding any time limits in 
their domestic laws that would otherwise bar such requests for 
information. Finally, paragraph 4 provides, consistent with 
paragraph 2 of the U.S. Model, that any agreement is to be 
implemented even if such implementation otherwise would be 
barred by the statute of limitations or by some other 
procedural limitation, such as a closing agreement. Paragraph 
4, however, does not prevent the application of domestic-law 
procedural limitations that give effect to the agreement (e.g., 
a domestic-law requirement that the taxpayer file a return 
reflecting the agreement within one year of the date of the 
agreement).
    Where the taxpayer has entered a closing agreement (or 
other written settlement) with the United States before 
bringing a case to the competent authorities, the U.S. 
competent authority will endeavor only to obtain a correlative 
adjustment from the other Contracting State. See Rev. Proc. 
2006-54, 2006-49 I.R.B. 1035, Sec. 7.05. Because, as specified 
in paragraph 2 of Article 1 (General Scope), the Convention 
cannot operate to increase a taxpayer's liability, temporal or 
other procedural limitations can be overridden only for the 
purpose of making refunds and not to impose additional tax.

Paragraph 5

    Paragraph 5 provides that the competent authorities may 
agree on administrative measures to carry out the provisions of 
the Convention, particularly with respect to documentation to 
be furnished by a resident to support a claim for reduced tax 
under the Convention.

Paragraph 6

    Paragraph 6 provides that the competent authorities may 
communicate with each other directly for the purpose of 
reaching an agreement. This makes clear that the competent 
authorities of the two Contracting States may communicate 
without going through diplomatic channels. Such communication 
may be in various forms, including, where appropriate, through 
face-to-face meetings of representatives of the competent 
authorities.

    Triangular competent authority solutions.--International 
tax cases may involve more than two taxing jurisdictions (e.g., 
transactions among a parent corporation resident in country A 
and its subsidiaries resident in countries B and C). As long as 
there is a complete network of treaties among the three 
countries, it should be possible, under the full combination of 
bilateral authorities, for the competent authorities of the 
three States to work together on a three-sided solution. 
Although country A may not be able to give information received 
under Article 24 (Exchange of Information) from country B to 
the authorities of country C, if the competent authorities of 
the three countries are working together, it should not be a 
problem for them to arrange for the authorities of country B to 
give the necessary information directly to the tax authorities 
of country C, as well as to those of country A. Each bilateral 
part of the trilateral solution must, of course, not exceed the 
scope of the authority of the competent authorities under the 
relevant bilateral treaty.

Paragraph 7

    Paragraphs 7 and 8 of the Convention and paragraph 6 of the 
Protocol provide a mandatory binding arbitration procedure.
    A case shall be resolved through arbitration when the 
competent authorities have endeavored but are unable to reach a 
complete agreement regarding a case through negotiation and the 
following three conditions are satisfied. First, tax returns 
have been filed with at least one of the Contracting States 
with respect to the taxable years at issue in the case. Second, 
the case is not a case that the competent authorities agree 
before the date on which arbitration proceedings would 
otherwise have begun, is not suitable for determination by 
arbitration. Third, all concerned persons and their authorized 
representatives agree, according to the provisions of 
subparagraph d) of paragraph 8, not to disclose to any other 
person any information received during the course of the 
arbitration proceeding from either the Contracting States or 
the arbitration board, other than the determination of the 
board (confidentiality agreement). The confidentiality 
agreement may also be executed by any concerned person that has 
the legal authority to bind any other concerned person on the 
matter.

