GOVERNMENT

Storage Mt PROTOCOLS WITH BELGIUM AND GERM ANY

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SUBCOMMITTEE OF THE

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE

EIGH TY -NINTH CONG RESS 

FIR ST SESSION

ON

EXECUTIVE G, 89TH CON GRE SS, 1ST SESSION

SUPPLEMENTARY INCOME TAX PROTOCOL WITH BELGIUM

EXECUTIVE I, 89TH CONGRESS, 1ST SESSION

TAX PROTOCOL WITH THE FEDERAL REP UBL IC OF GERMANY

OCTOBER 13, 1965

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U.S . GOV ERNMEN T PR INTING OFFIC E

64-647 O WA SHING TON : 196 5
JOHN SPARKMAN, Alabama

MIKE MANSFIELD, Montana

WAYNE MORSE, Oregon

RUSSELL B. LONG, Louisiana

ALBERT GORE, T ennessee

FRANK J. LAUSCHE, Ohio

FRANK CHURCH, Idaho

STUART SYMINGTON, Missouri

THOMAS J. DODD, Connecticut

JOSEPH S. CLARK, Pennsylvania

CLAIBORNE PELL, Rhode Island

EUGENE J. MCCARTHY, Minnesota

COMMITTEE ON FOREIGN RELATIONS

J. W. FULBRIGHT, Arkansas, Cha irm an

BOURKE B. HICKENLOOPER, Iowa

GEORGE D. AIKEN, Vermont

FRANK CARLSON, Kansas

JOHN J. WILLIAMS, Delaware

KARL E. MUNDT, South Dakota

CLIFFORD P. CASE, New Jersey

Carl Marcy, Chief of Staff

Darrell St. Claire, Clerk

II
C O N T E N T S

Statement of: Pag e

Allen, George V., president of the Tobacco Institute, Washington,

D.C.; accompanied by John Donaldson, assistant manager of the 

chamber of commerce’s international departm ent______________ 42

Surrey, Stanley S., Assistant Secretary of the Treasury; accompanied 

by Nathan Gordon, Director for International Tax Affairs, Office

of the Secretary, Treasury Dep artm ent______________________ 1

Insertions for the record:

Technical memorandum of Treasury Department concerning proposed protocol amending the income tax convention between the 

United States and Belgium________________________________ 6

Memorandum of understanding between tax delegations of Germany 

and the United States concerning the protocol signed September 

17, 1965, to modify the income tax convention of July 22, 1954___ 25

Technical memorandum of Treasury Department concerning proposed protocol amending the income tax convention between the 

United States and the Federal Republic of Germany___________ 26

Statement by Richard N. Cooper, Deputy Assistant Secretary of 

State for International Monetary Affairs, in support of protocols to 

income tax conventions with Belgium and the Federal Republic of 

Germany_______________________________________________ 44

Letter from William G. Laffer, president, Clevite Corp., to Senator

Albert Gore, dated October 11, 1965_________________________ 46

Letter from M. F. Crass, Jr., Manufacturing Chemists’ Association,

Inc., to Senator J. W. Fulbright, dated October 11, 1965________ 46

Letter from Joseph B. Brady, vice president, National Foreign Trade 

Council, Inc., to Senator Albert Gore, dated October 11, 1965, re 

protocol with Germany________________ _______ ____________ 47

Detailed comments by National Foreign Trade Council concerning tax

protocol with Federal Republic of Germany__________________ 48

Letter from Joseph B. Brady, vice president, National Foreign Trade 

Council, Inc., to Senator Albert Gore, dated October 11, 1956, re 

protocol with Belgium._________ __________________________ 50

Proposals in connection with prospective revision of the Tax Treaty

between the United States and the Kingdom of Belgium________ 53

in

TAX PROTOCOLS WITH BELGIUM AND GERMANY

WE DN ES DA Y, OCTOBER 13, 196 5

U nited States Senate,

Subcommittee on T ax C onventions

of th e Committee on F oreign Relations,

Was Kington, D.C.

The subcommittee met, pursuant to notice, at 9:35 a.m., in room 

4221, New Senate Office Building, Senator Albert Gore presiding.

Senator Gore. The committee will come to order.

The Subcommittee on Tax Conventions of the Committee on Foreign

Relations is meeting today to receive testimony on the supplementary 

income tax protocol with Belgium signed on May 21, 1965, and the 

tax protocol with the Federal Republic of Germany signed on September 17,1965.

Our first witness is Mr. Stanley S. Surrey, Assistant Secretary of 

the Treasury.

Mr. Surrey, we are glad to have you. I believe you have a prepared 

statement. Will you please proceed in your own way.

STATEMENT OF STANLEY S. SURREY, ASSISTANT SECRETARY OF 

THE TREASURY; ACCOMPANIED BY NATHAN GORDON, DI ­

RECTOR FOR INTERNATIONAL TAX AFFAIRS, OFFICE OF THE 

SECRETARY, TREASURY DEPARTMENT

Mr. Surrey. Thank you, Mr. Chairman. I have a prepared statement, but I think in view of the technical aspects or this treaty, it 

might be easier if I discussed the highlig hts of the treaty.

The existing Belgian convention came into effect in 1952. The 

protocol is a modification of the existing Belgian convention occasioned by a change in the internal law of Belgium. The protocol is 

designed to bring the treaty provisions into conformity with situations 

created by the new Belgian law. It is a relatively short protocol and 

is restricted primarily to this principal effect.

The Belgian Government in the early 1960’s changed its method 

of taxing corporations and individuals to such an extent th at the existing treaty became outmoded, and it was necessary therefore to enter 

into negotiations. Negotiations were limited to dealing with this 

particular point. We expect in the future to have further negotiations with the Belgian Government to modernize other provisions of 

the convention in the light of the recent OECD model convention, and 

changes that have occurred since 1952.

The principal aspect of the protocol as it affects U.S. shareholders 

deals with withholding by Belgian corporations on U.S. corporations 

having an interest in the Belgian corporation. The Belgian system

1
2 TAX PROTOCOLS W IT H BELG IUM AND GERMAN Y

provides for a 30-percent tax on corporate profits, and they also w ithhold a tax which is nominally at the rate of 15 percent on dividends 

paid to domestic shareholders and foreign shareholders. But under 

the technical way in which that withholding tax is applied, it actually 

amounts to 18.2 percent of the amount of cash that a shareholder 

receives as his dividend.

The U.S. rate of withholding on dividends going to Belgian shareholders in U.S. corporations, under the existing treaty, is 15 percent. 

The Belgian Government desired to maintain the withholding at a 

rate of 18.2 percent, which is the rate which they have applied in their 

recent treaties as well as their internal withholding rate.

The U.S. Government thought tha t the two withholding rates 

should be reciprocal, and if we were going to limit our withholding to 

15 percent, the Belgian Government should do likewise.

Aft er a good deal of discussion, which kept the negotiations run ­

ning from about 1962 to 1964 over this and other points, the Belgian 

Government agreed to the U.S. suggestion, and this protocol places 

their withholding at an actual 15 percent rather than 18.2 percent 

which would occur under their internal law. This reduced rate of 

15 percent applies only to registered shares. As you know’, there are 

two systems in effect with respect to share issuance in many European 

countries, a system of registered shares, in which the stock is registered 

in the name of the owner, as is the system in the United States, and 

a system of bearer shares, in which there is no identification of the 

owner, but it is simply a matter of coupons.

In the case of Belgium, where there is a direct investment by an 

American company, that is, an American parent and a Belgian subsidiary, as far as we know, shares are always registered, so th at in 

the case of direct investment of this fashion, the treaty will apply 

the 15-percent rate.

Also, any person who has a bearer share can very readily convert 

tha t share to a registered share without any difficulty, so that anybody can take advantage of this 15-percent rate. The Belgians were 

unable to apply the lower rate to bearer shares because of complications in administration tha t they thought wrould occur. We therefore decided not to press to a conclusion at this time our feeling t hat 

the rate also should be reduced to 15 percent for bearer shares. But 

we will take tha t up again a fter the Belgians have considered whether 

they can handle such a reduction administratively. However, as a 

matter of actual fact, due to a variety of aspects of the Belgian law, 

in most cases of bearer shares of the typical Belgian corporations in 

which Americans invest, the actual effective rate of tax comes out quite 

often even less than 15 percent. So we do not think that this is in any 

wTay restrictive on American interests.

The balance of the protocol deals with the methods by which Belgium w’ill give relief to Belgians who have income from U.S. sources. 

The existing convention had provisions to tha t effect, but they were 

outmoded by the changes in Belgian law. Consequently what this 

part of the treaty does is simply bring up to date the methods by 

which Belgium will give relief to its citizens and residents who invest 

in the United States.

As you know, w’e have the foreign tax credit for this purpose. Belgium has a more complicated arrangement, which in some cases 

involves a credit and in some cases involves an exemption.
TAX PROTOCOLS W IT H BELG IUM AND GERMANY 3

In addition, the Belgians under this protocol have given somewhat 

additional relief to those of its residents who are U.S. citizens living in 

Belgium and deriving income from the U nited States. In the case of 

dividend and interest income, investment income, we tax our citizens 

in full. If Belgium taxed them in full and gave them no relief, there 

would be rather heavy double taxation. Consequently, in its treaties 

with foreign countries, the United States seeks to have some recognition by the other government of the fact tha t we tax our citizens 

wherever they are in full, and in this treaty Belgium does give some 

partial recognition to tha t effect, and does give-----

Senator Gore. Wha t do you mean “p artial” ?

Mr. Surrey. In the typical case Belgium will g rant anybody living 

in Belgium a credit of 15 percent of the dividends or interest. Now, 

tha t is the amount that we normally withhold on a Belgian resident. 

But in the case of an American, since we impose tax in full, the Belgians go further and say that in any event an American will not be 

taxed by Belgium at more than 15 percent on his American investment 

income. So that they limit their tax to 15 percent of the American 

investment income.

Tha t is a more generous treatment of the U.S. citizen th an it is of 

their other residents getting income from the United States.

Aside from these matters, there is no other p articular matter of significance in the protocol. The protocol becomes effective, if ratified, 

starting with 1963 when the new Belgian law became effective. So 

tha t under the protocol, we would recognize the changes in Belgian law 

star ting with the year 1963, except that the rate of 18.2 must be reduced 

to 15 percent for registered shares for those years as well as for the 

future.

It may be that certain of our organizations which happen to hold 

Belgian shares, do not receive in effect the U.S. foreign tax credit because they do not pay any taxes, such as American charities and American pension trusts. We do not know whether they do or do not hold 

Belgian shares. They may feel that the Belgian law, in adopting the 

withholding rate, could have been regarded as contrary to the existing 

U.S. treaty. In this protocol we preserve the rights of these organizations to contest that withholding tax for prio r years if they feel inclined to do so. We do not know whether there are any organizations 

tha t are so interested or not. But if they are, their rights are fully 

protected under this protocol.

I think tha t is the sum and substance of the Belgian protocol.

Senator Gore. I wish to place in the record at this point a more detailed treatise of this protocol which you have prepared and submitted.

Mr. Surry. Yes; I would like, Mr. Chairman, to place both my written statement which I prepared and then a longer technical memorandum.

Senator Gore. All right, and the same will be true with respect to 

the German protocol to which you can address your remarks now.

(The statement and the technical memorandum concerning the Belgian protocol referred to above follow.)

Statement on th e Protocol to th e United States-Belgium I ncome T ax

Convention by Stanley S. Surrey, Assista nt Secretary of th e Treasury

Mr. Chairman, I am appearing before you today to urge favorable action on 

tiie supp leme ntary protocol to the income tax convention now in effect between
4 TAX PROTOCOLS WITH BELGIUM AND GERMANY

the United States and Belgium. The original convention was agreed to in October 1948 and has been the subject of two protocols since tha t time, in 1952 and in 

1957. The existing convention follows in broad outline the general pattern of 

tax treaties which the United States has negotiated with the other industrial ized 

countries of the world. The provisions of this protocol ar e also consistent with 

the general principles contained in these trea ties.

The agreement contained in this protocol covers a limited range of matters, 

and is principally directed toward issues arising out of Belgium’s 1962 revision 

of its domestic tax system. This revision required the United States and Belgium to renegotiate the existing income tax convention between the two countries, since that convention had been negotiated against the background of an 

altogether different Belgian tax system. The two countries agreed to deal in 

this protocol with the most pressing points which emerged from the Belgian 

revision of i ts tax laws. It is the intention of both countries to renegotiate the 

remaining portion of the convention when there is a further opi>ortunity to do so. 

In order to insure such further consideration, the protocol contains an expira ­

tion date beyond which it can not l>e extended.

The principal matter s dealt with in the protocol relate to (1 ) the Belgian 

taxes which are the subject of the convention, (2 ) the taxa tion of dividends and 

interest, and (3 ) the Belgian commitment to provide t ax relief for its residents 

and corporations deriving income from sources within the United States upon 

which the United States also imposes tax. A detailed technical memorandum 

describing the provisions of th e protocol is attached.

DESCRIPTION OF BELGIAN TAX LAW

In order to better understand the provisions of the protocol, it is necessary to 

describe briefly the basic provisions of th e new Belgian tax law. Under Belgian 

law, there are four classes of income ta x : an individual income t ax ; a corporate 

income tax; an income tax on legal entiti es (political subdivisions and nonprofit-making organizations) ; and an income tax on nonresidents. The income 

tax on nonresidents applies both to individuals and corporations and applies generally only to income which nonresidents receive from sources within Belgium.

The collection of Belgian income taxes relatin g to investments and wages is 

accomplished generally through a system of withholding or prepayments applicable to certain kinds of income. In the case of income from personal property (including stocks and bonds), there is both a stand ard and an additional 

personal property prepayment. In the case of income from real property, a 

standa rd and an additional prepayment are also imposed. In the case of wages 

and other remuneration, a stand ard professional prepayment is imposed.

The protocol specifically applies the convention to these various Belgian taxes.

TAXATION OF DIVIDENDS AND INTEREST

Belgian withholding on dividends

Under the present treaty, the United States may impose a tax on dividends 

from U.S. sources received by a resident or corporation of Belgium not having 

a permanent establishm ent within the United State s at a rate not exceeding 

15 percent. Under the existing treaty, Belgium is precluded from imposing a 

tax similar to the withholding tax imposed by the United States in the case 

of nonresident aliens and foreign corporations.

The protocol permits Belgium to impose a tax not in excess of 15 percent on 

dividends derived from Belgian sources by a U.S. resident or corporation not 

having a permanent establishment in Belgium. The protocol specifies th at the 

15-percent ra te of ta x shall apply only to dividends which are paid on registered 

shares. Thus, in the case of registered shares, a reduction to 15 percent is 

provided by the protocol from the regular Belgian withholding rate of 18.2 

percent under its standard personal property prepayment.1

 It should be pointed 

out tha t the 18.2-percent rate of tax still applies in the case of dividends which

1

 T he 18. 2-p erc ent ra te re su lts fro m the fa ct th at the st an da rd perso nal pr op ert y 

pre pay me nt is impo sed a t the ra te of 15 pe rcen t of the am ou nt of div ide nds ac tu ally dis ­

tri bu ted gross ed up by an am ou nt equ al to the spe cial div ide nds received cr ed it gran ted 

un de r Belgian law . To tak e ac co un t of th is spe cial cre dit , th e st an da rd perso nal prop erty 

pre pay me nt app lica ble to div ide nds is ca lcu lat ed on eigh ty-fi ve seve nti eth s of th e am ount 

ac tu ally distr ibut ed an d the effec tive ra te of ta x is th us 18 .2 pe rcen t of the divid end 

ac tually d istri bu ted.
TAX PROTOCOLS W IT H BELG IUM AND GERMANY 5

are paid on bearar shares. Typically, shares held by a U.S. parent corporation 

in a Belgian subsidiary are in registered form.

During the negotiations leading to the protocol, the United States urged a 

general Belgian withholding rate under the treaty of 15 percent. However, the 

Belgian authorities indicated tha t they would encounter serous difficulties in 

administering their tax system if a reduced rate of tax were applied to bearer 

shares as well as registered shares. As I have indicated, this protocol will be 

in effect for a limited period of time, and it is expected tha t by the expiration of 

tha t period Belgium will have developed appropriate procedures to permit a 

general maximum r ate of tax on Belgian source dividends paid to U.S. persons 

of 15 percent. Actually, even under present Belgian law, because of the exemptions and credits which are contained therein, the effective ra te of tax on dividends paid on bearer shares is generally below 18.2 percent and frequently less 

than 15 percent. Even in those cases where the effective rate of tax on bearer 

shares may exceed 15 percent, the holder of those shares can readily convert 

them to registered shares and thereby obtain the benefits of the 15-percent rate. 

Exemption from Belgian additional personal property prepayment

The protocol provides an exemption from the Belgian additional personal 

property prepayment with respect to dividends and interest paid to a resident 

or corporation of the United States not having a permanent establishment in 

Belgium. In the absence of this provision, a U.S. resident or corporation would 

be subject to a 15-percent tax on the amount received (after deduction of the 

standard personal property prepayment) in addition to the amount withheld as 

the standard prepayment. Thus, under this provision of the protocol, Belgium 

will not impose this additional prepayment on dividends and interest paid to U.S. 

residents and corporations from Belgian sources.

Dividends and interest paid by Belgian and United States corporations

Under the protocol, the United States agrees to exempt from tax dividends 

and interest paid by a Belgian corporation to a person other than a citizen, resident, or corporation of the United States. A provision of this type is contained 

in many of the tax treaties to which the United States is a party and operates 

to eliminate application of those rules contained in the Internal Revenue Code 

under which in certain circumstances dividends and interest paid by a foreign 

corporation may be regarded as being from U.S. sources.

The protocol contains a reciprocal provision under which Belgium will not 

tax dividends or interest paid by U.S. corporations to a person other than a 

resident or corporation of Belgium unless collection is made in Belgium. The 

reservation regarding collection in Belgium was included because of the problem of administering the Belgian tax laws in those cases where dividends or 

interest are paid on bearer shares or bonds to a recipient in Belgium through 

a collection agent (such as a bank) located there.

BE LIEF FROM DOUBLE TA XA TION

As is standard in tax treaties, the United States agrees to allow an appropriate credit against U.S. taxes for Belgian taxes paid by a U.S. resident or 

corporation. The obligation of the United States under this provision of the 

protocol is satisfied by the foreign tax credit provisions contained in the Internal 

Revenue Code.

The protocol also contains a series of provisions under which Belgium agrees 

to grant relief from double taxation to its residents and corporations on U.S. 

source income. In general, the protocol contains a broader commitment by 

Belgium to avoid double taxation than is present in the existing convention.

In the case of Belgian corporations not having a permanent establishment in 

the United States which receive dividends from U.S. sources, Belgium agrees 

to grant to these corporations the same exemptions from Belgian corporate income tax as would be granted if the paying corporation were a Belgian company. 

The exemption amounts to either 85 percent or 95 percent of the amount of 

the dividend afte r deducting the U.S. tax withheld, depending on the character 

of the recipient’s business. In addition to these exemptions, Belgium also 

agrees to permit a Belgian corporate recipient of U.S. dividends to elect under 

certain conditions to have the dividends exempted from Belgian personal property 

prepayment. This provision will operate to permit a Belgian corporation 

receiving U.S. dividends to accumulate or reinvest a larger portion of these 

dividends than would otherwise be permitted under Belgian law.

54-647 0 —65----- 2
6 TAX PROTOCOL S W IT H BE LG IUM AND GER MAN Y

In the case of a Belgian resident receiving dividends and a Belgian resident 

or corporation receiving interest from the United States, Belgium agrees in the 

protocol to permit a deduction from its tax attributable to the dividends and 

interest of at least 15 percent of the amount received, after deducting the U.S. 

tax withheld. This provision, which is contained in present Belgian law, represents a commitment by Belgium to continue to allow this deduction.

If a Belgian resident or corporation has a permanent establishment in the 

United States and dividends, interest, and royalties derived by such Belgian 

resident or corporation are taxed by the United States because of the existence 

of the permanent establishment, Belgium agrees in the protocol to exempt such 

income from tax.

The protocol also deals with the problem of double taxation in the case of a 

U.S. citizen residing in Belgium who is liable for income tax in both countries 

on his worldwide income. The convention does not restrict the right of the 

United States to tax its citizens, and consequently thi s individual is not entitled 

to the reduced rates of U.S. tax provided in the treaty for residents of Belgium 

on U.S. source income. Consequently, both Belgium and the United States will 

be ta xing his U.S. source income at progressive rates. The protocol provides a 

measure of relief from double taxat ion to such an individual by limiting the 

Belgian income tax which may be imposed on U.S. source dividends, interest, 

pensions, annuities, and royalties received by a U.S. citizen residing in Belgium 

to 15 percent of such income after reduction of that tax by the 15-percent 

Belgian foreign tax cred it on income from personal property.

EFFECTIVE DATES AND EXPIRATION

The effective dates provided in the protocol correspond generally to the 

effective dates of the new Belgian tax law applicable to the items of income 

involved. Where a new fea ture has been introduced into the convention the provisions are applied prospectively.

