EXPLANATION OF PROPOSED INCOME TAX TREATY BETWEEN 

THE UNITED STATES AND BELGIUM 

Scheduled for a Hearing 

Before the 

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

On July 17, 2007 

____________ 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

July 13, 2007 

JCX-45-07 
 

i

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

I. SUMMARY........................................................................................................................ 2 

II. OVERVIEW OF U.S. TAXATION OF INTERNATIONAL TRADE AND 

INVESTMENT AND U.S. TAX TREATIES .................................................................... 4 

A. U.S. Tax Rules .............................................................................................................. 4 

B. U.S. Tax Treaties .......................................................................................................... 6

III. OVERVIEW OF TAXATION IN BELGIUM................................................................... 8 

A. National Income Taxes ................................................................................................. 8 

B. International Aspects of Taxation in Belgium............................................................ 10 

C. Other Taxes................................................................................................................. 12 

IV. THE UNITED STATES AND BELGIUM: CROSS-BORDER INVESTMENT 

AND TRADE.................................................................................................................... 13

A. Introduction................................................................................................................. 13 

B. Overview of International Transactions Between the United States and Belgium..... 14 

C. Income Taxes and Withholding Taxes on Cross-Border Income Flows .................... 17 

D. Analyzing the Economic Effects of Protocols to Income Tax Treaties...................... 18 

V. EXPLANATION OF PROPOSED TREATY AND PROTOCOL .................................. 19 

Article 1. General Scope.................................................................................................. 19 

Article 2. Taxes Covered ................................................................................................. 22 

Article 3. General Definitions.......................................................................................... 22 

Article 4. Resident ........................................................................................................... 24 

Article 5. Permanent Establishment................................................................................. 26 

Article 6. Income from Real Property.............................................................................. 28 

Article 7. Business Profits................................................................................................ 29 

Article 8. Shipping and Air Transport ............................................................................. 33 

Article 9. Associated Enterprises..................................................................................... 34 

Article 10. Dividends....................................................................................................... 35

Article 11. Interest ........................................................................................................... 41 

Article 12. Royalties ........................................................................................................ 44 

Article 13. Gains .............................................................................................................. 45 

Article 14. Income from Employment............................................................................. 47 

Article 15. Directors’ Fees............................................................................................... 47 

Article 16. Entertainers and Sportsmen ........................................................................... 48 

Article 17. Pensions, Social Security, Annuities, Alimony, and Child Support.............. 50 

Article 18. Government Service ...................................................................................... 54 
 

ii

Article 19. Students, Trainees, Teachers and Researchers .............................................. 55 

Article 20. Other Income ................................................................................................. 56 

Article 21. Limitation on Benefits ................................................................................... 57 

Article 22. Relief from Double Taxation......................................................................... 68 

Article 23. Non-Discrimination ....................................................................................... 72 

Article 24. Mutual Agreement Procedure........................................................................ 73 

Article 25. Exchange of Information and Administrative Assistance ............................. 79 

Article 26. Assistance in Collection................................................................................. 80 

Article 27. Members of Diplomatic Missions and Consular Posts.................................. 81 

Article 28. Entry into Force ............................................................................................. 81 

Article 29. Termination.................................................................................................... 82 

VI. ISSUES ............................................................................................................................. 83 

A. Arbitration................................................................................................................... 83 

B. Treaty Shopping.......................................................................................................... 92 

C. Zero Rate of Withholding Tax on Direct Dividends .................................................. 96 

D. Students, Trainees, Teachers and Researchers ......................................................... 101 
 

1

INTRODUCTION 

This pamphlet,1

 prepared by the staff of the Joint Committee on Taxation, describes the 

proposed income tax treaty between the United States and Belgium as supplemented by a 

protocol (the “proposed protocol”). Unless otherwise specified, the proposed treaty and the 

proposed protocol are hereinafter referred to collectively as the “proposed treaty.” The proposed 

treaty was signed on November 27, 2006. The Senate Committee on Foreign Relations (the 

“Committee”) has scheduled a public hearing on the proposed treaty for July 17, 2007.2

Part I of the pamphlet provides a summary of the proposed treaty. Part II provides a brief 

overview of U.S. tax laws relating to international trade and investment and of U.S. income tax 

treaties in general. Part III contains a brief overview of Belgian tax laws. Part IV provides a 

discussion of investment and trade flows between the United States and Belgium. Part V 

contains an article-by-article explanation of the proposed treaty. Part VI contains a discussion of 

issues relating to the proposed treaty. 

 1

 This pamphlet may be cited as follows: Joint Committee on Taxation, Explanation of Proposed 

Income Tax Treaty Between the United States and Belgium (JCX-45-07), July 13, 2007. References to 

“the Code” are to the U.S. Internal Revenue Code of 1986, as amended. 

2

 For a copy of the proposed treaty, see Senate Treaty Doc. 110-3. 
 

2

I. SUMMARY 

The principal purposes of the proposed treaty are to reduce or eliminate double taxation 

of income earned by residents of either country from sources within the other country and to 

prevent avoidance or evasion of the taxes of the two countries. The proposed treaty also is 

intended to promote close economic cooperation between the two countries and to eliminate 

possible barriers to trade and investment caused by overlapping taxing jurisdictions of the two 

countries. 

As in other U.S. tax treaties, these objectives principally are achieved through each 

country’s agreement to limit, in certain specified situations, its right to tax income derived from 

its territory by residents of the other country. For example, the proposed treaty contains 

provisions under which each country generally agrees not to tax business income derived from 

sources within that country by residents of the other country unless the business activities in the 

taxing country are substantial enough to constitute a permanent establishment (Article 7). 

Similarly, the proposed treaty contains certain exemptions under which residents of one country 

performing personal services in the other country will not be required to pay tax in the other 

country unless their contact with the other country exceeds specified minimums (Articles 14 and 

16). 

The proposed treaty provides that dividends and certain gains derived by a resident of 

either country from sources within the other country generally may be taxed by both countries 

(Articles 10 and 13); however, the rate of tax that the source country may impose on a resident of 

the other country on dividends may be limited by the proposed treaty and source-country tax 

may be eliminated on certain dividends in which certain ownership thresholds and other 

requirements are satisfied (Article 10). The proposed treaty provides that, subject to certain rules 

and exceptions, interest and royalties derived by a resident of either country from sources within 

the other country may be taxed only by the residence country (Articles 11 and 12). 

In situations in which the country of source retains the right under the proposed treaty to 

tax income derived by residents of the other country, the proposed treaty generally provides for 

relief from the potential double taxation through the allowance by the country of residence of a 

tax credit for certain foreign taxes paid to the other country (Article 22). 

The proposed treaty contains the standard provision (the “saving clause”) included in 

U.S. tax treaties pursuant to which each country retains the right to tax its residents and citizens 

as if the treaty had not come into effect (Article 1). In addition, the proposed treaty contains the 

standard provision providing that the treaty may not be applied to deny any taxpayer any benefits 

to which the taxpayer would be entitled under the domestic law of a country or under any other 

agreement between the two countries (Article 1). 

The proposed treaty adds to the present treaty certain provisions regarding cross-border 

contributions to, and benefit accruals of, pension plans (Article 17). These rules are intended to 

remove barriers to the flow of personal services between the two countries that could otherwise 

result from discontinuities under the laws of each country and are similar to provisions included 

in other recent U.S. treaties and protocols, including the United States Model Income Tax 

Convention of November 15, 2006 (“U.S. Model treaty”). 
 

3

The proposed treaty (Article 19) generally provides that students, teachers, business 

trainees, and researchers visiting the other treaty country are exempt from host country taxation 

on certain types of payments received. 

The proposed treaty adds a mandatory arbitration procedure (Article 24) that is 

sometimes referred to as “last best offer” arbitration, in which each of the competent authorities 

proposes one and only one figure for settlement, and the arbitrator must select one of those 

figures as the award. Under the proposed 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 treaty countries with respect to the case. 

The mandatory and binding arbitration procedure is new to the U.S. treaty network. 

The proposed treaty provides authority for the two countries to exchange information 

(Article 25) and assist in the collection of tax (Article 26) in order to carry out the provisions of 

the proposed treaty. 

The proposed treaty also contains a detailed limitation-on-benefits provision that reflects 

the anti-treaty-shopping provisions included in the U.S. Model treaty and more recent U.S. 

income tax treaties. The new rules are intended to prevent the inappropriate use of the treaty by 

third-country residents (Article 28). 

The proposed treaty replaces the existing treaty (signed in 1970) and protocol (signed in 

1987). The rules of the proposed treaty generally are similar to rules of recent U.S. income tax 

treaties, the U.S Model treaty,3

 and the 2005 Model Convention on Income and on Capital of the 

Organisation for Economic Cooperation and Development (“OECD Model treaty”). However, 

the proposed treaty contains certain substantive deviations from these treaties and models. These 

deviations are noted throughout the explanation of the proposed treaty in Part V of this pamphlet. 

 3

 For a comparison of the U.S. Model treaty with its 1996 predecessor, see Joint Committee on 

Taxation, Comparison of the United States Model Income Tax Convention of September 20, 1996 with the 

United States Model Income Tax Convention of November 15, 2006 (JCX-27-07), May 8, 2007. 
 

4

II. OVERVIEW OF U.S. TAXATION OF INTERNATIONAL TRADE 

AND INVESTMENT AND U.S. TAX TREATIES 

This overview briefly describes certain U.S. tax rules relating to foreign income and 

foreign persons that apply in the absence of a U.S. tax treaty. This overview also discusses the 

general objectives of U.S. tax treaties and describes some of the modifications to U.S. tax rules 

made by treaties. 

A. U.S. Tax Rules 

The United States taxes U.S. citizens, residents, and corporations on their worldwide 

income, whether derived in the United States or abroad. The United States generally taxes 

nonresident alien individuals and foreign corporations on all their income that is effectively 

connected with the conduct of a trade or business in the United States (sometimes referred to as 

“effectively connected income”). The United States also taxes nonresident alien individuals and 

foreign corporations on certain U.S.-source income that is not effectively connected with a U.S. 

trade or business. 

Income of a nonresident alien individual or foreign corporation that is effectively 

connected with the conduct of a trade or business in the United States generally is subject to U.S. 

tax in the same manner and at the same rates as income of a U.S. person. Deductions are 

allowed to the extent that they are related to effectively connected income. A foreign 

corporation also is subject to a flat 30-percent branch profits tax on its “dividend equivalent 

amount,” which is a measure of the effectively connected earnings and profits of the corporation 

that are removed in any year from the conduct of its U.S. trade or business. In addition, a foreign 

corporation is subject to a flat 30-percent branch-level excess interest tax on the excess of the 

amount of interest that is deducted by the foreign corporation in computing its effectively 

connected income over the amount of interest that is paid by its U.S. trade or business. 

U.S.-source fixed or determinable annual or periodical income of a nonresident alien 

individual or foreign corporation (including, for example, interest, dividends, rents, royalties, 

salaries, and annuities) that is not effectively connected with the conduct of a U.S. trade or 

business is subject to U.S. tax at a rate of 30 percent of the gross amount paid. Certain insurance 

premiums earned by a nonresident alien individual or foreign corporation are subject to U.S. tax 

at a rate of one or four percent of the premiums. These taxes generally are collected by means of 

withholding. 

Specific statutory exemptions from the 30-percent withholding tax are provided. For 

example, certain original issue discount and certain interest on deposits with banks or savings 

institutions are exempt from the 30-percent withholding tax. An exemption also is provided for 

certain interest paid on portfolio debt obligations. In addition, income of a foreign government 

or international organization from investments in U.S. securities is exempt from U.S. tax. 

U.S.-source capital gains of a nonresident alien individual or a foreign corporation that 

are not effectively connected with a U.S. trade or business generally are exempt from U.S. tax, 

with two exceptions: (1) gains realized by a nonresident alien individual who is present in the 
 

5

United States for at least 183 days during the taxable year, and (2) certain gains from the 

disposition of interests in U.S. real property. 

Rules are provided for the determination of the source of income. For example, interest 

and dividends paid by a U.S. citizen or resident or by a U.S. corporation generally are considered 

U.S.-source income. Conversely, dividends and interest paid by a foreign corporation generally 

are treated as foreign-source income. Special rules apply to treat as foreign-source income (in 

whole or in part) interest paid by certain U.S. corporations with foreign businesses and to treat as 

U.S.-source income (in whole or in part) dividends paid by certain foreign corporations with U.S. 

businesses. Rents and royalties paid for the use of property in the United States are considered 

U.S.-source income. 

Because the United States taxes U.S. citizens, residents, and corporations on their 

worldwide income, double taxation of income can arise when income earned abroad by a U.S. 

person is taxed by the country in which the income is earned and also by the United States. The 

United States seeks to mitigate this double taxation generally by allowing U.S. persons to credit 

foreign income taxes paid against the U.S. tax imposed on their foreign-source income. A 

fundamental premise of the foreign tax credit is that it may not offset the U.S. tax liability on 

U.S.-source income. Therefore, the foreign tax credit provisions contain a limitation that ensures 

that the foreign tax credit offsets only the U.S. tax on foreign-source income. The foreign tax 

credit limitation generally is computed on a worldwide basis (as opposed to a “per-country” 

basis). The limitation is applied separately for certain classifications of income. In addition, 

special limitations apply to credits for foreign taxes imposed on foreign oil and gas extraction 

income and foreign oil related income. 

For foreign tax credit purposes, a U.S. corporation that owns 10 percent or more of the 

voting stock of a foreign corporation and receives a dividend from the foreign corporation (or is 

otherwise required to include in its income earnings of the foreign corporation) is deemed to 

have paid a portion of the foreign income taxes paid by the foreign corporation on its 

accumulated earnings. The taxes deemed paid by the U.S. corporation are included in its total 

foreign taxes paid and its foreign tax credit limitation calculations for the year in which the 

dividend is received. 
 

6

B. U.S. Tax Treaties 

The traditional objectives of U.S. tax treaties have been the avoidance of international 

double taxation and the prevention of tax avoidance and evasion. Another related objective of 

U.S. tax treaties is the removal of the barriers to trade, capital flows, and commercial travel that 

may be caused by overlapping tax jurisdictions and by the burdens of complying with the tax 

laws of a jurisdiction when a person’s contacts with, and income derived from, that jurisdiction 

are minimal. To a large extent, the treaty provisions designed to carry out these objectives 

supplement U.S. tax law provisions having the same objectives; treaty provisions modify the 

generally applicable statutory rules with provisions that take into account the particular tax 

system of the treaty partner. 

The objective of limiting double taxation generally is accomplished in treaties through 

the agreement of each country to limit, in specified situations, its right to tax income earned from 

its territory by residents of the other country. For the most part, the various rate reductions and 

exemptions agreed to by the source country in treaties are premised on the assumption that the 

country of residence will tax the income at levels comparable to those imposed by the source 

country on its residents. Treaties also provide for the elimination of double taxation by requiring 

the residence country to allow a credit for taxes that the source country retains the right to 

impose under the treaty. In addition, in the case of certain types of income, treaties may provide 

for exemption by the residence country of income taxed by the source country. 

Treaties define the term “resident” so that an individual or corporation generally will not 

be subject to tax as a resident by both of the countries. Treaties generally provide that neither 

country will tax business income derived by residents of the other country unless the business 

activities in the taxing jurisdiction are substantial enough to constitute a permanent establishment 

or fixed base in that jurisdiction. Treaties also contain commercial visitation exemptions under 

which individual residents of one country performing personal services in the other will not be 

required to pay tax in that other country unless their contacts exceed certain specified minimums 

(e.g., presence for a set number of days or earnings in excess of a specified amount). Treaties 

address passive income such as dividends, interest, and royalties from sources within one 

country derived by residents of the other country either by providing that such income is taxed 

only in the recipient’s country of residence or by reducing the rate of the source country’s 

withholding tax imposed on such income. In this regard, the United States agrees in its tax 

treaties to reduce its 30-percent withholding tax (or, in the case of some income, to eliminate it 

entirely) in return for reciprocal treatment by its treaty partner. 

In its treaties, the United States, as a matter of policy, generally retains the right to tax its 

citizens and residents on their worldwide income as if the treaty had not come into effect. The 

United States also provides in its treaties that it will allow a credit against U.S. tax for income 

taxes paid to the treaty partners, subject to the various limitations of U.S. law. 

The objective of preventing tax avoidance and evasion generally is accomplished in 

treaties by the agreement of each country to exchange tax-related information. Treaties generally 

provide for the exchange of information between the tax authorities of the two countries when 

such information is necessary for carrying out provisions of the treaty or of their domestic tax 

laws. The obligation to exchange information under the treaties typically does not require either 
 

7

country to carry out measures contrary to its laws or administrative practices or to supply 

information that is not obtainable under its laws or in the normal course of its administration or 

that would reveal trade secrets or other information the disclosure of which would be contrary to 

public policy. The Internal Revenue Service (the “IRS”) and the treaty partner’s tax authorities 

can request specific tax information from a treaty partner. This can include information to be 

used in a criminal investigation or prosecution. 

Administrative cooperation between countries is enhanced further under treaties by the 

inclusion of a “competent authority” mechanism to resolve double taxation problems arising in 

individual cases and, more generally, to facilitate consultation between tax officials of the two 

governments. 

Treaties generally provide that neither country may subject nationals of the other country 

(or permanent establishments of enterprises of the other country) to taxation more burdensome 

than the tax it imposes on its own nationals (or on its own enterprises). Similarly, in general, 

neither treaty country may discriminate against enterprises owned by residents of the other 

country. 

At times, residents of countries that do not have income tax treaties with the United 

States attempt to use a treaty between the United States and another country to avoid U.S. tax. 

To prevent third-country residents from obtaining treaty benefits intended for treaty country 

residents only, treaties generally contain an “anti-treaty shopping” provision that is designed to 

limit treaty benefits to bona fide residents of the two countries.
 

8

III. OVERVIEW OF TAXATION IN BELGIUM4

A. National Income Taxes 

Overview

 Belgium imposes income tax on net income at the national and local levels. The 

definition of income subject to tax is expansive and includes capital gains. Taxable income is 

computed on an annual basis and is either taxed by assessment or by a withholding tax. Any 

withholding tax paid may be credited against the income tax liability, and any excess is refunded. 

Aside from a few special exceptions, Belgium residents and nonresidents are generally subject to 

the same tax rules and tax rates on Belgian-source income. 

Individuals

 Individuals resident in Belgium are subject to tax on their worldwide income. An 

individual’s taxable income is the sum of the net income from each of the following categories: 

income from real property, income from personal property (e.g., dividends, interest, and 

royalties), income from professional activities, and miscellaneous income. Losses of one 

category of income may not be set off against income of another category. Losses incurred with 

respect to professional activities may be carried forward indefinitely and offer again future 

income from such activities. No losses may be deducted with respect to income from personal or 

real property. Belgian-source dividends and interest income are subject to a final withholding 

tax of 25 percent (reduced to 15 percent or 20 percent in certain cases) and 15 percent, 

respectively. Foreign-source dividends and interest payments, however, must be included in the 

individual income tax return of the recipient. A withholding tax is also imposed on income from 

real property located in Belgium. The withholding tax rate varies depending on the region in 

which the property is located. Capital gains realized on the sale of business assets are taxable, as 

are capital gains derived from speculative transactions, the sale of developed and undeveloped 

real estate within five years of acquisition, the sale of a substantial participation (more than 25 

percent) in a resident corporation to a nonresident legal entity, and the sale of certain intangible 

rights. Certain deductions are allowed against the total taxable income, including alimony 

payments, gifts and charitable contributions, remuneration paid to household staff, child day 

care, restoration of classified real property and landscape, and interest on mortgage loans. The 

rate structure is progressive and extends from 25 percent for taxable income up to €7,420 

($9,796) to 50 percent for taxable income exceeding €32,270 ($42,605).5

 Certain items of 

 4

 The information in this section relates to foreign law and is based on the Joint Committee 

staff’s review of publicly available secondary sources, including in large part Jacques Malherbe and 

Pascal Faes, Business Operations in Belgium, Tax Management Portfolio No. 953-2nd. The description 

is intended to serve as a general overview; it may not be fully accurate in all respects, as many details 

have been omitted and simplifying generalizations made for ease of exposition. 

5

 The quoted tax rates and local currency amounts apply in 2007. U.S. dollar equivalents were 

calculated using the exchange rate for January 1, 2007 according to OANDA’s FX Converter, available at 

www.oanda.com. See Article 130 of the Belgian Tax Code, Belgium Ministry of Finances, available at 
 

9

income (e.g., capital gains) are taxable at separate tax rates unless aggregation with other income 

taxable at the regular progressive rates is more beneficial. A basic allowance of €6,040 ($7,974) 

is tax free; the allowance is increased to €7,320 ($9,664) for single parents or disabled taxpayers. 

Additional allowances are granted for dependents. The allowance for four children, for example 

is €11,980 ($15,817). The national income tax is subject to a municipal surcharge ranging 

generally from zero to nine percent (no explicit maximum is provided), depending on the 

municipality. 

Corporations

 Corporations resident in Belgium are subject to tax on their worldwide income. A 

corporation is any company, association, establishment, or institution that has legal personality 

and is engaged in business or in profit-making activities. A corporation is a resident of Belgium 

if it has its legal seat, main establishment, or place of effective management in Belgium. 

 In general, all income derived by a corporation is taxable business income; this includes 

income from real property or personal property. Capital gains are normally taxed at the ordinary 

rates, but capital gains on shares may be exempt. The standard corporate tax rate is 33 percent; 

however, most companies with taxable income of €322,500 ($425,787) or less are subject to 

progressive rates ranging from 24.25 percent to 34.5 percent. In addition, the corporate tax rates 

are increased by a three percent austerity surcharge. 

 Dividends paid by a resident company to a resident shareholder are subject to a 25-

percent withholding tax. The rate is reduced to 15 percent on dividends distributed with respect 

to certain shares issued on or after January 1, 1994, certain qualifying shares issued in 1982 or 

1983, and shares of investment companies. If the resident shareholder is a corporation, it may 

benefit from the dividends received deduction. Under the dividends received deduction, 95 

percent of the dividends paid to a resident corporation are exempt from the withholding tax if: 

(1) the distributing corporation is subject to the corporate income tax or a tax similar to the 

Belgian corporate income tax; (2) the recipient corporation owns at least 10 percent of the capital 

or has an investment value of at least €1,200,000 ($1,584,324) in the distributing corporation; 

and (3) the shares with respect to which the dividends are distributed have been held in full 

ownership for an uninterrupted period of one year and qualify as financial fixed assets. Belgiansource interest on bonds, public securities, loans, and deposits is subject to a withholding tax of 

15 percent. A 15-percent withholding tax is payable on Belgian-source income arising from the 

rental or use of, or the grant of rights over, any type of personal property. However, royalties 

paid to resident companies are not subject to withholding tax but are instead subject to corporate 

income tax on their net amount. 

 

www.fisconet.fgov.be; IBFD European Taxation Analysis, Belgium, available at 

www.checkpoint.riag.com. 
 

10

B. International Aspects of Taxation in Belgium 

Individuals

Individuals resident in Belgium are taxed on their worldwide income. An individual is 

considered a resident of Belgium if his or her main home or center of economic interests is in 

Belgium. Nonresident individuals are subject to the same tax rules and tax rates on their 

Belgian-source income as those generally applicable to resident individuals. Belgian-source 

income includes: income from real property located in Belgium; personal property income (e.g., 

dividends, interest, and royalties) produced or collected in Belgium; profits generated through a 

Belgian establishment; gains derived from a professional activity exercised in Belgium; profits 

and gains derived from a former independent professional activity exercised in Belgium; certain 

employment; certain pension and annuities; income derived by nonresident public performers 

and athletes from performances in Belgium; and miscellaneous income obtained in Belgium. For 

nonresidents, the municipal surcharge is replaced by a flat six-percent surcharge levied at the 

national level. Nonresident individuals who have maintained a permanent abode in Belgium are 

entitled to most of the same personal deductions as resident individuals. Belgium imposes a 25-

percent (reduced to 15 percent or 20 percent in certain cases) withholding tax on dividends paid 

by resident companies to nonresident individuals. Interest and royalty income arising from 

Belgian sources are subject to a 15-percent withholding tax. Belgian-source capital gains on the 

sale of business assets are taxable, but capital gains on investment assets (other than real 

property) are not taxable. 

Corporations

Companies resident in Belgium are generally taxed on their worldwide income. A 

foreign company is subject to the same tax rules and tax rates as resident companies if it has an 

establishment in Belgium or receives Belgian-source income. A Belgian establishment is any 

fixed installation through which a foreign enterprise conducts, either wholly or partly, its 

business activities in Belgium. The activities of a nonresident’s representative are also deemed 

to constitute a Belgium establishment. Belgian-source income includes: income from real 

property located in Belgium; dividends, interest, and royalties produced or collected in Belgium; 

profits generated through a Belgian establishment; gains derived from a professional activity 

exercised in Belgium; profits and gains derived from a former independent professional activity 

exercised in Belgium; certain employment income; certain pension and annuities; income 

derived by nonresident public performers and athletes from performances in Belgium; and 

miscellaneous income obtained in Belgium. 

Dividends paid by resident companies to nonresident corporate shareholders are subject 

to withholding tax at a rate of 25 percent (reduced to 15 percent or 20 percent in certain cases). 

Belgian-source interest payments and royalties paid to nonresident companies are subject to a 

withholding tax rate of 15 percent. A real estate withholding tax may also be levied against 

nonresident companies. 
 

11

Relief from double taxation

In the absence of a treaty, relief from double taxation of foreign source income may be 

provided in the form of an exemption, credit, or tax reduction, depending on the type of income. 

For example, Belgian residents are taxed at one-half the normal tax rate on income from property 

situated abroad, professional income earned and taxed abroad, and miscellaneous income that 

includes profits and gains derived and taxed abroad, subsidies paid by foreign entities, and 

alimony payments due from nonresidents. 
 

12

C. Other Taxes 

Inheritance, gift, and wealth taxes

Belgium imposes an inheritance tax on all assets of a deceased person if the deceased was 

a resident in Belgium at the time of death. If the deceased was residing abroad at the time of his 

or her death, the Belgian inheritance tax is limited to Belgian real property that was owned, 

wholly or partly, by the deceased. The property of the deceased is valued at its market value at 

the time of death. The inheritance tax rate varies depending on the inherited amount, the degree 

of kinship between the deceased and the beneficiary, and the region in which the deceased was 

domiciled. A gift tax is levied on gifts of real property located in Belgium and gifts of personal 

property, wherever located, that are evidenced by a registered written document. The rate of the 

gift tax is determined by the region in which the donor permanently resides. Belgium does not 

levy a wealth tax. 

Social security

Social security contributions are levied on gross income at a total contribution rate of 

13.07 percent. For self-employed individuals, the contribution rate varies depending on net 

income. Social security contributions are deductible for income tax purposes. 

Other indirect taxes

Belgium imposes a value added tax (“VAT”) on the consumption of goods and services. 

Although the VAT is levied at each stage of the economic chain, it is ultimately borne by the 

final customer. The VAT due on any sale is a percentage of the sale price less all the tax paid at 

the preceding stages. The standard VAT rate is 21 percent. The rate is reduced for certain 

products and services and in some cases is zero. 

Belgium also imposes registration duties on documents recorded in an official registry, 

stamp fees, road tax, betting tax and tax on gambling machines, tax on the right to use highways, 

excise duty on petroleum vehicles, and tax on employee profit-sharing. Also, companies are 

subject to a commissions’ tax of 300 percent for failure to document certain payments that 

constitute earned income. 

Ecotaxes are regional taxes levied on a product that is placed on the market for 

consumption. Ecotaxes are imposed because of the negative ecological effects the product may 

generate. The following categories of products are subject to ecotaxes: drink receptacles, 

disposable items, batteries, and receptacles for certain industrial products.
 

13

IV. THE UNITED STATES AND BELGIUM: 

CROSS-BORDER INVESTMENT AND TRADE 

A. Introduction 

A principal rationale for negotiating tax treaties is to improve the business climate for 

business persons in one country who might aspire to sell goods and services to customers in the 

other country and to improve the investment climate for investors in one country who might 

aspire to own assets in the other country. Clarifying the application of the two nations’ income 

tax laws makes more certain the tax burden that will arise from different transactions, but may 

also increase or decrease that burden. Where there is, or where there is the potential to be, 

substantial cross-border trade or investment, changes in the tax structure applicable to the income 

from trade and investment has the potential to alter future flows of trade and investment. 

Therefore, in reviewing the proposed protocol it may be beneficial to examine the cross-border 

trade and investment between the United States and Belgium. Whether measured by trade in 

goods or services or when measuring by direct and non-direct cross-border investment, the 

United States and Belgium engage in significant cross-border activity. The income from crossborder trade and investment generally is subject to net-basis income tax in either the United 

States or Belgium and in many cases also is subject to gross basis withholding taxes in the source 

country. 
 