Paragraph 8

    Subparagraph a) of paragraph 8 provides that the term 
``concerned person'' means the person that brought the case to 
competent authority for consideration under Article 24 and 
includes all other persons, if any, whose tax liability to 
either Contracting State may be directly affected by a mutual 
agreement arising from that consideration. For example, a 
concerned person does not only include a U.S. corporation that 
brings a transfer pricing case with respect to a transaction 
entered into with its Belgian subsidiary for resolution to the 
U.S. competent authority, but also the Belgian subsidiary, 
which may have a correlative adjustment as a result of the 
resolution of the case.
    Subparagraph c) provides that an arbitration proceeding 
begins on the later of two dates: two years from the 
information necessary to undertake substantive consideration 
for mutual agreement has been received by both competent 
authorities.
    Clause (p) of paragraph 6 of the Protocol provides that 
each competent authority will confirm in writing to the other 
competent authority and to the concerned persons the date of 
its receipt of the information necessary to undertake 
substantive consideration for a mutual agreement. In the case 
of the United States, this information is (i) the information 
that must be submitted to the U.S. competent authority under 
Section 4.05 of Rev. Proc. 2002-52, 2002-2 C.B. 242 (since 
updated to Rev. Proc. 2006-54, 2006-49 I.R.B. 1035) Sec. 7.05, 
and (ii) for cases initially submitted as a request for an 
Advance Pricing Agreement, the information that must be 
submitted to the Internal Revenue Service under Rev. Proc. 
2006-9, 2006-2 I.R.B. 278, as it might be amended from time to 
time. In the case of Belgium, this information is any 
information that would be required under instructions or 
commentaries published by the Federal Public Service Finance. 
The information will not be considered received until both 
competent authorities receive copies of all materials submitted 
by concerned persons in connection with the mutual agreement 
procedure.
    Paragraph 6 of the Protocol provides for a several 
procedural rules once an arbitration proceeding under paragraph 
7 of Article 24 (``Proceeding'') has commenced, but the 
competent authorities may modify or supplement these rules as 
necessary. In addition, the arbitration board may adopt any 
procedures necessary for the conduct of its business, provided 
the procedures are not inconsistent with any provision of 
Article 24 of the Convention.
    Subparagraph (e) of paragraph 6 of the Protocol provides 
that each Contracting State has 60 days from the date on which 
the Proceeding begins to send a written communication to the 
other Contracting State appointing one member of the 
arbitration board. Within 60 days of the date the second of 
such communications is sent, these two board members will 
appoint a third member to serve as the chair of the board. The 
chair may not be a citizen of either Contracting State. In the 
event that any members of the board are not appointed 
(including as a result of the failure of the two members 
appointed by the Contracting States to agree on a third member) 
by the requisite date, the remaining members are appointed by 
the highest ranking member of the Secretariat at the Centre for 
Tax Policy and Administration of the Organisation for Economic 
Co-operation and Development (OECD) who is not a citizen of 
either Contracting State, by written notice to both Contracting 
States within 60 days of the date of such failure.
    Clause (g) of paragraph 6 of the Protocol establishes 
deadlines for submission of materials by the Contracting States 
to the arbitration board. Each competent authority has 60 days 
from the date of appointment of the chair to submit a Proposed 
Resolution describing the proposed disposition of the specific 
monetary amounts of income, expense or taxation at issue in the 
case, and a supporting Position Paper. Copies of each State's 
submissions are to be provided by the board to the other 
Contracting State on the date the later of the submissions is 
submitted to the board. Each of the Contracting States may 
submit a Reply Submission to the board within 120 days of the 
appointment of the chair to address points raised in the other 
State's Proposed Resolution or Position Paper. If one 
Contracting State fails to submit a Proposed Resolution within 
the requisite time, the Proposed Resolution of the other 
Contracting State is deemed to be the determination of the 
arbitration board. No other information may be supplied to the 
arbitration board, unless it requests additional information. 
Copies of any such requested information, along with the 
board's request, must be provided to the other Contracting 