A special transitional rule is provided primarily for the benefit of U.S. taxexempt organizations deriving dividend income from Belgium. Belgium is prohibited under the existing convention from imposing tax “similar to” tha t withheld at the source by the United States in the case of nonresident aliens and 

foreign corporations. Under the protocol Belgium is permitted to impose such 

a withholding tax effective as to payments on or afte r Jan uary 1, 1963. The 

special transitional rule, effective until Janu ary 1, 1965, preserves for taxexempt organizations and other comparable taxpayers any rights which they 

might have under the trea ty prior to this protocol, since such taxpay ers cannot 

benefit from the foreign tax credit provided in the Internal Revenue Code.

The protocol is to remain in effect until Janu ary 1, 1968, except tha t it may 

be extended by mutual consent of the parti es until no late r than December 31, 

1970.

CONCLUSION

The protocol which is before you deals with a limited number of questions 

primarily arising from the Belgian revision of its tax system. These changes 

in the trea ty are essential to coordinate the new Belgian system with the treaty 

and thereby permit the tre aty to operate as intended.

The protocol liberalizes the stat utor y taxation by Belgium of Belgian source 

dividends paid to U.S. investors. The reduction in the rate of Belgian withholding tax in the case of registered shares from 18.2 percent to 15 percent and 

the elimination of the additional personal property prepayment are significant 

benefits to U.S. investors in Belgium and the United States. The agreement by 

Belgium to provide relief from double taxation where U.S. source income is 

involved is an important additional benefit to the U.S. citizens involved. For 

these reasons, and because the protocol is an important step in keeping our existing treaties current, I urge you to recommend th at the Senate advise and consent 

to the ratification of th is protocol.

Tec hn ic al Memo ran dum of T rea sur y Depa rtme nt Con cer nin g Proposed

P rotocol A me nd ing th e I ncome T ax Conv ent ion Bet we en th e Unit ed States

and Belg ium

On May 21, 1965, a protocol was signed at Brussels modifying and supplementing the existing convention between the United States and Belgium for the
TAX PROTOCOLS W IT H BELGIUM AND GERMANY 7

avoidance of double taxation and the prevention of fiscal evasion with respect 

to taxes on income signed at Washington on September 9, 1952, and on 

August 22,1957.

The purpose of the proposed protocol is to amend the provisions of the existing convention to reflect the changes made in the Belgian tax laws by the act 

of November 20, 1962. This change in internal law required (1) redesignation 

of the Belgian taxes to which the convention applies; (2) revision of the provisions of paragraph (2) of article VIII, concerning the Belgian tax on dividends paid by Belgian corporations to residents, corportions, or other entities 

of the United States; (3) the addition of a new article VIII-B concerning 

dividends and interest; and (4) revision of paragraph (3) of article XII, concerning the Belgian commitment to provide tax relief for its residents or corporations deriving income from sources within the United States upon which 

U.S. income tax is levied.

The amendment to paragraph (2) of article VIII of the convention permits 

Belgium to tax dividends from Belgian sources received by U.S. residents, 

corporations, or other entities, but prescribes a maximum limitation on the rate 

of tax tha t may be imposed if such recipient has no permanent establishment in 

Belgium.

New article VIII-B provides an exemption (1) from the Belgian additional 

personal property prepayment for dividends and interest paid to a resident, 

corporation, or other entity of the United States not having a permanent 

establishment within Belgium; (2) from U.S. tax for dividends and interest 

paid by a Belgian corporation to a person other than a citizen, resident, corporation, or other entity of the United States; and (3) from Belgian tax for 

dividends and interest paid by a U.S. corporation to a person other than a 

resident, corporation, or other entity of Belgium unless such income is collected 

in Belgium.

The amendment to paragraph (3) of article XII is designed to afford substan tial relief from double taxation in the case of Belgian residents or corporations deriving certain types of income from sources within the United States 

upon which U.S. income tax is paid.

In addition to these substantive amendments certain technical amendments 

were also made.

Article II of the proposed protocol contains provisions for the ratification and 

entry into force of the protocol. The effective dates of those provisions of the 

protocol correspond generally to the effective date of similar provisions in the 

new Belgian law. Other amendments will generally take effect on the first 

day of January of the year following the year in which the instruments of 

ratification are exchanged.

The proposed protocol when ratified, is to remain in effect until January 1, 

1968. This termination date may l>e extended to, but not later than, January 1, 

1971, by mutual agreement of the parties.

A detailed summary and explanation of the protocol follow s:

ART ICLE I

Article I of the proposed protocol is made up of eight paragraphs which 

contain the following modifications to the original convention :

Paragraph 1

Taxes covered.—Para graph 1 of article I of the protocol redesignates the 

Belgian taxes covered by the treaty. These include the four classes of income 

taxes imposed under the Belgian law of November 20, 1962, the prepayments 

and additional prepayments relating to those four classes of taxes, and any 

proportional taxes supplementing those classes.

The law of November 20, 1962, provides for an individual income tax (l’impot 

des personnes physiques) ; a corporate income tax (l’impot des societes) ; an 

income tax on legal entities (l’impot des personnes morales) ; and an income 

tax on nonresidents (l’impot des nonresidents).

The individual income tax is imposed at graduated rate s ranging from 0 to 

55 percent on the worldwide income of individuals resident in Belgium.

The corporate income tax is imposed on corporations which have their statutory seat (as designated in the corporate charter), their principal establishment, or their central control and managment in Belgium, and which carry on 

a business or other profitmaking activities. The tax is imposed on profits from 

all sources, plus all gains realized on the sale or use of corporate assets. The
8 TAX PROTOCOLS WI TH BELGIUM AND GERMANY

ra te of tax on corp orate profits is gene rally 30 percent althoug h the rate may 

vary on income which is not dis trib ute d to the sha reholders of the corporation.

The income tax on legal entitie s applies to the politica l subdivisions of Belgium and those legal entitie s which nei ther carry on a business nor perform 

activit ies of a profitmaking nat ure . The tax is due on income from movable 

and immovable prop erty (ge ner ally corres ponding to personal and rea l property, 

resp ectiv ely) and is collected thro ugh a system of prepa ymen ts.

The income tax on perso ns not resi den t in Belgium applie s both to individuals and corpo rations. Thi s tax applies in general to income received from 

sources with in Belgium. In the case of nonresident individ uals the tax is imposed at gra dua ted rat es ranging from 0 to 55 percent, as in the ca se of resident 

indiv iduals, and in the case of nonr esident corporations, the tax is imposed at 

a ra te of 35 percent.

In most cases, the Belgia n income-tax liability of a non resi den t individu al 

or corix)rat ion is satisfied thro ugh a system of prepa yments. Such prepa yments 

will not, however, satisfy the tax obliga tion of such person if he car ries on a 

business through a per man ent establis hme nt in Belgium. In such case, the 

tax on nonresid ents will be assesse d and any prep aym ents previously paid may, 

subj ect to sta tut ory limitations, be allowed as a cre dit aga ins t such tax.

The Belgia n law contain s a form of withh oldin g or prep aym ent system applicable to certain types of income. Thi s system is made up of thr ee standard 

prep aym ents and two ad dition al prepayme nts, as fol low s:

1. The sta ndard personal prop erty prepayment (precom pte mobilier).

2. The add itional perso nal prop erty prepayment (comp lement de pre ­

compte mob ilier).

3. The sta nd ard rea l prop erty prep aym ent (prec omp te imm obil ier).

4. The additional rea l prop erty prep aym ent (comp lement de precompte 

imm obil ier).

5. The standard professio nal prep aym ent (precom pte prof essionnel).

The sta nd ard personal prop erty prep aym ent is with held by the Belgian payor

(o r Belgian fiduciary rec ipient ) on cer tain income from movable prope rty. In 

the case of individu als and corp orations not residen t in Belgium thi s prepa yme nt 

(an d the additional perso nal prop erty prepay ment) applie s only to income from 

movable prop erty which is considered to be from Belgian sources. The sta nda rd 

prep aym ent is withheld at a flat ra te of 15 percent of the net amo unt of inte res t 

and roya lties di stribut ed to the recipient. The standard prepaym ent on dividends 

is w ithheld at the s tat uto ry ra te of 18.2 perc ent.

The add ition al perso nal prop erty prep aym ent is gene rally imposed on income 

from movable prop erty if the recip ient of such income does not authorize the 

dis trib uting agen t to give cer tain info rma tion to the Belgia n tax aut hor ities. 

Under Belgian law, thi s prep aym ent is imposed on non resid ents whe ther or not 

such autho rity is given. The amo unt withheld is 15 perc ent of the net amount 

of any inte res t or dividen d dist ribu ted, af te r deduction of the sta ndard personal 

pro per ty prepayment.

The real prop erty prep aym ent is levied on certain income from immovable 

pro perty situ ate d in Belgium. This prep aym ent is generally based on “cadastra l 

income,” an estimat ed income based on the gross ann ual ren tal value of the 

prop erty. An amount equal to 25 perc ent of the gross ann ual ren tal value of 

buildings and 10 percent of the gross ann ual ren tal value for land, is allowed 

as an expense. The ra te of the prep aym ent is not unifo rm in th at it contains 

eleme nts of national, provincial, and municipal taxes , but gene rally is app roximately 21 percent of the cad est ral income. The sta nd ard rea l prop erty prepay ­

ment is computed on the ba sis of act ual ren tal income wher e the p roperty is used 

by the lessee in a business.

The addi tion al rea l prop erty prep aym ent applie s only to non resid ent individu als and corporations, and then only if such perso ns are residen ts of a 

cou ntry with which Belgium has an income-tax convention which reserves to 

Belgium the exclusive rig ht to tax such income. Because the United Sta tes 

reser ves the rig ht in the pres ent convention to tax its citizen s, resid ents, and 

corp orations on income from real prop erty, this add itio nal rea l pro perty prepay ­

ment does not apply to resi den ts or corp orations of the United States.

The standa rd profe ssion al prep aym ent applies to wages and salaries, rem uneratio n paid by a corporation to manag ers, direc tors, and perso ns with sim ilar 

functions, pensions, cer tain prizes and subsidies, and alimony paid to nonr esident 

indiv iduals. The amount of the prep aym ent is based on a specia l gra du ate d tax 

schedu le ra ngin g from 0 to 50 percent.
TAX PROTOCOLS W IT H BELG IUM AND GERMAN Y 9

Pa rag rap h 2

Territ ory covered.—Pa rag rap h 2 of art icl e I of the protocol provides a necessar y techn ical amen dmen t to the previo us definition of the term “United State s” 

by deleting the words “the t err ito rie s of Alaska and o f Hawaii.”

Parag rap h 3

Belgian tax on dividen ds.—Pa rag rap h 3 of a rticle I of the protocol deletes pa ra ­

gra ph (2 ) of a rtic le VI II of the basic convention (relatin g to the tax ati on of dividends by Belgiu m) and replac es it with a new provision. Exi stin g a rtic le VI II ( 2 ) 

provides th at Belgium shal l not impose on dividends deriv ed from sources with in 

Belgium by a resid ent, corp oration, or o ther en tity of the U nited S tate s n ot having 

a perm anent esta blis hment within Belgium any tax in the na tur e of a personal 

complementary tax or su rta x thereon, or any tax sim ilar to th at with held in the 

United S tate s on d ivide nds deriv ed by nonresid ent alie ns and foreign co rporation s.

New par agr aph (2 ) provides th at th e r ate of Belgian tax applic able to dividen ds 

derive d from sources within Belgium by a resid ent, corporation, or o ther e nti ty of 

the Unite d Sta tes not havi ng a perm anent esta blis hment in Belgium shal l not exceed 15 p ercent of the amou nt distrib ute d. However, this reduction in the ra te of 

tax will apply only to d ivide nds paid on regi stered sha res which have been h eld in 

th at form for a period of 12 m onths imme diately pri or to the d ate on which such 

dividends become p ayab le (o r for such period as the Belgia n corporation payin g 

the dividends has been in ex ist ence). Typically, sha res held by a foreign paren t 

in a Belgia n sub sidiary are in registe red form. The second se ntence of new p ar agra ph (2 ) provid es that, in all oth er cases, a U.S. resident, corpo ration, or othe r 

ent ity not having a per man ent esta blis hment wit hin Belgium and deriv ing dividends from sources wit hin Belgium w ill not be s ubject to Belgia n tax a t a ra te in 

excess of 15 perc ent of the tax able amount of such divide nds, determined in accorda nce with Belgian law in effect on May 21, 1965, the dat e of sig nat ure of the 

proposed protocol.

The Belgian law as of th at da te provid es t ha t n onresid ent individual and foreign 

corp orate shar eho lder s of Belgian corp orations are subj ect to the B elgian income 

tax on nonresidents covered und er art icl e 1 ( 1 ) (b ) (i v) of the convention, as 

amende d by art icl e 1 (1 ) of thi s protocol, with resp ect to divid ends they receive. 

This ta x is fully satisfied by the imposition of th e Belgian sta nd ard personal prop ­

ert y prepayment and the ad dition al perso nal prop erty p repa yme nt if the tax pay er 

is not engaged in tra de or business in Belgium thro ugh a perman ent establish ment, 

does not have a dwelling at his dispo sal in Belgium, and is not othe rwise subj ect 

to the asses smen t of the basic Belgian tax. The Belgian personal pro perty prepaym ent is imposed at the r ate of 15 p ercent of the amount of the dividends actually dis trib ute d grossed up by an amou nt equal to the special dividends received 

cre dit (cr edit d’iinpot) which is gra nted under art icl e 3 5 (6 ) of the law of November 20, 1962, to individ ual shareh old ers of Belgia n corp orat ions who are subj ect 

to asses smen t of the indi vidual income ta x or of the income tax on nonresidents as 

it applies to individu als. In ord er to tak e accoun t of thi s special credit, the per ­

sonal property prep aym ent applic able to divid ends paid by Belgia n corp orat ions 

is calc ulat ed on 8%o of the amo unt actually dis trib ute d and the effective ra te of 

thi s t ax is th us 18.2 pe rcen t of the divid end actually distrib uted. Under t he prot ocol, as indic ated above, this 18.2 perc ent rate is reduced to 15 perce nt in the case 

of regi stered shar es, since the base of the tax is limi ted to the amou nt actually 

distrib uted. In the case of beare r shar es, the base of the tax is the amo unt of 

the dividen d as calcula ted und er Belgia n law, which thu s include s the add ition 

for gross up and hence provid es the 18.2 per cent effective rate .

The thi rd senten ce of new parag rap h (2 ) of art icle VIII describes an add itional form of income to be covered, for Belgian tax purposes, by the dividend 

article. Under Belgian law, the term “divi dend s” refers to dis trib utio ns made 

by a Belgia n corp oration with resp ect to its sha res or dis trib utio ns by a Belgian 

joint stock company. It does not specifically ref er to dis trib utio ns made by 

a Belgian company oth er tha n a corp oration or a joi nt stock company wit h 

respe ct to the cap ital invested in such company. These paym ents are, however, 

subj ect to the pers ona l pro per ty prep aym ent imposed und er Belgian law at the 

18.2-percent rate (1 5 perc ent of 8%o of the amo unt rece ived ) in the same 

man ner as divid ends paid by corp orat ions and joint stock companies and, in 

addition, are not allowed as a deduction in compu ting the tax abl e income of 

the dis trib utin g company. The protocol tre ats thes e amounts, for Belg ian tax 

purposes, as dividend s under the convention.

The arrang ement p rovided in the protocol whereby Belgium may tax d ivide nds 

on regi stered sha res at a maxim um rate of 15 perc ent and divid ends paid on
10 TAX PROTOCOLS WIT H BELGIUM AND GERMANY

bea rer sha res at a maxim um rate of 18.2 percent results from the seriou s adm inist rat ive difficulties which Belgium indicate d it would enco unte r if a gene ral 

maximum rate of tax of 15 perc ent were provided in the protocol. As indicated 

in the discuss ion of parag rap h (5 ) of arti cle II, thi s protocol shal l remain in 

effect for a limite d period, and it is anticip ated th at by the exp irat ion of th at 

period Belgium will have developed app rop riate procedures to perm it a genera l maximum rate of tax on all divid ends of 15 pe rcent. Actua lly, under pres ent 

Belgia n law, the effective rate of tax on divide nds paid to non resid ents on 

bea rer sha res by Belgia n corp orat ions is freq uen tly less than 18.2 percent, or 

even 15 percent. Moreover, if the effective ra te of tax exceeds 15 percent, it is 

a simple ma tte r for bea rer shares to be converted by the holder into registered 

sha res so t ha t the benefits of the 15-percent rate can be ensured.

Parag rap h 4

Pa rag rap h 4 of art icl e I of the protocol adds a new art icle VIIIB to the b asic 

convention. This art icl e contains add itio nal rules dealing with the tax ation of 

divid ends and intere st und er the treat y.

Pa ragr ap h (1 ) of new art icl e VI IIB provides an exemp tion from the Belgian 

add itio nal perso nal pro perty prep aym ent in effect on May 21, 1965 (no rma lly 

with held at the rat e of 15 perce nt of the amount distrib ute d af ter deduction of 

the sta nd ard pre paym ent), with respe ct to dividends and int ere st paid to a 

resid ent, corporation or other entity o f the United Sta tes n ot having a perm anen t 

establis hme nt in Belgium. This exemp tion from add itio nal prepaym ent applie s 

even whe re the sta nd ard prep aym ent on divide nds paid on regi stered or bea rer 

sha res was computed at less tha n 15 percent and thu s is less tha n the maximum 

tax collectible by Belgium under the provisions of new art icle V II I( 2 ).

Pa rag rap h (2 ) of new art icle VI IIB provides for exemption from U.S. tax 

with respe ct to divide nds and int ere st paid by a Belgia n corp oration to a person 

oth er tha n a citizen, resid ent, corp orat ion or othe r ent ity of the United State s.

Pa rag rap h (3 ) of new article VI IIB contains the Belgian cou nte rpa rt of pa ra ­

gra ph (2 ), provid ing th at Belgium will not tax divide nds or int ere st paid by 

U.S. corp orations to a person oth er tha n a resid ent, corporation or other ent ity 

of Belgium unless collection is made in Belgium. Belgium reserves the rig ht 

to tax such divide nds or int ere st if collection is made in Belgium since Belgium 

reg ard s thi s tax as an imp ortant element in the adm inistration of its tax laws 

in those cases where divid ends or int ere st are paid on beare r sha res or bonds 

to a r ecipient in Belgium thro ugh a Belgia n collection agent.

Pa rag rap h 5

Pa rag rap h 5 of art icl e I of th is protocol adds the words “on such income” 

to the second sentence of art icl e IX ( 1 ) of the convention af te r the word “ta x” 

and b efore t he word “as.”

Article IX ( 1 ) of the convention permits Belgian inve stors to elect for any 

tax abl e year to be taxe d by the United Sta tes on their rea l property ren tal and 

na tural resource roy alty income “as if such resident , corp oration or entity were 

engaged in tra de or busine ss wit hin the United Sta tes thro ugh a perm anent 

esta blis hm ent” and thu s to be taxed on a net basis. This perm its the electin g 

person to tak e those deductions norm ally allowed under U.S. law to nonresident 

alien individu als and foreig n corp orations engaged in tra de or business in the 

United States with re spect to such income.

The words added by par agrap h 5 of the protocol make it clea r th at the net 

basi s election exte nds only to income from rea l pro perty renta ls and na tural 

resou rce royal ties.

Parag rap h 6

Parag rap h 6 of arti cle I of the protocol amends the provision s of parag rap hs 

(2 ) and (3 ) of art icle X II of the convention relating to the allowance of credits 

and other relie f by the country of the tax payer’s residence for tax imposed by 

the tre aty country wher e the income derived by the tax payer has its source.

U.S. foreig n tax credit, —New par agrap h (2 ) of art icl e X II modifies t he orig ­

inal provision of the convention gra nting credit again st U.S. tax for Belgia n 

tax es in orde r to elim inat e the require ment th at the credit be determined und er 

section 131 of the Intern al Revenue Code of 1939 as in effect on the dat e of 

ent ry into force of the basic Belgian convention. The proposed change gu arante es the basic allow ance by th e United Stat es of a tax cre dit while making 

clea r th at flexibility is per mit ted as to the techn ical formulation of the credit 

rules.
TAX PROTOCOL S W IT H BEL GIU M AND GER MAN Y 11

The credit shall be based on the tota l amount of the Belgia n tax es ref err ed to 

in new par agr aph (1 ) (b ) of art icl e I of the tre aty which ar e paid to Belgium. 

Under the protocol, the amount of the cre dit is th at proportio n of U.S. tax es 

which net income from sources within Belgium bea rs to total net income. 

The obligation of the United Sta tes und er thi s parag rap h is satisfied by the rule s 

conta ined in sections 901 thro ugh 905 of the In tern al Revenue Code of 1954, 

aud the regu lations ther eun der. Moreover, to the e xte nt th at the rul es provided 

in sections 901 -905 produ ce a more favorable result, the U.S. tax pay er may cal ­

cula te his cred it und er the code.