14

B. Overview of International Transactions Between 

the United States and Belgium 

Cross-border trade

The current account consists of three primary components: trade in goods; trade in 

services; and payment of income on assets invested abroad. While detail regarding the balance 

of payments between the United States and Belgium is not publicly available, one can document 

that the value of trade between the United States and Belgium is large. In 2005, the United 

States exported $18.7 billion of goods and services to Belgium and imported $13.0 billion in 

goods and services from Belgium. This made Belgium the United States’ 12th largest 

merchandise and service export destination and the 24th largest source of imported 

merchandise.6

 

Numerous disparate activities constitute trade in services. Among the sources of receipts 

from exported services are payments for transportation of goods, travel by persons and passenger 

fares, payments for professional services such as management consulting, architecture, 

engineering, and legal services, financial services, insurance services, computer and information 

services, and film and television tape rentals. Also included in receipts for services are the 

returns from investments in intangible assets in the form of royalties and license fees. In 2005, 

U.S. parent businesses received approximately $535 million in royalty and license fees from 

their affiliates in Belgium. In 2005, U.S. affiliates paid approximately $60 million in royalties 

and license fees to their Belgian parents.7

Cross-border investment

Income from foreign assets is categorized as income from “direct investments” and 

income from “non-direct investments.” Direct investment constitutes assets over which the 

owner has direct control. The Department of Commerce defines an investment as direct when a 

single person owns or controls, directly or indirectly, at least 10 percent of the voting securities 

of a corporate enterprise or the equivalent interest in an unincorporated business. Often the 

income that crosses borders from direct investments is in the form of dividends from a subsidiary 

to a parent corporation, although interest on loans between such related corporations is another 

source of income from a direct investment. In non-direct investments the investor generally does 

not have control over the assets that underlie the financial claims. Non-direct investments 

consist mostly of holdings of corporate equities and corporate and government bonds, generally 

referred to as “portfolio investments,” and bank deposits and loans. Hence, the income from 

non-direct investments generally is interest, dividends, or gains. 

 6

 Bureau of Economic Analysis, U.S. Department of Commerce, “U.S. International Trade in 

Goods and Services, Annual Revision for 2005,” June 9, 2006. 

7

 Bureau of Economic Analysis, U.S. Department of Commerce, “International Economic 

Accounts,” www.bea.gov/international, May 2007. 
 

15

Commensurate with the size of the Belgian economy in comparison to other European 

countries, the value of cross-border investment between the United States and Belgium is smaller 

than that of cross border investment between the United States and other European countries. In 

2005, U.S. persons held direct investments in Belgium valued at $36.7 billion on a historic cost 

basis and Belgian persons held direct investments in the United States valued at $9.7 billion. 

Figure 1, below, documents the value in U.S. direct investment in Belgium and Belgian direct 

investment in the United States on an historical cost basis at year-end for 2001 through 2005. 

Figure 1.−Value of U.S. Direct Investments in Belgium and Belgian Direct Investments

in The United States on an Historical Cost Basis, Year-End 2001-2005

[millions of dollars]

22,589

25,727

27,415

30,218

36,733

15,623

9,777

11,239 11,735

9,712

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2001 2002 2003 2004 2005

Year

Dollars in millions

U.S. Direct Investment

Belgian Direct Investment

Source: Bureau of Economic Analysis, U.S. Department of Commerce, May 2007. 

U.S. direct investments in Belgium produced approximately $3.1 billion in income (net 

of withholding taxes) to U.S. persons in 2005. Belgian direct investments in the United States 

produced approximately $440 million in income (net of withholding taxes) to Belgian persons in 

2005. Figure 2, below, details income from U.S. direct investments in Belgium and Belgian 

direct investments in the United States (net of withholding taxes) for the period 2001-2005. 
 

16

Figure 2.−Income From U.S. Direct Investments in Belgium and Beglian Direct Investments

in The United States (net of withholding taxes), Year End 2001-2005

[millions of dollars]

1,728

1,489

1,952

3,285

3,091

169

782

578

457 442

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2001 2002 2003 2004 2005

Year

Dollars in millions

Income to U.S. Owners

Income to Belgian Owners

Source: Bureau of Economic Analysis, U.S. Department of Commerce, May 2007. 

The data presented above do not report the amount of U.S. or Belgian portfolio 

investment holdings of stocks and bonds (including holdings of U.S. government securities). 

The Bureau of Economic Analysis generally only reports portfolio holdings by country for the 

several largest portfolio investment countries. 
 

17

C. Income Taxes and Withholding Taxes on Cross-Border Income Flows 

The data presented above report the amount of direct investment in Belgium by U.S. 

persons and the amount of direct investment in the United States by Belgian persons. Data from 

tax returns reflect the magnitudes of cross-border investment and trade and income flows 

reported above. In 2003, U.S. corporations with Belgian parent companies had $1.0 billion of 

income subject to tax and paid $0.3 billion in U.S. Federal income taxes.8 U.S. corporations, 

including U.S. parent companies of Belgian controlled foreign corporations, reported the receipt 

of $2.3 billion of dividends from Belgian corporations in 2002.9

 Of the $2.3 billion in dividends 

reported, approximately $0.4 billion reflected the grossed up value of net dividends to account 

for deemed taxes paid to Belgium. U.S. corporations recognized about $2.6 billion in taxable 

income originating in Belgium, including the dividend amounts just cited. This income was 

subject to an average Belgian corporate income tax rate of approximately 17.5 percent (after 

allowing for apportionment and allocation of certain expenses incurred in the United States). 

Data for withholding taxes from 2000 show that Belgium and the United States collected 

approximately the same amounts of receipts, with each country withholding under $100 million 

annually, by withholding tax on respective payments to each other.10 Data on withholding taxes 

may not be an accurate indicator of cross-border investment and income flows, because a 

taxpayer can often control the amount and timing of dividend payments to the home country and 

pays withholding tax only when these payments are made. 

 8

 James R. Hobbs, “Foreign Controlled Domestic Corporations, 2003,” Internal Revenue Service, 

Statistics of Income Bulletin, Summer 2006, pp. 67-112. 

9

 Data Release, “Corporate Foreign Tax Credit, 2002,” Internal Revenue Service, Statistics of 

Income Bulletin, Fall 2006, pp. 285-318. 

10 Data Release, “Foreign Recipients of U.S. Income, 2000,” Internal Revenue Service, Statistics 

of Income Bulletin, Summer 2003, pp. 177-186. 
 

18

D. Analyzing the Economic Effects of Protocols to Income Tax Treaties 

Among other things, tax treaties often change both the amount and timing of income 

taxes and the country (source or residence) that has priority to impose such taxes. If the tax 

treaty changes increase the after-tax return to cross-border trade and investment, or to particular 

forms of trade or investment, in the long run there could be significant economic effects. 

Generally, to the extent a treaty reduces barriers to capital and labor mobility, more efficient use 

of resources will result and economic growth in both countries will be enhanced, although there 

may be negative transitional effects occurring in specific industries or geographic regions. On 

the other hand, tax treaties may also lead to tax base erosion if they create new opportunities for 

tax arbitrage. Tax treaties also often increase and improve information sharing between tax 

authorities. Improvements in information sharing and the limitation of benefits provision should 

reduce the potential for outright evasion of U.S. and Belgian income tax liabilities. 

Generally, a treaty-based reduction in withholding rates will directly reduce U.S. tax 

collections in the near term on payments from the United States to, but will increase U.S. tax 

collections on payments from foreign persons to the United States because of the reduction in 

foreign taxes that are potentially creditable against the U.S. income tax. To the extent that the 

withholding rate reduction encourages more income flows between the treaty parties, this initial 

dampening of collections on payments to foreign persons and related decrease in foreign tax 

credits will begin to reverse. The present treaty’s reductions in dividend withholding rates will 

reduce U.S. withholding tax collections on dividend payments from the United States to 

Belgium. Over the longer term, the withholding tax rate changes coupled with other changes in 

the protocol are likely to cause small revenue increases in later years as capital flows increase 

and from improved allocation of capital. 

However, this simple analysis is incomplete. A complete analysis of a withholding 

change, or any other change in a treaty, would account for both tax and non-tax related factors, 

such as portfolio capital needs in the affected countries, and the corresponding relation between 

current and financial accounts. The potential for future growth in each country is an important 

determinant of cross-border investment decisions. In sum, even in the short run, the larger 

macroeconomic outlook, compared to treaty modifications, is likely to be a more important 

determinant of future cross-border income and investment flows and the related tax collections. 
 

19

V. EXPLANATION OF PROPOSED TREATY AND PROTOCOL 

Article 1. General Scope

In general

The general scope article describes the persons who may claim the benefits of the 

proposed treaty. It also includes a “saving clause” provision similar to provisions found in most 

U.S. income tax treaties. 

The proposed treaty generally applies to residents of the United States and to residents of 

Belgium. The determination of whether a person is a resident of the United States or Belgium is 

made under the provisions of Article 4 of the treaty (Resident). 

The proposed treaty provides that it does not restrict in any manner any exclusion, 

exemption, deduction, credit, or other allowance accorded by internal law, by any other 

agreement between the United States and Belgium, or by any multilateral agreement to which the 

United States and Belgium are parties, except in the case of a resident of Belgium who is also a 

citizen, former citizen, or former long-term resident of the United States. In the case of such a 

person, Article 22, paragraph 4(a) provides relief from double taxation. Thus, the proposed 

treaty will not apply to increase the tax burden of a resident of either the United States or 

Belgium. 

According to the Treasury Department's Technical Explanation (hereinafter referred to as 

the “Technical Explanation”), the fact that the proposed treaty applies only to a taxpayer's benefit 

does not mean that a taxpayer may select inconsistently among treaty and internal law provisions 

in order to minimize its overall tax burden. In this regard, the Technical Explanation sets forth 

the following example. Assume a resident of Belgium has three separate businesses in the 

United States. One business is profitable and constitutes a U.S. permanent establishment. The 

other two businesses generate effectively connected income as determined under the Code, but 

do not constitute permanent establishments as determined under the proposed treaty; one 

business is profitable and the other business generates a net loss. Under the Code, all three 

businesses would be subject to U.S. income tax, in which case the losses from the unprofitable 

business could offset the taxable income from the other businesses. On the other hand, only the 

income of the business which gives rise to a permanent establishment is taxable by the United 

States under the proposed treaty. The Technical Explanation makes clear that the taxpayer may 

not invoke the proposed treaty to exclude the profits of the profitable business that does not 

constitute a permanent establishment and invoke U.S. internal law to claim the loss of the 

unprofitable business that does not constitute a permanent establishment to offset the taxable 

income of the permanent establishment.11

Notwithstanding the foregoing rules, the proposed treaty provides that, in interpreting or 

applying the treaty and in determining whether a taxation measure is within the scope of the 

treaty, the dispute resolution procedures under its mutual agreement article (Article 24) take 

 11 See Rev. Rul. 84-17, 1984-1 C.B. 308. 
 

20

precedence over the corresponding provisions of paragraph 3 of Article XXII (Consultation) of 

the General Agreement on Trade in Services (“GATS”). 

The proposed treaty also provides that the provisions of Article XVII (Denial of Benefits) 

of GATS do not apply to any taxation measure, unless the competent authorities agree that the 

measure is not within the scope of the nondiscrimination provisions (Article 23) of the treaty. 

The Technical Explanation points out that consequently, the consultation provision of GATS 

may not be used to bring a dispute before the World Trade Organization unless the competent 

authorities of the United States and Belgium have determined that the relevant taxation measure 

is not within the nondiscrimination provision (Article 23) of the treaty. For purposes of this 

provision, the term “measure” means a law, regulation, rule, procedure, decision, administrative 

action, or any similar provision or action. 

Saving clause

Like all U.S. income tax treaties and the U.S. Model treaty, the proposed treaty includes a 

“saving clause.” Under this clause, with specific exceptions described below, the proposed 

treaty does not affect the taxation by either treaty country of its residents or its citizens. By 

reason of this saving clause, unless otherwise specifically provided in the proposed treaty, the 

United States may continue to tax its citizens who are residents of Belgium as if the treaty were 

not in force. For purposes of the proposed treaty (and, thus, for purposes of the saving clause), 

the term “residents,” which is defined in Article 4 (Resident), includes corporations and other 

entities as well as individuals. 

The proposed treaty contains a provision under which a former citizen or long-term 

resident of the United States may be taxed under United States law for the period of ten years 

following the loss of citizenship or long-term resident status. Section 877 of the Code 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. 

Under U.S. domestic law, an individual is considered a “long-term resident” of the 

United States if the individual (other than a citizen of the United States) was a lawful permanent 

resident of the United States in at least eight of the 15 taxable years ending with the taxable year 

in which the individual ceased to be a long-term resident. However, 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 for such year 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. 

The saving clause refers to provisions in paragraph 4 of Article 22 (Relief from Double 

Taxation) that apply in the situation in which a resident of Belgium is a citizen of the United 

States, or a former citizen or former long-term resident of the United States, and is therefore 

subject to United States tax in accordance with the saving clause. These provisions of Article 22 

generally serve to mitigate double taxation by providing an exemption or deduction from Belgian 

tax on the income taxed in the United States, or by providing a credit against U.S. tax for tax 

paid or accrued to Belgium, or by treating U.S.-source income as Belgian-source solely for 

purposes of the credit against U.S. tax under Article 22. 
 

21

Exceptions to the saving clause are provided for the following benefits conferred by the 

either treaty country: the allowance of correlative adjustments when the profits of an associated 

enterprise are adjusted by the other country (Article 9, paragraph 2); provisions for taxation of 

certain pension distributions, alimony and child support payments in only one of the treaty 

countries, and taxation of social security benefits only in the country of the recipient's residence 

(Article 17, paragraphs 1(b), 2, and 5); deferral of tax on income earned on pension plans that are 

resident in the other country, and U.S. deductibility of contributions (and excludability of 

benefits) under a pension plan of an employer in Belgium (Article 17, paragraphs 6 and 9); relief 

from double taxation through the provision of a foreign tax credit, or through exemption of 

income earned in the United States (Article 22); protection from discriminatory tax treatment 

with respect to transactions with residents of the other country (Article 23); and benefits under 

the mutual agreement procedures of the treaty (Article 24). 

In addition, the saving clause does not apply to certain benefits conferred by either treaty 

country upon individuals who neither are citizens nor have immigrant status. Under this set of 

exceptions to the saving clause, the specified treaty benefits are available to, for example, a 

citizen of Belgium who spends enough time in the United States to be taxed as a U.S. resident 

but who has not acquired U.S. permanent residence status (i.e., does not hold a “green card”). 

The benefits that are covered under this set of exceptions are the allowance of a host-country 

deduction for contributions and host-country deferral of taxation of accrued benefits under 

pension funds that are resident in the source country (Article 17, paragraph 7), and exemptions 

from host country taxation for certain income for government service (Article 18), certain 

income received by students, trainees, teachers and researchers (Article 19), and certain income 

received by members of diplomatic missions and consular posts (Article 27). 

Fiscally transparent entities

The proposed treaty contains special rules for fiscally transparent entities that are 

identical to those in the U.S. Model treaty. Under these rules, as explained in the Technical 

Explanation, income derived through an entity that is fiscally transparent under the laws of either 

treaty country is considered to be the income of a resident of one of the treaty countries only to 

the extent that the income is subject to tax in that country as the income of a resident. For 

example, if a Belgian company pays interest to an entity that is treated as fiscally transparent for 

U.S. tax purposes, the interest will be considered to be derived by a resident of the United States 

only to the extent that U.S. tax laws treat one or more U.S. residents (whose status as U.S. 

residents is determined under U.S. tax laws) as deriving the interest income for U.S. tax 

purposes. 

The Technical Explanation states that these rules for income derived through fiscally 

transparent entities apply regardless of where the entity is organized (i.e., in the United States, 

Belgium, or a third country). The Technical Explanation also states that these rules apply even if 

the entity is viewed differently under the tax laws of the other country. As an example, the 

Technical Explanation states that income from U.S. sources received by an entity organized 

under the laws of the United States, which is treated for Belgian tax purposes as a corporation 

and is owned by a Belgian shareholder who is a Belgian resident for Belgian tax purposes, is not 

considered derived by the shareholder of that corporation even if, under the tax laws of the 
 

22

United States, the entity is treated as fiscally transparent. Rather, for purposes of the proposed 

treaty, the income is treated as derived by the U.S. entity. 

The Technical Explanation generally defines fiscally transparent entities as entities in 

which income derived by such entities is taxed at the beneficiary, member, or participant level, 

under the law of either the United States or Belgium. Entities are not considered fiscally 

transparent if the entity tax may be relieved under an integrated system. For example, in the 

United States, a partnership, common investment trust under Code section 584, or grantor trust, 

or a limited liability company ("LLC") that is treated for tax purposes as a partnership or 

disregarded entity, is considered a fiscally transparent entity. 

The Technical Explanation also states that the treatment of fiscally transparent entities is 

not an exception to the saving clause. Therefore, such treatment does not preclude a treaty 

country from taxing an entity that is treated as a resident of that country under its tax laws. For 

example, if a U.S. LLC with Belgian members 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

The proposed treaty applies to all taxes on income irrespective of the manner in which 

they are levied, including taxes on gains from the alienation of property. In the case of Belgium, 

both the present treaty and the proposed treaty apply to the individual income tax, the corporate 

income tax, the income tax on legal entities, and the income tax on nonresidents; they also apply 

to the prepayments and surcharges on these taxes. In the case of the United States, both the 

present treaty and the proposed treaty apply to the Federal income taxes imposed by the Code, 

but social security taxes are specifically excluded under the proposed treaty. The proposed 

treaty, like the U.S. Model treaty but unlike the present treaty, also applies to Federal excise 

taxes imposed with respect to private foundations. 

The proposed treaty, like the present treaty, applies to any taxes that are identical or 

substantially similar to the taxes described in the preceding paragraph and that are imposed after 

the signing of the proposed treaty in addition to or in place of existing taxes. This provision 

generally is found in U.S. income tax treaties. The proposed treaty obligates the competent 

authority of each country to notify the competent authority of the other country of any changes in 

its internal taxation or other laws that significantly affect a country’s obligations under the 

proposed treaty. The proposed treaty, unlike the present treaty, does not specify the manner and 

frequency with which such notification must be provided and does not require that the competent 

authorities notify each other of any official published materials concerning the application of the 

proposed treaty. These changes bring the proposed treaty more in line with the U.S. Model 

treaty.

Article 3. General Definitions

The proposed treaty provides definitions of a number of terms for purposes of the 

proposed treaty. Certain of the standard definitions found in most U.S. income tax treaties are 

included in the proposed treaty. 
 

23 

The term “person” includes an individual, an estate, a trust, a partnership, a company, and 

any other body of persons. 

A “company” under the proposed treaty is any body corporate or any entity that is treated 

as a body corporate for tax purposes under the laws of the Contracting State in which it is 

organized. 

The terms “enterprise of a Contracting State” and “enterprise of the other Contracting 

State” mean, respectively, an enterprise carried on by a resident of a treaty country and an 

enterprise carried on by a resident of the other treaty country. The term “enterprise” applies to 

the carrying on of any business. The term “business” includes the performance of professional 

services and of other activities of an independent character. 

The proposed treaty provides that the terms “enterprise of a Contracting State” and 

“enterprise of the other Contracting State” also include an enterprise carried on by a resident of a 

Contracting State through an entity that is treated as fiscally transparent in the residence treaty 

country. 

The proposed treaty defines “international traffic” as any transport by a ship or aircraft, 

except when the transport is solely between places in a treaty country. Accordingly, purely 

domestic transport within the United States does not constitute “international traffic.” Similarly, 

a “cruise to nowhere,” i.e., a cruise beginning and ending n a port in the same treaty country with 

no stops in a foreign port, would not constitute international traffic. 

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 U.S. competent authority function has been delegated to the Commissioner of Internal 

Revenue, who has re-delegated the authority to the Deputy Commissioner (International) LMSB. 

On interpretative issues, the latter acts with the concurrence of the Associate Chief Counsel 

(International) of the IRS. 

The term “Belgium” means the Kingdom of Belgium, which, when used in a 

geographical sense includes 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 term “United States” means the United States of America (including the States 

thereof and the District of Columbia), but does not include Puerto Rico, the Virgin Islands, 

Guam, or any other U.S. possession or territory. The term “United States” also includes the 

territorial sea of the United States and any area beyond the territorial sea that is designated as an 

area within which the United States, in compliance with its legislation and in conformity with 

international law, exercises sovereign rights in respect of the exploration and exploitation of the 

natural resources of the seabed, the subsoil, and the superjacent waters. The Technical 

Explanation states that the extension of the term to such areas applies only if the person, 

property, or activity to which the proposed treaty is being applied is connected with such natural 

resource exploration or exploitation. 
 

24 

The term “national” of a treaty country means: (1) any individual possessing the 

nationality or citizenship of that treaty country; and (2) any legal person, partnership, or 

association deriving its status as such from the laws in force in that treaty country. 

The term “pension fund” means any person established in a treaty country that (1) 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 (2)(a) in the case of Belgium, is an entity 

organized under Belgian law and regulated by the Bank Finance and Insurance Commission, or 

(b) in the case of the United States, is generally exempt from U.S. income taxation with respect 

to the above-described activities. The proposed treaty follows the U.S. Model treaty in 

eliminating the defined term “qualified governmental entity.” 

The proposed treaty also contains the standard provision that, unless the context 

otherwise requires or the competent authorities agree upon a common meaning pursuant to 

Article 24 (Mutual Agreement Procedure), all terms not defined in the proposed treaty have the 

meaning pursuant to the respective tax laws of the country that is applying the treaty. 

Article 4. Resident

The assignment of a country of residence is important because the benefits of the 

proposed treaty generally are available only to a resident of one of the treaty countries as that 

term is defined in the proposed treaty. Issues arising because of dual residency, including 

situations of double taxation, may be avoided by the assignment of one treaty country as the 

country of residence when under the internal laws of the treaty countries a person is a resident of 

both countries. 

Internal taxation rules

United States

Under U.S. law, the residence of an individual is important because a resident alien, like 

a U.S. citizen, is taxed on his or her worldwide income, while a nonresident alien is taxed only 

on certain U.S.-source income and on income that is effectively connected with a U.S. trade or 

business. An individual who spends sufficient time in the United States in any year or over a 

three-year period generally is treated as a U.S. resident. A permanent resident for immigration 

purposes (that is, a “green card” holder) also is treated as a U.S. resident. 

Under U.S. law, a company is taxed on its worldwide income if it is a “domestic 

corporation.” A domestic corporation is one that is created or organized in the United States or 

under the laws of the United States, a State, or the District of Columbia. 

Belgium

Under Belgian law, resident individuals are subject to tax on their worldwide income, 

while nonresident individuals generally are subject to tax only on income arising in Belgium. An 

individual is considered to be a resident of Belgium if he or she has his or her domicile or the 

seat of his or her wealth in Belgium. Domicile is considered to be the place where a person is 

mainly and permanently established. Seat of wealth is considered to be the place from which a 
 

25 

person administers his or her wealth or patrimonial interests, regardless of the location of the 

underlying assets. A nonresident individual is an individual who does not have his or her 

domicile or seat of wealth in Belgium. 

Companies that are resident in Belgium are subject to tax on their worldwide income. A 

company is resident in Belgium if it has its statutory seat, its principal establishment, or its seat 

of management or administration in Belgium. Companies that are not resident in Belgium pay 

tax on income of their Belgian establishments and on Belgian-source income. 

Proposed treaty rules

Article 4 provides rules to determine whether a person is a resident of the United States 

or Belgium under the proposed treaty. The rules generally are consistent with the rules of the 

U.S. Model treaty. 

The proposed treaty generally defines “resident of a Contracting State” to mean any 

person who, under the laws of that State, is liable to tax in that State by reason of the person’s 

domicile, residence, citizenship, place of management, place of incorporation, or any other 

criterion of a similar nature. The term “resident of a Contracting State” does not include any 

person who is liable to tax in that State only on income from sources in that State or on profits 

attributable to a permanent establishment in that State. Accordingly, although not explicitly 

stated in the proposed treaty, an enterprise of Belgium with a permanent establishment in the 

United States does not become a resident of the United States as a result of its U.S. permanent 

establishment: The enterprise generally is liable to tax by the United States only on income 

attributable to its U.S. permanent establishment, not on its worldwide income. 

The proposed treaty makes explicit the generally understood practice of including in the 

definition of “resident of a Contracting State” the two treaty countries and any political 

subdivisions or local authorities of those countries. 

The proposed treaty includes an exception to the general rule described above that 

residence under internal tax law also determines residence under the treaty. The exception 

applies to a U.S. citizen or an alien lawfully admitted for permanent residence in the United 

States (i.e., a “green card” holder). The exception requires that such a person must satisfy two 

conditions to be considered a resident of the United States under the treaty and thereby qualify 

for treaty benefits. First, the person must have a substantial presence, permanent home, or 

habitual abode in the United States. Second, the person must not be treated as a resident of a 

country other than Belgium under any tax treaty between Belgium and a third country. The U.S. 

Model treaty does not include this exception to the general residence rule, although recent 

treaties have included a similar exception. 

The proposed treaty provides a special rule to treat as residents of a treaty country certain 

legal entities that generally are exempt from tax in that country. The provision applies to a 

pension fund, which is any person established in a treaty country that (1) 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 (2)(a) in the case of Belgium, is an entity organized under Belgian 

law and regulated by the Bank Finance and Insurance Commission, or (b) in the case of the 
 

26 

United States, is generally exempt from U.S. income taxation with respect to the above-described 

activities. The provision also applies to a tax-exempt entity organized under the laws of a treaty 

country and established and maintained in that country (1) to provide pensions or other similar 

retirement benefits pursuant to a plan, or (2) exclusively for religious, charitable, scientific, 

artistic, cultural, or educational purposes. 

The proposed treaty provides a series of tie-breaker rules to determine residence in the 

case of an individual who, under the basic residence definition, would be considered to be a 

resident of both countries. These tie-breaker rules are to be applied in the order in which they 

are described below. Under these rules, an individual is deemed to be a resident of the country in 

which he or she has a permanent home available. If the individual has a permanent home in both 

countries, the individual’s residence is deemed to be the country with which his or her personal 

and economic relations are closer (that is, the individual’s “center of vital interests”). If it cannot 

be determined in which country the individual has his or her center of vital interests, the 

individual is deemed to be a resident of the country in which he or she has an habitual abode. If 

the individual has an habitual abode in both countries or in neither country, the individual is 

deemed to be a resident of the country of which he or she is a national. If the individual is a 

national of both countries or of neither country, the competent authorities of the countries will 

endeavor to settle the question of residence by mutual agreement. 

The proposed treaty also provides a tie-breaker rule for persons other than individuals 

(e.g., companies, trusts, or estates). If, under the general residence rules described above, a 

person other than an individual is a resident of both countries, the proposed treaty requires the 

competent authorities to endeavor to settle the issue of residence by mutual agreement. If the 

competent authorities are unable to reach mutual agreement, then that person will not be entitled 

to claim any benefits provided by the proposed treaty, except those provided by paragraph 1 of 

Article 22 (Relief from Double Taxation), by paragraph 1 of Article 23 (Non-Discrimination), 

and by Article 24 (Mutual Agreement Procedure). 

Fiscally Transparent Entities

The residence treatment of items of income, profit, or gain derived through fiscally 

transparent entities is addressed in paragraph 6 of Article 1 (General Scope) of the proposed 

treaty.

Article 5. Permanent Establishment

The proposed treaty contains a definition of the term “permanent establishment” that 

generally follows the pattern of other recent U.S. income tax treaties, the U.S. model, and the 

OECD model. 

The permanent establishment concept is one of the basic devices used in income tax 

treaties to limit the taxing jurisdiction of the host country and thus to mitigate double taxation. 

Generally, an enterprise that is a resident of one country is not taxable by the other country on its 

business profits unless those profits are attributable to a permanent establishment of the resident 

in the other country. In addition, the permanent establishment concept is used to determine 
 

27 

whether the reduced rates of, or exemptions from, tax provided for dividends, interest, and 

royalties apply, or whether those items of income will be taxed as business profits. 

In general, under the proposed treaty, a permanent establishment is a fixed place of 

business in which the business of an enterprise is wholly or partly carried on. A permanent 

establishment includes a place of management, a branch, an office, a factory, a workshop, a 

mine, an oil or gas well, a quarry, or other place of extraction of natural resources. It also 

includes a building site or a construction or assembly project if it lasts for more than twelve 

months, and includes a an installation used for the exploration for natural resources if it lasts or 

the activity continues in the treaty country for more than twelve months. The Technical 

Explanation states that the twelve month test applies separately to each individual site or project, 

with a series of contracts or projects that are interdependent both commercially and 

geographically treated as a single project. The Technical Explanation further states that if the 

twelve month threshold is exceeded, the site or project constitutes a permanent establishment as 

of the first day that work in the country began. 

The proposed treaty provides that the following activities are deemed not to constitute a 

permanent establishment: (1) the use of facilities solely for storing, displaying, or delivering 

goods or merchandise belonging to the enterprise; (2) the maintenance of a stock of goods or 

merchandise belonging to the enterprise solely for storage, display, or delivery or solely for 

processing by another enterprise; and (3) the maintenance of a fixed place of business solely for 

the purchase of goods or merchandise or for the collection of information for the enterprise. The 

proposed treaty also provides that the maintenance of a fixed place of business solely for the 

purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary 

character does not constitute a permanent establishment. The proposed treaty provides that a 

combination of these activities will not give rise to a permanent establishment, if the 

combination results in an overall activity that is of a preparatory or auxiliary character. This rule 

is consistent with the OECD and the U.S. Model treaties. 

Under the proposed treaty, if a person, other than an independent agent, is acting in a 

treaty country on behalf of an enterprise of the other country and has, and habitually exercises in 

such first country, the authority to conclude contracts in the name of such enterprise, the 

enterprise is deemed to have a permanent establishment in the first country in respect of any 

activities undertaken for that enterprise. This rule does not apply where the activities are limited 

to the preparatory and auxiliary activities described in the preceding paragraph. 

No permanent establishment is deemed to arise, under the proposed treaty, if the agent is 

a broker, general commission agent, or any other agent of independent status, provided that the 

agent is acting in the ordinary course of its business. The Technical Explanation states that 

whether an enterprise and an agent are independent is a factual determination, and that the 

relevant factors in making this determination include: (1) the extent to which the agent operates 

on the basis of instructions from the principal; (2) the extent to which the agent bears business 

risk; and (3) whether the agent has an exclusive or nearly exclusive relationship with the 

principal. 