State on the date the request or response is submitted.
    All communication with the board is to be in writing 
between the chair of the board and the designated competent 
authorities with the exception of communication regarding 
logistical matters.
    In making its determination the arbitration board will 
apply the following authorities as necessary and in descending 
order of relevance: (i) the provisions of the Convention, (ii) 
any agreed commentaries or explanation of the Contracting 
States concerning the Convention, (iii) the laws of the 
Contracting States to the extent they are not inconsistent with 
each other, and (iv) any OECD Commentary, Guidelines or Reports 
regarding relevant analogous portions of the OECD Model Tax 
Convention.
    The arbitration board must deliver a determination in 
writing to the Contracting States within 6 months of the 
appointment of the chair. The determination must be one of the 
two Proposed Resolutions submitted by the Contracting States. 
The determination may only provide a determination regarding 
the amount of income, expense or tax reportable to the 
Contracting States. The determination has no precedential value 
and consequently the rationale behind a board's determination 
would not be beneficial and may not be provided by the board.
    Clause (k) of paragraph 6 of the Protocol provides that, 
unless any concerned person does not accept the decision of the 
arbitration board, the determination of the board constitutes a 
resolution by mutual agreement under Article 24 and, 
consequently, is binding on both Contracting States. Each 
concerned person must, within 30 days of receiving the 
determination from the competent authority to which the case 
was first presented, advise that competent authority whether 
the person accepts the determination. In addition, if the case 
is in litigation, the concerned persons must advise the 
relevant court of their acceptance of the arbitration 
determination, and withdraw from the litigation the issues 
resolved by the MAP arbitration. The failure to advise the 
competent authority or the relevant court within the requisite 
time is considered a rejection of the determination. If a 
determination is rejected the case cannot be the subject of a 
subsequent Proceeding. After the commencement of the Proceeding 
but before a decision of the board has been accepted by all 
concerned persons, the competent authorities may reach a mutual 
agreement to resolve the case and terminate the Proceeding.
    For purposes of the arbitration proceeding, the members of 
the arbitration board and their staffs shall be considered 
``persons or authorities'' to whom information may be disclosed 
under Article 25 (Exchange of Information and Administrative 
Assistance). Paragraph 6 of the Protocol provides that all 
materials prepared in the course of, or relating to, the 
Proceeding are considered information exchanged between the 
Contracting States. No information relating to the Proceeding 
or the board's determination may be disclosed by members of the 
arbitration board or their staffs or by either competent 
authority, except as permitted by the Convention and the 
domestic laws of the Contracting States. Members of the 
arbitration board and their staffs must agree in statements 
sent to each of the Contracting States in confirmation of their 
appointment to the arbitration board to abide by and be subject 
to the confidentiality and nondisclosure provisions of Article 
25 of the Convention and the applicable domestic laws of the 
Contracting States, with the most restrictive of the provisions 
applying.
    The applicable domestic law of the Contracting States 
determines the treatment of any interest or penalties 
associated with a competent authority agreement achieved 
through arbitration.
    In general, fees and expenses are borne equally by the 
Contracting States, including the cost of translation services. 
However, meeting facilities, related resources, financial 
management, other logistical support, and general and 
administrative coordination of the Proceeding will be provided, 
at its own cost, by the Contracting State whose competent 
authority initiated the mutual agreement proceedings. In 
general, the fees of members of the arbitration board will be 
set at the fixed amount of $2,000 per day (or the equivalent 
amount in euro). The expenses of members of the board will be 
set in accordance with the International Centre for Settlement 
of Investment Disputes (ICSID) Schedule of Fees for arbitrators 
(in effect on the date on which the arbitration board 
proceedings begin). The competent authorities may amend the set 
fees and expenses of members of the board. All other costs are 
to be borne by the Contracting State that incurs them.

