DEPARTMENT OF THE TREASURY 

TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN 

THE GOVERNMENT OF THE UNITED STATES OF AMERICA 

AND 

THE GOVERNMENT OF THE KINGDOM OF BELGIUM 

FOR THE AVOIDANCE OF DOUBLE TAXATION 

AND THE PREVENTION OF FISCAL EVASION 

WITH RESPECT TO TAXES ON INCOME 

 SIGNED AT BRUSSELS ON NOVEMBER 27, 2006 

This is a technical explanation of the Convention between the Government of the 

United States of America and the Government of the Kingdom of Belgium for the 

Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to 

Taxes on Income, signed at Brussels on November 27, 2006 (the “Convention”), and the 

Protocol also signed at Brussels on November 27, 2006, which forms an integral part 

thereto (the “Protocol”). The Protocol is discussed below in connection with relevant 

provisions of the Convention. 

References are made to the Convention between the Government of the United 

States of America and the Government of the Kingdom of Belgium for the Avoidance of 

Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, 

signed at Brussels on July 9, 1970, as amended by protocol signed December 31, 1987 

(the “prior Convention”). The Convention and Protocol replace the prior Convention. 

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

policy and the Treasury Department’s Model Income Tax Convention, published on 

November 15, 2006 (the “U.S. Model”). Negotiations also took into account the Model 

Tax Convention on Income and on Capital, published by the Organisation for Economic 

Cooperation and Development (the “OECD Model”), and recent tax treaties concluded by 

both countries. 

The Technical Explanation is an official guide to the Convention. It reflects the 

policies behind particular Convention provisions, as well as understandings reached with 

respect to the application and interpretation of the Convention. References in the 

Technical Explanation to "he" or "his" should be read to mean "he or she" or "his and 

her." 

ARTICLE 1 (GENERAL SCOPE) 

Paragraph 1 

Paragraph 1 of Article 1 provides that the Convention applies only to residents of 

the United States or Belgium except where the terms of the Convention provide 

otherwise. Under Article 4 (Resident) a person is generally treated as a resident of a 

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

reason of his domicile, citizenship, residence, or other similar criteria. However, if a 

person is considered a resident of both Contracting States, Article 4 provides rules for 

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determining a State of residence (or no State of residence). This determination governs 

for all purposes of the Convention. 

Certain provisions are applicable to persons who may not be residents of either 

Contracting State. For example, paragraph 1 of Article 23 (Non-Discrimination) applies 

to nationals of the Contracting States. Under Article 25 (Exchange of Information and 

Administrative Assistance), information may be exchanged with respect to residents of 

third states. 

Paragraph 2 

Paragraph 2 states the generally accepted relationship both between the 

Convention and domestic law and between the Convention and other agreements between 

the Contracting States. That is, no provision in the Convention may restrict any 

exclusion, exemption, deduction, credit or other benefit accorded by the tax laws of the 

Contracting States, or by any other agreement between the Contracting States. The 

relationship between the non-discrimination provisions of the Convention and other 

agreements is addressed not in paragraph 2 but in paragraph 3. 

Under paragraph 2, for example, if a deduction would be allowed under the U.S. 

Internal Revenue Code (the "Code") in computing the U.S. taxable income of a resident 

of Belgium, the deduction also is allowed to that person in computing taxable income 

under the Convention. Paragraph 2 also means that the Convention may not increase the 

tax burden on a resident of a Contracting State beyond the burden determined under 

domestic law. Thus, a right to tax given by the Convention cannot be exercised unless 

that right also exists under internal law. 

It follows that, under the principle of paragraph 2, a taxpayer's U.S. tax liability 

need not be determined under the Convention if the Code would produce a more 

favorable result. A taxpayer may not, however, choose among the provisions of the Code 

and the Convention in an inconsistent manner in order to minimize tax. For example, 

assume that a resident of Belgium has three separate businesses in the United States. One 

is a profitable permanent establishment and the other two are trades or businesses that 

would earn taxable income under the Code but that do not meet the permanent 

establishment threshold tests of the Convention. One is profitable and the other incurs a 

loss. Under the Convention, the income of the permanent establishment is taxable in the 

United States, and both the profit and loss of the other two businesses are ignored. Under 

the Code, all three would be subject to tax, but the loss would offset the profits of the two 

profitable ventures. The taxpayer may not invoke the Convention to exclude the profits 

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

or business against the profit of the permanent establishment. (See Rev. Rul. 84-17, 

1984-1 C.B. 308.) If, however, the taxpayer invokes the Code for the taxation of all three 

ventures, he would not be precluded from invoking the Convention with respect, for 

example, to any dividend income he may receive from the United States that is not 

effectively connected with any of his business activities in the United States. 

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

any other agreement between the United States and Belgium. For example, if certain 

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benefits are provided for military personnel or military contractors under a Status of 

Forces Agreement between the United States and Belgium, those benefits or protections 

will be available to residents of the Contracting States regardless of any provisions to the 

contrary (or silence) in the Convention. 

Paragraph 3 

Paragraph 3 specifically relates to non-discrimination obligations of the 

Contracting States under the General Agreement on Trade in Services (the "GATS"). 

The provisions of paragraph 3 are an exception to the rule provided in paragraph 2 of this 

Article under which the Convention shall not restrict in any manner any benefit now or 

hereafter accorded by any other agreement between the Contracting States. 

Subparagraph (a) of paragraph 3 provides that, unless the competent authorities 

determine that a taxation measure is not within the scope of the Convention, the national 

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

any question arising as to the interpretation of the Convention, including in particular 

whether a measure is within the scope of the Convention shall be considered only by the 

competent authorities of the Contracting States, and the procedures under the Convention 

exclusively shall apply to the dispute. Thus, paragraph 3 of Article XXII (Consultation) 

of the GATS may not be used to bring a dispute before the World Trade Organization 

unless the competent authorities of both Contracting States have determined that the 

relevant taxation measure is not within the scope of Article 23 (Non-Discrimination) of 

the Convention. 

The term "measure" for these purposes is defined broadly in subparagraph (b) of 

paragraph 3. It would include, for example, a law, regulation, rule, procedure, decision, 

administrative action or guidance, or any other form of measure. 

Paragraph 4 

Paragraph 4 contains the traditional saving clause found in all U.S. treaties. The 

Contracting States reserve their rights, except as provided in paragraph 5, to tax their 

residents and citizens as provided in their internal laws, notwithstanding any provisions 

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

professional services in the United States and the income from the services is not 

attributable to a permanent establishment in the United States, Article 7 (Business 

Profits) would by its terms prevent the United States from taxing the income. If, however, 

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

the United States to include the remuneration in the worldwide income of the citizen and 

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

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

credit rules applicable to the U.S. taxation of certain U.S. income of its citizens resident 

in Belgium. See paragraph 4 of Article 22 (Relief from Double Taxation). 

For purposes of the saving clause, "residence" is determined under Article 4 

(Resident). Thus, an individual who is a resident of the United States under the Code 

(but not a U.S. citizen) but who is determined to be a resident of Belgium under the tie3
breaker rules of Article 4 would be subject to U.S. tax only to the extent permitted by the 

Convention. The United States would not be permitted to apply its statutory rules to that 

person to the extent the rules are inconsistent with the treaty. 

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

other than determining the individual's U.S. tax liability. For example, in determining 

under Code section 957 whether a foreign corporation is a controlled foreign corporation, 

shares in that corporation held by the individual would be considered to be held by a U.S. 

resident. As a result, other U.S. citizens or residents might be deemed to be United States 

shareholders of a controlled foreign corporation subject to current inclusion of Subpart F 

income recognized by the corporation. See, Treas. Reg. section 301.7701(b)-7(a)(3). 

Under paragraph 4, each Contracting State also reserves its right to tax former 

citizens and former long-term residents for a period of ten years following the loss of 

such status. Thus, paragraph 4 allows the United States to tax former U.S. citizens and 

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

generally applies to a former citizen or long-term resident of the United States who 

relinquishes citizenship or terminates long-term residency if either of the following 

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

individual for the period of 5 taxable years ending before the date of the loss of status, or 

(b) the net worth of such individual as of the date of the loss of status. The annual net 

income tax threshold is adjusted annually for inflation. The United States defines "longterm resident" as an individual (other than a U.S. citizen) who is a lawful permanent 

resident of the United States in at least 8 of the prior 15 taxable years. An individual is 

not treated as a lawful permanent resident for any taxable year if such individual is 

treated as a resident of a foreign country under the provisions of a tax treaty between the 

United States and the foreign country and the individual does not waive the benefits of 

such treaty applicable to residents of the foreign country. 

Paragraph 5 

Paragraph 5 sets forth certain exceptions to the saving clause. The referenced 

provisions are intended to provide benefits to citizens and residents even if such benefits 

do not exist under internal law. Paragraph 5 thus preserves these benefits for citizens and 

residents of the Contracting States. 

Subparagraph (a) lists certain provisions of the Convention that are applicable to 

all citizens and residents of a Contracting State, despite the general saving clause rule of 

paragraph 4: 

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

correlative adjustment with respect to income tax due on profits reallocated under 

Article 9. 

(2) Paragraphs 1 b), 2, and 5 of Article 17 (Pensions, Social Security, Annuities, 

Alimony and Child Support) provide exemptions from source or residence State 

taxation for certain pension distributions, social security payments and child 

support. 

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(3) Paragraph 6 of Article 17 (Pensions, Social Security, Annuities, Alimony and 

Child Support) provides an exemption for certain investment income of pension 

funds located in Belgium, while paragraph 9 provides benefits for certain 

contributions by or on behalf of a U.S. citizen to certain pension funds established 

in Belgium. 

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

one Contracting State the benefit of a credit for income taxes paid to the other or 

an exemption for income earned in the other State. 

(5) Article 23 (Non-Discrimination) protects residents and nationals of one 

Contracting State against the adoption of certain discriminatory practices in the 

other Contracting State. 

(6) Article 24 (Mutual Agreement Procedure) confers certain benefits on citizens 

and residents of the Contracting States in order to reach and implement solutions 

to disputes between the two Contracting States. For example, the competent 

authorities are permitted to use a definition of a term that differs from an internal 

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

benefits of an agreement may be implemented. 

Subparagraph (b) of paragraph 5 provides a different set of exceptions to the 

saving clause. The benefits referred to are all intended to be granted to temporary 

residents of a Contracting State (for example, in the case of the United States, holders of 

non- immigrant visas), but not to citizens or to persons who have acquired permanent 

residence in that State. If beneficiaries of these provisions travel from one of the 

Contracting States to the other, and remain in the other long enough to become residents 

under its internal law, but do not acquire permanent residence status (i.e., in the U.S. 

context, they do not become "green card" holders) and are not citizens of that State, the 

host State will continue to grant these benefits even if they conflict with the statutory 

rules. The benefits preserved by this paragraph are: (1) the host country exemptions for 

government service salaries and pensions under Article 18 (Government Service), certain 

income of visiting students and trainees under Article 19 (Students and Trainees, 

Teachers and Researchers), and the income of diplomatic agents and consular officers 

under Article 27 (Members of Diplomatic Missions and Consular Posts); and (2) the 

beneficial tax treatment of pension fund contributions under paragraph 7 of Article 17 

(Pensions, Social Security, Annuities, Alimony and Child Support). 

Paragraph 6 

Paragraph 6 addresses special issues presented by fiscally transparent entities such 

as partnerships and certain estates and trusts. Because different countries frequently take 

different views as to when an entity is fiscally transparent, the risk of both double 

taxation and double non-taxation are relatively high. The intention of paragraph 6 is to 

eliminate a number of technical problems that arguably would have prevented investors 

using such entities from claiming treaty benefits, even though such investors would be 

subject to tax on the income derived through such entities. The provision also prevents 

the use of such entities to claim treaty benefits in circumstances where the person 

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investing through such an entity is not subject to tax on the income in its State of 

residence. The provision, and the corresponding requirements of the substantive rules of 

Articles 6 through 20, should be read with those two goals in mind. 

In general, paragraph 6 relates to entities that are not subject to tax at the entity 

level, as distinct from entities that are subject to tax, but with respect to which tax may be 

relieved under an integrated system. This paragraph applies to any resident of a 

Contracting State who is entitled to income derived through an entity that is treated as 

fiscally transparent under the laws of either Contracting State. Entities falling under this 

description in the United States include partnerships, common investment trusts under 

section 584 and grantor trusts. This paragraph also applies to U.S. limited liability 

companies ("LLCs") that are treated as partnerships or as disregarded entities for U.S. tax 

purposes. 

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

transparent entity will be considered to be derived by a resident of a Contracting State if a 

resident is treated under the taxation laws of that State as deriving the item of income. 

For example, if a company that is a resident of Belgium pays interest to an entity that is 

treated as fiscally transparent for U.S. tax purposes, the interest will be considered 

derived by a resident of the U.S. only to the extent that the taxation laws of the United 

States treats one or more U.S. residents (whose status as U.S. residents is determined, for 

this purpose, under U.S. tax law) as deriving the interest for U.S. tax purposes. In the 

case of a partnership, the persons who are, under U.S. tax laws, treated as partners of the 

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

interest income through the partnership. Also, it follows that persons whom the United 

States treats as partners but who are not U.S. residents for U.S. tax purposes may not 

claim a benefit for the interest paid to the entity under the Convention, because they are 

not residents of the United States for purposes of claiming this treaty benefit. (If, however, 

the country in which they are treated as resident for tax purposes, as determined under the 

laws of that country, has an income tax convention with Belgium, they may be entitled to 

claim a benefit under that convention.) In contrast, if, for example, an entity is organized 

under U.S. laws and is classified as a corporation for U.S. tax purposes, interest paid by a 

company that is a resident of Belgium to the U.S. entity will be considered derived by a 

resident of the United States since the U.S. corporation is treated under U.S. taxation laws 

as a resident of the United States and as deriving the income. 

The same result obtains even if the entity were viewed differently under the tax 

laws of Belgium (e.g., as not fiscally transparent in the first example above where the 

entity is treated as a partnership for U.S. tax purposes). Similarly, the characterization of 

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

country. The results follow regardless of whether the entity is disregarded as a separate 

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

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

under the laws of Belgium. These results also obtain regardless of where the entity is 

organized (i.e., in the United States, in Belgium or, as noted above, in a third country). 

For example, income from U.S. sources received by an entity organized under the 

laws of the United States, which is treated for tax purposes under the laws of Belgium as 

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

purposes, is not considered derived by the shareholder of that corporation even if, under 

the tax laws of the United States, the entity is treated as fiscally transparent. Rather, for 

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

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

in either Contracting State. For example, if X, a resident of Belgium, creates a revocable 

trust in the United States and names persons resident in a third country as the 

beneficiaries of the trust, the trust's income would be regarded as being derived by a 

resident of Belgium only to the extent that the laws of Belgium treat X as deriving the 

income for its tax purposes, perhaps through application of rules similar to the U.S. 

"grantor trust" rules. 

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

paragraph 6 does not prevent a Contracting State from taxing an entity that is treated as a 

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

are residents of Belgium elects to be taxed as a corporation for U.S. tax purposes, the 

United States will tax that LLC on its worldwide income on a net basis, without regard to 

whether Belgium views the LLC as fiscally transparent. 

ARTICLE 2 (TAXES COVERED) 

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

Convention applies. With two exceptions, the taxes specified in Article 2 are the covered 

taxes for all purposes of the Convention. A broader coverage applies, however, for 

purposes of Articles 23 (Non-Discrimination) and 25 (Exchange of Information and 

Administrative Assistance). Article 23 (Non-Discrimination) applies with respect to all 

taxes, including those imposed by state and local governments. Article 25 (Exchange of 

Information and Administrative Assistance) applies with respect to all taxes imposed at 

the national level. 

Paragraph 1 

Paragraph 1 identifies the category of taxes to which the Convention applies. 

Paragraph 1 is based on the OECD Model and defines the scope of application of the 

Convention. The convention applies to taxes on income, including gains, imposed on 

behalf of a Contracting State, irrespective of the manner in which they are levied. Except 

with respect to Article 23 (Non-Discrimination), state and local taxes are not covered by 

the Convention. 

Paragraph 2 

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

on income and on capital gains. The Convention covers taxes on total income or any part 

of income and includes tax on gains derived from the alienation of property. The 

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

where there is a direct connection between the levy and individual benefits. Nor does it 

apply to property taxes, except with respect to Article 23 (Non-Discrimination). 

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Paragraph 3 

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

which the Convention applies. 

Subparagraph 3 a) provides a list of income taxes imposed in Belgium that are 

covered taxes under the Convention. These taxes include: i) the individual income tax, ii) 

the corporate income tax, iii) the income tax on legal entities, and iv) the income tax on 

non-residents. All of these taxes include the prepayments and the surcharges on these 

taxes and prepayments. 

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

Convention are the Federal income taxes imposed by the Code, together with the excise 

taxes imposed with respect to private foundations (Code sections 4940 through 4948). 

Social security and unemployment taxes (Code sections 1401, 3101, 3111 and 3301) are 

excluded from coverage. 

Paragraph 4 

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

substantially similar, to those enumerated in paragraph 3, and which are imposed in 

addition to, or in place of, the existing taxes after November 27, 2006, the date of 

signature of the Convention. The paragraph also provides that the competent authorities 

of the Contracting States will notify each other of any changes that have been made in 

their laws, whether tax laws or non-tax laws, that affect significantly their obligations 

under the Convention. Non-tax laws that may affect a Contracting State's obligations 

under the Convention may include, for example, laws affecting bank secrecy. 

ARTICLE 3 (GENERAL DEFINITIONS) 

Article 3 provides general definitions and rules of interpretation applicable 

throughout the Convention. Certain other terms are defined in other articles of the 

Convention. For example, the term "resident of a Contracting State" is defined in Article 

4 (Resident). The term "permanent establishment" is defined in Article 5 (Permanent 

Establishment). These definitions are used consistently throughout the Convention. Other 

terms, such as "dividends," "interest" and "royalties" are defined in specific articles for 

purposes only of those articles. 

Paragraph 1 

Paragraph 1 defines a number of basic terms used in the Convention. The 

introduction to paragraph 1 makes clear that these definitions apply for all purposes of the 

Convention, unless the context requires otherwise. This latter condition allows flexibility 

in the interpretation of the treaty in order to avoid results not intended by the treaty's 

negotiators. 

Subparagraph 1(a) defines the term "person" to include an individual, an estate, a 

trust, a partnership, a company and any other body of persons. The definition is 

significant for a variety of reasons. For example, under Article 4, only a "person" can be 

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a "resident" and therefore eligible for most benefits under the treaty. Also, all "persons" 

are eligible to claim relief under Article 24 (Mutual Agreement Procedure). 

The term "company" is defined in subparagraph 1(b) as a body corporate or an 

entity treated as a body corporate for tax purposes in the state where it is organized. The 

definition refers to the law of the state in which an entity is organized in order to ensure 

that an entity that is treated as fiscally transparent in its country of residence will not get 

inappropriate benefits, such as the reduced withholding rate provided by subparagraph 

2(b), or paragraphs 3 or 4 of Article 10 (Dividends). It also ensures that the Limitation 

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

The terms "enterprise of a Contracting State" and "enterprise of the other 

Contracting State" are defined in subparagraph 1(c) as an enterprise carried on by a 

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

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

State. It may be carried on in the other Contracting State or a third state (e.g., a U.S. 

corporation doing all of its business in Belgium would still be a U.S. enterprise). 

Subparagraph 1(c) further provides that these terms also encompass an enterprise 

conducted through an entity (such as a partnership) that is treated as fiscally transparent 

in the Contracting State where the entity's owner is resident. The definition makes this 

point explicitly to ensure that the purpose of the Convention is not thwarted by an overly 

technical application of the term "enterprise of a Contracting State" to activities carried 

on through partnerships and similar entities. In accordance with Article 4 (Resident), 

entities that are fiscally transparent in the country in which their owners are resident are 

not considered to be residents of a Contracting State (although income derived by such 

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

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

conducted by a resident of a Contracting State, and therefore would not benefit from 

provisions applicable to enterprises of a Contracting State. The definition is intended to 

make clear that an enterprise conducted by such an entity will be treated as carried on by 

a resident of a Contracting State to the extent its partners or other owners are residents. 

This approach is consistent with the Code, which under section 875 attributes a trade or 

business conducted by a partnership to its partners and a trade or business conducted by 

an estate or trust to its beneficiaries. 

Subparagraph (d) defines the term "enterprise" as any activity or set of activities 

that constitutes the carrying on of a business. The term "business" is not defined, but 

subparagraph (e) provides that it includes the performance of professional services and 

other activities of an independent character. Both subparagraphs are identical to 

definitions recently added to the OECD Model in connection with the deletion of Article 

14 (Independent Personal Services) from the OECD Model. The inclusion of the two 

definitions is intended to clarify that income from the performance of professional 

services or other activities of an independent character is dealt with under Article 7 

(Business Profits) and not Article 20 (Other Income). 

Subparagraph 1(f) defines the term "international traffic." The term means any 

transport by a ship or aircraft except when such transport is solely between places within 

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a Contracting State. This definition is applicable principally in the context of Article 8 

(Shipping and Air Transport). The definition combines with paragraphs 2 and 3 of 

Article 8 to exempt from tax by the source State income from the rental of ships or 

aircraft that is earned both by lessors that are operators of ships and aircraft and by those 

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

The exclusion from international traffic of transport solely between places within 

a Contracting State means, for example, that carriage of goods or passengers solely 

between New York and Chicago would not be treated as international traffic, whether 

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

relating to the taxation of income from transport, principally Article 8 (Shipping and Air 

Transport), therefore, would not apply to income from such carriage. Thus, if the carrier 

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

under U.S. law), the United States would not be required to exempt the income from that 

transport under Article 8. The income would, however, be treated as business profits 

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

only if attributable to a U.S. permanent establishment of the foreign carrier, and then only 

on a net basis. The gross basis U.S. tax imposed by section 887 would never apply under 

the circumstances described. If, however, goods or passengers are carried by a carrier 

resident in Belgium from a non-U.S. port to, for example, New York, and some of the 

goods or passengers continue on to Chicago, the entire transport would be international 

traffic. This would be true if the international carrier transferred the goods at the U.S. 

port of entry from a ship to a land vehicle, from a ship to a lighter, or even if the overland 

portion of the trip in the United States was handled by an independent carrier under 

contract with the original international carrier, so long as both parts of the trip were 

reflected in original bills of lading. For this reason, the Convention refers, in the 

definition of "international traffic," to "such transport" being solely between places in the 

other Contracting State, while the OECD Model refers to the ship or aircraft being 

operated solely between such places. The Convention is consistent with the language in 

the U.S. Model and is intended to make clear that, as in the above example, even if the 

goods are carried on a different aircraft for the internal portion of the international voyage 

than is used for the overseas portion of the trip, the definition applies to that internal 

portion as well as the external portion. 

Finally, a "cruise to nowhere," i.e., a cruise beginning and ending in a port in the 

same Contracting State with no stops in a foreign port, would not constitute international 

traffic. 

Subparagraph 1(g) designates the "competent authorities" for Belgium and the 

United States, respectively. The Belgium competent authority is the Minister of Finance 

or his authorized representative. The U.S. competent authority is the Secretary of the 

Treasury or his delegate. The Secretary of the Treasury has delegated the competent 

authority function to the Commissioner of Internal Revenue, who in turn has delegated 

the authority to the Deputy Commissioner (International) LMSB. With respect to 

interpretative issues, the Deputy Commissioner (International) LMSB acts with the 

concurrence of the Associate Chief Counsel (International) of the Internal Revenue 

Service. 

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The geographical scope of the Convention with respect to Belgium is set out in 

subparagraph 1(h). It encompasses the territory of Belgium, including the territorial sea 

and the seabed and subsoil and the superjacent waters of the adjacent submarine areas 

beyond the territorial sea over which Belgium exercises sovereign rights in accordance 

with international law. 

The geographical scope of the Convention with respect to the United States is set 

out in subparagraph 1(i). It encompasses the United States of America, including the 

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

not include Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or 

territory. For certain purposes, the term "United States" includes the sea bed and subsoil 

of undersea areas adjacent to the territorial sea of the United States. This extension 

applies to the extent that the United States exercises sovereignty in accordance with 

international law for the purpose of natural resource exploration and exploitation of such 

areas. This extension of the definition applies, however, only if the person, property or 

activity to which the Convention is being applied is connected with such natural resource 

exploration or exploitation. Thus, it would not include any activity involving the sea 

floor of an area over which the United States exercised sovereignty for natural resource 

purposes if that activity was unrelated to the exploration and exploitation of natural 

resources. This result is consistent with the result that would be obtained under Section 

638, which treats the continental shelf as part of the United States for purposes of natural 

resource exploration and exploitation. 

The term "national," as it relates to the United States and to Belgium, is defined in 

subparagraph 1(j). This term is relevant for purposes of Articles 18 (Government 

Service) and 23 (Non-Discrimination). A national of one of the Contracting States is (1) 

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

partnership or association deriving its status, as such, from the law in force in the State 

where it is established. 

Subparagraph (k) defines the term "pension fund" to include any person 

established in a Contracting State that is operated principally to administer or provide 

pension or retirement benefits or to earn income for the benefit of one or more such 

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

regulated by the Bank Finance and Insurance Commission or, in the case of the United 

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

of the United States, the term "pension fund" includes the following: a trust providing 

pension or retirement benefits under a Code section 401(a) qualified pension plan, profit 

sharing or stock bonus plan, a trust providing pension or retirement benefits under a Code 

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

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

retirement account under Code section 408(p), a trust providing pension or retirement 

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

described in section 457(g) providing pension or retirement benefits under a Code section 

457(b) plan, and the Thrift Savings Fund (section 7701(j)). Section 401(k) plans and 

group trusts described in Revenue Ruling 81-100 and meeting the conditions of Revenue 

11
Ruling 2004-67 qualify as pension funds because they are covered by Code section 

401(a). 

Paragraph 2 

Terms that are not defined in the Convention are dealt with in paragraph 2. 

Paragraph 2 provides that in the application of the Convention, any term used but 

not defined in the Convention will have the meaning that it has under the law of the 

Contracting State whose tax is being applied, unless the context requires otherwise, or the 

competent authorities have agreed on a different meaning pursuant to Article 24 (Mutual 

Agreement Procedure). If the term is defined under both the tax and non-tax laws of a 

Contracting State, the definition in the tax law will take precedence over the definition in 

the non-tax laws. Finally, there also may be cases where the tax laws of a State contain 

multiple definitions of the same term. In such a case, the definition used for purposes of 

the particular provision at issue, if any, should be used. 

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

Contracting State, or if there is a conflict in meaning under the laws of the two States that 

creates difficulties in the application of the Convention, the competent authorities, as 

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

establish a common meaning in order to prevent double taxation or to further any other 

purpose of the Convention. This common meaning need not conform to the meaning of 

the term under the laws of either Contracting State. 

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

law in effect at the time the treaty is being applied, not the law as in effect at the time the 

treaty was signed. The use of "ambulatory" definitions, however, may lead to results that 

are at variance with the intentions of the negotiators and of the Contracting States when 

the treaty was negotiated and ratified. The reference in both paragraphs 1 and 2 to the 

"context otherwise requir[ing]" a definition different from the treaty definition, in 

paragraph 1, or from the internal law definition of the Contracting State whose tax is 

being imposed, under paragraph 2, refers to a circumstance where the result intended by 

the Contracting States is different from the result that would obtain under either the 

paragraph 1 definition or the statutory definition. Thus, flexibility in defining terms is 

necessary and permitted. 

ARTICLE 4 (RESIDENT) 

This Article sets forth rules for determining whether a person is a resident of a 

Contracting State for purposes of the Convention. As a general matter only residents of 

the Contracting States may claim the benefits of the Convention. The treaty definition of 

residence is to be used only for purposes of the Convention. The fact that a person is 

determined to be a resident of a Contracting State under Article 4 does not necessarily 

entitle that person to the benefits of the Convention. In addition to being a resident, a 

person also must qualify for benefits under Article 21 (Limitation on Benefits) in order to 

receive benefits conferred on residents of a Contracting State. 

12
The determination of residence for treaty purposes looks first to a person's 

liability to tax as a resident under the respective taxation laws of the Contracting States. 

As a general matter, a person who, under those laws, is a resident of one Contracting 

State and not of the other need look no further. For purposes of the Convention, that 

person is a resident of the State in which he is resident under internal law. If, however, a 

person is resident in both Contracting States under their respective taxation laws, the 

Article proceeds, where possible, to use tie-breaker rules to assign a single State of 

residence to such a person for purposes of the Convention. 

Paragraph 1 

The term "resident of a Contracting State" is defined in paragraph 1. In general, 

this definition incorporates the definitions of residence in U.S. law and that of Belgium 

by referring to a resident as a person who, under the laws of a Contracting State, is 

subject to tax there by reason of his domicile, residence, citizenship, place of 

management, place of incorporation or any other similar criterion. Thus, residents of the 

United States include aliens who are considered U.S. residents under Code section 

7701(b). Paragraph 1 also specifically includes the United States and Belgium, and 

political subdivisions and local authorities of both States, as residents for purposes of the 

Convention. 

Certain entities that are nominally subject to tax but that in practice are rarely 

required to pay tax also would generally be treated as residents and therefore accorded 

treaty benefits. For example, a U.S. Regulated Investment Company (RIC) and a U.S. 

Real Estate Investment Trust (REIT) are residents of the United States for purposes of the 

treaty. Although the income earned by these entities normally is not subject to U.S. tax in 

the hands of the entity, they are taxable to the extent that they do not currently distribute 

their profits, and therefore may be regarded as "liable to tax." They also must satisfy a 

number of requirements under the Code in order to be entitled to special tax treatment. 

A person who is liable to tax in a Contracting State only in respect of income 

from sources within that State or of profits attributable to a permanent establishment in 

that State will not be treated as a resident of that Contracting State for purposes of the 

Convention. Thus, a consular official of Belgium who is posted in the United States, who 

may be subject to U.S. tax on U.S. source investment income, but is not taxable in the 

United States on non-U.S. source income (see Code section 7701(b)(5)(B)), would not be 

considered a resident of the United States for purposes of the Convention. Similarly, an 

enterprise of Belgium with a permanent establishment in the United States is not, by 

virtue of that permanent establishment, a resident of the United States. The enterprise 

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

U.S. permanent establishment, not with respect to its worldwide income, as it would be if 

it were a U.S. resident. 

Paragraph 2 

Paragraph 2 contains an exception to the general rule of paragraph 1 that 

residence under internal law also determines residence under the Convention. The 

exception applies with respect to a U.S. citizen or alien lawfully admitted for permanent 

residence (i.e., a "green card" holder). Under paragraph 1, a person is considered a 

13
resident of a Contracting State for purposes of the Convention if he is liable to tax in that 

Contracting State by reason of citizenship. Although this rule applies to both Contracting 

States, only the United States taxes its non-resident citizens in the same manner as its 

residents. In addition, aliens admitted to the United States for permanent residence 

(“green card” holders) qualify as U.S. residents under the first sentence of paragraph 1 

because they are taxed by the United States as residents, regardless of where they 

physically reside. 

Under the exception of paragraph 2, a U.S. citizen or green card holder will be 

treated as a resident of the United States for purposes of the Convention, and, thereby 

entitled to treaty benefits, only if he meets two conditions. First, he must have a 

substantial presence (see section 7701(b)(3)), permanent home or habitual abode in the 

United States. This rule requires that the U.S. citizen or green card holder have a 

reasonably strong economic nexus with the United States. Second, he must not be treated 

as a resident of a state other than Belgium under any treaty between Belgium and a third 

state. This rule prevents a U.S. citizen or green card holder who is a resident of a country 

other than the United States or Belgium from choosing the benefits of the Convention 

over those provided by the treaty between Belgium and his country of residence. If the 

U.S. citizen or green card holder's country of residence does not have a treaty with the 

Belgium, however, then he will be treated as a resident of the United States as long as he 

meets the first requirement of an economic nexus. If such a person is a resident of both 

the United States and Belgium, whether or not he is to be treated as a resident of the 

United States for purposes of the Convention is determined by the tie-breaker rules of 

paragraph 4. 

Thus, for example, an individual resident of the United Kingdom who is a U.S. 

citizen by birth, or who is a United Kingdom citizen and holds a U.S. green card, but who, 

in either case, has never lived in the United States, would not be entitled to benefits under 

the Convention. However, a U.S. citizen who is transferred to the United Kingdom for 

two years would be entitled to benefits under the Convention if he maintains a permanent 

home or habitual abode in the United States and is not a resident of the United Kingdom 

for purposes of the Belgium-U.K. tax treaty. If he were treated as a resident of the United 

Kingdom under the Belgium-U.K. tax treaty, he could claim only the benefits of that 

treaty, even if the Convention would provide greater benefits. 

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

not be treated as a U.S. resident under the Convention does not alter the application of the 

saving clause of paragraph 4 of Article 1 (General Scope) to that citizen. For example, a 

U.S. citizen who pursuant to the "citizen/green card holder" exception in paragraph 2 is 

not considered to be a resident of the United States still is taxable in the United States on 

his worldwide income under the generally applicable rules of the Code. 

Paragraph 3 

Paragraph 3 provides that certain tax-exempt entities such as pension funds and 

charitable organizations will be regarded as residents of a Contracting State regardless of 

14
whether they are generally liable to income tax in the State where they are established. 

The paragraph applies to legal persons organized under the laws of a Contracting State 

and established and maintained in that State to provide pensions or other similar benefits 

pursuant to a plan, or exclusively for religious, charitable, scientific, artistic, cultural, or 

educational purposes. Thus, a section 501(c) organization organized in the United States 

(such as a U.S. charity) that is generally exempt from tax under U.S. law is a resident of 

the United States for all purposes of the Convention. 