The proposed treaty provides that the fact that a company that is a resident of one country 

controls or is controlled by a company that is a resident of the other country or that carries on 
 

28 

business in the other country does not in and of itself cause either company to be a permanent 

establishment of the other. 

Article 6. Income from Real Property

This article covers income from real property. The rules governing gains from the sale of 

real property are included in Article 13 (Gains). Under the proposed treaty, income derived by a 

resident of one country from real property situated in the other country may be taxed in that other 

country. This rule and, in general, the other rules of this article are consistent with the rules in 

the U.S. and OECD Model treaties. 

The term “real property” generally has the meaning that it has under the law of the 

country in which the property in question is situated.12 The proposed treaty provides that, 

regardless of internal law definitions, real property also includes property accessory to real 

property, including livestock and equipment used in agriculture and forestry; rights to which the 

provisions of general law respecting landed property apply; usufruct of real property; and rights 

to variable or fixed payments as consideration for the working of, or the right to work, mineral 

deposits, sources, and other natural resources. Ships and aircraft are not regarded as real 

property. 

The proposed treaty specifies that the country in which the property is situated also may 

tax income derived from the direct use, letting, or use in any other form of real property. The 

rules permitting source-country taxation of income from real property also apply to the income 

from real property of an enterprise. This latter rule, according to the Technical Explanation, 

clarifies that the country in which real property is situated may tax the real property income of a 

resident of the other treaty country even if the income is not attributable to that resident’s 

permanent establishment in the source state. This rule is an exception to the general rule in 

Article 7 (Business Profits) that income is taxable in the source country only if it is attributable 

to a permanent establishment in that country. 

The proposed treaty provides that a resident of one treaty country that derives real 

property income from the other treaty country may elect for any taxable year to be subject to netbasis taxation by that other country on the real property income as if the income were attributable 

to a permanent establishment in that other country. This election may be terminated with the 

consent of the competent authority of the country in which the real property is located. 

The Technical Explanation notes that the proposed treaty does not grant an exclusive 

taxing right to the country in which the property is situated; that country is merely given the 

primary right to tax. The proposed treaty does not limit the rate or form of tax that the source 

country may impose other than that the source country must permit a net-basis taxation election.

 12 In the case of the United States, according to the Technical Explanation, the term “real 

property” has the meaning given to it by Treas. Reg. sec. 1.897-1(b). 
 

29 

Article 7. Business Profits

Internal taxation rules

United States

U.S. law distinguishes between the U.S. business income and the other U.S. income of a 

nonresident alien or foreign corporation. A nonresident alien or foreign corporation is subject to 

a flat 30 percent rate (or lower treaty rate) of tax on certain U.S. source income if that income is 

not effectively connected with the conduct of a trade or business within the United States. The 

regular individual or corporate rates apply to income (from any source) that is effectively 

connected with the conduct of a trade or business within the United States. The performance of 

personal services within the United States may constitute a trade or business within the United 

States. 

The treatment of income as effectively connected with a U.S. trade or business depends 

upon whether the source of the income is U.S. or foreign. In general, U.S. source periodic 

income (such as interest, dividends, rents, and wages) and U.S. source capital gains are 

effectively connected with the conduct of a trade or business within the United States if the asset 

generating the income is used in (or held for use in) the conduct of the trade or business or if the 

activities of the trade or business were a material factor in the realization of the income. All 

other U.S. source income of a person engaged in a trade or business in the United States is 

treated as effectively connected with the conduct of a trade or business in the United States 

(under what is referred to as a “force of attraction” rule). 

The income of a nonresident alien individual from the performance of personal services 

within the United States is excluded from U.S.-source income, and therefore is not taxed by the 

United States in the absence of a U.S. trade or business, if the following criteria are met: (1) the 

individual is not in the United States for over 90 days during the taxable year; (2) the 

compensation does not exceed $3,000; and (3) the services are performed as an employee of, or 

under a contract with, a foreign person not engaged in a trade or business in the United States, or 

are performed for a foreign office or place of business of a U.S. person. 

Foreign source income generally is effectively connected income only if the foreign 

person has an office or other fixed place of business in the United States and the income is 

attributable to that place of business. Only three types of foreign source income are considered 

to be effectively connected income: rents and royalties for the use of certain intangible property 

derived from the active conduct of a U.S. business; certain dividends and interest either derived 

in the active conduct of a banking, financing or similar business in the United States or received 

by a corporation the principal business of which is trading in stocks or securities for its own 

account; and certain sales income attributable to a U.S. sales office. Special rules apply for 

purposes of determining the foreign source income that is effectively connected with a U.S. 

business of an insurance company. 

Any income or gain of a foreign person for any taxable year that is attributable to a 

transaction in another year is treated as effectively connected with the conduct of a U.S. trade or 

business if it would have been so treated had it been taken into account in that other year (Code 
 

30 

sec. 864(c)(6)). In addition, if any property ceases to be used or held for use in connection with 

the conduct of a trade or business within the United States, the determination of whether any 

income or gain attributable to a sale or exchange of that property occurring within ten years after 

the cessation of business is effectively connected with the conduct of a trade or business within 

the United States is made as if the sale or exchange occurred immediately before the cessation of 

business (Code sec. 864(c)(7)). 

Belgium

Foreign corporations and nonresident individuals generally are subject to tax in Belgium 

only on income arising in Belgium. Business income derived in Belgium by a foreign 

corporation or nonresident individual generally is taxed in the same manner as the income of a 

resident corporation or individual. 

Proposed treaty limitations on internal law

Under the proposed treaty, business profits of an enterprise of a treaty country are taxable 

in the other treaty country only to the extent that they are attributable to a permanent 

establishment in the other country through which the enterprise carries on business. This rule is 

one of the basic treaty limitations on a country’s right to tax income of a resident of the other 

country. The rule is similar to the rules found in the U.S. and OECD models. 

Although the proposed treaty does not provide a definition of the term “business profits,” 

the Technical Explanation states that the term is intended to cover income derived from any trade 

or business. As a result of the definitions of "enterprise" and "business" in Article 3, this 

definition includes income from independent personal services, which, unlike the present treaty 

but like the U.S. and OECD models, is not addressed in a separate article. Although the 

proposed treaty does not include a separate article for independent personal services, this article 

limits the right of a treaty country to tax income from the performance of personal services by a 

resident of the other treaty country in a manner similar to the limitations provided in the separate 

article applicable to independent personal services that is included in the present treaty. 

The Technical Explanation discusses significant features of the definition of “business 

profits.” First, the inclusion in the definition of income of an enterprise from personal services is 

consistent with the long-standing U.S. position that an enterprise’s personal services income is 

business profits. Accordingly, a consulting firm resident in one treaty country whose employees 

perform services in the other treaty country through a permanent establishment may be taxed in 

that other country under Article 7 (and not under Article 14 (Income from Employement) 

because that article applies only to individuals). Second, 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 financial instruments is, according to the Technical Explanation, addressed 

in Article 22 (Other Income), unless specifically governed by another article. 
 

31 

The proposed treaty provides rules for the attribution of business profits to a permanent 

establishment. Under these rules, the treaty countries will attribute to a permanent establishment 

the business profits that the permanent establishment might be expected to make if it were a 

distinct and independent enterprise engaged in the same or similar activities under the same or 

similar conditions. The proposed protocol to the proposed treaty makes clear that the principles 

of the OECD Transfer Pricing Guidelines will apply for purposes of determining the profits 

attributable to a permanent establishment, taking into account the different economic and legal 

circumstances of a single entity. The Technical Explanation notes that this rule incorporates the 

arm’s length standard for purposes of determining the profits attributable to a permanent 

establishment. 

In determining the amount of attributable profits, the permanent establishment shall be 

treated as having the same amount of capital that it would need to support its activities if it were 

a distinct and separate enterprise engaged in the same or similar activities. With respect to 

financial institutions other than insurance companies, a Contracting State may determine the 

amount of capital to be attributed to a permanent establishment 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. In the case of an insurance company, there 

shall be attributed to a permanent establishment not only premiums earned through the 

permanent establishment, but that portion of the insurance company's overall investment income 

from reserves and surplus that supports the risks assumed by the permanent establishment 

In the case of a permanent establishment to which a treaty country attributes additional 

capital because the permanent establishment is undercapitalized, the Technical Explanation 

states that U.S. internal law prescribes the method for making such an attribution of additional 

capital.13 However, the Technical Explanation notes that U.S. internal law does not take into 

account the fact that some assets are more risky than other assets, and that an independent 

enterprise would require less capital to support a perfectly hedged U.S. Treasury security than it 

would to support an equity security or other asset with significant market and/or credit risk. 

Thus, U.S. internal law requires taxpayers in some cases to allocate more capital to the United 

States (and, thus, reduces the taxpayer’s interest deduction) than is appropriate. To address these 

cases, the Technical Explanation states that the proposed treaty permits taxpayers to apply a 

more flexible approach that takes into account the relative risk of its assets in the various 

jurisdictions in which it conducts business. However, the Technical Explanation also states that 

taxpayers are permitted to apply U.S. internal law, rather than risk-weighted attribution, if U.S. 

internal law results in less U.S. taxable income in the taxpayer’s particular circumstances. 

In applying the arm’s-length standard to determine the taxable business profits of a 

permanent establishment, the Technical Explanation observes that it is necessary to draw an 

economic (as well as legal) distinction between operating through a single legal entity rather than 

through separate legal entities. 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 

 13 See Treas. reg. sec. 1.882-5. 
 

32 

regulatory restrictions). Thus, most commercial banks and some insurance companies operate 

through branches rather than subsidiaries. While 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 because each entity must either be 

capitalized separately or compensate another entity for providing capital (e.g., through a 

guarantee). 

The Technical Explanation states that, whereas U.S. internal law does not recognize 

inter-branch transactions because they do not have legal significance, the rule provided by the 

proposed protocol to the proposed treaty 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. 

For example, in the case of global dealing in securities, many banks use internal swap 

transactions to transfer risk from one branch to a central location (e.g., a hedge center) where 

traders have the expertise to manage that particular type of risk. Under the proposed treaty, such 

banks also are permitted to use such swap transactions as a means of allocating income between 

or among the branches, provided the allocation method used by the bank complies with the 

transfer pricing rules of U.S. internal law. However, the books of a branch will not be respected 

if the results are inconsistent with a functional analysis. For example, income from a transaction 

that is booked in a particular branch (or home office) would not be allocated to that location if 

the sales and risk management functions that generate such income are performed in another 

location. 

The proposed treaty provides that in computing taxable business profits of a permanent 

establishment, deductions are allowed for expenses, wherever incurred, that are for the purposes 

of the permanent establishment. These deductions include executive and general administrative 

expenses so incurred. The Technical Explanation states that deductions are allowed regardless of 

which accounting unit of the enterprise books the expenses, so long as the expenses are incurred 

for the purposes of the permanent establishment; the amount of expense that must be allowed as 

a deduction is determined by applying the arm's length principle. The Technical Explanation 

states that 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, provided the 

deduction comports to the arm’s-length standard. The method for computing the amount of such 

a deduction would depend upon the terms of the arrangements between the branches and head 

office. 

Like the U.S. and OECD Model treaties, the proposed treaty provides that business 

profits are not attributed to a permanent establishment merely by reason of the purchase of goods 

or merchandise by the permanent establishment for the enterprise of which it is a part. 

According to the Technical Explanation, this rule applies only to an office that performs 

functions in addition to purchasing because purchasing does not by itself give rise to a permanent 

establishment under Article 5 (Permanent Establishment) to which income can be attributed. 

When it applies, the rule provides that business profits may be attributable to a permanent 

establishment for its non-purchasing activities (e.g., sales activities), but not for its purchasing 

activities. 
 

33 

The proposed treaty requires that the determination of the business profits of a permanent 

establishment be made using the same method year by year unless there is a good and sufficient 

reason to the contrary. 

Where business profits include items of income that are dealt with separately in other 

articles of the proposed treaty, those other articles, and not the business profits article, generally 

govern the treatment of those items of income. Thus, for example, the taxation of dividends is 

determined under the rules of Article 10 (Dividends), and not by the rules of Article 7 (Business 

Profits), except as specifically provided in Article 10 (that is, when dividends are attributable to a 

permanent establishment or a fixed base). 

The proposed treaty provides that, for purposes of the taxation of business profits, income 

may be attributable to a permanent establishment (and therefore may be taxable in the source 

country) even if the payment of the income is deferred until after the permanent establishment or 

fixed base has ceased to exist. This rule incorporates into the proposed treaty the rule of Code 

section 864(c)(6) described above. This rule applies in the implementation of the rules for 

business profits (Article 7), dividends (Article 10, paragraph 8), interest (Article 11, paragraph 

4), royalties (Article 12, paragraph 3), gains (Article 13) and other income (Article 20). 

The Technical Explanation notes that Article 7 is subject to the savings clause of 

paragraph 4 of Article 1 (General Scope). Thus, in the case of the savings clause, if a U.S. 

citizen who is a resident of Belgium 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 that paragraph 1 of this article would exempt the income from 

U.S. tax. 

Article 8. Shipping and Air Transport

Article 8 of the proposed treaty covers income from the operation of ships and aircraft in 

international traffic. The rules governing income from the disposition of ships, aircraft, and 

containers are in Article 13 (Gains). 

The United States generally taxes the U.S.-source income of a foreign person from the 

operation of ships or aircraft to or from the United States. An exemption from U.S. tax is 

provided if the income is earned by a corporation that is organized in, or an alien individual who 

is resident in, a foreign country that grants an equivalent exemption to U.S. corporations and 

residents. The United States has entered into agreements providing such reciprocal exemptions 

with a number of countries, including Belgium.14

Like the present treaty, the proposed treaty provides that profits that are derived by an 

enterprise of one country from the operation in international traffic of ships or aircraft are taxable 

only in that country, regardless of the existence of a permanent establishment in the other 

 14 See Taxation: Shipping and Aircraft Agreement, effected by exchange of notes between the 

United States and Belgium, dated October 14, 1987 and March 21, 1988. 
 

34 

country. “International traffic” is defined in Article 3(1)(f) (General Definitions) as any 

transport by a ship or aircraft, except when the transport is solely between places in a treaty 

country. 

The proposed treaty provides that profits from the operation of ships or aircraft in 

international traffic include (but are not limited to) profits from the rental of ships or aircraft on a 

full (time or voyage) basis (i.e., with crew). Like the U.S. Model treaty, it also includes profits 

from the rental of ships or aircraft on a bareboat basis (i.e., without crew), either when such 

rental income is incidental to the profits from the operation of ships or aircraft in international 

traffic, or when the ships or aircraft are operated in international traffic by the lessee. 

The proposed treaty provides that profits derived by an enterprise from the inland 

transport of property or passengers within either treaty country are treated as profits from the 

operation of ships or aircraft in international traffic (and, thus, governed by this Article) if such 

transport is undertaken as part of international traffic by the enterprise. For example, if a Belgian 

enterprise contracts to carry property from the United States to Belgium and, as part of the 

contract, it transports (or contracts to transport) the property by truck from its point of origin to 

an airport in the United States, the income earned by the Belgian enterprise from the overland leg 

of the journey would be taxable only in Belgium. Similarly, the Technical Explanation states 

that Article 8 would also apply to income from lighterage undertaken as part of the international 

transport of goods. 

As under the U.S. Model treaty, the proposed treaty provides that profits of an enterprise 

of a treaty country from the use, maintenance, or rental of containers (including trailers, barges, 

and related equipment for the transport of containers) are taxable only in that treaty country, 

except to the extent such containers are used for transport solely between places within the other 

treaty country. 

As under the U.S. Model treaty, the shipping and air transport provisions of the proposed 

treaty apply to profits derived 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. 

The Technical Explanation notes that this article is subject to the savings clause of 

paragraph 4 of Article 1 (General Scope), as well as Article 23 (Limitation on Benefits). 

Article 9. Associated Enterprises

The proposed treaty, like most other U.S. tax treaties, contains an arm’s-length pricing 

provision. The proposed treaty recognizes the right of each country to make an allocation of 

profits to an enterprise of that country in the case of transactions between related enterprises, if 

conditions are made or imposed between the two enterprises in their commercial or financial 

relations that differ from those that would be made between independent enterprises. In such a 

case, a country may allocate to such an enterprise the profits that it would have accrued but for 

the conditions so imposed. This treatment is consistent with the U.S. Model treaty. 

For purposes of the proposed treaty, an enterprise of one country is related to an 

enterprise of the other country if one of the enterprises participates directly or indirectly in the 
 

35 

management, control, or capital of the other enterprise. Enterprises are also related if the same 

persons participate directly or indirectly in the enterprises’ management, control, or capital. 

Under the proposed treaty, when a redetermination of tax liability has been made by one 

country under the provisions of this article, and the other country agrees with that 

redetermination, then that other country will make an appropriate adjustment to the amount of 

tax paid in that country on the redetermined income. In making such adjustment, due regard is to 

be given to other provisions of the proposed treaty. The proposed treaty’s saving clause 

retaining full taxing jurisdiction in the country of residence or citizenship does not apply in the 

case of such adjustments. Accordingly, internal statute of limitations provisions do not prevent 

the allowance of appropriate correlative adjustments. However, the Technical Explanation states 

that statutory or procedural limitations cannot be overridden to impose additional tax because 

paragraph 2 of Article 1 (General Scope) provides that the proposed treaty cannot restrict any 

statutory benefit.

Article 10. Dividends

Overview

The dividends article of the proposed treaty generally allows full residence-country 

taxation and limited source-country taxation of dividends. The proposed treaty includes a 

generally applicable maximum rate of withholding at source of 15 percent and a reduced fivepercent maximum rate for dividends received by a company owning at least 10 percent of the 

dividend-paying company. Like several other recent treaties and protocols, however, the 

proposed treaty provides for a zero rate of withholding tax on certain dividends received by a 

parent company from a subsidiary that is at least 80-percent owned by the parent. The zero-rate 

provision is broader than the provision in other recent treaties because the required ownership 

threshold is reduced to 10 percent for dividends paid by a company that is a resident of Belgium. 

(Certain other requirements described below also must be satisfied.) A zero rate also generally 

applies to dividends received by pension funds. Special rules apply to dividends received from 

RICs and REITs. These special rules are similar to provisions included in other recent treaties 

and protocols. 

Internal taxation rules

United States

The United States generally imposes a 30-percent tax on the gross amount of U.S.-source 

dividends paid to nonresident alien individuals and foreign corporations. The 30-percent tax 

does not apply if the foreign recipient is engaged in a trade or business in the United States and 

the dividends are effectively connected with that trade or business. In that case, the foreign 

recipient is subject to U.S. tax on the dividends on a net basis at graduated rates in the same 

manner in which a U.S. person would be taxed. 

Under U.S. law, the term “dividend” generally means any distribution of property made 

by a corporation to its shareholders from current or accumulated earnings and profits. 
 

36 

In general, corporations are not entitled under U.S. law to a deduction for dividends paid. 

Thus, the withholding tax on dividends theoretically represents imposition of a second level of 

tax on corporate taxable income. Treaty reductions of this tax reflect the view that where the 

United States already imposes corporate-level tax on the earnings of a U.S. corporation, a 

30-percent withholding rate may represent an excessive level of source-country taxation. 

Moreover, the reduced rate of tax often applied by treaty to dividends paid to direct investors 

reflects the view that the source-country tax on payments of profits to a substantial foreign 

corporate shareholder may properly be reduced further to avoid double corporate-level taxation 

and to facilitate international investment. 

A REIT is a U.S. domestic corporation, trust, or association that is subject to the regular 

corporate income tax, but that receives a deduction for dividends paid to its shareholders if 

certain conditions are met. To qualify for the deduction for dividends paid, a REIT must 

distribute most of its income. As a result of the deduction for dividends paid, a REIT generally 

does not pay Federal income tax. Except for capital gain dividends, a distribution of REIT 

earnings is generally treated by the recipient as a dividend rather than as income of the same type 

as the underlying earnings.15 This distribution is subject to the U.S. 30-percent withholding tax 

when paid to foreign owners. However, the receipt of a distribution from a REIT is generally 

treated as a disposition of a U.S. real property interest by the recipient to the extent that it is 

attributable to a sale or exchange of a U.S. real property interest by the REIT.16

A REIT generally is organized to allow investment in primarily passive real estate 

investments. As such, income of a REIT often includes rentals from real estate holdings or 

interest from loans secured by real estate mortgages. Like dividends, U.S.-source rental income 

of foreign persons generally is subject to the 30-percent withholding tax (unless the recipient 

makes an election to have the rental income taxed in the United States on a net basis at the 

regular graduated rates). Unlike the withholding tax on dividends, however, the withholding tax 

on rental income generally is not reduced in U.S. income tax treaties. When rental income (or 

interest income) of a REIT is distributed to a foreign shareholder as a REIT dividend, it is treated 

as a dividend under U.S. internal law. U.S.-source interest income of foreign persons is not 

subject to U.S. withholding tax in certain circumstances. A REIT dividend does not, however, 

pass through interest characterization of the REIT’s underlying earnings. 

U.S. internal law also generally treats a RIC as both a corporation and as an entity not 

subject to corporate tax to the extent it distributes substantially all of its income. The purpose of 

a RIC is to allow investors to hold diversified portfolios of securities. Dividends paid by a RIC 

generally are treated as dividends received by the payee, and the RIC generally pays no tax 

 15 Because a REIT generally does not pay corporate level tax, certain U.S. benefits of dividend 

treatment are not available. A U.S. corporate shareholder is not generally entitled to a dividends-received 

deduction for REIT dividends. REIT dividends generally are not qualified dividends eligible for the 15-

percent rate available for individual shareholders. 

16 There is an exception for distributions to a shareholder that owns five percent or less of the 

REIT, if the REIT stock is regularly traded on an established securities market located in the United 

States. Sec. 897(h)(1). These distributions are treated as dividends under U.S. internal law. 
 

37 

because it is permitted to deduct dividends paid to its shareholders in computing its taxable 

income. However, a RIC generally may pass through to its shareholders the character of its net 

long-term and, before January 1, 2008, net short-term capital gains by designating a dividend it 

pays as a long-term or short-term capital gain dividend, to the extent that the RIC has net capital 

gains. Nonresident aliens and foreign corporations generally are not subject to tax on capital 

gains. A distribution before January 1, 2008 to a nonresident alien or foreign corporation made 

by a RIC that is (or, if certain exceptions were disregarded, would be) a U.S. real property 

holding corporation, however, is treated as gain recognized by that nonresident alien or foreign 

corporation from the sale or exchange of a U.S. real property interest to the extent the gain is 

attributable to gain from sales or exchanges of U.S. real property interests.17

Similarly, a RIC that earns interest income that would not be subject to U.S. tax if earned 

by a foreign person directly (“qualified interest income”)18 generally may designate a dividend it 

pays before January 1, 2008 as derived from that interest income, to the extent of that income. 

Nonresident aliens and foreign corporations are not subject to tax on interest-related dividends. 

The aggregate amount that may be designated by a RIC as interest-related dividends generally is 

limited to the sum of qualified interest income less the amount of expenses of the RIC properly 

allocable to the interest income. 

Belgium

Dividends paid by Belgian resident companies to nonresident individuals and companies 

generally are subject to withholding tax at a 25-percent rate. 

Proposed treaty limitations on internal law

In general

Under the proposed treaty, dividends paid by a company that is a resident of a treaty 

country to a resident of the other country may be taxed in that other country. The dividends also 

may be taxed by the country in which the payor company is resident, but the rate of tax is 

limited. Under the proposed treaty, source-country taxation of dividends (that is, taxation by the 

country in which the dividend-paying company is resident) generally is limited to 15 percent of 

the gross amount of the dividends paid to residents of the other treaty country. A lower rate of 

 17 The exception described in the immediately preceding footnote also applies for distributions 

by RICs. 

18 Qualified interest income of the RIC is equal to the sum of its U.S.-source income with respect 

to: (1) bank deposit interest; (2) short term original issue discount that is currently exempt from the 

gross-basis tax under section 871; (3) any interest (including amounts recognized as ordinary income in 

respect of original issue discount, market discount, or acquisition discount under the provisions of 

sections 1271-1288, and such other amounts as regulations may provide) on an obligation that is in 

registered form, unless it is earned on an obligation issued by a corporation or partnership in which the 

RIC is a 10-percent shareholder or is contingent interest not treated as portfolio interest under section 

871(h)(4); and (4) any interest-related dividend from another RIC. 
 

38 

five percent applies if the beneficial owner of the dividends is a company that owns directly at 

least 10 percent of the voting stock of the dividend-paying company. 

The term “beneficial owner” is not defined in the proposed treaty and therefore is defined 

under the internal law of the country imposing tax (that is, the source country). The Technical 

Explanation states that the beneficial owner of a dividend for purposes of this article is the 

person to which the dividend income is attributable for tax purposes under the laws of the source 

country. Further, companies holding shares through fiscally transparent entities, such as 

partnerships, are considered to hold their proportionate interests in those shares. 

The proposed treaty provides a zero rate of withholding tax for certain intercompany 

dividends in cases in which there is a sufficiently high (80-percent for U.S. resident payors; 10-

percent for payors resident in Belgium) level of ownership (often referred to as “direct 

dividends”). A zero rate also applies for dividends received by a pension fund, provided that the 

dividends are not derived from the carrying on of a business by the fund or through an associated 

enterprise. 

Zero rate for direct dividends

Under the proposed treaty, the withholding tax rate generally is zero for certain direct 

dividends. The requirements for the zero rate differ based on whether the dividend-paying 

company is a resident of the United States or of Belgium. If the company paying the dividend is 

a resident of the United States, the zero rate is available only if the beneficial owner of the 

dividend is a Belgian resident company that has owned directly or indirectly shares representing 

at least 80 percent of the dividend-paying company’s voting power for the 12-month period 

ending on the date on which entitlement to the dividend is determined. If the company paying 

the dividend is a resident of Belgium, the zero rate is available only if the beneficial owner of the 

dividend is a U.S. resident company that has owned directly shares representing at least 10 

percent of the capital of the dividend-paying company for a 12-month period ending on the date 

the dividend is declared. 

Eligibility for the benefits of the zero rate for dividends paid by a company that is 

resident of the United States is subject to a more stringent set of limitation-on-benefits 

requirements than the requirements that normally apply under the proposed treaty. Specifically, 

in order to qualify for the zero rate, a dividend-receiving company that is a resident of Belgium 

must (1) satisfy the public trading test of the limitation-on-benefits article; (2) meet the 

ownership and base erosion test and satisfy the active trade or business conditions of the 

limitation-on-benefits article with respect to the dividend in question; (3) satisfy the derivative 

benefits test of the limitation-on-benefits article; or (4) receive a favorable determination from 

the competent authority with respect to the zero-rate provision. 

The Technical Explanation states that these additional restrictions are intended to prevent 

companies from reorganizing to become eligible for the zero rate. As an example, the Technical 

Explanation describes a situation in which a company resident in a third country that does not 

have a zero-rate treaty provision with the United States might contribute the stock of a wholly 

owned U.S. subsidiary to a wholly owned Belgian subsidiary to secure the benefit of the zero 

rate on a dividend from the U.S. subsidiary. In that case, the Technical Explanation explains that 
 

39 

treaty shopping could occur notwithstanding the Belgian company’s satisfaction of the active 

trade or business test with respect to the dividend. For this reason, the proposed protocol does 

not allow the benefits of the zero rate to be claimed by a company that meets only the active 

trade or business test of the limitation-on-benefits article. 

The Technical Explanation notes that, in the case of a Belgian company that receives 

dividends from a U.S. subsidiary, the derivative benefits test might be satisfied if the Belgian 

company is wholly owned, for example, by a publicly traded company resident in a European 

Union (“EU”), European Economic Area (“EEA”), or North American Free Trade Agreement 

(“NAFTA”) country with which the United States has a zero-rate treaty provision.19

The proposed treaty lacks a rule that is included in the proposed protocols with Denmark, 

Finland, and Germany and in other recent treaties and that modifies the application of the 

derivative benefits test under the zero-rate provisions of those protocols and treaties. That rule 

provides generally that in determining whether a shareholder of a dividend-receiving company is 

an equivalent beneficiary, the shareholder is treated as owning shares in the dividend-paying 

company with the same percentage voting power as the shares held by the dividend-receiving 

company According to the Technical Explanations of the proposed protocols with Denmark, 

Finland, and Germany, this rule is intended to ensure that certain joint ventures, and not just 

wholly-owned subsidiaries, are eligible for the benefits of the zero rate. Treasury Department 

personnel have stated that following ratification of the proposed treaty, Belgian and U.S. officials 

will exchange letters memorializing their shared understanding that in applying the derivative 

benefits test to a circumstance in which dividends are paid by a U.S. company to a Belgian 

company, each person that owns, directly or indirectly, shares in the Belgian company will be 

treated as owning the same voting power in the U.S. company as the Belgian company owns in 

that U.S. company. 

Dividends paid by U.S. RICs and REITs

The proposed treaty generally denies the five-percent and zero rates of withholding tax to 

dividends paid by U.S. RICs and REITs. 

The 15-percent rate of withholding generally is allowed for dividends paid by a RIC. The 

15-percent rate of withholding is allowed for dividends paid by a REIT, provided one of three 

additional conditions is met: (1) 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; (2) 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 five percent of any class of the 

REIT’s stock; or (3) the beneficial owner of the dividend holds an interest in the REIT of not 

more than 10 percent, and the REIT is diversified (that is, the value of no single interest in real 

property held by the REIT exceeds 10 percent of the total interests of the REIT in real property). 