    Treaty termination in relation to competent authority 
dispute resolution.--A case may be raised by a taxpayer under a 
treaty with respect to a year for which a treaty was in force 
after the treaty has been terminated. In such a case the 
ability of the competent authorities to act is limited. They 
may not exchange confidential information, nor may they reach a 
solution that varies from that specified in its law.

Relationship to Other Articles

    This Article is not subject to the saving clause of 
paragraph 4 of Article 1 (General Scope) by virtue of the 
exceptions in paragraph 5(a) of that Article. Thus, rules, 
definitions, procedures, etc. that are agreed upon by the 
competent authorities under this Article may be applied by the 
United States with respect to its citizens and residents even 
if they differ from the comparable Code provisions. Similarly, 
as indicated above, U.S. law may be overridden to provide 
refunds of tax to a U.S. citizen or resident under this 
Article. A person may seek relief under Article 24 regardless 
of whether he is generally entitled to benefits under Article 
21 (Limitation on Benefits). As in all other cases, the 
competent authority is vested with the discretion to decide 
whether the claim for relief is justified.

   ARTICLE 25 (EXCHANGE OF INFORMATION AND ADMINISTRATIVE ASSISTANCE)

    This Article provides for the exchange of information and 
administrative assistance between the competent authorities of 
the Contracting States.

Paragraph 1

    The obligation to obtain and provide information to the 
other Contracting State is set out in Paragraph 1. The 
information to be exchanged is that which may be relevant for 
carrying out the provisions of the Convention or the domestic 
laws of the United States or of Belgium concerning taxes 
covered by the Convention. This language incorporates the 
standard in 26 U.S.C. Section 7602 which authorizes the IRS to 
examine ``any books, papers, records, or other data which may 
be relevant or material.'' (Emphasis added.) In United States 
v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the Supreme 
Court stated that the language ``may be'' reflects Congress's 
express intention to allow the IRS to obtain ``items of even 
potential relevance to an ongoing investigation, without 
reference to its admissibility.'' (Emphasis in original.) 
However, the language ``may be'' would not support a request in 
which a Contracting State simply asked for information 
regarding all bank accounts maintained by residents of that 
Contracting State in the other Contracting State, or even all 
accounts maintained by its residents with respect to a 
particular bank.
    Exchange of information with respect to each State's 
domestic law is authorized to the extent that taxation under 
domestic law is not contrary to the Convention. Thus, for 
example, information may be exchanged with respect to a covered 
tax, even if the transaction to which the information relates 
is a purely domestic transaction in the requesting State and, 
therefore, the exchange is not made to carry out the 
Convention. An example of such a case is provided in the OECD 
Commentary: a company resident in the United States and a 
company resident in Belgium transact business between 
themselves through a third-country resident company. Neither 
Contracting State has a treaty with the third State. To enforce 
their internal laws with respect to transactions of their 
residents with the third-country company (since there is no 
relevant treaty in force), the Contracting States may exchange 
information regarding the prices that their residents paid in 
their transactions with the third-country resident.
    Paragraph 1 clarifies that information may be exchanged 
that relates to the assessment or collection of, the 
enforcement or prosecution in respect of, or the determination 
of appeals in relation to, the taxes covered by the Convention. 
Thus, the competent authorities may request and provide 
information for cases under examination or criminal 
investigation, in collection, on appeals, or under prosecution.
    Information exchange is not restricted by paragraph 1 of 
Article 1 (General Scope). Accordingly, information may be 
requested and provided under this article with respect to 
persons who are not residents of either Contracting State. For 
example, if a third- country resident has a permanent 
establishment in Belgium, and that permanent establishment 
engages in transactions with a U.S. enterprise, the United 
States could request information with respect to that permanent 
establishment, even though the third-country resident is not a 
resident of the United States or Belgium. Similarly, if a 
third-country resident maintains a bank account in Belgium, and 
the Internal Revenue Service has reason to believe that funds 
in that account should have been reported for U.S. tax purposes 
but have not been so reported, information can be requested 
from Belgium with respect to that person's account, even though 
that person is not the taxpayer under examination.
    Although the term ``United States'' does not encompass U.S. 
possessions for most purposes of the Convention, Section 7651 
of the Code authorizes the Internal Revenue Service to utilize 
the provisions of the Internal Revenue Code to obtain 
information from the U.S. possessions pursuant to a proper 
request made under Article 25. If necessary to obtain requested 
information, the Internal Revenue Service could issue and 
enforce an administrative summons to the taxpayer, a tax 
authority (or a government agency in a U.S. possession), or a 
third party located in a U.S. possession.