Paragraph 4 

If, under the laws of the two Contracting States, and, thus, under paragraph 1, an 

individual is deemed to be a resident of both Contracting States, a series of tie-breaker 

rules are provided in paragraph 4 to determine a single State of residence for that 

individual. These tests are to be applied in the order in which they are stated. The first 

test is based on where the individual has a permanent home. If that test is inconclusive 

because the individual has a permanent home available to him in both States, he will be 

considered to be a resident of the Contracting State where his personal and economic 

relations are closest (i.e., the location of his "centre of vital interests"). If that test is also 

inconclusive, or if he does not have a permanent home available to him in either State, he 

will be treated as a resident of the Contracting State where he maintains an habitual 

abode. If he has an habitual abode in both States or in neither of them, he will be treated 

as a resident of the Contracting State of which he is a national. If he is a national of both 

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

assign a single State of residence. 

Paragraph 5 

Paragraph 5 seeks to settle dual-residence issues for persons other than 

individuals (e.g., companies, trusts, or estates). For example, a dual-residence may arise 

in the case of a company that is incorporated in the United States, and therefore treated as 

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

it is managed and controlled in Belgium, or perhaps, maintains a dual charter of 

incorporation in Belgium. In such a case, if such a person is, under the rules of paragraph 

1, resident in both Contracting States, the competent authorities shall seek to determine a 

single State of residence for that person for purposes of the Convention. If the competent 

authorities do not reach an agreement on a single State of residence, that company may 

not claim any benefit accorded to residents of a Contracting State by the Convention, 

except those provided in paragraph 1 of Article 22 (Relief From Double Taxation), 

paragraph 1 of Article 23 (Non-Discrimination), and Article 24 (Mutual Agreement 

Procedure). Thus, for example, a State cannot discriminate against a dual resident 

company. 

ARTICLE 5 (PERMANENT ESTABLISHMENT) 

This Article defines the term "permanent establishment," a term that is significant 

for several articles of the Convention. The existence of a permanent establishment in a 

Contracting State is necessary under Article 7 (Business Profits) for the taxation by that 

State of the business profits of a resident of the other Contracting State. Articles 10, 11 

15
and 12 (dealing with dividends, interest, and royalties, respectively) provide for reduced 

rates of tax at source on payments of these items of income to a resident of the other State 

only when the income is not attributable to a permanent establishment that the recipient 

has in the source State. The concept is also relevant in determining which Contracting 

State may tax certain gains under Article 13 (Gains) and certain "other income" under 

Article 20 (Other Income). 

Paragraph 1 

The basic definition of the term "permanent establishment" is contained in 

paragraph 1. As used in the Convention, the term means a fixed place of business 

through which the business of an enterprise is wholly or partly carried on. As indicated 

in the OECD Commentary to Article 5 (see paragraphs 4 through 8), a general principle 

to be observed in determining whether a permanent establishment exists is that the place 

of business must be "fixed" in the sense that a particular building or physical location is 

used by the enterprise for the conduct of its business, and that it must be foreseeable that 

the enterprise's use of this building or other physical location will be more than 

temporary. 

Paragraph 2 

Paragraph 2 lists a number of types of fixed places of business that constitute a 

permanent establishment. This list is illustrative and non-exclusive. According to 

paragraph 2, the term permanent establishment includes a place of management, a branch, 

an office, a factory, a workshop, and a mine, oil or gas well, quarry or other place of 

extraction of natural resources. 

Paragraph 3 

This paragraph provides rules to determine whether a building site or a 

construction, assembly or installation project, or an installation used for the exploration 

of natural resources constitutes a permanent establishment for the contractor, explorer, 

etc. Such a site or activity does not create a permanent establishment unless the site, 

project, etc. lasts, or the exploration activity continues, for more than twelve months. It is 

only necessary to refer to "exploration" and not "exploitation" in this context because 

exploitation activities are defined to constitute a permanent establishment under 

subparagraph (f) of paragraph 2. Thus, a drilling rig does not constitute a permanent 

establishment if a well is drilled in only six months, but if production begins in the 

following month the well becomes a permanent establishment as of that date. 

The twelve-month test applies separately to each site or project. The twelvemonth period begins when work (including preparatory work carried on by the enterprise) 

physically begins in a Contracting State. A series of contracts or projects by a contractor 

that are interdependent both commercially and geographically are to be treated as a single 

project for purposes of applying the twelve-month threshold test. For example, the 

construction of a housing development would be considered as a single project even if 

each house were constructed for a different purchaser. 

16
In applying this paragraph, time spent by a sub-contractor on a building site is 

counted as time spent by the general contractor at the site for purposes of determining 

whether the general contractor has a permanent establishment. However, for the subcontractor itself to be treated as having a permanent establishment, the sub-contractor's 

activities at the site must last for more than 12 months. If a sub-contractor is on a site 

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

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

the sub-contractor is not on the site are counted). 

These interpretations of the Article are based on the Commentary to paragraph 3 

of Article 5 of the OECD Model, which contains language that is substantially the same 

as that in the Convention. These interpretations are consistent with the generally 

accepted international interpretation of the relevant language in paragraph 3 of Article 5 

of the Convention. 

If the twelve-month threshold is exceeded, the site or project constitutes a 

permanent establishment from the first day of activity. 

Paragraph 4 

This paragraph contains exceptions to the general rule of paragraph 1, listing a 

number of activities that may be carried on through a fixed place of business but which 

nevertheless do not create a permanent establishment. The use of facilities solely to store, 

display or deliver merchandise belonging to an enterprise does not constitute a permanent 

establishment of that enterprise. The maintenance of a stock of goods belonging to an 

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

of processing by another enterprise does not give rise to a permanent establishment of the 

first-mentioned enterprise. The maintenance of a fixed place of business solely for the 

purpose of purchasing goods or merchandise, or for collecting information, for the 

enterprise, or for other activities that have a preparatory or auxiliary character for the 

enterprise, such as advertising, or the supply of information, do not constitute a 

permanent establishment of the enterprise. Moreover, subparagraph 4(f) provides that a 

combination of the activities described in the other subparagraphs of paragraph 4 will not 

give rise to a permanent establishment if the combination results in an overall activity 

that is of a preparatory or auxiliary character. 

Paragraph 5 

Paragraphs 5 and 6 specify when activities carried on by an agent or other person 

acting on behalf of an enterprise create a permanent establishment of that enterprise. 

Under paragraph 5, a person is deemed to create a permanent establishment of the 

enterprise if that person has and habitually exercises an authority to conclude contracts 

that are binding on the enterprise. If, however, for example, his activities are limited to 

those activities specified in paragraph 4 which would not constitute a permanent 

establishment if carried on by the enterprise through a fixed place of business, the person 

does not create a permanent establishment of the enterprise. 

17
The OECD Model uses the term "in the name of that enterprise" rather than 

"binding on the enterprise." This difference is intended to be a clarification rather than a 

substantive difference. As indicated in paragraph 32 to the OECD Commentaries on 

Article 5, paragraph 5 of the Article is intended to encompass persons who have 

"sufficient authority to bind the enterprise's participation in the business activity in the 

State concerned." 

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

operations of the enterprise, rather than ancillary activities. For example, if the person 

has no authority to conclude contracts in the name of the enterprise with its customers for, 

say, the sale of the goods produced by the enterprise, but it can enter into service 

contracts in the name of the enterprise for the enterprise's business equipment, this 

contracting authority would not fall within the scope of the paragraph, even if exercised 

regularly. 

Paragraph 6 

Under paragraph 6, an enterprise is not deemed to have a permanent 

establishment in a Contracting State merely because it carries on business in that State 

through an independent agent, including a broker or general commission agent, if the 

agent is acting in the ordinary course of his business as an independent agent. Thus, there 

are two conditions that must be satisfied: the agent must be both legally and economically 

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

business in carrying out activities on behalf of the enterprise. 

Whether the agent and the enterprise are independent is a factual determination. 

Among the questions to be considered are the extent to which the agent operates on the 

basis of instructions from the enterprise. An agent that is subject to detailed instructions 

regarding the conduct of its operations or comprehensive control by the enterprise is not 

legally independent. 

In determining whether the agent is economically independent, a relevant factor is 

the extent to which the agent bears business risk. Business risk refers primarily to risk of 

loss. An independent agent typically bears risk of loss from its own activities. In the 

absence of other factors that would establish dependence, an agent that shares business 

risk with the enterprise, or has its own business risk, is economically independent 

because its business activities are not integrated with those of the principal. Conversely, 

an agent that bears little or no risk from the activities it performs is not economically 

independent and therefore is not described in paragraph 6. 

Another relevant factor in determining whether an agent is economically 

independent is whether the agent acts exclusively or nearly exclusively for the principal. 

Such a relationship may indicate that the principal has economic control over the agent. 

A number of principals acting in concert also may have economic control over an agent. 

The limited scope of the agent's activities and the agent's dependence on a single source 

of income may indicate that the agent lacks economic independence. It should be borne 

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

economically independent notwithstanding an exclusive relationship with the principal if 

18
it has the capacity to diversify and acquire other clients without substantial modifications 

to its current business and without substantial harm to its business profits. Thus, 

exclusivity should be viewed merely as a pointer to further investigation of the 

relationship between the principal and the agent. Each case must be addressed on the 

basis of its own facts and circumstances. 

Paragraph 7 

This paragraph clarifies that a company that is a resident of a Contracting State is 

not deemed to have a permanent establishment in the other Contracting State merely 

because it controls, or is controlled by, a company that is a resident of that other 

Contracting State, or that carries on business in that other Contracting State. The 

determination whether a permanent establishment exists is made solely on the basis of the 

factors described in paragraphs 1 through 6 of the Article. Whether a company is a 

permanent establishment of a related company, therefore, is based solely on those factors 

and not on the ownership or control relationship between the companies. 

ARTICLE 6 (INCOME FROM REAL PROPERTY) 

Paragraph 1 

The first paragraph of Article 6 states the general rule that income of a resident of 

a Contracting State derived from real property situated in the other Contracting State may 

be taxed in the Contracting State in which the property is situated. The paragraph 

specifies that income from real property includes income from agriculture and forestry. 

Given the availability of the net election in paragraph 5, taxpayers generally should be 

able to obtain the same tax treatment in the situs country regardless of whether the 

income is treated as business profits or real property income. 

This Article does not grant an exclusive taxing right to the situs State; the situs 

State is merely given the primary right to tax. The Article does not impose any limitation 

in terms of rate or form of tax on the situs State, except that, as provided in paragraph 5, 

the situs State must allow the taxpayer an election to be taxed on a net basis. 

Paragraph 2 

The term "real property" is defined in paragraph 2 by reference to the internal law 

definition in the situs State. In the case of the United States, the term has the meaning 

given to it by Reg. § 1.897-1(b). In addition to the statutory definitions in the two 

Contracting States, the paragraph specifies certain additional classes of property that, 

regardless of internal law definitions, are within the scope of the term for purposes of the 

Convention. This expanded definition conforms to that in the OECD Model. The 

definition of "real property" for purposes of Article 6 is more limited than the expansive 

definition of "real property" in paragraph 1 of Article 13 (Gains). The Article 13 term 

includes not only real property as defined in Article 6 but certain other interests in real 

property. 

19
Paragraph 3 

Paragraph 3 makes clear that all forms of income derived from the exploitation of 

real property are taxable in the Contracting State in which the property is situated. This 

includes income from any use of real property, including, but not limited to, income from 

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

purposes) and rental income from the letting of real property. In the case of a net lease of 

real property, if a net election has not been made, the gross rental payment (before 

deductible expenses incurred by the lessee) is treated as income from the property. 

Other income closely associated with real property is covered by other Articles of 

the Convention, however, and not Article 6. For example, income from the disposition of 

an interest in real property is not considered "derived" from real property; taxation of that 

income is addressed in Article 13 (Gains). Interest paid on a mortgage on real property 

would be covered by Article 11 (Interest). Distributions by a U.S. Real Estate Investment 

Trust or certain regulated investment companies would fall under Article 13 (Gains) in 

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

distributions treated as dividends. Finally, distributions from a United States Real 

Property Holding Corporation are not considered to be income from the exploitation of 

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

Paragraph 4 

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

paragraph 3) applies to income from real property of an enterprise. This clarifies that the 

situs country may tax the real property income (including rental income) of a resident of 

the other Contracting State in the absence of attribution to a permanent establishment in 

the situs State. This provision represents an exception to the general rule under Article 7 

(Business Profits) that income must be attributable to a permanent establishment in order 

to be taxable in the situs state. 

Paragraph 5 

The paragraph provides that a resident of one Contracting State that derives real 

property income from the other may elect, for any taxable year, to be subject to tax in that 

other State on a net basis, as though the income were attributable to a permanent 

establishment in that other State. The election may be terminated with the consent of the 

competent authority of the situs State. In the United States, revocation will be granted in 

accordance with the provisions of Treas. Reg. section 1.871-10(d)(2). 

ARTICLE 7 (BUSINESS PROFITS) 

This Article provides rules for the taxation by a Contracting State of the business 

profits of an enterprise of the other Contracting State. 

Paragraph 1 

Paragraph 1 states the general rule that business profits of an enterprise of one 

Contracting State may not be taxed by the other Contracting State unless the enterprise 

20
carries on business in that other Contracting State through a permanent establishment (as 

defined in Article 5 (Permanent Establishment)) situated there. When that condition is 

met, the State in which the permanent establishment is situated may tax the enterprise on 

the income that is attributable to the permanent establishment. 

Although the Convention does not include a definition of "business profits," the 

term is intended to cover income derived from any trade or business. In accordance with 

this broad definition, the term "business profits" includes income attributable to notional 

principal contracts and other financial instruments to the extent that the income is 

attributable to a trade or business of dealing in such instruments or is otherwise related to 

a trade or business (as in the case of a notional principal contract entered into for the 

purpose of hedging currency risk arising from an active trade or business). Any other 

income derived from such instruments is, unless specifically covered in another article, 

dealt with under Article 20 (Other Income). 

The term "business profits" also includes income derived by an enterprise from 

the rental of tangible personal property (unless such tangible personal property consists of 

aircraft, ships or containers, income from which is addressed by Article 8 (Shipping and 

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

tangible personal property in business profits means that such income earned by a 

resident of a Contracting State can be taxed by the other Contracting State only if the 

income is attributable to a permanent establishment maintained by the resident in that 

other State, and, if the income is taxable, it can be taxed only on a net basis. Income 

from the rental of tangible personal property that is not derived in connection with a trade 

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

In addition, as a result of the definitions of "enterprise" and "business" in Article 3 

(General Definitions), the term includes income derived from the furnishing of personal 

services. Thus, a consulting firm resident in one State whose employees or partners 

perform services in the other State through a permanent establishment may be taxed in 

that other State on a net basis under Article 7, and not under Article 14 (Income from 

Employment), which applies only to income of employees. With respect to the 

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

Because this article applies to income earned by an enterprise from the furnishing 

of personal services, the article also applies to income derived by a partner resident in a 

Contracting State that is attributable to personal services performed in the other 

Contracting State through a partnership with a permanent establishment in that other 

State. Income which may be taxed under this article includes all income attributable to 

the permanent establishment in respect of the performance of the personal services 

carried on by the partnership (whether by the partner himself, other partners in the 

partnership, or by employees assisting the partners) and any income from activities 

ancillary to the performance of those services (e.g., charges for facsimile services). 

The application of Article 7 to a service partnership may be illustrated by the 

following example: a partnership formed in Belgium has five partners (who agree to split 

profits equally), four of whom are resident and perform personal services only in 

Belgium at Office A, and one of whom performs personal services at Office B, a 

21
permanent establishment in the United States. In this case, the four partners of the 

partnership resident in Belgium may be taxed in the United States in respect of their share 

of the income attributable to the permanent establishment, Office B. The services giving 

rise to income which may be attributed to the permanent establishment would include not 

only the services performed by the one resident partner, but also, for example, if one of 

the four other partners came to the United States and worked on an Office B matter there, 

the income in respect of those services. Income from the services performed by the 

visiting partner would be subject to tax in the United States regardless of whether the 

visiting partner actually visited or used Office B while performing services in the United 

States. 

Paragraph 2 

Paragraph 2 provides rules for the attribution of business profits to a permanent 

establishment. The Contracting States will attribute to a permanent establishment the 

profits that it would have earned had it been a distinct and separate enterprise engaged in 

the same or similar activities under the same or similar conditions and dealing wholly 

independently with the enterprise of which it is a permanent establishment. 

The "attributable to" concept of paragraph 2 provides an alternative to the 

analogous but somewhat different "effectively connected" concept in Code section 864(c). 

In effect, paragraph 2 allows the United States to tax the lesser of two amounts of 

income: the amount determined by applying U.S. rules regarding the calculation of 

effectively connected income and the amount determined under Article 7 of the 

Convention. That is, a taxpayer may choose the set of rules that results in the lowest 

amount of taxable income, but may not mix and match. 

In some cases, the amount of income "attributable to" a permanent establishment 

under Article 7 may be greater than the amount of income that would be treated as 

"effectively connected" to a U.S. trade or business under section 864. For example, a 

taxpayer that has a significant amount of foreign source royalty income attributable to a 

U.S. branch may find that it will pay less tax in the United States by applying section 

864(c) of the Code, rather than the rules of Article 7, if the foreign source royalties are 

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

connected income. But, as described in the Technical Explanation to Article 1(2), if it 

does so, it may not then use Article 7 principles to exempt other income that would be 

effectively connected to the U.S. trade or business. Conversely, if it uses Article 7 

principles to exempt other effectively connected income that is not attributable to its U.S. 

permanent establishment, then it must include the foreign source royalties in its net 

taxable income even though such royalties would not constitute effectively connected 

income. 

In the case of financial institutions, the use of internal dealings to allocate income 

within an enterprise may produce results under Article 7 that are significantly different 

from the results under the effectively connected income rules. For example, income from 

interbranch notional principal contracts may be taken into account under Article 7, 

notwithstanding that such transactions may be ignored for purposes of U.S. domestic law. 

Under the consistency rule described above, a financial institution that conducts different 

22
lines of business through its U.S. permanent establishment may not choose to apply the 

rules of the Code with respect to some lines of business and Article 7 of the Convention 

with respect to others. If it chooses to use the rules of Article 7 to allocate its income 

from its trading book, it may not then use U.S. domestic rules to allocate income from its 

loan portfolio. 

The profits attributable to a permanent establishment may be from sources within 

or without a Contracting State. However, as stated in the Protocol, the business profits 

attributable to a permanent establishment include only those profits derived from the 

assets used, risks assumed, and activities performed by, the permanent establishment. 

The language of paragraph 2, when combined with paragraph 3 dealing with the 

allowance of deductions for expenses incurred for the purposes of earning the profits, and 

the Protocol to Article 7, incorporates the arm's-length standard for purposes of 

determining the profits attributable to a permanent establishment. As noted below with 

respect to Article 9, the United States generally interprets the arm's length standard in a 

manner consistent with the OECD Transfer Pricing Guidelines. 

The Protocol confirms that the arm's length method of paragraphs 2 and 3 consists 

of applying the OECD Transfer Pricing Guidelines, but taking into account the different 

economic and legal circumstances of a single legal entity (as opposed to separate but 

associated enterprises). Thus, any of the methods used in the Transfer Pricing Guidelines, 

including profits methods, may be used as appropriate and in accordance with the 

Transfer Pricing Guidelines. However, the use of the Transfer Pricing Guidelines applies 

only for purposes of attributing profits within the legal entity. It does not create legal 

obligations or other tax consequences that would result from transactions having 

independent legal significance. 

For example, an entity that operates through branches rather than separate 

subsidiaries will have lower capital requirements because all of the assets of the entity are 

available to support all of the entity's liabilities (with some exceptions attributable to 

local regulatory restrictions). This is the reason that most commercial banks and some 

insurance companies operate through branches rather than subsidiaries. The benefit that 

comes from such lower capital costs must be allocated among the branches in an 

appropriate manner. This issue does not arise in the case of an enterprise that operates 

through separate entities, since each entity will have to be separately capitalized or will 

have to compensate another entity for providing capital (usually through a guarantee). 

Under U.S. domestic regulations, internal "transactions" generally are not 

recognized because they do not have legal significance. In contrast, the rule provided by 

the Protocol is that such internal dealings may be used to allocate income in cases where 

the dealings accurately reflect the allocation of risk within the enterprise. One example is 

that of global trading in securities. In many cases, banks use internal swap transactions to 

transfer risk from one branch to a central location where traders have the expertise to 

manage that particular type of risk. Under the Convention, such a bank may also use 

such swap transactions as a means of allocating income between the branches, if use of 

that method is the "best method" within the meaning of regulation section 1.482-1(c). 

The books of a branch will not be respected, however, when the results are inconsistent 

23
with a functional analysis. So, for example, income from a transaction that is booked in a 

particular branch (or home office) will not be treated as attributable to that location if the 

sales and risk management functions that generate the income are performed in another 

location. 

Because the use of profits methods is permissible under paragraph 2, it is not 

necessary for the Convention to include a provision corresponding to paragraph 4 of 

Article 7 of the OECD Model. 

Paragraph 3 

This paragraph is identical to the provision in the U.S. Model. Paragraph 3 

provides that in determining the business profits of a permanent establishment, 

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

establishment, ensuring that business profits will be taxed on a net basis. This rule is not 

limited to expenses incurred exclusively for the purposes of the permanent establishment, 

but includes expenses incurred for the purposes of the enterprise as a whole, or that part 

of the enterprise that includes the permanent establishment. Deductions are to be allowed 

regardless of which accounting unit of the enterprise books the expenses, so long as they 

are incurred for the purposes of the permanent establishment. For example, a portion of 

the interest expense recorded on the books of the home office in one State may be 

deducted by a permanent establishment in the other if properly allocable thereto. The 

amount of expense that must be allowed as a deduction is determined by applying the 

arm's length principle. 

As noted above, the Protocol provides that the OECD Transfer Pricing Guidelines 

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

Accordingly, a permanent establishment may deduct payments made to its head office or 

another branch in compensation for services performed for the benefit of the branch. The 

method to be used in calculating that amount will depend on the terms of the 

arrangements between the branches and head office. For example, the enterprise could 

have a policy, expressed in writing, under which each business unit could use the services 

of lawyers employed by the head office. At the end of each year, the costs of employing 

the lawyers would be allocated to each business unit according to the amount of services 

used by that business unit during the year. Since this appears to be a kind of cost-sharing 

arrangement and the allocation of costs is based on the benefits received by each business 

unit, it would be an acceptable means of determining a permanent establishment's 

deduction for legal expenses. Alternatively, the head office could agree to employ 

lawyers at its own risk, and to charge an arm's length price for legal services performed 

for a particular business unit. If the lawyers were under-utilized, and the "fees" received 

from the business units were less than the cost of employing the lawyers, then the head 

office would bear the excess cost. If the "fees" exceeded the cost of employing the 

lawyers, then the head office would keep the excess to compensate it for assuming the 

risk of employing the lawyers. If the enterprise acted in accordance with this agreement, 

this method would be an acceptable alternative method for calculating a permanent 

establishment's deduction for legal expenses. 

24
The Protocol also specifies that a permanent establishment cannot be funded 

entirely with debt, but must have sufficient capital to carry on its activities as if it were a 

distinct and separate enterprise. To the extent that the permanent establishment does not 

have such capital, a Contracting State may attribute such capital to the permanent 

establishment and deny an interest deduction to the extent necessary to reflect that capital 

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

found in Treas. Reg. Section 1.882-5. Both Section 1.882-5 and the method prescribed in 

the Protocol start from the premise that all of the capital of the enterprise supports all of 

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

must be allocated to its various businesses and offices. 

However, section 1.882-5 does not take into account the fact that some assets 

create more risk for the enterprise than do other assets. An independent enterprise would 

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

to support an equity security or other asset with significant market and/or credit risk. 

Accordingly, in some cases section 1.882-5 would require a taxpayer to allocate more 

capital to the United States, and therefore would reduce the taxpayer's interest deduction 

more, than is appropriate. To address these cases, the Protocol allows a taxpayer to apply 

a more flexible approach that takes into account the relative risk of its assets in the 

various jurisdictions in which it does business. In particular, in the case of financial 

institutions other than insurance companies, the amount of capital attributable to a 

permanent establishment is determined by allocating the institution's total equity between 

its various offices on the basis of the proportion of the financial institution's riskweighted assets attributable to each of them. This recognizes the fact that financial 

institutions are in many cases required to risk-weight their assets for regulatory purposes 

and, in other cases, will do so for business reasons even if not required to do so by 

regulators. However, risk-weighting is more complicated than the method prescribed by 

Section 1.882-5. Accordingly, to ease this administrative burden, taxpayers may choose 

to apply the principles of Treas. Reg. Section 1.882-5(c) to determine the amount of 

capital allocable to its U.S. permanent establishment, in lieu of determining its allocable 

capital under the risk-weighed capital allocation method provided by the Protocol, even if 

it has otherwise chosen to apply the principles of Article 7 rather than the effectively 

connected income rules of U.S. domestic law. 

Paragraph 4 

Paragraph 4 provides that no business profits can be attributed to a permanent 

establishment merely because it purchases goods or merchandise for the enterprise of 

which it is a part. This paragraph is essentially identical to paragraph 5 of Article 7 of the 

U.S. and OECD Models. This rule applies only to an office that performs functions for 

the enterprise in addition to purchasing. The income attribution issue does not arise if the 

sole activity of the office is the purchase of goods or merchandise because such activity 

does not give rise to a permanent establishment under Article 5 (Permanent 

Establishment). A common situation in which paragraph 4 is relevant is one in which a 

permanent establishment purchases raw materials for the enterprise's manufacturing 

operation conducted outside the United States and sells the manufactured product. While 

25
business profits may be attributable to the permanent establishment with respect to its 

sales activities, no profits are attributable to it with respect to its purchasing activities. 

Paragraph 5 

Paragraph 5 provides that profits shall be determined by the same method each 

year, unless there is good reason to change the method used. This rule assures consistent 

tax treatment over time for permanent establishments. It limits the ability of both the 

Contracting State and the enterprise to change accounting methods to be applied to the 

permanent establishment. It does not, however, restrict a Contracting State from 

imposing additional requirements, such as the rules under Code section 481, to prevent 

amounts from being duplicated or omitted following a change in accounting method. 

Such adjustments may be necessary, for example, if the taxpayer switches from using the 

domestic rules under section 864 in one year to using the rules of Article 7 in the next. 

Also, if the taxpayer switches from Convention-based rules to U.S. domestic rules, it may 

need to meet certain deadlines for making elections that are not necessary when applying 

the rules of the Convention. 

Paragraph 6 

Paragraph 6 coordinates the provisions of Article 7 and other provisions of the 

Convention. Under this paragraph, when business profits include items of income that 

are dealt with separately under other articles of the Convention, the provisions of those 

articles will, except when they specifically provide to the contrary, take precedence over 

the provisions of Article 7. For example, the taxation of dividends will be determined by 

the rules of Article 10 (Dividends), and not by Article 7, except where, as provided in 

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

the latter case the provisions of Article 7 apply. Thus, an enterprise of one State deriving 

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

tax at source if they are not attributable to a permanent establishment of the enterprise in 

the other State. By the same token, if the dividends are attributable to a permanent 

establishment in the other State, the dividends may be taxed on a net income basis at the 

source State full corporate tax rate, rather than on a gross basis under Article 10 

(Dividends). 

As provided in Article 8 (Shipping and Air Transport), income derived from 

shipping and air transport activities in international traffic described in that Article is 

taxable only in the country of residence of the enterprise regardless of whether it is 

attributable to a permanent establishment situated in the source State. 

Paragraph 7 

Paragraph 7 incorporates into the Convention the rule of Code section 864(c)(6). 

Like the Code section on which it is based, paragraph 7 provides that any income or gain 

attributable to a permanent establishment during its existence is taxable in the 

Contracting State where the permanent establishment is situated, even if the payment of 

that income or gain is deferred until after the permanent establishment ceases to exist. 

This rule applies with respect to paragraphs 1 and 2 of Article 7 (Business Profits), 

26
paragraph 8 of Article 10 (Dividends), paragraph 4 of Article 11 (Interest), paragraph 3 of 

Articles 12 (Royalties) and 13 (Gains) and paragraph 2 of Article 20 (Other Income). 

The effect of this rule can be illustrated by the following example. Assume a 

company that is a resident of Belgium and that maintains a permanent establishment in 

the United States winds up the permanent establishment's business and sells the 

permanent establishment's inventory and assets to a U.S. buyer at the end of year 1 in 

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

Despite the fact that the company has no permanent establishment in the United States in 

year 3, the United States may tax the deferred income payment recognized by the 

company in year 3. 

Relationship to Other Articles 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General 

Scope) of the Convention. Thus, if a citizen of the United States who is a resident of 

Belgium under the treaty derives business profits from the United States that are not 

attributable to a permanent establishment in the United States, the United States may, 

subject to the special foreign tax credit rules of paragraph 4 of Article 22 (Relief from 

Double Taxation), tax those profits, notwithstanding the provision of paragraph 1 of this 

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

The benefits of this Article are also subject to Article 21 (Limitation on Benefits). 

Thus, an enterprise of Belgium and that derives income effectively connected with a U.S. 

trade or business may not claim the benefits of Article 7 unless the resident carrying on 

the enterprise qualifies for such benefits under Article 21. 

ARTICLE 8 (SHIPPING AND AIR TRANSPORT) 

This Article governs the taxation of profits from the operation of ships and 

aircraft in international traffic. The term "international traffic" is defined in subparagraph 

1(f) of Article 3 (General Definitions). The provisions of Article 8 are in all material 

respects identical to the provisions of Article 8 of the U.S. Model. 

Paragraph 1 

Paragraph 1 provides that profits derived by an enterprise of a Contracting State 

from the operation in international traffic of ships or aircraft are taxable only in that 

Contracting State. Because paragraph 6 of Article 7 (Business Profits) defers to Article 8 

with respect to shipping income, such income derived by a resident of one of the 

Contracting States may not be taxed in the other State even if the enterprise has a 

permanent establishment in that other State. Thus, if a U.S. airline has a ticket office in 

Belgium, Belgium may not tax the airline's profits attributable to that office under Article 

7. Since entities engaged in international transportation activities normally will have 

many permanent establishments in a number of countries, the rule avoids difficulties that 

would be encountered in attributing income to multiple permanent establishments if the 

income were covered by Article 7 (Business Profits). 

27
Paragraph 2 

The income from the operation of ships or aircraft in international traffic that is 

exempt from tax under paragraph 1 is defined in paragraph 2. 

In addition to income derived directly from the operation of ships and aircraft in 

international traffic, this definition also includes certain items of rental income. First, 

income of an enterprise of a Contracting State from the rental of ships or aircraft on a full 

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

international traffic and, therefore, is exempt from tax in the other Contracting State 

under paragraph 1. Also, paragraph 2 encompasses income from the lease of ships or 

aircraft on a bareboat basis (i.e., without crew), either when the income is incidental to 

other income of the lessor from the operation of ships or aircraft in international traffic, 

or when the ships or aircraft are operated in international traffic by the lessee. If neither 

of those two conditions apply, income from the bareboat rentals would constitute 

business profits. The coverage of Article 8 is therefore broader than that of Article 8 of 

the OECD Model, which covers bareboat leasing only when it is incidental to other 

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

Paragraph 2 also clarifies, consistent with the Commentary to Article 8 of the 

OECD Model, that income earned by an enterprise from the inland transport of property 

or passengers within either Contracting State falls within Article 8 if the transport is 

undertaken as part of the international transport of property or passengers by the 

enterprise. Thus, if a U.S. shipping company contracts to carry property from Belgium to 

a U.S. city and, as part of that contract, it transports the property by truck from its point 

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

property to the airport) the income earned by the U.S. shipping company from the 

overland leg of the journey would be taxable only in the United States. Similarly, Article 

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

transport of goods, even if the goods were transported to the port by a lighter, not by the 

vessel that carried the goods in international waters. 

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

performed by a transport company, or are ancillary to the enterprise's operation of ships 

or aircraft in international traffic, are understood to be covered in paragraph 1, though 

they are not specified in paragraph 2. These include, for example, the provision of goods 

and services by engineers, ground and equipment maintenance and staff, cargo handlers, 

catering staff and customer services personnel. Where the enterprise provides such goods 

to, or performs services for, other enterprises and such activities are directly connected 

with or ancillary to the enterprise's operation of ships or aircraft in international traffic, 

the profits from the provision of such goods and services to other enterprises will fall 

under this paragraph. 

For example, enterprises engaged in the operation of ships or aircraft in 

international traffic may enter into pooling arrangements for the purposes of reducing the 

costs of maintaining facilities needed for the operation of their ships or aircraft in other 

countries. For instance, where an airline enterprise agrees (for example, under an 

International Airlines Technical Pool agreement) to provide spare parts or maintenance 

28
services to other airlines landing at a particular location (which allows it to benefit from 

these services at other locations), activities carried on pursuant to that agreement will be 

ancillary to the operation of aircraft in international traffic by the enterprise. 

Also, advertising that the enterprise may do for other enterprises in magazines 

offered aboard ships or aircraft that it operates in international traffic or at its business 

locations, such as ticket offices, is ancillary to its operation of these ships or aircraft. 

Profits generated by such advertising fall within this paragraph. Income earned by 

concessionaires, however, is not covered by Article 8. These interpretations of paragraph 

1 also are consistent with the Commentary to Article 8 of the OECD Model. 