The Technical Explanation indicates that the restrictions on availability of the lower rates 

are intended to prevent the use of RICs and REITs to gain inappropriate U.S. tax benefits. For 

 19 These countries currently are Mexico, the Netherlands, Sweden, and the United Kingdom. 
 

40 

example, a company resident in Belgium could directly own a diversified portfolio of U.S. 

corporate shares and pay a U.S. withholding tax of 15 percent on dividends on those shares. 

Absent the additional RIC restrictions, there is a concern that such a company instead might 

purchase 10 percent or more of the interests in a RIC, which could even be established as a mere 

conduit, and thereby obtain a lower withholding tax rate by holding the portfolio through the RIC 

(transforming portfolio dividends generally taxable at 15 percent into direct investment 

dividends taxable under the treaty at zero or five percent). 

Similarly, the Technical Explanation provides an example of a resident of Belgium that 

directly holds real property and is required to pay U.S. tax either at a 30-percent rate on gross 

income or at graduated rates on the net income from the property. By placing the property in a 

REIT, the investor could transform real estate income into dividend income, taxable at the lower 

rates provided in the proposed treaty. The limitations on REIT dividend benefits are intended to 

protect against this result. 

Definitions and special rules and limitations

The proposed treaty generally defines dividends as income from shares or other corporate 

participation rights that are not treated as debt, as well as other amounts that are subjected to the 

same tax treatment by the source country as income from shares (for example, constructive 

dividends). 

The proposed treaty’s reduced rates of tax on dividends do not apply if the dividend 

recipient carries on business through a permanent establishment in the source country and the 

holding in respect of which the dividends are paid is effectively connected with that permanent 

establishment. In this case, the dividends are taxed as business profits (Article 7). 

The proposed treaty prevents each treaty country from imposing a tax on dividends paid 

by a resident of the other treaty country unless the dividends are paid to a resident of the first 

country or are attributable to a permanent establishment in that country. 

The proposed treaty allows each treaty country to impose a branch profits tax on a 

company that has income attributable to a permanent establishment in that country, derives 

income from real property in that country that is taxed on a net basis under the treaty, or realizes 

gains taxable in that country under the treaty. In the case of the United States, the tax is limited 

to the “dividend equivalent amount,” consistent with the branch profits tax under U.S. internal 

law (Code section 884). In the case of Belgium, the tax is limited to an amount that is analogous 

to the dividend equivalent amount. The rate of branch profits tax is generally limited to five 

percent, but a zero rate applies where limitation-on-benefits requirements parallel to those 

applicable to the zero-rate provision for dividends are satisfied. 

The proposed treaty defines a pension fund as a person established in Belgium or the 

United States 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 that is either, 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, is exempt from tax in the United 

States with respect to its pension activities. 
 

41 

Termination of zero rate for dividends paid by U.S. companies

The proposed treaty provides that the zero rate of withholding tax on dividends paid by 

U.S. resident companies will terminate for amounts paid or credited on or after January 1 of the 

sixth year following the year in which the proposed treaty enters into force unless by June 30 of 

the preceding year, the U.S. Treasury Secretary, on the basis of a report of the IRS 

Commissioner, certifies to the U.S. Senate that Belgium has satisfactorily complied with its 

obligations under Article 25 (Exchange of Information and Administrative Assistance). 

The United States also may terminate the zero-rate provision for dividends paid by U.S. 

resident companies in another circumstance. Under the proposed treaty, if the United States 

determines that Belgium’s actions under Article 24 (Mutual Agreement Procedure) and Article 

25 (Exchange of Information and Administrative Assistance) have materially altered the balance 

of benefits of the proposed treaty, the United States may terminate the zero-rate provision for 

dividends paid by U.S. resident companies. To terminate the zero-rate provision, the United 

States must give written notice of termination to Belgium, through the diplomatic channel, on or 

before June 30 in any year. If the United States gives this notice, the zero-rate provision will 

cease to have effect for amounts paid or credited on or after January 1 of the year following the 

year in which the notice is given. 

The Technical Explanation states that if the zero-rate provision for U.S.-source dividends 

terminates under the rules described above, Belgium will be relieved of certain obligations under 

Article 25 (Exchange of Information and Administrative Assistance) to provide information, 

including bank information. This rule is described in the discussion of Article 25 below. 

Relation to other Articles

The Technical Explanation notes that the saving clause of paragraph 4 of Article 1 of the 

treaty (Personal 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 proposed treaty had not come into effect. 

The benefits of the dividends article are also subject to the provisions of Article 21 of the 

treaty (Limitation on Benefits). 

Article 11. Interest

Internal taxation rules

United States

Subject to several exceptions (such as those for portfolio interest, bank deposit interest, 

and short-term original issue discount), the United States imposes a 30-percent withholding tax 

on U.S.-source interest paid to foreign persons under the same rules that apply to dividends. 

U.S.-source interest, for purposes of the 30-percent tax, generally is interest on the debt 

obligations of a U.S. person, other than a U.S. person that meets specified foreign business 

requirements. Also subject to the 30-percent tax is interest paid by the U.S. trade or business of 

a foreign corporation. A foreign corporation is subject to a branch-level excess interest tax with 
 

42 

respect to certain “excess interest” of a U.S. trade or business of such corporation; under this 

rule, an amount equal to the excess of the interest deduction allowed with respect to the U.S. 

business over the interest paid by such business is treated as if paid by a U.S. corporation to a 

foreign parent and, therefore, is subject to the 30-percent withholding tax. 

Portfolio interest generally is defined as any U.S.-source interest that is not effectively 

connected with the conduct of a trade or business if such interest (1) is paid on an obligation that 

satisfies certain registration requirements or specified exceptions thereto and (2) is not received 

by a 10-percent owner of the issuer of the obligation, taking into account shares owned by 

attribution. However, the portfolio interest exemption does not apply to certain contingent 

interest income. 

If an investor holds an interest in a fixed pool of real estate mortgages that is a real estate 

mortgage interest conduit (“REMIC”), the REMIC generally is treated for U.S. tax purposes as a 

pass-through entity and the investor is subject to U.S. tax on a portion of the REMIC’s income 

(which, generally is interest income). If the investor holds a so-called “residual interest” in the 

REMIC, the Code provides that a portion of the net income of the REMIC that is taxed in the 

hands of the investor -- referred to as the investor’s “excess inclusion” -- may not be offset by 

any net operating losses of the investor, must be treated as unrelated business income if the 

investor is an organization subject to the unrelated business income tax, and is not eligible for 

any reduction in the 30-percent rate of withholding tax (by treaty or otherwise) that would apply 

if the investor were otherwise eligible for such a rate reduction. 

Belgium

Belgian-source interest payments to nonresidents generally are subject to withholding tax 

at a rate of 15 percent. However, tax is generally not required to be withheld on payments to 

nonresidents for interest from resident banks, interest on registered government bonds and loans, 

and interest on registered corporate bonds. 

Proposed treaty limitations on internal law

The proposed treaty generally exempts interest arising in one country (the source 

country) and beneficially owned by a resident of the other country from tax in the source 

country. This exemption from source country tax is similar to that provided in the U.S. model. 

The present treaty generally permits both treaty countries to tax interest derived from sources 

within the source country by a resident of the other treaty country, but limits the rate of tax 

imposed by the source country to not more than 15 percent. 

The proposed treaty defines interest as income from debt claims of every kind, whether 

or not secured by mortgage and whether or not carrying a right to participate in the debtor’s 

profits. In particular, it includes income from government securities and from bonds and 

debentures, including premiums or prizes attaching to such securities, bonds, or debentures. The 

term “interest” also includes all other income that is treated as income from money lent under the 

tax law of the country in which the income arises. Interest does not include income covered in 

Article 10 (Dividends). Penalty charges for late payment also are not treated as interest. 
 

43 

This exemption from source country tax does not apply if the beneficial owner of the 

interest carries on business through a permanent establishment in the source country and the 

interest paid is attributable to the permanent establishment. In that event, the interest is taxed as 

business profits (Article 7). Under Article 7, and as described in the Technical Explanation, 

interest attributable to a permanent establishment but received after the permanent establishment 

is no longer in existence is taxable in the country where the permanent establishment existed. 

The proposed treaty provides that interest is generally considered to arise in a source 

country if paid by a resident of the source country. However, interest that is borne by a 

permanent establishment in a treaty country is considered to arise that country and not in the 

state of the payor’s residence (if different). The Technical Explanation provides that interest is 

considered to be borne by a permanent establishment if it is allocable to taxable income of that 

permanent establishment, and is allowable as a deduction in computing taxable income. 

The proposed treaty addresses the issue of non-arm’s-length interest charges between 

related parties (or parties having an otherwise special relationship) by stating that this article 

applies only to the amount of arm’s-length interest. Any amount of interest paid in excess of the 

arm’s-length interest is taxable according to other provisions of the proposed treaty. For 

example, excess interest paid to a parent corporation may be treated as a dividend under local 

law and, thus, entitled to the benefits of Article 10 (Dividends). The proposed treaty does not 

address cases where the amount of interest paid is less than the amount of arm's-length interest. 

The Technical Explanation states that in those cases a transaction may be characterized to reflect 

its substance and interest may be imputed consistent with the definition of interest in this Article. 

The proposed treaty provides two anti-abuse exceptions to the general source-country 

exemption from tax discussed above. The first exception relates to “contingent interest” 

payments. If interest is paid by a source-country resident and is determined with reference to (1) 

receipts, sales, income, profits, or other cash flow of the debtor or a related person, (2) to any 

change in the value of any property of the debtor or a related person, or (3) to any dividend, 

partnership distribution, or similar payment made by the debtor to a related person, such interest 

may be taxed in the source country in accordance with its laws. However, if the beneficial 

owner is a resident of the other country, such interest may not be taxed as a rate exceeding 15 

percent (i.e., the rate prescribed in paragraph 2(b) of Article 10 (Dividends)). The proposed 

treaty provides that this anti-abuse rule will not apply to any interest solely because it is paid 

under an arrangement providing that the amount of interest payable will be reduced (or 

increased) in the event of improvements (or deteriorations) in the factors by reference to which 

the amount of interest payable. The Technical Explanation states that interest will not, for 

example, become contingent interest solely by virtue of a provision in an agreement that calls for 

an increase in the rate charged upon the deterioration of the credit position of the borrower. 

The second anti-abuse exception provides that exemptions from source country tax do not 

apply to interest paid with respect to ownership interests in a vehicle used for the securitization 

of real estate mortgages or other assets, to the extent that the amount of interest paid exceeds the 

return on comparable debt instruments as specified by the domestic law of that country. The 

Technical Explanation states that this provision denies source country exemptions with respect to 

excess inclusions with respect to a residual interest in a REMIC. This provision, like the U.S. 
 

44 

model, is drafted reciprocally presumably to apply to similar Belgian securitization vehicles. 

Such income may be taxed in accordance with each country’s internal law. 

Article 12. Royalties

Internal taxation rules

United States

Under the same system that applies to dividends and interest, the United States imposes a 

30-percent withholding tax on U.S.-source royalties paid to foreign persons. U.S.-source 

royalties include royalties for the use of or right to use intangible property in the United States. 

Belgium

Royalties paid to nonresidents are generally subject to a 15-percent withholding rate. 

Proposed treaty limitations on internal law

The proposed treaty provides that royalties arising in a treaty country (the source country) 

and beneficially owned by a resident of the other treaty country is exempt from tax in the source 

country. This exemption from source country tax is similar to that provided in the U.S. Model 

treaty (except as noted below) and the present treaty. 

The term “royalties” as used in Article 12 means payments of any kind received as 

consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific 

work (including cinematographic films and computer software), any patent, trade mark, design 

or model, plan, secret formula or process, or for information concerning industrial, commercial, 

or scientific experience. As in the 2006 U.S. Model treaty, the term no longer includes payments 

made as consideration for “any like right or property,” thereby narrowing the scope of the term. 

Unlike the provision in the U.S. Model treaty, the term “royalties” does not include 

contingent gain from the alienation of any right or property described above, that is, to the extent 

that the amount of such gain is contingent on the productivity, use, or disposition of the right or 

property. The treatment of such gain (as well as other gains from the alienation of such property) 

is addressed in Article 13 (Gains). 

The Technical Explanation states that the term royalties does not include income from 

leasing personal property. The Technical Explanation further states that it is understood that a 

typical retail sale of “shrink wrap” computer software will not be considered as royalty income 

(even though for copyright law purposes it may be characterized as a license). 

The exemption from source country tax does not apply if the beneficial owner of the 

royalties carries on a business through a permanent establishment in the source country, and the 

right or property with respect of which the royalties are paid is effectively connected with such 

permanent establishment. In that event, the royalties are taxed as business profits (Article 7). 

According to the Technical Explanation, royalties attributable to a permanent establishment but 
 

45 

received after the permanent establishment is no longer in existence is taxable in the country 

where the permanent establishment existed. 

The proposed treaty addresses the issue of non-arm’s-length royalties between related 

parties (or parties otherwise having a special relationship) by providing that this article applies 

only to the amount of arm’s-length royalties. Any amount of royalties paid in excess of the 

arm’s-length interest is taxable according to other provisions of the proposed treaty. For 

example, excess royalties paid by a subsidiary corporation to its parent corporation may be 

treated as a dividend under local law and, thus, entitled to the benefits of Article 10 (Dividends).

Article 13. Gains

Internal taxation rules

United States

Generally, gain realized from the sale of a capital asset by a nonresident alien individual 

or a foreign corporation is not subject to U.S. tax unless the gain is effectively connected with 

the conduct of a U.S. trade or business or, in the case of a sale by a nonresident alien individual, 

that individual is physically present in the United States for at least 183 days in the taxable year. 

A nonresident alien individual or foreign corporation generally is subject to U.S. tax on gain 

from the sale of a U.S. real property interest as if the gain were effectively connected with a trade 

or business conducted in the United States. “U.S. real property interests” include interests in 

certain corporations if U.S. real property comprises at least 50 percent of the assets of the 

corporation. 

Belgium

Belgian-source capital gains derived by nonresident individuals and companies generally 

are not subject to tax by Belgium. Capital gains from the sale of Belgian real property, however, 

may be taxed. 

Proposed treaty limitations on internal law

The proposed treaty provides rules governing when a treaty country may tax gains from 

the alienation of property by a resident of the other treaty country. The rules generally are 

consistent with those included in the U.S. Model treaty. 

Under the proposed treaty, gains derived by a resident of one treaty country that are 

attributable to the alienation of real property situated in the other country may be taxed in that 

other country. The Technical Explanation states that the proposed treaty phrase “gains 

attributable to the alienation of real property” is used instead of the OECD Model treaty phrase 

“gains from the alienation” to clarify that the United States treats distributions made by a REIT 

and certain RICs as taxable under Article 13, not under Article 10 (Dividends), when those 

distributions are attributable to gains derived from the alienation of U.S. real property interests 

by the REIT or RIC. 
 

46 

For the purposes of this article, real property situated in the other treaty country includes 

real property referred to in Article 6 (Income from Real Property) – that is, an interest in the real 

property itself – and, in the case of the United States, a U.S. real property interest. Under U.S. 

internal law, a U.S. real property interest includes, among other property, shares in a U.S. 

corporation that owns sufficient U.S. real property interests to satisfy an asset-based test. 

The proposed treaty includes a standard provision that permits a treaty country to tax 

gains from the alienation of movable property (that is, property other than real property) that 

forms a part of the business property of a permanent establishment that an enterprise of the other 

treaty country has in the first treaty country. This rule permits source-country taxation of gains 

from the alienation of the permanent establishment (alone or with the enterprise as a whole). 

According to the Technical Explanation, this taxation is permitted whether or not the permanent 

establishment exists at the time of alienation. Consequently, income that is attributable to a 

permanent establishment but that is deferred and is received after the permanent establishment 

no longer exists may nevertheless be taxed in the treaty country in which the permanent 

establishment was located. This rule is similar to a rule in U.S. internal law. 

The Technical Explanation notes that a resident of Belgium 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. Under the proposed treaty, the 

United States may tax the partner’s distributive share of income realized by the partnership on 

the disposition of movable property forming part of the partnership’s business property in the 

United States. 

The proposed treaty provides that gains derived by an enterprise of one treaty country 

from the alienation of ships or aircraft operated in international traffic or of personal property 

related to the operation of the ships or aircraft are taxable only in that country. This rule applies 

even if the gains are attributable to a permanent establishment maintained by the enterprise in the 

other treaty country. 

Similarly, gains derived by an enterprise of a treaty country from the alienation of 

containers (including trailers and related equipment for the transport of containers) used for the 

transport of goods or merchandise are taxable only in that country unless those containers or 

trailers and related equipment are used for transport solely between places in the other treaty 

country. The general rule of exclusive residence country taxation applies even if the gains are 

attributable to a permanent establishment in the other treaty country. 

Gain from the alienation of any property other than the property described above is 

taxable under the proposed treaty only in the country in which the person alienating the property 

is a resident. 

The Technical Explanation states that the saving clause of paragraph 4 of Article 1 

(General Scope) permits the United States to tax its citizens and residents as if the proposed 

treaty had not come into effect. The Technical Explanation also notes that the benefits of this 

Article 13 are available only to a treaty country resident that satisfies one of the conditions in 

Article 21 (Limitation on Benefits).
 

47 

Article 14. Income from Employment

Under the proposed treaty, salaries, wages, and other similar remuneration derived from 

services performed as an employee in one treaty country (the source country) by a resident of the 

other treaty country are taxable only by the country of residence if three requirements are met: 

(1) the individual is present in the source country for not more than 183 days in any twelvemonth period commencing or ending in the taxable year or year of assessment concerned; (2) the 

individual is paid by, or on behalf of, an employer who is not a resident of the source country; 

and (3) the remuneration is not borne by a permanent establishment of the employer in the source 

country. These limitations on source country taxation are similar to the rules of the U.S. and 

OECD Model treaties. 

The proposed treaty contains a special rule that permits remuneration derived by a 

resident of one treaty country with respect to employment as a regular member of the crew of a 

ship or aircraft operated in international traffic by an enterprise of the other treaty country to be 

taxed only in the first treaty country. A similar rule is included in the U.S. and OECD Model 

treaties. U.S. internal law does not impose tax on such income of a person who is neither a 

citizen nor a resident of the United States, even if the person is employed by a U.S. entity. 

The proposed protocol to the proposed treaty expressly provides that, 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. 

This article is subject to the provisions of the separate articles covering directors’ fees 

(Article 15), pensions, social security, annuities, alimony, and child support payments (Article 

17), government service (Article 19), and students, trainees, teachers and researchers (Article 

19). 

Article 15. Directors’ Fees

Under the proposed treaty, director’s fees and other similar payments derived by a 

resident of one country for services rendered in the other country in his or her capacity as a 

member of the board of directors of a company that is a resident of that other country is taxable 

in that other country. Under the proposed treaty, as under the U.S. Model treaty, the country of 

the company’s residence may tax the remuneration of nonresident directors, but only with 

respect to remuneration for services performed in that country. 

The proposed protocol elaborates on Article 15 in several ways. First, the proposed 

protocol states that the article also applies to fees received by a “gerant”/”zaakvoerder” of a 

company, other than a company with share capital, in his or her capacity as such. Second, the 

proposed protocol states that remuneration derived by a person referred to in Article 15 from a 

company that is a resident of treaty country in respect of the discharge of day-to-day functions of 

a managerial or technical, commercial or financial nature is taxable in accordance with the 

provisions of Article 14 (Income from Employment) and not Article 15; to the extent that the 
 

48 

company is a Belgian company, Article 14 is applied as if such remuneration were remuneration 

derived by an employee in respect of employment and as if references to the “employer” were 

references to the company. Third, the proposed protocol states that remuneration received by a 

resident of a treaty country in respect of his or her day-to-day activity as a partner of a company 

that is a resident of Belgium, other than a company with share capital, is taxable in accordance 

with the provisions of Article 14, as if such remuneration were remuneration derived by an 

employee in respect of employment and as if references to the “employer” were references to the 

company. Finally, the proposed protocol states that Article 7 (Business Profits), and not Article 

14 or 15, applies to a partner’s distributive share of the income of an entity that is treated as 

fiscally transparent, such as a U.S. partnership.

Article 16. Entertainers and Sportsmen

Like the U.S. and OECD Model treaties, the proposed treaty contains a separate set of 

rules that apply to the taxation of income earned by entertainers (such as theater, motion picture, 

radio, or television artistes or musicians) and sportsmen. 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. These rules apply notwithstanding the other provisions of the proposed treaty 

dealing with the taxation of business profits and income from employment (Articles 7 and 14) 

and are intended, in part, to prevent entertainers and sportsmen from using the treaty to avoid 

paying any tax on their income earned in one of the countries. 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 (Business Profits) and 14 (Income from Employment). In 

addition, except as provided in paragraph 2 of this article, income earned by legal persons is not 

covered by this article. 

Under paragraph 1 of Article 16 of the proposed treaty, income derived by an entertainer 

or sportsman who is a resident of one country from his or her personal activities as such in the 

other country may be taxed in the other country if the amount of the gross receipts derived by 

him or her from such activities exceeds $20,000 or its equivalent in euro for the taxable year. 

The $20,000 threshold includes expenses that are reimbursed to the entertainer or sportsman or 

borne on his or her behalf. Under this rule, if a Belgian entertainer does not have a permanent 

establishment in the United States and performs (as an independent contractor) in the United 

States for total compensation of $19,000 during a taxable year, the United States would not tax 

that income. If, however, that entertainer’s total compensation were $21,000, the full amount 

would be subject to U.S. tax. On the other hand, if such an entertainer earned $19,000 during a 

taxable year in the United States, but that income is attributable to a U.S. permanent 

establishment, the United States could tax him under the provisions of Article 7 (Business 

Profits). The proposed treaty’s taxation threshold of $20,000 is the same as the U.S. Model 

treaty’s threshold. 

As described in the Technical Explanation, Article 16 of the proposed treaty 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 treaty country by a performer 

who is a resident of the other treaty country from other than actual performance, such as royalties 
 

49 

from record sales and payments for product endorsements, is not covered by this article, but is 

covered by other articles, 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 subject to source-country tax under Article 12 if the requirements of that article 

are met. In addition, the entertainer would be taxed under this article by the source country with 

respect to income from the performance itself if the dollar threshold is exceeded. 

The Technical Explanation states that if an individual fulfills a dual role as performer and 

nonperformer (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 treaty country 

with respect to a performance in the other country occurring in a particular taxable year would be 

subject to Article 16 even if it was paid after the close of the year. 

Paragraph 2 of this article provides that where income in respect of activities performed 

by an entertainer or sportsman in his or her capacity as such accrues not to the entertainer or 

sportsman but to another person, that other person’s income may be taxable in the country in 

which the activities are performed, notwithstanding the provisions of Articles 7 (Business 

Profits) and 14 (Income from Employment). However, paragraph 2 applies only if the contract 

pursuant to which the personal activities are performed designates the entertainer or sportsman or 

allows someone other than the entertainer or sportsman or the person to whom the income 

accrues to designate the individual who is to perform the personal activities.20 This provision is 

intended to prevent highly-paid entertainers and sportsmen from avoiding tax in the country in 

which they perform by, for example, routing the compensation for their services through a 

personal holding company (a “star company”) located in the residence country that does not have 

a permanent establishment in the source country. At the same time, the provision is intended to 

protect a performer’s rights under the treaty when there is a legitimate employer-employee 

relationship between the performer and the person providing his or her services. If the star 

company is not a resident of the United States or Belgium, then the treaty (and this provision) 

does not apply. If the star company passes the residency threshold, however, this provision 

applies notwithstanding the articles governing business profits and income from employment 

(Articles 7 and 14). The effect of this provision is that the star company may be taxed in the 

treaty country in which the performer’s services are exercised. The income taxable by virtue of 

this paragraph is reduced to the extent of salary payments taxed to the performer. 

This article is subject to the provisions of the saving clause of paragraph 4 of Article 1 

(General Scope). Thus, if an entertainer or sportsman who is resident of Belgium is a citizen of 

 20 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 sec. 954(c)(1)(I). 
 

50 

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, the 

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 pensions and annuities, social security 

benefits, alimony, child support payments, and pension funds. This article does not cover 

payments of government pensions covered under Article 18 (Government Service), but covers 

government pension funds, as well as private pension funds. 

Pensions

Under the proposed treaty, pensions and other similar remuneration derived and 

beneficially owned by a resident of either country is taxable only in the recipient’s country of 

residence. The proposed treaty also requires the individual’s country of residence not to tax the 

portion of pension income arising in the other country to the extent such income would have 

been exempt if the beneficiary were a resident of the other country. According to the Technical 

Explanation, the term “pensions and other similar remuneration” includes both periodic and 

lump sum payments. These rules are the same as those in the U.S. Model treaty. 

The phrase “pensions and other similar remuneration” is intended to encompass 

payments made by qualified private retirement plans. According to the Technical Explanation, 

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. However, 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)). 

Social security benefits

The proposed treaty, like the present treaty and the U.S. Model treaty, provides for 

exclusive source-country taxation of payments made under provisions of social security or 

“similar legislation.” This provision is an exception to the saving clause of paragraph 4 of 

Article 1 (General Scope) by virtue of subparagraph 5(a) of Article 1. Thus, only Belgium and 

not the United States, may tax Belgian social security benefits paid to a U.S. citizen. The 

provision under the proposed treaty applies to both private sector and government employees. 

Article 5 of the proposed protocol provides that the term “similar legislation” is intended to refer 

to United States tier 1 Railroad Retirement benefits. 
 

51 

Annuities

The proposed treaty also provides that annuities (other than those paid for services 

rendered) derived and beneficially owned by a resident of either country are taxable only in the 

recipient’s country of residence. This is similar to the rule in the U.S. Model treaty. The term 

“annuities” is defined for purposes of this provision as a stated sum paid periodically at stated 

time during a specified number of years, or for life, under an obligation to make the payments in 

return for adequate and full consideration (other than services rendered). The Technical 

Explanation states that an annuity received in consideration for services rendered would be 

treated either as deferred compensation and generally taxable in accordance with Article 14 

(Income from Employment) or as a pension subject to the pension rules of this article. 

Alimony and child support

The proposed treaty addresses the treatment of alimony and child support payments. 

Both are generally defined as certain periodic payments made pursuant to a written separation 

agreement or a decree of divorce, separate maintenance, or compulsory support. If the payment 

is taxable to the recipient under the laws of the treaty country of which he or she is a resident, it 

is a payment of alimony. If not, it is a payment of child support. Under the proposed treaty, 

alimony paid by a resident of a treaty country to a resident of the other treaty country is taxable 

only in the country in which the recipient is a resident. This rule is the same as under the U.S. 

Model treaty. Child support payments, however, are taxable only in the resident country of the 

payor. The U.S. Model treaty provides that child support payments are exempt from tax in both 

treaty countries. 

Pension fund income

In general

Article 17 also deals with cross-border pension contributions and taxation of pension 

funds. It is intended to remove barriers to the flow of personal services between the two 

countries that could otherwise result from discontinuities under the laws of each country 

regarding the deductibility of pension contributions and the taxation of a pension fund’s earnings 

and accretions in value. These rules are similar to new rules that were recently added to the 

corresponding articles of the Netherlands and United Kingdom treaties, and the proposed U.S.-

Belgium treaty; the proposed rules are also similar to the rules of Article 18 of the U.S. Model 

treaty. 

The term “pension fund” is defined in paragraph 1(k) of Article 3 (General Definitions) 

and means any person established in a treaty country that (1) 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 (2)(a) in the case of Belgium, is an entity organized under Belgian law and 

regulated by the Bank Finance and Insurance Commission, or (b) in the case of the United States, 

is generally exempt from U.S. income taxation with respect to the above-described activities. 

The proposed treaty provides that neither country may tax a resident on pension income 

earned through a pension fund that is a resident of the other country until such income is 

distributed. When a resident receives a distribution from a pension fund, such distribution is 
 

52 

subject to taxation in accordance with the provisions of Article 17 (or if relevant, Article 18). 

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, Belgium is prevented from taxing currently that 

fund’s earnings and accretions with respect to that individual. For purposes of this provision, 

rollovers to another pension fund in the same country are not treated as distributions. 

Cross-border employment

Under the proposed treaty, as under the U.S. Model treaty, if an individual who is a 

member or beneficiary of, or participant in, a pension fund established under the law of one 

treaty country performs personal services in the other country, or in a similar fund that is a 

resident of a comparable third country, whether or not the individual is resident in that other 

country, contributions made by or on behalf of the individual to the plan during the period he or 

she performs such personal services are deductible in computing his or her taxable income in the 

other country. Similarly, contributions made to the plan by or on behalf of his or her employer 

during such period, and benefits accrued under the plan, are not treated as part of his or her 

taxable income, and such contributions are allowed as a deduction in computing the employer’s 

profits in the other country. For example, if a participant in a U.S. qualified plan goes to work in 

Belgium for a period of time, contributions made by the participant and his or her employer 

during that period are not included in the participant’s income in Belgium, and the employer may 

deduct its contributions from its business profits in Belgium. The relief provided under these 

rules by the other country will not exceed the relief that would be allowed by that country to its 

residents for contributions to, or benefits accrued under, a pension plan established in that 

country, in the case of the United States, or recognized for tax purposes in that country, in the 

case of Belgium. 

The rules of the immediately preceding paragraph apply only if the following three 

conditions apply: (a) contributions by or on behalf of the individual, or by or on behalf of the 

individual’s employer were made under the pension plan or under a similar pension plan for 

which the first pension plan was substituted) before he or she began to exercise employment or 

self-employment in the other country; (b) the individual has performed personal services in the 

other treaty country for a cumulative period not exceeding ten calendar years; and (c) the 

competent authority of the other country has agreed that the pension plan “generally 

corresponds” to an pension plan recognized for tax purposes by that country. Conditions (a) and 

(c) above are found in the U.S. Model treaty. The rationale for condition (b), which is not found 

in the U.S. Model treaty, is that a host country should not be required to grant benefits under the 

immediately preceding paragraph in cases of very long visits to the host country. 