Paragraph 2

    Paragraph 2 also provides assurances that any information 
exchanged will be treated as secret, subject to the same 
disclosure constraints as information obtained under the laws 
of the requesting State. Furthermore, information received may 
be disclosed only to persons, including courts and 
administrative bodies, involved in the assessment, collection, 
or administration of, the enforcement or prosecution in respect 
of, or the determination of appeals in relation to, the taxes 
covered by the Convention. The information must be used by 
these persons in connection with the specified functions. 
Information may also be disclosed to legislative bodies, such 
as the tax-writing committees of Congress and the Government 
Accountability Office, engaged in the oversight of the 
preceding activities. Information received by these bodies must 
be for use in the performance of their role in overseeing the 
administration of U.S. tax laws. Information received may be 
disclosed in public court proceedings or in judicial decisions.

Paragraph 3

    Paragraph 3 provides that the obligations undertaken in 
paragraphs 1 and 2 to exchange information do not require a 
Contracting State to carry out administrative measures that are 
at variance with the laws or administrative practice of either 
State. Nor is a Contracting State required to supply 
information not obtainable under the laws or administrative 
practice of either State, or to disclose trade secrets or other 
information, the disclosure of which would be contrary to 
public policy.
    Thus, a requesting State may be denied information from the 
other State if the information would be obtained pursuant to 
procedures or measures that are broader than those available in 
the requesting State. However, the statute of limitations of 
the Contracting State making the request for information should 
govern a request for information. Thus, the Contracting State 
of which the request is made should attempt to obtain the 
information even if its own statute of limitations has passed. 
In many cases, relevant information will still exist in the 
business records of the taxpayer or a third party, even though 
it is no longer required to be kept for domestic tax purposes.
    While paragraph 3 states conditions under which a 
Contracting State is not obligated to comply with a request 
from the other Contracting State for information, the requested 
State is not precluded from providing such information, and 
may, at its discretion, do so subject to the limitations of its 
internal law.

Paragraph 4

    Paragraph 4 provides that when information is requested by 
a Contracting State in accordance with this Article, the other 
Contracting State is obligated to obtain the requested 
information as if the tax in question were the tax of the 
requested State, even if that State has no direct tax interest 
in the case to which the request relates. In the absence of 
such a paragraph, some taxpayers have argued that paragraph 
3(a) prevents a Contracting State from requesting information 
from a bank or fiduciary that the Contracting State does not 
need for its own tax purposes. This paragraph clarifies that 
paragraph 3 does not impose such a restriction and that a 
Contracting State is not limited to providing only the 
information that it already has in its own files.

Paragraph 5

    Paragraph 5 provides that a Contracting State may not 
decline to provide information because that information is held 
by financial institutions, nominees or persons acting in an 
agency or fiduciary capacity. Thus, paragraph 5 would 
effectively prevent a Contracting State from relying on 
paragraph 3 to argue that its domestic bank secrecy laws (or 
similar legislation relating to disclosure of financial 
information by financial institutions or intermediaries) 
override its obligation to provide information under paragraph 
1. This paragraph also requires the disclosure of information 
regarding the beneficial owner of an interest in a person, such 
as the identity of a beneficial owner of bearer shares. 
Consistent with paragraph 6, discussed below, to obtain such 
information, the tax administration of the requested State has 
the power to ask for the disclosure of information and to 
conduct investigations and hearings notwithstanding any 
contrary provisions in its domestic tax laws.
    Paragraph 7 of the Protocol provides that banking records 
will be exchanged only upon request. Further, a request for 
bank information must identify both a specific taxpayer and a 
specific bank or financial institution, or the competent 
authority of the requested State may decline to obtain any 
information that it does not already possess.

Paragraph 6

    Paragraph 6 provides that in order to obtain information 
requested under this Article, the requested State has the power 
to ask for the disclosure of information and to conduct 
investigations and hearings despite any time limits required in 
the domestic tax laws of the requested State. Therefore, the 
requested State will have such powers in order to meet its 
obligations under Article 25 of the Convention, even though it 
may not have such powers for purposes of enforcing its own tax 
laws due, for example to the expiration of its statute of 
limitations on tax audits.

Paragraph 7

    Paragraph 7 provides that penalties under the domestic law 
of the requested State shall apply to any person that fails to 
provide information to the requested State seeking to fulfill 
its obligations under the Article, as if the request for the 
information and the obligation to provide such information was 
an obligation provided in the domestic tax laws of the 
requested State.