Paragraph 3 

Under this paragraph, profits of an enterprise of a Contracting State from the use, 

maintenance or rental of containers (including equipment for their transport) are exempt 

from tax in the other Contracting State, unless those containers are used for transport 

solely in the other Contracting State. This result obtains under paragraph 3 regardless of 

whether the recipient of the income is engaged in the operation of ships or aircraft in 

international traffic, and regardless of whether the enterprise has a permanent 

establishment in the other Contracting State. Only income from the use, maintenance or 

rental of containers (including equipment for their transport) that is incidental to other 

income from international traffic is covered by Article 8 of the OECD Model. 

Paragraph 4 

This paragraph clarifies that the provisions of paragraphs 1 and 3 also apply to 

profits derived by an enterprise of a Contracting State from participation in a pool, joint 

business or international operating agency. This refers to various arrangements for 

international cooperation by carriers in shipping and air transport. For example, airlines 

from two countries may agree to share the transport of passengers between the two 

countries. They each will fly the same number of flights per week and share the revenues 

from that route equally, regardless of the number of passengers that each airline actually 

transports. Paragraph 4 makes clear that with respect to each carrier the income dealt 

with in the Article is that carrier's share of the total transport, not the income derived 

from the passengers actually carried by the airline. This paragraph corresponds to 

paragraph 4 of Article 8 of the OECD Model. 

Relationship to Other Articles 

The taxation of gains from the alienation of ships, aircraft or containers is not 

dealt with in this Article but in paragraphs 4 and 5 of Article 13 (Gains). 

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

country taxation under Article 8 is available to an enterprise only if it is entitled to 

benefits under Article 21 (Limitation on Benefits). 

This Article also is subject to the saving clause of paragraph 4 of Article 1 

(General Scope) of the Convention. Thus, if a citizen of the United States who is a 

resident of Belgium derives profits from the operation of ships or aircraft in international 

29
traffic, notwithstanding the exclusive residence country taxation in paragraph 1 of Article 

8, the United States may, subject to the special foreign tax credit rules of paragraph 4 of 

Article 22 (Relief from Double Taxation), tax those profits as part of the worldwide 

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

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

corporate form.) 

ARTICLE 9 (ASSOCIATED ENTERPRISES) 

This Article incorporates in the Convention the arm's-length principle reflected in 

the U.S. domestic transfer pricing provisions, particularly Code section 482. It provides 

that when related enterprises engage in a transaction on terms that are not arm's-length, 

the Contracting States may make appropriate adjustments to the taxable income and tax 

liability of such related enterprises to reflect what the income and tax of these enterprises 

with respect to the transaction would have been had there been an arm's-length 

relationship between them. The provisions of Article 9 are identical to the provisions of 

Article 9 in the U.S. Model. 

Paragraph 1 

This paragraph is essentially the same as its counterpart in the OECD Model. It 

addresses the situation where an enterprise of a Contracting State is related to an 

enterprise of the other Contracting State, and there are arrangements or conditions 

imposed between the enterprises in their commercial or financial relations that are 

different from those that would have existed in the absence of the relationship. Under 

these circumstances, the Contracting States may adjust the income (or loss) of the 

enterprise to reflect what it would have been in the absence of such a relationship. 

The paragraph identifies the relationships between enterprises that serve as a 

prerequisite to application of the Article. As the Commentary to the OECD Model makes 

clear, the necessary element in these relationships is effective control, which is also the 

standard for purposes of section 482. Thus, the Article applies if an enterprise of one 

State participates directly or indirectly in the management, control, or capital of the 

enterprise of the other State. Also, the Article applies if any third person or persons 

participate directly or indirectly in the management, control, or capital of enterprises of 

different States. For this purpose, all types of control are included, i.e., whether or not 

legally enforceable and however exercised or exercisable. 

The fact that a transaction is entered into between such related enterprises does 

not, in and of itself, mean that a Contracting State may adjust the income (or loss) of one 

or both of the enterprises under the provisions of this Article. If the conditions of the 

transaction are consistent with those that would be made between independent persons, 

the income arising from that transaction should not be subject to adjustment under this 

Article. 

Similarly, the fact that associated enterprises may have concluded arrangements, 

such as cost sharing arrangements or general services agreements, is not in itself an 

indication that the two enterprises have entered into a non-arm's-length transaction that 

30
should give rise to an adjustment under paragraph 1. Both related and unrelated parties 

enter into such arrangements (e.g., joint venturers may share some development costs). 

As with any other kind of transaction, when related parties enter into an arrangement, the 

specific arrangement must be examined to see whether or not it meets the arm's-length 

standard. In the event that it does not, an appropriate adjustment may be made, which 

may include modifying the terms of the agreement or re-characterizing the transaction to 

reflect its substance. 

It is understood that the "commensurate with income" standard for determining 

appropriate transfer prices for intangibles, added to Code section 482 by the Tax Reform 

Act of 1986, was designed to operate consistently with the arm's-length standard. The 

implementation of this standard in the section 482 regulations is in accordance with the 

general principles of paragraph 1 of Article 9 of the Convention, as interpreted by the 

OECD Transfer Pricing Guidelines. 

This Article also permits tax authorities to deal with thin capitalization issues. 

They may, in the context of Article 9, scrutinize more than the rate of interest charged on 

a loan between related persons. They also may examine the capital structure of an 

enterprise, whether a payment in respect of that loan should be treated as interest, and, if 

it is treated as interest, under what circumstances interest deductions should be allowed to 

the payor. Paragraph 3 of the Commentary to Article 9 of the OECD Model, together 

with the U.S. observation set forth in paragraph 15, sets forth a similar understanding of 

the scope of Article 9 in the context of thin capitalization. 

Paragraph 2 

When a Contracting State has made an adjustment that is consistent with the 

provisions of paragraph 1, and the other Contracting State agrees that the adjustment was 

appropriate to reflect arm's-length conditions, that other Contracting State is obligated to 

make a correlative adjustment (sometimes referred to as a "corresponding adjustment") to 

the tax liability of the related person in that other Contracting State. Although the OECD 

Model does not specify that the other Contracting State must agree with the initial 

adjustment before it is obligated to make the correlative adjustment, the Commentary 

makes clear that the paragraph is to be read that way. 

As explained in the Commentary to Article 9 of the OECD Model, Article 9 

leaves the treatment of "secondary adjustments" to the laws of the Contracting States. 

When an adjustment under Article 9 has been made, one of the parties will have in its 

possession funds that it would not have had at arm's length. The question arises as to 

how to treat these funds. In the United States the general practice is to treat such funds as 

a dividend or contribution to capital, depending on the relationship between the parties. 

Under certain circumstances, the parties may be permitted to restore the funds to the 

party that would have the funds had the transactions been entered into on arm's length 

terms, and to establish an account payable pending restoration of the funds. See Rev. 

Proc. 99-32, 1999-2 C.B. 296. 

The Contracting State making a secondary adjustment will take the other 

provisions of the Convention, where relevant, into account. For example, if the effect of 

31
a secondary adjustment is to treat a U.S. corporation as having made a distribution of 

profits to its parent corporation in Belgium, the provisions of Article 10 (Dividends) will 

apply. Also, if under Article 22 Belgium generally gives a credit for taxes paid with 

respect to such dividends, it would also be required to do so in this case. 

The competent authorities are authorized by paragraph 3 of Article 24 (Mutual 

Agreement Procedure) to consult, if necessary, to resolve any differences in the 

application of these provisions. For example, there may be a disagreement over whether 

an adjustment made by a Contracting State under paragraph 1 was appropriate. 

If a correlative adjustment is made under paragraph 2, it is to be implemented, 

pursuant to paragraph 2 of Article 24 (Mutual Agreement Procedure), notwithstanding 

any time limits or other procedural limitations in the law of the Contacting State making 

the adjustment. If a taxpayer has entered a closing agreement (or other written 

settlement) with the United States prior to bringing a case to the competent authorities, 

the U.S. competent authority will endeavor only to obtain a correlative adjustment from 

Belgium. See, Rev. Proc. 2006-54, 2006-49 I.R.B. 1035, Section 7.05. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to 

paragraph 2 of Article 9 by virtue of an exception to the saving clause in paragraph 5(a) 

of Article 1. Thus, even if the statute of limitations has run, a refund of tax can be made 

in order to implement a correlative adjustment. Statutory or procedural limitations, 

however, cannot be overridden to impose additional tax, because paragraph 2 of Article 1 

provides that the Convention cannot restrict any statutory benefit. 

ARTICLE 10 (DIVIDENDS) 

Article 10 provides rules for the taxation of dividends paid by a company that is a 

resident of one Contracting State to a beneficial owner that is a resident of the other 

Contracting State. The article provides for full residence country taxation of such 

dividends and a limited source-State right to tax. Article 10 also provides rules for the 

imposition of a tax on branch profits by the State of source. 

Paragraph 1 

The right of a shareholder's country of residence to tax dividends arising in the 

source country is preserved by paragraph 1, which permits a Contracting State to tax its 

residents on dividends paid to them by a company that is a resident of the other 

Contracting State. For dividends from any other source paid to a resident, Article 20 

(Other Income) grants the residence country exclusive taxing jurisdiction (other than for 

dividends attributable to a permanent establishment in the other State). 

Paragraph 2 

The State of source also may tax dividends beneficially owned by a resident of the 

other State, subject to the limitations of paragraphs 2 through 4. Paragraph 2 generally 

limits the rate of withholding tax in the State of source on dividends paid by a company 

32
resident in that State to 15 percent of the gross amount of the dividend. If, however, the 

beneficial owner of the dividend is a company resident in the other State and owns 

directly shares representing at least 10 percent of the voting power of the company 

paying the dividend, then the rate of withholding tax in the State of source is limited to 5 

percent of the gross amount of the dividend. Shares are considered voting shares if they 

provide the power to elect, appoint or replace any person vested with the powers 

ordinarily exercised by the board of directors of a U.S. corporation. 

The benefits of paragraph 2 may be granted at the time of payment by means of 

reduced rate of withholding tax at source. It also is consistent with the paragraph for tax 

to be withheld at the time of payment at full statutory rates, and the treaty benefit to be 

granted by means of a subsequent refund so long as such procedures are applied in a 

reasonable manner. 

The determination of whether the ownership threshold for subparagraph a) of 

paragraph 2 is met for purposes of the 5 percent maximum rate of withholding tax is 

made on the date on which entitlement to the dividend is determined. Thus, in the 

case of a dividend from a U.S. company, the determination of whether the ownership 

threshold is met generally would be made on the dividend record date. 

The term "beneficial owner" is not defined in the Convention, and is, therefore, 

defined as under the internal law of the country imposing tax (i.e., the source country). 

The beneficial owner of the dividend for purposes of Article 10 is the person to which the 

dividend income is attributable for tax purposes under the laws of the source State. Thus, 

if a dividend paid by a corporation that is a resident of one of the States (as determined 

under Article 4 (Residence)) is received by a nominee or agent that is a resident of the 

other State on behalf of a person that is not a resident of that other State, the dividend is 

not entitled to the benefits of this Article. However, a dividend received by a nominee on 

behalf of a resident of that other State would be entitled to benefits. These interpretations 

are confirmed by paragraph 12 of the Commentary to Article 10 of the OECD Model. 

Companies holding shares through fiscally transparent entities such as 

partnerships are considered for purposes of this paragraph to hold their proportionate 

interest in the shares held by the intermediate entity. As a result, companies holding 

shares through such entities may be able to claim the benefits of subparagraph (a) under 

certain circumstances. The lower rate applies when the company’s proportionate share of 

the shares held by the intermediate entity meets the 10 percent threshold , and the 

company meets the requirements of Article 1(6) (i.e., the company’s country of residence 

treats the intermediate entity as fiscally transparent) with respect to the dividend. 

Whether this ownership threshold is satisfied may be difficult to determine and often will 

require an analysis of the partnership or trust agreement. 

Of note is the interaction of paragraph 2 and paragraph 4, with respect to 

dividends paid by a Belgian company. Under paragraph 2, the withholding tax imposed 

in Belgium may not exceed 5 percent if the beneficial owner of the dividend is a 

company resident in the United States and that U.S. resident company owns directly at 

least 10 percent of the voting stock of the Belgian company. However, under paragraph 

4, no withholding may be imposed on the dividend payment if the U.S. resident company 

33
has owned directly at least 10 percent of the Belgian company for the 12 month period 

ending on the date the dividend is declared. Thus, although the ownership threshold is 

the same under subparagraph 2 a) and paragraph 4, there is an additional requirement in 

paragraph 4 that the U.S. resident company have held the stock for a 12 month period 

ending on the date the dividend is declared. 

Paragraph 3 

Paragraph 3 provides exclusive residence-country taxation (i.e., an elimination of 

withholding tax) with respect to certain dividends distributed by a company that is a 

resident of the United States to a resident of Belgium. As described further below, this 

elimination of withholding tax is available with respect to certain inter-company 

dividends and with respect to pension funds. 

Subparagraph (a) of paragraph 3 provides for the elimination of withholding tax 

on dividends beneficially owned by a Belgian company that has owned, directly or 

indirectly, 80 percent or more of the voting power of the U.S. company paying the 

dividend for the 12-month period ending on the date entitlement to the dividend is 

determined. 

Eligibility for the elimination of withholding tax provided by subparagraph (a) is 

subject to additional restrictions based on, but supplementing, the rules of Article 21 

(Limitation on Benefits). Accordingly, a company that meets the holding requirements 

described above will qualify for the benefits of paragraph 3 only if it also: (1) meets the 

“publicly traded” test of subparagraph 2(c) of Article 21 (Limitation on Benefits), (2) 

meets the “ownership-base erosion” and “active trade or business” tests described in 

subparagraph 2(e) and paragraph 4 of Article 21 (Limitation on Benefits), (3) meets the 

“derivative benefits” test of paragraph 3 of Article 21 (Limitation on Benefits), or (4) is 

granted the benefits of subparagraph 3(a) of Article 10 by the competent authority of the 

source State pursuant to paragraph 7 of Article 21 (Limitation on Benefits). 

These restrictions are necessary because of the increased pressure on the 

Limitation on Benefits tests resulting from the fact that the United States has relatively 

few treaties that provide for such elimination of withholding tax on inter-company 

dividends. The additional restrictions are intended to prevent companies from reorganizing in order to become eligible for the elimination of withholding tax in 

circumstances where the Limitation on Benefits provision does not provide sufficient 

protection against treaty-shopping. 

For example, assume that ThirdCo is a company resident in a third country that 

does not have a tax treaty with the United States providing for the elimination of 

withholding tax on inter-company dividends. ThirdCo owns directly 100 percent of the 

issued and outstanding voting stock of USCo, a U.S. company, and of BelCo, a Belgian 

company. BelCo is a substantial company that manufactures widgets; USCo distributes 

those widgets in the United States. If ThirdCo contributes to BelCo all the stock of 

USCo, dividends paid by USCo to BelCo would qualify for treaty benefits under the 

active trade or business test of paragraph 4 of Article 21. However, allowing ThirdCo to 

34
qualify for the elimination of withholding tax, which is not available to it under the third 

state’s treaty with the United States (if any), would encourage treaty-shopping. 

In order to prevent this type of treaty-shopping, paragraph 3 requires BelCo to 

meet the ownership-base erosion requirements of subparagraph 2(e) of Article 21 in 

addition to the active trade or business test of paragraph 4 of Article 16. Thus, BelCo 

would not qualify for the exemption from withholding tax unless (i) on at least half the 

days of the taxable year, at least 50 percent of each class of its shares was owned by 

persons that are residents of Belgium and eligible for treaty benefits under certain 

specified tests and (ii) less than 50 percent of BelCo’s gross income is paid in deductible 

payments to persons that are not residents of either Contracting State eligible for benefits 

under those specified tests. Because BelCo is wholly owned by a third country resident, 

BelCo could not qualify for the elimination of withholding tax on dividends from USCo 

under the ownership-base erosion test and the active trade or business test. Consequently, 

BelCo would need to qualify under another test or obtain discretionary relief from the 

competent authority under Article 21(7). For purposes of Article 10(3)(a)(ii), it is not 

sufficient for a company to qualify for treaty benefits generally under the active trade or 

business test or the ownership-base erosion test unless it qualifies for treaty benefits 

under both. 

Alternatively, companies that are publicly traded or subsidiaries of publiclytraded companies will generally qualify for the elimination of withholding tax. Thus, a 

company that is a resident of Belgium and that meets the requirements of Article 

21(2)(c)(i) or (ii) will be entitled to the elimination of withholding tax, subject to the 12­

month holding period requirement of Article 10(3)(a). 

In addition, under Article 10(3)(a)(iii), a company that is a resident of Belgium 

may also qualify for the elimination of withholding tax on dividends if it satisfies the 

derivative benefits test of paragraph 3 of Article 21. Thus, a Belgian company that owns 

all of the stock of a U.S. corporation may qualify for the elimination of withholding tax if 

it is wholly-owned, for example, by a U.K., Dutch, Swedish, or Mexican publicly-traded 

company and the other requirements of the derivative benefits test are met. At this time, 

ownership by companies that are residents of other European Union, European Economic 

Area or North American Free Trade Agreement countries would not qualify the Belgian 

company for benefits under this provision, as the United States does not have treaties that 

eliminate the withholding tax on inter-company dividends with any other of those 

countries. If the United States were to enter into such treaties with more of those 

countries, residents of those countries could then qualify as equivalent beneficiaries for 

purposes of this provision. 

A company also may qualify for the elimination of withholding tax pursuant to 

Article 10(3)(a)(iii) if it is owned by seven or fewer U.S. or Belgian residents who 

qualify as an “equivalent beneficiary” and meet the other requirements of the derivative 

benefits provision. This rule may apply, for example, to certain Belgian corporate joint 

venture vehicles that are closely-held by a few Belgian resident individuals. 

35
If a company does not qualify for the elimination of withholding tax under any of 

the foregoing objective tests, it may request a determination from the relevant competent 

authority pursuant to paragraph 7 of Article 21. Benefits will be granted with respect to 

an item of income if the competent authority of the Contracting State in which the 

income arises determines that the establishment, acquisition or maintenance of such 

resident and the conduct of its operations did not have as one of its principal purposes the 

obtaining of benefits under the Convention. 

Subparagraph (b) of paragraph 3 of Article 10 of the Convention provides that 

dividends beneficially owned by a pension fund (as defined in subparagraph (k) of 

paragraph 1 of Article 3) may not be taxed in the Contracting State of which the 

company paying the dividends is a resident, unless such dividends are derived from the 

carrying on of a business, directly by the pension fund or indirectly through an 

associated enterprise. 

This rule is necessary because pension funds normally do not pay tax (either 

through a general exemption or because reserves for future pension liabilities effectively 

offset all of the fund’s income), and therefore cannot benefit from a foreign tax credit. 

Moreover, distributions from a pension fund generally do not maintain the character of 

the underlying income, so the beneficiaries of the pension are not in a position to claim a 

foreign tax credit when they finally receive the pension, in many cases years after the 

withholding tax has been paid. Accordingly, in the absence of this rule, the dividends 

would almost certainly be subject to unrelieved double taxation. 

Paragraph 4 

Paragraph 4 provides for exclusive residence country taxation on certain 

dividends paid by a company that is a resident of Belgium to a company that is resident 

in the United States. 

Subparagraph a) provides that a where the company paying the dividend is a 

resident of Belgium, and the beneficial owner of such dividend is a company that is a 

resident in the United States, no withholding tax will be collected in Belgium, provided 

the United States company has owned directly shares representing at least 10 percent of 

the capital of the Belgian company for a 12-month period ending on the date the dividend 

is declared. 

Subparagraph b) provides a rule that corresponds to subparagraph b) of paragraph 

3 of this Article. Accordingly, dividends paid by a company resident in Belgium to a 

pension fund that is a resident of the United States may not be taxed in Belgium, unless 

such dividends are derived from the carrying on of a business, directly by the pension 

fund or indirectly through an associated enterprise. 

Paragraph 5 

Paragraph 5 provides that paragraphs 2 through 4 do not affect the taxation of the 

profits out of which the dividends are paid. The taxation by a Contracting State of the 

income of its resident companies is governed by the internal law of the Contracting State, 

subject to the provisions of paragraph 4 of Article 23 (Non-Discrimination). 

36
Paragraph 6 

Article 10 generally applies to distributions made by a RIC or a REIT. However, 

distributions made by a REIT or certain RICs that are attributable to gains derived from 

the alienation of U.S. real property interests and treated as gain recognized under section 

897(h)(1) are taxable under paragraph 1 of Article 13 instead of Article 10. In the case of 

RIC or REIT distributions to which Article 10 applies, paragraph 6 imposes limitations 

on the rate reductions provided by paragraphs 2 and 3. 

The first sentence of subparagraph 6(a) provides that dividends paid by a RIC or 

REIT are not eligible for the 5 percent rate of withholding tax of subparagraph 2(a) or the 

elimination of source country withholding tax under subparagraph 3(a). 

The second sentence of subparagraph 6(a) provides that the 15 percent maximum 

rate of withholding tax of subparagraph 2(b) applies to dividends paid by RICs and that 

the elimination of source-country withholding tax of subparagraph 3(b) applies to 

dividends paid by RICs and beneficially owned by a pension fund. 

The third sentence of subparagraph 6(a) provides that the 15 percent rate under 

subparagraph 2(b) for dividends paid by a REIT and the exemption from source State 

withholding under subparagraph 3(b) for dividends paid by REITs and beneficially 

owned by a pension fund, apply only if one of the three following conditions is met. First, 

the beneficial owner of the dividend is an individual or a pension fund, in either case 

holding an interest of not more than 10 percent in the REIT. Second, the dividend is paid 

with respect to a class of stock that is publicly traded and the beneficial owner of the 

dividend is a person holding an interest of not more than 5 percent of any class of the 

REIT's shares. Third, the beneficial owner of the dividend holds an interest in the REIT 

of not more than 10 percent and the REIT is "diversified." 

Subparagraph (b) provides a definition of the term "diversified", which is 

necessary because the term is not defined in the Code. A REIT is diversified if the gross 

value of no single interest in real property held by the REIT exceeds 10 percent of the 

gross value of the REIT's total interest in real property. Foreclosure property is not 

considered an interest in real property, and a REIT holding a partnership interest is 

treated as owning its proportionate share of any interest in real property held by the 

partnership. 

The restrictions set out above are intended to prevent the use of these entities to 

gain inappropriate U.S. tax benefits. For example, a company resident in Belgium that 

wishes to hold a diversified portfolio of U.S. corporate shares could hold the portfolio 

directly and would bear a U.S. withholding tax of 15 percent on all of the dividends that 

it receives. Alternatively, it could hold the same diversified portfolio by purchasing 10 

percent or more of the interests in a RIC. If the RIC is a pure conduit, there may be no 

U.S. tax cost to interposing the RIC in the chain of ownership. Absent the special rule in 

paragraph 6, such use of the RIC could transform portfolio dividends, taxable in the 

United States under the Convention at a 15 percent maximum rate of withholding tax, 

into direct investment dividends taxable at a 5 percent maximum rate of withholding tax 

or eligible for the elimination of source-country withholding tax. 

37
Similarly, a resident of Belgium directly holding U.S. real property would pay 

U.S. tax on rental income at either a 30 percent rate of withholding tax on the gross 

income or at graduated rates on the net income. As in the preceding example, by placing 

the real property in a REIT, the investor could, absent a special rule, transform rental 

income into dividend income from the REIT, taxable at the rates provided in Article 10, 

significantly reducing the U.S. tax that otherwise would be imposed. Paragraph 6 

prevents this result and thereby avoids a disparity between the taxation of direct real 

estate investments and real estate investments made through REIT conduits. In the cases 

in which paragraph 6 allows a dividend from a REIT to be eligible for the 15 percent rate 

of withholding tax, the holding in the REIT is not considered the equivalent of a direct 

holding in the underlying real property. 

Paragraph 7 

Paragraph 7 defines the term dividends broadly and flexibly. The definition is 

intended to cover all arrangements that yield a return on an equity investment in a 

corporation as determined under the tax law of the State of source, as well as 

arrangements that might be developed in the future. 

The term includes income from shares, or other corporate rights that are not 

treated as debt under the law of the source State, that participate in the profits of the 

company. The term also includes income that is subjected to the same tax treatment as 

income from shares by the law of the State of source. Thus, a constructive dividend that 

results from a non-arm's length transaction between a corporation and a related party is a 

dividend. In the case of the United States the term dividend includes amounts treated as a 

dividend under U.S. law upon the sale or redemption of shares or upon a transfer of 

shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-2 C.B. 69 (sale of foreign 

subsidiary's stock to U.S. sister company is a deemed dividend to extent of the 

subsidiary's and sister company's earnings and profits). Further, a distribution from a U.S. 

publicly traded limited partnership, which is taxed as a corporation under U.S. law, is a 

dividend for purposes of Article 10. However, a distribution by a limited liability 

company is not taxable by the United States under Article 10, provided the limited 

liability company is not characterized as an association taxable as a corporation under 

U.S. law. 

Finally, a payment denominated as interest that is made by a thinly capitalized 

corporation may be treated as a dividend to the extent that the debt is recharacterized as 

equity under the laws of the source State. 

Paragraph 8 

Paragraph 8 excludes from the general source country limitations under 

paragraphs 1 through 6 dividends that are business profits attributable to a permanent 

establishment in the source country. In such case, the rules of Article 7 (Business Profits) 

shall apply. Accordingly, the dividends will be taxed on a net basis using the rates and 

rules of taxation generally applicable to residents of the State in which the permanent 

establishment is located, as such rules may be modified by the Convention. An example 

of dividends that are business profits attributable to a permanent establishment would be 

38
dividends derived by a dealer in stock or securities from stock or securities that the dealer 

held for sale to customers. 

Paragraph 9 

The right of a Contracting State to tax dividends paid by a company that is a 

resident of the other Contracting State is restricted by paragraph 9 to cases in which the 

dividends are paid to a resident of that Contracting State or are attributable to a 

permanent establishment in that Contracting State. Thus, a Contracting State may not 

impose a "secondary" withholding tax on dividends paid by a nonresident company out 

of earnings and profits from that Contracting State. In the case of the United States, the 

secondary withholding tax was eliminated for payments made after December 31, 2004 

in the American Jobs Creation Act of 2004. 

The paragraph also restricts the right of a Contracting State to impose corporate 

level taxes on undistributed profits, other than a branch profits tax. The paragraph does 

not restrict a State's right to tax its resident shareholders on undistributed earnings of a 

corporation resident in the other State. Thus, the authority of the United States to impose 

taxes on subpart F income and on earnings deemed invested in U.S. property, and its tax 

on income of a passive foreign investment company that is a qualified electing fund is in 

no way restricted by this provision. 

Paragraph 10 

Paragraph 10 permits a Contracting State to impose a branch profits tax on a 

company resident in the other Contracting State. The tax is in addition to other taxes 

permitted by the Convention. The term "company" is defined in subparagraph 1(b) of 

Article 3 (General Definitions). 

A Contracting State may impose a branch profits tax on a company if the 

company has income attributable to a permanent establishment in that Contracting State, 

derives income from real property in that Contracting State that is taxed on a net basis 

under Article 6 (Income from Real Property), or realizes gains taxable in that State under 

paragraph 1 of Article 13 (Gains). The imposition of such tax is limited, however, to the 

portion of the aforementioned items of income that represents, in the case of the United 

States, the amount of such income that is the "dividend equivalent amount,” and, in the 

case of Belgium, an amount that is analogous to the dividend equivalent amount. This is 

consistent with the relevant rules under the U.S. branch profits tax, and the term dividend 

equivalent amount is defined under U.S. law. Section 884 defines the dividend 

equivalent amount as an amount for a particular year that is equivalent to the income 

described above that is included in the corporation's effectively connected earnings and 

profits for that year, after payment of the corporate tax under Articles 6 (Income from 

Real Property), 7 (Business Profits) or 13 (Gains), reduced for any increase in the 

branch's U.S. net equity during the year or increased for any reduction in its U.S. net 

equity during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg. 

section 1.884-1. The dividend equivalent amount for any year approximates the dividend 

that a U.S. branch office would have paid during the year if the branch had been operated 

as a separate U.S. subsidiary company. 

39
As discussed in the Technical Explanations to Articles 1(2) and 7(2), consistency 

principles require that a taxpayer may not mix and match the rules of the Code and the 

Convention in an inconsistent manner. In the context of the branch profits tax, the 

consistency requirement means that an enterprise that uses the principles of Article 7 to 

determine its net taxable income also must use those principles in determining the 

dividend equivalent amount. Similarly, an enterprise that uses U.S. domestic law to 

determine its net taxable income must also use U.S. domestic law in complying with the 

branch profits tax. As in the case of Article 7, if an enterprise switches between domestic 

law and treaty principles from year to year, it will need to make appropriate adjustments 

or recapture amounts that otherwise might go untaxed. 

Paragraph 11 

Paragraph 11 provides that the branch profits tax shall not be imposed at a rate 

exceeding the direct investment dividend withholding rate of five percent. 

The branch profits tax will not be imposed at all, however, if certain requirements 

are met. In general, these requirements provide rules for a branch that parallel the rules 

for when a dividend paid by a subsidiary will be subject to exclusive residence-country 

taxation (i.e., the elimination of source-country withholding tax). Accordingly, the 

branch profits tax may not be imposed in the case of a company that (1) meets the 

“publicly traded” test or subsidiary of a publicly traded company under subparagraph 2(c) 

of Article 21 (Limitation on Benefits), (2) meets the “ownership-base erosion” and 

“active trade or business” tests described in subparagraph 2(e) and paragraph 4 of Article 

21, (3) meets the “derivative benefits” test described in paragraph 3 of Article 21, or (4) 

is granted such benefit with respect to the branch profits tax by the relevant competent 

authority pursuant to paragraph 7 of Article 21. 

Thus, for example, if a Belgian company would be subject to the branch profits 

tax with respect to profits attributable to a U.S. branch and not reinvested in that branch, 

paragraph 11 may apply to eliminate the branch profits tax if the company meets the 

“publicly traded” test, subsidiary of a publicly traded company, the combined 

“ownership-base erosion and active trade or business” test, or the “derivative benefits” 

test. If, by contrast, the Belgian company did not meet any of those tests, but met 

the ownership-base erosion test (and thus qualified for treaty benefits under subparagraph 

2(a)), then the branch profits tax would apply at a rate of 5 percent, unless the Belgian 

company is granted benefits with respect to the elimination of the branch profits tax by 

the U.S. competent authority pursuant to paragraph 7 of Article 21. 

Paragraph 12 

Paragraph 12 contains two provisions that may operate to terminate the zero rate 

of withholding tax that may apply for dividends paid by a U.S. resident company under 

paragraph 3. Subparagraph (a)(i) provides that paragraph 3 shall cease to be effective for 

amounts paid or credited on or after January 1 of the 6th year following the year in which 

the Convention enters into force, unless by June 30 of the 5th year following entry into 

force, the United States Secretary of the Treasury, based on a report from the 

Commissioner of the Internal Revenue Service, certifies to the Senate of the United 

40
States that Belgium has satisfactorily complied with its obligations under Article 25 

(Exchange of Information and Administrative Assistance). 

Subparagraph (a)(ii) provides an additional method by which the United States 

may terminate paragraph 3. This additional method provides that the United States may 

terminate paragraph 3 at any time by providing written notice to Belgium, through the 

diplomatic channel, on or before June 30 in any year. In such a case, paragraph 3 shall 

cease to be effective for amounts paid or credited on or after January 1 of the year next 

following that in which such notice is given. Further, subparagraph (a)(ii) provides that 

the United States will not provide notice of termination under subparagraph (a)(ii) unless 

it has determined that Belgium’s actions with respect to Article 24 (Mutual Agreement 

Procedure) and 25 have materially altered the balance of benefits of the Convention. 

Subparagraph b) provides that the United States and Belgian competent 

authorities shall consult at least annually regarding any issues that otherwise might 

trigger a termination under subparagraph (a). 

As discussed in Article 25 (Exchange of Information and Administrative 

Assistance), if the provisions of this paragraph are used to terminate paragraph 3 of 

Article 10, then Belgium will be relieved of its obligations under paragraph 5 of Article 

25 to provide certain information, including bank information. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of dividends, 

the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to 

tax dividends received by its residents and citizens, subject to the special foreign tax 

credit rules of paragraph 4 of Article 22 (Relief from Double Taxation), as if the 

Convention had not come into effect. 

The benefits of this Article are also subject to the provisions of Article 21 

(Limitation on Benefits). Thus, if a resident of Belgium is the beneficial owner of 

dividends paid by a U.S. corporation, the shareholder must qualify for treaty benefits 

under at least one of the tests of Article 21 in order to receive the benefits of this Article. 

ARTICLE 11 (INTEREST) 

Article 11 specifies the taxing jurisdictions over interest income of the States of 

source and residence and defines the terms necessary to apply the article. 

Paragraph 1 

Paragraph 1 generally grants to the State of residence the exclusive right to tax 

interest beneficially owned by its residents and arising in the other Contracting State. 

The term "beneficial owner" is not defined in the Convention, and is, therefore, 

defined under the internal law of the State of source. The beneficial owner of the interest 

for purposes of Article 11 is the person to which the income is attributable under the laws 

41
of the source State. Thus, if interest arising in a Contracting State is received by a 

nominee or agent that is a resident of the other State on behalf of a person that is not a 

resident of that other State, the interest is not entitled to the benefits of Article 11. 

However, interest received by a nominee on behalf of a resident of that other State would 

be entitled to benefits. These limitations are confirmed by paragraph 8 of the OECD 

Commentary to Article 11. 

Paragraph 2 

Paragraph 2 provides anti-abuse exceptions to the source-country exemption in 

paragraph 1 for two classes of interest payments. 