For purposes of condition (c) above, the U.S. pension funds eligible for these benefits 

(i.e., that generally correspond to a pension plan recognized for tax purposes in Belgium) include 

qualified plans under section 401(a), individual retirement plans (including individual retirement 

plans that are part of a simplified employee pension plan that satisfies section 408(k)), individual 

retirement accounts, individual retirement annuities, section 408(p) accounts and Roth IRAs 

under section 408A, section 403(a) qualified annuity plans, section 403(b) plans, section 457(b) 

plans, and the Thrift Savings Plan (section 7701(j)). 
 

53 

U.S. citizens resident in Belgium

The proposed treaty also provides special rules applicable to certain U.S. citizens who are 

resident in Belgium. Under these rules, a U.S. citizen who is resident in Belgium may exclude or 

deduct for U.S. tax purposes contributions to a pension fund that is a resident of Belgium, or is a 

similar fund that is a resident of a comparable third country, provided such contributions are 

made during the period the U.S. citizen exercises taxable employment in Belgium and are 

attributable to such employment, and the contribution is borne by a Belgian employer or Belgian 

permanent establishment. Similarly, employer contributions to, or benefits accrued under, such a 

pension plan are not treated as part of the employee’s taxable income in the United States. 

The U.S. tax benefits under these rules of the immediately preceding paragraph are 

limited to the lesser of: (1) the amount of relief allowed for the contributions or benefits in 

Belgium; and (2) the amount of relief that would be allowed by the United States for 

contributions to, or benefits accrued under, a generally corresponding pension plan recognized 

for tax purposes in the United States. 

To the extent relief is available to the individual under this provision, the contributions 

made to (and benefits accrued under) a pension plan recognized for tax purposes in Belgium are 

counted when determining the individual’s eligibility for benefits and contribution limits under a 

generally corresponding pension plan established in the United States. 

The benefits under these rules do not apply unless the U.S. competent authority has 

agreed that the pension plan generally corresponds to a pension plan recognized for tax purposes 

in the United States. 

Similar fund that is a resident of a comparable third country

For purposes of the rules relating to cross-border employment and the special rules 

relating to U.S. citizens resident in Belgium, a fund will be considered to be a similar fund that is 

a resident of a comparable third country if the fund is a resident of a country (other than a treaty 

country) that (1) is a member state of the European Union or any other European Economic Area 

country, is a party to the North American Free Trade Agreement, or is Switzerland; (2) provides, 

under a tax treaty or otherwise, comparable favorable treatment for contributions to a pension 

fund that is a resident of the treaty country providing benefits under one of these two sets of 

rules; and (3) has an information exchange provision in a tax treaty or other arrangement with the 

treaty country that is providing benefits under one of these two sets of rules, and such 

information exchange provision is satisfactory to such treaty country. 

Pension plan recognized for tax purposes in a treaty country

For purposes of the rules relating to cross-border employment and the special rules 

relating to U.S. citizens resident in Belgium, a pension plan is recognized for tax purposes in a 

treaty country if contributions to that plan would qualify for tax relief in that treaty country. 
 

54 

Saving clause

Paragraphs 1(a), 3, and 4 of Article 17 are subject to the saving clause of paragraph 4 of 

Article 1 (General Scope). Thus, for example, a U.S. citizen who is a resident of Belgium and 

receives 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 recipient’s 

country of residence the exclusive taxing right. Paragraphs 1(b), 2, 5, 6, and 9 of Article 17 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. Paragraph 7 of Article 17 is 

excepted from the saving clause by subparagraph 5(b) of Article 1, but only with respect to 

persons who are neither citizens of the host state nor admitted for permanent residence there. 

Accordingly, a person who becomes a U.S. citizen or permanent resident will no longer receive a 

deduction for contributions to a pension fund established in Belgium. 

Article 18. Government Service

Under paragraph 1 of Article 18 of the proposed treaty, remuneration, other than a 

pension, paid to an individual for services rendered to a treaty country (or political subdivision or 

local authority) is taxable only in that country. However, the remuneration is taxable only in the 

other country if the services are rendered there and the individual is a resident of that other 

country who is either a national of that other country or who did not become a resident of that 

other country solely for the purpose of rendering the services. According to the Technical 

Explanation, the provision applies to government employees and to independent contractors and 

employees of independent contractors engaged by governments to perform services for them. 

Paragraph 2 covers any pension and other similar remuneration that is not in the form of 

social security benefits and is in respect of government service rendered to a treaty county (or 

subdivision or authority) by an individual. Such a pension is taxable only in that country. 

However, such a pension is taxable only in the other country if the individual is both a resident 

and a national of the other country. Pensions paid to retired civilian and military employees of 

the government of either country are intended to be covered under paragraph 2. 

When benefits paid by a treaty country in respect of services rendered to that country (or 

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 

both social security benefits and government pensions are taxable exclusively by the source 

country. According to the Technical Explanation, the result differs only when the payment is 

made to a citizen and resident of the other country, who is not also a citizen of the paying 

country. In such a case, social security benefits continue to be taxable at source while 

government pensions are taxable only in the residence country. 

The treatment of payments described in paragraphs 1 and 2 of this article are subject to 

the provisions of those paragraphs and not to those of Articles 14 (Income from Employment), 

15 (Directors’ Fees), 16 (Entertainers and Sportsmen) or, except as noted above for social 

security payments, 17 (Pensions, Social Security, Annuities, Alimony, and Child Support). If, 
 

55 

however, the remuneration or pension is paid for services performed in connection with a 

business carried on by a treaty country (or subdivision or authority), those other articles, and not 

this article, apply. 

This article is generally not subject to the saving clause of the proposed treaty, Article 1, 

paragraph 4 (applicable to treaty country residents and its citizens). However, in the case of 

benefits conferred by the United States, the saving clause will apply to U.S. citizens and 

permanent residents. Thus, for example, a resident of Belgium who, in the course of rendering 

services to the government of Belgium, becomes a resident of the United States (but not a 

permanent resident) would be entitled to the exemption from taxation by the United States. In 

addition, an individual who receives a pension paid by the government of Belgium in respect of 

services rendered to that government is taxable on that 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

The proposed treaty modifies the present treaty to address the tax treatment of students, 

trainees, teachers, and researchers under one article. 

Students and business trainees

The treatment provided to students and business trainees under the proposed treaty 

generally corresponds to the treatment provided under the present treaty and the U.S. Model 

treaty, with certain modifications, and is similar to the provision of the OECD Model treaty. 

Under the proposed treaty, a student or business trainee who visits a treaty country (“host 

country”) and who is, or was immediately prior to visiting the host country, a resident of the 

other treaty country will be exempt from income tax in the host country on certain payments 

received if the purpose of the visit is to engage in full-time education or full-time training. The 

exempt payments are limited to those payments the individual may receive for his or her 

maintenance, education, or training as long as such payments are from sources outside the host 

country. In the case of business trainees, the exemption from income tax in the host country 

applies only for a period of two years from the time the visitor first arrives in the host country for 

training. 

The proposed treaty provides students and business trainees with an exemption for 

income from personal services performed in the host country up to a total of $9,000 U.S. dollars 

or its equivalent in euro annually. This amount will be adjusted every five years to take into 

account changes in the U.S. personal exemption and standard deduction and the Belgian basic 

allowance. 

As similarly defined in the U.S. Model treaty, a business trainee is an individual who is in 

the host country temporarily either (1) for the purpose of securing training required to qualify the 

individual to practice a profession or professional specialty or (2) as an employee of, or under 

contract with, a resident of the other treaty country for the primary purpose of acquiring 

technical, professional, or business experience from a person other than that resident or a person 

related to such resident. 
 

56 

Teachers and researchers

The treatment provided to teachers and researchers under the proposed treaty corresponds 

to the treatment provided under the present treaty, with certain modifications. Such a provision 

is not part of either the U.S. Model treaty or the OECD Model treaty. 

Under the proposed treaty, an individual who visits a host country for the purpose of 

teaching or engaging in research at a university, college, school, or other educational or research 

institution, and who at the beginning of that visit is a resident of the other treaty country, 

generally is exempt from tax in the host country on any remuneration received for such teaching 

or research. Income from research undertaken not in the public interest but primarily for the 

private benefit of a specific person or persons, however, is not tax exempt. The exemption 

applies only for a period of two years from the time the visitor first arrives in the host country. 

Article 20. Other Income

This article is a catch-all provision intended to cover items of income not specifically 

covered in other articles, and to assign the right to tax income from third countries to either the 

United States or Belgium. As a general rule, items of income not otherwise “dealt with” in the 

proposed treaty which are beneficially owned by residents of one of the countries are taxable 

only in the country of residence. This rule is similar to the rules in the U.S. and OECD models. 

In general, this rule gives the United States the sole right under the proposed treaty to tax 

income derived from sources in a third country and paid to a U.S. resident. However, in 

determining whether an item of income is “dealt with” in another article (and therefore not 

subject to Article 20), its source may or may not be relevant, depending on the type of income. 

For example, 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 treaty countries, so income sourced in 

a third country that is attributable to a permanent establishment of a Belgian resident in the 

United States is subject to Article 7 and not Article 20. In contrast, Article 11 (Interest) 

addresses only the taxation of interest arising in a treaty country. Interest arising in a third 

country that is not attributable to a permanent establishment is subject to Article 20. 

According to the Technical Explanation, examples of types of items of income covered 

by Article 20 include income from gambling, punitive (but not compensatory) damages and 

covenants not to compete. Article 20 also applies 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 fall 

within Article 20 if derived by persons not engaged in the trade or business of dealing in such 

instruments, unless such instruments are being used to hedge risks arising in a trade or business. 

The general rule stated above does not apply to income (other than income from real 

property as defined in Article 6) if the beneficial owner of the income is a resident of one country 

and carries on business in the other country through a permanent establishment situated therein, 

and the income is attributable to such permanent establishment. In such a case, the provisions of 

Article 7 (Business Profits) will apply. 
 

57 

This article is subject to the saving clause, so U.S. citizens who are residents of Belgium 

will continue to be taxable by the United States on income to which this article applies, including 

relevant third-country income. 

Article 21. Limitation on Benefits

In general

Article 21 of the proposed treaty includes rules that are similar to the limitation-onbenefits provisions included in other recent U.S. income tax treaties and protocols. These rules 

are intended to prevent the indirect use of the treaty by persons who are not entitled to its 

benefits by reason of residence in Belgium or the United States. 

The proposed treaty is intended to limit double taxation caused by the interaction of the 

tax systems of the United States and Belgium as they apply to residents of the two countries. At 

times, however, residents of third countries attempt to benefit from a treaty by engaging in treaty 

shopping. Treaty shopping by a third-country resident may involve organizing in a treaty 

country a corporation that is entitled to the benefits of the treaty. Alternatively, a third-country 

resident eligible for favorable treatment under the tax rules of its country of residency may 

attempt to reduce the income base of a treaty country resident by having that treaty country 

resident pay to it, directly or indirectly, interest, royalties, or other amounts that are deductible in 

the treaty country from which the payments are made. Limitation-on-benefits provisions are 

intended to deny treaty benefits in certain cases of treaty shopping or income stripping engaged 

in by third-country residents. 

Generally, a resident of either treaty country is entitled to all the benefits accorded by the 

proposed treaty if the resident has any one of six listed attributes. The six attributes are that the 

resident is (1) an individual; (2) one of the two treaty countries or a political subdivision or local 

authority of one of the two countries; (3) a company that satisfies a public company test or that is 

a subsidiary of a public company; (4) a pension fund that satisfies a beneficiaries test or a 

sponsor test; (5) an organization that is established and maintained in its country of residence 

exclusively for religious, charitable, scientific, artistic, cultural, or educational purposes, even if 

all or part of its income or gains are exempt from tax under the residence country’s domestic 

law; or (6) an entity that satisfies an ownership test and a base erosion test. A resident that has 

none of these six attributes may be entitled to treaty benefits with respect to certain items of 

income under the derivative benefits test or the active business test. 

Special rules apply to treaty country residents that function as headquarters companies for 

multinational corporate groups. 

Special anti-abuse rules govern certain items of income derived from the United States by 

an enterprise resident in Belgium in so-called “triangular cases.” 

A person that does not satisfy any of the requirements described above may be entitled to 

the benefits of the treaty if the source country’s competent authority so determines. 
 

58 

Six attributes for qualification for all treaty benefits

Individual

Under the proposed treaty, an individual resident of the United States or Belgium is 

entitled to all treaty benefits. If, however, such an individual receives income as a nominee on 

behalf of a third-country resident, and thus is not the beneficial owner of the income, benefits 

may be denied. 

Governments

The proposed treaty provides that the United States and Belgium, and any political 

subdivision or local authority of either of the two countries are entitled to all treaty benefits. 

Publicly traded companies and subsidiaries

A company that is a resident of Belgium or the United States is entitled to all treaty 

benefits if the principal class of its shares (and any disproportionate class of shares) is regularly 

traded on one or more recognized stock exchanges (the “regular trading test”) and either (1) the 

company’s principal class of shares is primarily traded on a recognized stock exchange in its 

country of residence or, in the case of a Belgian company, on a recognized stock exchange in the 

European Union or in any other European Economic Area country or, in the case of a U.S. 

company, on a recognized stock exchange located in another state that is a party to the North 

American Free Trade Agreement (the "primary trading test"), or (2) the company’s primary place 

of management and control is in its country of residence (the "management and control test"). 

Certain key elements of the regular trading test, primary trading test, and management and 

control test are described below. 

The term “principal class of shares” means the ordinary or common shares of a company 

representing the majority of the aggregate voting power and value of that company. If the 

company does not have a single class of ordinary or common shares representing the majority of 

the aggregate voting power and value, then the “principal class of shares” means that class or 

those classes of shares that in the aggregate represent a majority of the aggregate voting power 

and value of the company. 

A company that is resident in one treaty country has a “disproportionate class of shares” 

if any outstanding class of shares is subject to terms or other arrangements that entitle a 

shareholder to a larger portion of the company’s income, profit, or gain in the other treaty 

country than that to which the shareholder would be entitled in the absence of those terms or 

arrangements. For example, a company resident in Belgium meets this test 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 term “shares” includes depository receipts for shares. 

A class of shares is considered to be “regularly traded” in a taxable year if the aggregate 

number of shares of that class traded on one or more recognized exchanges during the preceding 

taxable year is at least six percent of the average number of shares outstanding in that class 
 

59 

during that preceding taxable year. The Technical Explanation notes that trading on one or more 

recognized stock exchanges may be aggregated for purposes of meeting the "regularly traded" 

requirement. 

The term “recognized stock exchange” means the NASDAQ System owned by the 

National Association of Securities Dealers, Inc.; any stock exchange registered with the U.S. 

Securities and Exchange Commission as a national securities exchange under the U.S. Securities 

Exchange Act of 1934; 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 any other stock exchange agreed upon by the competent authorities of the treaty 

countries. 

The term “primarily traded” is not defined in the proposed treaty and therefore has the 

meaning it has under the laws of the relevant treaty country, usually the source country. In the 

United States, the term has the same meaning as it does under Treas. Reg. section 1.884-5(d)(3). 

Based on that provision, the Technical Explanation states that 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 treaty country 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 the principal class of shares (and any disproportionate class of shares) of 

which is regularly traded on a recognized stock exchange but which does not satisfy the primary 

trading test (that is, the requirement that a company’s principal class of shares be primarily 

traded on a recognized stock exchange in the required area) may claim treaty benefits if it 

satisfies the management and control test – that is, if the company’s primary place of 

management and control is in the treaty country of which it is a resident. According to the 

Technical Explanation, a company’s primary place of management is located in the treaty 

country 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 

country than in the other treaty country or any third country, and if the staff that support the 

management in making those decisions are also based in that residence country. 

The Technical Explanation notes that the management and control test should be 

distinguished from the “place of effective management” test used by many countries and in the 

OECD Model treaty to establish residence. The place of effective management test often has 

been interpreted to mean the place where the board of directors meets. Under the proposed 

treaty, 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. 

A company that does not satisfy the regular trading test and either the primary trading test 

or the management and control test (because, for example, its shares are not publicly traded) may 

be entitled to treaty benefits if shares representing at least 50 percent of its aggregate voting 

power and value (and at least 50 percent of any disproportionate class of its shares) are owned, 

directly or indirectly, by five or fewer companies that satisfy the regular trading test and either 

the primary trading test or the management and control test, provided that, in the case of indirect 
 

60 

ownership, each intermediate owner is a resident of the United States or Belgium. This rule 

allows certain subsidiaries of publicly-traded companies to be eligible for all benefits under the 

treaty. 

Pension funds

A pension fund is entitled to all the benefits of the proposed treaty if more than 50 

percent of the fund’s beneficiaries, members, or participants are individuals resident in either the 

United States or Belgium or if the organization sponsoring the fund is entitled to benefits under 

the proposed treaty. According to the Technical Explanation, for purposes of this provision, the 

term “beneficiaries” should be understood to refer to the persons receiving benefits from the 

organization. 

Tax-exempt organizations

An organization established and maintained in its country of residence exclusively for 

religious, charitable, scientific, artistic, cultural, or educational purposes is entitled to treaty 

benefits notwithstanding that all or part of its income or gains may be exempt from tax under the 

domestic law of that country. The Technical Explanation notes that a tax-exempt organization 

other than a pension fund qualifies for benefits without regard to the residence of its beneficiaries 

or members. 

Ownership and base erosion tests

An entity that is a resident of one of the treaty countries is entitled to treaty benefits if it 

satisfies both an ownership test and a base erosion test. 

An entity that is a resident of a treaty country satisfies the ownership test if on at least 

half the days of the taxable year at least 50 percent of each class of the entity’s shares or other 

beneficial interests is owned, directly or indirectly, by residents of that treaty country who are 

entitled to treaty benefits under the limitation-on-benefits article as individuals, governments, 

parent companies that meet the public company test, pension funds, or tax-exempt organizations. 

The base erosion test is satisfied only if less than 50 percent of the person’s gross income 

for the taxable year, as determined in that person’s country of residence, is paid or accrued, 

directly or indirectly, in the form of payments deductible in the person’s country of residence, to 

persons who are not residents of either treaty country entitled to treaty benefits under this article 

as individuals, governments, parent companies that meet the public company test, tax-exempt 

organizations, or pension funds. Arm’s-length payments made 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 entity making the payment do not count against the entity in determining 

whether the 50-percent threshold is reached. 

The Technical Explanation states that trusts may be entitled to the benefits of this 

provision if they are treated as residents under Article 4 (Residence) and they otherwise satisfy 

the ownership and base erosion tests. 
 

61 

Derivative benefits rule

The proposed treaty includes derivative benefits rules that are generally intended to allow 

a treaty-country company treaty benefits for an item of income if the company’s owners would 

have been entitled to the same benefits for the income had those owners derived the income 

directly. Under these derivative benefits rules, a treaty country company is eligible for treaty 

benefits for an item of income only if the company satisfies both an ownership requirement and a 

base erosion requirement. 

A company satisfies the ownership requirement if shares representing at least 95 percent 

of the company’s aggregate voting power and value, and at least 50 percent of any of the 

company’s disproportionate class of shares, are owned directly or indirectly by seven or fewer 

persons who are equivalent beneficiaries. The term "disproportionate class of shares" has the 

same definition as the definition previously described. 

A company satisfies the base erosion requirement for an item of income only if, in the 

taxable year in which the income item arises, the amount of the deductible payments or accruals 

the company makes, directly or indirectly, to persons who are not equivalent beneficiaries is less 

than 50 percent of the company’s gross income for the year, as determined in the company’s 

country of residence. Deductible payments do not include arm’s-length payments in the ordinary 

course of a business for services or tangible property and payments in respect of financial 

obligations to a bank that is not related to the company making the payment. The Technical 

Explanation notes that the base erosion requirement under the derivative benefits rule is the same 

as the base erosion test described previously (that is, the test that is included in the rules for 

determining whether a treaty country resident has one of the six attributes for qualification for all 

treaty benefits), except that, for the derivative benefits rule, deductible payments made to 

equivalent beneficiaries, not just to residents of a treaty country entitled to treaty benefits, are 

excluded from the payments that count toward the 50-percent limitation. 

An equivalent beneficiary must be a resident of a European Union member state, a 

European Economic Area state, a North American Free Trade Agreement party, or Switzerland 

(together, “qualifying countries”) and must satisfy either of two criteria described below. 

The first criterion includes two requirements. First, the person must be entitled to all 

treaty benefits under a comprehensive income tax treaty between a qualifying country and the 

country from which the benefits of the U.S.-Belgium treaty are being claimed (an "applicable 

treaty"), and this entitlement to treaty benefits must result from satisfaction of limitation-onbenefits provisions analogous to the proposed treaty’s rules, described above, for individuals, 

governments, publicly-traded companies, pension funds, and tax-exempt organizations. If the 

applicable treaty does not include a comprehensive limitation-on-benefits article, this first 

requirement is satisfied only if the person would meet the proposed treaty’s requirements for 

entitlement to treaty benefits as an individual, a government, a publicly-traded company, a taxexempt organization, or a pension fund. Second, for insurance premiums and income from 

dividends, interest, or royalties, the person must be entitled under an applicable treaty to a rate of 

tax on that income that is at least as low as the rate applicable under the proposed treaty (the “tax 

rate test”). 
 

62 

The Technical Explanation gives the following example to illustrate the operation of the 

tax rate test. A U.S. company is wholly owned by a Belgian company that in turn is wholly 

owned by a French company. Assume the Belgian company otherwise satisfies the requirements 

of the zero-rate dividend provision, and assume that if the French company received a dividend 

directly from the U.S. company, the applicable dividend withholding tax rate under the U.S.-

France treaty would be five percent. Under these facts, the French company would not be an 

equivalent beneficiary under the rules described above because it would not be entitled to a 

withholding tax rate at least as low as the applicable rate (zero) under the U.S.-Belgium tax 

treaty as modified by the proposed treaty. 

For dividend, interest, or royalty payments arising in Belgium and beneficially owned by 

a resident of the United States, the proposed treaty includes a special rule for determining 

whether a company that is a resident of an EU member state satisfies the tax rate test for 

purposes of determining whether the U.S. resident is entitled to treaty benefits for the payments. 

The special rule provides that the EU member state resident satisfies the tax rate test if a 

dividend, interest, or royalty payment arising in Belgium and paid directly to that EU member 

state resident would be exempt from withholding tax under an EU directive even though the 

income tax treaty between Belgium and that EU member state would permit imposition of a 

higher withholding tax rate on that payment than is permitted by the U.S.-Belgium tax treaty as 

amended by the proposed treaty. The Technical Explanation states that this special rule takes 

account of the fact that withholding taxes on many inter-company dividend, interest, and royalty 

payments are exempt within the EU under various EU directives. The special rule is necessary, 

according to the Technical Explanation, because many EU member countries have not renegotiated their tax treaties to reflect the EU directives’ elimination of withholding tax. 

Under the second criterion for determining whether a resident of a qualifying country is 

an equivalent beneficiary, the resident must be a Belgian or U.S. resident that is entitled to treaty 

benefits under one of the rules described previously for individuals, governments, publiclytraded companies, pension funds, and tax-exempt organizations. Under this rule, according to 

the Technical Explanation, a Belgian individual is an equivalent beneficiary for an item of 

income received by another treaty country resident regardless of whether the individual would 

have been entitled to receive the same benefits if it had received the income directly. The 

Technical Explanation states that this criterion was included to clarify that ownership by certain 

residents of a treaty country does not disqualify a U.S. or Belgian company from treaty benefits 

under the derivative benefits rules. If, for example, 90 percent of a Belgian company is owned 

by five companies that are residents of EU member states and that satisfy the first criterion 

described previously (the applicable treaty rules and the tax rate test), and 10 percent of the 

Belgian company is owned by a U.S. or a Belgian individual, the Belgian company still can 

satisfy the requirements of the ownership test of the derivative benefits rules. 

Active business test

Under the proposed treaty, a resident of one treaty country is entitled to treaty benefits 

with respect to an item of income derived from the other country if (1) the resident is engaged in 

the active conduct of a trade or business in its residence country and (2) the income from the 

other country is derived in connection with or is incidental to that trade or business. The 

proposed treaty provides that the business of making or managing investments for the resident’s 
 

63 

own account does not constitute an active trade or business unless the business is banking, 

insurance, or securities activities carried on by a bank, an insurance company, or a registered 

securities dealer. 

The term “trade or business” is not defined in the current treaty or in the proposed treaty. 

According to the Technical Explanation, under paragraph 2 of Article 3 (General Definitions) of 

the current treaty, when determining whether a resident of Belgium is entitled to the benefits of 

the treaty under the active business test 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 Technical Explanation states, 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, 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 Technical Explanation elaborates on the requirement that an item of income from the 

source country be derived “in connection with” or be “incidental to” the resident’s trade or 

business in its residence country. The Technical Explanation provides that an item of income is 

derived in connection with a trade or business if the income-producing activity in the source 

country is a line of business that “forms a part of” or is “complementary to” the trade or business 

conducted in the residence country by the income recipient. 

According to the Technical Explanation, a business activity generally will be considered 

to form part of a business activity conducted in the country 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 country of residence may be upstream, downstream, 

or parallel to the activity conducted in the country of source. Thus, the line of business may 

provide inputs for a manufacturing process that occurs in the source country, 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 country of source. 

The Technical Explanation states that for two activities to be considered to be 

“complementary,” the activities need not relate to the same types of products or services but 

should be part of the same overall industry and should 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 country 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 country of residence, 

it is necessary, according to the Technical Explanation, to identify the trade or business to which 

an item of income is attributable. Royalties generally are considered to be derived in connection 

with the trade or business to which the underlying intangible property is attributable. Dividends 

are 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. 
 

64 

The Technical Explanation further states that an item of income derived from the country 

of source is “incidental to” the trade or business carried on in the country of residence if 

production of the item facilitates the conduct of the trade or business in the country of residence. 

An example of incidental income is the temporary investment of working capital of a person in 

the country of residence in securities issued by persons in the country of source. 

The proposed treaty provides that if a resident of a treaty country or any of its associated 

enterprises carries on a trade or business activity in the other country that gives rise to an item of 

income, the active business test applies to the item of income only if the trade or business 

activity in the residence country is substantial in relation to the trade or business activity in the 

source country. The determination is made separately for each item of income derived from the 

source country. 

The Technical Explanation explains that 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 (that is, 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 

treaty country, the nature of the activities performed in each country, and the relative 

contributions made to that trade or business in each country. According to the Technical 

Explanation, in making each determination or comparison, due regard will be given to the 

relative sizes of the U.S. and Belgian economies. 

The proposed treaty provides that, in determining whether a person is engaged in the 

active conduct of a trade or business in a treaty country, activities conducted by persons 

“connected” to that first person are deemed to be conducted by that first person. A person is 

“connected” to another person if one possesses at least 50 percent of the beneficial interest in the 

other (or, in the case of a company, at least 50 percent of the aggregate voting power and at least 

50 percent of the aggregate value of the shares in the company or of the beneficial equity interest 

in the company), or another person possesses, directly or indirectly, that requisite interest in each 

of the two entities. A person is also considered to be connected to another if, based on all the 

relevant facts and circumstances, one has control of the other or both are under the control of the 

same person or persons. 

Rules for headquarters companies

Under the proposed treaty, a resident of the United States or Belgium is entitled to treaty 

benefits if that person functions as a headquarters company for a multinational corporate group. 

A person is considered a headquarters company for this purpose only if each of several criteria is 

satisfied. 

Overall supervision and administration

To be considered a headquarters company, a person must provide a substantial portion of 

the overall supervision and administration of the multinational corporate group. This supervision 

and administration may include, but cannot be principally, group financing. 
 

65 

The Technical Explanation states that a person will be considered to engage in 

supervision and administration only if it engages in a number of the following activities: group 

financing (but, as mentioned above, not as its principal activity), pricing, marketing, internal 

auditing, internal communications, and management. In determining whether a substantial 

portion of the overall supervision and administration of the group is provided by the headquarters 

company, that company’s headquarters-related activities must be substantial in relation to the 

same activities for the same group performed by other entities. 

Active trade or business

Under the active trade or business requirement, the multinational corporate group must 

consist of companies that are resident in, and engaged in an active business in, at least five 

countries, and the business activities carried on in each of the five countries (or five groupings of 

countries) must generate at least 10 percent of the gross income of the group. The Technical 

Explanation states that this active trade or business rule is the first of several requirements 

intended to ensure that the relevant group is truly multinational. According to the Technical 

Explanation, so long as there are at least five individual countries or groupings that satisfy the 

10-percent requirement, the income from multiple countries may be aggregated into nonoverlapping groupings in determining whether the 10-percent gross income requirement is 

satisfied. If the gross income requirement is not satisfied for a taxable year, the taxpayer may 

satisfy the requirement by applying the 10-percent gross income test to the average of the gross 

incomes for the four years preceding the taxable year. 