Paragraph 8

    Paragraph 8 further expands on the consequences of failing 
to provide information to the requested State seeking to 
fulfill its obligations under the Article, including a failure 
to provide the requested information in the manner and within 
the time limits required. The paragraph provides that the 
requested State may bring appropriate enforcement proceedings 
against the person failing to provide the information, 
including (but not limited to) summary summons enforcement 
proceedings in the case of the United States and summary 
proceedings (procedure en refere/procedure in kortgeding) in 
the case of Belgium. Further, such person may be compelled to 
provide such information under such civil or criminal penalties 
that may be available under the laws of the requested State.

Paragraph 9

    Paragraph 9 provides that the requesting State may specify 
the form in which information is to be provided (e.g., 
depositions of witnesses and authenticated copies of original 
documents). The intention is to ensure that the information may 
be introduced as evidence in the judicial proceedings of the 
requesting State. The requested State should, if possible, 
provide the information in the form requested to the same 
extent that it can obtain information in that form under its 
own laws and administrative practices with respect to its own 
taxes.

Paragraph 10

    Paragraph 10 provides that the requested State shall allow 
representatives of the requesting State to enter the requested 
State to interview individuals and examine books and records. 
However, such interview or examination must take place under 
the conditions and limits agreed upon by the competent 
authorities.

Paragraph 11

    Paragraph 11 states that the competent authorities of the 
Contracting States shall agree upon the mode of application of 
the Article. The article authorizes the competent authorities 
to exchange information on a routine basis, on request in 
relation to a specific case, or spontaneously. It is 
contemplated that the Contracting States will utilize this 
authority to engage in all of these forms of information 
exchange, as appropriate.
    The competent authorities may also agree on specific 
procedures and timetables for the exchange of information. In 
particular, the competent authorities may agree on minimum 
thresholds regarding tax at stake or take other measures aimed 
at ensuring some measure of reciprocity with respect to the 
overall exchange of information between the Contracting States.

    Treaty efective dates and termination in relation to 
exchange of information.--Once the Convention is in force, the 
competent authority may seek information under the Convention 
with respect to a year prior to the entry into force of the 
Convention. Even if an earlier Convention with more restrictive 
provisions, or even no Convention, was in effect during the 
years in which the transaction at issue occurred, the exchange 
of information provisions of the Convention apply. In that 
case, the competent authorities have available to them the full 
range of information exchange provisions afforded under this 
Article. Paragraph 6 of Article 28 (Entry into Force) confirms 
this understanding with respect to the effective date of the 
Article.
    A tax administration may also seek information with respect 
to a year for which a treaty was in force after the treaty has 
been terminated. In such a case the ability of the other tax 
administration to act is limited. The treaty no longer provides 
authority for the tax administrations to exchange confidential 
information. They may only exchange information pursuant to 
domestic law or other international agreement or arrangement.

Paragraph 12

    Paragraph 12 provides that if the United States terminates 
the provisions of paragraph 3 of Article 10 (Dividends), then, 
from the date such provision no longer applies to eliminate 
dividend withholding tax, Belgium will not be required to 
provide information pursuant to paragraph 5 of this Article.

                 ARTICLE 26 (ASSISTANCE IN COLLECTION)

    This Article provides for assistance in collection of taxes 
to the extent necessary to ensure that treaty benefits are 
enjoyed only by persons entitled to those benefits under the 
terms of the Convention.

Paragraph 1

    Under paragraph 1, a Contracting State will endeavor to 
collect on behalf of the other State only those amounts 
necessary to ensure that any exemption or reduced rate of tax 
at source granted under the Convention by that other State is 
not enjoyed by persons not entitled to those benefits. For 
example, if the payer of a U.S.-source portfolio dividend 
receives a Form W-8BEN or other appropriate documentation from 
the payee, the withholding agent is permitted to withhold at 
the portfolio dividend rate of 15 percent. If, however, the 
addressee is merely acting as a nominee on behalf of a third-
country resident, paragraph 1 would obligate the other 
Contracting State to withhold and remit to the United States 
the additional tax that should have been collected by the U.S. 
withholding agent.