Belgian relief from double tax ation. —New pa rag rap h (3 ) of art icle XII contai ns eight sub par agr aph s dealing with the relief Belgium is to gr an t its own 

residen ts or corp orations und er the tre aty to tak e acco unt of U.S. taxe s paid by 

such persons on their U.S. source income. These provisions are based upon the 

law of Belgium rel ating to the imposition of tax on Belgi ans receiving income 

from sources outs ide Belgium. Under the term s of the proposed protocol, pre sent Belgian sta tut ory law is liber alize d with respe ct to (1 ) U.S. source divid ends 

received by a Belgian corp oration, (2 ) U.S. source busin ess and personal serv ice 

income, and (3 ) cer tain item s of U.S. source income received by a citize n of 

the Un ited Sta tes who is a resident of Belgium .

Dividends derived by Belg ian corp orat ion or oth er entity. —Sub paragraph (a ) 

of new par agr aph (3 ) of art icle X II has the effect of incorpo rating into the 

convention the pre sen t sta tutory tre atm ent of Belgian corp orations or oth er 

entities. It provides th at divide nds taxed by the Unite d Sta tes under art icle 

VI II (1 ) of the conven tion at the reduce d 15-percent ra te sha ll be e xempt from 

Belgian corp orate income tax to the ex ten t th at such exemp tion would be gra nte d 

und er Belgian law in force on May 21, 1965, if both corp oration s were Belgian 

corp orations subj ect to the Belgian corporate income tax . The amo unt of this 

exemp tion is 85 perc ent (i-n the case of a financ ial cor por ation) or 95 perc ent 

(in the case of an ind us trial cor poration ) of the amoun t of the divide nd af ter 

redu ction for all expen ses and taxe s, including the U.S. with holding tax and 

Belgian personal pro perty prepayment.

Sub paragraph (b ) of new pa rag rap h (3 ) of artic le XI I provides a tre aty 

exception, in fav or of U.S. source dividen ds, to the above rules dealing wit h 

the imposition by Belgium of tax on dividends receive d by a Belgia n corp oration 

or other ent ity sub jec t to Belgian corporate income tax. This exception is in 

add ition to the exem ption provided in sub par agr aph ( a ) .

Under the provisions of sub par agr aph (b ), a Belgian corp oration or other 

ent ity which receive s divid ends from a U.S. co rporation on stock which has been 

directly owned by th at Belgian corp oration or oth er ent ity for a period of 6 

months imme diately prior to the date upon which the divid ends become payab le 

(or for such period of time as both the dis trib uti ng and the reci pien t corporation have been in ex ist ence), may elect to have such divid ends exemp ted from 

the Belgian personal prop erty prep aym ent ord ina rily applicable to such dividend. A Belgia n corp orat ion may elect thi s tre atm en t by making a wr itten re ­

quest for such exemp tion when filing its ann ual tax ret ur n or before the e xp ira ­

tion of the period allowed for the filing of such ret urn . Under thi s provisio n, 

the Belgia n corp oration deriv ing a divide nd from a U.S. corp orat ion (a ft er the 

withhold ing of U.S. tax at the source at the 15-pe rcent tre aty ra te ) (1 ) will 

not be requ ired to pay the perso nal prop erty prep aym ent due on rece ipt and (2 ) 

will be per mitted to calculate its sta tut ory corpor ate income tax exem ption (a s 

provided in sub par agr aph ( a ) ) on the full divide nd received. This tre atm ent 

perm its the qualified Belgian corporation or oth er entity receiving divid ends 

from U.S. corp orations to accu mul ate or rein vest a lar ger portion of such 

dividends tha n would be the case und er Belgia n law in the absence of this 

tre aty provision. However, dividend s accorde d thi s exemption shall not be 

deducted for purposes of dete rmin ing the personal pro perty prep aym ent app licable to divide nds dis trib ute d by the reci pien t corp orat ion or oth er entity to 

its sha reholders or members.

Under this rule, a Belgian corp oration receiving a dividend of .$85 (a ft er the 

with holding of U.S. tax at the source at the 15-perce nt tre aty ra te ) (1 ) will 

not have to pay the $12.75 personal prop erty prepayment due on receip t and 

(2 ) may calc ulate its sta tut ory 85 or 95 percent cor porate income tax exemp tion 

on t he full $85 dividend. In the case whe re the 85-pe rcent e xemption is app licable, co rporate income ta x would be paid with respe ct to 15 perce nt of the fu ll $85, 

or $12.75, and would amou nt to $3.83 ( 30 perc ent of $12.7 5). Thus, of the $85 

received, $81.17 ($8 5—$3 .83) will rem ain ava ilab le fo r rein vestme nt or other
12 TAX PROTOCOLS WITH BELGIUM AUD GERMANY

use. If the recipient corporation distribu tes these dividends, it must then withI old the personal property prepayment a t the 18.2 i>ercent rate on the fu ll amount 

of the distribution, since, under subpara graph (b ) of new paragraph (3 ) of 

article XII, the amount excluded from the corporate income tax is not excluded 

from the imposition of th e personal property prepayment. Therefore, assuming 

a total distributio n of the amount remaining available for redistribution, or 

.$81.17, the personal property prepayment would be calculated on the full $81.17 

and would amount to $14.77 (18.2 percent of $81.17). The shareholders of the 

Belgian corporation would thus receive a dividend of $66.40 ($81.17 —$14.77).

Dividends derived by individual residents of Belgium.—Subparagraph (c ) of new paragraph (3 ) of ar ticle XII incorporates into the convention the statu tory 

treatment which Belgium presently grants to its residents with respect to foreign source dividends. It provides tha t where a resident of Belgium receives 

dividends taxed by the United States under article VIII (1 ) of the convention 

at the reduced 15-percent rate, Belgium shall deduct from its tax attri buta ble 

to tha t income an amount which shall not be less than 15 |>ercent of the net 

dividends received in Belgium afte r deduction of U.S. tax withheld at the source 

under article VII (1 ). This provision, in effect, allows a credit against Belgian 

tax, which allowance is in addition to credits which Belgium now affords with 

respect to any Belgian prepayments withheld on receipt of the dividend income.

Inter est derived by Belgian resident, corporation or other entity.—Subpara ­ graph (d ) of new paragraph (3 ) of article XII provides relief with respect to 

intere st taxed by the United States under article VIIIA of the treaty and received by a Belgian resident, corporation, or other entity. As is the case under 

subparag raph (c ) of this paragraph, the relief is presently embodied in the Belgian tax system with respect to interest taxed abroad and derived eithe r by 

an individual or corporate resident of Belgium. The relief is a credit in the 

amount of not less than 15 percent of the intere st received afte r deduction of 

U.S. tax. This credit is to be applied against the final individual or corporate 

income tax liability in addition to the credit for any personal property prepayment withheld upon receipt of the interest income.

U.S. citizens residing in Belgium.—Subparagraph (e ) of new paragraph (3 ) 

of article XII contains a special provision dealing with certain income derived 

by a citizen of the United States who is a resident of Belgium and thus liable to 

income tax in both countries on worldwide income. This provision replaces ar ­

ticle X II (3 ) (c ) of the original convention which reduced the former Belgian 

personal complementary tax due by citizens or residents of the United State s who 

were also residents of Belgium to one-fourth of the am ount otherwise owing with 

respect to their U.S. source income which was taxed by the United States. The 

new provision affords substan tially similar relief to our citizens under the revised Belgian tax laws. It provides tha t the Belgian individual income tax 

proportionately attributable to dividends, interest, i>ensions, annuities, or royalties received by a citizen of the United States residing in Belgium from sources 

within the United States may not exceed 15 percent of t hat income, afte r allowance of the lump-sum foreign tax credit.

Though residence in Belgium would ordinarily entitle individuals to an exemption from, or reduction in rate of, U.S. tax on specified items of income under 

the treaty, such benefits are not available to U.S. citizens. The new provision 

provides a measure of relief in these circumstances by reducing the amount of 

Belgian tax which can be imposed on the specified items of income.

The application of subparagraph (3 ) can be illustra ted as follows:

A citizen of the United States residing in Belgium receives $3,000 in dividends 

from a U.S. corporation and, in addition. $4,000 net personal service income 

earned in the course of his employment in Belgium. The standard personal 

property prepayment due on the $3,000 in dividends is $450 (15 percent of 

$3,000 ), which will be creditable against the individual income tax. His income, 

afte r allowance of appropriate deductions, amounts to $7,000 and his tax liability 

to Belgium, computed without regard to credits, is $2,450 (35 percent of $7,000) 

under the progressive rates provided in Belgian law. The proportion of that 

liability which is attributa ble to the individual’s U.S. source dividends is $1,050 

(three-sevenths of $2,450). This tax must then be reduced by the Belgian lumpsum credit for foreign tax amounting to 15 percent of the dividends received, 

or $450. Under subpara graph (e ), the amount of tax attri buta ble to the dividends remaining afte r reduction of the Belgian foreign tax credit, or $600 

($1,050—$450 ), cannot amount to more than 15 percent of the dividends received, 

Thus, the citizen’s total tax would amount to $1,850, computed by adding the
TAX PROTOCOLS WITH BELGIUM AND GERMANY 13

Belgian tax due under subparagraph (e) with respect to the dividends ($450) 

to the tax due with respect to the taxpayer’s Belgian source income ($1,400), 

representing a net tax savings of $150. The $450 already paid as standard personal property prepayment would be credited against the $1,850.

Business income derived by Belgian resident, corporation, or other entity.—

Subparagraphs (f) and (g) of new paragraph (3) of article XII contain the 

rules to be applied under the protocol by Belgium with respect to income which 

is received by Belgian residents, corporations, or other entities and which is 

taxed by the United States in accordance with the convention. The items of 

income specified in subparagraphs (f) and (g) shall be exempt from Belgian 

tax, but Belgium reserves the right to take this income into account for the purpose of determining the rate of tax which is to be applied against the remaining 

income.

The items of income exempted from Belgian ta x under subparagraph (f) are :

(1) industrial and commercial profits subject to U.S. tax by reason of their 

being attributab le to the maintenance by the taxpayer of a permanent establishment in the United States (artic le III (1) and article IV of the convention) ;

(2) income from real property situated in the United States and U.S. natural 

resource rentals or royalties (articles VI and IX (1) of the convention) ; (3) salaries, pensions, and annuities paid by the United States, or by any political subdivision thereof, to U.S. citizens residing in Belgium (artic le X (1) of the convention) ; (4) compensation for labor or personal services performed in the 

United States and taxed by the United States in accordance with article XI of 

the convention; and (5) any other business or personal service income which 

may be taxed by the United States in accordance with the treaty. The “other 

business or personal service income” mentioned in subparagraph (f) has reference to professional income (revenus professionnels) as tha t concept is used in 

Belgian tax law. Among items included in this category other than “industrial 

and commercial profits” and “compensation for personal services,” as these terms 

are used in the treaty, are gains from the sale or exchange of capital assets used 

in a trade or business and remuneration paid to persons involved in the management of Belgian corporations.

Subparagraph (g) provides that Belgium will grant exemption to its residents, 

corporations, o r other entities with respect to interest, dividends, and royalties 

which are taxed by the United States by reason of the fact that the Belgian 

taxpayer receiving tha t income has a permanent establishment in the United 

States, but that Belgium will include the exempt income to determine the rate 

of tax applicable to the taxable portion of the taxpayer’s other income.

Net operating loss deduction.—Subparagraph (h) of new article X II (3) of 

the treaty provides that the amount of income of any Belgian resident, corporation, or other entity which is exempted from Belgian tax, in accordance 

with the provisions of subparagraphs (f) and (g) of new paragraph (3), shall 

be reduced by the amount of any net operating loss deducted in the same year in 

computing the U.S. tax. This reduction applies only to the extent tha t such loss 

has been deducted from income which would be subject to Belgian tax in any 

year.

Paragraph 7

Parag raph 7 of article I of the protocol amends the French text of paragraph 

(1) of article XV of the original convention, relating to the exchange of information between the competent authorities of the two trea ty countries. Under this 

article only such information as is “available under the respective taxation laws 

of the contracting States” shall be exchanged. The proposed change makes 

the French translation coincide with the substance of the English text. 

Paragraph 8

Paragraph 8 of article I of the protocol deletes article XII of the convention. 

This article contained the authorization for, and provided the procedures to be 

followed in, extending the original convention, as amended, to any of the 

colonies or overseas territories of either treaty country. This provision is obsolete inasmuch as Belgium no longer has any such colonies or territories. In 

practice, the provision never applied to the United States.

ARTICLE II

Paragraph 1 of article II provides tha t the protocol shall be ratified and the 

instruments of ratification exchanged as soon as possible.

54-647 0—65----- 3
14 TAX PROTOCOLS WITH BELGIUM AND GERMANY

Paragr aphs 2, 3, and 4 of article II contain the provisions setting out the effective dates of the s everal provisions of the protocol. Generally, the effective dates 

correspond to the effective dates of the new Belgian tax laws applicable to the 

same income.

Subparagraph (a ) of paragra ph 2 of article II provides t hat the protocol will 

apply to income received by individuals during the calendar year 1963, taxable 

years ending within 1963, and subsequent taxable years. Subparagraphs (b ) 

and (c ) provide the rules governing the effective dates of the provisions contained in the protocol dealing with the U.S. corporate income tax and the Belgian 

corporate income tax applicable to corporations, companies limited by shares, 

and other entities subjected to tha t tax. The provisions also deal with the 

effective date of the protocol as applied to the Belgian tax on legal entitie s and 

the Belgian tax on nonresidents.

With respect to Belgian prepayments and additional prepayments, subpar agraph (d ) provides tha t the protocol shall apply to the prepayment imposed on 

real property income of the year 1963 or subsequent years. The protocol shall 

apply to the prepayments and additional prepayments imposed on other income 

which is distributed or paid on or afte r Janu ary 1, 1963, by payors established in 

Belgium or paid on or afte r that date by payors established in the United States 

and collected by residents, corporations, or other entitie s of Belgium.

Thus, a Belgian corporation may elect the exemption from personal property 

prepayment which is provided under new article X II (3 ) (b ) of the treaty with 

respect to dividends paid by a U.S. corporation on or after Janu ary 1, 1963, and a 

U.S. resident, corporation, or other entity will be entitled to the 15-percent rate of 

Belgian tax provided under new article V II I( 2) with respect to dividends paid 

on registered sha res on or af ter that date.

Subparagraph (e ) provides th at the effective date for the deletion of the extension provision of article XXII of the treat y is to be June 30, 1960, the date on 

which Belgium granted independence to the last of its overseas territ ories or 

colonies.

The provisions of the protocol which introduce new featu res into the basic convention are applicable only prospectively. Thus, under pa ragraph 3 of article II, 

the provisions of paragraphs (2 ) and (3 ) of new article VII IB of the treaty, 

grantin g exemption from the tax of one country with respect to dividends and 

interest distributed by corporations of the other country to persons not resident in 

the first country, a re made applicable w ith resiiect to income paid during taxable 

years beginning on or afte r Janu ary 1, of the year following th at in which the 

instruments of ratification of the protocol are exchanged.

Paragr aph 4 of article II of the protocol contains a special rule which was included for the purpose of giving continued application to the provisions of old 

article V II I( 2 ), prohibiting the imposition by Belgium of any tax “similar to” 

tha t withheld at the source on dividends under U.S. law in the case of nonresident 

aliens and foreign corporations. This rule in effect relates to any U.S. resident, 

corporation, or other entity which, by reason of its taxable statu s in the United 

States, cannot benefit from a credit against U.S. tax for Belgian taxes imposed 

with respect to the dividends it receives. The rule provides th at, in such a case, 

article V II I( 2 ), as amended by this protocol, shall apply only to dividends paid 

on or after January 1, 1965. In determining whether a taxpayer in fac t can benefit from the credit, the amount of the credit is to be computed without regard to 

income derived from, or taxes paid to, foreign countries other than Belgium as 

provided in article XII ( 2) of the convention, regardless of the manner in which 

the taxpayer actually calculated his credit for United States tax purposes. If the 

taxpayer receives no tax benefit under this computation, the provisions of this 

paragraph shall apply.

The special rule contained in paragraph (4 ) of a rticle II is intended to apply 

mainly to U.S. tax-exempt organizations which, by reason of their exemption from 

U.S. tax, cannot benefit from the foreign tax credit and must bear the full burden 

of Belgian t axes imposed on the dividends received from Belgium. It preserves 

any righ ts which such taxpayer might have under article V II I(2) of the treat y as 

it existed before this protocol with respect to the re lationship of the 1962 changes 

in Belgian tax law to the provisions of existing artic le V II I(2) prohibiting any 

Belgian tax “similar to” t hat withheld at the source on dividends under U.S. tax 

law. Examples of the organizations to which the provision would apply are cha rita ­

ble foundations and pension trus ts but would not encompass a U.S. regulated 

investment company which has invested most of its assets in foreign stocks or
TAX PROTOCOLS WITH BELGIUM AND GERMANY 15

securities and which dis trib utes at least 90 percent of its investment income 

to its own shareholders, since in such cases the benefits of the foreign tax 

credit described in section 90 1(b)(1) of the code are passed through to the 

shareholders of the investment company if the company makes the election 

provided under section 853 of the code.

The word “recipient” of the dividends, as it is used in this parag rap h of 

article II, means the U.S. tax payer upon whom U.S. tax liability finally rests 

with respect to dividends, such as a resident of the United States who is eith er 

a partn er in a U.S. partn ers hip or a beneficiary of a U.S. tru st which currently 

distrib utes its income.

Parag rap h 5 of article II of the protocol provides that the protocol shall 

remain in effect with respe ct to income of calend ar or taxable years beginning 

before J an ua ry 1, 1968, or with respe ct to payments m ade before tha t date where 

withholding taxes are involved. The protocol may be continued in effect after 

Janu ary 1, 1968, if an extension of time is agreed to by the two countrie s 

through an exchange of diplomatic notes. However, the application of the 

protocol may in no event be extended beyond December 31, 1970. If th e protocol 

is term inated, the provisions of the basic convention which have been deleted or 

amended by the protocol will be reinstated in effect with respect to income of 

taxable year s beginning on or after Janu ary 1, 1971.

Mr. Surrey. Thank you.

Senator Gore. Before you go to the German protocol, let me ask 

you one question. Is it unusual to negotiate a protocol with a time 

limit which the Belgian protocol contains?

Mr. Surrey. I think it is somewhat unusual, and I do not know, 

in retrospect, if we would have done it that way. The problem was 

this. We were beginning, when efforts were made to bring these negotiations to a conclusion in 1964, to explore with European governments 

a modernization of existing treaties in the light of the OECD model, 

and additional thoughts that we had had in some of the newer treaties 

that had been ratified by the Senate. The Belgians were very anxious, 

on the other hand, to come to an early decision on a revision of the 

treaty with respect to the matters tha t I have addressed myself to, 

because, I think, we were the last government with which they had 

not yet come into agreement on accommodating their treaties to their 

revisions. So they were anxious to deal only in that narrow segment.

In addition, neither we nor they had explored in full a number of 

the implications of the OECD draft. We realized tha t would take 

time. Consequently the U.S. delegation agreed with the Belgian request that the protocol be limited to the matters I have stated.

We were interested in having some assurance that the Belgian Governnment would look at the remaining aspects of the treaty, and 

consequently we p ut in this termination date as a sort of prod to both 

their government and to ourselves in the Treasury to make sure tha t 

we look at this matter again in the near future with respect to these 

other clauses, and to bring the existing clauses of the treaty dealing 

with other matters into conformity with newer versions. Tha t is the 

reason for it. It may have been unnecessary, but at the time we 

though it would be a useful prod to both governments.

PROTOCOL W IT H GERMANY

With respect to the protocol with Germany, this is a more extensive protocol. It in part grows out again of a change in the German 

law that has occurred since the basic German treaty was negotiated. 

The German corporate tax system is different from ours. As you 

know, we have now a stra ight 48-percent rate on corporate profits.
16 TAX PROTOCOLS W IT H BELG IUM AND GERMANY

The Germans have a two-rate system under which there is a 51-percent rate on profits retained by the corporation and a 15-percent 

rate on profits distributed by the corporation, a much lower rate 

which favors distribution by corporations.

Under our existing treaty with Germany, in the case of parent subsidiary investment, each country limits its witholding rate to 15 percent. The German delegation, starting in 1960, urged tha t in view 

of the fact they had a very low rate on distributed dividends, 15 

percent on the profits involved as compared with our 48-percent rate, 

they should have a higher withholding rate, and asked th at the withholding rate on pare nt subsidiary situations be perhaps 25 percent, 

which is their standard rate of w ithholding unless reduced by treaty. 

The U.S. delegation, over a period of years, said that the rates in this 

case should be reciprocal. If we limit ourselves to 15 percent, we 

thought the Germans ought to do the same, despite their lower corporate rate. We said tha t was an internal matter, and one tha t should 

not affect the withholding rate.

The Germans disputed that position, and in most of their other 

treaties with other countries do have a withholding rate higher than 

15 percent to reflect their lower corporate rate on distributed profits.