The Technical Explanation gives the following example of the operation of the active 

trade or business requirement. BHQ is a Belgian resident that functions as a headquarters 

company for a group of companies resident in the United States, Canada, New Zealand, the 

United Kingdom, Malaysia, the Philippines, Singapore, and Indonesia. In 2008, the total gross 

income of the multinational corporate group is $137, of which $40 is generated in the United 

States, $25 in Canada, $10 in New Zealand, $30 in the United Kingdom, $10 in Malaysia, $7 in 

the Philippines, $10 in Singapore, and $5 in Indonesia. Ten percent of the group’s gross income 

in 2008 is $13.70; only the United States, Canada, and the United Kingdom satisfy the 10-

percent requirement by themselves. Together, the New Zealand and Malaysia members generate 

$20 of gross income, and the Philippines, Singapore, and Indonesia members together generate 

$22 of gross income. These two groupings therefore may be treated as the fourth and fifth 

members of the group (in addition to the United States, Canada, and the United Kingdom) under 

the active trade or business requirement, and the requirement is satisfied in 2008. 

Single-country limitation

The business activities carried on in any one country other than the residence country of 

the headquarters company must generate less than 50 percent of the gross income of the group. 

If this less-than-50-percent requirement is not satisfied for a taxable year, it will be satisfied if 

the percentage for the four years preceding the taxable year is less than 50 percent. The 

Technical Explanation provides an example of the application of this rule: 

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 U.S. subsidiary in the 
 

66 

2008 taxable year. The states of residence of the companies in the group, the sites of their 

activities, and the amounts of gross income attributable to the companies 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 U.S. situs companies’ total gross income of $130 in 2012 is not less than 50 

percent of the gross income of the group, the provision is not satisfied with respect to dividends 

derived in 2012. However, the U.S. situs companies’ 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 through 2011 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 United States satisfies the 

single-country limitation. 

Other country gross income limitation

No more than 25 percent of gross income of a headquarters company that is a resident of 

one treaty country may be derived from the other treaty country. Thus, according to the 

Technical Explanation, if the headquarters company’s gross income for the taxable year is $200, 

no more than $50 of gross income may be derived from the other country. If this gross income 

requirement is not met for the taxable year, it may be satisfied based on the average percentage 

for the four preceding years. 

Independent Discretionary Authority

The headquarters company must have and exercise independent discretionary authority to 

carry out the overall supervision and administration functions described above for the overall 

supervision and administration requirement. The Technical Explanation states that this 

determination is made separately for each function. Thus, if a headquarters company is 

nominally responsible for group financing, pricing, marketing, and internal auditing functions, 

and another entity is actually directing the headquarters company as to the group financing 

function, the headquarters company would not be deemed to have independent discretionary 

authority for group financing, but it may have such authority for the other functions. 
 

67 

Income taxation rules

The headquarters company must be subject to the generally applicable income taxation 

rules in its country of residence. The Technical Explanation states that 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 trade or business would be subject. Thus, if one of the countries 

has or introduces special taxation legislation that imposes 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 headquarters companies, a 

headquarters company subject to these rules is not entitled to treaty benefits under the 

headquarters company rules. 

The Technical Explanation states that in accordance with paragraph 3 of Article 28 

(Entry into Force), this provision does not have effect until January 1, 2011. 

In connection with or incidental to a trade or business

The income that a headquarters company resident in one treaty country derives in the 

other treaty country must be derived in connection with or be incidental to the active business 

activities described in the active trade or business requirement above. For example, according to 

the Technical Explanation, if a Belgian company that satisfied the other requirements of the 

headquarters company rules acted as a headquarters company for a group that included a United 

States corporation, and the group was engaged in the design and manufacture of computer 

software, but the U.S. company was also engaged in the design and manufacture of 

photocopying machines, the income that Belgium company derived 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 treaty benefits under the headquarters company rules. 

The Technical Explanation similarly states that interest income received from the U.S. company 

also would be entitled to treaty benefits as long as the interest was attributable to the computer 

business supervised by the headquarters company. Interest income derived form an unrelated 

party, however, normally would not satisfy the in-connection-with-or-incidental requirement. 

The triangular case

The proposed treaty provides a special anti-abuse rule that, according to the Technical 

Explanation, addresses a Belgian resident’s use of the following structure to earn interest income 

from the United States. The Belgian resident (who is otherwise qualified for benefits under this 

article) organizes a permanent establishment in a third country that imposes 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 is an integral 

part of the Belgian resident. Consequently, the interest income that the permanent establishment 

earns on the loan is entitled to exemption from U.S. withholding tax under the treaty. Under the 

tax treaty between Belgium and the third country, Belgium does not tax the income earned by the 

permanent establishment. Consequently, the income is not taxed in Belgium or the United 

States, and is only lightly taxed in the third country. 
 

68 

Under the proposed treaty, the United States may impose withholding tax on the interest 

payments if the tax actually paid on the income in the third country is less than 60 percent of the 

tax that would have been payable to Belgium if the income were earned in Belgium and were not 

attributable to the permanent establishment in the third country. 

Although the example in the Technical Explanation involves interest income, the 

triangular provision also applies to royalties. Any interest or royalties to which the provision 

applies may be subject to a maximum withholding tax rate of 15 percent. 

According to the Technical Explanation, the principles of the U.S. subpart F rules are 

employed to determine whether the profits of the permanent establishment are subject to an 

effective rate of tax that is above the specified threshold. 

The triangular provision does not apply to a person’s interest income derived from the 

United States if the income 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 (other than the 

business of making, managing, or holding investments for the person’s own account, unless the 

business is banking or securities activities carried on by a bank or a registered securities dealer). 

The triangular provision does not apply to royalties that are received as compensation for the use 

of, or the right to use, intangible property produced or developed by the permanent establishment 

itself. 

Grant of treaty benefits by the competent authority

Under the proposed treaty, a resident of a treaty country that is not otherwise entitled to 

treaty benefits under this article may nonetheless be granted treaty benefits if the competent 

authority of the other treaty country determines that the establishment, acquisition, or 

maintenance of the resident and the conduct of its operations did not have as one of its principal 

purposes the obtaining of benefits under the treaty. The competent authority of the source 

country is required to consult with the competent authority of the residence country before 

denying treaty benefits under this provision. 

According to the Technical Explanation, the competent authority’s discretion under this 

provision is broad. The competent authority, for example, may grant all treaty benefits, may 

grant benefits only with respect to a particular item of income, and may set time limits on the 

duration of any relief granted. 

Article 22. Relief from Double Taxation

Internal taxation rules

United States

The United States taxes the worldwide income of its citizens and residents. It attempts 

unilaterally to mitigate double taxation generally by allowing taxpayers to credit the foreign 

income taxes that they pay against U.S. tax imposed on their foreign-source income. An indirect 

or “deemed-paid” credit is also provided. Under this rule, a U.S. corporation that owns 10 

percent or more of the voting stock of a foreign corporation and that receives a dividend from the 
 

69 

foreign corporation (or an inclusion of the foreign corporation's income) is deemed to have paid 

a portion of the foreign income taxes paid (or deemed paid) by the foreign corporation on its 

earnings. The taxes deemed paid by the U.S. corporation are included in its total foreign taxes 

paid for the year the dividend is received. 

A fundamental premise of the foreign tax credit is that it may not offset the U.S. tax on 

U.S.-source income. Therefore, the foreign tax credit provisions contain a limitation that ensures 

that the foreign tax credit only offsets U.S. tax on foreign-source income. The foreign tax credit 

limitation generally is computed on a worldwide consolidated basis. Hence, all income taxes 

paid to all foreign countries are combined to offset U.S. taxes on all foreign income. The 

limitation is computed separately for certain classifications of income (e.g., passive income and 

financial services income) in order to prevent the crediting of foreign taxes on certain high-taxed 

foreign-source income against the U.S. tax on certain types of traditionally low-taxed foreignsource income. Other limitations may apply in determining the amount of foreign taxes that may 

be credited against the U.S. tax liability of a U.S. taxpayer. 

Belgium

Belgian double tax relief depends upon the type of income that is earned abroad, and can 

take the form of an exemption, credit, or reduction of taxes. For example, Belgian resident 

individuals are taxed at one-half the normal tax rate on certain income from property situated 

abroad and for professional income earned and taxed abroad. However, this 50 percent reduction 

does not apply to income derived from capital investments and movable property used for 

business purposes in Belgium; instead a foreign tax credit is available if the income has been 

subject to a foreign tax similar to the Belgian income tax, subject to certain limitation rules. 

Proposed treaty limitations on internal law

Overview

One of the principal purposes for entering into an income tax treaty is to limit double 

taxation of income earned by a resident of one of the countries that may be taxed by the other 

country. Unilateral efforts to limit double taxation are imperfect. Because of differences in rules 

as to when a person may be taxed on business income, a business may be taxed by two countries 

as if it were engaged in business in both countries. Also, a corporation or individual may be 

treated as a resident of more than one country and be taxed on a worldwide basis by both. 

Part of the double tax problem is dealt with in other articles of the proposed treaty that 

limit the right of a source country to tax income. This article provides further relief where both 

Belgium and the United States otherwise still tax the same item of income. This article is not 

subject to the saving clause, so that the country of citizenship or residence will waive its 

overriding taxing jurisdiction to the extent that this article applies. 

The present treaty provides separate rules for relief from double taxation for the United 

States and Belgium. The present treaty generally provides for relief from double taxation of U.S. 

residents and citizens by requiring the United States to permit a credit against its tax for taxes 

paid to Belgium. The determination of this credit is made in accordance with U.S. law. In the 

case of Belgium, the present treaty generally provides relief from double taxation by a 
 

70 

combination of exemption and credit: for instance, Belgium exempts certain income from 

taxation (but Belgium may take the excluded income into account for purposes of determining 

the rate of tax on the remainder of income, i.e., Belgium reserves the right to apply an exemption 

with progression regime), while other income (including certain dividends, interest and royalties) 

is subject to tax in Belgium but eligible for a credit for taxes paid to the United States. 

Dividends paid by a U.S. corporation to a Belgian corporate shareholder, however, are exempt 

from tax in Belgium to the extent that the dividends would have been exempt from tax if the two 

corporations had both been Belgian corporations. 

U.S. tax relief for Belgian taxes paid

The proposed treaty generally provides that the United States will allow a U.S. citizen or 

resident a foreign tax credit for the income taxes imposed by Belgium. The proposed treaty also 

requires the United States to allow a deemed-paid credit, with respect to Belgian income tax, to 

any U.S. company that receives dividends from a Belgian company if the U.S. company owns 10 

percent or more of the voting stock of such Belgian company. The credit generally is to be 

computed in accordance with the provisions and subject to the limitations of U.S. law (as such 

law may be amended from time to time without changing the general principles of the proposed 

treaty provisions). This provision is similar to those found in the U.S. Model and treaty many 

U.S. treaties. 

The proposed treaty provides that the taxes referred to in paragraphs 3(a) and 4 of Article 

2 (Taxes Covered) will be considered creditable income taxes for purposes of the proposed 

treaty. This includes the Belgian individual and corporate income taxes, the income tax on legal 

entities, and the income tax on non-residents. 

The proposed treaty contains a resourcing rule for these purposes. Under the proposed 

treaty, an item of gross income (as defined under U.S. law) that is derived by a U.S. resident and 

that is taxed by Belgium under the proposed treaty will be deemed to be Belgian-source income 

for U.S. foreign tax credit purposes. The Technical Explanation states that this resourcing rule is 

intended to ensure that a U.S. resident can obtain a U.S. foreign tax credit for Belgian taxes paid 

when the proposed treaty assigns primary taxing jurisdiction to Belgium. The Technical 

Explanation further states that in the case of a U.S.-owned foreign corporation, the resourcing 

rules under Code section 904(g)(10) may apply for purposes of determining the amount of the 

U.S. foreign tax credit with respect to such income (including rules applying separate foreign tax 

credit limitations to such resourced income). This rule is consistent with the U.S. Model treaty. 

Belgian tax relief for U.S. taxes paid

The proposed treaty provides that Belgium will provide relief from double taxation 

through a mixture of the credit and exemption methods. Where a resident of Belgium derives 

income other than dividends, interest and royalties which is taxed in the U.S. in accordance with 

the proposed treaty, Belgium will exempt such income from taxation, but Belgium may take the 

excluded income into account for purposes of determining the rate of tax on the remainder of 

income (i.e., Belgium reserves the right to apply exemption with progression). 
 

71 

The proposed treaty contains a special rule for residents of Belgium deriving income 

described above through a so-called hybrid entity, i.e., an entity which is fiscally transparent for 

U.S. tax purposes but viewed as a company under Belgian law. As described in the Technical 

Explanation, a resident of Belgium deriving income described above from participation in such 

an entity will generally be subject to tax in the United States on his proportional share of the 

income of such entity. However, since Belgian tax law views such an entity as not 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. 

If and when such a distribution occurs, there would (absent a special provision) be double 

taxation on the investor with respect to such income, first in the United States when it was earned 

by the enterprise and passed through to the investor, and later in Belgium when the earnings 

were distributed to the investor. According to the Technical Explanation, subparagraph b) is 

designed to permit a Belgian investor in such circumstances to claim an exemption from Belgian 

tax with respect to the income out of which the income (treated as a dividend under Belgian law) 

is paid 

The proposed treaty retains the rule contained in the present treaty providing that 

dividends paid by a U.S. corporation to a Belgian corporate shareholder are exempt from tax in 

Belgium to the extent that the dividends would have been exempt from tax if the two 

corporations had both been Belgian corporations. The proposed treaty adds a provision that with 

respect to dividends not eligible for exemption under the above rule, the Belgian company will 

be entitled to deduct from its Belgian corporate income tax the U.S. tax levied on such dividends 

in accordance with Article 10 (Dividends) of the proposed treaty, subject to certain limitations. 

The proposed treaty also adds a provision under which Belgium will generally permit a 

resident of Belgium to claim a credit against Belgian income tax liability for the U.S. tax levied 

on such interest or royalties (subject to provisions of Belgian law concerning the deduction of 

taxes paid in a foreign country). 

Finally, the proposed treaty provides that if a Belgian resident has a U.S. permanent 

establishment, and losses from the activity have effectively been deducted from the resident's 

income for purposes of determining Belgian tax liability, then the exemption from Belgian tax 

which the proposed treaty otherwise provides will not apply to the profits of other taxable 

periods attributable to that permanent establishment to the extent those profits have also been 

exempted from tax in the United States by reason of such offsetting losses. 

Special rules for citizens, former citizens and former long-term residents of the U.S.

The proposed treaty contains special rules designed to provide relief from double taxation 

for U.S. citizens who are Belgian residents. Unlike the U.S. Model treaty, the rules also apply to 

former U.S. citizens or long-term residents who are Belgian residents. Under the proposed 

treaty, Belgium is not required to provide a credit to such Belgian residents for U.S. tax on 

profits, income, or chargeable gains from sources outside the United States (as determined under 

the laws of Belgium). The Technical Explanation notes that, as a result of this provision, no 

agreement is reached under the proposed treaty for relieving double taxation with respect to such 

income; the Technical Explanation suggests that the provisions of Article 24 (Mutual Agreement 

Procedure) could be used to alleviate double taxation in such cases. 
 

72 

In addition, under the proposed treaty, Belgium will allow a foreign tax credit to a U.S. 

citizen, former U.S. citizen, or former U.S. resident who is a Belgian resident by taking into 

account only the amount of U.S. taxes, if any, that may be imposed pursuant to the proposed 

treaty on a Belgian resident who is not a U.S. citizen. The Technical Explanation states that 

these rules apply to items of U.S.-source income that would either be exempt from U.S. tax or 

subject to reduced rates of U.S. tax under the proposed treaty if they had been received by a 

Belgian resident who is not a U.S. citizen. The Technical Explanation further states that the 

Belgian tax credit allowed with respect to such items need not exceed the U.S. tax that may be 

imposed under the proposed treaty, other than taxes imposed solely by reason of the U.S. 

citizenship of the taxpayer under saving clause of paragraph 4 of Article 1 (General Scope). The 

United States will then credit the income tax and capital gains tax actually paid to Belgium, 

determined after application of the preceding rule. The proposed treaty recharacterizes the 

income that is subject to Belgian taxation as foreign-source income for purposes of this 

computation, but only to the extent necessary to avoid double taxation of such income. 

Article 23. Non-Discrimination

The proposed treaty contains a comprehensive nondiscrimination article. It is similar to 

the nondiscrimination article in the U.S. Model treaty and to provisions that have been included 

in other recent U.S. income tax treaties. 

In general, under the proposed treaty, one country cannot discriminate by imposing more 

burdensome taxes on nationals of the other country than it would impose on its own comparably 

situated nationals in the same circumstances.21 Not all instances of differential treatment are 

discriminatory. Differential treatment is permissible in some instances under this rule on the 

basis of tax-relevant differences (e.g., the fact that one person is subject to worldwide taxation in 

a treaty country and another person is not, or the fact that an item of income may be taxed at a 

later date in one person’s hands but not in another person’s hands). 

Under the proposed treaty, neither country may tax a permanent establishment of an 

enterprise of the other country less favorably than it taxes its own enterprises carrying on the 

same activities. 

Similar to the U.S. and OECD Model treaties, however, a country is not obligated to 

grant residents of the other country any personal allowances, reliefs, or reductions for tax 

purposes on account of civil status or family responsibilities that are granted to its own residents. 

Subject to the anti-avoidance rules described in paragraph 1 of Article 9 (Associated 

Enterprises), paragraph 6 of Article 11 (Interest), and paragraph 4 of Article 12 (Royalties), each 

treaty country is required to allow its residents to deduct interest, royalties, and other 

disbursements paid by them to residents of the other country under the same conditions that it 

allows deductions for such amounts paid to residents of the same country as the payor. The 

 21 A national of one treaty country may claim protection under this article even if the national is 

not a resident of either treaty country. For example, a U.S. citizen who is resident in a third country is 

entitled to the same treatment in Belgium as a comparably situated Belgian national. 
 

73 

Technical Explanation states that the exception with respect to paragraph 6 of Article 11 

(Interest) would include the denial or deferral of certain interest deductions under section 163(j) 

of the Code, thus preserving for the United States the ability to apply its earnings stripping rules. 

In addition, any debts of a resident of one treaty country to a resident of the other treaty 

country shall, for purposes of determining the taxable capital of the obligor, be deductible under 

the same conditions as if they had been owed to a resident of the same treaty country. 

The nondiscrimination rules also apply to enterprises of one country that are owned in 

whole or in part by residents of the other country. Enterprises resident in one country, the capital 

of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents 

of the other country, will not be subjected in the first country to any taxation (or any connected 

requirement) that is more burdensome than the taxation (or connected requirements) that the first 

country imposes or may impose on other similar enterprises. As noted above, some differences 

in treatment may be justified on the basis of tax-relevant differences in circumstances between 

two enterprises. In this regard, the Technical Explanation provides examples of Code provisions 

that are understood by the two countries not to violate the nondiscrimination provision of the 

proposed treaty, including the rules that tax U.S. corporations making certain distributions to 

foreign shareholders in what would otherwise be nonrecognition transactions, the rules that 

impose a withholding tax on non-U.S. partners of a partnership, the rules that prevent foreign 

persons from owning stock in subchapter S corporations, and the rules that prevent foreign 

corporations from joining in filing consolidated returns with domestic corporations. 

The proposed treaty provides that nothing in the nondiscrimination article may be 

construed as preventing either of the countries from imposing a branch profits tax as described in 

paragraph 10 of Article 10 (Dividends). 

In addition, notwithstanding the definition of taxes covered in Article 2 (Taxes Covered), 

this article applies to taxes of every kind and description imposed by either country, or any 

political subdivision or local authority thereof. The Technical Explanation states that customs 

duties are not regarded as taxes for this purpose. 

The saving clause does not apply to the nondiscrimination article. Thus, a U.S. citizen 

who is resident in Belgium may claim benefits with respect to the United States under this 

article. 

Article 24. Mutual Agreement Procedure

General procedures

The proposed treaty contains the U.S. Model treaty mutual agreement provision, with 

some variations, that authorizes the competent authorities of the two countries to consult together 

to attempt to alleviate individual cases of double taxation not in accordance with the proposed 

treaty. 

Under this article, a resident of one country who considers that the action of one or both 

of the countries cause him or her to be subject to tax which is not in accordance with the 

provisions of the proposed treaty may (irrespective of internal law remedies) present his or her 
 

74 

case to the competent authority of either treaty country. Similar to the OECD Model treaty, but 

unlike the U.S. Model treaty, the proposed treaty provides that the case must be presented within 

three years from the first notification of the action resulting in taxation not in accordance with 

the provisions of the treaty. The proposed protocol provides that the term “first notification of 

the action resulting in taxation not in accordance with the provisions of the [treaty]” 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 treaty; 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. 

The proposed treaty provides that if the objection appears to be justified and that 

competent authority is not itself able to arrive at a satisfactory solution, that competent authority 

must endeavor to resolve the case by mutual agreement with the competent authority of the other 

country, with a view to the avoidance of taxation which is not in accordance with the proposed 

treaty. During the period that any mutual agreement proceeding is pending, any collection 

procedures are to be suspended. 

The competent authorities of the treaty countries are to endeavor to resolve by mutual 

agreement any difficulties or doubts arising as to the interpretation or application of the proposed 

treaty. In particular, the competent authorities may agree to: (1) the same attribution of income, 

deductions, credits, or allowances of an enterprise of one treaty country to the enterprise’s 

permanent establishment situated in the other treaty country; (2) the same attribution of income, 

deductions, credits, or allowances between permanent establishments located in the treaty 

countries, even if the enterprise is not located in a treaty country; (3) the same allocation of 

income, deductions, credits, or allowances between persons; (4) the same characterization of 

particular items of income; (5) the same characterization of persons; (6) the same application of 

source rules with respect to particular items of income; (7) a common meaning of a term; (8) 

advance pricing arrangements; and (9) the application of the provisions of each country’s 

domestic law regarding penalties, fines, and interest in a manner consistent with the purposes of 

the proposed treaty. The Technical Explanation clarifies that this list is a non-exhaustive list of 

examples of the kinds of matters about which the competent authorities may reach agreement. 

To the extent necessary to facilitate the resolution of a case subject to a mutual agreement 

procedure, the tax authorities of each treaty country are authorized under Article 24 to request 

the disclosure of information relevant to the mutual agreement procedure from any person who 

may have such information. In addition, each may conduct investigations and hearings 

notwithstanding any time limits in their domestic laws that would otherwise bar such requests for 

information. Consistent with the U.S. Model treaty, the proposed treaty also provides that any 

agreement is to be implemented even if such implementation otherwise would be barred by the 

statute of limitations or other procedural limitations under the domestic law of the treaty 

countries. 

The proposed treaty provides that the competent authorities may agree on administrative 

measures to carry out the provisions of the proposed treaty, particularly with respect to 

documentation to be furnished by a resident to support a claim for reduced tax under the 

proposed treaty. 
 

75 

The proposed treaty authorizes the competent authorities to communicate with each other 

directly, including through a joint commission, for purposes of reaching an agreement. The 

Technical Explanation states that this provision makes clear that it is not necessary to go through 

diplomatic channels in order to discuss problems arising in the application of the proposed treaty. 

Arbitration procedures

The current treaty does not provide for arbitration. Paragraphs 7 and 8 of Article 24 of 

the proposed treaty introduce a mandatory arbitration procedure that is sometimes referred to as 

“last best offer” or “final offer” arbitration.22 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 treaty countries with respect to the case. 

Paragraph 6 of the proposed protocol provides detailed rules regarding the new arbitration 

procedures.23

The proposed arbitration procedures raise a number of issues, which are discussed in Part 

VI of this pamphlet. 

New paragraph 7 of Article 24 sets forth the basic rule of the mandatory arbitration that 

requires the competent authorities to invoke the arbitration procedures if they have endeavored 

but are unable to reach a complete agreement in the case, and if three conditions are met. The 

first condition is that tax returns have been filed with at least one of the treaty countries with 

respect to the taxable years at issue in the case. The second condition is that the case is not a 

particular case that the competent authorities agree, before the date on which arbitration 

proceedings (“proceedings”) would otherwise have begun, is not suitable for determination by 

arbitration. The third condition is that the taxpayer and all “concerned persons” agree to certain 

nondisclosure conditions, as discussed below. Under the proposed treaty, all articles of the treaty 

are eligible for arbitration.24

 22 The new arbitration procedure is also informally called “baseball arbitration” because it is 

similar to the procedure used to resolve major league baseball salary disputes. In this type of arbitration, 

each of the parties proposes one and only one figure for settlement, and the arbitrator must select one of 

those figures as the award. 

23 A similar arbitration procedure is introduced in the proposed protocol to the U.S.-Germany 

income tax treaty. The few differences between the proposed Belgium and Germany treaty provisions are 

footnoted in the discussion below. 

24 Under the proposed protocol to the U.S.-Germany treaty, only issues arising under certain 

articles are automatically eligible. These articles are: Article 4 (Residence), insofar as it relates to the 

residence of a natural person, Article 5 (Permanent Establishment), Article 7 (Business Profits), Article 9 

(Associated Enterprises), and Article 12 (Royalties). Under the proposed protocol to the U.S.-Germany 

treaty, the competent authorities may agree that a particular case arising under these articles is not suitable 

for determination by arbitration. The competent authorities may also agree that other particular cases are 

suitable for arbitration. 
 

76 

The third condition is met when both competent authorities have received from each 

concerned person a statement agreeing that the concerned person and each person acting on the 

concerned person’s behalf (i.e., their authorized representatives or agents) will not disclose to 

any other person any information received during the course of the proceedings from either 

treaty country or the board, other than the determination of the board (the “nondisclosure 

agreement”). A concerned person that has the legal authority to bind any other concerned person 

on this matter may do so in a comprehensive statement. A concerned person is defined as the 

presenter of a case to a competent authority for consideration under Article 24 (i.e., the 

taxpayer), and any other persons whose tax liability to either treaty country may be directly 

affected by a mutual agreement arising from that consideration. For example, in the case of a 

U.S. corporation that brings a transfer pricing case for resolution to the U.S. competent authority 

with respect to a transaction with its Belgian subsidiary, both the U.S. corporation and its 

Belgian subsidiary (that may have a correlative adjustment as a result of the resolution of the 

case) are concerned parties. 

Meeting the third condition may trigger the beginning of arbitration proceedings. 

Paragraph 8(c) of Article 24 provides that the proceedings begin on the later of (i) two years after 

the “commencement date” of the case, unless the competent authorities have previously agreed 

to a different date, and (ii) the earliest date upon which both competent authorities have received 

the nondisclosure agreement. Paragraph 8(b) provides that the commencement date of a case is 

the earliest date on which the information necessary to undertake substantive consideration for a 

mutual agreement has been received by both competent authorities. 

Paragraph 6(p) of the proposed protocol requires that each competent authority shall 

confirm in writing to the other competent authority and to the concerned person or persons the 

date of its receipt of the information necessary to undertake substantive consideration for a 

mutual agreement. With respect to the United States, that information is the information 

required to be submitted to the U.S. competent authority under Revenue Procedure 2002-52, 

section 4.05, (or any applicable successor provisions), and for cases initially submitted as a 

request for an Advance Pricing Agreement, the information required to be submitted to the 

Internal Revenue Service under Revenue Procedure 2006-9, section 4 (or any applicable 

successor provisions). With respect to Belgium, that information is any information that would 

be required under instructions or commentaries published by the Federal Public Service Finance. 

In any event, the information is not considered received until both competent authorities have 

received copies of all materials submitted to either treaty country by every concerned person in 

connection with the mutual agreement procedure. Thus, the competent authorities must have 

exchanged copies of all of the submitted materials before the commencement date of the case is 

deemed to arrive, triggering the two-year period. 

Paragraph 6 of the proposed protocol provides for several procedural rules once 

arbitration proceedings have begun, but paragraph 6(q) provides that the competent authorities 

may modify or supplement any of the rules or procedures of paragraph 6 as necessary to more 

effectively implement the intent of paragraph 7 of Article 24 to eliminate double taxation. In 

addition, paragraph 6(f) provides that the arbitration board may adopt any procedures necessary 

for the conduct of its business provided that such procedures are not inconsistent with any 

provision of Article 24 or paragraph 6 of the proposed protocol. 
 

77 

Paragraph 6(e) of the proposed protocol provides that within 60 days from the date on 

which the proceeding begins, each treaty county is required to send a written communication to 

the other appointing one member of the board. Within 60 days from the date that the second 

such communication is sent, the two appointed board members are required to appoint a third 

member to serve as Chair of the board. If either treaty country fails to appoint a board member, 

or if the appointed members fail to appoint a third member, the remaining member or members 

are to be 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”)25 who is not a citizen of either treaty country, by written notice to both treaty 

countries within 60 days of the date of such failure. The competent authorities are required to 

develop a list of individuals with familiarity in international tax matters who may potentially 

serve as Chair of an arbitration board. However, the Chair may not be a citizen of either treaty 

country. 

Paragraph 6(g) of the proposed protocol prescribes the submission procedures in detail. 

Each of the treaty countries is permitted to submit to the board a proposed resolution describing 

its proposed disposition of the specific amounts of income, expense or taxation at issue in the 

case, and a supporting position paper. These submissions are due within 60 days of the 

appointment of the Chair of the board.26 The board is required to provide copies of these 

submissions to the other treaty country on the date on which the later of the two submissions are 

received by the board. If only one treaty country submits a timely proposed resolution, that 

proposed resolution is deemed to be the determination of the board in that case and the 

arbitration proceeding is terminated. Each of the treaty countries may submit a reply submission 

to the board within 120 days of the appointment of the Chair,27 to address any points raised by 

the other country’s proposed resolution or position paper. Additional information may be 

submitted to the board only at its request, and copies of any such request and the treaty country’s 

response is to be provided to the other treaty country on the date on which the request or 

response is submitted. Except for certain logistical matters, all communications between the 

treaty countries and the arbitration board is required to be in writing between the designated 

competent authorities and the Chair of the board. 