The first class of interest, dealt with in subparagraphs (a) and (b) is so-called 

"contingent interest." With respect to interest arising in the United States, subparagraph 

(a) refers to contingent interest of a type that does not qualify as portfolio interest under 

U.S. domestic law. The cross-reference to the U.S. definition of contingent interest, 

which is found in section 871(h)(4) of the Code, is intended to ensure that the exceptions 

of section 871(h)(4)(C) will be applicable. With respect to Belgium, such interest is 

defined in subparagraph (b) as any interest arising in Belgium that is determined by 

reference to the receipts, sales, income, profits or other cash flow of the debtor or a 

related person, to any change in the value of any property of the debtor or a related 

person or to any dividend, partnership distribution or similar payment made by the debtor 

or a related person. Any such interest may be taxed in Belgium according to the laws of 

Belgium. 

Under subparagraphs (a) or (b), the gross amount of the “contingent interest” may 

be taxed at a rate not exceeding 15 percent. 

The second class of interest is dealt with in subparagraph (c) of paragraph 2. This 

exception is consistent with the policy of Code sections 860E(e) and 860G(b) that excess 

inclusions with respect to a real estate mortgage investment conduit (REMIC) should 

bear full U.S. tax in all cases. Without a full tax at source foreign purchasers of residual 

interests would have a competitive advantage over U.S. purchasers at the time these 

interests are initially offered. Also, absent this rule, the U.S. fisc would suffer a revenue 

loss with respect to mortgages held in a REMIC because of opportunities for tax 

avoidance created by differences in the timing of taxable and economic income produced 

by these interests. 

Paragraph 3 

The term "interest" as used in Article 11 is defined in paragraph 2 to include, inter 

alia, income from debt claims of every kind, whether or not secured by a mortgage. 

Penalty charges for late payment are excluded from the definition of interest. Interest 

that is paid or accrued subject to a contingency is within the ambit of Article 11. This 

includes income from a debt obligation carrying the right to participate in profits. The 

term does not, however, include amounts that are treated as dividends under Article 10 

(Dividends). 

42
The term interest also includes amounts subject to the same tax treatment as 

income from money lent under the law of the State in which the income arises. Thus, for 

purposes of the Convention, amounts that the United States will treat as interest include 

(i) the difference between the issue price and the stated redemption price at maturity of a 

debt instrument (i.e., original issue discount ("OID")), which may be wholly or partially 

realized on the disposition of a debt instrument (section 1273), (ii) amounts that are 

imputed interest on a deferred sales contract (section 483), (iii) amounts treated as 

interest or OID under the stripped bond rules (section 1286), (iv) amounts treated as 

original issue discount under the below-market interest rate rules (section 7872), (v) a 

partner's distributive share of a partnership's interest income (section 702), (vi) the 

interest portion of periodic payments made under a "finance lease" or similar contractual 

arrangement that in substance is a borrowing by the nominal lessee to finance the 

acquisition of property, (vii) amounts included in the income of a holder of a residual 

interest in a REMIC (section 860E), because these amounts generally are subject to the 

same taxation treatment as interest under U.S. tax law, and (viii) interest with respect to 

notional principal contracts that are re-characterized as loans because of a "substantial 

non-periodic payment." 

Paragraph 4 

Paragraph 4 provides an exception to the exclusive residence taxation rule of 

paragraph 1 and the source-country gross taxation rule of paragraph 2 in cases where the 

beneficial owner of the interest carries on business through a permanent establishment in 

the State of source and the interest is attributable to that permanent establishment. In 

such cases the provisions of Article 7 (Business Profits) will apply and the State of source 

will retain the right to impose tax on such interest income. 

In the case of a permanent establishment that once existed in the State but that no 

longer exists, the provisions of paragraph 4 also apply, by virtue of paragraph 7 of Article 

7 (Business Profits), to interest that would be attributable to such a permanent 

establishment if it did exist in the year of payment or accrual. See the Technical 

Explanation of paragraph 7 of Article 7. 

Paragraph 5 

Paragraph 5 establishes the source of interest for purposes of Article 11. The 

paragraph is identical to paragraph 5 of Article 11 of the OECD Model. Interest is 

considered to arise in a Contracting State if paid by a resident of that State. As an 

exception, interest that is borne by a permanent establishment in one of the States is 

considered to arise in that State. For this purpose, "borne by" means allowable as a 

deduction in computing taxable income. 

Paragraph 6 

Paragraph 6 provides that in cases involving special relationships between the 

payor and the beneficial owner of interest income, Article 11 applies only to that portion 

of the total interest payments that would have been made absent such special 

relationships (i.e., an arm's-length interest payment). Any excess amount of interest paid 

43
remains taxable according to the laws of the United States and the other Contracting State, 

respectively, with due regard to the other provisions of the Convention. Thus, if the 

excess amount would be treated under the source country's law as a distribution of profits 

by a corporation, such amount could be taxed as a dividend rather than as interest, but the 

tax would be subject, if appropriate, to the rate limitations of paragraphs 2 through 4 of 

Article 10 (Dividends). 

The term "special relationship" is not defined in the Convention. In applying this 

paragraph the United States considers the term to include the relationships described in 

Article 9, which in turn corresponds to the definition of "control" for purposes of section 

482 of the Code. 

This paragraph does not address cases where, owing to a special relationship 

between the payer and the beneficial owner or between both of them and some other 

person, the amount of the interest is less than an arm's-length amount. In those cases a 

transaction may be characterized to reflect its substance and interest may be imputed 

consistent with the definition of interest in paragraph 3. The United States would apply 

section 482 or 7872 of the Code to determine the amount of imputed interest in those 

cases. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of interest, 

the saving clause of paragraph 4 of Article 1 permits the United States to tax its residents 

and citizens, subject to the special foreign tax credit rules of paragraph 4 of Article 22 

(Relief from Double Taxation), as if the Convention had not come into force. 

As with other benefits of the Convention, the benefits of exclusive residence State 

taxation of interest under paragraph 1 of Article 11, or limited source taxation under 

subparagraphs 2(a) and (b), are available to a resident of the other State only if that 

resident is entitled to those benefits under the provisions of Article 21 (Limitation on 

Benefits). 

ARTICLE 12 (ROYALTIES) 

Article 12 provides rules for the taxation of royalties arising in one Contracting 

State and paid to a beneficial owner that is a resident of the other Contracting State. 

Paragraph 1 

Paragraph 1 generally grants to the State of residence the exclusive right to tax 

royalties beneficially owned by its residents and arising in the other Contracting State. 

The term "beneficial owner" is not defined in the Convention, and is, therefore, 

defined under the internal law of the State of source. The beneficial owner of the royalty 

for purposes of Article 12 is the person to which the income is attributable under the laws 

of the source State. Thus, if a royalty arising in a Contracting State is received by a 

nominee or agent that is a resident of the other State on behalf of a person that is not a 

resident of that other State, the royalty is not entitled to the benefits of Article 12. 

44
However, a royalty received by a nominee on behalf of a resident of that other State 

would be entitled to benefits. These limitations are confirmed by paragraph 4 of the 

OECD Commentary to Article 12. 

Paragraph 2 

Paragraph 2 defines the term "royalties," as used in Article 12, to include any 

consideration for the use of, or the right to use, any copyright of literary, artistic, or 

scientific work (including cinematographic films and software), any patent, trademark, 

design or model, plan, secret formula or process, or for information concerning industrial, 

commercial, or scientific experience. The term "royalties," however, does not include 

income from leasing personal property. 

The term royalties is defined in the Convention and therefore is generally 

independent of domestic law. Certain terms used in the definition are not defined in the 

Convention, but these may be defined under domestic tax law. For example, the term 

"secret process or formulas" is found in the Code, and its meaning has been elaborated in 

the context of sections 351 and 367. See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 

64-56, 1964-1 C.B. 133; Rev. Proc. 69-19, 1969-2 C.B. 301. 

Consideration for the use or right to use cinematographic films and software, or 

works on film, tape, or other means of reproduction in radio or television broadcasting is 

included in the definition of royalties. It is intended that, with respect to any subsequent 

technological advances in the field of radio or television broadcasting, consideration 

received for the use of such technology will also be included in the definition of royalties. 

If an artist who is resident in one Contracting State records a performance in the 

other Contracting State, retains a copyrighted interest in a recording, and receives 

payments for the right to use the recording based on the sale or public playing of the 

recording, then the right of such other Contracting State to tax those payments is 

governed by Article 12. See Boulez v. Commissioner, 83 T.C. 584 (1984), aff'd, 810 F.2d 

209 (D.C. Cir. 1986). By contrast, if the artist earns in the other Contracting State 

income covered by Article 16 (Entertainers and Sportsmen), for example, endorsement 

income from the artist's attendance at a film screening, and if such income also is 

attributable to one of the rights described in Article 12 (e.g., the use of the artist's 

photograph in promoting the screening), Article 16 and not Article 12 is applicable to 

such income. 

Computer software generally is protected by copyright laws around the world. 

Under the Convention, consideration received for the use, or the right to use, computer 

software is treated either as royalties or as business profits, depending on the facts and 

circumstances of the transaction giving rise to the payment. 

The primary factor in determining whether consideration received for the use, or 

the right to use, computer software is treated as royalties or as business profits is the 

nature of the rights transferred. See Treas. Reg. section 1.861-18. The fact that the 

transaction is characterized as a license for copyright law purposes is not dispositive. For 

example, a typical retail sale of "shrink wrap" software generally will not be considered 

45
to give rise to royalty income, even though for copyright law purposes it may be 

characterized as a license. 

The means by which the computer software is transferred are not relevant for 

purposes of the analysis. Consequently, if software is electronically transferred but the 

rights obtained by the transferee are substantially equivalent to rights in a program copy, 

the payment will be considered business profits. 

The term "industrial, commercial, or scientific experience" (sometimes referred to 

as "know-how") has the meaning ascribed to it in paragraph 11 et seq. of the 

Commentary to Article 12 of the OECD Model. Consistent with that meaning, the term 

may include information that is ancillary to a right otherwise giving rise to royalties, such 

as a patent or secret process. 

Know-how also may include, in limited cases, technical information that is 

conveyed through technical or consultancy services. It does not include general 

educational training of the user's employees, nor does it include information developed 

especially for the user, such as a technical plan or design developed according to the 

user's specifications. Thus, as provided in paragraph 11.4 of the Commentary to Article 

12 of the OECD Model, the term "royalties" does not include payments received as 

consideration for after-sales service, for services rendered by a seller to a purchaser under 

a warranty, or for pure technical assistance. 

The term "royalties" also does not include payments for professional services 

(such as architectural, engineering, legal, managerial, medical, software development 

services). For example, income from the design of a refinery by an engineer (even if the 

engineer employed know-how in the process of rendering the design) or the production of 

a legal brief by a lawyer is not income from the transfer of know-how taxable under 

Article 12, but is income from services taxable under either Article 7 (Business Profits) 

or Article 14 (Income from Employment). Professional services may be embodied in 

property that gives rise to royalties, however. Thus, if a professional contracts to develop 

patentable property and retains rights in the resulting property under the development 

contract, subsequent license payments made for those rights would be royalties. 

Paragraph 3 

This paragraph provides an exception to the rule of paragraph 1 that gives the 

state of residence exclusive taxing jurisdiction in cases where the beneficial owner of the 

royalties carries on business through a permanent establishment in the state of source and 

the royalties are attributable to that permanent establishment. In such cases the 

provisions of Article 7 (Business Profits) will apply. 

The provisions of paragraph 7 of Article 7 (Business Profits) apply to this 

paragraph. For example, royalty income that is attributable to a permanent establishment 

and that accrues during the existence of the permanent establishment, but is received after 

the permanent establishment no longer exists, remains taxable under the provisions of 

Article 7 (Business Profits), and not under this Article. 

46
Paragraph 4 

Paragraph 4 provides that in cases involving special relationships between the 

payor and beneficial owner of royalties, Article 12 applies only to the extent the royalties 

would have been paid absent such special relationships (i.e., an arm's-length royalty). 

Any excess amount of royalties paid remains taxable according to the laws of the two 

Contracting States, with due regard to the other provisions of the Convention. If, for 

example, the excess amount is treated as a distribution of corporate profits under 

domestic law, such excess amount will be taxed as a dividend rather than as royalties, but 

the tax imposed on the dividend payment will be subject to the rate limitations of Article 

10 (Dividends). 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on source country taxation of royalties, 

the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to 

tax its residents and citizens, subject to the special foreign tax credit rules of paragraph 4 

of Article 22 (Relief from Double Taxation), as if the Convention had not come into force. 

As with other benefits of the Convention, the benefits of exclusive residence State 

taxation of royalties under paragraph 1 of Article 12 are available to a resident of the 

other State only if that resident is entitled to those benefits under Article 21 (Limitation 

on Benefits). 

ARTICLE 13 (GAINS) 

Article 13 assigns either primary or exclusive taxing jurisdiction over gains from 

the alienation of property to the State of residence or the State of source. 

Paragraph 1 

Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source 

to tax gains attributable to the alienation of real property situated in that State. The 

paragraph therefore permits the United States to apply section 897 of the Code to tax 

gains derived by a resident of Belgium that are attributable to the alienation of real 

property situated in the United States (as defined in paragraph 2). Gains attributable to 

the alienation of real property include gains from any other property that is treated as a 

real property interest within the meaning of paragraph 2. 

Paragraph 1 refers to gains "attributable to the alienation of real property" rather 

than the OECD Model phrase "gains from the alienation" to clarify that the United States 

will look through distributions made by a REIT and certain RICs. Accordingly, distributions made by a REIT or certain RICs are taxable under paragraph 1 of Article 13 (not 

under Article 10 (Dividends)) when they are attributable to gains derived from the 

alienation (disposition) of U.S. real property interests and treated as gain recognized 

under section 897(h)(1). 

47
Paragraph 2 

This paragraph defines the term "real property situated in the other Contracting 

State." The term includes real property referred to in Article 6 (i.e., an interest in the real 

property itself), and, in the case of the United States, a "United States real property 

interest." 

Under section 897(c) of the Code the term "United States real property interest" 

includes shares in a U.S. corporation that owns sufficient U.S. real property interests to 

satisfy an asset-ratio test on certain testing dates. The term also includes certain foreign 

corporations that have elected to be treated as U.S. corporations for this purpose. Section 

897(i). 

Paragraph 3 

Paragraph 3 of Article 13 deals with the taxation of certain gains from the 

alienation of movable property forming part of the business property of a permanent 

establishment that an enterprise of a Contracting State has in the other Contracting State. 

This also includes gains from the alienation of such a permanent establishment (alone or 

with the whole enterprise). Such gains may be taxed in the State in which the permanent 

establishment is located. 

A resident of the other Contracting State that is a partner in a partnership doing 

business in the United States generally will have a permanent establishment in the United 

States as a result of the activities of the partnership, assuming that the activities of the 

partnership rise to the level of a permanent establishment. Rev. Rul. 91-32, 1991-1 C.B. 

107. Further, under paragraph 3, the United States generally may tax a partner's 

distributive share of income realized by a partnership on the disposition of movable 

property forming part of the business property of the partnership in the United States. 

The gains subject to paragraph 3 may be taxed in the State in which the 

permanent establishment is located, regardless of whether the permanent establishment 

exists at the time of the alienation. This rule incorporates the rule of section 864(c)(6) of 

the Code. Accordingly, income that is attributable to a permanent establishment, but that 

is deferred and received after the permanent establishment no longer exists, may 

nevertheless be taxed by the State in which the permanent establishment was located. 

Paragraph 4 

This paragraph limits the taxing jurisdiction of the State of source with respect to 

gains from the alienation of ships or aircraft operated in international traffic by the 

enterprise alienating the ship or aircraft and from property (other than real property) 

pertaining to the operation of such ships, aircraft, or containers. 

Under paragraph 4, such income is taxable only in the Contracting State in which 

the alienator is resident. Notwithstanding paragraph 3, the rules of this paragraph apply 

even if the income is attributable to a permanent establishment maintained by the 

enterprise in the other Contracting State. This result is consistent with the allocation of 

taxing rights under Article 8 (Shipping and Air Transport). 

48
Paragraph 5 

Paragraph 5 provides a rule similar to paragraph 4 with respect to gains from the 

alienation of containers and related personal property. Such gains derived by an 

enterprise of a Contracting State shall be taxable only in that Contracting State unless the 

containers were used for the transport of goods or merchandise solely within the other 

Contracting State. The other Contracting State may not tax even if the gain is attributable 

to a permanent establishment maintained by the enterprise in that other Contracting State. 

Paragraph 6 

Paragraph 6 grants to the State of residence of the alienator the exclusive right to 

tax gains from the alienation of property other than property referred to in paragraphs 1 

through 5. For example, gain derived from shares, other than shares described in 

paragraphs 2 or 3, debt instruments and various financial instruments, may be taxed only 

in the State of residence, to the extent such income is not otherwise characterized as 

income taxable under another article (e.g., Article 10 (Dividends) or Article 11 (Interest)). 

Similarly gain derived from the alienation of tangible personal property, other than 

tangible personal property described in paragraph 3, may be taxed only in the State of 

residence of the alienator. 

Gains derived by a resident of a Contracting State from real property located in a 

third state are not taxable in the other Contracting State, even if the sale is attributable to 

a permanent establishment located in the other Contracting State. 

Relationship to Other Articles 

Notwithstanding the foregoing limitations on taxation of certain gains by the State 

of source, the saving clause of paragraph 4 of Article 1 (General Scope) permits the 

United States to tax its citizens and residents as if the Convention had not come into 

effect. Thus, any limitation in this Article on the right of the United States to tax gains 

does not apply to gains of a U.S. citizen or resident. 

The benefits of this Article are also subject to the provisions of Article 21 

(Limitation on Benefits). Thus, only a resident of a Contracting State that satisfies one of 

the conditions in Article 21 is entitled to the benefits of this Article. 

ARTICLE 14 (INCOME FROM EMPLOYMENT) 

Article 14 apportions taxing jurisdiction over remuneration derived by a resident 

of a Contracting State as an employee between the States of source and residence. 

Paragraph 1 

The general rule of Article 14 is contained in paragraph 1. Remuneration derived 

by a resident of a Contracting State as an employee may be taxed by the State of 

residence, and the remuneration also may be taxed by the other Contracting State to the 

extent derived from employment exercised (i.e., services performed) in that other 

Contracting State. Paragraph 1 also provides that the more specific rules of Articles 15 

(Directors' Fees), 17 (Pensions, Social Security, Annuities, Alimony and Child Support), 

49
18 (Government Service), and 19 (Students, Trainees, Teachers and Researchers) apply 

in the case of employment income described in one of those articles. Thus, even though 

the State of source has a right to tax employment income under Article 14, it may not 

have the right to tax that income under the Convention if the income is described, for 

example, in Article 17 (Pensions, Social Security, Annuities, Alimony and Child 

Support) and is not taxable in the State of source under the provisions of that article. 

Article 14 applies to any form of compensation for employment, including 

payments in kind. Paragraph 1.1 of the Commentary to Article 16 of the OECD Model 

now confirms that interpretation. 

Consistent with section 864(c)(6) of the Code, Article 14 also applies regardless 

of the timing of actual payment for services. Consequently, a person who receives the 

right to a future payment in consideration for services rendered in a Contracting State 

would be taxable in that State even if the payment is received at a time when the recipient 

is a resident of the other Contracting State. Thus, a bonus paid to a resident of a 

Contracting State with respect to services performed in the other Contracting State with 

respect to a particular taxable year would be subject to Article 14 even if it was paid after 

the close of the year. An annuity received for services performed in a taxable year could 

be subject to Article 14 despite the fact that it was paid in subsequent years. In that case, 

it would be necessary to determine whether the payment constitutes deferred 

compensation, taxable under Article 14, or a qualified pension subject to the rules of 

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

14 also applies to income derived from the exercise of stock options granted with respect 

to services performed in the host State, even if those stock options are exercised after the 

employee has left the source country. If Article 14 is found to apply, whether such 

payments were taxable in the State where the employment was exercised would depend 

on whether the tests of paragraph 2 were satisfied in the year in which the services to 

which the payment relates were performed. 

Paragraph 2 

Paragraph 2 sets forth an exception to the general rule that employment income 

may be taxed in the State where it is exercised. Under paragraph 2, the State where the 

employment is exercised may not tax the income from the employment if three 

conditions are satisfied: (a) the individual is present in the other Contracting State for a 

period or periods not exceeding 183 days in any 12-month period that begins or ends 

during the relevant taxable year (i.e., in the United States, the calendar year in which the 

services are performed); (b) the remuneration is paid by, or on behalf of, an employer 

who is not a resident of that other Contracting State; and (c) the remuneration is not borne 

as a deductible expense by a permanent establishment that the employer has in that other 

State. In order for the remuneration to be exempt from tax in the source State, all three 

conditions must be satisfied. This exception is identical to that set forth in the OECD 

Model. 

The 183-day period in condition (a) is to be measured using the "days of physical 

presence" method. Under this method, the days that are counted include any day in 

which a part of the day is spent in the host country. (Rev. Rul. 56-24, 1956-1 C.B. 851.) 

50
Thus, days that are counted include the days of arrival and departure; weekends and 

holidays on which the employee does not work but is present within the country; vacation 

days spent in the country before, during or after the employment period, unless the 

individual's presence before or after the employment can be shown to be independent of 

his presence there for employment purposes; and time during periods of sickness, training 

periods, strikes, etc., when the individual is present but not working. If illness prevented 

the individual from leaving the country in sufficient time to qualify for the benefit, those 

days will not count. Also, any part of a day spent in the host country while in transit 

between two points outside the host country is not counted. If the individual is a resident 

of the host country for part of the taxable year concerned and a non-resident for the 

remainder of the year, the individual's days of presence as a resident do not count for 

purposes of determining whether the 183-day period is exceeded. 

Conditions (b) and (c) are intended to ensure that a Contracting State will not be 

required to allow a deduction to the payor for compensation paid and at the same time to 

exempt the employee on the amount received. Accordingly, if a foreign person pays the 

salary of an employee who is employed in the host State, but a host State corporation or 

permanent establishment reimburses the payor with a payment that can be identified as a 

reimbursement, neither condition (b) nor (c), as the case may be, will be considered to 

have been fulfilled. 

The reference to remuneration "borne by" a permanent establishment is 

understood to encompass all expenses that economically are incurred and not merely 

expenses that are currently deductible for tax purposes. Accordingly, the expenses 

referred to include expenses that are capitalizable as well as those that are currently 

deductible. Further, salaries paid by residents that are exempt from income taxation may 

be considered to be borne by a permanent establishment notwithstanding the fact that the 

expenses will be neither deductible nor capitalizable since the payor is exempt from tax. 

The Protocol clarifies that with respect to paragraphs 1 and 2, where remuneration 

is derived by a resident of one of the States in respect of an employment, employment is 

exercised in the place where the employee is physically present when performing the 

activities for which the remuneration is paid, irrespective of the residence of the payer, 

the place in which the contract of employment was made, the residence of the employer, 

the place or time of payment, or the place where the results of the work were exploited. 

Paragraph 3 

Paragraph 3 contains a special rule applicable to remuneration for services 

performed by a resident of a Contracting State as an employee aboard a ship or aircraft 

operated in international traffic. Such remuneration may be taxed only in the State of 

residence of the employee if the services are performed as a member of the regular 

complement of the ship or aircraft. The "regular complement" includes the crew. In the 

case of a cruise ship, for example, it may also include others, such as entertainers, 

lecturers, etc., employed by the shipping company to serve on the ship throughout its 

voyage. The use of the term "regular complement" is intended to clarify that a person 

who exercises his employment as, for example, an insurance salesman while aboard a 

ship or aircraft is not covered by this paragraph. 

51
If a U.S. citizen who is resident in Belgium performs services as an employee in 

the United States and meets the conditions of paragraph 2 for source country exemption, 

he nevertheless is taxable in the United States by virtue of the saving clause of paragraph 

4 of Article 1 (General Scope), subject to the special foreign tax credit rule of paragraph 

4 of Article 22 (Relief from Double Taxation). 

ARTICLE 15 (DIRECTORS' FEES) 

This Article provides that a Contracting State may tax the fees and other 

compensation paid by a company that is a resident of that State for services performed in 

that State by a resident of the other Contracting State in his capacity as a director of the 

company. This rule is an exception to the more general rules of Articles 7 (Business 

Profits) and 14 (Income from Employment). Thus, for example, in determining whether 

a director's fee paid to a non-employee director is subject to tax in the country of 

residence of the corporation, it is not relevant to establish whether the fee is attributable 

to a permanent establishment in that State. 

The analogous OECD provision reaches different results in certain cases. Under 

the OECD Model provision, a resident of one Contracting State who is a director of a 

corporation that is resident in the other Contracting State is subject to tax in that other 

State in respect of his directors' fees regardless of where the services are performed. The 

United States has entered a reservation with respect to the OECD provision. Under the 

provision in the Convention, the State of residence of the corporation may tax 

nonresident directors with no time or dollar threshold, but only with respect to 

remuneration for services performed in that State. 

The Protocol elaborates on the provisions of Article 15. Specifically, the Protocol 

provides that Article 15 shall also apply to fees received by a "gerant"/"zaakvoerder" of a 

company, other than a company with share capital, in his capacity as such. Further, 

remuneration derived by a person referred to in Article 15 from a company which is a 

resident of a Contracting State in respect of the discharge of day-to-day functions of a 

managerial or technical, commercial or financial nature shall be taxable in accordance 

with the provisions of Article 14 (Income from Employment), and not Article 15. In such 

a case, to the extent that the company is a Belgian company, Article 14 shall be applied 

as if such remuneration were remuneration derived by an employee in respect of an 

employment and as if references to the "employer" were references to the company. 

Remuneration received by a resident of a Contracting State in respect of his dayto-day activity as a partner of a company that is a resident of Belgium, other than a 

company with share capital, shall be taxable in accordance with the provisions of Article 

14, as if such remuneration were remuneration derived by an employee in respect of an 

employment and as if references to the "employer" were references to the company. 

Article 7 (Business Profits), and not Article 14 or 15, shall apply to a partner's 

distributive share of the income of an entity that is treated as fiscally transparent, such as 

a U.S. partnership. 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General 

Scope). Thus, if a U.S. citizen who is a resident of Belgium is a director of a U.S. 

52
corporation, the United States may tax his full remuneration regardless of where he 

performs his services. 

ARTICLE 16 (ENTERTAINERS AND SPORTSMEN) 

This Article deals with the taxation in a Contracting State of entertainers and 

sportsmen resident in the other Contracting State from the performance of their services 

as such. The Article applies both to the income of an entertainer or sportsman who 

performs services on his own behalf and one who performs services on behalf of another 

person, either as an employee of that person, or pursuant to any other arrangement. The 

rules of this Article take precedence, in some circumstances, over those of Articles 7 

(Business Profits) and 14 (Income from Employment). 

This Article applies only with respect to the income of entertainers and sportsmen. 

Others involved in a performance or athletic event, such as producers, directors, 

technicians, managers, coaches, etc., remain subject to the provisions of Articles 7 and 14. 

In addition, except as provided in paragraph 2, income earned by juridical persons is not 

covered by Article 16. 

Paragraph 1 

Paragraph 1 describes the circumstances in which a Contracting State may tax the 

performance income of an entertainer or sportsman who is a resident of the other 

Contracting State. Under the paragraph, income derived by an individual resident of a 

Contracting State from activities as an entertainer or sportsman exercised in the other 

Contracting State may be taxed in that other State if the amount of the gross receipts 

derived by the performer exceeds $20,000 (or its equivalent in euro) for the taxable year. 

The $20,000 includes expenses reimbursed to the individual or borne on his behalf. If the 

gross receipts exceed $20,000, the full amount, not just the excess, may be taxed in the 

State of performance. 

 This Convention introduces the monetary threshold to distinguish between two 

groups of entertainers and athletes -- those who are paid relatively large sums of money 

for very short periods of service, and who would, therefore, normally be exempt from 

host country tax under the standard personal services income rules, and those who earn 

relatively modest amounts and are, therefore, not easily distinguishable from those who 

earn other types of personal service income. 

Tax may be imposed under paragraph 1 even if the performer would have been 

exempt from tax under Article 7 (Business Profits) or 14 (Income from Employment). 

On the other hand. if the performer would be exempt from host-country tax under Article 

16, but would be taxable under either Article 7 or 14, tax may be imposed under either of 

those Articles. Thus, for example, if a performer derives remuneration from his activities 

in an independent capacity, and the performer does not have a permanent establishment 

in the host State, he may be taxed by the host State in accordance with Article 16 if his 

remuneration exceeds $20,000 annually, despite the fact that he generally would be 

exempt from host State taxation under Article 7. However, a performer who receives less 

than the $20,000 threshold amount and therefore is not taxable under Article 16 

53
nevertheless may be subject to tax in the host country under Article 7 or 14 if the tests for 

host-country taxability under the relevant Article are met. For example, if an entertainer 

who is an independent contractor earns $14,000 of income in a State for the calendar year, 

but the income is attributable to his permanent establishment in the State of performance, 

that State may tax his income under Article 7. 

Since it frequently is not possible to know until year-end whether the income an 

entertainer or sportsman derived from performances in a Contracting State will exceed 

$20,000, nothing in the Convention precludes that Contracting State from withholding 

tax during the year and refunding it after the close of the year if the taxability threshold 

has not been met. 

As explained in paragraph 9 of the Commentary to Article 17 of the OECD Model, 

Article 16 of the Convention applies to all income connected with a performance by the 

entertainer, such as appearance fees, award or prize money, and a share of the gate 

receipts. Income derived from a Contracting State by a performer who is a resident of the 

other Contracting State from other than actual performance, such as royalties from record 

sales and payments for product endorsements, is not covered by this Article, but by other 

articles of the Convention, such as Article 12 (Royalties) or Article 7 (Business Profits). 

For example, if an entertainer receives royalty income from the sale of live recordings, 

the royalty income would be exempt from source state tax under Article 12, even if the 

performance was conducted in the source country, although the entertainer could be taxed 

in the source country with respect to income from the performance itself under Article 16 

if the dollar threshold is exceeded. 

In determining whether income falls under Article 16 or another article, the 

controlling factor will be whether the income in question is predominantly attributable to 

the performance itself or to other activities or property rights. For instance, a fee paid to 

a performer for endorsement of a performance in which the performer will participate 

would be considered to be so closely associated with the performance itself that it 

normally would fall within Article 16. Similarly, a sponsorship fee paid by a business in 

return for the right to attach its name to the performance would be so closely associated 

with the performance that it would fall under Article 16 as well. As indicated in 

paragraph 9 of the Commentary to Article 17 of the OECD Model, however, a 

cancellation fee would not be considered to fall within Article 16 but would be dealt with 

under Article 7 (Business Profits) or 14 (Income from Employment). 

As indicated in paragraph 4 of the Commentary to Article 17 of the OECD Model, 

where an individual fulfills a dual role as performer and non-performer (such as a playercoach or an actor-director), but his role in one of the two capacities is negligible, the 

predominant character of the individual's activities should control the characterization of 

those activities. In other cases there should be an apportionment between the 

performance-related compensation and other compensation. 

Consistent with Article 14 (Income from Employment), Article 16 also applies 

regardless of the timing of actual payment for services. Thus, a bonus paid to a resident 

of a Contracting State with respect to a performance in the other Contracting State during 

a particular taxable year would be subject to Article 16 even if it was paid after the close 

54
of the year. The determination as to whether the $20,000 threshold has been exceeded is 

determined separately with respect to each year of payment. Accordingly, if an actor 

who is a resident of one Contracting State receives residual payments over time with 

respect to a movie that was filmed in the other Contracting State, the payments do not 

have to be aggregated from one year to another to determine whether the total payments 

have finally exceeded $20,000. Otherwise, residual payments received many years later 

could retroactively subject all earlier payments to tax by the other Contracting State. 

Paragraph 2 

Paragraph 2 is intended to address the potential for circumvention of the rule in 

paragraph 1 when a performer's income does not accrue directly to the performer himself, 

but to another person. Foreign performers frequently perform in the United States as 

employees of, or under contract with, a company or other person. 

The relationship may truly be one of employee and employer, with no 

circumvention of paragraph 1 either intended or realized. On the other hand, the 

"employer" may, for example, be a company established and owned by the performer, 

which is merely acting as the nominal income recipient in respect of the remuneration for 

the performance (a "star company"). The performer may act as an "employee," receive a 

modest salary, and arrange to receive the remainder of the income from his performance 

from the company in another form or at a later time. In such case, absent the provisions 

of paragraph 2, the income arguably could escape host-country tax because the company 

earns business profits but has no permanent establishment in that country. The performer 

may largely or entirely escape host-country tax by receiving only a small salary, perhaps 

small enough to place him below the dollar threshold in paragraph 1. The performer 

might arrange to receive further payments in a later year, when he is not subject to hostcountry tax, perhaps as dividends or liquidating distributions. 

Paragraph 2 seeks to prevent this type of abuse while at the same time protecting 

the taxpayers' rights to the benefits of the Convention when there is a legitimate 

employee-employer relationship between the performer and the person providing his 

services. Under paragraph 2, when the income accrues to a person other than the 

performer, the income may be taxed in the Contracting State where the performer's 

services are exercised, without regard to the provisions of the Convention concerning 

business profits (Article 7) or income from employment (Article 14), but only in cases in 

which the contract pursuant to which the personal activities are performed designates the 

entertainer or sportsman or allows a person other than the performer or the person to 

whom the income accrues to designate the individual who is to perform the personal 

activities. This rule is based on the U.S. domestic law provision characterizing income 

from certain personal service contracts as foreign personal holding company income in 

the context of the foreign personal holding company provisions. See Code section 

954(c)(1)(I). The premise of this rule is that, in a case where a performer is using another 

person in an attempt to circumvent the provisions of paragraph 1, the recipient of the 

services of the performer would contract with a person other than that performer (i.e., a 

company employing the performer) only if the recipient of the services were certain that 

the performer himself would perform the services. If instead the person is allowed to 

designate the individual who is to perform the services, then likely the person is a service 

55
company not formed to circumvent the provisions of paragraph 1. The following 

example illustrates the operation of this rule. 