After a good deal of analysis, it turned out tha t one of the principal problems the Germans saw with their lower rate of 15 percent 

on distributed profits was tha t in some cases it paid American corporate parents to have the profits of their German subsidiaries completely distributed, to pay all relevant German taxes on the distribution, and even our tax on the dividend less the foreign tax credit, and 

then immediately reinvest the profits in the German subsidiary.

This was in a sense a technical maneuver, perfectly proper, to obtain the maximum advantage of the lower German rate, and there 

was a tax saving under tha t method of operation as compared with 

leaving the profit simply in the German subsidiary subject to the 

51-percent rate.

The Germans thought tha t this gave certain of the American subsidiaries an unfa ir competitive advantage as against indigenous German companies. We thought if this was the crux of their problem, 

then we should deal only with tha t problem in the treaty and otherwise keep the withholding rate at 15 percent. So this protocol deals 

with tha t situation and says tha t in the case of a reinvestment of 

dividends such as I have described, the German tax rate on withholding can be 25 percent. But in all other cases where there is no re investment, then the rate remains at 15 percent as does our rate.

So the protocol has a rath er complex provision dealing with this 

situation. This matter wras carefully discussed with American interests in Germany before this particu lar solution was negotiated 

with the Germans. We think it is favorable to American interests, 

and is at the same time an accommodation to what was a real German 

problem in this situation and a competitive difficulty tha t the Germans felt was serious.

Senator Gore. Will the American interests be adversely affected 

by this or can they adjust themselves to this new arrangement?

Mr. Surrey. I think they can adjust themselves, Mr. Chairman, 

to this new arrangement. It will mean th at they will be paying the 

German rate of 51 percent if they leave their profits in Germany,
TAX PROTOCOLS W IT H BELG IUM AND GER MANY 17

and I think that is the accommodation that they will make. We have 

discussed this with them.

Now, the other changes in the protocol begin with the modernization of certain clauses in our treaties to follow the OECD draft, For 

example, this protocol contains a revision of the definition of permanent establishment to follow the OEC I) draft. Tha t OECD dra ft 

has been contained, for example, in the treaty with Luxembourg, 

which this committee approved last year. As you know, if an American company has a permanent establishment in Germany, then the 

German Government can tax the American company on its business 

done in Germany. If it does not have a permanent establishment, 

then it is not taxable on its business done in Germany.

We tax German corporations doing business directly with the 

United States only if they have a permanent establishment here. 

Now the permanent establishment can be a variety of things, it can 

be a warehouse, for example, or an office building and the like, and 

one of the items mentioned is a place of management. That was contained in the Luxembourg dra ft, and since it was a new term, there 

was some discussion at the time of the Luxembourg draft on how it 

would be interpreted. We cleared that up with an exchange of letters 

with the Luxembourg Government and we have in this case had an 

understanding with the German Government that is similar to that 

with Luxembourg.

I do not thin k tha t this place of management definition will cause 

trouble the way we understand it will be interpreted by them and 

the way we would interpret it ourselves. To have a place of management you have to really be managing the company.

Now, in addition, there is, I think, a more important aspect of this 

protocol, under the traditional American treatie s if, for example, an 

American corporation were to do business in Germany, it would be 

subject to full corporate tax of 51 percent on its business done there, 

if it had a permanent establishment. In addition, if the American 

corporation has investment income from Germany, or royalty income 

from Germany, if it also has a permanent establishment, it cannot have 

the advantages of the reduced rates of the German tax under the treaty 

on such things as royalties and interest or dividends.

For example, the existing treaty exempts royalties from tax by Germany, but if an American corporation which is getting royalties has a 

permanent establishment, which may be completely unconnected with 

these royalties, the exemption does not apply, and similarly on our 

part. If a German corporation doing business in the United States 

through a permanent establishment also happens to have royalty income, unassociated with that business, nevertheless the exemption does 

not apply. This in technical international tax terms is described as 

the force of attraction. The permanent establishment attracts all th e 

other income that comes from the country to it, and subjects it to the 

full corporate tax.

The OECD trea ty abandons tha t force of attraction, and it says in 

essence tha t the permanent establishment should attrac t to it only 

those other items of income tha t are effectively connected with it. 

“Effectively connected with it” is the teiminology used. But if they 

are unrelated, these other items of income remain separate and obtain whatever treaty advantages they would otherwise have obtained.
18 TAX PROTOCOLS W IT H BELG IUM AND GER MANY

In this German treaty protocol, we have embodied this newer version of the OECD formula and abandoned the force of attraction in 

favor of the effectively connected rule. We think it works for better 

treatment of international transactions and is, I think, going to be 

the pattern that most modern treatie s will have. This is, I think, the 

first protocol having this rule tha t has come before this committee. 

There was a partial version of this in the United Kingdom treaty 

which extended only to royalty income but not to other forms of income, but this protocol for the first time extends this idea to all forms 

of income.

The next matter that is of importance is the treatment of royalties. 

Under the existing treaty, royalties, patent royalties, copyright royalties and the like, are exempt from tax by the country of source, and 

the country of incorporation or residence taxes in full, so tha t an 

American corporation deriving paten t royalties from a German licensee does not pay German tax but pays the full 48-percent U.S. tax 

with no foreign tax credit because there is no foreign tax.

Uncertainties arose in Germany as to whether the term royalty included payments for know-how, and varying interpretations were 

given by the German authorities in particular cases. It was an unsettled question in the German law. In this protocol, the Germans 

have agreed, starting with 1963, to exempt know-how royalties, which 

was the interpretation the United States had thought was proper. 

They agreed to that starting in 1963, and in a letter—in an exchange 

of letters which I will submit for the record (see p. 26) also indicate 

that if there had been an express holding or rulin g in any situation 

previous to 1963 with respect to any taxpayer, they will in effect abide 

by that ruling of exemption, even in the years prior to 1963.

I think this is highly favorable to American interests and settles 

this matter which was of great concern to a number of American 

companies.

The next matter—I th ink this is getting near the end—is tha t under 

our internal law, we largely exempt capital gains of foreigners where 

the gains arise in the United States. The German law was not that 

way, and they did subject foreigners to a capital gains tax. Under 

the peculiarities of German law, that capital gains tax could be imposed in some situations where the entire transaction occurred outside of Germany, but the tax would be imposed because the subject 

matter of the transaction was stock in the German corporation. So, 

for example, if a U.S. company, owning a German subsidiary, sold 

the stock of tha t subsidiary in the United States to another U.S. 

company, Germany would levy a 51-percent tax on th at transaction, 

saying in effect that it arose out of a German activity.

Under this protocol, Germany gives up its tax in that case, and this 

is a distinct benefit to U.S. interests because the German tax would 

otherwise apply in some situations where people would not expect it 

to apply. It also benefits the U.S. Government because we do not have 

to give a foreign tax credit any longer for this tax.

The other pa rts of the protocol deal with restatement of the German 

rules by which double tax relief, relief against double taxation, is 

given to German residents and Germany corporations investing in the 

United States. They really pretty much bring the treaty into conformity with existing German internal law.
TAX PROTOCOLS W IT H BE LG IUM AND GERMAN Y 19

And then one other clause which I thin k is of importance and is new 

to our treaties. This deals with this kind of situation. When a U.S. 

parent has a foreign subsidiary, a number of transactions take place. 

Goods are sold to that subsidiary. Services may be rendered to that 

subsidiary. Our Government is interested in the charges that occur 

in these transactions between a U.S. paren t and a foreign subsidiary 

to see that the U.S. parent receives a fai r return for the goods it sells 

or the services it renders, to make sure t hat its U.S. income, subject 

to U.S. tax, is fairly reflected. We have the authority to make adjustments where there has been improper accounting.

Our adjustments would generally be in the form, in this situation, 

of ascribing income to the U.S. parent. For example, the U.S. pa rent 

may have undercharged its foreign subsidiary for goods. The U.S. 

Internal Revenue Service may say tha t it should have charged more 

for these goods. If it is successful in that contention, it means tha t 

the German subsidiary in turn should have paid more and should have 

a higher deduction under its German tax and is entitled in effect to a 

refund from Germany.

These transactions are so difficult tha t sometimes they are not decided and terminated for a considerable period of time. In many cases 

the two countries may not agree until after the statute of limitations 

may have run on the ability of, say, the German Government to make 

a refund. This protocol says th at if the two Governments come into 

agreement as to what is the proper allocation of profits or other matte rs of this nature, such as source of income, then they have authority 

to carry out that agreement despite limitations in the Code, such as the 

statu te of limitations on the carrying out of that agreement; and the 

same rule would apply to the United States if the situations were reversed and we reached agreement to make a refund. Then, in effect, 

our statute of limitations is put to one side.

I think clauses of this nature, which we are endeavoring to incorporate in all of our treaties with the major countries, will greatly facilitate what is probably coming to l>e one of the most difficult problems 

in international transactions, and that is a fai r allocation of income 

between one country and another, and the ability to carry out an 

agreement, once it is reached. The clauses will permit us and foreign 

governments and American taxpayers and foreign taxpayers to reach 

rational results in these cases. So I regard this as an important step 

forward in international transactions and in international rules.

Senator Gore. Germany has not taken any action on the treaty, 

has she ?

Mr. Surrey. No, Mr. Chairman. Their parliament has not come 

into session until after the recent elections. We understand tha t their 

parliament, their legislature will meet this year, and the German 

authorities involved with these matters will make every effort to 

have the treaty ratified this year. They regard tha t as an important 

matter.

Senator Gore. A loss of revenue to the German Government and 

thus a larger payment on the part of the U.S. interests will be involved in the ratification this year or after this year, will it not?

Mr. Surrey. I think there may be cases in which the figures for a 

particular company are large, but this has never been a point of discussion with the German authorities, and they have been anxious to
20 TAX PROTOCOLS WITH BELGIUM AND GERMANY

have the treaty ratified. I have never had this point brought up. 

Mr. Gordon who talked with the German authorities recently, confirms thei r desire to get this ratified this year. One of the biggest 

items is their giving up their tax on know-how royalties, which is 

much large r than anyth ing else involved, and tha t is effective as of 

Jan uary 1963. So it would not make any difference when it was 

ratified.

Senator Gore. Have you ha d any assurances in writ ing of the G erman inten t to secure early ra tification ?

Mr. Surrey. We do not have it in writing. Mr. Gordon discussed 

this matt er with the German authorities about a week ago in Pari s, 

and I think both governments agreed to inform ally take every step 

necessary. I am certain t hat if the tre aty is ratified by us, tha t within 

this year we and they will make every effort to assure its ratification in 

Germany.

Senator Gore. Thank you, Mr. Secretary.

Mr. Surrey. Than k you.

(Th e statement and memorandum on the tax protocol with the Fed ­

eral Republic of Germany referred to above follows:)

Statement on the Protocol Amending th e I ncome Tax Convention Between

th e United States and the Federal Republic of Germany by Stanley S. 

Surrey, Assistant Secretary of th e Treasury

Mr. Chairman and members of the committee, I am very glad to discuss the 

protocol signed September 17, 1965, to amend the income tax convention between 

the United States and the Federal Republic of Germany, which was entered 

into in 1954. The protocol is the resul t of discussions which have taken place 

over a period of years to deal with a number of problems tha t emerged under 

the convention as it now stands and to take account of changes made in the 

German income tax system in the years since the convention came into effect.

I do not propose to discuss each provision of the protocol, since the President, 

in transmitting the protocol to the Senate, also transm itted a memorandum 

which summarizes each article in the protocol. Moreover, at the end of my 

remarks I will submit for the record a comprehensive technical memorandum 

which goes into considerable detail in connection with each artic le of the protocol. 

I shall therefore confine my remarks to the principal provisions of t he protocol.

I should like, first, to note tha t on the whole the protocol will have a greater 

impact on the application of German tax laws than on U.S. tax laws. It will 

bring German tax practices more into line with U.S. tax practices and thus 

bring about a great er degree of reciprocity than has hithe rto prevailed with respect to certain types of trans action s and income flows. In general, therefore, the 

protocol produces tax changes which are beneficial to Americans having interests 

in Germany.

Article 1 of the protocol restates the taxes covered by the convention. It describes more precisely than at present the German taxes falling within its scope 

and adds certain German taxes which are not measured by income, the trad e 

tax, and the tax on capital. The consequence of this change is to enlarge the 

tax benefits accruing to U.S. residents and corporations holding German assets 

by also granting them exemption from these nonincome taxes on those assets.

PERMANENT EST ABL ISHMENT PROVISIONS

Article 2 of the protocol provides for a new definition of the term “permanent 

establishment.” This is a key term in tax treaties since a taxpayer not having 

a permanent establishment in a country may not under our treaties be taxed 

on industrial or commercial profits arising within the country. The definition 

of the term, in effect, sets forth what types of activity constitu te a permanent 

establishment and hence establishes the limits within which an enterprise of 

one country may conduct activities in the other country without being subject 

to tax on industrial or commercial profits in tha t other country. The definition
TAX PROTOCOLS WITH BELGIUM AND GERMANY 21

of a permanent establishment in this protocol is essentially the same as in our 

tax conventions with Luxembourg and Sweden, which have been approved by 

the Senate, and in our convention with Belgium which is also before your committee. I would like specifically to mention one aspect of this definition, the 

phrase which refers to a “place of management.” A place of management, like 

an office, store, or factory, can constitu te a permanen t establishment. Some 

have feared tha t this phrase may be interpr eted by Germany to hold a permanent establishment to exist if a business executive from an American corporation should make certain decisions in tha t country with respect to the 

operations of his firm’s subsidiary there, even though the decisions are made 

in a place temporarily occupied by the executive as living quarters.

In this connection, I would like to submit a memorandum of understan ding 

which accompanies the protocol (see p. 2 5). The first item in t ha t memorandum 

provides tha t “a hotel room or similar place temporarily occupied by officials of 

an enterprise exercising management functions shall not be interpr eted to constitute a place of management.” This issue also was considered in connection with 

the tax convention with Luxembourg, and we th ere entered into an exchange of 

letters which provided tha t decisions taken by executives which are solely of a 

technical or scientific n atur e will not be interpr eted to constitute “management.” 

We have agreed with the German tax authorities tha t a similar principle will 

apply in the application of the term “management” used in this protocol. We 

have not included this in the memorandum of understanding only because the 

time necessary to reach terminological precision in both the English and German 

languages would have delayed too long consummation of the protocol. I am 

confident tha t in the application of the term “place of management,” the fears 

tha t have been expressed will prove to be groundless. I should like to point out 

tha t the language used in the protocol is taken from the OECD model convention. We are seeking to achieve as much uniformity among the industrialized 

countries as possible in the terminology used in tax conventions. For t his reason, 

we and the German authorities preferre d not to alte r the permanen t establishment language but to arriv e at a clearer understanding of what the language 

means through the memorandum of understanding and our discussions.

Article I II of the existing convention provides that an enterprise of one country 

with a permanent establishment in the other may be taxed in tha t other country 

on its industrial or commercial profits. The tax will be a t the regula r rate s applicable to business income. It goes on to say, moreover, tha t all other income 

from tha t country, such as investment income or royalty income, which accrues 

to the enterprise will be treat ed as income of the permanent establishment and 

taxed at such regular rates together with the profits which are actually att rib utable to the operations of t he permanent establishment. Thus, if a German company having a marketing branch in the United S tates holds, say, U.S. government 

bonds, the interest it receives is tre ated as the income of the permanent establishment and taxable to it even though the convention provides fo r tax exemption of 

intere st paid to a German corporation which does not have a permanent establishment here. The taxa tion of a foreign enterprise which has a permanent establishment on all income from sources within the United States at regular rate s has 

come to be referr ed to as the “force of a ttra ctio n”. It produces anomalous sit uations and tends to discourage investment in the United States by the foreigners 

most likely to invest here.

The protocol amends the convention so as to abandon the “force of a ttra ctio n”. 

To accomplish this re sult, the protocol amends article s I II, VI, VII, and V III and 

adds a new article IXA. Under these new provisions, a permanent establishment 

of a firm in the other country will be taxabl e at r egula r ra tes only on the business 

income attr ibuta ble to the activities of th e permanent establishment or the investment income “effectively connected” with the activities of the permanent estab ­

lishment. Other income, such as investment income or royalties which are not 

effectively connected to the firm’s business activities in the country, will be treate d 

in accordance with the relevant provisions in the convention regarding those 

types of income. Hence, if a German firm derives intere st income which is not 

effectively connected with the activities of its permanent establishment in the 

United States, the intere st would be tax exempt u nder the convention.

This is not the fi rst tax convention to depart from the “force of a ttra ctio n” approach. Our tax convention with the United Kingdom was amended some years 

ago to extend the exemption which otherwise applied to royalty payments to cases 

where the recipient of the royalties had a permanent establishment situa ted in

54-64 7 0 —65- 4
22 TAX PROTOCOLS WITH BELGIUM AND GERMANY

the country from which the royalties were derived where such payments are not 

directly associated with such permanent establishment. However, this protocol 

is the first convention which fully eliminates the “force of attra ctio n” principle.

I should like to add tha t the t reaties written among the European countries, as 

well as the OECD model convention, generally do not contain the “force of a ttr ac ­

tion” principle. Instead, they rely on the “effectively connected” doctrine.

The memorandum of under standing expounds on the meaning of the term “effectively connected” and is intended to minimize adminis trative problems tha t might 

arise in its application.

TAX BATE ON DIVIDENDS AND PROFITS

In the existing income-tax convention, provision is made for a reduced rate of 

withholding tax of 15 percent on dividends paid by a 10-percent-or-more-owned 

subsidiary corporation in one country to a pa rent corporation in the other country. 

As respects the United States, this is in lieu of our 30-percent statu tory rate. 

Under artic le 4 of the protocol, thi s reduced rat e would apply to all noneffectively 

connected dividends paid from one country to a recipient in the other, and thus 

will extend to portfolio investments. This extension of the reduced rate of tax 

applicable to dividends brings the German convention more nearly into line with 

most of the other tax conventions to which the United States is a party. At the 

same time, the protocol increases the withholding tax rate in certain situations to 

deal with wha t Germany has considered to be an abuse resulting from the interaction of the split rate German corporation tax and the reduced withholding tax 

rate in the treaty.

The German corporate tax on distribu ted profits (15 percent) is much lower 

than tha t on retained profits (51 perc ent). As a result, some American companies with German subsidiaries have found it to their tax advantage to distribute all of the profits from such German subsidiaries as dividends to the U.S. 

parent, subjecting those profits to the low German corporate tax rate on distributed profits and to the 15-percent German withholding tax (and also to the 

U.S. tax, but with application of a credit for the German tax es), and then immediately to reinvest the balance in the German subsidiary. The combination 

of th e low German corporate tax on distributed profits and the treaty withholding tax, even with any U.S. t ax tha t had to be paid, often was lower th an what 

the German corporate tax alone would have been on the undistributed profits 

involved had they been simply retained by the German subsidiary rath er than 

being distributed and reinvested. To eliminate the incentive to distribute and 

reinvest in such cases, the protocol provides tha t Germany may continue to 

impose its statutory withholding tax rate of 25 percent on dividends which are 

distributed and then reinvested in Germany by the parent company. For this 

purpose, an investment made in a German subsidiary by a U.S. parent company in 

the year in which the latter receives dividends from the subsidiary, or in either 

the year immediately preceding or following the receipt of such dividends, is 

considered to be a reinvestment of the dividends received. However, the amount 

deemed reinvested in any year must exceed 7% percent of the dividends received 

from the subsidiary in such yea r for th is provision to apply.

In connection with the abandonment of the “force of attraction” principle 

which I mentioned earlier, the protocol also provides in ar ticle 4 t hat if dividends 

paid to a foreign enterprise are unrelated to the operations of its permanent 

establishment in the country from which the dividends are paid, such dividends 

will not be taxable a t regular rate s to such foreign enterprise. Instead they will 

be taxed at the 15-percent withholding tax rate applicable to a foreign enterprise 

which does not have a permanent establishment in the source country.

The same principle is established by article 5 of the protocol with respect to 

intere st received by a person in one country from sources within the other, 

and by article 6 with respect to royalties. Both types of income are thus exempt 

under the convention from tax in the source country when not effectively connected with a permanent establishment situated therein.

Article 6 of the protocol revises the tax treatment of royalties in one other 

respect also. Prior to the protocol, royalties were exempt from tax in the 

source country when received bv a resident or corporation of the other country. 

However, in some cases the German autho rities bad been niacin0- a stri cter construction on the term “royalty” than was the case in the United States. For 

example, they did not apply the exemption to payments for “know-how.” The
TAX PROTOCOLS WITH BELGIUM AND GERMANY 23

protocol revises the definition of royalties so tha t not only are payments for the 

use of or right to use patents, copyrights, and similar property rights covered 

by the exemption, but also payments for the use of or right to use knowledge, 

experience, and skill (“know-how”) are exempt. It has been agreed tha t this 

expanded exemption will be applicable from January 1, 1963, and in some cases 

the exemption will apply to earlier periods as well. In this connection, I would 

like to submit for the record an exchange of letters between the Treasury and 

the German Ministry of Finance relating to this question, which indicates the 

cases in which the German exemption will apply prior to January 1, 1963.

Under existing U.S. law, capital gains realized by nonresident aliens and foreign companies are exempt from tax in the United States except in limited cases. 