Paragraph 2

    Paragraph 2 makes clear that the Contracting State asked to 
collect the tax is not obligated, in the process of providing 
collection assistance, to carry out administrative measures 
that are different from those used in the collection of its own 
taxes, or that would be contrary to its sovereignty, security 
or public policy.

     ARTICLE 27 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR POSTS)

    This Article confirms that any fiscal privileges to which 
diplomatic or consular officials are entitled under general 
provisions of international law or under special agreements 
will apply notwithstanding any provisions to the contrary in 
the Convention. The agreements referred to include any 
bilateral agreements, such as consular conventions, that affect 
the taxation of diplomats and consular officials and any 
multilateral agreements dealing with these issues, such as the 
Vienna Convention on Diplomatic Relations and the Vienna 
Convention on Consular Relations. The U.S. generally adheres to 
the latter because its terms are consistent with customary 
international law.
    The Article does not independently provide any benefits to 
diplomatic agents and consular officers. Article 19 (Government 
Service) does so, as do Code section 893 and a number of 
bilateral and multilateral agreements. In the event that there 
is a conflict between the Convention and international law or 
such other treaties, under which the diplomatic agent or 
consular official is entitled to greater benefits under the 
latter, the latter laws or agreements shall have precedence. 
Conversely, if the Convention confers a greater benefit than 
another agreement, the affected person could claim the benefit 
of the tax treaty.
    Pursuant to subparagraph 5(b) of Article 1, the saving 
clause of paragraph 4 of Article 1 (General Scope) does not 
apply to override any benefits of this Article available to an 
individual who is neither a citizen of the United States nor 
has immigrant status in the United States.

                     ARTICLE 28 (ENTRY INTO FORCE)

    This Article contains the rules for bringing the Convention 
into force and giving effect to its provisions.

Paragraph 1

    Paragraph 1 provides for the ratification of the Convention 
by both Contracting States according to their constitutional 
and statutory procedures. Each Contracting State will use the 
diplomatic channel to notify the other when it has completed 
the required procedures. The notification will be accompanied 
by an instrument of ratification.
    In the United States, the process leading to ratification 
and entry into force is as follows: Once a treaty has been 
signed by authorized representatives of the two Contracting 
States, the Department of State sends the treaty to the 
President who formally transmits it to the Senate for its 
advice and consent to ratification, which requires approval by 
two-thirds of the Senators present and voting. Prior to this 
vote, however, it generally has been the practice for the 
Senate Committee on Foreign Relations to hold hearings on the 
treaty and make a recommendation regarding its approval to the 
full Senate. Both Government and private sector witnesses may 
testify at these hearings. After the Senate gives its advice 
and consent to ratification of the protocol or treaty, an 
instrument of ratification is drafted for the President's 
signature. The President's signature completes the process in 
the United States.

Paragraph 2

    Paragraph 2 provides that the Convention will enter into 
force upon the exchange of instruments of ratification. The 
date on which a treaty enters into force is not necessarily the 
date on which its provisions take effect. Paragraph 2, 
therefore, also contains rules that determine when the 
provisions of the treaty will have effect.
    Under subparagraph 2(a), the Convention will have effect 
with respect to taxes withheld at source (principally 
dividends, interest and royalties) for amounts paid or credited 
on or after the first day of the second month following the 
date on which the Convention enters into force. For example, if 
instruments of ratification are exchanged on April 25 of a 
given year, the withholding rates specified in paragraph 2 of 
Article 10 (Dividends) would be applicable to any dividends 
paid or credited on or after June 1 of that year. This rule 
allows the benefits of the withholding reductions to be put 
into effect as soon as possible, without waiting until the 
following year. The delay of one to two months is required to 
allow sufficient time for withholding agents to be informed 
about the change in withholding rates. If for some reason a 
withholding agent withholds at a higher rate than that provided 
by the Convention (perhaps because it was not able to re-
program its computers before the payment is made), a beneficial 
owner of the income that is a resident of the other Contracting 
State may make a claim for refund pursuant to section 1464 of 
the Code.
    For all other taxes, paragraph 2(b) specifies that the 
Convention will have effect for any taxable period beginning on 
or after January 1 of the year following entry into force.