Any meetings of the board are required to be held in facilities provided by the treaty 

country whose competent authority initiated the mutual agreement proceeding in the case. Fees 

and expenses of the arbitration, including language translation fees, are generally to be borne 

equally by the treaty countries. The fees of members of the arbitration board are, in general, 

fixed at $2,000 per day (or the equivalent amount in euros), subject to modification by the 

competent authorities. The expenses of the board members are set, in general, in accordance 

with the International Centre for Settlement of Investment Disputes Schedule of Fees for 

arbitrators, as in effect on the date on which the proceedings begin, subject to modification by 

the competent authorities. Meeting facilities, related resources, financial management, other 

 25 That position is currently occupied by Jeffrey Owens. 

26 The proposed protocol to the U.S.-Germany treaty allows 90 days. 

27 The proposed protocol to the U.S.-Germany treaty allows 180 days. 
 

78 

logistical support, and general administrative coordination of the arbitration proceeding are to be 

provided, at its own cost, by the treaty country whose competent authority initiated the mutual 

agreement proceedings in the case. Any other costs are to be borne by the treaty country that 

incurs the costs. 

New paragraph 8(f) of Article 24 provides that the members of the board and their staffs 

are considered persons or authorities to whom information may be disclosed under Article 25 

(Exchange of Information and Administrative Assistance). Paragraph 6(n) of the proposed 

protocol provides that all members of the board and their staffs must submit statements to each 

of the treaty countries in confirmation of their appointment to the board in which they agree to 

abide by and be subject to the confidentiality and nondisclosure provisions of Article 25 and the 

applicable domestic laws of the treaty countries. In the event these provisions conflict, the most 

restrictive condition applies. All materials prepared in the course of the proceeding, or relating 

to the proceeding, are considered to be information exchanged between the treaty countries under 

Article 25. In addition, no information relating to the arbitration proceeding, including the 

board’s determination, may be disclosed by the members of the arbitration board or their staffs or 

by either competent authority, except as otherwise permitted by the treaty and the domestic laws 

of the treaty countries. 

Paragraph 6(h) of the proposed protocol provides that the arbitration board will deliver its 

determination in writing to the treaty countries within six28 months of the appointment of the 

Chair. The board is required to adopt as its determination one of the proposed resolutions 

submitted by the treaty countries. In making its determination, the arbitration board is required 

to apply the following authorities, in the following order of priority: (a) the provisions of the 

treaty; (b) any agreed commentaries or explanations of the treaty countries concerning the treaty; 

(c) the laws of the treaty countries to the extent not inconsistent with each other; and (d) any 

OECD commentary, guidelines, or reports regarding relevant analogous portions of the OECD 

Model treaty. 

New paragraph 8(e) of Article 24 provides that unless any concerned person does not 

accept the determination of the arbitration board, the determination shall constitute a resolution 

by mutual agreement under Article 24 and is binding on both treaty countries in the case. 

Paragraph 6(j) of the proposed protocol also provides that the determination of the board is 

binding upon the treaty countries, but adds that the determination will not state a rationale and 

will have no precedential value. Paragraph 6(b) provides that the determination by the board in a 

proceeding is limited to a determination regarding the amount of income, expense, or tax 

reportable to the relevant treaty country. Paragraph 6(m) provides that the treatment of any 

associated interest or penalties will be determined by applicable domestic law of the treaty 

country concerned. 

Paragraph 6(k) of the proposed protocol provides that within 30 days of receiving the 

determination of the board from the competent authority to which the case was first presented, 

each concerned person must advise that competent authority whether that concerned person 

 28 The proposed protocol to the U.S.-Germany treaty allows nine months. 
 

79 

accepts the determination of the board. If the case is in litigation, each concerned person who is 

a party to the litigation must also advise, within the same time frame, the relevant court of its 

acceptance of the determination of the board as the resolution by mutual agreement and 

withdraw from the consideration of the court the issues resolved through the arbitration 

proceeding.29 If any concerned person fails to so advise both the relevant competent authority 

and any relevant court within that time frame, the determination of the board will be considered 

not to have been accepted in that case. If the board’s determination is not accepted, the case may 

not subsequently be the subject of an arbitration proceeding. 

Paragraph 6(c) of the proposed protocol provides that notwithstanding the initiation of an 

arbitration proceeding, the competent authorities may reach a mutual agreement to resolve a case 

and terminate the proceeding, but only before a decision of the board has been accepted by all 

concerned persons. In addition, any concerned person may withdraw a request for the competent 

authorities to engage in the mutual agreement procedure under Article 24, thereby terminating 

the arbitration proceeding (as well as the mutual agreement procedure generally). 

Article 25. Exchange of Information and Administrative Assistance

The proposed treaty provides that the two competent authorities will exchange such 

information as is relevant to carry out the provisions of the proposed treaty, or the domestic laws 

of the two countries concerning all taxes covered by the treaty insofar as the taxation thereunder 

is not contrary to the proposed treaty. This exchange of information is not restricted by Article 1 

(General Scope). 

Any information exchanged under the proposed treaty is treated as secret in the same 

manner as information obtained under the domestic laws of the country receiving the 

information. The exchanged information may be disclosed only to persons or authorities 

(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 to which the proposed treaty applies, or the oversight of such taxes (e.g., the 

tax-writing committees of Congress and the General Accounting Office). Such persons or 

authorities must use the information for such purposes only. Exchanged information may be 

disclosed in public court proceedings or in judicial decisions. 

Under the proposed treaty, a country is not required to carry out administrative measures 

at variance with the laws and administrative practice of either country, to supply information that 

is not obtainable under the laws or in the normal course of the administration of either country, 

or to supply information that would disclose any trade, business, industrial, commercial, or 

professional secret or trade process or information the disclosure of which would be contrary to 

public policy. 

If information is requested by a country in accordance with this article, the proposed 

treaty provides that the other country will obtain the requested information, notwithstanding that 

such other country may not need such information at that time. 

 29 The proposed protocol to the U.S.-Germany treaty does not provide a litigation clause. 
 

80 

The proposed treaty provides that a country may not refuse to supply information because 

the information is held by a bank, or other financial institution, nominees or person acting in an 

agency or fiduciary capacity, or because it relates to ownership interests in a person. In order to 

obtain such information, the tax administration of a country shall have the power to ask for the 

disclosure of information and to conduct investigations and hearings. 

Notwithstanding general limitations on the exchange of information, in order to obtain 

requested information, the tax administration of a country shall have the power to ask for the 

disclosure of information and to conduct investigations and hearings outside any time limits 

imposed under domestic law. 

The proposed treaty provides that any penalties imposed under the domestic laws of a 

requested country for failing to give information necessary for carrying out the domestic tax laws 

of such country shall apply as if the obligation to provide information was an obligation provided 

under the domestic tax laws of such country. 

Under the proposed treaty, where a person refuses to give information requested or fails 

to give such information within the time required by the tax administration of the requested 

country, the requested country may bring appropriate enforcement proceedings against such 

person. Such person may be compelled to give such information under penalty of such civil or 

criminal penalties as may be available under the laws of the requested country. 

The proposed treaty provides that if specifically requested by the competent authority of 

a country, the competent authority of the other country must provide information under this 

article in the form of depositions of witnesses and authenticated copies of unedited original 

documents (including books, papers, statements, records, accounts, and writings). 

Under the proposed treaty, the requested country shall allow representatives of the 

requesting country to enter the requested country to interview individuals and examine books 

and records. Such interview or examination shall take place under the conditions and within the 

limits agreed upon by the competent authorities of both treaty countries. 

The proposed treaty provides that the competent authorities of the treaty countries shall 

agree upon the mode of application of the exchange of information under this article, including 

agreement to ensure comparable levels of assistance to each of the treaty countries. 

The proposed treaty provides that if the United States terminates paragraph three of 

Article 10 (Dividends) as permitted under the proposed treaty, Belgium will not be required to 

provide information held by a bank, or other financial institution, nominees or person acting in 

an agency or fiduciary capacity, or because it relates to ownership interests in a person as of the 

date that paragraph three of Article 10 is no longer effective. 

Article 26. Assistance in Collection

Under the proposed treaty, a treaty country shall endeavor to collect on behalf of the 

other treaty country, but only to the extent necessary to ensure that any exemption or reduced 

rate of tax at source granted under the proposed treaty is not enjoyed by persons not entitled to 

those benefits. The proposed treaty provides that a country is not required to carry out 
 

81 

administrative measures at variance with the regulations and practices of either country or which 

would be contrary to a treaty country’s sovereignty, security, or public policy. 

Article 27. Members of Diplomatic Missions and Consular Posts

The proposed treaty contains the rule found in the U.S. Model treaty, the present treaty, 

and other U.S. tax treaties that its provisions do not affect the fiscal privileges of members of 

diplomatic missions or consular posts under the general rules of international law or under the 

provisions of special agreements. Accordingly, the proposed treaty will not defeat the exemption 

from tax that a host country may grant to the salary of diplomatic officials of the other country. 

The saving clause does not apply in the application of this article to host country residents who 

are neither citizens nor lawful permanent residents of that country. Thus, for example, Belgian 

diplomats who are considered residents of the United States may be protected from U.S. tax. 

Article 28. Entry into Force

The proposed treaty provides that the treaty is subject to ratification in accordance with 

the applicable procedures of each country. Each country shall notify the other in writing through 

the diplomatic channel, accompanied by an instrument of ratification, when it has completed the 

required procedures. The proposed treaty will enter into force upon the exchange of instruments 

of ratification. 

With respect to withholding taxes, the provisions of the proposed protocol will have 

effect for amounts paid or credited on or after the first day of the second month next following 

the date on which the proposed treaty enters into force. With respect to other taxes, the 

provisions of the proposed treaty will have effect for taxable periods beginning on or after the 

first day of January next following the date on which the proposed treaty enters into force. 

Notwithstanding the general effective date of the proposed treaty, 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 taxation in its state of residence 

in the same manner that a company that is a resident of that same state and which engages in the 

active conduct of a trade or business in such state is subject to tax. The Technical Explanation 

states that Belgium law is in transition and as of January 1, 2011, this subparagraph will be met. 

The proposed treaty provides that the prior treaty generally ceases to have effect with 

respect to any tax or exchange of information as of the date the proposed treaty takes effect. 

Notwithstanding this provision, taxpayers may elect temporarily to continue to claim benefits 

under the present treaty with respect to a period after the proposed protocol takes effect if they 

would have been entitled to greater benefits under the present treaty. For such a taxpayer, the 

present treaty would continue to have effect in its entirety for a twelve-month period from the 

date on which the provisions of the proposed protocol would otherwise take effect. 

The proposed treaty provides that the provisions of Article 26 (Exchange of Information 

and Administrative Assistance) will have effect from the date of entry into force of the proposed 

treaty, without regard to the taxable period to which the matter relates. 
 

82 

For purposes of the arbitration provisions of Article 24 (Mutual Agreement Procedure), 

the proposed treaty is effective with respect to: (1) cases that are under consideration by the 

competent authorities as of the date the proposed treaty enters into force and (2) cases that come 

under consideration after that time. For cases that are under consideration as of the date the 

proposed treaty enters into force, the commencement date for such cases shall be the date the 

proposed treaty enters into force. 

Article 29. Termination

The article provides that the proposed treaty is to remain in effect indefinitely, unless 

terminated by one of the treaty countries. The treaty may be terminated at any time after five 

years from the date on which the treaty enters into force (as determined under Article 28). In 

addition, if notice of termination is given, the provisions of the treaty with respect to withholding 

at source will cease to have effect after the expiration of a period of six months beginning with 

the date notice of termination was given. For other taxes, the treaty will cease to have effect for 

taxable periods beginning on or after the expiration of this six-month period. 
 

83 

VI. ISSUES 

A. Arbitration 

In general

Paragraphs 7 and 8 of Article 24 of the proposed treaty introduce a mandatory arbitration 

procedure under which each of the competent authorities proposes one (and only one) figure for 

settlement and the arbitrator must select one of those figures as the award. Unless a taxpayer (or 

other concerned person) does not accept the arbitration determination, it is binding on the treaty 

countries with respect to the case. The current treaty does not provide for arbitration. 

New paragraph 7 of Article 24 requires the competent authorities to invoke the binding 

arbitration procedures if they have endeavored, but are unable, to reach a complete agreement in 

the case, and if three conditions are met. The first condition is that tax returns have been filed 

with at least one of the treaty countries with respect to the taxable years at issue in the case. The 

second condition is that the case is not a particular case that the competent authorities agree, 

before the date on which arbitration proceedings (“proceedings”) would otherwise have begun, is 

not suitable for determination by arbitration. The third condition is that the taxpayer and all 

“concerned persons” agree to certain nondisclosure conditions. Under the proposed treaty, all 

articles of the treaty are eligible for arbitration.30

The proposed treaty provides detailed procedural rules governing the arbitration 

proceedings, including strict time limits for submissions and the final determination of the board. 

Overview of issues

In general, it is beneficial to resolve tax disputes effectively and efficiently. The new 

arbitration procedures are intended to ensure that the mutual agreement procedures proceed 

according to a schedule and that all cases will be resolved within a time period not exceeding 

approximately 35 months. However, the proposed mandatory and binding arbitration procedures 

are new to the United States’ treaty network. It will take time to ascertain if these procedures are 

effective in meeting these objectives or if unexpected problems arise. Meanwhile, the Treasury 

Department may seek to negotiate treaty provisions with current or future treaty partners that are 

similar, in whole or in part, to the arbitration procedures of the proposed treaty. It is appropriate, 

therefore, to address issues or potential issues that may arise under the procedures, while 

 30 A similar arbitration procedure is introduced in the proposed protocol to the U.S.-Germany 

income tax treaty. Under the proposed protocol to the U.S.-Germany treaty (Article XVI, paragraph 22), 

only issues arising under certain articles are automatically eligible for arbitration. These articles are: 

Article 4 (Residence), insofar as it relates to the residence of a natural person, Article 5 (Permanent 

Establishment), Article 7 (Business Profits), Article 9 (Associated Enterprises), and Article 12 

(Royalties). Under the proposed protocol to the U.S.-Germany treaty, the competent authorities may 

agree that a particular case arising under these articles is not suitable for determination by arbitration. 

The competent authorities may also agree that other particular cases are suitable for arbitration. 
 

84 

considering the place of arbitration within the framework of the mutual agreement procedures of 

the U.S. treaty system. 

Other mandatory arbitration proposals and conventions

There have been other recent developments in the area of arbitration. On January 30, 

2007, the OECD adopted proposed changes to its Model treaty and commentary, incorporating a 

mandatory and binding arbitration procedure (the “OECD mandatory arbitration procedure”), 

some elements of which are generally similar to those of the proposed treaty.31 The OECD 

mandatory arbitration procedure allows a taxpayer whose case has any issues that remain 

unresolved after the case has been in a mutual agreement procedure for two years to require the 

issues to be submitted to arbitration. However, the details of the OECD mandatory arbitration 

procedure are not to be specified in the OECD Model treaty, but are, instead, left to an 

agreement, governing all arbitration cases, between the competent authorities. A proposed 

Annex to the proposed Commentary contains a Sample Mutual Agreement on Arbitration 

(“Sample Agreement”) that may be varied by the treaty countries (the Annex discusses a number 

of possible variations in a separate commentary on the issues raised by the Sample Agreement 

(the “Sample Agreement Commentary”)). 

The European Union has adopted certain mandatory and binding arbitration procedures 

that are applicable to transfer pricing disputes between the “EU-15” countries (the “EU 

mandatory arbitration procedure”).32 Under these procedures, two years after the case is 

submitted to one of the relevant competent authorities, the relevant competent authorities must 

set up an “advisory commission” charged with delivering an opinion within six months on the 

elimination of double taxation in the case under the arm’s-length principle. The competent 

authorities must either reach an agreement to eliminate double taxation within six months of the 

advisory commission’s opinion, or must accept and implement that opinion. 

Due to the implementation procedures employed by the EU, there was an interim period 

from January 1, 2000 through October 2004 in which the EU mandatory arbitration procedure 

was not in effect. Beginning November 1, 2004, the EU mandatory arbitration procedure was 

extended retroactively back to January 1, 2000. Due in part to these timing issues and in part to 

other reasons, a number of cases are currently awaiting arbitration under the EU mandatory 

 31 OECD Centre for Tax Policy and Administration (Report adopted by the Committee on Fiscal 

Affairs), Improving the Resolution of Tax Treaty Disputes (Jan. 30, 2007). Paragraph 7 of this report 

states that the changes will be included in the next update to the OECD Model treaty, which will be 

published in 2008. 

32 See Convention on the elimination of double taxation in connection with the adjustment of 

profits of associated enterprises (90/436/EEC), 1990 O.J. (L 225) 10 (extended by Protocol amending the 

Convention of 23 July 1990 on the elimination of double taxation in connection with the adjustment of 

profits of associated enterprises, 1999 O.J. (C 202) 1). The EU-15 countries are: Belgium, Denmark, 

Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal, Finland, 

Sweden, and the United Kingdom. A process is under way to extend those arbitration rules to newer 

members of the EU. 
 

85 

arbitration procedure. The European Commission recently expressed its concern with the 

procedure: 

The Commission considers that the number of long outstanding transfer pricing 

double tax cases means that, for reasons that need to be further explored, the 

Arbitration Convention is not eliminating transfer pricing related double taxation 

in the EU as well as it is supposed to. The proper functioning of the single market 

is therefore impaired. The Commission intends to consider how this failing can 

be addressed. It might well be that an instrument that ensures a more timely and 

effective elimination of double taxation, is necessary from the perspective of the 

single market.33

Mandatory arbitration and issues covered

Mandatory arbitration

The proposed treaty generally requires arbitration of qualifying cases that are unresolved 

two years after submission to both competent authorities, unless both competent authorities agree 

that the case is not suitable for arbitration. One objective of the new procedures is the more 

efficient resolution of these cases by the competent authorities prior to the running of the twoyear deadline triggering referral to arbitration. Another objective is the resolution of cases by 

arbitration within a guaranteed time period, notwithstanding the difficulty of one or both of the 

treaty countries in reaching agreement through the general mutual agreement process. 

However, if one competent authority is able to slow down the mutual agreement process 

in a number of cases with the expectation that the arbitrators will resolve difficult issues, the 

proposed arbitration procedures may not yield the expected favorable results for the mutual 

agreement process. The Committee may wish to inquire how the Treasury Department and the 

U.S. competent authority will monitor the competent authority function to determine the overall 

effects of the new arbitration procedures on the mutual agreement process. 

Issues covered

Another set of questions relates to the circumstances, treaty partners, and types of issues 

for which the mandatory resolution of cases would benefit the United States. The Committee 

may wish to inquire whether mandatory and binding arbitration will generally favor the United 

States or its treaty partner, whether particular types of issues would be more likely than others to 

be resolved adversely to the position of the United States, and whether it is appropriate for 

arbitration to cover all of the issues arising under this treaty (and future treaties). For example, 

the Committee may wish to consider the potential effects of including a mandatory and binding 

 33 Communication from the Commission to the Council, the European Parliament and the 

European Economic and Social Committee on the work of the EU Joint Transfer Pricing Forum in the 

field of dispute avoidance and resolution procedures and on Guidelines for Advance Pricing Agreements 

within the EU, COM(2007) 71 final, at para. 28 (Feb. 26, 2007). 
 

86 

arbitration provision in U.S. tax treaties with developing countries as well as the appropriateness 

of including such a provision in the U.S. Model treaty. 

Taxpayer participation in arbitration proceedings and consent to initiation and decision

Taxpayer participation

Taxpayers have an important role to play under the mutual agreement procedure of most 

U.S. tax treaties, including the U.S.-Belgium treaty. Under the existing treaty, as well as the 

proposed treaty and most other treaties, the taxpayer initiates the mutual agreement procedure 

and presents its case to the competent authorities.34 Once initiated, however, the general 

framework for mutual agreement proceedings is that they are a government-to-government 

activity.35 The arbitration procedures of the proposed treaty do not provide for direct taxpayer 

input to, or appearance before, the board (although such participation is not precluded). 

Some believe that the proposed arbitration procedures do not give due regard to the effect 

of the arbitration process upon taxpayers, and assert that the board might benefit from a direct 

understanding of taxpayers’ positions. Others fear that too much taxpayer involvement in the 

arbitration process could result in a more lengthy, expensive, and complicated set of procedures 

than those currently proposed. These persons believe that taxpayers’ primary concern in the 

competent authority process is that their cases are resolved expeditiously. It is also important to 

note that a taxpayer need not accept the board’s determination (as more fully discussed below). 

The Committee may wish to consider whether the proposed arbitration procedures strike the 

appropriate balance between efficiency of the deliberative process and taxpayer involvement.36

Taxpayer consent to initiation and decision

Under the proposed treaty, although the taxpayer does not have the formal right to 

consent to the arbitration process, the third required condition for arbitration is not met until both 

competent authorities have received from each concerned person (generally, taxpayers and 

related parties affected by the case) a statement agreeing that the concerned person and each 

person acting on the concerned person’s behalf (i.e., their authorized representatives or agents) 

will not disclose to any other person any information received during the course of the 

proceedings from either treaty country or the board, other than the determination of the board 

 34 The EU mandatory arbitration procedure also permits each of the associated enterprises, at its 

request, to appear before the advisory commission. EU mandatory arbitration procedure, Article 11, 

paragraph 2. See also Sample Agreement, paragraph 11, which allows the taxpayer to present its position 

to the arbitrators in writing to the same extent as would be allowed during mutual agreement procedures 

generally, and which also allows for oral presentation by the taxpayer with the permission of the 

arbitrators. 

35 See, e.g., Rev. Proc. 2006-54, sec. 12.02(4), 2006-49 I.R.B. 1035. 

36 A number of alternative means could be devised to balance efficiency and greater taxpayer 

involvement, if desired. For example, a taxpayer could be permitted to submit one brief to the board at its 

request, limited to five or 10 pages, if such taxpayer agrees to be bound by the board’s determination. 
 

87 

(the “nondisclosure agreement”). Accordingly, a taxpayer can prevent the initiation of 

arbitration proceedings by failing to enter into a nondisclosure agreement. Thus, the 

nondisclosure agreement has the effect of a consent and triggers the process initiating arbitration. 

In addition, a taxpayer or other concerned person can reject the determination of the board 

(including simply by failing to accept it within 30 days of receiving it from the competent 

authority). In that event, the case may not be the subject of further arbitration. 

Under the OECD mandatory arbitration procedure, the taxpayer must request arbitration, 

but has the option not to accept the mutual agreement between the competent authorities 

implementing the arbitration decision.37 In contrast, under the EU mandatory arbitration 

procedure, the taxpayer has no right to request or refuse arbitration in advance, or to accept or 

reject an arbitration decision. 

The Committee may wish to consider whether providing the taxpayer with the option to 

reject the arbitration decision is a necessary attribute of the type of arbitration adopted by the 

proposed treaty. In addition, the Committee may wish to inquire whether rejecting an arbitration 

determination could render uncreditable foreign taxes that would otherwise be creditable, due to 

the taxpayer’s failure to exhaust its remedies.38

“Last best offer” vs. “independent opinion” arbitration

In general

Under the EU mandatory arbitration procedure, the advisory commission must base its 

opinion on the arm’s-length principle. The competent authorities’ decision must also be based 

on that principle, and they may agree to publish their decision, if the taxpayer consents. 

Under paragraph 6(g) of the proposed protocol, each of the treaty countries submits to the 

board a proposed resolution describing its proposed disposition of the specific amounts of 

income, expense, or taxation at issue in the case, and a supporting position paper. The board is 

required to adopt as its determination one of the proposed resolutions submitted by the treaty 

countries, limited to a determination regarding the amount of income, expense, or tax reportable 

to the relevant treaty country. This method may be referred to as the “last best offer” or “final 

offer” approach.39 Paragraph 6(j) of the proposed protocol provides that the determination of the 

board is binding upon the treaty countries, but adds that the determination will not state a 

rationale and will have no precedential value. 

 37 Proposed paragraph 5 of Article 25 of the OECD Model treaty. 

38 The exhaustion of remedies rule requires the exhaustion of “all effective and practical 

remedies, including invocation of competent authority procedures available under applicable tax treaties.” 

Treas. Reg. sec. 1.901-2(e)(5)(i). 

39 The method is also informally called “baseball arbitration” because it is similar to the 

arbitration method used to revolve major league baseball salary disputes. 
 

88 

The OECD Sample Agreement Commentary describes the various options open to treaty 

partners in structuring the arbitral process. One method is the “independent opinion” approach, 

under which the arbitrators are presented with the facts and arguments of the parties based on 

applicable law, and then reach their own independent decision based upon a written, reasoned 

analysis of the facts involved and applicable legal sources. The Sample Agreement Commentary 

explains that there are a number of variations between the independent opinion and the last best 

offer approaches. For example, the arbitrators could reach an independent decision but would 

not be required to submit a written decision, but simply their conclusions. The Sample 

Agreement Commentary states that “to some extent, the appropriate method depends on the type 

of issue to be decided.” Although the Sample Agreement takes as its starting point the 

independent opinion approach, the Sample Agreement Commentary suggests that the last best 

offer approach may be better suited to factual questions rather than questions of law, and, 

alternatively, that competent authorities may agree to use this more “streamlined” process on a 

case-by-case basis.40

The use of the last best offer approach for decision making is intended to cause the 

negotiators to moderate their positions, on the theory that the arbitrators are more likely to accept 

a position that they view as reasonable or moderate. Consequently, the potential use in a 

particular case of the last best offer approach may induce the competent authorities to reach a 

voluntary agreement at some point in the mutual agreement process, prior to the issuance of the 

final arbitration decision or even before the case advances to arbitration. 

Precedent, feedback, or neither

Under the proposed treaty, the board provides only a determination regarding the amount 

of income, expense, or tax reportable to the relevant treaty country. The OECD mandatory 

arbitration procedure does not take a position on this issue, but the Sample Agreement provides 

that unless otherwise provided in the terms of reference to the arbitrators, the decision of the 

arbitrators is required to indicate the sources of law relied upon and the reasoning that led to its 

result.41 The Sample Agreement Commentary states that “showing the method through which 

the decision was reached is important in assuring acceptance of the decision by all relevant 

participants.”42 It is far less important, and perhaps undesirable, to disclose such reasoning if it 

only represents a position of one of the competent authorities which must be chosen by the 

board, as in the proposed treaty. 

Under last best offer arbitration, it is possible that interpretations of similar law (e.g., the 

arm’s-length principle) might vary widely across different arbitration proceedings. Moreover, no 

one would know that fact because the board’s rationale would never be disclosed. However, the 

 40 Sample Agreement Commentary, paragraphs 2-4. 

41 Sample Agreement, paragraph 15. Article 11 of the EU mandatory arbitration procedure 

requires the board to issue an “opinion,” which could be published with the consent of the enterprises 

concerned, implying that the board’s reasoning is stated in the opinion. 

42 Sample Agreement Commentary, paragraph 36. 
 

89 

question of whether the arbitration determination should be a reasoned opinion, and, if so, should 

be published, involves several considerations. A “judicial” model of published precedent, as 

some have recommended, might required the submission of more formalized legal briefs to the 

board and, therefore, more board resources, perhaps including staff, to interpret those briefs and 

devise a written opinion. The resulting body of bilateral international tax treaty law might, or 

might not, extend to other tax treaties in the U.S. tax treaty network. Overall, this might result in 

a much more expensive and time-consuming arbitration process than that proposed. Moreover, 

many competent authority cases are based on disputes that are factual in nature, or at least on 

disputes perceived as factual in nature by one of the competent authorities; the creation of 

precedent might be of limited usefulness in resolving factual disputes. On the other hand, it 

might be useful to the competent authorities and the taxpayers to understand the rationale for the 

board’s determination. Under a last best offer arbitration procedure, no such feedback is 

available. 

Given these considerations, the Committee may generally wish to inquire regarding the 

rationale for selecting the last best offer approach instead of the independent opinion approach or 

a more hybrid approach. More specifically, the Committee may wish to consider whether the 

lack of feedback from the board to the competent authorities of the rationale for the board’s 

determination is an essential and desirable feature of the mandatory and binding last best offer 

arbitration procedure.43

Sources of authority for decision of the board

Under the proposed treaty, the board is required to apply the following authorities in 

making its determination, in the following order of priority: (a) the provisions of the treaty; (b) 

any agreed commentaries or explanations of the treaty countries concerning the treaty; (c) the 

laws of the treaty countries to the extent not inconsistent with each other; and (d) any OECD 

commentary, guidelines, or reports regarding relevant analogous portions of the OECD Model 

treaty. 

With regard to (b) above, the Committee may wish to inquire regarding precisely what is 

meant by “any agreed commentaries or explanations of the treaty countries concerning the 

treaty,” and whether the Treasury Department has a process in place for obtaining agreement 

from treaty partners with respect to the technical explanations of the Treasury Department. 

The IRS has stated that the U.S. competent authority is to be guided in part by certain 

OECD pronouncements, as well as U.S. law: 

With respect to requests for competent authority assistance involving the 

allocation of income and deductions between a U.S. taxpayer and a related 

 43 There could be a number of ways to obtain such feedback without materially altering the 

proposed arbitration procedure. For example, the competent authorities could meet with the arbitration 

board after the board’s determination has been accepted (or not accepted) by the taxpayer to learn the 

board’s rationale for its determination. Such a “back-end” procedure might be of assistance in measuring 

the effectiveness of the arbitration procedure. 
 