Example. Company O, a resident of Belgium, is engaged in the business of 

operating an orchestra. Company O enters into a contract with Company A pursuant to 

which Company O agrees to carry out two performances in the United States in 

consideration of which Company A will pay Company O $200,000. The contract 

designates two individuals, a conductor and a flutist, that must perform as part of the 

orchestra, and allows Company O to designate the other members of the orchestra. 

Because the contract does not give Company O any discretion to determine whether the 

conductor or the flutist perform personal services under the contract, the portion of the 

$200,000 which is attributable to the personal services of the conductor and the flutist 

may be taxed by the United States pursuant to paragraph 2. The remaining portion of the 

$200,000, which is attributable to the personal services of performers that Company O 

may designate, is not subject to tax by the United States pursuant to paragraph 2. 

In cases where paragraph 2 is applicable, the income of the "employer" may be 

subject to tax in the host Contracting State even if it has no permanent establishment in 

the host country. Taxation under paragraph 2 is on the person providing the services of 

the performer. This paragraph does not affect the rules of paragraph 1, which apply to the 

performer himself. The income taxable by virtue of paragraph 2 is reduced to the extent 

of salary payments to the performer, which fall under paragraph 1. 

For purposes of paragraph 2, income is deemed to accrue to another person (i.e., 

the person providing the services of the performer) if that other person has control over, 

or the right to receive, gross income in respect of the services of the performer. 

Since pursuant to Article 1 (General Scope) the Convention only applies to 

persons who are residents of one of the Contracting States, income of the star company 

would not be eligible for benefits of the Convention if the company is not a resident of 

one of the Contracting States. 

Relationship to other Articles 

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

Article 1 (General Scope). Thus, if an entertainer or a sportsman who is resident in 

Belgium is a citizen of the United States, the United States may tax all of his income 

from performances in the United States without regard to the provisions of this Article, 

subject, however, to the special foreign tax credit provisions of paragraph 4 of Article 22 

(Relief from Double Taxation). In addition, benefits of this Article are subject to the 

provisions of Article 21 (Limitation on Benefits). 

ARTICLE 17 (PENSIONS, SOCIAL SECURITY, ANNUITIES, ALIMONY, AND 

CHILD SUPPORT) 

This Article deals with the taxation of private (i.e., non-government service) 

pensions and annuities, social security benefits, alimony and child support payments. 

56
Paragraph 1 

Paragraph 1 provides that distributions from pensions and other similar 

remuneration beneficially owned by a resident of a Contracting State in consideration of 

past employment are taxable only in the State of residence of the beneficiary. This 

paragraph is subject to the provisions of paragraph 2 of Article 18 (Government Service), 

which generally provides for exclusive source state taxation for such payment when paid 

by, or out of funds created by, a Contracting State. The term "pensions and other similar 

remuneration" includes both periodic and single sum payments. 

The phrase "pensions and other similar remuneration" is intended to encompass 

payments made by qualified private retirement plans. In the United States, the plans 

encompassed by Paragraph 1 include: qualified plans under section 401(a), individual 

retirement plans (including individual retirement plans that are part of a simplified 

employee pension plan that satisfies section 408(k), individual retirement accounts and 

section 408(p) accounts), section 403(a) qualified annuity plans, and section 403(b) plans. 

Distributions from section 457 plans may also fall under Paragraph 1 if they are not paid 

with respect to government services covered by Article 18. 

Pensions in respect of government services covered by Article 18 are not covered 

by this paragraph. They are covered either by paragraph 2 of this Article, if they are in 

the form of social security benefits, or by paragraph 2 of Article 18 (Government 

Service). Thus, Article 18 generally covers section 457, 401(a), 403(b) plans established 

for government employees, and the Thrift Savings Plan (section 7701(j)). 

However, the State of residence, under subparagraph (b), must exempt from tax 

any amount of such pensions or other similar remuneration that would be exempt from 

tax in the Contracting State in which the pension fund is established if the recipient were 

a resident of that State. Thus, for example, a distribution from a U.S. "Roth IRA" to a 

resident of Belgium would be exempt from tax in Belgium to the same extent the 

distribution would be exempt from tax in the United States if it were distributed to a U.S. 

resident. The same is true with respect to distributions from a traditional IRA to the 

extent that the distribution represents a return of non-deductible contributions. Similarly, 

if the distribution were not subject to tax when it was "rolled over" into another U.S. IRA 

(but not, for example, to a pension fund in Belgium), then the distribution would be 

exempt from tax in Belgium. 

Paragraph 2 

The treatment of social security benefits is dealt with in paragraph 2. This 

paragraph provides that, notwithstanding the provision of paragraph 1 under which 

private pensions are taxable exclusively in the State of residence of the beneficial owner, 

payments made by one of the Contracting States under the provisions of its social 

security or similar legislation to a resident of the other Contracting State or to a citizen of 

the United States will be taxable only in the Contracting State making the payment. The 

reference to U.S. citizens is necessary to ensure that a social security payment by 

Belgium to a U.S. citizen who is not resident in the United States will not be taxable by 

the United States. 

57
This paragraph applies to social security beneficiaries whether they have 

contributed to the system as private sector or Government employees. The Protocol 

provides that the phrase "similar legislation" is intended to refer to United States tier 1 

Railroad Retirement benefits. 

Paragraph 3 

Under paragraph 3, annuities that are derived and beneficially owned by a 

resident of a Contracting State are taxable only in that State. An annuity, as the term is 

used in this paragraph, means a stated sum paid periodically at stated times during a 

specified number of years, under an obligation to make the payment in return for 

adequate and full consideration (other than for services rendered). An annuity received in 

consideration for services rendered would be treated as either deferred compensation that 

is taxable in accordance with Article 14 (Income from Employment) or a pension that is 

subject to the rules of Article 17 (Pensions, Social Security, Annuities, Alimony, and 

Child Support). 

Paragraphs 4 and 5 

Paragraphs 4 and 5 deal with alimony and child support payments. Both alimony, 

under paragraph 4, and child support payments, under paragraph 5, are defined as 

periodic payments made pursuant to a written separation agreement or a decree of 

divorce, separate maintenance, or compulsory support. Paragraph 4, however, deals only 

with payments of that type that are taxable to the payee. Under that paragraph, alimony 

paid by a resident of a Contracting State to a resident of the other Contracting State is 

taxable under the Convention only in the State of residence of the recipient. Paragraph 5 

deals with those periodic payments that are for the support of a child and that are not 

covered by paragraph 4. These types of payments by a resident of a Contracting State to 

a resident of the other Contracting State are taxable only in the Contracting State where 

the payor is a resident. 

Paragraph 6 

Paragraph 6 provides that, if a resident of a Contracting State participates in a 

pension fund established in the other Contracting State, the State of residence will not tax 

the income of the pension fund with respect to that resident until a distribution is made 

from the pension fund. Thus, for example, if a U.S. citizen contributes to a U.S. qualified 

plan while working in the United States and then establishes residence in Belgium, 

paragraph 6 prevents Belgium from taxing currently the plan's earnings and accretions 

with respect to that individual. When the resident receives a distribution from the 

pension fund, that distribution may be subject to tax in the State of residence, subject to 

paragraph 1. 

Paragraph 7 

Paragraph 7 provides certain benefits with respect to cross- border contributions 

to a pension fund, subject to the limitations of paragraphs 8 and 9 of the Article. It is 

irrelevant for purposes of paragraph 7 whether the participant establishes residence in the 

State where the individual renders services (the "host State"). 

58
Subparagraph (a) of paragraph 7 allows an individual who exercises employment 

or self-employment in a Contracting State to deduct or exclude from income in that 

Contracting State contributions made by or on behalf of the individual during the period 

of employment or self-employment to a pension fund established in the other Contracting 

State (or in a similar fund that is a resident of a comparable third state). Thus, for 

example, if a participant in a U.S. qualified plan goes to work in Belgium, the participant 

may deduct or exclude from income in Belgium contributions to the U.S. qualified plan 

made while the participant works in Belgium. The benefits provided under subparagraph 

(a) by the host State are limited. In the case where the United States is the host State, the 

benefits granted by subparagraph (a) apply only to the extent the United States would 

provide relief if the plan were established in the United States. In the case where 

Belgium is the host State, the benefits granted by subparagraph (a) apply only to the 

extent that Belgium would provide relief if the plan was recognized for Belgian tax 

purposes. A “similar fund that is a resident of comparable third State” is discussed with 

respect to paragraph 10, below, and is applicable for paragraphs 7 through 9 of this 

Article. 

Subparagraph (b) of paragraph 7 provides that, in the case of employment, 

accrued benefits and contributions by or on behalf of the individual's employer, during 

the period of employment in the host State, will not be treated as taxable income to the 

employee in that State. Subparagraph (b) also allows the employer a deduction in 

computing its taxable income in the host State for contributions to the plan. For example, 

if a participant in a U.S. qualified plan goes to work in Belgium, the participant's 

employer may deduct from its taxable income in Belgium contributions to the U.S. 

qualified plan for the benefit of the employee while the employee renders services in 

Belgium. 

As in the case of subparagraph (a), the benefits of subparagraph (b) are limited. 

In the case where the United States is the host State, the benefits granted by subparagraph 

(b) apply only to the extent that the United States would provide relief if the plan were 

established in the United States. In the case where Belgium is the host State, the benefits 

of subparagraph (b) apply only to the extent that Belgium would provide relief if the plan 

were recognized for Belgian tax purposes. Therefore, where the United States is the host 

State, the exclusion of employee contributions from the employee's income under this 

paragraph is limited to contributions not in excess of the amount specified in section 

402(g) for elective contributions. Deduction of employer contributions is subject to the 

limitations of sections 415 and 404. The section 404 limitation on deductions is 

calculated as if the individual were the only employee covered by the plan. 

Paragraph 8 

Paragraph 8 limits the availability of benefits under paragraph 7. Under 

subparagraph (a) of paragraph 8, paragraph 7 does not apply to contributions to a pension 

fund unless the participant already was contributing to the fund, or his employer already 

was contributing to the fund with respect to that individual, before the individual began 

exercising employment in the host State. This condition would be met if either the 

employee or the employer was contributing to a fund that was replaced by the fund to 

which he is contributing. The rule regarding successor funds would apply if, for example, 

59
the employer has been taken over by a company that replaces the existing fund with its 

own fund, rolling membership in the old fund over into the new fund. 

In addition, under subparagraph (b), the participant must not have performed 

personal services in the host State for a cumulative period that exceeds ten years. 

Further, under subparagraph (c) of paragraph 8, the competent authority of the 

host State must determine that the pension plan to which a contribution is made generally 

corresponds to a pension plan recognized for tax purposes in the host State. Generally, 

for this purpose, the U.S. pension plans eligible for the benefits of paragraph 7 would 

include qualified plans under section 401(a), individual retirement plans (including 

individual retirement plans that are part of a simplified employee pension plan that 

satisfies section 408(k)), individual retirement accounts, individual retirement annuities, 

section 408(p) accounts and Roth IRAs under section 408A, section 403(a) qualified 

annuity plans, section 403(b) plans, section 457(b) plans and the Thrift Savings Plan 

(section 7701(j)). However, the competent authorities shall agree upon the list of pension 

plans that are acceptable under this paragraph. 

Paragraph 9 

Paragraph 9 generally provides U.S. tax treatment for certain contributions by or 

on behalf of U.S. citizens resident in Belgium to pension funds established in Belgium (or 

a similar fund that is a resident of a comparable third State) that is comparable to the 

treatment that would be provided for contributions to U.S. funds. Under subparagraph (a), 

a U.S. citizen resident in Belgium may exclude or deduct for U.S. tax purposes certain 

contributions to a pension fund established in Belgium. Qualifying contributions 

generally include contributions made during the period the U.S. citizen exercises an 

employment in Belgium if expenses of the employment are borne by an employer or 

permanent establishment in Belgium. Similarly, with respect to the U.S. citizen's 

participation in the pension fund in Belgium, accrued benefits and contributions during 

that period generally are not treated as taxable income in the United States. 

The U.S. tax benefit allowed by paragraph 9, however, is limited under 

subparagraph (b) to the lesser of the amount of relief allowed for contributions and 

benefits that qualify for relief in Belgium and the amount of relief that would be allowed 

for contributions and benefits under a generally corresponding pension fund established 

in the United States. 

Subparagraph (c) provides that the benefits an individual obtains under paragraph 

9 are counted when determining that individual's eligibility for benefits under a pension 

fund established in the United States. Thus, for example, contributions to a pension fund 

recognized for tax purposes in Belgium may be counted in determining whether the 

individual has exceeded the annual limitation on contributions to an individual retirement 

account. 

Under subparagraph (d), paragraph 9 does not apply to pension contributions and 

benefits unless the competent authority of the United States has agreed that the pension 

fund recognized for tax purposes in Belgium generally corresponds to a pension fund 

60
established in the United States. Since paragraph 9 applies only with respect to 

employees, however, the relevant plans are those that correspond to employer plans in the 

United States. The competent authorities shall agree upon the list of pension plans that 

are acceptable under this paragraph. 

Paragraph 10 

Paragraph 10 provides guidance for the application of paragraphs 7 and 9 by 

delineating when a similar fund that is a resident of a State other than a Contracting State 

will be considered to be a resident of a “comparable third State.” The paragraph requires 

that such a state will be considered a comparable third State only if the following three 

requirements are met: 1) the third State is a member state of the European Union or any 

other European Economic Area state or any party to the North American Free Trade 

Agreement or Switzerland, 2) the third State provides, under a tax treaty or otherwise, 

comparable favorable treatment for contributions to a pension fund that is a resident of 

the Contracting State that is providing benefits under paragraph 7 (i.e., host state) or 

paragraph 9 (i.e., the United States), and 3) the third State has an information exchange 

provision in a tax treaty or other arrangement with the Contracting State that is providing 

benefits under paragraph 7 or paragraph 9 that is satisfactory to that Contracting State. 

Subparagraph (b) provides that a pension plan is recognized for tax purposes in a 

Contacting State if contributions to the plan would qualify for tax relief in that 

Contracting State. 

Relationship to other Articles 

Paragraphs 1 (a), 3 and 4 of Article 17 are subject to the saving clause of 

paragraph 4 of Article 1 (General Scope). Thus, a U.S. citizen who is resident in the 

other Contracting State, and receives either a pension, annuity or alimony payment from 

the United States, may be subject to U.S. tax on the payment, notwithstanding the rules in 

those three paragraphs that give the State of residence of the recipient the exclusive 

taxing right. Paragraphs 1(b), 2 and 5 are excepted from the saving clause by virtue of 

subparagraph 5(a) of Article 1. Thus, the United States will not tax U.S. citizens and 

residents on the income described in those paragraphs even if such amounts otherwise 

would be subject to tax under U.S. law. 

Paragraphs 6 and 9 of Article 17 are excepted from the saving clause of paragraph 

4 of Article 1 by virtue of paragraph 5(a) of Article 1. Thus, the United States will allow 

U.S. citizens and residents the benefits of paragraphs 6 and 9. Paragraph 7 is excepted 

from the saving clause by subparagraph 5(b) of Article 1 with respect only to persons 

who are not admitted for permanent residence or citizens. Accordingly, a person who 

becomes a U.S. permanent resident or citizen will no longer receive a deduction for 

contributions to a pension fund established in the other Contracting State. 

61
ARTICLE 18 (GOVERNMENT SERVICE) 

Paragraph 1 

Subparagraphs (a) and (b) of paragraph 1 deal with the taxation of government 

compensation (other than a pension addressed in paragraph 2). Subparagraph (a) 

provides that remuneration paid to any individual who is rendering services to a State, or 

a political subdivision or a local authority thereof, is exempt from tax by the other State. 

Under subparagraph (b), such payments are, however, taxable exclusively in the other 

State (i.e., the host State) if the services are rendered in that other State and the individual 

is a resident of that State who is either a national of that State or a person who did not 

become resident of that State solely for purposes of rendering the services. The 

paragraph applies to anyone performing services for a government, whether as a 

government employee, an independent contractor, or an employee of an independent 

contractor. 

Paragraph 2 

Paragraph 2 deals with the taxation of pensions and other similar remuneration 

paid by, or out of funds created by, one of the States, or a political subdivision or a local 

authority thereof, to an individual in respect of services rendered to that State or 

subdivision or authority. Subparagraph (a) provides that such pensions and other similar 

remuneration are taxable only in that State. Subparagraph (b) provides an exception 

under which such pensions and other similar remuneration are taxable only in the other 

State if the individual is a resident of, and a national of, that other State. 

Pensions paid to retired civilian and military employees of a Government of either 

State are intended to be covered under paragraph 2. When benefits paid by a State in 

respect of services rendered to that State or a subdivision or authority are in the form of 

social security benefits, however, those payments are covered by paragraph 2 of Article 

17 (Pensions, Social Security, Annuities, Alimony, and Child Support). As a general 

matter, the result will be the same whether Article 17 or 18 applies, since social security 

benefits are taxable exclusively by the source country and so are government pensions. 

The result will differ only when the payment is made to a citizen and resident of the other 

Contracting State, who is not also a citizen of the paying State. In such a case, social 

security benefits continue to be taxable at source while government pensions become 

taxable only in the residence country. 

Paragraph 3 

Paragraph 3 provides that the remuneration described in paragraph 1 will be 

subject to the rules of Articles 14 (Income from Employment), 15 (Directors' Fees), 16 

(Entertainers and Sportsmen) or 17 (Pensions, Social Security, Annuities, Alimony, and 

Child Support) if the recipient of the income is employed by a business conducted by a 

government. 

62
Relationship to other Articles 

Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 

of Article 1) does not apply to the benefits conferred by one of the States under Article 18 

if the recipient of the benefits is neither a citizen of that State, nor a person who has been 

admitted for permanent residence there (i.e., in the United States, a "green card" holder). 

Thus, a resident of a Contracting State who in the course of performing functions of a 

governmental nature becomes a resident of the other State (but not a permanent resident), 

would be entitled to the benefits of this Article. However, an individual who receives a 

pension paid by the Government of Belgium in respect of services rendered to that 

Government shall be taxable on this pension only in Belgium unless the individual is a 

U.S. citizen or acquires a U.S. green card. 

ARTICLE 19 (STUDENTS, TRAINEES, TEACHERS AND RESEARCHERS) 

This Article provides rules for host-country taxation of visiting students, business 

trainees, teachers and researchers. Persons who meet the tests of the Article will be 

exempt from tax in the State that they are visiting with respect to designated classes of 

income. Paragraph 1 addresses payments received by a student or business trainee, while 

paragraph 2 addresses teachers and researchers temporarily present in the host country. 

Paragraph 1 

Subparagraph (a) addresses the situation where a student or business trainee that 

is a resident of a Contracting State receives certain payments other than for personal 

services, while present in the host State. Several conditions must be satisfied for such an 

individual to be exempt from host country taxation. 

First, the student or business trainee must have been, either at the time of his 

arrival in the host State or immediately before, a resident of the other Contracting State. 

Second, the purpose of the visit must be the full-time education or full-time 

training of the visitor. Thus, if the visitor comes principally to work in the host State but 

also is a part-time student, he would not be entitled to the benefits of this Article, even 

with respect to any payments he may receive from abroad for his maintenance or 

education, and regardless of whether or not he is in a degree program. Whether a student 

is to be considered full-time will be determined by the rules of the educational institution 

at which he is studying. 

The host-country exemption in subparagraph (a) applies to payments received by 

the student or business trainee for the purpose of his maintenance, education or training 

that arise outside the host State. A payment will be considered to arise outside the host 

State if the payer is located outside the host State. Thus, if an employer from one of the 

Contracting States sends an employee to the other Contracting State for training, the 

payments the trainee receives from abroad from his employer for his maintenance or 

training while he is present in the host State will be exempt from tax in the host State. 

Where appropriate, substance prevails over form in determining the identity of the payer. 

Thus, for example, payments made directly or indirectly by a U.S. person with whom the 

visitor is training, but which have been routed through a source outside the United States 

63
(e.g., a foreign subsidiary), are not treated as arising outside the United States for this 

purpose. 

Subparagraph (1) (b) also provides a limited exemption for remuneration from 

personal services rendered in the host State with a view to supplementing the resources 

available to him for such purposes to the extent of $9,000 United States dollars (or its 

equivalent in euro) per taxable year. The competent authorities are instructed to adjust 

this amount every five years, if necessary, to take into account changes in the amount of 

the U.S. standard deduction and personal exemption and the Belgian basic allowance. 

In the case of a business trainee, the benefits of paragraph 1 will extend only for a 

period of two years from the time that the visitor first arrives in the host country. If, 

however, a trainee remains in the host country for a third year, thus losing the benefits of 

the Article, he would not retroactively lose the benefits of the Article for the first two 

years. Supbaragraph 1(c) defines the term "business trainee" as a person who is in the 

country temporarily for the purpose of securing training that is necessary to qualify to 

pursue a profession or professional specialty. Moreover, a business trainee also includes 

an individual who is employed or under contract with a resident of the other Contracting 

State and is temporarily present in the host State for the primary purpose of receiving 

technical, professional, or business experience from a person other than his employer or a 

person related to its employer. Thus, a business trainee might include a lawyer employed 

by a law firm in one Contracting State who works for two years as a stagiare in an 

unrelated law firm in the other Contracting State. However, the term would not include a 

manager who normally is employed by a parent company in one Contracting State who is 

sent to the other Contracting State to run a factory owned by a subsidiary of the parent 

company. 

Paragraph 2 

Paragraph 2 provides an exemption from host State taxation for teachers and 

researchers. Under paragraph 2 an individual who is a resident of a Contracting State at 

the beginning of his visit to the other Contracting State (i.e., host State), and who is 

temporarily present in the host State for the purpose of teaching or carrying on research at 

a school, college, university or other educational or research institution is exempt from 

host Sate taxation for a period not exceeding 2 years from the person’s arrival in the host 

State on the person’s remuneration received in consideration of teaching or carrying on 

research. However, the benefits of paragraph 2 do not apply to income from research if 

such research is undertaken primarily for the private benefit of a specific person or 

persons. 

Relationship to other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to 

this Article with respect to an individual who is neither a citizen of the host State nor has 

been admitted for permanent residence there. The saving clause, however, does apply 

with respect to citizens and permanent residents of the host State. Thus, a U.S. citizen 

who is a resident of Belgium and who visits the United States as a full-time student at an 

accredited university will not be exempt from U.S. tax on remittances from abroad that 

64
otherwise constitute U.S. taxable income. A person, however, who is not a U.S. citizen, 

and who visits the United States as a student and remains long enough to become a 

resident under U.S. law, but does not become a permanent resident (i.e., does not acquire 

a green card), will be entitled to the full benefits of the Article. 

ARTICLE 20 (OTHER INCOME) 

Article 20 generally assigns taxing jurisdiction over income not dealt with in the 

other articles (Articles 6 through 19) of the Convention to the State of residence of the 

beneficial owner of the income. In order for an item of income to be "dealt with" in 

another article it must be the type of income described in the article and, in most cases, it 

must have its source in a Contracting State. For example, all royalty income that arises in 

a Contracting State and that is beneficially owned by a resident of the other Contracting 

State is "dealt with" in Article 12 (Royalties). However, profits derived in the conduct of 

a business are "dealt with" in Article 7 (Business Profits) whether or not they have their 

source in one of the Contracting States. 

Examples of items of income covered by Article 20 include income from 

gambling, punitive (but not compensatory) damages and covenants not to compete. The 

article would also apply to income from a variety of financial transactions, where such 

income does not arise in the course of the conduct of a trade or business. For example, 

income from notional principal contracts and other derivatives would fall within Article 

20 if derived by persons not engaged in the trade or business of dealing in such 

instruments, unless such instruments were being used to hedge risks arising in a trade or 

business. It would also apply to securities lending fees derived by an institutional investor. 

Further, in most cases guarantee fees paid within an intercompany group would be 

covered by Article 20, unless the guarantor were engaged in the business of providing 

such guarantees to unrelated parties. 

Article 20 also applies to items of income that are not dealt with in the other 

articles because of their source or some other characteristic. For example, Article 11 

(Interest) addresses only the taxation of interest arising in a Contracting State. Interest 

arising in a third State that is not attributable to a permanent establishment, therefore, is 

subject to Article 20. 

Distributions from partnerships are not generally dealt with under Article 20 

because partnership distributions generally do not constitute income. Under the Code, 

partners include in income their distributive share of partnership income annually, and 

partnership distributions themselves generally do not give rise to income. This would 

also be the case under U.S. law with respect to distributions from trusts. Trust income 

and distributions that, under the Code, have the character of the associated distributable 

net income would generally be covered by another article of the Convention. See Code 

section 641 et seq. 

Paragraph 1 

The general rule of Article 20 is contained in paragraph 1. Items of income not 

dealt with in other articles and beneficially owned by a resident of a Contracting State 

65
will be taxable only in the State of residence. This exclusive right of taxation applies 

whether or not the residence State exercises its right to tax the income covered by the 

Article. 

The reference in this paragraph to "items of income beneficially owned by a 

resident of a Contracting State" rather than simply "items of income of a resident of a 

Contracting State," as in the OECD Model, is intended merely to make explicit the 

implicit understanding in other treaties that the exclusive residence taxation provided by 

paragraph 1 applies only when a resident of a Contracting State is the beneficial owner of 

the income. Thus, source taxation of income not dealt with in other articles of the 

Convention is not limited by paragraph 1 if it is nominally paid to a resident of the other 

Contracting State, but is beneficially owned by a resident of a third State. However, 

income received by a nominee on behalf of a resident of that other State would be entitled 

to benefits. 

The term "beneficially owned" is not defined in the Convention, and is, therefore, 

defined under the internal law of the country imposing tax (i.e., the source country). The 

person who beneficially owns the income for purposes of Article 20 is the person to 

which the income is attributable for tax purposes under the laws of the source State. 

Paragraph 2 

This paragraph provides an exception to the general rule of paragraph 1 for 

income that is attributable to a permanent establishment maintained in a Contracting State 

by a resident of the other Contracting State. The taxation of such income is governed by 

the provisions of Article 7 (Business Profits). Therefore, income arising outside the 

United States that is attributable to a permanent establishment maintained in the United 

States by a resident of Belgium generally would be taxable by the United States under the 

provisions of Article 7. This would be true even if the income is sourced in a third State. 

Relationship to Other Articles 

This Article is subject to the saving clause of paragraph 4 of Article 1 (General 

Scope). Thus, the United States may tax the income of a resident of Belgium that is not 

dealt with elsewhere in the Convention, if that resident is a citizen of the United States. 

The Article is also subject to the provisions of Article 21 (Limitation on Benefits). Thus, 

if a resident of Belgium earns income that falls within the scope of paragraph 1 of Article 

20, but that is taxable by the United States under U.S. law, the income would be exempt 

from U.S. tax under the provisions of Article 20 only if the resident satisfies one of the 

tests of Article 21 for entitlement to benefits. 

ARTICLE 21 (LIMITATION ON BENEFITS) 

Article 21 contains anti-treaty-shopping provisions that are intended to prevent 

residents of third countries from benefiting from what is intended to be a reciprocal 

agreement between two countries. In general, the provision does not rely on a 

determination of purpose or intention but instead sets forth a series of objective tests. A 

resident of a Contracting State that satisfies one of the tests will receive benefits 

regardless of its motivations in choosing its particular business structure. 

66
The structure of the Article is as follows: Paragraph 1 states the general rule that 

residents are entitled to benefits otherwise accorded to residents only to the extent 

provided in the Article. Paragraph 2 lists a series of attributes of a resident of a 

Contracting State, the presence of any one of which will entitle that person to all the 

benefits of the Convention. Paragraph 3 provides that, regardless of whether a person 

qualifies for benefits under paragraph 2, benefits may be granted to a company if it meets 

a “derivative benefits” test that generally considers whether the owners of the company 

would qualify for benefits under Article 21, and whether the company makes significant 

payments to certain persons that erode the taxable base of the country where the company 

is a resident.. Paragraph 4 provides that, regardless of whether a person qualifies for 

benefits under paragraph 2, benefits may be granted to that person with regard to certain 

income earned in the conduct of an active trade or business. Paragraph 5 provides that a 

so called headquarters company resident in a Contracting State may qualify for benefits if 

certain conditions are met. Paragraph 6 generally provides rules that deny the benefit of a 

reduced rate of source country tax with respect to interest or royalties in certain cases 

where the beneficial owner of the payments derives the income through a permanent 

establishment in a third State and such third State does not impose a significant tax on 

such income. Paragraph 7 provides that benefits also may be granted if the competent 

authority of the State from which benefits are claimed determines that it is appropriate to 

provide benefits in that case. Paragraph 8 defines certain terms used in the Article. 

Paragraph 1 

Paragraph 1 provides that a resident of a Contracting State will be entitled to the 

benefits otherwise accorded to residents of a Contracting State under the Convention only 

to the extent provided in the Article. The benefits otherwise accorded to residents under 

the Convention include all limitations on source-based taxation under Articles 6 through 

20, the treaty-based relief from double taxation provided by Article 22, and the protection 

against discrimination afforded to residents of a Contracting State under Article 23. 

Some provisions do not require that a person be a resident in order to enjoy the benefits 

of those provisions. The mutual agreement procedure of Article 24 is not limited to 

residents of the Contracting States, and Article 27 applies to diplomatic agents or 

consular officials regardless of residence. Article 21 accordingly does not limit the 

availability of treaty benefits under these provisions. 

Article 21 and the anti-abuse provisions of domestic law complement each other, 

as Article 21 effectively determines whether an entity has a sufficient nexus to the 

Contracting State to be treated as a resident for treaty purposes, while domestic antiabuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit 

principles) determine whether a particular transaction should be recast in accordance with 

its substance. Thus, internal law principles of the source Contracting State may be 

applied to identify the beneficial owner of an item of income, and Article 21 then will be 

applied to the beneficial owner to determine if that person is entitled to the benefits of the 

Convention with respect to such income. 

67
Paragraph 2 

Paragraph 2 has five subparagraphs, each of which describes a category of 

residents that are entitled to all benefits of the Convention. 

It is intended that the provisions of paragraph 2 will be self executing. Unlike the 

provisions of paragraph 7, discussed below, claiming benefits under paragraph 2 does not 

require an advance competent authority ruling or approval. The tax authorities may, of 

course, on review, determine that the taxpayer has improperly interpreted the paragraph 

and is not entitled to the benefits claimed. 

Individuals -- Subparagraph 2(a) 

Subparagraph (a) provides that individual residents of a Contracting State will be 

entitled to all treaty benefits. If such an individual receives income as a nominee on 

behalf of a third country resident, benefits may be denied under the respective articles of 

the Convention by the requirement that the beneficial owner of the income be a resident 

of a Contracting State. 

Governments -- Subparagraph 2(b) 

Subparagraph (b) provides that the Contracting States and any political subdivision or 

local authority thereof will be entitled to all benefits of the Convention. 

Publicly-Traded Corporations -- Subparagraph 2(c)(i) 

Subparagraph (c) applies to two categories of companies: publicly traded companies and 

subsidiaries of publicly traded companies. A company resident in a Contracting State is 

entitled to all the benefits of the Convention under clause (i) of subparagraph (c) if the 

principal class of its shares, and any disproportionate class of shares, is regularly traded 

on one or more recognized stock exchanges and the company satisfies at least one of the 

following additional requirements: first, the company's principal class of shares is 

primarily traded on a recognized stock exchange located in the Contracting State of 

which the company is a resident (or, in the case of a company resident in Belgium, on a 

recognized stock exchange located within the European Union or in any other European 

Economic Area state, or in the case of a company resident in the United States, on a 

recognized stock exchange located in another state that is a party to the North American 

Free Trade Agreement); or, second, the company's primary place of management and 

control is in its State of residence. 

The term "recognized stock exchange" is defined in subparagraph (d) of 

paragraph 8. It includes (i) the NASDAQ System and any stock exchange registered with 

the Securities and Exchange Commission as a national securities exchange for purposes 

of the Securities Exchange Act of 1934; (ii) the Brussels stock exchange, the Irish Stock 

exchange and the stock exchanges of Amsterdam, Frankfurt, Hamburg, Lisbon, London, 

Madrid, Milan, Paris, Toronto, and Zurich; and (iii) any other stock exchange agreed 

upon by the competent authorities of the Contracting States. 

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If a company has only one class of shares, it is only necessary to consider whether 

the shares of that class meet the relevant trading requirements. If the company has more 

than one class of shares, it is necessary as an initial matter to determine which class or 

classes constitute the "principal class of shares.” The term "principal class of shares" is 

defined in subparagraph (a) of paragraph 8 to mean the ordinary or common shares of the 

company representing the majority of the aggregate voting power and value of the 

company. If the company does not have a class of ordinary or common shares 

representing the majority of the aggregate voting power and value of the company, then 

the "principal class of shares" is that class or any combination of classes of shares that 

represents, in the aggregate, a majority of the voting power and value of the company. 

Subparagraph (c) of paragraph 8 defines the term “shares” to include depository receipts 

for shares. Although in a particular case involving a company with several classes of 

shares it is conceivable that more than one group of classes could be identified that 

account for more than 50 percent of the shares, it is only necessary for one such group to 

satisfy the requirements of this subparagraph in order for the company to be entitled to 

benefits. Benefits would not be denied to the company even if a second, non-qualifying, 

group of shares with more than half of the company's voting power and value could be 

identified. 