Under German law, however, capital gains of Americans are taxable under circumstances that are not so restricted. Since the trea ty now contains no provision on capital gains, the reciprocity in the tax treatment of capital gains is 

lacking. Article 8 of the protocol remedies this by establishing rules for the 

exemption of capital gains. The principal advantage to the United States lies 

in the changed tax treatment with respect to what the Germans refer to as “a 

substantial partic ipatio n”—where a taxpayer, an individual, or corporation, 

owns 25 percent or more of the shares of a Germany company. If the owner of 

such an interest in a German company disposes of any shares, the profits derived from their sale are treated under Germany law as profits derived from 

within Germany and are therefore subject to tax there. The German view is 

that under these circumstances the owner of the stock is in effect doing business 

in Germany and therefore the gains derived from the sale of the stock represents the realization of profits within Germany. This situation has posed problems for American companies who sought to reorganize their holdings in a 

German subsidiary or to dispose of their interest in a German corporation. 

Such companies found themselves subject to tax in Germany under circumstances where no tax was levied in the United States, as in the case of a taxfree reorganization. Or if the sale took place in the United States, the gain was 

considered to have a source in the United States and therefore no credit was 

allowed for the tax imposed by Germany. Under the protocol, such situations 

will no longer arise since Germany will not tax any gain on the disposition of 

shares in a Germany company. The memorandum of understanding attached 

to the protocol makes explicit tha t the exemption applies to stock in a subsidiary 

company (substantial participation) disposed of by a parent corporation. Moreover, as in the case of other income, the “force of attraction” principle will be 

replaced by the “effectively connected” concept with respect to capital gains.

Under German law, payments received by a U.S. resident for services which 

are performed in the United States but the results of which are utilized in 

Germany are considered to be income earned in Germany and subject to tax 

there. For example, if an engineer in the United States prepares drawings for 

use in connection with a manufacturing process, which drawings are transmitted 

to Germany and utilized there, Germany would tax the engineer on the income 

he receives for his services in preparing the drawings. This German tax would 

be imposed even though the engineer never left the United States, on the ground 

tha t his income is derived from the utilization in Germany of the fruits of his 

services. Under U.S. law, the income would have a source in the United States 

because the services are performed here and no part of the Germany tax imposed on such income would be allowable as a credit against U.S. tax. Article 9 

of the protocol amends the existing convention to eliminate German tax in such 

situations and thus removes the double taxation tha t now exists.

This article of the protocol also tightens up somewhat the tax treatment of 

personal service income. Prior to the protocol, the exemptions contained in 

article X of the convention applied to services performed as an employee of, 

or under contact with, either (1) a natural person resident in, or a company of, 

the country of the taxpayer’s residence—in which case there was no limitation 

on the amount of compensation which was exempt from source country taxation, 

or (2) any other employer—in which case the exemption from source country 

taxation was limited to cases in which compensation received for such labor or 

personal services did not exceed $3,000. Amended article X of the convention 

requires that, as a prerequisite to exemption, compensation be received for 

services performed as an employee of, or under contract with, only a natural 

person resident in, or a corporation of, the country of the taxpayer’s residence. 

Moreover, the amended article requires tha t such compensation be borne directly 

by such an individual resident or corporate employer, and not by a permanent
24 TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y

establishment maintained by such employer in the country of source. This 

change brings the convention into conformity with the OECD model dra ft 

convention.

Article XV of the existing convention contains the basic provisions for eliminating double taxation. Under its terms Germany does not impose a tax on 

its residents otr companies receiving income from sources within the United 

States if under the convention such income is taxable in the United States. 

This has resulted in certain tax advantages which Germany does not wish 

to perpetuat e for German ta xpaye rs receiving some forms of income from sources 

within the United States. Consequently, article 12 of the protocol revises the 

tax treat y so tha t in the case of portfolio dividends and Government wages, 

salaries, and pensions Germany will be permitted to impose tax on amounts 

received from U.S. sources but will allow a credit for U.S. tax imposed on such 

income. Exemption will continue where dividends are paid by a U.S. corporation to a German paren t corporation. For this purpose a paren t company is 

defined as one which owns 25 percent or more of t he voting stock of the corporation paying the dividends. Article XV also provides tha t U.S. citizens or 

residents who also are residents of Germany for tax purposes (and, therefore, 

are subject to tax in both countries on their worldwide income) shall be allowed a credit against German tax for U.S. taxes on any U.S. sources income 

regardless of other provisions of the trea ty.

Under U.S. tax law, nonprofit institutions abroad may qualify for exemption from U.S. tax on their income from U.S. sources and may secure a ruling 

from the Inter nal Revenue Service as to their nontaxable status. In other 

words, a German nonprofit i nstitution may acquire the same tax-exempt statu s 

as a domestic nonprofit instituti on. However, German law does not accord 

U.S. organizations the exemption from German tax which German institutions 

enjoy. There are some American nonprofit institu tions tha t have obtained 

German securities by bequest or otherwise and are subject to tax in Germany 

on the income from such securities. Article 13 of the protocol revises the existing convention by inserting a new article as a result of which American nonprofit institutions may qualify for exemption from tax in Germany on income 

from sources there. It thus would achieve reciprocity in the tax treatm ent of 

nonprofit institutions.

The existing convention contains provisions for exchanges of information between the tax autho rities of the two countries to prevent frau d and to carry 

out the various provisions of the convention. However, the existing language 

has been construed to preclude the use by one country of tax information obtained in the other in proceedings before a court or other administrativ e body. 

Article 14 of the protocol would amend the existing language of t he convention 

so as to permit the disclosure of such information in a court or other administrat ive proceeding involving the assessment and collection of taxes.

The objective of the tax conventions to eliminate double taxation has sometimes been frustrate d by the fact tha t refunds could not be made in appropriate 

cases. Assume for example th at transac tions have taken place between a 

German subsidiary and a U.S. pare nt corporation and tha t upon audit of the 

retu rn of the parent company the U.S. tax autho rities find tha t the income 

reported by the paren t company had been understated. Perhap s the price 

charged the subsidiary company for goods sold to it by the pare nt corporation 

was too low. A deficiency might be assessed against the parent company and 

U.S. tax imposed on an amount which had previously been reported as a profit 

by the German subsidiary and had been subject to tax in Germany. Assume, 

furth er, tha t the German tax authorities are in agreement with the U.S. tax 

authorities tha t the price charged the German subsidiary is too low. Unless 

the Germans can make a refund of the tax previously collected on the income 

of the subsidiary, which is now to be treated instead as additional profits of 

the American paren t company, there will be double taxation. However, the 

authority for Germany to make refunds might have expired because the length 

of time taken for the U.S. tax autho rities to make the deficiency assessment 

exceeded the time during which a refund could be made by the German authorities. Article 15 of the protocol amends the existing convention so tha t 

under these circumstances a refund could be made by the German authorities. 

In other words, the protocol would extend the sta tut e of limitations for the 

purpose of making refunds in app ropriate cases. The same provision would apply 

to the United States.

The dividend article of the protocol will affect dividends paid on or afte r 

Jan uary 1, 1965; the royalty article will affect such payments made on or afte r
TAX PROTOCOLS W IT H BELG IUM AND GER MANY 25

January 1, 1963; and all other articles of the protocol will become effective for 

taxable years beginning on or afte r the first day of January in the year in 

which the exchange of instruments of ratification occurs.

I have discussed what I believe to be the most important provisions of the proposed protocol to the convention between Germany and the United States, and I 

urge the committee to take prompt action in reporting it out with a recommendation for ratification. With your permission, I am submitting for the record a 

memorandum of understanding with the German authorities on the permanent 

establishment and other questions, an exchange of letters on the “know-how” 

question, and the technical memorandum on the protocol.

Memorandum of Understanding Between Tax Delegations of Germany and

the United States Concerning the Protocol Signed September 17, 1965, To Modify the Income Tax Convention of J uly 22, 1954

The representatives of the German Ministry of Finance and of the U.S.

Treasury Department hereby agree tha t the protocol modifying the Income 

Tax Convention of July 22, 1954, between Germany and the United States of 

America shall be applied in accordance with the following princip les: 1. In the application of article II of the convention a hotel room or similar 

place temporarily occupied by officials of an enterprise exercising management 

functions shall not be interpreted to constitute “a place of management.”

2. For purposes of determining whether a corporation tha t has received a 

dividend has made a reinvestment in the corporation paying the dividend so 

tha t paragraph (3) of artic le VI of the convention applies to the dividend 

deemed to have been reinvested, paragraph (5) of tha t article shall be interpreted so tha t loans which do not constitute more than a temporary addition 

to the capital of the corporation paying the dividend, as for example trade 

credit extended in accordance with the general credit practices followed in 

the trade or business concerned, shall not be deemed to constitute reinvestments. 

The renewal or conversion into equity capital of loans outstanding as of December 31, 1964, other than those mentioned in the foregoing sentence, shall not 

be deemed to constitute a reinvestment.

3. The term “effectively connected” as used in articles VI, VII and VIII of 

the convention shall be so construed that items of income referred to in the 

respective articles will be considered to be effectively connected with a permanent establishment if such items of income accrue to the recipient by v irtue of 

assets (a) held by the permanent establishment or (ft) held by the recipient 

specifically to promote the business activities of the permanent establishment, 

or if the activities of the permanent establishment are a material factor in 

realizing such items of income. As used in article IX A of the convention, the 

term “effectively connected” shall be so construed tha t gain to which the article applies will be considered to be effectively connected with a permanent 

establishment if the gain is derived from the alienation of property (a) held 

by such permanent establishment or (b) held specifically to promote its business activities.

4. Both delegations agree tha t the amendment effected by article 6 of the 

protocol shall not influence the interpretation to be given to article VII I of 

the convention prior to the amendment.

5. The exemption of capital gains provided by article IX A of the convention is understood to apply to the sale, liquidation or other alienation of a 

“wesentliche beteiligung” (substantial participation) in a company.

6. In the event tha t either the U.S. income tax or Federal Republic tax, as 

it applies to corporations, is substantially changed, or if experience in individual 

cases indicates tha t the application of article VI leads to effects tha t are not 

in accordance with the basic principles underlying tha t article, the competent 

authorities of the contracting States shall consult together for the purpose of 

ascertaning whether it is necessary to amend article VI.

Done at Bonn in duplicate, in the Engish and German languages, each text 

having equal authenticity, this 18th day of October 1965.

For the U.S. Treasury Department.

Arthur Blaser.

For the Federal Ministry of Finance.

Falk.
26 TAX PROTOCOLS WITH BELGIUM AND GERMANY

Treasury Depar tmen t,

Assi sta nt Secretary, 

Washington, D.C., August 27, 1965.

Dear Mr. Fa l k: To avoid possible difficulties in the future concerning the 

tax treatm ent accorded by the tax autho rities in the Federal Republic of Germany 

to payments for know-how made prior to Janu ary 1, 1963, to U.S. recipients, 1 

am writing my understanding of the agreement we reached in the course of 

our discussions on the modification of the existing income tax convention.

Remuneration for know-how paid prior to Janu ary 1, 1963, from sources in 

the Federal Republic to a resident or corporation or other entity of the United 

States will be exempt from Federal Republic tax provided the competent German 

tax assessment autho rities by virtue of an audit report or for other reasons 

have stated tha t such remuneration is exempt from tax. Such a statement will 

be deemed to have been made if the competent a uthority in rendering i ts decision 

did not expressly disagree with an audit report holding such remuneration to 

be tax exempt. Such remuneration will be ta x exempt provided the said state ­

ment was not revoked prior to the payment of the remuneration.

If this accords with your understanding of the matter , I would appreciate it 

if you were to send me, as promptly as possible, a letter confirming it.

Sincerely yours,

(Sign ed) Stanley S. Surrey.

Mr. Ludwig F alk,

Ministerial Director,

Ministry of Finance,

Bonn, Germany.

Ministerialdirektor Dr. Fal k, im ,

Bun desminis ter ium der Fina nz en,

Bonn, September 28, 1965.

Prof. Stanley S. Surrey,

Assistant Secretary, Treasury Department,

Washington, D.C.

Dear Mr. Surrey : Thank you for your letter of August 27, 1965. I have 

pleasure in confirming as follows my understanding of the agreement we reached 

in the course of our discussions on the protocol to amend the United Stat es/ 

German income tax convention:

Remuneration for know-how paid prior to January 1, 1963, from sources in 

the Federal Republic to a resident or corporation or other entity of the United 

States will be exempt from Federal Republic tax provided the competent German 

tax assessment a utho rities by virtue of an audi t report or for other reasons have 

stated that such remuneration is exempt from tax. Such a statement will be 

deemed to have been made if the competent autho rity in rendering its decision 

did not disagree with an audit report expressly holding such remuneration to be 

tax exempt. Such remuneration will be tax exempt provided the said statement 

was not revoked prior to the payment of the remuneration.

You will note tha t I changed the wording of the last sentence of the preceding 

text by inserting “expressly” between “report” and “holding” in order to make 

it quite clear to the German reader tha t the findings of the audit report must 

expressly mention the tax exemption of the payments for know-how. In view 

of what the term “holding” means in this context, tha t change does not alter 

the substance of what is contained in our exchange of letters.

Sincerely yours,

F al k.

Techn ical Memorandum of Treasury Department Concerning P roposed

Protocol Amending th e I ncome Tax Convention Between th e United

States and th e Federal Republ ic of Germany

A protocol was signed a t Bonn on September 17, 1965, modifying the existing 

incom tax convention between the United States and the Federal Republic of 

Germany. This protocol had its inception in the desire of the contracting par ­

ties, in some cases occasioned by changes in thei r respective tax laws, to make 

certain changes in the convention and to extend it both to certain other taxes
TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y 27

and to some additional items of income. The extension in the coverage of this 

convention to certain German ta xes imposed upon capital necessitated an amendment in the title of the original convention to include a fter the words “with respect to taxes on income” the words “and to certain other taxes.”

This protocol contains 18 article s and includes a memorandum of understand ­

ing concerning the interp retation to be given to certain of its provisions. It 

covers a broad range of subjects, including the ta xation of business and personal 

service income, dividends, interest, rents, royalties, and capital gains, as well as 

a redefinition of the concept of “permanent establishment,” the grantin g of relief 

from double taxatio n by the country of the taxpayer’s residence, and the abandonment of the so-called force-of-attraction doctrine. In addition the protocol 

contains a new provision empowering the competent auth oritie s of the two countries to make adjustments in tax liability, including refunds, and determinations 

as to the source of parti cula r items of income, in o rder to avoid double taxation 

in approp riate cases. Such adjustm ents may be necessary, for example, when 

disparate allocations of income are made in relation to trad e transact ions between a German and a related United States enterprise. A summary and explanation of the protocol follows.

ARTICLE 1

Taxes covered

Article 1 of the protocol amends existing article I of the convention, relating 

to the taxes referred to in the treaty.

The amended article adds two German taxes to the list of those covered by 

the trea ty and eliminates a German tax (th e Berlin emergency contribution, i.e., 

Notopfer) which the Federal Republic no longer imposes.

The additional German taxes covered by the amended convention are the 

German trade tax (Gewerbe steuer) and the German capital tax (Vermoegensteuer ). The Government of the Federal Republic relinquished its right to impose its tax on capital with respect to certain U.S. taxpayers, under article 11 

of th e protocol, even though the United States does not impose comparable taxes 

and could not make a reciprocal concession.

The German Government also relinquished its right to impose the trade 

tax, which is computed on the basis of business profits, capital, and wages paid, 

where no German income or corporation tax can be imposed under the treaty. 

As a result, new paragraph (3 ) of article I of t he convention makes clear tha t 

the entire trade tax is covered under the trea ty and not jus t the portion thereof 

which is computed on the basis of profits or capital.

The United States, however, will continue to allow a foreign tax credit only 

for the portion of the trad e tax which is computed on the basis of business 

profits.

ARTICLE 2

Perman ent establishment

Article 2 of the protocol redefines the term “permanent establishment” in ar ticle 11 (1 ) (c ) of the existing convention. This redefinition corresponds in all 

mater ial respects with article 5 of the model income tax convention prepared 

by th e OECD Fiscal Committee, with the following exce ptions:

1. The phrase “a store or other sales outlet” has been added to the list of 

those fixed places of business which, if maintained or used by the taxpayer in 

carrying on his business in the taxing jurisdiction, will constitu te a permanent 

establishment ;

2. The provisions of clause (cc ) of new subpara graph (c ) have been revised 

to provide tha t a taxpa yer of one country can maintain facilities for one or more 

of the activities enumerated therein without being considered as having a permanent establishment in the other contractin g state. Thus, the goods of a taxpa yer 

of one country can be stored in a fixed place of business of the taxpayer in the 

other contracting s tate fo r delivery, display, or processing by an unrelated party, 

and the taxpayer may engage in purchasing, advertising, research, and simila r 

activities through such a fixed place of business without being considered as 

having a permanent establishment.

Paragraph 1 of the memorandum of understanding which supplements this 

protocol provides a definition of the term “a place of management,” which appears in new article 11 (1 ) (c ) (ff ) of the existing convention, by excluding therefrom a hotel room or similar place temporarily occupied by officials of an enterprise who are exercising management functions therein. Thus, the executives 

of a U.S. corporation can visit the Federal Republic and make decisions in a
28 TAX PROTOCOLS WITH BELGIUM AND GERMANY

hotel room or similar place which they temporarily occupy during such visit, 

which decisions affect the management of tha t corporatio n’s business without 

such room or similar place being classified as “a place of management’' (and, 

therefore, a permanent establis hment) for purposes of the convention. It was 

also agreed tha t the term “management” should be interpreted to exclude decisions which are solely of a technical or scientific nature.

ARTICLE 3

Industrial or commercial profits

Article 3 of the protocol limits existing article II I of the convention, which 

relates to industrial or commercial profits, by providing tha t such profits are 

taxable by the source country only if an enterprise of the other contracting 

stat e is engaged in trad e or business in the source country through a permanent 

establishment and if such industrial or commercial profits are (1 ) attributable 

to such permanent establishment, (2 ) derived from sales of goods or merchandise 

of the same kind as those sold through such permanent establishment, or (3 ) 

derived from other business transactions of the same kind as those effected 

through such permanent establishment.

Example 1. A German company maintains a permanen t establishment in the 

United States through which it sells and services computer equipment. In 

addition, it sells office furn iture in the United States through an independent 

agent. The profits derived from the sale of the office furn iture are exempt 

from U.S. tax under the convention, since the office furnitu re is not the same 

kind of goods or merchandise as the computer equipment being sold th rough the 

permanen t establishment.

Para graph (2 ) of new artic le II I of the trea ty contains the provision found in 

the original convention requirin g the allocation of profits between the enterprise’s home office in one trea ty country and permanen t establishment in the 

other country on an “arm’s length” basis.

Para grap h (3 ) of new article II I provides th at there shall be allowed as deductions all expenses, wherever incurred, which are reasonably connected with 

the industrial or commercial profits taxable to the permanent establishment. 

This paragraph is similar to parag raph (4 ) of article II I of the original convention. The revised paragraph, however, states specifically tha t deductions 

shall be allowed if reasonably connected with the permanent establishment’s 

profits without regard to the country in which those expenses are incurred. 

Thus, where an enterprise of one country uses a patented formula in the manufactu ring operations it is carrying on through a permanen t establishment in 

the other country, all or a portion of the royalty which the enterprise must pay 

for the use of the patented formula may be deducted in computing the amount 

of the industrial or commercial profits attributa ble to the permanent establishment which is taxable in such other country.

Paragraph (4 ) of new article II I of the treaty provides tha t no profits shall 

be deemed to be derived by an enterprise merely by reason of the purchase of 

goods or merchandise by a permanent establishment of the enterprise, or by 

the enterprise itself, for the account of the enterprise. Essentially the same 

provision is contained in artic le I II (2 ) of the original treaty .

Parag raph (5 ) of new article II I of the treaty contains a definition of the 

term “industrial or commercial profits,” for purposes of the convention. Such 

term includes income derived by an enterprise in the active conduct of a trad e 

or business and generally excludes income, such as dividends, interest, royalties, 

and capital gain which is specifically dealt with in other article s of the convention.

Prio r to this protocol, it was not clear tha t income derived from the furn ishing of services of employees of a U.S. enterprise within Germany (or for utilization in Germany) constitute d “indus trial or commercial profits” within the 

meaning of article II I of the convention, or personal services within the meaning of article X of the convention. New paragraph (5 ) of ar ticle II I of the convention, added by the protocol, specifically provides tha t the term “indus trial 

or commercial profits” includes “income derived by an enterprise from the 

furnishi ng of services of employees or other personnel.” The services referre d 

to include income from the furnishing, by a corporate or other enterprise, of 

engineering, marketing research, consultant, advertising, advisory, legal, accounting, entertainment, or other services whether performed by its own employees 

or by individuals who are not technically employees but who are under contract 

with tha t enterprise to perform such services. Thus income derived from the 

performance of such services within Germany by a U.S. enterprise which does
TAX PROT OCOLS W IT H BE LG IUM AND GER MANY 29

not have a permanent establishm ent in Germany will not be subject to German 

tax. However, the new p aragraph has no application to compensation for services which an individual taxpayer renders.