90 

person, the U.S. competent authority and its counterpart in the treaty country will 

be bound by the arm's length standard provided by the applicable provisions of 

the relevant treaty. The U.S. competent authority will also be guided by the arm's 

length standard consistent with the regulations under section 482 of the Code and 

the Transfer Pricing Guidelines for Multinational Enterprises and Tax 

Administrations as published from time to time by the Organisation for Economic 

Co-operation and Development.44

Although the OECD mandatory arbitration procedure does not take a firm position on the 

authorities to be used, the Sample Agreement and Sample Agreement Commentary provide that 

the arbitrators must decide the issues in accordance with the applicable provisions of the treaty 

and, subject to those provisions, of the domestic laws of the treaty countries.45 Beyond that, the 

Sample Agreement and Sample Agreement Commentary allow for a certain degree of flexibility 

with respect to interpretation. They invoke Articles 31 to 34 of the Vienna Convention on the 

Law of Treaties, “having regard to the Commentaries of the OECD Model Tax Convention.”46 

The Sample Agreement also states that “issues related to the application of the arm’s length 

 44 Rev. Proc. 2006-54, sec. 3.03, 2006-49 I.R.B. 1035. 

45 Sample Agreement, paragraph 14, and Sample Agreement Commentary, paragraphs 33-35. 

46 The Vienna Convention on the Law of Treaties (“Vienna Convention”) permits a wide access 

to supplementary means of interpretation. Article 31 of the Vienna Convention states that “a treaty shall 

be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty 

in their context, and in the light of its object and purpose.” The “context” comprises, in addition to the 

text of the treaty (including its preamble and annexes), agreements made between all the parties in 

connection with the conclusion of the treaty and instruments made by one party in connection with the 

conclusion of the treaty and accepted by the other party as an instrument related to the treaty. There shall 

be taken into account, together with the context, any subsequent agreement between the parties regarding 

the interpretation of the treaty or the application of its provisions, any subsequent practice in the 

application of the treaty that establishes the agreement of the parties regarding its interpretation, and any 

relevant rules of international law applicable in the relations between the parties. Article 32 of the Vienna 

Convention states that under certain circumstances recourse may also be had to supplementary means of 

interpretation, including the preparatory work of the treaty and the circumstances of its conclusion. The 

Committee may wish to inquire whether the nonprecedential nature of the arbitration methodology 

adopted by the proposed treaty will restrict the future interpretation of the treaty by the competent 

authorities, with regard to the broad interpretive means adopted in the Vienna Convention. 

Although the Vienna Convention has not been ratified by the United States, it has been “generally 

recognized as the authoritative guide to current treaty law and practice.” Message from the President of 

the United States Transmitting the Vienna Convention on the Law of Treaties Signed for the United 

States on April 24, 1970 (quoting from Letter of Submittal of Secretary of State to the President), S. Exec. 

Doc. L, 92nd Cong., 1st Sess. 1 (1971). 
 

91 

principle should similarly be decided having regard to the OECD Transfer Pricing Guidelines for 

Multinational Enterprises and Tax Administrations.”47

In the case of a difference in opinion as to the appropriate interpretation of applicable 

law, that is, where the authorities listed above as priorities (a), (b), and (c) are inconsistent or not 

agreed by the treaty countries, it is possible that the OECD authorities referenced in (d) above 

could rise in importance, even with respect to issues or articles that the United States has 

reserved its rights to treat in a different manner. On the other hand, it may be useful to specify 

the hierarchy of authorities to foreign-trained arbitrators. The Committee may wish to inquire 

whether the listing and priority of authorities to be invoked by the arbitrators, when coupled with 

the requirement that the arbitrators decide the case, will result in giving excessive deference in 

certain circumstances to OECD commentaries, guidelines, and reports.

 47 Sample Agreement, paragraph 14. The arbitration board under the EU mandatory arbitration 

procedure must base its opinion on the arm’s length method. EU mandatory arbitration procedure, Article 

11, paragraph 1. 
 

92 

B. Treaty Shopping 

In general

The proposed treaty includes limitation on benefits rules that are similar to the limitation 

on benefits rules in other recent U.S. income tax treaties; in the proposed protocols with 

Denmark, Finland, and Germany; and in the U.S. Model treaty. These rules are intended to 

prevent the indirect use of the U.S.-Belgium income tax treaty by persons who are not entitled to 

its benefits by reason of residence in Belgium or the United States. 

When a resident of one country derives income from another country, the internal tax 

rules of the two countries may cause that income to be taxed in both countries. One purpose of a 

bilateral income tax treaty is to allocate taxing rights for cross-border income and thereby to 

prevent double taxation of residents of the treaty countries. Although a bilateral income tax 

treaty is intended to apply only to residents of the two treaty countries, residents of third 

countries may attempt to benefit from a treaty by engaging in treaty shopping. This treaty 

shopping may involve organizing in a treaty country a corporation that is entitled to the benefits 

of the treaty or engaging in income-stripping transactions with a treaty-country resident. 

Limitation on benefits provisions are intended to deny treaty benefits in certain cases of treaty 

shopping. 

Although the limitation on benefits rules in the proposed treaty are similar to the rules in 

other recent and proposed U.S. income tax treaties and protocols and in the U.S. Model treaty, 

they are not identical, and the Committee may wish to inquire about certain differences. In 

particular, the Committee may wish to examine the rules for publicly-traded companies, 

derivative benefits, and certain triangular arrangements. The Committee also may wish to ask 

the Treasury Department about the special limitation on benefits rules applicable to headquarters 

companies. 

Publicly traded companies

A company that is a resident of a treaty country is eligible for all the benefits of the 

proposed treaty if it satisfies a regular trading test and either a management and control test or a 

primary trading test. A company satisfies the regular trading test if its principal class of shares 

(and any disproportionate class of shares) is regularly traded on one or more recognized stock 

exchanges. Under the management and control test, the company’s primary place of 

management and control must be in the treaty country of which the company is a resident. The 

primary trading test requires that a company’s principal class of shares be primarily traded on a 

recognized stock exchange located in the treaty country of which the company is a resident or, in 

the case of a Belgian company, on a recognized stock exchange in another EU or EEA country, 

or in the case of a U.S. company, in another NAFTA country. A recognized stock exchange 

specifically includes, in addition to the U.S. and Brussels exchanges, the Irish Stock Exchange 
 

93 

and the stock exchanges of Amsterdam, Frankfurt, Hamburg, Lisbon, London, Madrid, Milan, 

Paris, Toronto, and Zurich.48

The Committee may wish to inquire about the primary trading test in the proposed treaty. 

That test is similar to the primary trading test in the proposed protocols with Denmark and 

Finland and the recent protocol with Sweden but differs from the test in the U.S. Model treaty 

and the test included in the proposed protocol with Germany. Under the primary trading test in 

the U.S. Model treaty and in the proposed protocol with Germany, the required trading must 

occur on a stock exchange in the treaty country of which the relevant company is a resident; 

trading on a stock exchange in another country may not be used to satisfy the test. A possible 

rationale for this narrower primary trading test, and for the management and control test that may 

be satisfied instead of the primary trading test, is that a publicly-traded company should be 

eligible for treaty benefits only if it has a nexus with its country of residence. A company that is 

a resident of the United States or Belgium may not have this nexus if it satisfies the proposed 

treaty’s primary trading test because of trading on an exchange in a third country. The 

Committee may wish to ask the Treasury Department about the circumstances that justify 

allowing trading on third country exchanges to be used to satisfy the primary trading test. In 

particular, the Committee might ask when it is more appropriate to consider trading in the 

economic areas of the treaty countries (for example, NAFTA, EU, and EEA countries) than to 

consider only trading in the treaty countries of which companies are resident. The Committee 

also may wish to inquire whether trends toward greater or lesser integration in Europe might 

affect Treasury Department considerations when negotiating about primary trading rules. 

Although the proposed treaty’s primary trading test is similar to the tests in the recent 

protocol with Sweden and the proposed protocols with Denmark and Finland, the stock 

exchanges specifically included in the definition of “recognized stock exchange” (under both the 

regular trading test and the primary trading test) differ among the three protocols and the treaty. 

The Committee may wish to inquire about the criteria the Treasury Department considers when 

negotiating over the definition of a recognized stock exchange. 

Derivative benefits

Like the proposed protocols with Denmark, Finland, and Germany, and like other recent 

treaties, the proposed treaty includes derivative benefits rules that are generally intended to allow 

a treaty-country company treaty benefits for an item of income if the company’s owners (referred 

to in the proposed treaty as equivalent beneficiaries) would have been entitled to the same 

benefits for the income had those owners derived the income directly. 

The derivative benefits rules may grant treaty benefits to a treaty country resident 

company in circumstances in which the company would not qualify for treaty benefits under any 

of the other limitation on benefits provisions. The U.S. Model Treaty does not include derivative 

 48 Trading on only recognized stock exchanges located in the United States, Belgium, or (for 

Finnish companies) an EEA or EU country, or (for U.S. companies) a NAFTA country may be used to 

satisfy the primary trading test. Trading on recognized stock exchanges located in any country may be 

used to satisfy the regular trading test. 
 

94 

benefits rules. The Committee may wish to inquire about the circumstances that justify inclusion 

of these rules in new treaties notwithstanding their absence from the U.S. Model treaty. 

Triangular arrangements

The proposed treaty includes special anti-abuse rules intended to deny treaty benefits in 

certain circumstances in which a Belgian resident company earns U.S.-source income 

attributable to a third-country permanent establishment and is subject to little or no tax in the 

third jurisdiction and Belgium. Similar anti-abuse rules are included in other recent treaties and 

in the proposed protocols with Denmark, Finland, and Germany. The U.S. Model treaty, 

however, does not include rules addressing triangular arrangements. The Committee may wish 

to ask the Treasury Department about the circumstances that justify inclusion of the anti-abuse 

rules notwithstanding their absence from the U.S. Model treaty. In particular, the Committee 

may wish to inquire whether the Treasury Department will insist on inclusion of anti-abuse rules 

whenever a treaty partner’s internal tax rules provide an exemption for the income of a thirdcountry permanent establishment of a treaty partner resident. 

Headquarters companies

The proposed treaty includes special rules intended to allow treaty country benefits for a 

resident of a treaty country that functions as a headquarters company and that satisfies certain 

requirements intended to ensure that the headquarters company performs substantial supervisory 

and administrative functions for a group of companies; that the group of companies is genuinely 

multinational; that the headquarters company is subject to the same income tax rules in its 

country of residence as would apply to a company engaged in the active conduct of a trade or 

business in that country; and that the headquarters company has independent authority in 

carrying out its supervisory and administrative functions. U.S. income tax treaties with Australia 

and the Netherlands include similar rules for headquarters companies. The U.S. Model treaty, 

however, does not include headquarters company rules. 

The requirement that a headquarters company be subject to the same income taxation 

rules in its country of residence as would apply to a company engaged in an active trade or 

business in that country has a different effective date from the general effective dates of the 

proposed treaty. The general effective dates are (1) for withholding taxes, for amounts paid or 

credited on or after the first day of the second month following the date on which the proposed 

treaty enters into force and (2) for other taxes, for taxable periods beginning on or after the first 

day of the first January after the proposed treaty enters into force. The special income tax 

requirement for headquarters companies, by contrast, is not effective until January 1, 2011. 

According to the Technical Explanation, Belgian law applicable to headquarters companies is in 

transition, and the proposed treaty’s income taxation requirement for headquarters companies 

will be satisfied by 2011. 

The Committee may wish to ask the Treasury Department about the policies that justify 

deviating from the U.S. Model treaty and including rules in a treaty that grant headquarters 

companies treaty benefits when those headquarters companies would not be eligible for treaty 

benefits under any other limitation-on-benefits provision. The Committee also may wish to 
 

95 

inquire about the basis for the Treasury Department’s agreement to a delayed effective date for 

the income taxation requirement for headquarters companies. 
 

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C. Zero Rate of Withholding Tax on Direct Dividends 

In general

When certain conditions are met, the proposed treaty eliminates withholding tax on 

dividends (“direct dividends”) paid by a company that is resident in one treaty country to a 

company that is a resident of the other treaty country and that satisfies an ownership requirement. 

A Belgian company that receives dividends from a U.S. company must own at least 80 percent of 

the stock of the U.S. company to qualify for the zero rate. A U.S. company that receives 

dividends from a Belgian company must own at least 10 percent of the stock of the Belgian 

company to qualify for the zero rate. The elimination of withholding tax on direct dividends is 

intended to reduce the tax barriers to direct investment between the two treaty countries. 

Under the present treaty, direct dividends may be taxed by the source country at a 

maximum rate of five percent. Both Belgium and the United States impose withholding tax on 

direct dividends under their internal tax laws. The principal effects of the zero-rate provision on 

U.S. taxpayers and the U.S. tax base would be (1) to relieve U.S. companies of the burden of 

Belgian withholding tax on dividends qualifying for the zero rate; (2) to increase the U.S. tax 

base by eliminating foreign tax credits for Belgian withholding tax that would be imposed in the 

absence of the zero-rate provision; and (3) to decrease the U.S. tax base by eliminating the U.S. 

withholding tax on dividends paid by U.S. companies to Belgian companies eligible for the zero 

rate. 

Until 2003, no U.S. income tax treaty provided for a complete exemption from dividend 

withholding tax, and the U.S. and OECD Model treaties do not provide an exemption. By 

contrast, many bilateral income tax treaties of other countries eliminate withholding taxes on 

direct dividends between treaty countries, and the EU Parent-Subsidiary Directive repeals 

withholding taxes on intra-EU direct dividends. Recent U.S. income tax treaties and protocols 

with Australia, Japan, Mexico, the Netherlands, Sweden, and the United Kingdom include zerorate provisions. The Senate ratified those treaties in 2003 (Australia, Mexico, United Kingdom), 

2004 (Japan, Netherlands), and 2006 (Sweden). The zero-rate provisions in those treaties are 

similar to the provision in the proposed treaty.49

Description of provision

Under the proposed treaty, the withholding tax rate is reduced to zero on dividends paid 

by a treaty country resident company and beneficially owned by a company that is a resident of 

the other treaty country and that has satisfied an ownership requirement for a12-month period. A 

Belgian company that receives a dividend from a U.S. company is eligible for the zero rate only 

if it has owned at least 80 percent of the voting power of the U.S. company for a 12-month 

period ending on the date on which entitlement to the dividend is determined. This 80-percent 

ownership requirement may be satisfied by either direct or indirect ownership. A U.S. company 

 49 The treaty with Japan provides a zero-percent rate at a lower ownership threshold than the 

threshold in the proposed treaty and the other treaties (more than 50 percent as opposed to at least 80 

percent). 
 

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that receives a dividend from a Belgian company is eligible for the zero rate only if it has owned 

at least 10 percent of the capital of the Belgian company for the 12-month period ending on the 

date the dividend is declared. This 10-percent ownership requirement may be satisfied only by 

direct stock ownership. 

A Belgian company’s eligibility for the benefits of the zero-rate provision for dividends 

received from a U.S. company is subject to a more stringent set of limitation-on-benefits 

requirements than normally apply under the proposed treaty. To qualify for the zero rate, the 

dividend-receiving company must: (1) satisfy the public trading test of the limitation-on-benefits 

article; (2) meet the ownership and base erosion test and satisfy the active trade or business 

conditions of the limitation-on-benefits article with respect to the dividend in question; (3) 

satisfy the derivative benefits test of the limitation-on-benefits article; or (4) receive a favorable 

determination from the competent authority. 

The proposed treaty provides that the zero-rate provision for paid by U.S. companies will 

terminate for amounts paid or credited on or after January 1 of the sixth year following the year 

in which the proposed treaty enters into force unless by June 30 of the preceding year, the U.S. 

Treasury Secretary, on the basis of a report of the IRS Commissioner, certifies to the U.S. Senate 

that Belgium has satisfactorily complied with its obligations under Article 25 (Exchange of 

Information and Administrative Assistance). The United States also may terminate the zero-rate 

provision for dividends paid by U.S. resident companies if it determines that Belgium’s actions 

under Article 24 (Mutual Agreement Procedure) and Article 25 (Exchange of Information and 

Administrative Assistance) have materially altered the balance of benefits of the proposed treaty. 

To terminate the zero-rate provision, the United States must give written notice of termination to 

Belgium, through the diplomatic channel, on or before June 30 in any year. If the United States 

gives this notice, the zero-rate provision will cease to have effect for amounts paid or credited on 

or after January 1 of the year following the year in which the notice is given. 

Issues

In general

The proposed protocols with Denmark, Finland, and Germany and the proposed treaty 

with Belgium would bring to ten the number of U.S. income tax treaties that provide a zero rate 

for direct dividends. Because zero-rate provisions are a relatively recent but now prominent 

development in U.S. income tax treaty practice, the Committee may wish to consider the costs 

and benefits of zero-rate provisions; the Treasury Department’s criteria for determining when a 

zero-rate provision is appropriate; and certain specific features of zero-rate provisions such as 

ownership thresholds, holding-period requirements, the treatment of indirect ownership, 

heightened limitation-on-benefits requirements, and termination provisions. 

Costs and benefits of adopting a zero rate with Belgium

Tax treaties mitigate double taxation by resolving potentially conflicting source and 

residence country claims of taxing rights for a particular item of income. Under most income tax 

treaties, source countries wholly or partly yield to residence countries the right to tax most 

dividends (other than dividends attributable to a permanent establishment that a company has in 
 

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the source country). Thus, the residence country preserves its right to tax the dividend income of 

its residents, and the source country agrees either to limit its withholding tax to a low rate (five 

percent, for example) or to forgo it entirely. 

Treaties that permit a positive rate of dividend withholding tax allow the possibility of 

double taxation. If the residence country allows a foreign tax credit for source-country 

withholding tax, double taxation may be mitigated or eliminated, but the effect of a credit is to 

violate the residence country’s primary right to tax dividend income. If a residence country 

imposes limitations on its foreign tax credit (as the United States does with its overall and basket 

limitations), withholding taxes may not be fully creditable and some double taxation may 

remain. For these reasons, dividend withholding taxes are commonly viewed as barriers to 

cross-border investment. Removing a barrier to cross-border investment is a principal argument 

for the proposed treaty’s zero-rate provision. 

Direct dividends may present an appropriate circumstance for eliminating withholding 

tax. A company deriving business income in the United States or Belgium generally is subject to 

net-basis income tax in that country on the business income, and when it pays a dividend out of 

the income to a company in the other country, the dividend income generally is taxed in that 

other country (subject to allowable foreign tax credits). If the dividend-paying company is at 

least 10-percent owned by the dividend-receiving company, the dividend-receiving company 

may be viewed as a direct investor (and taxpayer) in the source country rather than as a portfolio 

investor. A portfolio investor would be less likely to be subject to net-basis taxation in the 

source country; a source-country withholding tax on dividends paid to a portfolio investor 

therefore might be viewed as more appropriate than a withholding tax on direct dividends. 

Under domestic laws, both the United States and Belgium generally impose withholding 

tax on cross-border dividends. The zero-rate provision, therefore, would benefit direct 

investment in Belgium by U.S. companies and direct investment in the United States by Belgian 

companies. Stated differently, the zero-rate provision would provide benefits both when the 

United States is exporting capital and when it is importing capital. The zero-rate provision may 

be more widely applicable when the U.S. is exporting capital than when it is importing capital 

because the ownership requirement in the former case (Belgian-source dividends) is 10 percent 

and in the latter case (U.S.-source dividends) is 80 percent. The revenue effect of the zero-rate 

provision is unclear: the revenue loss to the United States from the elimination of withholding 

tax on U.S.-source dividends might be offset in whole or part by reduced foreign tax credit 

claims related to Belgian-source dividend payments. 

Many countries have included zero-rate dividend provisions in their income tax treaties 

for longer than the United States has. These countries include OECD members Austria, 

Denmark, Finland France, Germany, Iceland, Ireland, Japan, Luxembourg, Mexico, the 

Netherlands, Norway, Sweden, Switzerland, and the United Kingdom, and non-OECD-members 

Belarus, Brazil, Cyprus, Egypt, Estonia, Israel, Latvia, Lithuania, Mauritius, Namibia, Pakistan, 

Singapore, South Africa, Ukraine, and the United Arab Emirates. The EU Parent-Subsidiary 

Directive also eliminates withholding tax on direct dividends between EU companies. Many 

countries have eliminated withholding taxes on dividends as a matter of internal law. Thus, 

although the zero-rate provision in the proposed treaty is part of a relatively recent development 

in U.S. income tax treaties, there is substantial international precedent. This international 
 

99 

precedent may be a reason in itself why the zero-rate provision in the proposed treaty is 

appropriate: by eliminating withholding tax on direct dividends between the United States and 

Belgium, the proposed treaty joins many existing income tax treaties and domestic and 

international tax rules in reducing tax barriers to foreign direct investment. 

General direction of U.S. tax treaty policy

Because zero-rate provisions are common in U.S. income tax treaties that have entered 

into force since 2003, the Committee may wish to examine the Treasury Department’s criteria 

for determining the circumstances under which a zero-rate provision may be appropriate. 

Although zero-rate provisions are common in recent U.S. treaties, recent treaties with 

Bangladesh, France, and Sri Lanka do not include zero-rate rules. The U.S. Model also does not 

provide a zero dividend withholding tax rate. In previous testimony before the Committee, the 

Treasury Department has indicated that zero-rate provisions should be allowed only under 

treaties that have restrictive limitation-on-benefits rules and that provide comprehensive 

information exchange. Even in those treaties, according to previous Treasury Department 

statements, dividend withholding tax should be eliminated only based on an evaluation of the 

overall balance of benefits under the treaty. The Committee may wish to ask what overall 

balance considerations might prompt the Treasury Department not to seek a zero-rate provision 

in a treaty that has limitation-on-benefits and information-exchange provisions meeting the 

highest standards. 

Specific design features

The Committee also may wish to examine certain specific design features of zero-rate 

provisions, features such as ownership thresholds, holding-period requirements, the treatment of 

indirect ownership, heightened limitation-on-benefits requirements, and the termination 

provisions. 

The Committee may wish to ask the Treasury Department why the ownership 

requirements are different for Belgian-source dividends (10 percent) than for U.S-source 

dividends (80 percent). One question might be under what circumstances is an ownership 

requirement below 80 percent appropriate. Another question might be what circumstances 

justify different ownership requirements based on the source of the dividend. 

The Committee also may wish to ask the Treasury Department why a 12-month holding 

period strikes a proper balance between the competing considerations of, on the one hand, 

preventing short-term shifting of ownership to claim the zero rate and, on the other hand, of 

allowing the zero rate in connection with ordinary, non-abusive structures. 

The Committee may wish to inquire about the proposed treaty’s rules that (1) the 80-

percent ownership requirement for U.S.-source dividends may be satisfied by taking into account 

direct and indirect ownership and (2) the 10-percent ownership requirement for Belgian-source 

dividends may be satisfied by taking into account only direct stock ownership. The Committee 

may wish to ask what considerations determine whether zero-rate treaty provisions should permit 

indirect ownership to be taken into account in testing whether ownership rules are satisfied. It 
 

100 

may also wish to ask what circumstances justify different stock ownership rules for dividends 

paid by U.S. companies than for dividends paid by companies resident in another treaty country. 

The Committee may wish to ask whether the proposed treaty’s special limitation-onbenefits conditions for qualification for the zero rate for U.S.-source dividends -- for example, 

the active trade or business and ownership and base erosion tests -- are likely to be included in 

future treaties, and how these special provisions might change as zero-rate provisions become 

more widespread in the U.S. income tax treaty network. Because the proposed treaty does not 

impose special limitation-on-benefits conditions for qualification for the zero rate for Belgiumsource dividends, the Committee may wish to ask whether the Treasury Department foresees 

similar disparities between the zero-rate limitation-on-benefits rules for U.S.-source dividends 

and the rules for dividends sourced in other treaty countries. 

The Committee may wish to inquire about the rules permitting termination of the zerorate provision for dividends paid by U.S. companies. No other U.S. income tax treaty that 

provides exemption from dividend withholding tax includes provisions allowing the exemption 

to be terminated. The Committee may wish to ask the Treasury Department whether the 

termination provisions represent a precedent that may be followed in future treaty negotiations. 

More generally, the Committee might ask about the circumstances that could justify inclusion of 

termination provisions. 
 

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D. Students, Trainees, Teachers and Researchers 

Treatment under proposed treaty

The proposed treaty modifies the present treaty’s treatment of income taxes for students, 

business trainees, teachers, and researchers but maintains the general exemptions of the present 

treaty. 

Under the proposed treaty (Article 19), teachers and researchers who are residents of one 

treaty country and who visit the other treaty country (host country) are entitled to an exemption 

from host country taxation on certain remuneration for a period not exceeding two years from the 

date of arrival. The exempt remuneration is that received for teaching or research so long as the 

visit is for the purpose of teaching or carrying on research at a school, university, college, or 

other educational or research institution. 

The proposed treaty’s treatment of students and business trainees (Article 19) 

corresponds to the U.S. Model treaty. Under the proposed treaty, students and business trainees 

are exempt from host country income tax on payments arising from outside the host country 

received for maintenance, education, and study if the purpose of the visit is to engage in full-time 

education or full-time training. Business trainees are defined as individuals visiting the host 

country to secure training to practice a profession or professional specialty or individuals who 

are employed by a resident of the other country and whose purpose is to acquire technical, 

professional, or business experience from someone other than their employers or relatives of 

their employers. While the payments received by students are exempt so long as the purpose of 

their visit is to engage in full-time education, the exemption for business trainees is limited to a 

period not exceeding two years from the date of arrival in the host country for the purpose of 

training. 

Under the proposed treaty, students and business trainees may also exempt an aggregate 

amount of $9,000 or its euro equivalent of income from personal services performed in the host 

country. The exemption for the personal service income of business trainees is limited to a 

period of two years from the date of arrival in the host country. 

Issues

Teachers and researchers

Unlike the U.S. Model treaty, the proposed treaty provides an exemption from host 

country income tax for income an individual receives from teaching or research in the host 

country. Under section 911, a U.S. citizen or resident may elect to exclude up to $85,700 of nonU.S. source earned income attributable to personal services performed by the citizen or 

resident.50 Additionally, such an individual may exclude or deduct from gross income certain 

foreign housing costs paid or incurred by or on behalf of the individual. Section 911 in 

conjunction with the proposed treaty provision allows a teacher or researcher to receive 

 50 The $85,700 exemption amount for 2007 is indexed for inflation. Sec. 911(b)(2)(D). 
 

102 

remuneration of up to $85,700, plus certain housing costs, tax free. Likewise, under the 

proposed treaty a Belgian teacher or researcher is exempt for a period of two years or less from 

U.S. income tax on income earned while visiting the United States for the purpose of engaging in 

teaching or research. 

The effect of the proposed treaty is to make cross-border visits for the purpose of 

teaching or research financially attractive. Ignoring relocation expenses, a U.S. citizen or 

permanent resident may receive more net, after-tax remuneration by visiting Belgium as a 

teacher or researcher than by remaining in the United States. Likewise, a Belgian resident may 

receive more net, after-tax remuneration by visiting the United States as a teacher or researcher 

than by remaining in Belgium. Increasing the financial reward may serve to encourage crossborder visits by academics for teaching and research, which in turn may foster the advancement 

of knowledge and redound to the benefit of residents of both countries. 

On the other hand, complete exemption from income tax in both the United States and 

Belgium may be seen as unfair when compared to other persons who must temporarily relocate 

abroad for their occupation or employment. The income of a U.S. citizen or permanent resident 

who is not a teacher or researcher and who temporarily takes up residence and employment in 

Belgium is subject to Belgian income tax; the income may also be subject to U.S. income tax to 

the extent it is in excess of the section 911 limitation. Likewise, the income of a Belgian resident 

who is not a teacher or researcher and who temporarily takes up residence and employment in 

the United States is subject to U.S. income tax. Thus, the proposed treaty could be viewed as 

violating the principle of horizontal equity by treating otherwise similarly economically situated 

taxpayers differently. 

The U.S. Model treaty includes no exemption for the remuneration of visiting teachers or 

researchers. An exemption for visiting teachers and professors has been included in many 

bilateral tax treaties. The Committee may wish to satisfy itself that the inclusion of an 

exemption for a limited class of individuals is appropriate. 

Full-time students and trainees

The proposed treaty generally has the effect of exempting from the income tax of both 

treaty countries certain payments. The exempt payments are those arising outside the host 

country that are received for the maintenance, education, and training of full-time students and 

full-time trainees as visitors from one treaty country to the other. This exemption conforms to 

the U.S. Model treaty and the OECD Model treaty provisions. Under the proposed treaty, fulltime students and trainees may also earn up to $9,000 or its equivalent in euro annually in taxfree personal services income in the host country. This personal service income exemption is 

similar to a provision in the U.S. Model treaty but departs from the OECD Model treaty. This 

provision generally would have the effect of reducing the cost of the education and training 

received by visitors, which may encourage individuals to consider study abroad in the other 

treaty country. Such cross-border visits by students and trainees may foster the advancement of 

knowledge and redound to the benefit of residents of both countries. 

In the case of business trainees, the proposed treaty limits the exemption for such 

payments to a period of two years or less. By potentially subjecting such payments to host 
 

103 

country income tax, the cost for cross-border visitors of engaging in such longer duration 

training programs would be increased. This increased cost may discourage visitors to such 

programs in either country. It could be argued that the training of a business trainee relates 

primarily to specific job skills of value to the individual or the individual’s employer rather than 

enhancing general knowledge and cross-border understanding, as may be the case in the 

education of a full-time student. This could provide a rationale for providing more open-ended 

treaty benefits in the case of students as opposed to business trainees. However, this rationale 

raises a question as to why training requiring two years or less is preferred to training that 

requires a longer visit to the host country. As such, the proposed treaty would favor certain types 

of training arrangements over others. The OECD Model treaty does not limit the duration of 

exemption for payments for maintenance, education, and training for business trainees; the U.S. 

Model treaty limits the exemption to a period not exceeding one year.