A company whose principal class of shares is regularly traded on a recognized 

stock exchange will nevertheless not qualify for benefits under subparagraph (c) of 

paragraph 2 if it has a disproportionate class of shares that is not regularly traded on a 

recognized stock exchange. The term "disproportionate class of shares" is defined in 

subparagraph (b) of paragraph 8. A company has a disproportionate class of shares if it 

has outstanding a class of shares which is subject to terms or other arrangements that 

entitle the holder to a larger portion of the company's income, profit, or gain in the other 

Contracting State than that to which the holder would be entitled in the absence of such 

terms or arrangements. Thus, for example, a company resident in Belgium has a 

disproportionate class of shares if it has outstanding a class of "tracking stock" that pays 

dividends based upon a formula that approximates the company's return on its assets 

employed in the United States. 

The following example illustrates this result. 

 Example. BCo is a corporation resident in Belgium. BCo has two classes of 

shares: Common and Preferred. The Common shares are listed and regularly traded on 

the Brussels stock exchange. The Preferred shares have no voting rights and are entitled 

to receive dividends equal in amount to interest payments that BCo receives from 

unrelated borrowers in the United States. The Preferred shares are owned entirely by a 

single investor that is a resident of a country with which the United States does not have a 

tax treaty. The Common shares account for more than 50 percent of the value of BCo 

and for 100 percent of the voting power. Because the owner of the Preferred shares is 

entitled to receive payments corresponding to the U.S. source interest income earned by 

BCo, the Preferred shares are a disproportionate class of shares. Because the Preferred 

shares are not regularly traded on a recognized stock exchange, BCo will not qualify for 

benefits under subparagraph (c) of paragraph 2. 

69
The term "regularly traded" is defined in subparagraph (e) of paragraph 8. Under 

that subparagraph a class of shares is considered to be regularly traded on one or more 

recognized stock exchanges if the aggregate number of shares of that class traded on such 

stock exchange or exchanges during the preceding taxable year is at least 6 percent of the 

average number of shares outstanding in that class during that preceding taxable year. 

The regular trading requirement can be met by trading on any recognized 

exchange or exchanges. Trading on one or more recognized stock exchanges may be 

aggregated for purposes of this requirement. Thus, a U.S. company could satisfy the 

regularly traded requirement through trading, in whole or in part, on a recognized stock 

exchange located in Belgium. Authorized but unissued shares are not considered for 

purposes of this test. 

The term "primarily traded" is not defined in the Convention. In accordance with 

paragraph 2 of Article 3 (General Definitions), this term will have the meaning it has 

under the laws of the State concerning the taxes to which the Convention applies, 

generally the source State. In the case of the United States, this term is understood to 

have the meaning it has under Treas. Reg. section 1.884-5(d)(3), relating to the branch 

tax provisions of the Code. Accordingly, stock of a corporation is "primarily traded" if 

the number of shares in the company's principal class of shares that are traded during the 

taxable year on all recognized stock exchanges in the Contracting State of which the 

company is a resident exceeds the number of shares in the company's principal class of 

shares that are traded during that year on established securities markets in any other 

single foreign country. 

A company whose principal class of shares is regularly traded on a recognized 

exchange but cannot meet the primarily traded test may claim treaty benefits if its 

primary place of management and control is in its country of residence. This test should 

be distinguished from the "place of effective management" test which is used in the 

OECD Model and by many other countries to establish residence. In some cases, the 

place of effective management test has been interpreted to mean the place where the 

board of directors meets. By contrast, the primary place of management and control test 

looks to where day-to-day responsibility for the management of the company (and its 

subsidiaries) is exercised. The company's primary place of management and control will 

be located in the State in which the company is a resident only if the executive officers 

and senior management employees exercise day-to-day responsibility for more of the 

strategic, financial and operational policy decision making for the company (including 

direct and indirect subsidiaries) in that State than in the other State or any third state, and 

the staff that support the management in making those decisions are also based in that 

State. Thus, the test looks to the overall activities of the relevant persons to see where 

those activities are conducted. In most cases, it will be a necessary, but not a sufficient, 

condition that the headquarters of the company (that is, the place at which the CEO and 

other top executives normally are based) be located in the Contracting State of which the 

company is a resident. 

To apply the test, it will be necessary to determine which persons are to be 

considered "executive officers and senior management employees.” In most cases, it will 

not be necessary to look beyond the executives who are members of the Board of 

70
Directors (the "inside directors") in the case of a U.S. company. That will not always be 

the case, however; in fact, the relevant persons may be employees of subsidiaries if those 

persons make the strategic, financial and operational policy decisions. Moreover, it 

would be necessary to take into account any special voting arrangements that result in 

certain board members making certain decisions without the participation of other board 

members. 

Subsidiaries of Publicly-Traded Corporations -- Subparagraph 2(c)(ii) 

A company resident in a Contracting State is entitled to all the benefits of the 

Convention under clause (ii) of subparagraph (c) of paragraph 2 if five or fewer publicly 

traded companies described in clause (i) are the direct or indirect owners of at least 50 

percent of the aggregate vote and value of the company's shares (and at least 50 percent 

of any disproportionate class of shares). If the publicly-traded companies are indirect 

owners, however, each of the intermediate companies must be a resident of one of the 

Contracting States. 

Thus, for example, a company that is a resident of Belgium, all the shares of 

which are owned by another company that is a resident of Belgium, would qualify for 

benefits under the Convention if the principal class of shares (and any disproportionate 

classes of shares) of the parent company are regularly and primarily traded on the 

Brussels stock exchange. However, such a subsidiary would not qualify for benefits 

under clause (ii) if the publicly traded parent company were a resident of a third state, for 

example, and not a resident of the United States or Belgium. Furthermore, if a parent 

company in Belgium indirectly owned the bottom-tier company through a chain of 

subsidiaries, each such subsidiary in the chain, as an intermediate owner, must be a 

resident of the United States or Belgium in order for the subsidiary to meet the test in 

clause (ii). 

Tax Exempt Organizations -- Subparagraph 2(d) 

Subparagraph 2(d) provides rules by which the tax exempt organizations 

described in paragraph 3 of Article 4 (Resident) will be entitled to all the benefits of the 

Convention. A pension fund will qualify for benefits if more than fifty percent of the 

beneficiaries, members or participants are individuals resident in either Contracting State 

or the organization sponsoring such pension fund is entitled to benefits under the 

Convention (i.e., meets the limitations on benefits provisions of Article 21). For 

purposes of this provision, the term "beneficiaries" should be understood to refer to the 

persons receiving benefits from the pension fund. On the other hand, a tax-exempt 

organization other than a pension fund automatically qualifies for benefits, without regard 

to the residence of its beneficiaries or members. Entities qualifying under this rule are 

those that are generally exempt from tax in their State of residence and that are 

established and maintained exclusively to fulfill religious, charitable, scientific, artistic, 

cultural, or educational purposes. 

Ownership/Base Erosion -- Subparagraph 2(e) 

Subparagraph 2(e) provides an additional method to qualify for treaty benefits that 

applies to any form of legal entity that is a resident of a Contracting State. The test 

71
provided in subparagraph (e), the so-called ownership and base erosion test, is a two-part 

test. Both prongs of the test must be satisfied for the resident to be entitled to treaty 

benefits under subparagraph 2(e). 

The ownership prong of the test, under clause (i), requires that 50 percent or more 

of each class of shares or other beneficial interests in the person is owned, directly or 

indirectly, on at least half the days of the person's taxable year by persons who are 

residents of the Contracting State of which that person is a resident and that are 

themselves entitled to treaty benefits under subparagraphs (a), (b), (d) or clause (i) of 

subparagraph (c) of paragraph 2 

Trusts may be entitled to benefits under this provision if they are treated as 

residents under Article 4 (Residence) and they otherwise satisfy the requirements of this 

subparagraph. For purposes of this subparagraph, the beneficial interests in a trust will be 

considered to be owned by its beneficiaries in proportion to each beneficiary's actuarial 

interest in the trust. The interest of a remainder beneficiary will be equal to 100 percent 

less the aggregate percentages held by income beneficiaries. A beneficiary's interest in a 

trust will not be considered to be owned by a person entitled to benefits under the other 

provisions of paragraph 2 if it is not possible to determine the beneficiary's actuarial 

interest. Consequently, if it is not possible to determine the actuarial interest of the 

beneficiaries in a trust, the ownership test under clause i) cannot be satisfied, unless all 

possible beneficiaries are persons entitled to benefits under the other subparagraphs of 

paragraph 2. 

The base erosion prong of clause (ii) of subparagraph (e) is satisfied with respect 

to a person if less than 50 percent of the person's gross income for the taxable year, as 

determined under the tax law in the person's State of residence, is paid or accrued, 

directly or indirectly, to persons who are not residents of either Contracting State entitled 

to benefits under subparagraphs (a), (b), (d) or clause (i) of subparagraph (c) of paragraph 

2, in the form of payments deductible for tax purposes in the payor's State of residence. 

These amounts do not include arm's-length payments in the ordinary course of business 

for services or tangible property or payments in respect of financial obligations to a bank 

that is not related to the payor. To the extent they are deductible from the taxable base, 

trust distributions are deductible payments. However, depreciation and amortization 

deductions, which do not represent payments or accruals to other persons, are disregarded 

for this purpose. 

Paragraph 3 

Paragraph 3 sets forth a derivative benefits test that is potentially applicable to all 

treaty benefits, although the test is applied to individual items of income. In general, a 

derivative benefits test entitles the resident of a Contracting State to treaty benefits if the 

owner of the resident would have been entitled to the same benefit had the income in 

question flowed directly to that owner. To qualify under this paragraph, the company 

must meet an ownership test and a base erosion test. 

Subparagraph (a) sets forth the ownership test. Under this test, seven or fewer 

equivalent beneficiaries must own shares representing at least 95 percent of the aggregate 

voting power and value of the company and at least 50 percent of any disproportionate 

72
class of shares. Ownership may be direct or indirect. The term “equivalent beneficiary” 

is defined in subparagraph (g) of paragraph 8. This definition may be met in two 

alternative ways, the first of which has two requirements. 

Under the first alternative, a person may be an equivalent beneficiary because it is 

entitled to equivalent benefits under a treaty between the country of source and the 

country in which the person is a resident. This alternative has two requirements. 

The first requirement is that the person must be a resident of a Member State of 

the European Union or any other European Economic Area state, or Switzerland, or a 

party to the North American Free Trade Agreement (collectively, “qualifying States”). 

The second requirement of the definition of “equivalent beneficiary” is that the 

person must be entitled to equivalent benefits under an applicable treaty. To satisfy the 

second requirement, the person must be entitled to all the benefits of a comprehensive 

treaty between the Contracting State from which benefits of the Convention are claimed 

and a qualifying State under provisions analogous to subparagraphs 2(a), (b), (d) or 

clause i) of subparagraph (c). For this purpose, however, if the treaty in question does 

not have a comprehensive limitation on benefits article, this requirement is met only if 

the person is entitled to benefits under the aforementioned provisions of paragraph 2. 

In addition, to satisfy the second requirement by virtue of clause (B) of 

subparagraph (g)(i) with respect to dividends, interest, royalties, or branch tax, the person 

must be entitled to a rate of tax that is at least as low as the rate that would apply under 

the Convention to such income. Thus, the rates to be compared are: (1) the rate of 

withholding or branch tax that the source State would have imposed if a qualified resident 

of the other Contracting State was the beneficial owner of the income; and (2) the rate of 

withholding or branch tax that the source State would have imposed if the third State 

resident received the income directly from the source State. For example, USCo is a 

wholly owned subsidiary of BelgiumCo, a company resident in Belgium. BelgiumCo is 

wholly owned by FCo, a corporation resident in Italy. Assuming BelgiumCo satisfies the 

requirements of paragraph 3(a) of Article 10 (Dividends), BelgiumCo would be eligible 

for the elimination of dividend withholding tax. The dividend withholding rate in the 

treaty between the United States and Italy is 5 percent. Thus, if FCo received the 

dividend directly from USCo, FCo would have been subject to a 5 percent rate of 

withholding tax on the dividend. Because FCo would not be entitled to a rate of 

withholding tax that is at least as low as the rate that would apply under the Convention 

to such income (i.e., zero), FCo is not an equivalent beneficiary within the meaning of 

paragraph 8(g)(i) of Article 21 with respect to the elimination of withholding tax on 

dividends. 

Subparagraph 8(h) provides a special rule to take account of the fact that 

withholding taxes on many inter-company dividends, interest and royalties are exempt 

within the European Union by reason of various EU directives, rather than by tax treaty. 

If a U.S. company receives such payments from a Belgian company, and the U.S. 

company is owned by a company resident in a member state of the European Union that 

73
would have qualified for an exemption from withholding tax if it had received the income 

directly, the parent company will be treated as an equivalent beneficiary. This rule is 

necessary because many European Union member countries have not re-negotiated their 

tax treaties to reflect the exemptions available under the directives. 

The requirement that a person be entitled to "all the benefits" of a comprehensive 

tax treaty eliminates those persons that qualify for benefits with respect to only certain 

types of income. Accordingly, the fact that a French parent of a Belgium company is 

engaged in the active conduct of a trade or business in France and therefore would be 

entitled to the benefits of the U.S.-France treaty if it received dividends directly from a 

U.S. subsidiary of the Belgian company is not sufficient for purposes of this paragraph. 

Further, the French company cannot be an equivalent beneficiary if it qualifies for 

benefits only with respect to certain income as a result of a "derivative benefits" 

provision in the U.S.-France treaty. However, it would be possible to look through the 

French company to its parent company to determine whether the parent company is an 

equivalent beneficiary. 

The second alternative for satisfying the "equivalent beneficiary" test is available 

only to residents of one of the two Contracting States. U.S. or Belgian residents who are 

eligible for treaty benefits by reason of subparagraphs (a), (b), (d) or clause i) of 

subparagraph (c) of paragraph 2 are equivalent beneficiaries under the second alternative. 

Thus, a Belgian individual will be an equivalent beneficiary without regard to whether 

the individual would have been entitled to receive the same benefits if it received the 

income directly. A resident of a third country could not qualify for treaty benefits under 

any of those subparagraphs or any other rule of the treaty, and therefore does not qualify 

as an equivalent beneficiary under this alternative. Thus, any resident of a third country 

can be an equivalent beneficiary only if it would have been entitled to equivalent benefits 

had it received the income directly. 

The second alternative was included in order to clarify that ownership by certain 

residents of a Contracting State would not disqualify a U.S. or Belgian company under 

this paragraph. Thus, for example, if 90 percent of a Belgian company is owned by five 

companies that are resident in member states of the European Union who satisfy the 

requirements of clause (i) of subparagraph (g) of paragraph 8, and 10 percent of the 

Belgian company is owned by a U.S. or Belgian individual, then the Belgian company 

still can satisfy the requirements of subparagraph (a) of paragraph 3. 

Subparagraph (b) sets forth the base erosion test. A company meets this base 

erosion test if less than 50 percent of its gross income for the taxable period (as 

determined in the company’s State of residence) is paid or accrued, directly or indirectly, 

to a person or persons who are not equivalent beneficiaries in the form of payments 

deductible for tax purposes in company’s State of residence. This test is the same as the 

base erosion test in clause (ii) of subparagraph (e) of paragraph 2, except that the test in 

subparagraph 3(b) focuses on base-eroding payments to persons who are not equivalent 

beneficiaries. 

74
As in the case of base erosion test in subparagraph (e) of paragraph 2, deductible 

payments in subparagraph (b) of paragraph 3 also do not include arm’s length payments 

in the ordinary course of business for services or tangible property and payments in 

respect of financial obligations to a bank that is not related to the payor. 

Paragraph 4 

Paragraph 4 sets forth an alternative test under which a resident of a Contracting 

State may receive treaty benefits with respect to certain items of income that are 

connected to an active trade or business conducted in its State of residence. A resident of 

a Contracting State may qualify for benefits under paragraph 4 whether or not it also 

qualifies under paragraph 2 or 3. 

Subparagraph (a) sets forth the general rule that a resident of a Contracting State 

engaged in the active conduct of a trade or business in that State may obtain the benefits 

of the Convention with respect to an item of income derived from the other Contracting 

State. The item of income, however, must be derived in connection with or incidental to 

that trade or business. 

The term "trade or business" is not defined in the Convention. Pursuant to 

paragraph 2 of Article 3 (General Definitions), when determining whether a resident of 

Belgium is entitled to the benefits of the Convention under paragraph 4 of this Article 

with respect to an item of income derived from sources within the United States, the 

United States will ascribe to this term the meaning that it has under the law of the United 

States. Accordingly, the U.S. competent authority will refer to the regulations issued 

under section 367(a) for the definition of the term "trade or business." In general, 

therefore, a trade or business will be considered to be a specific unified group of activities 

that constitute or could constitute an independent economic enterprise carried on for 

profit. Furthermore, a corporation generally will be considered to carry on a trade or 

business only if the officers and employees of the corporation conduct substantial 

managerial and operational activities. 

The business of making or managing investments for the resident's own account 

will be considered to be a trade or business only when part of banking, insurance or 

securities activities conducted by a bank, an insurance company, or a registered securities 

dealer. Such activities conducted by a person other than a bank, insurance company or 

registered securities dealer will not be considered to be the conduct of an active trade or 

business, nor would they be considered to be the conduct of an active trade or business if 

conducted by a bank, insurance company or registered securities dealer but not as part of 

the company's banking, insurance or dealer business. Because a headquarters operation 

is in the business of managing investments, a company that functions solely as a 

headquarters company will not be considered to be engaged in an active trade or business 

for purposes of paragraph 3. 

An item of income is “derived in connection with” a trade or business if the 

income-producing activity in the State of source is a line of business that "forms a part 

of" or is "complementary" to the trade or business conducted in the State of residence by 

the income recipient. 

75
A business activity generally will be considered to form part of a business activity 

conducted in the State of source if the two activities involve the design, manufacture or 

sale of the same products or type of products, or the provision of similar services. The 

line of business in the State of residence may be upstream, downstream, or parallel to the 

activity conducted in the State of source. Thus, the line of business may provide inputs 

for a manufacturing process that occurs in the State of source, may sell the output of that 

manufacturing process, or simply may sell the same sorts of products that are being sold 

by the trade or business carried on in the State of source. 

 Example 1. USCo is a corporation resident in the United States. USCo is engaged 

in an active manufacturing business in the United States. USCo owns 100 percent of the 

shares of BelCo, a corporation resident Belgium. BelCo distributes USCo products in 

Belgium. Since the business activities conducted by the two corporations involve the 

same products, BelCo's distribution business is considered to form a part of USCo's 

manufacturing business. 

 Example 2. The facts are the same as in Example 1, except that USCo does not 

manufacture. Rather, USCo operates a large research and development facility in the 

United States that licenses intellectual property to affiliates worldwide, including BelCo. 

BelCo and other USCo affiliates then manufacture and market the USCo-designed 

products in their respective markets. Since the activities conducted by BelCo and USCo 

involve the same product lines, these activities are considered to form a part of the same 

trade or business. 

For two activities to be considered to be "complementary," the activities need not 

relate to the same types of products or services, but they should be part of the same 

overall industry and be related in the sense that the success or failure of one activity will 

tend to result in success or failure for the other. Where more than one trade or business is 

conducted in the State of source and only one of the trades or businesses forms a part of 

or is complementary to a trade or business conducted in the State of residence, it is 

necessary to identify the trade or business to which an item of income is attributable. 

Royalties generally will be considered to be derived in connection with the trade or 

business to which the underlying intangible property is attributable. Dividends will be 

deemed to be derived first out of earnings and profits of the treaty-benefited trade or 

business, and then out of other earnings and profits. Interest income may be allocated 

under any reasonable method consistently applied. A method that conforms to U.S. 

principles for expense allocation will be considered a reasonable method. 

 Example 3. Americair is a corporation resident in the United States that operates 

an international airline. BelSub is a wholly-owned subsidiary of Americair resident in 

Belgium. BelSub operates a chain of hotels in Belgium that are located near airports 

served by Americair flights. Americair frequently sells tour packages that include air 

travel to Belgium and lodging at BelSub hotels. Although both companies are engaged in 

the active conduct of a trade or business, the businesses of operating a chain of hotels and 

operating an airline are distinct trades or businesses. Therefore BelSub's business does 

not form a part of Americair's business. However, BelSub's business is considered to be 

complementary to Americair's business because they are part of the same overall industry 

(travel) and the links between their operations tend to make them interdependent. 

76
 Example 4. The facts are the same as in Example 3, except that BelSub owns an 

office building in Belgium instead of a hotel chain. No part of Americair's business is 

conducted through the office building. BelSub's business is not considered to form a part 

of or to be complementary to Americair's business. They are engaged in distinct trades or 

businesses in separate industries, and there is no economic dependence between the two 

operations. 

 Example 5. USFlower is a corporation resident in the United States. USFlower 

produces and sells flowers in the United States and other countries. USFlower owns all 

the shares of BelHolding, a corporation resident in Belgium. BelHolding is a holding 

company that is not engaged in a trade or business. BelHolding owns all the shares of 

three corporations that are resident in Belgium: BelFlower, BelLawn, and BelFish. 

BelFlower distributes USFlower flowers under the USFlower trademark in Belgium. 

BelLawn markets a line of lawn care products in Belgium under the USFlower trademark. 

In addition to being sold under the same trademark, BelLawn and BelFlower products are 

sold in the same stores and sales of each company's products tend to generate increased 

sales of the other's products. BelFish imports fish from the United States and distributes 

it to fish wholesalers in Belgium. For purposes of paragraph 4, the business of BelFlower 

forms a part of the business of USFlower, the business of BelLawn is complementary to 

the business of USFlower, and the business of BelFish is neither part of nor 

complementary to that of USFlower. 

An item of income derived from the State of source is "incidental to" the trade or 

business carried on in the State of residence if production of the item facilitates the 

conduct of the trade or business in the State of residence. An example of incidental 

income is the temporary investment of working capital of a person in the State of 

residence in securities issued by persons in the State of source. 

Subparagraph (b) of paragraph 4 states a further condition to the general rule in 

subparagraph (a) in cases where the trade or business generating the item of income in 

question is carried on either by the person deriving the income or by any associated 

enterprises. Subparagraph (b) states that the trade or business carried on in the State of 

residence, under these circumstances, must be substantial in relation to the activity in the 

State of source. The substantiality requirement is intended to prevent a narrow case of 

treaty-shopping abuses in which a company attempts to qualify for benefits by engaging 

in de minimis connected business activities in the treaty country in which it is resident 

(i.e., activities that have little economic cost or effect with respect to the company 

business as a whole). 

The determination of substantiality is made based upon all the facts and 

circumstances and takes into account the comparative sizes of the trades or businesses in 

each Contracting State, the nature of the activities performed in each Contracting State, 

and the relative contributions made to that trade or business in each Contracting State. In 

any case, in making each determination or comparison, due regard will be given to the 

relative sizes of the economies in the two Contracting States. 

The determination in subparagraph (b) also is made separately for each item of 

income derived from the State of source. It therefore is possible that a person would be 

77
entitled to the benefits of the Convention with respect to one item of income but not with 

respect to another. If a resident of a Contracting State is entitled to treaty benefits with 

respect to a particular item of income under paragraph 4, the resident is entitled to all 

benefits of the Convention insofar as they affect the taxation of that item of income in the 

State of source. 

The application of the substantiality requirement only to income from related 

parties focuses only on potential abuse cases, and does not hamper certain other kinds of 

non-abusive activities, even though the income recipient resident in a Contracting State 

may be very small in relation to the entity generating income in the other Contracting 

State. For example, if a small U.S. research firm develops a process that it licenses to a 

very large, unrelated, pharmaceutical manufacturer in Belgium, the size of the U.S. 

research firm would not have to be tested against the size of the Belgian manufacturer. 

Similarly, a small U.S. bank that makes a loan to a very large unrelated company 

operating a business in Belgium would not have to pass a substantiality test to receive 

treaty benefits under Paragraph 4. 

Subparagraph (c) of paragraph 4 provides special attribution rules for purposes of 

applying the substantive rules of subparagraphs (a) and (b). Thus, these rules apply for 

purposes of determining whether a person meets the requirement in subparagraph (a) that 

it be engaged in the active conduct of a trade or business and that the item of income is 

derived in connection with that active trade or business, and for making the comparison 

required by the "substantiality" requirement in subparagraph (b). Subparagraph (c) 

attributes to a person activities conducted by persons "connected" to such person. A 

person ("X") is connected to another person ("Y") if X possesses 50 percent or more of 

the beneficial interest in Y (or if Y possesses 50 percent or more of the beneficial interest 

in X). For this purpose, X is connected to a company if X owns shares representing fifty 

percent or more of the aggregate voting power and value of the company or fifty percent 

or more of the beneficial equity interest in the company. X also is connected to Y if a 

third person possesses fifty percent or more of the beneficial interest in both X and Y. 

For this purpose, if X or Y is a company, the threshold relationship with respect to such 

company or companies is fifty percent or more of the aggregate voting power and value 

or fifty percent or more of the beneficial equity interest. Finally, X is connected to Y if, 

based upon all the facts and circumstances, X controls Y, Y controls X, or X and Y are 

controlled by the same person or persons. 

Paragraph 5 

Paragraph 5 provides that a resident of one of the Contracting States is entitled to 

all the benefits of the Convention if that person functions as a recognized headquarters 

company for a multinational corporate group. The provisions of this paragraph are 

consistent with the other U.S. treaties where this provision has been adopted. For this 

purpose, the multinational corporate group includes all corporations that the headquarters 

company supervises and excludes affiliated corporations not supervised by the 

headquarters company. The headquarters company does not have to own shares in the 

companies that it supervises. In order to be considered a headquarters company, the 

person must meet several requirements that are enumerated in Paragraph 5. These 

requirements are discussed below. 

78
Overall Supervision and Administration 

Subparagraph (a) provides that the person must provide a substantial portion of 

the overall supervision and administration of the group. This activity may include group 

financing, but group financing may not be the principal activity of the person functioning 

as the headquarters company. A person only will be considered to engage in supervision 

and administration if it engages in a number of the following activities: group financing, 

pricing, marketing, internal auditing, internal communications, and management. Other 

activities also could be part of the function of supervision and administration. 

In determining whether a "substantial portion" of the overall supervision and 

administration of the group is provided by the headquarters company, its headquartersrelated activities must be substantial in relation to the same activities for the same group 

performed by other entities. 

Subparagraph (a) does not require that the group that is supervised include 

persons in the other State. However, it is anticipated that in most cases the group will 

include such persons, due to the requirement discussed below that the income derived by 

the headquarters company be derived in connection with or be incidental to an active 

trade or business supervised by the headquarters company. 

Active Trade or Business 

Subparagraph (b) is the first of several requirements intended to ensure that the 

relevant group is truly "multinational." This sub-paragraph provides that the corporate 

group supervised by the headquarters company must consist of corporations resident in, 

and engaged in active trades or businesses in, at least five countries. Furthermore, at least 

five countries must contribute substantially to the income generated by the group, as the 

rule requires that the business activities carried on in each of the five countries (or 

groupings of countries) generate at least 10 percent of the gross income of the group. For 

purposes of the 10 percent gross income requirement, the income from multiple countries 

may be aggregated into non-overlapping groupings, as long as there are at least five 

individual countries or groupings that each satisfy the 10 percent requirement. If the 

gross income requirement under this subparagraph is not met for a taxable year, the 

taxpayer may satisfy this requirement by applying the 10 percent gross income test to the 

average of the gross incomes for the four years preceding the taxable year. 

Example 1. BHQ is a corporation resident in Belgium. BHQ functions as a 

headquarters company for a group of companies. These companies are resident in the 

United States, Canada, New Zealand, the United Kingdom, Malaysia, the Philippines, 

Singapore, and Indonesia. The gross income generated by each of these companies for 

2008 and 2009 is as follows: 

79
Country 

2008 2009 

United States $40 $45 

Canada $25 $15 

New Zealand $10 $20 

United Kingdom $30 $35 

Malaysia $10 $12 

Philippines $ 7 $10 

Singapore $10 $ 8 

Indonesia $ 5 $10

 $137 $155 

For 2008, 10 percent of the gross income of this group is equal to $13.70. Only 

the United States, Canada, and the United Kingdom satisfy this requirement for that year. 

The other companies in the group may be aggregated to meet this requirement. Because 

New Zealand and Malaysia have a total gross income of $20, and the Philippines, 

Singapore, and Indonesia have a total gross income of $22, these two groupings of 

countries may be treated as the fourth and fifth members of the group for purposes of 

subparagraph (b). 

In the following year, 10 percent of the gross income is $15.50. Only the United 

States, New Zealand, and the United Kingdom satisfy this requirement. Because Canada 

and Malaysia have a total gross income of $27, and the Philippines, Singapore, and 

Indonesia have a total gross income of $28, these two groupings of countries may be 

treated as the fourth and fifth members of the group for purposes of subparagraph (b). 

The fact that Canada replaced New Zealand in a group is not relevant for this purpose. 

The composition of the grouping may change from year to year. 

Single Country Limitation 

Subparagraph (c) provides that the business activities carried on in any one 

country other than the headquarters company's state of residence must generate less than 

50 percent of the gross income of the group. If the gross income requirement under this 

subparagraph is not met for a taxable year, the taxpayer may satisfy this requirement 

applying the 50 percent gross income test to the average of the gross incomes for the four 

years preceding the taxable year. The following example illustrates the application of 

this subparagraph. 

Example. BHQ is a corporation resident in Belgium. BHQ functions as a 

headquarters company for a group of companies. BHQ derives dividend income from a 

United States subsidiary in the 2008 taxable year. The state of residence of each of these 

companies, the situs of their activities and the amounts of gross income attributable to 

each for the years 2008 through 2012 are set forth below. 

80
Company Situs 2012 2011 2010 2009 2008 

United States U.S. $100 $100 $ 95 $ 90 $ 85 

Mexico U.S. 10 8 5 0 0 

Canada U.S. 20 18 16 15 12 

United Kingdom U.K 30 32 30 28 27 

New Zealand N.Z. 40 42 38 36 35 

Japan Japan 35 32 30 30 28 

Singapore Singapore 25 25 24 22 20 

$260 $257 $238 $221 $207 

Because the United States’ total gross income of $130 in 2012 is not less than 50 

percent of the gross income of the group, subparagraph (c) is not satisfied with respect to 

dividends derived in 2012. However, the United States’ average gross income for the 

preceding four years may be used in lieu of the preceding year’s average. The United 

States’ average gross income for the years 2008-11 is $111.00 ($444/4). The group’s 

total average gross income for these years is $230.75 ($923/4). Because $111.00 

represents 48.1 percent of the group’s average gross income for the years 2008 through 

2011, the requirement under subparagraph (c) is satisfied. 

Other State Gross Income Limitation 

Subparagraph (d) provides that no more than 25 percent of the headquarters 

company's gross income may be derived from the other Contracting State. Thus, if the 

headquarters company's gross income for the taxable year is $200, no more than $50 of 

this amount may be derived from the other Contracting State. If the gross income 

requirement under this subparagraph is not met for a taxable year, the taxpayer may 

satisfy this requirement by applying the 25 percent gross income test to the average of the 

gross incomes for the four years preceding the taxable year. 

Independent Discretionary Authority 

Subparagraph (e) requires that the headquarters company have and exercise 

independent discretionary authority to carry out the functions referred to in subparagraph 

(a). Thus, if the headquarters company was nominally responsible for group financing, 

pricing, marketing and other management functions, but merely implemented instructions 

received from another entity, the headquarters company would not be considered to have 

and exercise independent discretionary authority with respect to these functions. This 

determination is made individually for each function. For instance, a headquarters 

company could be nominally responsible for group financing, pricing, marketing and 

internal auditing functions, but another entity could be actually directing the headquarters 

company as to the group financing function. In such a case, the headquarters company 

would not be deemed to have independent discretionary authority for group financing, 

but it might have such authority for the other functions. Functions for which the 

headquarters company does not have and exercise independent discretionary authority are 

considered to be conducted by an entity other than the headquarters company for 

purposes of subparagraph (a). 

81
Income Taxation Rules 

Subparagraph (f) requires that the headquarters company be subject to the 

generally applicable income taxation rules in its country of residence. This reference 

should be understood to mean that the company must be subject to the income taxation 

rules to which a company engaged in the active conduct of a trade or business would be 

subject. Thus, if one of the Contracting States has or introduces special taxation 

legislation that impose a lower rate of income tax on headquarters companies than is 

imposed on companies engaged in the active conduct of a trade or business, or provides 

for an artificially low taxable base for such companies, a headquarters company subject 

to these rules is not entitled to the benefits of the Convention under Paragraph 5. 

In accordance with paragraph 3 of Article 28 (Entry Into Force), subparagraph (f) 

shall not have effect until January 1, 2011. 

In Connection With or Incidental to Trade or Business 

Subparagraph (g) requires that the income derived in the other Contracting State 

be derived in connection with or be incidental to the active business activities referred to 

in subparagraph (b). This determination is made under the principles set forth in 

paragraph 4. For instance, assume that a Belgian company satisfies the other 

requirements in paragraph 5 and acts as a headquarters company for a group that includes 

a United States corporation. If the group is engaged in the design and manufacture of 

computer software, but the U.S. company is also engaged in the design and manufacture 

of photocopying machines, the income that the Belgian company derives from the United 

States would have to be derived in connection with or be incidental to the income 

generated by the computer business in order to be entitled to the benefits of the 

Convention under paragraph 5. Interest income received from the U.S. company also 

would be entitled to the benefits of the Convention under this paragraph as long as the 

interest was attributable to the computer business supervised by the headquarters 

company Interest income derived from an unrelated party would normally not, however, 

satisfy the requirements of this clause. 

Paragraph 6 

Paragraph 6 deals with the treatment of interest or royalty income in the context 

of a so-called "triangular case." The paragraph provides special rules applicable to U.S. 

source interest or royalties that are attributable to permanent establishment that a Belgian 

company has in a third state, and that are otherwise exempt from taxation in Belgium. 