ARTICLE 4

Dividends

Article 4 of the protocol deletes existing article VI of the convention, relating 

to the taxation of dividends, and replaces it with a new article VI.

Parag raphs (1 ) and (2 ) of new article VI provide in general tha t the tax 

imposed by the country of source on dividends received by individuals and 

corporations of th e other trea ty country shall not exceed 15 percent of th e gross 

amount of the dividends actually distributed. These provisions generally reduce 

the tax otherwise imposed under the U.S. Internal Revenue Code (usua lly 30 

percent) and under the German income tax law (usually 25 perc ent). Such 

paragraphs also expand the coverage of article VI of the existing convention by 

including for the first time within paragraphs (1 ) and (2 ) dividends paid to 

individual sharehold ers and less than 10 percent corporate shareholders.

The Federal Republic imposes a lower rate of corporate tax (prese ntly 15 

percent) on distributed earnings than it imposes on undistribute d earnings (pre sently 51 percent) ; and the trad e tax which is collected by the municipalities on 

(among other thing s) the business profits of a corporation is deductible in computing the Federal Republic corporation tax on und istributed profits.

In the case of dividends paid by a German subsidiary to a German paren t 

corporation which owns directly at least 25 percent of the outstanding stock of 

such subsidiary, the Federal Republic imposes a supplementary 36-percent tax 

(Nachsteu er) on the amount of dividends received by the German parent corporation from its 25 percent or more owned subsidiary (to the extent such dividend 

income is not distribute d to the shareholders of the German parent corpo ration). 

However, such supplementary tax (Nachsteuer ) does not apply to dividends received by a foreign corporation owning stock of the German distributing corporation. In such cases, dividends are subject to German withholding tax of 25 

percent at source under German law. Article VI of th e original treaty , however, 

reduces this rate of the German withholding tax to 15 percent in the case of 

U.S. corporations owning 10 percent or more of the voting stock of th e distr ibuting corporation. The application of these rules may be illustrated by the following exam ples:

Example 1. Assume tha t a German company X derives $1,000 of business 

profits ; tha t German company X is wholly owned by U.S. corporation Z ; and 

tha t neither X nor Z distribu tes any dividends. The German tax liability of X 

and the amount available for reinvestme nt by X is determined as follow s:

Pretax pr of its ___________________________________________ $1, 000

Trade tax at average of 12.3 percent _______________________ $123

Corporation tax : On undistribute d profits (51 percent of $ 8 7 7 )___ 447

Total tax on $1,000 of profits of German co mpany ________ 570

After-tax profits av ail ab le____________________________ 430

Example 2. Assume the same facts as in example 1, except tha t the only income of Z is the $671 (th e maximum dividend distri butab le by company X 

from its $1,000 in income a fte r satisfaction of German trad e tax and corporation 

tax liability applicable to such income) distribution from X. The German tax 

liability of Z and the amount available for reinvestment in X is determined as 

follow s:

Dividend from X _________________________________________ $671

Amount subject to withholding tax (ar t. VI of original tr e a ty )____ 671

Withholding tax (15 percent of $ 6 7 1 )_________________________ 101

U.S. tax at 48 percent rate on $671 distribu tion from German companv (af ter application of gross-up) :

Dividend (reduced by 15 percent withholding) (671 minus $ 1 0 1 )___ $570

U.S. t ax (48 percent of $ 1. 00 0) ___________________________$480

Foreign tax credit ($329 plus $ 1 0 1 )______________________ 430

Net U.S. t a x _____________________________________________ 50

After-tax pr of it_______ - __________________ *___________ *__ 520

54-^647 O—^65 •» •• '5
30 TAX PROTOCOLS W IT H BEL GIU M AND GERMAN Y

The above examples illustra te the incentive afforde d a U.S. paren t corporation 

to maximiz e dis trib utio ns from its German sub sidiary and rein vest the amo unt 

of such dist ribu tion s in the su bsidi ary.

To elim inate this incentiv e, new art icle VI provid es th at the German tax imposed with respec t to divide nds paid on or af ter Janu ary 1, 1965, and received by 

a U.S. corpo ration or o the r en tity from a Germany company may exceed 15 perce nt 

but shal l not exceed 25 perc ent of th at portion of any dividend which is deemed 

reinv ested, on or af ter th at date, und er par agrap h (5 ) of the art icl e if—

1. The U.S. recipient corp orat ion or o ther entit y owns d irec tly at le ast 10 

percent of the voting sha res of the German company paying the div ide nd ;

2. At t he time th e divide nd is d istr ibu ted the Fed eral Republic imposes a 

corp oratioin tax on the dis trib ute d profits of the Germa n distrib uting company at a rate at least 20 perc entage point s lower tha n the corpor ation tax 

imposed on its un distrib ute d profits.

However, under p ara gra ph (5 ) of am ended arti cle VI the increased w ithho lding 

tax ap plies only if such reinvest men t exceeds 7.5 pe rcent of the divide nds received 

by the U.S. corporation from the German corporati on in the cale nda r yea r in 

which such reinvest men t is made. Pa rag rap h (5 ) also provid es th at w ith respect 

to divid ends paid in any year , the re shal l first be t ake n into account the amou nt 

tra ns ferre d in the preceding y ear to the ex ten t th at such amou nts were deemed to 

be reinvestme nts und er the above rules and did not res ult in the imposition of 

tax unde r p ara gra ph (3 ) on any pr ior dividend.

The provisions of parag rap hs (3 ) and (5 ) of new art icl e VI of the tre aty 

can be illus tra ted by th e follo wing c ha rt and explana tion concerning (1 ) dividends 

paid by a Germany company to a U.S. corpora tion dire ctly owning at least 10 p ercent of its voting sha res and (2 ) reinvestmen ts made by the U.S. c orporation in 

the Ge rman company over a period of yea rs :

Year

19 65 ....................................................................................................

1966 _________________________________________________

1967 _______________________ _________________________

1968 _________________________________________________

19 69 ._____ ________ _______________________ ____ _____

Dividend Reinvestment

Am ount 

taxable at 

25-pereent 

rate

$100 0 i $100

0 $200 ’ 0

80 10 3

 80

90 20 <30

70 5 »0

1

 $100 is taxable at 25 percen t in 1965 because (a ) $100 divide nd was paid in 1965, an d (6) $100 of the rein ves tmen t m ade in 1966 is deemed made in 1965.

2

 N o am oun t is taxable at 25 percent i n 1966 because no divid end was paid in 1966.

3

 $80 is tax able at 25 perc ent in 1967 because (a) $80 div idend was paid in 1967, and (6) $80 of the rein ves tme nt made in 1966 is de emed mad e in 1967.

4

 $30 is taxable a t 25 percent in 1968 because (a) $20 was r einve sted in 1968, (6) the $10 re inve stment mad e 

in 1967 is deemed made in 1968, and (c) a d ivid end in excess of $30 ($90) was paid in 1968.

5

 N o amo unt is taxable at 25 percent in 1969 because th e $5 rein vest men t is less th an 7.5 per cent of the d ividen d ($70) paid in 1969.

For purpos es of determin ing wh eth er par agr aph (3 ) require s the imposition 

of incre ased German with holding tax, parag rap h 2 of t he memorandum of u nderstan din g between the United Sta tes and the German tax delegations, which is 

att ach ed to this protocol, provides th at par agr aph (5 ) of amended art icle VI 

of the convention sha ll be interp rete d to exclude from wit hin the meaning of the 

term “reinve stme nt” loans which do n ot con stitute more tha n a tem pora ry add ition to the cap ital of the German corporation paying the div ide nd ; e.g., tra de 

cre dit extended in accordance wit h the general cre dit practic es followed in the 

tra de or business concerned.

Pa rag rap h 2 of the memorandum of und erst and ing also provid es th at the 

renewal or conversion into equity cap ital of loans out stan din g as of December 

31, 1964 (othe r tha n loans con stitutin g only tem porary add itio ns to ca pital) 

shall not be deemed to con stit ute a reinv estment. This rule is consi stent with 

the effective dat e provis ion of the protocol as applicable to the new dividend 

art icl e (a rt . 17( 2) (a ) of the protocol provid es th at new art icl e VI shal l apply 

to divid ends paid and to rein vestme nts made on or after Ja nu ary 1, 196 5).

Pa rag rap h (4 ) of new art icle VI provides th at the rule permitting the imposition of the 25-per cent with hold ing tax on dividend s shall also apply for U.S. 

tax purpose s in the convers e case. This rule will only have effect, however, if 

the United Sta tes ena cts a split ra te c orporate income tax sim ilar to th at now i n
TAX PROTOCOLS WITH BELGIUM AND GERMANY 31

force in Germany. Consequently, at the present time, paragraph (4) merely 

provides theoretical, rather than practical, reciprocity under the protocol.

Paragraph (G) of new article VI provides a special rule which in effect gives 

Germany the right to recapture amounts of tax which subsequently become due 

by reason of the reinvestment rules contained in new article VI (3) and (5). 

Under amended article VI of the convention, the Federal Republic will tax only 

at the reduced 15-percent rate on dividends described in paragraph (3) of new 

article VI of the convention, but reserve their right to recapture trea ty withholding tax benefits from a U.S. parent corporation if subsequent reinvestments 

are made within the meaning of new article VI (5) of the convention. Pa ragraph (6) also makes it clear tha t both the taxpayer U.S. corporation and the 

German distributing company (the withholding agent) are jointly and severally 

liable for such recapture.

Paragraph 7 of revised article VI of the convention reflects, in the case of 

dividends, mutual acceptance of limitation on the “force of attraction” do ctri ne; 

i.e., the doctrine which permits taxation of all source country income of a foreign enterprise at graduated rates if such enterprise is engaged in trade or business in the source country through a permanent establishment situated therein. 

It provides tha t the reduction in withholding tax rates on dividends will apply 

only to dividend income not “effectively connected” with a permanent establishment in the country of source. The adoption of this new rule attributing to the 

permanent establishment only those dividends which are effectively connected 

with tha t establishment will make it unnecessary for a taxpayer of one country 

to isolate his business activities in a subsidiary solely to prevent taxation (by 

reason of the force of attraction rule) of his investment or other income from 

sources within the other country.

Para grap h 3 of the memorandum of understanding, which supplements the 

protocol, provides guidelines for determining whether dividends, interest, royalties, and capital gains are “effectively connected” with a permanent establishment within the meaning of articles VI (dividends), VII (interest), VIII 

(royalties), and IXA (capital gains) of the amended convention. Such classes 

of income will be considered under the guidelines to be effectively connected 

wilh a permanent establishment maintained in the taxing jurisdiction—

(1) If they accrue to the recipient by virtue of assets which are either— 

(a) Held by the permanent establish ment; or

(ft) Held by the recipient specifically to promote the business activities of the permanent establish ment; or

(2) If the activities of the permanent establishment ar e a material factor 

in realizing such items of income.

The rule contained in (1) (a) above will apply where, for example, stock certificates are (1) held by or (2) accounted for on the books of the permanent 

establishment. The rule of (1) (b) above will apply where, for example, a 

dividend is paid by a U.S. selling subsidiary to its parent German manufacturing 

corporation, and where the German manufacturing corporation has a U.S. 

permanent establishment which manufactures products sold exclusively by the 

U.S. selling subsidiary of the German manufacturing corporation.

The rule contained in (2) above will apply, for example, where the activities 

of the permanent establishment constitute management of securities producing 

dividend income, i.e, where an office staffed by employees is maintained in the 

source country by an investment company of the other contracting state for 

the purpose of selecting and acquiring suitable U.S. investments, since the 

activities of the permanent establishment would be a material factor in realizing 

the dividend income.

’ Paragraph (8) of new article VI contains a definition of the term “dividends” 

for purposes of the imposition of German tax under the convention. The provision contains a list of the types of distributions by German corporations or 

other commercial entities which are treated as dividend income for purposes 

of German withholding tax at the source. The inclusion of this provision was 

considered necessary in order to clarify certain interpretive difficulties which 

had existed under the original convention with respect to the scope of the term 

“corporation” (for purposes of determining whether distributions from such 

entities constitute dividends). Para graph (8) of the new dividend article 

resolves such difficulties by providing tha t private limited company distributions 

and income derived by silent partn ers both constitute dividend income for 

purposes of the treaty. In addition distributions with respect to shares in a 

kapitalanlagegesellschaft (investment tru st) and in a “kommanditgesell-
32 TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y

schaft auf aktien” (partnersh ip limited by shares) as well as income derived 

from “kuxe” (mining shares) and “genussscheine” (profit participation certificates) are considered to be “dividends” under paragraph (8) of new article VI.

Paragraph (8) affects only the imposition of German tax under the revised 

convention and has no bearing upon the characterization of income involved for 

U.S. tax purposes.

ARTICLE 5 Interest

Article 5 of the protocol amends existing article VII of the convention, which 

provides for reciprocal exemption from source country taxation of interest on 

bonds, notes, debentures, securities or any other form of indebtedness (including debts secured by mortages or other encumbrances on real property). The 

existing article was modified by (1) making the exemption applicable to interest 

on debts secured by mortgages or other encumbrances on real property and (2) 

providing for the abandonment of the force of attraction doctrine with respect 

to interest income.

Para graph (3) of the new article VII provides for the abandonment of the 

force of attra ction doctrine in the case of interest income. Under tha t par agraph interest will be exempt from tax in the source country if the resident or 

corporation of the other country (1) does not maintain a permanent establishment in the source country or (2) receives interest income which is not effectively connected with a permanent establishment which the recipient maintains 

in the source country. In this connection, the rules contained in paragraph 3 

of the memorandum of understanding attached to the protocol relating to the 

definition of the term “effectively connected” are applicable.

Example 1. A German company makes a loan to a U.S. corporation which 

customarily buys goods from the company’s U.S. branch oflice. If the loan is 

made for the purpose of permitting the U.S. customer to remain in business, 

interest paid on the loan will be considered to be effectively connected with the 

permanent establishment and will be subject to U.S. tax under section 882 of 

the U.S. Internal Revenue Code.

Paragraph (4) of the new interest article contains a provision denying the 

exemption for all, or a portion, of interest paid which exceeds the amount which 

would be agreed upon on an arm’s-length basis.

ARTICLE 6 Royalties

Article 6 of the protocol deletes existing article VIII of the treaty and replaces it with a revised provision dealing with the taxation of royalties. The 

article of the original treaty was modified to (1) provide for the express inclusion of “know-how” payments, (2) include gains from the alienation of any property or rights giving rise to royalties, and (3) abandon the force of attra ction 

doctrine with respect to royalty income.

Subparagraph (a) of paragraph (3) of existing article V III defines the term 

“royalties” to mean any royalties, rentals, or other amounts paid as consideration for the use of, or the right to use, copyrights, artistic or scientific works 

(including motion picture films, or films or tapes for radio or television broadcasting), patents, designs, plans, secret processes or formulas, trademarks, or 

other like property or rights, or industrial, commercial, scientific, or other like 

equipment. The protocol expands this definition of royalties to include amounts 

which are paid as consideration for knowledge, experience, or skill (know-how).

Under article 17(2) (b) of the protocol, the new royalty article will have effect 

in respect of royalty payments made on or afte r January 1, 1963. However, the 

exemption from German tax for “know-how” payments also will apply to such 

payments made prior to January 1, 1963, in accordance with a separate letter 

agreement exchanged by the tax authorities of the United States and Germany, 

where the competent German tax authorities by virtue of an audit report or for 

other reasons have stated that such remuneration is exempt from tax. Such a 

statement will be deemed to have been made if the competent authority in rendering its decision did not disagree with an audit report expressly holding such 

remuneration to be tax exempt.

Parag raph 4 of the memorandum of understanding accompanying the protocol 

contains the agreement of the United States and the Federal Republic tha t the 

“know-how” amendment effected by article 6 of the protocol (new article VIII 

of the convention) shall not influence the interpretation to be given to article VIII 

of the convention prior to such amendment. Thus, where no express decision
TAX PROTOCOLS WITH BELGIUM AND GERMANY 33

had been made holding “know-how” payments made prior to January 1, 1963, 

to be exempt, the German tax authorities may not make use of the fact tha t such 

payments were later specifically included under this protocol as royalties for 

purposes of concluding tha t such earlier payments were not covered by the 

exemption provided for royalties in the existing convention.

Parag raph (3) of new article VIII provides that the term “royalties” shall 

include gains derived from the alienation of any right or property giving rise 

to those royalty payments described in paragraph (3) (a ) of amended article 

VIII of the convention. For U.S. tax purposes, this exemption shall apply both 

to gains derived from the outright assignment of property or rights, and from 

arrangements for the licensing of such property or rights which a re deemed to 

constitute transactions which produce capital gain income. Thus, where an individual resident in the Federal Republic, who does not have a permanent establishment in the United States, transfers all of his substantial rights in a patent 

he developed to a U.S. corporation in consideration for payments which are 

contingent upon the use of such patent by the trans feree corporation, the payments he receives shall be exempt under article V III of the convention from the 

3O-percent U.S. tax otherwise imposed under section 871 (a)(1) of the code, 

despite the specific inclusion within tha t paragraph of amounts described in 

section 1235 of the code which are considered to be gains from the sale or 

exchange of capital assets.

Paragraph (4) of new article VIII provides for the abandonment of the force 

of attra ction doctrine in the case of royalty income. Under that paragraph, 

royalties and gains derived from the alienation of any right or property giving 

rise to such royalties, will be exempt from tax in the source country if the resident or corporation of the other country (1) does not maintain a permanent 

establishment in the source country or (2) receives royalty income within the 

meaning of amended article VIII which is not effectively connected with a permanent establishment which the recipient maintains in the source country. (See 

paragraph 3 of the memorandum of understanding fo r guidelines in determining 

whether income is effectively connected.)

Paragraph (5) of the revised royalty article corresponds substantially to 

paragraph (4) of new article VII of this treaty, relating to interest income. 

It provides tha t the exemption afforded under the a rticle shall apply only to th at 

portion of any royalty payment which would have been paid pursuant to an 

arm’s-length agreement.

ARTICLE 7

Real property income and natural resource royalties

Article 7 of the protocol amends existing article IX of the convention relating 

to real property income and royalties derived from natural resources. As is the 

case under the existing convention, the new provision grants to each country 

the right to tax income from real property, and royalties in respect of the operation of mines, quarries, or other natu ral resources, located in tha t country, but 

provides tha t a resident or corporation of the other country may elect for any 

taxable year to be taxed on th at income in the source jurisdiction on a net basis 

at the rates tha t would apply to a resident or company of the contracting state 

in which the property is located—thus allowing deductions for expenses connected with such income. The provision, as amended, no longer applies to any 

item of interest income; interest income is dealt with under article 5 of the 

protocol. In addition, the revised provision contains a clarifying amendment 

making clear tha t the election applies only to the rental or royalty income 

referred to in the article.

ARTICLE 8

Capital gains

Article 8 of the protocol adds new article IXA to the convention, which relates 

to the reciprocal exemption from tax by the country of source of capital gains 

(other than gains from the alienation of real property, which is governed by 

amended article IX of the convention).

Paragraph (1) of new article IXA provides, subject to paragraph (3) or (4) 

thereof, tha t gain derived by a natural person resident in Germany or a German 

company from the alienation of a capital asset (other than gain from the alienation of real property covered under new art. IX) shall be exempt from U.S. tax. 

Paragraph (3) provides tha t the exemption shall not apply where the person 

deriving the gain has a permanent establishment in the United States with which 

the capital asset alienated is effectively connected.
34 TAX PROTOCOLS W IT H BELG IUM AND GER MANY

Pa rag rap h (4 ) contains a un ila ter al provision designed to preven t individual 

German residen ts who ar e pre sen t in the United Sta tes for an exten ded period 

of time from benefiting from the exemp tion provid ed und er parag rap h (1 ) in 

respect of short-term cap ital gains. Under par agrap h (4 ) a na tural person res ­

iden t in Germany shal l not be e xemp t from U.S. ta x by vir tue of the tre aty with 

respe ct to the g ain he de rives if—

1. He is present in the United Sta tes for a perio d equa l to or exceeding 

an aggregate of 183 days dur ing t he taxable year, and

2. The asse t alie nat ed was held by such person for 6 months or less.

A similar pr ovision is conta ined in the int ern al German tax law.

Thu s an alien indiv idual, resi den t in Germa ny who sells in the United Sta tes 

an item of prop erty which con stitutes a cap ital ass et in his han ds which he has 

held for more tha n 6 months sha ll be exe mpt from U.S. tax (wh ere no p erm ane nt 

esta blis hment is mai ntai ned , or where a per man ent esta blis hment is mainta ined 

and the cap ital gain is not effectively connected with such permanen t establ ish ­

me nt) with respe ct to any gain deriv ed from such sale regard less of the length 

of his sta y in the Unite d States. Where, however, the ass et was held by such 

indi vidual for 6 month s or less pri or to its sale, and the tax pay er meets the 

183-day test, gain on the sale of such ass et will be subj ect to U.S. income tax 

whethe r or not the seller is physically present in the United Sta tes when the 

ass et is sold.