Paragraph 3

    Paragraph 3 provides that subparagraph (f) of paragraph 5 
of Article 21 (Limitation on Benefits) is not effective until 
January 1, 2011. That subparagraph requires that a headquarters 
company be subject to the same income tax rules in its state of 
residence as a resident company engaged in the active conduct 
of a trade or business in such state. Belgian law is in 
transition and as of January 1, 2011, this subparagraph will 
met.

Paragraph 4

    Paragraph 4 provides that the prior Convention generally 
ceases to have effect with respect to any tax as of the date 
this Convention takes effect with respect to that tax in 
accordance with paragraphs 2 and 6.

Paragraph 5

    As in many recent U.S. treaties, however, paragraph 5 
provides an exception to the general rule of paragraph 4. Under 
paragraph 5, if the prior Convention would have afforded 
greater relief from tax than this Convention, the prior 
Convention shall, at the election of any person that was 
entitled to benefits under the prior Convention, continue to 
have effect in its entirety for a twelve-month period from the 
date on which this Convention otherwise would have had effect 
with respect to such person.
    Thus, a taxpayer may elect to extend the benefits of the 
prior Convention for one year from the date on which the 
relevant provision of the new Convention would first take 
effect. During the period in which the election is in effect, 
the provisions of the prior Convention will continue to apply 
only insofar as they applied before the entry into force of the 
Convention. If the grace period is elected, all of the 
provisions of the prior Convention must be applied for that 
additional year. The taxpayer may not apply certain, more 
favorable provisions of the prior Convention and, at the same 
time, apply other, more favorable provisions of this 
Convention. The taxpayer must choose one regime or the other.
    The prior Convention shall terminate on the last date on 
which it has effect with respect to any tax in accordance with 
the provisions of paragraphs 4 and 5 of Article 28.

Paragraph 6

    Paragraph 6 provides that the provisions of Article 25 
(Exchange of Information), have effect from the date of entry 
into force, without regard to the taxable period to which a 
particular matter relates. Accordingly, the powers afforded the 
competent authority under these articles apply retroactively to 
taxable periods preceding entry into force.

Paragraph 7

    Paragraph 7 provides a specific effective date for purposes 
of the binding arbitration provisions of Article 24 (Mutual 
Agreement Procedure). Paragraph 7 provides that paragraph 7 and 
8 of Article 24 are effective for cases (i) that are under 
consideration by the competent authorities as of the date on 
which the Convention enters into force and (ii) cases that come 
under such consideration after the Convention enters into 
force. In addition, paragraph 7 provides that the commencement 
date for cases that are under consideration by the competent 
authorities as of the date on which the Convention enters into 
force is the date the Convention enters into force. As a 
result, cases that are unresolved as of the entry into force of 
the Convention will go into binding arbitration no later than 
two years after the entry into force of the Convention, if the 
cases are not otherwise resolved through the competent 
authority procedure.

                        ARTICLE 29 (TERMINATION)

    The Convention is to remain in effect indefinitely, unless 
terminated by one of the Contracting States in accordance with 
the provisions of Article 29. The Convention may be terminated 
at any time after five years from the date on which the 
Convention enters into force. If notice of termination is 
given, the provisions of the Convention with respect to 
withholding at source will cease to have effect after the 
expiration of a period of 6 months beginning with the delivery 
of notice of termination. For other taxes, the Convention will 
cease to have effect as of taxable periods beginning after the 
expiration of this 6 month period.
    Article 29 relates only to unilateral termination of the 
Convention by a Contracting State. Nothing in that Article 
should be construed as preventing the Contracting States from 
concluding a new bilateral agreement, subject to ratification, 
that supersedes, amends or terminates provisions of the 
Convention without the six-month notification period.
    Customary international law observed by the United States 
and other countries, as reflected in the Vienna Convention on 
Treaties, allows termination by one Contracting State at any 
time in the event of a ``material breach'' of the agreement by 
the other Contracting State.

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