The paragraph is intended to authorize the United States to collect a tax at source when 

there is not a significant level of double taxation. 

The term "triangular case" refers to the use of the structure described below by a 

resident of Belgium to earn, in this example, interest income from the United States. The 

Belgian resident, who is assumed to qualify for benefits under one or more of the 

provisions of Article 21 (Limitation on Benefits), sets up a permanent establishment in a 

third jurisdiction that imposes only a low rate of tax on the income of the permanent 

82
establishment. The Belgian resident then lends funds into the United States through the 

permanent establishment. The permanent establishment, despite its third-jurisdiction 

location, is an integral part of a Belgian resident. Therefore the income that it earns on 

those loans, absent the provisions of paragraph 6, is entitled to exemption from U.S. 

withholding tax under the Convention. However, assume the income of the permanent 

establishment is exempt from Belgian tax. Thus, the interest income is exempt from U.S. 

tax, is subject to little tax in the host jurisdiction of the permanent establishment, and is 

exempt from Belgian tax. 

Because the United States does not exempt the profits of a third-jurisdiction 

permanent establishment of a U.S. resident from U.S. tax, either by statute or by treaty, 

this paragraph only applies with respect to U.S. source interest, or royalties that are 

attributable to a third-jurisdiction of a Belgian resident. Paragraph 6 replaces the 

otherwise applicable rules in the Convention for interest and royalties with a 15 percent 

withholding tax for these amounts, if the actual tax paid on the income in the country 

where the permanent establishment is located is less than 60 percent of the tax that would 

have been payable in Belgium if the income were earned in Belgium by the enterprise 

and were not attributable to the permanent establishment in the third state. 

In general, the principles employed under Code section 954(b)(4) will be 

employed to determine whether the profits are subject to an effective rate of taxation that 

is above the specified threshold. 

Notwithstanding the level of tax on income of the permanent establishment, 

paragraph 6 does not apply under certain circumstances. 

Subparagraph a) provides that in the case of interest as defined in Article 11 

(Interest), the paragraph does not apply if the interest is derived in connection with, or is 

incidental to, the active conduct of a trade or business carried on by the permanent 

establishment in the third state. The business of making, managing or simply holding 

investments for the person’s own account is not considered to be an active trade or 

business, unless these are banking or securities activities carried on by a bank or 

registered securities dealer. 

Subparagraph b) provides that in the case of royalties defined in Article 12 

(Royalties), the paragraph does not apply if the royalties are received as compensation for 

the use of, or the right to use, intangible property produced or developed by the 

permanent establishment. 

Paragraph 7 

Paragraph 7 provides that a resident of one of the States that is not entitled to the 

benefits of the Convention as a result of paragraphs 1 through 6 still may be granted 

benefits under the Convention at the discretion of the competent authority of the State 

from which benefits are claimed. In making determinations under paragraph 7, that 

competent authority will take into account as its guideline whether the establishment, 

acquisition, or maintenance of the person seeking benefits under the Convention, or the 

conduct of such person's operations, has or had as one of its principal purposes the 

83
obtaining of benefits under the Convention. Benefits will not be granted, however, solely 

because a company was established prior to the effective date of a treaty or protocol. In 

that case a company would still be required to establish to the satisfaction of the 

Competent Authority clear non-tax business reasons for its formation in a Contracting 

State, or that the allowance of benefits would not otherwise be contrary to the purposes of 

the treaty. Thus, persons that establish operations in one of the States with a principal 

purpose of obtaining the benefits of the Convention ordinarily will not be granted relief 

under paragraph 7. 

The competent authority's discretion is quite broad. It may grant all of the benefits 

of the Convention to the taxpayer making the request, or it may grant only certain 

benefits. For instance, it may grant benefits only with respect to a particular item of 

income in a manner similar to paragraph 4. Further, the competent authority may 

establish conditions, such as setting time limits on the duration of any relief granted. 

For purposes of implementing paragraph 7, a taxpayer will be permitted to present 

his case to the relevant competent authority for an advance determination based on the 

facts. In these circumstances, it is also expected that, if the competent authority 

determines that benefits are to be allowed, they will be allowed retroactively to the time 

of entry into force of the relevant treaty provision or the establishment of the structure in 

question, whichever is later. 

Finally, there may be cases in which a resident of a Contracting State may apply 

for discretionary relief to the competent authority of his State of residence. This would 

arise, for example, if the benefit it is claiming is provided by the residence country, and 

not by the source country. So, for example, if a company that is a resident of the United 

States would like to claim the benefit of the re-sourcing rule of paragraph 3 of Article 22, 

but it does not meet any of the objective tests of paragraphs 2 through 6, it may apply to 

the U.S. competent authority for discretionary relief. 

Paragraph 8 

Paragraph 8 defines several key terms for purposes of Article 21. Each of the 

defined terms is discussed above in the context in which it is used. 

ARTICLE 22 (RELIEF FROM DOUBLE TAXATION) 

This Article describes the manner in which each Contracting State undertakes to 

relieve double taxation. The United States uses the foreign tax credit method under its 

internal law, and by treaty. 

Paragraph 1 

Paragraph 1 provides that Belgium will provide relief from double taxation 

through a mixture of the credit and exemption methods. 

Under subparagraph a) Belgium generally adopts the exemption with progression 

method of relieving double taxation with respect to certain income that is taxed by the 

United States. The income subject to exemption is income derived by a resident of 

84
Belgium and taxed by the United States in accordance with the Convention, other than 

dividend, interest and royalty income. Under subparagraph a), Belgium exempts such 

income from taxation, but takes the income into account in determining rate of Belgian 

tax applicable to the remainder of the resident’s income. The exemption provided under 

subparagraph (a) is subject to the provisions of subparagraph (f), discussed below, in 

certain cases where a Belgian resident derives income through a permanent establishment 

in the United States. 

Subparagraph b) provides relief from double taxation for residents of Belgium 

deriving income described in subparagraph a) through certain entities that are created in 

the United States. The subparagraph seeks to coordinate the use of United States entities 

that are so called hybrid entities, in that they are fiscally transparent for United States tax 

purposes (the income of such entities is subject to tax in the hands of the investors of the 

entity), but such entities are viewed as companies under Belgian law. Where a resident 

of Belgium derives income from participation in such entity, the income from such entity 

will generally have been subject to taxation in the United States in the hands of the 

Belgian investor. That is, the investor will be subject to tax in the United States on his 

proportional share of the income of such entity. However, since Belgium views the entity 

as non-fiscally transparent, Belgian tax law will not see income at the investor level until 

there is a distribution of the earnings of such entity. Under Belgian tax law, this 

distribution is viewed as a dividend. Without the relief under this subparagraph, the 

Belgian investor would be double taxed with respect to such income: once in the United 

States when the income was earned and taxed in the hands of the investor, and once in 

Belgium when the earnings are distributed to the investor and Belgium sees a dividend. 

As a consequence, subparagraph b) provides the Belgian investor an exemption with 

respect to the dividend, provided that the investor has been taxed by the United States 

proportionally to his participation in the entity on the income out of which the income 

treated as dividends under Belgian law is paid. 

Subparagraph (b) also provides that the exempted income is the income received 

after deduction of the costs incurred in Belgium or elsewhere in relation to the 

management of the participation in the entity. 

Subparagraph c) provides that dividends that derived by a Belgian company from 

a company resident in the United States, are exempt from the Belgian corporate income 

tax to the extent that such a dividend would have been exempt from Belgian tax if the 

two companies were both residents of Belgium. 

If subparagraph c) does not apply to exempt dividends derived by a Belgian 

resident company from a U.S. resident company, subparagraph d) provides protection 

from double taxation in the form of a credit against Belgian corporate tax. In such cases, 

the Belgian company shall be entitled to credit against its Belgian corporate income tax 

the United States tax levied on the dividends under Article 10 (Dividends). The credit is 

limited to that part of the corporate income tax that is proportionally related to the 

relevant dividends. 

Subparagraph e) generally provides that Belgium will permit a Belgian resident a 

credit against Belgian tax for United States taxes levied on interest or royalties. The 

85
credit of such tax is subject to the provisions of Belgian law concerning foreign tax 

credits. 

Subparagraph f) provides that if a Belgian resident has a permanent establishment 

in the United States, and the losses from such activity have been effectively deducted 

from profits for its taxation in Belgium, then the exemption of subparagraph a) does not 

apply to profits of other taxable periods attributable to the permanent establishment to the 

extent that those profits were exempted from United States tax by reason of the use of 

such losses in the United States. 

Paragraph 2 

The United States agrees, in paragraph 2, to allow to its citizens and residents a 

credit against U.S. tax for income taxes paid or accrued to Belgium. Paragraph 2 also 

provides that Belgium's covered taxes are income taxes for U.S. purposes. This provision 

is based on the Department of the Treasury's review of Belgium's laws. 

Subparagraph (b) provides for a deemed-paid credit, consistent with section 902 

of the Code, to a U.S. corporation in respect of dividends received from a corporation 

resident in Belgium of which the U.S. corporation owns at least 10 percent of the voting 

stock. This credit is for the tax paid by the corporation to Belgium on the profits out of 

which the dividends are considered paid. 

The credits allowed under paragraph 2 are allowed in accordance with the 

provisions and subject to the limitations of U.S. law, as that law may be amended over 

time, so long as the general principle of the Article, that is, the allowance of a credit, is 

retained. Thus, although the Convention provides for a foreign tax credit, the terms of 

the credit are determined by the provisions, at the time a credit is given, of the U.S. 

statutory credit. 

Therefore, the U.S. credit under the Convention is subject to the various 

limitations of U.S. law (see, e.g., Code sections 901-908). For example, the credit against 

U.S. tax generally is limited to the amount of U.S. tax due with respect to net foreign 

source income within the relevant foreign tax credit limitation category (see Code section 

904(a) and (d)), and the dollar amount of the credit is determined in accordance with U.S. 

currency translation rules (see, e.g., Code section 986). Similarly, U.S. law applies to 

determine carryover periods for excess credits and other inter-year adjustments. 

Paragraph 3 

Paragraph 3 provides a re-sourcing rule for gross income covered by paragraph 2. 

Paragraph 3 is intended to ensure that a U.S. resident can obtain an appropriate amount of 

U.S. foreign tax credit for income taxes paid to Belgium when the Convention assigns to 

Belgium primary taxing rights over an item of gross income. 

Accordingly, if the Convention allows Belgium to tax an item of gross income (as 

defined under U.S. law) derived by a resident of the United States, the United States will 

treat that item of gross income as gross income from sources within Belgium for U.S. 

foreign tax credit purposes. In the case of a U.S.-owned foreign corporation, however, 

86
section 904(h)(10) may apply for purposes of determining the U.S. foreign tax credit with 

respect to income subject to this re-sourcing rule. Section 904(h)(10) generally applies 

the foreign tax credit limitation separately to re-sourced income. Furthermore, the 

paragraph 3 resourcing rule applies to gross income, not net income. Accordingly, U.S. 

expense allocation and apportionment rules, see, e.g., Treas. Reg. section 1.861-9, 

continue to apply to income resourced under paragraph 3. 

Paragraph 4 

Paragraph 4 provides special rules for the tax treatment in both States of certain 

types of income. Subparagraph (a) addresses income arising in a State other than the 

United States or Belgium that is derived by U.S. citizens, former citizens or former longterm residents who are residents of Belgium. The remaining subparagraphs address 

income derived from U.S. sources by such persons. 

U.S. citizens, regardless of residence, are subject to U.S. tax at ordinary 

progressive rates on their worldwide income. In certain cases, the United States may 

impose taxation on former U.S. citizens or former long-term residents of the United 

States (referred to in this paragraph as “section 877 taxpayers”). Because of these rules, 

the U.S. tax on income of U.S. citizens or section 877 taxpayers who are resident in 

Belgium may exceed the U.S. tax that may be imposed under the Convention on income 

derived by a resident of Belgium who is not a U.S. citizen. In general, the provisions of 

paragraph 4 ensure that Belgium does not bear the cost of U.S. taxation of U.S. citizens 

or section 877 taxpayers who are residents of Belgium. 

Subparagraph (a) provides that where a U.S. citizen or section 877 taxpayer that is 

a resident of Belgium derives income from sources arising in third countries, as 

determined under the laws of Belgium, the taxation of such amounts by the United States 

shall not affect the taxation in Belgium of such income. Thus, no agreement is reached 

under Article 22 of the Convention for relieving double taxation with respect to such 

income. The provisions of Article 24 (Mutual Agreement Procedure) may be used to 

alleviate double taxation in such cases. 

Subparagraph (b) provides special credit rules for Belgium with respect to U.S. 

source income or income treated as U.S. source income under section 877 of the Code 

(referred to in the following explanation as U.S. source income). These rules apply to 

items of U.S. source income that would be either exempt from U.S. tax or subject to 

reduced rates of U.S. tax under the provisions of the Convention if they had been 

received by a resident of Belgium who is not a U.S. citizen or section 877 taxpayer. The 

tax credit allowed in Belgium under subparagraph 4(b) with respect to such items need 

not exceed the U.S. tax that may be imposed under the Convention, other than tax 

imposed solely by reason of the U.S. citizenship of the taxpayer or application of section 

877 of the Code under the provisions of the saving clause of paragraph 4 of Article 1 

(General Scope). 

For example, if a U.S. citizen resident in Belgium receives portfolio dividends 

from sources within the United States, the foreign tax credit granted by Belgium would 

be limited to 15 percent of the dividend -- the U.S. tax that may be imposed under 

87
subparagraph (b) of paragraph 2 of Article 10 (Dividends) -- even if the shareholder is 

subject to U.S. net income tax because of his U.S. citizenship. With respect to royalty or 

interest income, Belgium would allow no foreign tax credit, because its residents are 

exempt from U.S. tax on these classes of income under the provisions of Articles 11 

(Interest) and 12 (Royalties). 

Paragraph 4(c) eliminates the potential for double taxation that can arise because 

subparagraph 4(b) provides that Belgium need not provide full relief for the U.S. tax 

imposed on its citizens or section 877 taxpayers resident in Belgium. The subparagraph 

provides that the United States will credit the income tax paid or accrued to Belgium, 

after the application of subparagraph 4(b). It further provides that in allowing the credit, 

the United States will not reduce its tax below the amount that is taken into account in 

Belgium in applying subparagraph 4(b). That is, at a minimum, the United States will 

preserve its ability to tax the U.S. citizen or section 877 taxpayer to the extent that it 

would be entitled to impose source country taxation if the income was earned by a 

Belgian resident that is not a U.S. citizen or section 877 taxpayer. 

Since the income described in paragraph 4(b) generally will be U.S. source 

income, or so treated under section 877 of the Code, special rules are required to resource some of the income to Belgium in order for the United States to be able to credit 

the tax paid to Belgium. This resourcing is provided for in subparagraph 4(d), which 

deems the items of income referred to in subparagraph 4(b) to be from foreign sources to 

the extent necessary to avoid double taxation under paragraph 4(c). Subparagraph 

3(d)(iii) of Article 24 (Mutual Agreement Procedure) provides a mechanism by which the 

competent authorities can resolve any disputes regarding whether income is from sources 

within the United States. 

The following two examples illustrate the application of paragraph 4 in the case 

of a U.S.-source portfolio dividend received by a U.S. citizen resident in Belgium. In 

both examples, the U.S. rate of tax on residents of Belgium, under subparagraph (b) of 

paragraph 2 of Article 10 (Dividends) of the Convention, is 15 percent. In both examples, 

the U.S. income tax rate on the U.S. citizen is 35 percent. In example 1, the rate of 

income tax imposed in Belgium on its resident (the U.S. citizen) is 25 percent (below the 

U.S. rate), and in example 2, the rate imposed on its resident is 40 percent (above the U.S. 

rate). The assumptions with respect to the rate of Belgium tax are intended only for 

illustrative purposes. 

Example 1 Example 2 

 Subparagraph (b) 

U.S. dividend declared $100.00 $100.00 

 Notional U.S. withholding tax (Article 10(2)(b)) 15.00 15.00

 Taxable income in Belgium 100.00 100.00

 Belgium tax before credit 25.00 40.00

 Less: tax credit for notional U.S. withholding tax 15.00 15.00

 Net post-credit tax paid to Belgium 10.00 25.00 

88
 Subparagraphs (c) and (d)

 U.S. pre-tax income $100.00 $100.00

 U.S. pre-credit citizenship tax 35.00 35.00 

Notional U.S. withholding tax 15.00 15.00

 U.S. tax eligible to be offset by credit 20.00 20.00

 Tax paid to Belgium 10.00 25.00 

 Income re-sourced from U.S. to Belgium (see below) 28.57 57.14 

 U.S. pre-credit tax on re-sourced income 10.00 20.00

 U.S. credit for tax paid to Belgium 10.00 20.00 

 Net post-credit U.S. tax 10.00 0.00 

 Total U.S. tax 25.00 15.00 

In both examples, in the application of subparagraph (b), Belgium credits a 15 

percent U.S. tax against its residence tax on the U.S. citizen. In the first example, the net 

tax paid to Belgium after the foreign tax credit is $10.00; in the second example, it is 

$25.00. In the application of subparagraphs (c) and (d), from the U.S. tax due before 

credit of $35.00, the United States subtracts the amount of the U.S. source tax of $15.00, 

against which no U.S. foreign tax credit is allowed. This subtraction ensures that the 

United States collects the tax that it is due under the Convention as the State of source. 

In both examples, given the 35 percent U.S. tax rate, the maximum amount of U.S. 

tax against which credit for the tax paid to Belgium may be claimed is $20 ($35 U.S. tax 

minus $15 U.S. withholding tax). Initially, all of the income in both examples was from 

sources within the United States. For a U.S. foreign tax credit to be allowed for the full 

amount of the tax paid to Belgium, an appropriate amount of the income must be 

resourced to Belgium under subparagraph (d). 

The amount that must be re-sourced depends on the amount of tax for which the 

U.S. citizen is claiming a U.S. foreign tax credit. In example 1, the tax paid to Belgium 

was $10. For this amount to be creditable against U.S. tax, $28.57 ($10 tax divided by 35 

percent U.S. tax rate) must be resourced to Belgium. When the tax is credited against the 

$10 of U.S. tax on this resourced income, there is a net U.S. tax of $10 due after credit 

($20 U.S. tax eligible to be offset by credit, minus $10 tax paid to Belgium). Thus, in 

example 1, there is a total of $25 in U.S. tax ($15 U.S. withholding tax plus $10 residual 

U.S. tax). 

In example 2, the tax paid to Belgium was $25, but, because the United States 

subtracts the U.S. withholding tax of $15 from the total U.S. tax of $35, only $20 of U.S. 

taxes may be offset by taxes paid to Belgium. Accordingly, the amount that must be 

resourced to Belgium is limited to the amount necessary to ensure a U.S. foreign tax 

credit for $20 of tax paid to Belgium, or $57.14 ($20 tax paid to Belgium divided by 35 

percent U.S. tax rate). When the tax paid to Belgium is credited against the U.S. tax on 

this re-sourced income, there is no residual U.S. tax ($20 U.S. tax minus $25 tax paid to 

Belgium, subject to the U.S. limit of $20). Thus, in example 2, there is a total of $15 in 

U.S. tax ($15 U.S. withholding tax plus $0 residual U.S. tax). Because the tax paid to 

Belgium was $25 and the U.S. tax eligible to be offset by credit was $20, there is $5 of 

excess foreign tax credit available for carryover. 

89
Relationship to other Articles 

By virtue of subparagraph (a) of paragraph 5 of Article 1 (General Scope), Article 

22 is not subject to the saving clause of paragraph 4 of Article 1. Thus, the United States 

will allow a credit to its citizens and residents in accordance with the Article, even if such 

credit were to provide a benefit not available under the Code (such as the re-sourcing 

provided by paragraph 3 and subparagraph 4(d)). 

ARTICLE 23 (NON-DISCRIMINATION) 

This Article ensures that nationals of a Contracting State, in the case of paragraph 

1, and residents of a Contracting State, in the case of paragraphs 2 through 5, will not be 

subject, directly or indirectly, to discriminatory taxation in the other Contracting State. 

Not all differences in tax treatment, either as between nationals of the two States, or 

between residents of the two States, are violations of the prohibition against 

discrimination. Rather, the nondiscrimination obligations of this Article apply only if the 

nationals or residents of the two States are comparably situated. 

Each of the relevant paragraphs of the Article provides that two persons that are 

comparably situated must be treated similarly. Although the actual words differ from 

paragraph to paragraph (e.g., paragraph 1 refers to two nationals "in the same 

circumstances," and paragraph 2 refers to two enterprises "carrying on the same 

activities"), the common underlying premise is that if the difference in treatment is 

directly related to a tax-relevant difference in the situations of the domestic and foreign 

persons being compared, that difference is not to be treated as discriminatory (i.e., if one 

person is taxable in a Contracting State on worldwide income and the other is not, or tax 

may be collectible from one person at a later stage, but not from the other, distinctions in 

treatment would be justified under paragraph 1). Other examples of such factors that can 

lead to nondiscriminatory differences in treatment are noted in the discussions of each 

paragraph. 

The operative paragraphs of the Article also use different language to identify the 

kinds of differences in taxation treatment that will be considered discriminatory. For 

example, paragraph 1 speaks of "any taxation or any requirement connected therewith 

that is more burdensome," while paragraph 2 specifies that a tax "shall not be less 

favorably levied." Regardless of these differences in language, only differences in tax 

treatment that materially disadvantage the foreign person relative to the domestic person 

are properly the subject of the Article. 

Paragraph 1 

Paragraph 1 provides that a national of one Contracting State may not be subject 

to taxation or connected requirements in the other Contracting State that are more 

burdensome than the taxes and connected requirements imposed upon a national of that 

other State in the same circumstances. The OECD Model prohibits taxation that is "other 

than or more burdensome" than that imposed on U.S. persons. This Convention omits the 

reference to taxation that is "other than" that imposed on U.S. persons because the only 

relevant question under this provision should be whether the requirement imposed on a 

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national of the other Contracting State is more burdensome. A requirement may be 

different from the requirements imposed on U.S. nationals without being more 

burdensome. 

The term "national" in relation to a Contracting State is defined in subparagraph 

1(j) of Article 3 (General Definitions). The term includes both individuals and juridical 

persons. A national of a Contracting State is afforded protection under this paragraph 

even if the national is not a resident of either Contracting State. Thus, a U.S. citizen who 

is resident in a third country is entitled, under this paragraph, to the same treatment in 

Belgium as a national of Belgium who is in similar circumstances (i.e., presumably one 

who is resident in a third State). 

As noted above, whether or not the two persons are both taxable on worldwide 

income is a significant circumstance for this purpose. For this reason, paragraph 1 

specifically states that the United States is not obligated to apply the same taxing regime 

to a national of Belgium who is not resident in the United States as it applies to a U.S. 

national who is subject to tax on a worldwide basis but who is not resident in the United 

States. U.S. citizens who are not resident in the United States but who are, nevertheless, 

subject to U.S. tax on their worldwide income are not in the same circumstances with 

respect to U.S. taxation as citizens of Belgium who are not U.S. residents. Thus, for 

example, Article 23 would not entitle a national of Belgium residing in a third country to 

taxation at graduated rates on U.S. source dividends or other investment income that 

applies to a U.S. citizen residing in the same third country. 

Paragraph 2 

Paragraph 2 of the Article, provides that a Contracting State may not tax a 

permanent establishment of an enterprise of the other Contracting State less favorably 

than an enterprise of that first-mentioned State that is carrying on the same activities. 

The fact that a U.S. permanent establishment of an enterprise of Belgium is 

subject to U.S. tax only on income that is attributable to the permanent establishment, 

while a U.S. corporation engaged in the same activities is taxable on its worldwide 

income is not, in itself, a sufficient difference to provide different treatment for the 

permanent establishment. There are cases, however, where the two enterprises would not 

be similarly situated and differences in treatment may be warranted. For instance, it 

would not be a violation of the non-discrimination protection of paragraph 2 to require 

the foreign enterprise to provide information in a reasonable manner that may be different 

from the information requirements imposed on a resident enterprise, because information 

may not be as readily available to the Internal Revenue Service from a foreign as from a 

domestic enterprise. Similarly, it would not be a violation of paragraph 2 to impose 

penalties on persons who fail to comply with such a requirement (see, e.g., sections 

874(a) and 882(c)(2)). Further, a determination that income and expenses have been 

attributed or allocated to a permanent establishment in conformity with the principles of 

Article 7 (Business Profits) implies that the attribution or allocation was not 

discriminatory. 

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Section 1446 of the Code imposes on any partnership with income that is 

effectively connected with a U.S. trade or business the obligation to withhold tax on 

amounts allocable to a foreign partner. In the context of the Convention, this obligation 

applies with respect to a share of the partnership income of a partner resident in Belgium, 

and attributable to a U.S. permanent establishment. There is no similar obligation with 

respect to the distributive shares of U.S. resident partners. It is understood, however, that 

this distinction is not a form of discrimination within the meaning of paragraph 2 of the 

Article. No distinction is made between U.S. and non-U.S. partnerships, since the law 

requires that partnerships of both U.S. and non-U.S. domicile withhold tax in respect of 

the partnership shares of non-U.S. partners. Furthermore, in distinguishing between U.S. 

and non-U.S. partners, the requirement to withhold on the non-U.S. but not the U.S. 

partner's share is not discriminatory taxation, but, like other withholding on nonresident 

aliens, is merely a reasonable method for the collection of tax from persons who are not 

continually present in the United States, and as to whom it otherwise may be difficult for 

the United States to enforce its tax jurisdiction. If tax has been over-withheld, the partner 

can, as in other cases of over-withholding, file for a refund. 

Paragraph 3 

Paragraph 3 makes clear that the provisions of paragraphs 1 and 2 do not obligate 

a Contracting State to grant to a resident of the other Contracting State any tax 

allowances, reliefs, etc., that it grants to its own residents on account of their civil status 

or family responsibilities. Thus, if a sole proprietor who is a resident of Belgium has a 

permanent establishment in the United States, in assessing income tax on the profits 

attributable to the permanent establishment, the United States is not obligated to allow to 

the resident of Belgium the personal allowances for himself and his family that he would 

be permitted to take if the permanent establishment were a sole proprietorship owned and 

operated by a U.S. resident, despite the fact that the individual income tax rates would 

apply. 

Paragraph 4 

Paragraph 4 prohibits discrimination in the allowance of deductions. When a 

resident or an enterprise of a Contracting State pays interest, royalties or other 

disbursements to a resident of the other Contracting State, the first-mentioned 

Contracting State must allow a deduction for those payments in computing the taxable 

profits of the resident or enterprise as if the payment had been made under the same 

conditions to a resident of the first-mentioned Contracting State. Paragraph 4, however, 

does not require a Contracting State to give non-residents more favorable treatment than 

it gives to its own residents. Consequently, a Contracting State does not have to allow 

non-residents a deduction for items that are not deductible under its domestic law (for 

example, expenses of a capital nature). 

An exception to the rule of paragraph 4 is provided for cases where the provisions 

of paragraph 1 of Article 9 (Associated Enterprises), paragraph 6 of Article 11 (Interest) 

or paragraph 4 of Article 12 (Royalties) apply. All of these provisions permit the denial 

of deductions in certain circumstances in respect of transactions between related persons. 

Neither State is forced to apply the non-discrimination principle in such cases. The 

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exception with respect to paragraph 6 of Article 11 would include the denial or deferral 

of certain interest deductions under Code section 163(j). 

Paragraph 4 also provides that any debts of a resident of a Contracting State to a 

resident of the other Contracting State are deductible in the first-mentioned Contracting 

State for purposes of computing the taxable capital of the enterprise under the same 

conditions as if the debt had been contracted to a resident of the first-mentioned 

Contracting State. Even though, for general purposes, the Convention covers only 

income taxes, under paragraph 7 of this Article, the nondiscrimination provisions apply to 

all taxes levied in both Contracting States, at all levels of government. Thus, this 

provision may be relevant for both States. Belgium may have capital taxes and in the 

United States such taxes frequently are imposed by local governments. 

Paragraph 5 

Paragraph 5 requires that a Contracting State not impose more burdensome 

taxation or connected requirements on an enterprise of that State that is wholly or partly 

owned or controlled, directly or indirectly, by one or more residents of the other 

Contracting State than the taxation or connected requirements that it imposes on other 

similar enterprises of that first-mentioned Contracting State. For this purpose it is 

understood that "similar" refers to similar activities or ownership of the enterprise. 

This rule, like all non-discrimination provisions, does not prohibit differing 

treatment of entities that are in differing circumstances. Rather, a protected enterprise is 

only required to be treated in the same manner as other enterprises that, from the point of 

view of the application of the tax law, are in substantially similar circumstances both in 

law and in fact. The taxation of a distributing corporation under section 367(e) on an 

applicable distribution to foreign shareholders does not violate paragraph 5 of the Article 

because a foreign-owned corporation is not similar to a domestically-owned corporation 

that is accorded non-recognition treatment under sections 337 and 355. 

For the reasons given above in connection with the discussion of paragraph 2 of 

the Article, it is also understood that the provision in section 1446 of the Code for 

withholding of tax on non-U.S. partners does not violate paragraph 5 of the Article. 

It is further understood that the ineligibility of a U.S. corporation with nonresident 

alien shareholders to make an election to be an "S" corporation does not violate 

paragraph 5 of the Article. If a corporation elects to be an S corporation, it is generally 

not subject to income tax and the shareholders take into account their pro rata shares of 

the corporation's items of income, loss, deduction or credit. (The purpose of the provision 

is to allow an individual or small group of individuals the protections of conducting 

business in corporate form while paying taxes at individual rates as if the business were 

conducted directly.) A nonresident alien does not pay U.S. tax on a net basis, and, thus, 

does not generally take into account items of loss, deduction or credit. Thus, the S 

corporation provisions do not exclude corporations with nonresident alien shareholders 

because such shareholders are foreign, but only because they are not net-basis taxpayers. 

Similarly, the provisions exclude corporations with other types of shareholders where the 

purpose of the provisions cannot be fulfilled or their mechanics implemented. For 

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example, corporations with corporate shareholders are excluded because the purpose of 

the provision to permit individuals to conduct a business in corporate form at individual 

tax rates would not be furthered by their inclusion. 

Finally, it is understood that paragraph 5 does not require a Contracting State to 

allow foreign corporations to join in filing a consolidated return with a domestic 

corporation or to allow similar benefits between domestic and foreign enterprises. 

Paragraph 6 

Paragraph 6 of the Article confirms that no provision of the Article will prevent 

either Contracting State from imposing the branch profits tax described in paragraph 10 

of Article 10 (Dividends). 

Paragraph 7 

As noted above, notwithstanding the specification of taxes covered by the 

Convention in Article 2 (Taxes Covered) for general purposes, for purposes of providing 

nondiscrimination protection this Article applies to taxes of every kind and description 

imposed by a Contracting State or a political subdivision or local authority thereof. 

Customs duties are not considered to be taxes for this purpose. 

Relationship to Other Articles 

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to 

this Article by virtue of the exceptions in paragraph 5(a) of Article 1. Thus, for example, 

a U.S. citizen who is a resident of Belgium may claim benefits in the United States under 

this Article. 

Nationals of a Contracting State may claim the benefits of paragraph 1 regardless 

of whether they are entitled to benefits under Article 21 (Limitation on Benefits), because 

that paragraph applies to nationals and not residents. They may not claim the benefits of 

the other paragraphs of this Article with respect to an item of income unless they are 

generally entitled to treaty benefits with respect to that income under a provision of 

Article 21. 

ARTICLE 24 (MUTUAL AGREEMENT PROCEDURE) 

This Article provides the mechanism for taxpayers to bring to the attention of 

competent authorities issues and problems that may arise under the Convention. It also 

provides the authority for cooperation between the competent authorities of the 

Contracting States to resolve disputes and clarify issues that may arise under the 

Convention. The competent authorities of the two Contracting States are identified in 

paragraph 1(g) of Article 3 (General Definitions). 

Paragraph 1 

This paragraph provides that where a resident of a Contracting State considers 

that the actions of one or both Contracting States will result in taxation that is not in 

accordance with the Convention he may present his case to the competent authority of 

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either Contracting State. This rule is more generous than in most treaties, which 

generally allow taxpayers to bring competent authority cases only to the competent 

authority of their country of residence, or citizenship/nationality. Under this more 

generous rule, a U.S. permanent establishment of a corporation resident in Belgium that 

faces inconsistent treatment in the two countries would be able to bring its complaint to 

the U.S. competent authority. If the U.S. competent authority can resolve the issue on its 

own, then the taxpayer need never involve the Belgian competent authority. Thus, the 

rule provides flexibility that might result in greater efficiency. 

Although the typical cases brought under this paragraph will involve economic 

double taxation arising from transfer pricing adjustments, the scope of this paragraph is 

not limited to such cases. For example, a taxpayer could request assistance from the 

competent authority if one Contracting State determines that the taxpayer has received 

deferred compensation taxable at source under Article 14 (Income from Employment), 

while the taxpayer believes that such income should be treated as a pension that is taxable 

only in his country of residence pursuant to Article 17 (Pensions, Social Security, 

Annuities, Alimony, and Child Support). 

It is not necessary for a person bringing a complaint first to have exhausted the 

remedies provided under the national laws of the Contracting States before presenting a 

case to the competent authorities, nor does the fact that the statute of limitations may 

have passed for seeking a refund preclude bringing a case to the competent authority. 

Paragraph 1 provides that a case must be presented within three years from the first 

notification of the action resulting in double taxation not in accordance with the 

provisions of the Convention. 