In the absence of new art icle IXA, income from the al ien atio n of a sub sta ntial 

par tici pat ion in a German company by a resident, corpo ration, or other ent ity of 

the United States would be subj ect to German tax, withou t reg ard to the exten t 

of the seller’s bu siness activities or presence in Germany. ( Sim ilar tra nsa ctions 

would not be subje ct to tax und er the Inter na l Revenue Code.) Parag rap h 5 of 

the memorandum of und erstan din g accomp anying the pre sen t protocol provides 

th at the exemptio n of cap ita l gai ns found in art icl e IXA applies to the sale, 

liquidati on, or othe r alienati on of a sub sta ntial par tici pat ion in a company.

As previously indic ated, par agrap h (3 ) of art icl e IXA provides for the abandonm ent of the force of att rac tio n rule with respe ct to the tax ation of cap ital 

gain income. In thi s rega rd, parag rap h 3 of the memorandum of und erst and ing 

provides th at the term “effectively connected” shal l be so co nstr ued th at the gain 

to which arti cle IXA applie s will be considered to be effectively connected with 

a perm anent establis hme nt if the g ain is derive d from the alie nati on of prop erty 

eit her (1 ) held by such perm anent establis hme nt or (2 ) held by the reci pien t 

of the cap ital gain (hom e office) specifically to promote the perm anent establ ishme nt’s busin ess activities. Unlike the definition of the term “effectively connect ed” for purpos es of the divide nd, inte rest , and roy alty art icles of the convention, for purpose s of new art icle IXA th at te rm does not include assets the income 

from which was derived from activit ies in which the i»ermauent esta blish men t 

was a ma terial fact or.

ARTIC LE «

Per son al service compensation

Arti cle 9 of the protocol dele tes the perso nal service income art icl e of the 

orig inal tre aty (a rti cle X ) and repla ces it with a revised provision dealing with 

the tax ation of such income.

The United States does not tax nonresident alien indi viduals with respect to 

compensation for perso nal servi ces performed outs ide the Un ited Sta tes (whethe r 

or not the prod uct of such services is used in the Unite d St at es ). However, only 

German tre aty regu lations pres ently prev ent German tax ati on of limited ($3,000 

or less) compensation paid to resi den ts of the United Sta tes for services performed outside of Germa ny where such services are considered unde r German 

law as having been utiliz ed in Germa ny. New art icl e X remed ies thi s situ atio n.

Both par agr aph s (1 ) and (3 ) of new arti cle X of the convention provide for 

the exemptio n from the tax of one country of compen sation for labo r or personal 

services (including compen sation deriv ed from the pra ctic e of a liber al prof ession and the rend ition of servic es as a dir ec tor ) perfo rmed outside th at coun try 

by an indiv idual residen t of the oth er country. Under thi s rule, which is in 

accord with U.S. source rules, a lawy er residen t in the United Sta tes who per ­

form s legal services both in the Unite d Sta tes an d in the U nited Kingdom dur ing 

the taxable year for a German company will be exempt from German tax with 

respect to the fee he receives in respe ct of such services, withou t reg ard to 

whethe r or not such services ar e considered und er Germ an law to have been 

utiliz ed in Germany.
TAX PROT OCOL S W IT H BE LG IUM AND GER MAN Y 35

Paragraphs (2 ) and (4 ) of t he amended article concern the taxation of income for services performed in one country by an individual resident of the 

other country and, as such, constitute a restatement of article X as originally included in the trea ty.

Paragraph (2 ) provides tha t compensation for labor or personal services (in ­

cluding, as is the case under para. (1 ), liberal profession income and direct ors’ 

fees) i>erformed in the United States by a n atural person resident in the Federal 

Republic shall be exempt from U.S. tax if the following three conditions are 

satis fied:

1. He is present in the United States for a period or periods not exceeding a 

total of 183 days during a taxable ye ar ;

2. Such labor or personal services are performed as an employee of, or under 

contract with, a natural person resident in the Federal Republic or a German 

company, and such compensation is borne by such resident or company: and

3. Such compensation is not borne by a permanent establishment which such 

resident or company has in the United States.

Paragraph (4 ) provides corresponding relief from German tax where the services are performed in Germany by a U.S. resident as an employee of, or under 

contract with, a U.S resident, corporation, or other entity.

Certain changes have been made in article X by vir tue of the present protocol. 

Prior to the protocol, the exemptions contained in artic le X of the convention 

applied to services performed as an employee of, or under contract with, either 

(1 ) a natu ral i>erson resident in, or a company of, the country of the taxp ayer’s 

residence—in which case there was no limitation on the amount of compensation 

which was exempt from source country taxation, or (2 ) any other employer—in 

which case the exemption from source country taxat ion was limited to cases in 

which comi»ensation received for such labor or personal services did not exceed 

$3,000. Amended a rticle X of the convention requires that, as a prerequisite to 

exemption, compensation be received for services i>erformed as an employee of, 

or under contract with, only a natural person resident in, or a corporation of, 

the country of the taxp ayer’s residence. Moreover, the amended article requires 

tha t such compensation be borne directly by such an individual resident or 

corporate employer, and not by a permanent establishment maintained by such 

employer in the country of source.

ARTI CLE 1 o

Government pension and salaries; private pensions and ann uities

Article 10 of the protocol deletes article XI of the original convention and 

replaces it with a new provision relatin g both to governmental salarie s and pensions and private tensions and annuities. This revision was made for the purpose of adding language to the original article which would exempt from U.S. 

tax pensions, annuities, or other amounts paid by Germany or by a juridica l person organized under the public laws of Germany as compensation for an injury 

or damage sustained as a result of hostilities or political persecution.

Amounts paid by reason of political persecution under the National-Socialist 

regime are considered to be in the natu re of reimbursements for the deprivation 

of civil or personal rights and do not constit ute taxable income to the recipients 

under U.S. law (Rev. Rul. 56-518, C.B. 1956-2, 25 ).

Provisions such as this one are generally included within income-tax conventions concluded by Germany and are phrased in reciprocal terms. However, in 

the case of compensation for injuries sustained as a result of hostilities or 

political i>ersecution, such provisions apply only for purposes of limiting the imposition of tax by Germany’s tr eaty partner.

ART IC LE 11

Taxes on capital

Article 11 of the protocol adds new article XIVA to the existing convention, 

relating to the imposition of the taxes covered by amended article I of the convention which constitu te taxes on capital. This has reference (1 ) to the portion of the German Gewerbesteuer (trad e tax) which is computed on the basis 

of capital and (2 ) to the German Vermoegensteuer (cap ital ta x) covered under 

new article 1( 1) (b ) of the treaty. It has no reference to any taxes imposed 

by the United States or by any political subdivision thereof, and, as such, constitu tes a provision affording relief from German tax only.
36 TAX PROTOCOLS WITH BELGIUM AND GERMANY

Paragraph (1) of new article XIVA provides tha t capital represented by 

real property or natu ral resources mentioned in new article IX of the treaty may 

be taxed by the country where such property is situated.

Paragraph (2) of the new article provides th at capital represented by assets, 

other than real property or natural resources referred to in paragraph (1) above, 

which are effectively connected with a permanent establishment of an enterprise 

of one country may be taxed in the country where the permanent establishment 

is situated, unless the provisions of paragraph (3) apply.

Paragraph (3) of the new article provides that ships and airc raft of an enterprise of one country and assets, other than real property referred to in paragraph 

(1), pertaining to the operation of such ships and airc raft shall be exempt from 

tax by the other country.

Paragraph (4) provides t hat other elements of capital of a resident, corporation, or other entity of one country shall be exempt from tax by the other 

country.

As indicated, the new article provides unilateral relief from German capital 

tax and from the portion of the trade tax applicable to capital in the ease of 

a resident, corporation, or other entity of the United States. Such article 

affects the imposition of those taxes by Germany in respect of residents of the 

United States and U.S. corporations or other entities.

In the case of nonresidents and foreign corporations, the portion of the 

German trade tax computed on the basis of capital is imposed under German 

law only if such taxpayer maintains a permanent establishment in Germany 

(world tax series, international program in taxation, Harvard Law School, 

‘’Taxation in the Federal Republic of Germany,” sec. 15/10.2). However, in 

the case of nonresidents and foreign corporations, under German law the German capital tax is imposed with respect to items of domestic capital, without 

regard to the maintenance of a permanent establishment in Germany.

It should be noted tha t the United States is not obliged to grant a foreign 

tax credit with respect either to the German capital tax or to the trade tax applicable to capital.

ARTICLE 12

Relief from double taxation in country of residence

Article 12 of the protocol deletes paragraph (1) of existing article XV and 

replaces it with a new provision relating to the relief to be granted by each 

treaty country to its residents and corporations (and citizens in the case of 

the United States) with respect to taxes paid to the other country. As under 

the existing convention, the United States will continue to apply its. statutory 

foreign tax credit system for purposes of affording such relief, while Germany 

will apply principally an exemption method to achieve a similar result.

(a) Relief to U.S. citizens, residents, and corporations

Article X V (l)( a) contains an amended foreign tax credit article and also 

embodies the traditional “saving clauses,” reserving to the United States, subject to article XV(2), the right to tax its citizens, residents, or corporations 

as if the treaty had not come into affect. The amendments made by the protocol to existing article XV (1) (a ) ar e:

(1) The reference to section 131 of the Internal Revenue Code of 1939 (secs. 

901 through 905 of the 1954 code), as in effect on the date of the entry into 

force of the original convention has been deleted. Thus, it has been made clear 

that modifications in the U.S. law concerning the foreign tax credit made a fter 

the effective date of this protocol cannot be barred by the amended credit article.

(2) The principles of the per-country limitation in section 904(a) (1) of the 

Internal Revenue Code have been incorporated into the convention. The inclusion of the per-country limitation within the convention, however, will not 

affect the right presently enjoyed by U.S. taxpayers to elect the overall limitation provided under sections 904 (a)(2) and (b) of the code.

(b) Relief to German residents and companies

Subparagraph (b) of new paragraph (1) of article XV, as amended, provides 

relief from double taxation to German residents and companies with respect 

to income from U.S. sources (and also provides unilateral relief from Federal 

Republic taxation for certain items of capital, the situs of which is in the 

United States). Subdivision 1. of that subparagraph provides relief for German companies and German residents who are not also U.S. citizens or resi-
TAX PROTOCOLS WITH BELGIUM AND GERMANY 37

dents. Subdivision 2. provides relief for U.S. citizens or residents who are also 

residents of Germany.

1. Relief to German companies and German residents who are neith er citizens nor residents of the United States.—Subdivision 1. (a a) provides for relief 

by the exemption method and subdivision 1. (bb ) provides for relief by the 

credit method.

(a a) Exemption method: Subdivision l( a a ) states tha t unless the provisions 

of subdivision l( b b ) apply, there will be excluded from the basis upon which 

German income, corporation, trade, or capital tax is imposed any item of income 

from sources within the United States or any item of capital situated in the 

United States which, under the provisions of the amended convention, is not 

exempt from tax in the United States. In the case of dividend income, however, 

such exclusion applies only to dividends subject to U.S. tax paid to a German 

company limited by shares ( kapit algese llschaft) by a U.S. corporation in which 

at least 25 percent of the voting shares are owned directly by such German company. Subdivision l( a a ) in addition provides t hat there shall be excluded from 

the basis uiam which German capital tax or the portion of the German tr ade taxapplicable to capita l is imposed any holding, the dividends on which are excluded 

or if paid would be excluded, from the basis upon which Federal Republic corporation tax is imposed.

For purposes of the imposition of the German taxes on income (income tax. 

corporation tax, and the trad e tax on business profits) and of the German trade 

tax computed on the basis of capital, the exclusions provided under subdivision 

l( a a ) apply to those items of income (oth er than intercorjwrate dividends, 

discussed below) which are considered under German law to be derived from 

sources within the United States.

The rules of subdivision l(a a ) of the new article XV (1 ) (b ) can be illustr ated 

by the following examples :

Example 1. A natu ral person resident in Germany derived income from alimony paid by a resident of the United States. This income is not dealt with 

in the treaty, will be subjected to 30-percent U.S. withholding tax and, accordingly, will be excluded from the German income tax base. Although this income 

could not have been excluded under the original trea ty because alimony payments were not “dealt with ”, in the existing convention, the rule was changed 

through the elimination of the requirement tha t income need be “dealt with” 

in the convention to be excludable thereunder.

Example 2. Compensation paid for services utilized in the United States but 

performed in Germany is not to be excluded from the basis upon which German 

income tax is to be imposed, since the income is exempt from U.S. tax under 

new article X (l ) of the treaty . The fact tha t it is also exempt by U.S. law 

is immaterial.

The interco rporate dividend exclusion provided in subdivision l( a a ) applies 

only where the following conditions are satisfied :

(i ) The recipient must be a German company limited by shares (ka pitalgesells chaft). This includes a stock corporation (aktie ngesellschaft) , a p artn ership limited by share s ( kommanditgesellschaft auf akt ien ), a private limited 

company (gesellschaft mit bes chraenkte r ha ftu ng), a colonial company (kolonialgesellsch aft), and a mining company (bergrechtliche gewe rkschaft).

(i i) The company distribu ting the dividend must be a U.S. corporation (oth er 

than a corporation described in sec. 86 1( a) (2 ) (A )) .

(ii i) The recipient company must own directly at least 25 percent of the 

voting shares of th e payor corporation.

(iv ) The dividends may not be exempt, under the treaty , from U.S. tax.

If any of the above conditions are not met, dividend income received by a German company will not be excluded from the basis upon which Federal Republic 

corporation tax is imposed (bu t may be dealt with under the credit method prescribed in subdivision l (b b ) of new art. XV( 1) ( b ) ). Thus, the German method 

is to exempt dividend income of certain German pa rent corporations and gran t a 

credit against Federal Republic tax in the case of other dividend income from 

sources within the United States.

The application of the above-described intercorporate dividend exclusion p rovision can be illu strated as follows:

Example 1. Corporation A, which is organized and managed in the United 

States, is wholly owned throughout the taxable year by B company, a German 

stock corporation. Corporation A pays a dividend of $1,000 with respect to all 

classes of its stock, only 50 percent of the total value of which is represented by

54-647 O—-65----6
38 TAX PROTOCOLS W IT H BEL GIU M AND GERMAN Y

voting shares. U.S. tax is withheld at the source in the a mount of .$150 under new 

article VI (1) of the treaty . The en tire $1,000 is excludable from the basis upon 

which German corporation tax is imposed on B company.

In the case of German taxes on capital referred to in the convention ( the capital 

tax and the portion of t he trade tax applicable to c api tal) , relief similar to that 

provided in respect of income taxes is afforded under subdivision l( a a ) of new 

article XV (1 ) (b ) of the treaty . Thus, there is excluded from the basis on which 

German capital taxes are imposed any holding, the dividends on which are excluded, or if paid would be excluded, under the treaty for Federal Republic tax 

purposes. There will be excluded from the basis upon which German taxes on 

capital are imposed (without regard to the rules of art. XIVA of the revised 

treaty ) if the German taxpayer is a company limited by shares owning directly 

at least 25 percent of the voting shares of the U.S. corporation, the shares of 

which constitute the holding in question. In such a case, the holding can include 

nonvoting shares if the holder owns at least 25 percent of the voting shares of the 

corporation.

The relief from German tax afforded by the exemption method is somewhat restricted, however, because Germany continues under revised article X V (l )( b ) 

l(a a ) to reserve the rig ht to take the excluded income into account in determining 

the rate of tax to be applied to the German resident's remaining income (exemption with progression ).

(bb ) Credit method. Subdivision l (b b ) of new arti cle XV(1) (b ) provides that 

U.S. tax payable under U.S. law, an d in accordance with the convention, on the 

following items of income shall be allowed as a credit against the German income 

taxes which are payable with respect to such items of income:

( i ) Dividends not dealt with in new artic le IV (1 ) ( b) 1 (a a) ; and

(i i) Wages, salaries, pensions, and similar compensation paid by the United 

States or by its States, te rritories, or political subdivisions, not being exempt from 

Federal Republic tax under new article X I( 1) (a ) of the treaty.

It is also provided tha t the allowable credi t may not exceed the portion of German tax which the above items of income bear to the total amount of all items of 

income.

Accordingly under article XV(1) (b )l (b b ) a credit against German income or 

corporation tax liabiilty will be granted for U.S. tax imposed with respect to dividends from sources within the United States which are not excluded under subdivision (a a) from Federal Republic tax. and for wages, salaries, pensions, and 

similar compensation paid by the United States or by its States, territories, or 

political subdivisions to a German citizen, since the la tter amounts are not exempt 

from German tax under new article X I( 1) (a ).

2. Relief to individual residents of Germany who arc U.S. citizens or residents.—Article X V (l )( b )2 of the treaty provides the rules to be applied by 

Germany in granting relief from double taxatio n to those German individual 

residents who a re also citizens or residents of the United States and, as a re sult, 

are subject to taxatio n in both countries on their worldwide income.

Subdivision 2 provides that where a natu ral person subject to unlimited tax 

liability in Germany is also a citizen or resident of the United States for U.S. 

tax purposes, subdivision l (a a ) shall apply to those items of income from sources 

within the United States, and those items of ca pital situat ed within the United 

States which, under the provisions of that subparagraph, are exempt from German tax when received by a n atur al person who is not a U.S. citizen or resident. 

It further provides that all other items of income and capita l shall be included 

in the basis upon which German tax is imposed as if the convention had not 

come into effect, but tha t the U.S. tax on such other U.S. source income shall be 

allowed as a credit against German income tax, subject to the provisions of 

section 34c of the German income tax law (relatin g to the foreign tax credit 

limitation ) as amended.

These rules with respect to the taxation of U.S. citizens or residents apply to 

any such individual who is a n atural person subject to German tax on his worldwide income. Such an individual is, for German tax purposes, to be taxed 

in the same manner as an individual resident of Germany who is not a U.S. 

citizen or resident; i.e., exempt under the convention from Federal Republic tax 

on any item of income from U.S. sources which is not, under the provisions of 

the convention, exempt from U.S. income tax.

The same exclusion rules apply with respect to items of capital otherwise 

taxable to a citizen or resident of the United States who is a res ident of Germany.

The application of these rules of exclusion may be illustrate d by the following examp les:
TAX PROTOCOL S W IT H BE LG IUM AND GER MAN Y 39

Example 1. A, a U.S. citize n residen t in Germany, is employed by company M, 

a German company, 100 perc ent of all classes of stock of which is owned by 

corp oration N, a U.S. corporation. A spends 30 days of the tax abl e ye ar in the 

United Sta tes worki ng with officials of corp orat ion N. The net amo unt of A’s 

salary which is att rib utab le to the services rend ered in the United Sta tes is 

$1,000. A’s ent ire sal ary is paid, and is taken as a deduction in comp uting ta xable income, by company M, which has no perm anent establis hme nt in the United 

States. A is not exempt from Germa n tax on the $1,000 of pers ona l service 

income, since he would have been exempt from U.S. tax under new art icle X 

of the tre aty had he been a na tu ra l person resident in Germany, and not also a 

citize n or resident of the United States. Therefore, A m ust include the $1,000 in 

his tax abl e income and may tak e a cred it aga ins t his Germ an income tax lia ­

bility wit h respect to the port ion of his U.S. tax which is att rib uta ble to th at 

income.

Exam ple 2. B, a residen t of Germany, is also considered und er U.S. tax law 

to be a residen t of the Unite d States. He derives ren tal s from rea l pro perty 

sit uat ed in the Unite d States. Such ren tal income is exempt from Germ an income tax in B’s h and s (bu t mus t be taken into accoun t in dete rmin ing the ra te 

of tax applic able to B’s nonexc luded income), since the United Sta tes could 

tax it to a non resi den t alien indi vidual resident in Germany and it con stitutes 

U.S. source income und er the Germ an source rules.

The amou nt of the cred it gra nte d by the Fed eral Republic und er the convention cannot exceed the Germa n income tax paya ble with respec t to the foreign 

income, i.e., it is limit ed in the proportion of foreig n net income to tot al net 

income, as computed und er German law. Thu s such cre dit lim itation is sim ilar 

to the per-co untry limi tation described in section 9 0 4 (a )( 1 ) of the Int ern al 

Revenue Code.

ART ICLE 13

Cha ritable orga niza tion s

Artic le 13 of the protocol add s a new ar tic le XVA to the convention, relating 

to the tax ation by one of the con trac ting sta tes of cer tain nonprofit org ani zations of the other con trac ting state. The new art icle provid es th at org ani zations of one country which are operated exclus ively for religious, charitable, 

scientific, educ ation al, or public purpo ses shall be exempt from tax in the other 

country if and to the extent th at -----

1. Such o rgan izati on is exempt from tax in its own cou ntry ; and

2. Such orga niza tion would be exempt from the othe r cou ntry’s tax if it 

were organ ized, and car ried on all its acti vities, in tha t oth er coun try.

Pa rag rap h (1 ) of art icle XVA provides for the applicati on of the above rules 

to German companies or organiz atio ns operated exclusively for the sta ted purposes. Under present U.S. law, a German company or organization operate d for 

religious, cha rita ble, scientific, or educ ation al purpo ses with in the meaning of 

section 50 1( c) (3 ) of the code is exempt from U.S. tax rega rdle ss of its place of 

organization or the geographic al scope of i ts activities.