The Protocol provides that the term "first notification of the action resulting in 

taxation not in accordance with the provisions of the Convention" means in the case of 

Belgium, the date on which the notice of assessment containing an assessment or 

supplementary assessment is sent to the person who considers that the taxation provided 

for in such assessment or supplementary assessment is contrary to the provisions of the 

Convention; and in the case of the United States, the date on which the taxpayer receives 

a notice of proposed adjustment or of assessment, whichever is earlier. 

Paragraph 2 

Paragraph 2 sets out the framework within which the competent authorities will 

deal with cases brought by taxpayers under paragraph 1. It provides that, if the 

competent authority of the Contracting State to which the case is presented judges the 

case to have merit, and cannot reach a unilateral solution, it shall seek an agreement with 

the competent authority of the other Contracting State pursuant to which taxation not in 

accordance with the Convention will be avoided. During the period that a proceeding 

under this Article is pending, any collection procedures shall be suspended. 

Paragraph 3 

Paragraph 3 authorizes the competent authorities to resolve difficulties or doubts 

that may arise as to the application or interpretation of the Convention. The paragraph 

includes a non-exhaustive list of examples of the kinds of matters about which the 

95
competent authorities may reach agreement. This list is purely illustrative; it does not 

grant any authority that is not implicitly present as a result of the introductory sentence of 

paragraph 3. 

The competent authorities may, for example, agree to the same allocation of 

income, deductions, credits or allowances between an enterprise in one Contracting State 

and its permanent establishment in the other (or between permanent establishments of a 

third country enterprise that are situated in the Contracting States) or between related 

persons. These allocations are to be made in accordance with the arm's length principle 

underlying Article 7 (Business Profits) and Article 9 (Associated Enterprises). 

Agreements reached under these subparagraphs may include agreement on a 

methodology for determining an appropriate transfer price, common treatment of a 

taxpayer's cost sharing arrangement, or upon an acceptable range of results under that 

methodology. 

As indicated in subparagraph (d), the competent authorities also may agree to 

settle a variety of conflicting applications of the Convention. They may agree to settle 

conflicts regarding the characterization of particular items of income, the characterization 

of persons, the application of source rules to particular items of income, the meaning of a 

term. 

They also may agree as to advance pricing arrangements. They also may agree as 

to the application of the provisions of domestic law regarding penalties, fines, and 

interest in a manner consistent with the purposes of the Convention. 

Since the list under paragraph 3 is not exhaustive, the competent authorities may 

reach agreement on issues not enumerated in paragraph 3 if necessary to avoid double 

taxation. For example, the competent authorities may seek agreement on a uniform set of 

standards for the use of exchange rates. Agreements reached by the competent 

authorities under paragraph 3 need not conform to the internal law provisions of either 

Contracting State. 

Finally, paragraph 3 authorizes the competent authorities to consult for the 

purpose of resolving any difficulties or doubts arising as to the interpretation or 

application of the Convention. This provision is intended to permit the competent 

authorities to implement the treaty in particular cases in a manner that is consistent with 

its expressed general purposes. 

Paragraph 4 

Paragraph 4 authorizes the competent authorities to request the disclosure of 

information from any person who may have such information relevant to the MAP 

proceeding to the extent necessary to facilitate the resolution of the case. The paragraph 

provides that a competent authority may conduct investigations and hearings 

notwithstanding any time limits in their domestic laws that would otherwise bar such 

requests for information. Finally, paragraph 4 provides, consistent with paragraph 2 of 

the U.S. Model, that any agreement is to be implemented even if such implementation 

otherwise would be barred by the statute of limitations or by some other procedural 

96
limitation, such as a closing agreement. Paragraph 4, however, does not prevent the 

application of domestic-law procedural limitations that give effect to the agreement (e.g., 

a domestic-law requirement that the taxpayer file a return reflecting the agreement within 

one year of the date of the agreement). 

Where the taxpayer has entered a closing agreement (or other written settlement) 

with the United States before bringing a case to the competent authorities, the U.S. 

competent authority will endeavor only to obtain a correlative adjustment from the other 

Contracting State. See Rev. Proc. 2006-54, 2006-49 I.R.B. 1035, § 7.05. Because, as 

specified in paragraph 2 of Article 1 (General Scope), the Convention cannot operate to 

increase a taxpayer's liability, temporal or other procedural limitations can be overridden 

only for the purpose of making refunds and not to impose additional tax. 

Paragraph 5 

Paragraph 5 provides that the competent authorities may agree on administrative 

measures to carry out the provisions of the Convention, particularly with respect to 

documentation to be furnished by a resident to support a claim for reduced tax under the 

Convention. 

Paragraph 6 

Paragraph 6 provides that the competent authorities may communicate with each 

other directly for the purpose of reaching an agreement. This makes clear that the 

competent authorities of the two Contracting States may communicate without going 

through diplomatic channels. Such communication may be in various forms, including, 

where appropriate, through face-to-face meetings of representatives of the competent 

authorities. 

Triangular competent authority solutions 

International tax cases may involve more than two taxing jurisdictions (e.g., 

transactions among a parent corporation resident in country A and its subsidiaries 

resident in countries B and C). As long as there is a complete network of treaties among 

the three countries, it should be possible, under the full combination of bilateral 

authorities, for the competent authorities of the three States to work together on a threesided solution. Although country A may not be able to give information received under 

Article 24 (Exchange of Information) from country B to the authorities of country C, if 

the competent authorities of the three countries are working together, it should not be a 

problem for them to arrange for the authorities of country B to give the necessary 

information directly to the tax authorities of country C, as well as to those of country A. 

Each bilateral part of the trilateral solution must, of course, not exceed the scope of the 

authority of the competent authorities under the relevant bilateral treaty. 

Paragraph 7 

Paragraphs 7 and 8 of the Convention and paragraph 6 of the Protocol provide a 

mandatory binding arbitration procedure. 

97
A case shall be resolved through arbitration when the competent authorities have 

endeavored but are unable to reach a complete agreement regarding a case through 

negotiation and the following three conditions are satisfied. First, tax returns have been 

filed with at least one of the Contracting States with respect to the taxable years at issue 

in the case. Second, the case is not a case that the competent authorities agree before the 

date on which arbitration proceedings would otherwise have begun, is not suitable for 

determination by arbitration. Third, all concerned persons and their authorized 

representatives agree, according to the provisions of subparagraph d) of paragraph 8, not 

to disclose to any other person any information received during the course of the 

arbitration proceeding from either the Contracting States or the arbitration board, other 

than the determination of the board (confidentiality agreement). The confidentiality 

agreement may also be executed by any concerned person that has the legal authority to 

bind any other concerned person on the matter. 

Paragraph 8 

Subparagraph a) of paragraph 8 provides that the term “concerned person” means 

the person that brought the case to competent authority for consideration under Article 24 

and includes all other persons, if any, whose tax liability to either Contracting State may 

be directly affected by a mutual agreement arising from that consideration. For example, 

a concerned person does not only include a U.S. corporation that brings a transfer pricing 

case with respect to a transaction entered into with its Belgian subsidiary for resolution to 

the U.S. competent authority, but also the Belgian subsidiary, which may have a 

correlative adjustment as a result of the resolution of the case. 

Subparagraph c) provides that an arbitration proceeding begins on the later of two 

dates: two years from the information necessary to undertake substantive consideration 

for mutual agreement has been received by both competent authorities. 

Clause p) of paragraph 6 of the Protocol provides that each competent authority 

will confirm in writing to the other competent authority and to the concerned persons the 

date of its receipt of the information necessary to undertake substantive consideration for 

a mutual agreement. In the case of the United States, this information is (i) the 

information that must be submitted to the U.S. competent authority under Section 4.05 of 

Rev. Proc. 2002-52, 2002-2 C.B. 242 (since updated to Rev. Proc. 2006-54, 2006-49 

I.R.B. 1035) §7.05, and (ii) for cases initially submitted as a request for an Advance 

Pricing Agreement, the information that must be submitted to the Internal Revenue 

Service under Rev. Proc. 2006-9, 2006-2 I.R.B. 278, as it might be amended from time to 

time. In the case of Belgium, this information is any information that would be required 

under instructions or commentaries published by the Federal Public Service Finance. 

The information will not be considered received until both competent authorities receive 

copies of all materials submitted by concerned persons in connection with the mutual 

agreement procedure. 

Paragraph 6 of the Protocol provides for a several procedural rules once an 

arbitration proceeding under paragraph 7 of Article 24 (“Proceeding”) has commenced, 

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but the competent authorities may modify or supplement these rules as necessary. In 

addition, the arbitration board may adopt any procedures necessary for the conduct of its 

business, provided the procedures are not inconsistent with any provision of Article 24 of 

the Convention. 

Subparagraph (e) of paragraph 6 of the Protocol provides that each Contracting 

State has 60 days from the date on which the Proceeding begins to send a written 

communication to the other Contracting State appointing one member of the arbitration 

board. Within 60 days of the date the second of such communications is sent, these two 

board members will appoint a third member to serve as the chair of the board. The chair 

may not be a citizen of either Contracting State. In the event that any members of the 

board are not appointed (including as a result of the failure of the two members appointed 

by the Contracting States to agree on a third member) by the requisite date, the remaining 

members are appointed by the highest ranking member of the Secretariat at the Centre for 

Tax Policy and Administration of the Organisation for Economic Co-operation and 

Development (OECD) who is not a citizen of either Contracting State, by written notice 

to both Contracting States within 60 days of the date of such failure. 

Clause (g) of paragraph 6 of the Protocol establishes deadlines for submission of 

materials by the Contracting States to the arbitration board. Each competent authority has 

60 days from the date of appointment of the chair to submit a Proposed Resolution 

describing the proposed disposition of the specific monetary amounts of income, expense 

or taxation at issue in the case, and a supporting Position Paper. Copies of each State’s 

submissions are to be provided by the board to the other Contracting State on the date the 

later of the submissions is submitted to the board. Each of the Contracting States may 

submit a Reply Submission to the board within 120 days of the appointment of the chair 

to address points raised in the other State’s Proposed Resolution or Position Paper. If one 

Contracting State fails to submit a Proposed Resolution within the requisite time, the 

Proposed Resolution of the other Contracting State is deemed to be the determination of 

the arbitration board. No other information may be supplied to the arbitration board, 

unless it requests additional information. Copies of any such requested information, 

along with the board’s request, must be provided to the other Contracting State on the 

date the request or response is submitted. 

All communication with the board is to be in writing between the chair of the 

board and the designated competent authorities with the exception of communication 

regarding logistical matters. 

In making its determination the arbitration board will apply the following 

authorities as necessary and in descending order of relevance: (i) the provisions of the 

Convention, (ii) any agreed commentaries or explanation of the Contracting States 

concerning the Convention, (iii) the laws of the Contracting States to the extent they are 

not inconsistent with each other, and (iv) any OECD Commentary, Guidelines or Reports 

regarding relevant analogous portions of the OECD Model Tax Convention. 

The arbitration board must deliver a determination in writing to the Contracting 

States within 6 months of the appointment of the chair. The determination must be one 

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of the two Proposed Resolutions submitted by the Contracting States. The determination 

may only provide a determination regarding the amount of income, expense or tax 

reportable to the Contracting States. The determination has no precedential value and 

consequently the rationale behind a board’s determination would not be beneficial and 

may not be provided by the board. 

Clause (k) of paragraph 6 of the Protocol provides that, unless any concerned 

person does not accept the decision of the arbitration board, the determination of the 

board constitutes a resolution by mutual agreement under Article 24 and, consequently, is 

binding on both Contracting States. Each concerned person must, within 30 days of 

receiving the determination from the competent authority to which the case was first 

presented, advise that competent authority whether the person accepts the 

determination. In addition, if the case is in litigation, the concerned persons must advise 

the relevant court of their acceptance of the arbitration determination, and withdraw from 

the litigation the issues resolved by the MAP arbitration. The failure to advise the 

competent authority or the relevant court within the requisite time is considered a 

rejection of the determination. If a determination is rejected the case cannot be the subject 

of a subsequent Proceeding. After the commencement of the Proceeding but before a 

decision of the board has been accepted by all concerned persons, the competent 

authorities may reach a mutual agreement to resolve the case and terminate the 

Proceeding. 

For purposes of the arbitration proceeding, the members of the arbitration board 

and their staffs shall be considered “persons or authorities” to whom information may be 

disclosed under Article 25 (Exchange of Information and Administrative 

Assistance). Paragraph 6 of the Protocol provides that all materials prepared in the 

course of, or relating to, the Proceeding are considered information exchanged between 

the Contracting States. No information relating to the Proceeding or the board’s 

determination may be disclosed by members of the arbitration board or their staffs or by 

either competent authority, except as permitted by the Convention and the domestic laws 

of the Contracting States. Members of the arbitration board and their staffs must agree in 

statements sent to each of the Contracting States in confirmation of their appointment to 

the arbitration board to abide by and be subject to the confidentiality and nondisclosure 

provisions of Article 25 of the Convention and the applicable domestic laws of the 

Contracting States, with the most restrictive of the provisions applying. 

The applicable domestic law of the Contracting States determines the treatment of 

any interest or penalties associated with a competent authority agreement achieved 

through arbitration. 

In general, fees and expenses are borne equally by the Contracting States, 

including the cost of translation services. However, meeting facilities, related resources, 

financial management, other logistical support, and general and administrative 

coordination of the Proceeding will be provided, at its own cost, by the Contracting State 

whose competent authority initiated the mutual agreement proceedings. In general, the 

fees of members of the arbitration board will be set at the fixed amount of $2,000 per day 

100
(or the equivalent amount in euro). The expenses of members of the board will be set in 

accordance with the International Centre for Settlement of Investment Disputes (ICSID) 

Schedule of Fees for arbitrators (in effect on the date on which the arbitration board 

proceedings begin). The competent authorities may amend the set fees and expenses of 

members of the board. All other costs are to be borne by the Contracting State that incurs 

them. 

Treaty termination in relation to competent authority dispute resolution 

A case may be raised by a taxpayer under a treaty with respect to a year 

for which a treaty was in force after the treaty has been terminated. In such a case the 

ability of the competent authorities to act is limited. They may not exchange confidential 

information, nor may they reach a solution that varies from that specified in its law. 

Relationship to Other Articles 

This Article is not subject to the saving clause of paragraph 4 of Article 1 

(General Scope) by virtue of the exceptions in paragraph 5(a) of that Article. Thus, rules, 

definitions, procedures, etc. that are agreed upon by the competent authorities under this 

Article may be applied by the United States with respect to its citizens and residents even 

if they differ from the comparable Code provisions. Similarly, as indicated above, U.S. 

law may be overridden to provide refunds of tax to a U.S. citizen or resident under this 

Article. A person may seek relief under Article 24 regardless of whether he is generally 

entitled to benefits under Article 21 (Limitation on Benefits). As in all other cases, the 

competent authority is vested with the discretion to decide whether the claim for relief is 

justified. 

ARTICLE 25 (EXCHANGE OF INFORMATION AND ADMINISTRATIVE 

ASSISTANCE) 

This Article provides for the exchange of information and administrative 

assistance between the competent authorities of the Contracting States. 

Paragraph 1 

The obligation to obtain and provide information to the other Contracting State is 

set out in Paragraph 1. The information to be exchanged is that which may be relevant 

for carrying out the provisions of the Convention or the domestic laws of the United 

States or of Belgium concerning taxes covered by the Convention. This language 

incorporates the standard in 26 U.S.C. Section 7602 which authorizes the IRS to 

examine "any books, papers, records, or other data which may be relevant or material." 

(Emphasis added.) In United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), 

the Supreme Court stated that the language "may be" reflects Congress's express intention 

to allow the IRS to obtain "items of even potential relevance to an ongoing investigation, 

without reference to its admissibility." (Emphasis in original.) However, the language 

"may be" would not support a request in which a Contracting State simply asked for 

information regarding all bank accounts maintained by residents of that Contracting State 

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in the other Contracting State, or even all accounts maintained by its residents with 

respect to a particular bank. 

Exchange of information with respect to each State's domestic law is authorized 

to the extent that taxation under domestic law is not contrary to the Convention. Thus, 

for example, information may be exchanged with respect to a covered tax, even if the 

transaction to which the information relates is a purely domestic transaction in the 

requesting State and, therefore, the exchange is not made to carry out the Convention. 

An example of such a case is provided in the OECD Commentary: a company resident in 

the United States and a company resident in Belgium transact business between 

themselves through a third-country resident company. Neither Contracting State has a 

treaty with the third State. To enforce their internal laws with respect to transactions of 

their residents with the third-country company (since there is no relevant treaty in force), 

the Contracting States may exchange information regarding the prices that their residents 

paid in their transactions with the third-country resident. 

Paragraph 1 clarifies that information may be exchanged that relates to the 

assessment or collection of, the enforcement or prosecution in respect of, or the 

determination of appeals in relation to, the taxes covered by the Convention. Thus, the 

competent authorities may request and provide information for cases under examination 

or criminal investigation, in collection, on appeals, or under prosecution. 

Information exchange is not restricted by paragraph 1 of Article 1 (General 

Scope). Accordingly, information may be requested and provided under this article with 

respect to persons who are not residents of either Contracting State. For example, if a 

third- country resident has a permanent establishment in Belgium, and that permanent 

establishment engages in transactions with a U.S. enterprise, the United States could 

request information with respect to that permanent establishment, even though the thirdcountry resident is not a resident of the United States or Belgium. Similarly, if a thirdcountry resident maintains a bank account in Belgium, and the Internal Revenue Service 

has reason to believe that funds in that account should have been reported for U.S. tax 

purposes but have not been so reported, information can be requested from Belgium with 

respect to that person's account, even though that person is not the taxpayer under 

examination. 

Although the term "United States" does not encompass U.S. possessions for most 

purposes of the Convention, Section 7651 of the Code authorizes the Internal Revenue 

Service to utilize the provisions of the Internal Revenue Code to obtain information from 

the U.S. possessions pursuant to a proper request made under Article 25. If necessary to 

obtain requested information, the Internal Revenue Service could issue and enforce an 

administrative summons to the taxpayer, a tax authority (or a government agency in a U.S. 

possession), or a third party located in a U.S. possession. 

Paragraph 2 

Paragraph 2 also provides assurances that any information exchanged will be 

treated as secret, subject to the same disclosure constraints as information obtained under 

the laws of the requesting State. Furthermore, information received may be disclosed 

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only to persons, including courts and administrative bodies, involved in the assessment, 

collection, or administration of, the enforcement or prosecution in respect of, or the 

determination of appeals in relation to, the taxes covered by the Convention. The 

information must be used by these persons in connection with the specified functions. 

Information may also be disclosed to legislative bodies, such as the tax-writing 

committees of Congress and the Government Accountability Office, engaged in the 

oversight of the preceding activities. Information received by these bodies must be for 

use in the performance of their role in overseeing the administration of U.S. tax laws. 

Information received may be disclosed in public court proceedings or in judicial 

decisions. 

Paragraph 3 

Paragraph 3 provides that the obligations undertaken in paragraphs 1 and 2 to 

exchange information do not require a Contracting State to carry out administrative 

measures that are at variance with the laws or administrative practice of either State. Nor 

is a Contracting State required to supply information not obtainable under the laws or 

administrative practice of either State, or to disclose trade secrets or other information, 

the disclosure of which would be contrary to public policy. 

Thus, a requesting State may be denied information from the other State if the 

information would be obtained pursuant to procedures or measures that are broader than 

those available in the requesting State. However, the statute of limitations of the 

Contracting State making the request for information should govern a request for 

information. Thus, the Contracting State of which the request is made should attempt to 

obtain the information even if its own statute of limitations has passed. In many cases, 

relevant information will still exist in the business records of the taxpayer or a third party, 

even though it is no longer required to be kept for domestic tax purposes. 

While paragraph 3 states conditions under which a Contracting State is not 

obligated to comply with a request from the other Contracting State for information, the 

requested State is not precluded from providing such information, and may, at its 

discretion, do so subject to the limitations of its internal law. 

Paragraph 4 

Paragraph 4 provides that when information is requested by a Contracting State in 

accordance with this Article, the other Contracting State is obligated to obtain the 

requested information as if the tax in question were the tax of the requested State, even if 

that State has no direct tax interest in the case to which the request relates. In the absence 

of such a paragraph, some taxpayers have argued that paragraph 3(a) prevents a 

Contracting State from requesting information from a bank or fiduciary that the 

Contracting State does not need for its own tax purposes. This paragraph clarifies that 

paragraph 3 does not impose such a restriction and that a Contracting State is not limited 

to providing only the information that it already has in its own files. 

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Paragraph 5 

Paragraph 5 provides that a Contracting State may not decline to provide 

information because that information is held by financial institutions, nominees or 

persons acting in an agency or fiduciary capacity. Thus, paragraph 5 would effectively 

prevent a Contracting State from relying on paragraph 3 to argue that its domestic bank 

secrecy laws (or similar legislation relating to disclosure of financial information by 

financial institutions or intermediaries) override its obligation to provide information 

under paragraph 1. This paragraph also requires the disclosure of information regarding 

the beneficial owner of an interest in a person, such as the identity of a beneficial owner 

of bearer shares. Consistent with paragraph 6, discussed below, to obtain such 

information, the tax administration of the requested State has the power to ask for the 

disclosure of information and to conduct investigations and hearings notwithstanding any 

contrary provisions in its domestic tax laws. 

Paragraph 7 of the Protocol provides that banking records will be exchanged only 

upon request. Further, a request for bank information must identify both a specific 

taxpayer and a specific bank or financial institution, or the competent authority of the 

requested State may decline to obtain any information that it does not already possess. 

Paragraph 6 

Paragraph 6 provides that in order to obtain information requested under this 

Article, the requested State has the power to ask for the disclosure of information and to 

conduct investigations and hearings despite any time limits required in the domestic tax 

laws of the requested State. Therefore, the requested State will have such powers in 

order to meet its obligations under Article 25 of the Convention, even though it may not 

have such powers for purposes of enforcing its own tax laws due, for example to the 

expiration of its statute of limitations on tax audits. 

Paragraph 7 

Paragraph 7 provides that penalties under the domestic law of the requested State 

shall apply to any person that fails to provide information to the requested State seeking 

to fulfill its obligations under the Article, as if the request for the information and the 

obligation to provide such information was an obligation provided in the domestic tax 

laws of the requested State. 

Paragraph 8 

Paragraph 8 further expands on the consequences of failing to provide 

information to the requested State seeking to fulfill its obligations under the Article, 

including a failure to provide the requested information in the manner and within the time 

limits required. The paragraph provides that the requested State may bring appropriate 

enforcement proceedings against the person failing to provide the information, including 

(but not limited to) summary summons enforcement proceedings in the case of the United 

States and summary proceedings (procédure en référé/procedure in kortgeding) in the 

case of Belgium. Further, such person may be compelled to provide such information 

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under such civil or criminal penalties that may be available under the laws of the 

requested State. 

Paragraph 9 

Paragraph 9 provides that the requesting State may specify the form in which 

information is to be provided (e.g., depositions of witnesses and authenticated copies of 

original documents). The intention is to ensure that the information may be introduced as 

evidence in the judicial proceedings of the requesting State. The requested State should, 

if possible, provide the information in the form requested to the same extent that it can 

obtain information in that form under its own laws and administrative practices with 

respect to its own taxes. 

Paragraph 10 

Paragraph 10 provides that the requested State shall allow representatives of the 

requesting State to enter the requested State to interview individuals and examine books 

and records. However, such interview or examination must take place under the 

conditions and limits agreed upon by the competent authorities. 

Paragraph 11 

Paragraph 11 states that the competent authorities of the Contracting States shall 

agree upon the mode of application of the Article. The article authorizes the competent 

authorities to exchange information on a routine basis, on request in relation to a specific 

case, or spontaneously. It is contemplated that the Contracting States will utilize this 

authority to engage in all of these forms of information exchange, as appropriate. 

The competent authorities may also agree on specific procedures and timetables 

for the exchange of information. In particular, the competent authorities may agree on 

minimum thresholds regarding tax at stake or take other measures aimed at ensuring 

some measure of reciprocity with respect to the overall exchange of information between 

the Contracting States. 

Treaty effective dates and termination in relation to exchange of information 

Once the Convention is in force, the competent authority may seek information 

under the Convention with respect to a year prior to the entry into force of the 

Convention. Even if an earlier Convention with more restrictive provisions, or even no 

Convention, was in effect during the years in which the transaction at issue occurred, the 

exchange of information provisions of the Convention apply. In that case, the competent 

authorities have available to them the full range of information exchange provisions 

afforded under this Article. Paragraph 6 of Article 28 (Entry into Force) confirms this 

understanding with respect to the effective date of the Article. 

A tax administration may also seek information with respect to a year for which a 

treaty was in force after the treaty has been terminated. In such a case the ability of the 

other tax administration to act is limited. The treaty no longer provides authority for the 

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tax administrations to exchange confidential information. They may only exchange 

information pursuant to domestic law or other international agreement or arrangement. 

Paragraph 12 

Paragraph 12 provides that if the United States terminates the provisions of 

paragraph 3 of Article 10 (Dividends), then, from the date such provision no longer 

applies to eliminate dividend withholding tax, Belgium will not be required to provide 

information pursuant to paragraph 5 of this Article. 

ARTICLE 26 (ASSISTANCE IN COLLECTION) 

This Article provides for assistance in collection of taxes to the extent necessary 

to ensure that treaty benefits are enjoyed only by persons entitled to those benefits under 

the terms of the Convention. 

Paragraph 1 

Under paragraph 1, a Contracting State will endeavor to collect on behalf of the 

other State only those amounts necessary to ensure that any exemption or reduced rate of 

tax at source granted under the Convention by that other State is not enjoyed by persons 

not entitled to those benefits. For example, if the payer of a U.S.-source portfolio 

dividend receives a Form W-8BEN or other appropriate documentation from the payee, 

the withholding agent is permitted to withhold at the portfolio dividend rate of 15 percent. 

If, however, the addressee is merely acting as a nominee on behalf of a third-country 

resident, paragraph 1 would obligate the other Contracting State to withhold and remit to 

the United States the additional tax that should have been collected by the U.S. 

withholding agent. 

Paragraph 2 

Paragraph 2 makes clear that the Contracting State asked to collect the tax is not 

obligated, in the process of providing collection assistance, to carry out administrative 

measures that are different from those used in the collection of its own taxes, or that 

would be contrary to its sovereignty, security or public policy. 

ARTICLE 27 (MEMBERS OF DIPLOMATIC MISSIONS AND CONSULAR 

POSTS) 

This Article confirms that any fiscal privileges to which diplomatic or consular 

officials are entitled under general provisions of international law or under special 

agreements will apply notwithstanding any provisions to the contrary in the Convention. 

The agreements referred to include any bilateral agreements, such as consular 

conventions, that affect the taxation of diplomats and consular officials and any 

multilateral agreements dealing with these issues, such as the Vienna Convention on 

Diplomatic Relations and the Vienna Convention on Consular Relations. The U.S. 

generally adheres to the latter because its terms are consistent with customary 

international law. 

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The Article does not independently provide any benefits to diplomatic agents and 

consular officers. Article 19 (Government Service) does so, as do Code section 893 and 

a number of bilateral and multilateral agreements. In the event that there is a conflict 

between the Convention and international law or such other treaties, under which the 

diplomatic agent or consular official is entitled to greater benefits under the latter, the 

latter laws or agreements shall have precedence. Conversely, if the Convention confers a 

greater benefit than another agreement, the affected person could claim the benefit of the 

tax treaty. 

Pursuant to subparagraph 5(b) of Article 1, the saving clause of paragraph 4 of 

Article 1 (General Scope) does not apply to override any benefits of this Article available 

to an individual who is neither a citizen of the United States nor has immigrant status in 

the United States. 

ARTICLE 28 (ENTRY INTO FORCE) 

This Article contains the rules for bringing the Convention into force and giving 

effect to its provisions. 

Paragraph 1 

Paragraph 1 provides for the ratification of the Convention by both Contracting 

States according to their constitutional and statutory procedures. Each Contracting State 

will use the diplomatic channel to notify the other when it has completed the required 

procedures. The notification will be accompanied by an instrument of ratification. 

In the United States, the process leading to ratification and entry into force is as 

follows: Once a treaty has been signed by authorized representatives of the two 

Contracting States, the Department of State sends the treaty to the President who formally 

transmits it to the Senate for its advice and consent to ratification, which requires 

approval by two-thirds of the Senators present and voting. Prior to this vote, however, it 

generally has been the practice for the Senate Committee on Foreign Relations to hold 

hearings on the treaty and make a recommendation regarding its approval to the full 

Senate. Both Government and private sector witnesses may testify at these hearings. 

After the Senate gives its advice and consent to ratification of the protocol or treaty, an 

instrument of ratification is drafted for the President's signature. The President's 

signature completes the process in the United States. 

Paragraph 2 

Paragraph 2 provides that the Convention will enter into force upon the exchange 

of instruments of ratification. The date on which a treaty enters into force is not 

necessarily the date on which its provisions take effect. Paragraph 2, therefore, also 

contains rules that determine when the provisions of the treaty will have effect. 

Under subparagraph 2(a), the Convention will have effect with respect to taxes 

withheld at source (principally dividends, interest and royalties) for amounts paid or 

credited on or after the first day of the second month following the date on which the 

Convention enters into force. For example, if instruments of ratification are exchanged 

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on April 25 of a given year, the withholding rates specified in paragraph 2 of Article 10 

(Dividends) would be applicable to any dividends paid or credited on or after June 1 of 

that year. This rule allows the benefits of the withholding reductions to be put into effect 

as soon as possible, without waiting until the following year. The delay of one to two 

months is required to allow sufficient time for withholding agents to be informed about 

the change in withholding rates. If for some reason a withholding agent withholds at a 

higher rate than that provided by the Convention (perhaps because it was not able to reprogram its computers before the payment is made), a beneficial owner of the income 

that is a resident of the other Contracting State may make a claim for refund pursuant to 

section 1464 of the Code. 

For all other taxes, paragraph 2(b) specifies that the Convention will have effect 

for any taxable period beginning on or after January 1 of the year following entry into 

force. 

Paragraph 3 

Paragraph 3 provides that subparagraph (f) of paragraph 5 of Article 21 

(Limitation on Benefits) is not effective until January 1, 2011. That subparagraph 

requires that a headquarters company be subject to the same income tax rules in its state 

of residence as a resident company engaged in the active conduct of a trade or business in 

such state. Belgian law is in transition and as of January 1, 2011, this subparagraph will 

met. 

Paragraph 4 

Paragraph 4 provides that the prior Convention generally ceases to have effect 

with respect to any tax as of the date this Convention takes effect with respect to that tax 

in accordance with paragraphs 2 and 6. 

Paragraph 5 

As in many recent U.S. treaties, however, paragraph 5 provides an exception to 

the general rule of paragraph 4. Under paragraph 5, if the prior Convention would have 

afforded greater relief from tax than this Convention, the prior Convention shall, at the 

election of any person that was entitled to benefits under the prior Convention, continue 

to have effect in its entirety for a twelve-month period from the date on which this 

Convention otherwise would have had effect with respect to such person. 

Thus, a taxpayer may elect to extend the benefits of the prior Convention for one 

year from the date on which the relevant provision of the new Convention would first 

take effect. During the period in which the election is in effect, the provisions of the 

prior Convention will continue to apply only insofar as they applied before the entry into 

force of the Convention. If the grace period is elected, all of the provisions of the prior 

Convention must be applied for that additional year. The taxpayer may not apply certain, 

more favorable provisions of the prior Convention and, at the same time, apply other, 

more favorable provisions of this Convention. The taxpayer must choose one regime or 

the other. 

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The prior Convention shall terminate on the last date on which it has effect with 

respect to any tax in accordance with the provisions of paragraphs 4 and 5 of Article 28. 

Paragraph 6 

Paragraph 6 provides that the provisions of Article 25 (Exchange of Information), 

have effect from the date of entry into force, without regard to the taxable period to 

which a particular matter relates. Accordingly, the powers afforded the competent 

authority under these articles apply retroactively to taxable periods preceding entry into 

force. 

Paragraph 7 

Paragraph 7 provides a specific effective date for purposes of the binding 

arbitration provisions of Article 24 (Mutual Agreement Procedure). Paragraph 7 provides 

that paragraph 7 and 8 of Article 24 are effective for cases (i) that are under consideration 

by the competent authorities as of the date on which the Convention enters into force and 

(ii) cases that come under such consideration after the Convention enters into force. In 

addition, paragraph 7 provides that the commencement date for cases that are under 

consideration by the competent authorities as of the date on which the Convention enters 

into force is the date the Convention enters into force. As a result, cases that are 

unresolved as of the entry into force of the Convention will go into binding arbitration no 

later than two years after the entry into force of the Convention, if the cases are not 

otherwise resolved through the competent authority procedure. 

ARTICLE 29 (TERMINATION) 

The Convention is to remain in effect indefinitely, unless terminated by one of the 

Contracting States in accordance with the provisions of Article 29. The Convention may 

be terminated at any time after five years from the date on which the Convention enters 

into force. If notice of termination is given, the provisions of the Convention with respect 

to withholding at source will cease to have effect after the expiration of a period of 6 

months beginning with the delivery of notice of termination. For other taxes, the 

Convention will cease to have effect as of taxable periods beginning after the expiration 

of this 6 month period. 

Article 29 relates only to unilateral termination of the Convention by a 

Contracting State. Nothing in that Article should be construed as preventing the 

Contracting States from concluding a new bilateral agreement, subject to ratification, that 

supersedes, amends or terminates provisions of the Convention without the six-month 

notification period. 

Customary international law observed by the United States and other countries, as 

reflected in the Vienna Convention on Treaties, allows termination by one Contracting 

State at any time in the event of a "material breach" of the agreement by the other 

Contracting State. 

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