Parag rap h (2 ) of art icl e XVA recipr ocally provid es that a U.S. corp oration 

or orga nization ope rate d for the stated purpo ses shal l be exempt from German 

tax if an d to the ext ent (1 ) th at it is exempt from U.S. ta x and (2 ) th at it would 

be exempt from Germ an tax if it were a German company or orga niza tion and 

car ried on all its activit ies in Germany. Under pres ent German law, only German companies or orga niza tion s o perated for th e s tated purpos es are e xempt from 

German corp oration tax law and U.S. corpo ratio ns or or ganizat ions ha ving n eith er 

the ir sea t nor the ir busine ss manag ement in Germany are not eligible for thi s 

exemption.

Thu s new art icl e XVA of the convention in effect creates an exemption from 

German tax in fav or of U.S. ch aritab le organiz atio ns while ma inta inin g the 

present exempti on gra nted in the United Sta tes w ith respect to sim ilar org ani zations which a re created or orga nized in Germany.

ARTICLE 14

Exchang e of in form ation

Article 14 of the protocol provid es for the d eletio n of par agr aph (1 ) of art icl e 

XVI of the convention and for its replac ement with a new par agr aph , rel ati ng to 

the exchan ge of tax info rmation between the compe tent autho rities of the t reaty 

coun tries. The new art icle modifies par agr aph (1 ) of exis ting art icle XVI of 

the convention by makin g clear th at tax ati on info rma tion to be excha nged between the competent autho riti es of the con trac ting sta tes may be disclosed to a
40 TAX PROTOCOLS W IT H BELG IUM AND GERMANY

court or administrative body as well as to other persons concerned with assessment and collection of taxes which are the subject of the convention. It also 

adds language permitting such information to be disclosed to persons concerned 

with “enforcement or prosecution” of such taxes.

ARTICLE 1 5

Taxpayer claims and consultation

Article 15 of the protocol deletes article XVII of the convention and replaces 

it with a revised provision dealing with (1) the presentation and disposition 

of taxpayer claims and (2) consultation between the competent authorities 

of both countries with respect to questions of the interpretation or application 

of the treaty. Revisions are, however, made only with respect to the portion of 

the original article which relates to the consultation procedures.

Paragraph (1) of new article XVII, relating to taxpayer claims, is identical 

with its counterpart in the original treaty.

The language of paragraph (2) has been modified to express more accurately 

the intention of the parties to the original convention; i.e., that the competent 

authorities shall “endeavor to settle the question as quickly as possible on mutual 

agreement.” A new sentence also has been added to paragraph (2) specifically 

authorizing the competent authorities of the contracting states to communicate 

with each other directly for the purpose of implementing the provisions of the 

convention.

Paragraph (3) of new article XVII contains a new provision. It states that 

notwithstanding their internal law the competent authorities of the two treaty 

countries may consult together to endeavor to agree—

1. To the same attributio n of industrial or commercial profits to an 

enterprise of one country and to its permanent establishment in the other 

cou ntry ;

2. To the same allocation of profits between related enterprises as provided in article IV ; or

3. To the same determination of the source of p articular items of income. 

In addition the new provision states that, in the event that the competent

authorities reach such an agreement, then taxes shall be imposed on such reattributed and reallocated income by the country to which such profits a re attributed or allocated and refund of taxes shall be allowed by the country from 

which such profits are attributed or allocated. If the competent authorities 

reach agreement on the source of an item of income, appropriate refunds shall 

be made reflecting such agreement. Thus, for example, one country might agree 

tha t income was not sourced within it and refund any tax withheld on such 

income or agree that income was sourced in the other country and so consider it 

for purposes of determining the allowable credit for taxes paid to tha t other 

country.

Prior to this protocol, no income tax convention to which the United States 

is a party contained procedures permitting the appropriate accommodation of 

tax liability resulting from allocations made by the competent authorities of 

one country and accepted as proper by the competent authorities of the other 

country (and by the taxpayer himself). Moreover, impediments of domestic 

law, such as the statute of limitations or the finality of previous assessments, 

often prevented effective implementation of any agreement on allocations. Thus 

prior to the above amendment to article XVII if the U.S. tax authorities made 

an allocation under article IV of the convention of $100 from German company 

A to United States parent corporation B, even if the German tax authorities 

agreed with the adjustment, the German tax authorities were unable to make an 

adjustm ent to effect a corresponding reduction in the German tax liability of A 

company (1) where the claim for refund of tax was filed after the expiration 

of the period of time allowed for the filing of such claims or (2) where the German tax authorities were barred by the statute of limitations from amending 

the earlier tax assessment. Accordingly, the $100 of profit allocated by the U.S. 

tax authorities would be taxed twice, once to A company and once to B corporation.

Parag raph (3) of new article XVII provides a remedy to the above problem 

by specifying that, in the above case, the German tax authorities may implement their agreement with the reallocation of the $100 of income for the “barred ” 

taxable year from A company to B corporation by refunding to A company the 

portion of the German corporation tax paid for t ha t barred year with respect to 

the reallocated income. However, such p aragraph will not permit tax deficien-
TAX PROTOCOLS WITH BELGIUM AND GERMANY 41

cies (within the meaning of sec. 6211 of the code) to be asserted against U.S. 

citizens or residents in cases in which such deficiencies are barred by the statute 

of limitations.

The provisions of paragraph (3) will apply to any case upon which the competent authorities consult afte r the treaty goes into effect, regardless of the 

taxable year to which such case relates.

Parag raph 6 of the memorandum of understanding accompanying the present 

protocol similarly provides for consulation between the competent authorities of 

both countries for the purpose of determining whether it is necessary to amend 

new article VI of the convention, relating to the taxation of dividends, in the 

event that either the United States or German income tax applicable to corporations is substantially changed, or if experience in individual cases indicates tha t 

the effect of the application of new article VI is not in accordance with the purposes underlying the promulgation of that article.

ARTICLE 16 Application to West Berlin

Article 16 of the protocol provides that the present protocol shall also apply to 

Land Berlin (West Berlin) provided that the Government of the Federal Republic has not delivered a contrary declaration to the Government of the United 

States within 3 months from the date of entry into force of the protocol. If no 

declaration is delivered, the protocol becomes effective with respect to Land 

Berlin in accordance with article XVII of the convention.

ARTICLE 17 Effective dates

Article 17 of the protocol provides for the ratification of the protocol and for 

the exchange of instrum ents of ratification. In addition, the dates upon which 

the various provisions of the protocol are to become effective are provided in this 

article.

It is provided therein tha t the protocol shall come into force on the date of 

exchange of instruments of ratification and that all the articles thereof, other 

than articles 4 and 6, will be effective for taxable years beginning on or after 

January 1 of the year in which such exchange of instruments of ratification takes 

place. Article 4, containing the new dividend article of the convention (art. 

VI), will have effect with respect to dividends paid on or afte r January 1, 1965, 

and paragraph (3) of new article VI will apply to reinvestments made on or after 

that date. Article 6, containing the new royalty article of the convention (art. 

VIII), will have effect with respect to any payment made on or afte r Jan ­

uary 1, 1963.

ARTICLE 1 8

Integration into original treaty

Article 18 of the protocol provides, under paragraph (1) thereof, tha t the 

protocol will form an integral part of the original convention of July 22, 1954, 

and tha t it will continue in force as long as that convention remains effective. 

Article XXI of the existing convention provides that either party to the treaty 

may terminate it at any time afte r a period of 5 years beginning with the calendar 

year 1954, the year in which ratification took place, by giving notice in the prescribed manner. No additional 5-year period is prescribed with respect to the 

duration of the convention, as amended by the present protocol. Accordingly, 

the convention, as amended by the present protocol, may be terminated by either 

country at any time and, in such event, will cease to be effective for taxable 

years beginning on or after January 1 of any subsequent calendar year, provided 

that the prescribed prior notice of termination has been given by such country 

on or before June 30 of the preceding calendar year.

Paragraph (2) of article 18 of the protocol provides tha t the competent auth orities of the United States and Germany are authorized to publish the text of the 

convention, as modified by this protocol, afte r this protocol comes into force: i.e., 

afte r the date of the exchange of instruments of ratification. This provision 

has no effect upon publication by the United States of the text of this protocol, 

or of the full text of the convention as amended by this protocol. Either text 

may be made public by the U.S. Government at any time after the date of signature of the present protocol.

Senator Gore. I s there any witness who wishes to appear in opposition to the treaty? Mr. Allen, do you wish to testify?
4 2 TAX PROTOCOLS WITH BELGIUM AND GERMANY

STA TEM ENT OF GEORGE V. ALL EN, PR ES IDEN T OF TH E TOBACCO

INST ITUT E, WASHINGT ON, D .C.; ACCOMPANIED BY JOHN DONALDSON, ASSISTA NT MANAGER OF TH E CHAM BER OF COMMERCE’S

INTE RN AT IONA L DEPARTME NT

Mr. Allen. Thank you, Mr. Chairman. I have a prepared statement which is very short and which I would like to read, and then, if 

I may, to add a couple of points of my own that I think may be pertinent.

I am George V. Allen, president of the Tobacco Institute, W ashington, D.C. My testimony before this subcommittee is on behalf of the 

Chamber of Commerce of the United States, on whose International 

Committee and Foreign Operations Review Subcommittee I serve. 1 

also speak from personal experience as U.S. ambassador to four countries and Assistant Secretary of State. In addition I am chairman of 

the League of Americans Residing Abroad. Let me add that is a 

new and a fairly recently organized group. With me is Mr. John 

Donaldson, assistant manager of the chamber’s international department.

The National Chamber supports the Income Tax Conventions with 

the Federal Republic of Germany and Belgium, pending before the 

Senate, and urges their ratification.

To begin with, we believe th at it is in the national interest to conclude conventions for the avoidance of double taxation with all countries of the free world, both developed and less developed. We believe 

this general proposition is supported by both the Government and 

the U.S. business community. To date, the United States has entered 

into treaties for the avoidance of double taxation with 22 foreign 

nations.

From the point of view of U.S. business, our treaties endeavor to 

reduce the overall foreign rate of tax on foreign investment to a rate 

not exceeding the U.S. rate, through the reduction of the tax rates in 

the foreign country on dividends and royalties.

Our treaties not only tend to eliminate double taxation of income, 

but in many instances help to avoid the double reporting and payment of taxes, even in situations where actual double taxation of income would not otherwise occur. Through the use of the concept of 

permanent establishment, which is incorporated in all of our treaties, 

the treaties uniformly exempt U.S. exporters from the reporting and 

payment of foreign taxes in the normal course of an export transaction. To this extent, our treaty network substantially assists and 

fosters the U.S. policy regarding encouragement of exports. Through 

the use of normal treaty provisions, the conventions w ith Germany 

and Belgium will accomplish both of these objectives.

Most of the provisions of the pending conventions are, in some 

form or another, included in U.S. treaties currently in force with 

other countries. I shall not direct my remarks to these standard 

treaty provisions, since they have been approved by the Senate in 

other conventions many times. There are, we note, a few changes 

of a substantive nature in the pending revised treaty with Germany. 

We understand the new Belgian treaty to be largely a technical 

revision.
TAX PROTOCOLS W IT H BELG IUM AND GERMANY 4 3

We believe the U.S. business community will particula rly welcome 

the revised article V III of the convention, which treats payments for 

U.S. technical know-how as other tax-exempt royalty payments, much 

as they are treated under our conventions with other countries and as 

foreign investment in know-how is treated by the United States.

Another change in the German treaty moves to bring the definition 

of “permanent establishment,” which determines applicability of the 

host-country income tax, closer into line with the model definition 

contained in a d raft model tax convention developed by the Organization for Economic Cooperation and Development (OE CD).

A thir d substantive change in the German treaty increases from 

the current 15-percent rate to the 25-percent reinvested earnings rate 

the withholding tax on dividends.

Mr. Surrey just spoke to that point.

Not every U.S. investor in Germany will find himself benefited by 

every provision of the new treaty, just as there can be—and are— 

many honest objections to one or another of the provisions of any 

double-tax treaty. On balance, however, we want to reiterate the 

national chamber’s firm support for the principle of the avoidance 

of double taxation throu gh such bilateral treaties.

The current U.S. reexamination of existing income tax conventions continues to move in the direction of lessening taxation by the 

country of the source of income. This trend is desirable. It is a 

step in the right direction toward removal of disincentives to vital 

private investment abroad. It has been shown again and again that 

U.S. direct private productive investment abroad stimulates U.S. exports, returns substantial dollar earnings, and this contributes to our 

balance of international payments as well as to our competitive position in world markets and to the healthy growth of international 

trade.

It should be obvious that an American corporation investing in foreign countries with tax rates lower than our own does not benefit 

from the lower tax rates, because its total tax will always be at least 

as great as if the U.S. rates were applied initially.

Double taxation can only serve as a disincentive to U.S. foreign investment. The Chamber of Commerce of the Ignited States therefore 

urges your subcommittee to support the pending tax conventions with 

Germany and Belgium, and other such treaties with friendly countries 

for the avoidance of double taxation.

Now it occurs to me, Mr. Chairman, and I should emphasize th at I 

am speaking more personally than as a representative of the U.S. 

chamber although I have no reason to believe that my views on this 

subject would be objected to by members of the chamber. It just has 

not been discussed. But I am particula rly interested in the ratification of these two treaties with two NATO countries, because it seems 

to me that it is in the general trend toward improving our relations 

with those NATO countries, and to the extent that language and experience is made more uniform in accordance with standard provisions, and with ruling and experience on those, to that extent possibilities for misunderstandings and disputes with our NATO countries is 

limited, and it tends to improve the general trade situation with those 

countries.
44 TAX PROTOCOLS W IT H BE LG IUM AND GERMAN Y

I may add a further point. It seems to me that the development 

of these types of treaties which regularize the establishment and investments of one country and another is just to that extent adding to 

the general concept of a rule of law in the relations between nations, 

because these treaties have the effect of laws which through negotiation and experience in living with them tend to develop the concept 

tha t relations between nations are settled by standard, legal, recognized methods adopted by the two countries.

Senator Gore. Thank you very much.

Mr. Allen. Thank you, sir.

Senator Gore. Are there further witnesses ?

(No response.)

Senator Gore. If not, I will insert certain material that has come 

to me for the record.

(The material referred to follows:)

Statem ent by Richard N. Cooper, Deputy Assista nt Secretary of State for

International Monetary Affa irs, in Support of Protocols to I ncome-Tax

Conventions Wit h Belgium and th e F ederal Republic of Germany

Mr. Chairman, I appreciate this opportunity to appear before your committee 

to state the views of the Department of State regarding the income-tax protocols 

with Belgium and with the Federal Republic of Germany (Executive G and 

Executive I, 89th Cong., 1st sess.) that are now before the committee.

These protocols are simply amendments of our existing income-tax conventions with these countries—amendments designed primarily to deal with new 

problems th at have arisen under those conventions—and are not intended to introduce new major policies or principles in our tax treaties, although they do 

contain, we believe, significantly improved provisions in a number of instances.

Officers of my Department, in testimony before the committee, have frequently 

stated our conviction that well-conceived tax treat ies are of great assistance 

to the United States in its international economic relations and to the American 

business community in carryin g on business abroad. They minimize conflicts 

between natio nal tax policies, remove the possibility of discriminatory tax tre atment, and eliminate tax irr ita nts affecting intern ational business and international relations. Our basic conventions with Belgium and Germany have been 

very successful in accomplishing these objectives. If they are to remain an aid 

to our economic relations with these countries, they must be kept up to date 

and must undergo adaptations from time to time to assure tha t they apply 

equitably to th e situations existing in the te rritories of each party.

Germany and Belgium are two very important foreign markets for U.S. exports, and there are extensive American private investments in each country. 

While it is not our purpose at present to encourage additional investment in 

these countries, either through tax-treaty policy or otherwise, American investors there are entitled to the benefit of such protective measures and other 

assistance as can reasonably be afforded. Moreover, some of our foreign investments generate large and continuing exports from the United States and, indeed, 

a rapid growth in exports increasingly requires investment abroad in sales and 

servicing facilities.

In 1964, U.S. exports to the Federal Republic exceeded $1,310 million and 

imports from there amounted to $1,173 million, leaving a balance in favor of 

the United States of $137 million. U.S. private investment in Germany totaled 

$2,077 million at the end of 1964. Dividends, interest, and branch profits repatri ated in tha t year amounted to $178 million, and it has been estimated tha t 

an additional $67,500,000 came back to this country in the form of royalties. 

U.S. exports to Germany are up 169 percent over a decade ago, investments are 

up fivefold, and investment earnings are up sixfold.

In the case of Belgium, U.S. exports in 1964 amounted to $627 million, 

and imports totaled $422 million, the balance in fa vor of the United State s being 

$205 million. Total U.S. private investment in Belgium at the end of 1964 was
TAX PROTOCOLS W IT H BE LG IUM AND GERM ANY 45

$452 million. As in the case of Germany, these represent very large increases 

over the level a decade ago, in 1954.

Although German and Belgian private investment in the United States by no 

means approached the amount of U.S. private investment in those countries, 

there are significant German and Belgian investments here, and both countries 

are regarded as important potential sources of investment funds in the futu re 

which may contribute to the solution of our balance-of-payments problem.

The stati stics I have cited reflect the background of growing international 

economic intercourse against which questions concerning our tax conventions 

with Belgium and the Federal Republic of Germany, and the protocols for their 

revision tha t are now before the committee, should be considered. They reflect 

more numerous and more complicated relationships between firms domiciled in 

the United States and those domiciled abroad. Combined with persisting differences in national tax law, these relationships create for national tax auth orities the difficult ta sks of insuring equitable treat ment to taxpayers and minimizing tax distortio ns to free market decisions concerning foreign trad e and investments. Tax treat ies represent the response to these difficult tasks, and they must, 

of course, be continually revised to conform both with current tax law and with 

contemporary business practice.

The new protocol with Belgium may be described as a minimal revision of 

the 1948 convention with that country. By a law enacted in 1962, Belgium ca rried out a thorough reformation of the income-tax system. Some of the rules 

and principles set out in the 1948 convention are now unworkable or would 

impede the operation of the new system. The main purpose of the protocol is 

to make the necessary adaptation of our convention to the new income tax law. 

I think that both p artie s recognize tha t the 1948 convention is in need of a more 

extensive overhauling for purposes of modernization. The urgency of revision 

to meet the immediate requirements of the new Belgian law, however, made it 

undesirable to under take the time-consuming task of a complete rewriting of 

the convention at this time. In contemplation of such revision, however, provision is made tha t the new protocol sha ll remain in effect no longer than 1971.

The protocol negotiated with the Federal Republic of Germany goes much 

further in the direction of modernization of the existing convention. The main 

incentive for its negotiation arose from complaints by German businessmen concerning the limitation in the convention on the taxation by Germany of inte rcorporate dividends flowing from American subsidiaries in Germany to their 

parents in the United States. This limitation resulted in a substantial tax advantage for American enterprises as compared with German enterprises in like 

circumstances. The protocol contains an adjustm ent in rates in certain circumstances designed to s ettle this complaint.

In addition, the protocol provides for significant modifications of the provisions of the basic convention tha t deal, among other things, with taxation of 

transfers of technical information, with capital gains, and with the rules regarding income attributa ble to permanent establishments. We believe tha t a 

number of these modifications will result in substantial benefits for U.S. ente rprises subject to ta xation in Germany, and some of them (fo r example, the more 

liberal tax treatm ent of dividends and the new rules governing attributio n of 

income to i>ermanent establishments ) should make investment in the United 

States more attractive to German enterprises.

The Department of State believes, Mr. Chairman, tha t the new protocols concluded with Belgium and the Federal Republic of Germany are reasonable and 

practica l agreements that are needed for the continuation and further development of effective tax-treaty relationships with these two countries. We urge 

the committee to give them favorable consideration.

Although these agreements, as I stated previously, are of considerable significance in our economic foreign relations, their content is concerned primarily 

with detailed and technical matters of tax policy, which fall within the special 

competence of the Treasury Department. The protocols were negotiated under 

the direction of Assistant Secretary Surrey, and he can inform vou fully and 

accurate ly with regar d to them.

Thank you, Mr. Chairman.
46 TAX PROT OCOLS W IT H BE LG IUM AND GERMAN Y

Clevite Corp.,

Cleveland, Ohio, October 11, 1965.

lio n . Albert Gore

Chairman, Subcommittee on Tux Treaties,

Senate Committee on Foreign Relations,

Washington, D.C.

Dear Senator Gore: On behalf of Clevite Corp., I am writing to urge that 

the protocol revising the existing convention between United States and the 

Federal Republic of Germany be ratified by the Senate prior to adjournment of 

this session.

The interest of Clevite Corp, in ratification of the protocol prior to December 31, 1965, arises out of the fact that in Jan uary 1965, Clevite sold, to Int ernational Telephone & Telegraph Corp., at a gain of about $4 million, the entire 

equity capital of a German limited liability company known as Interm etall 

G.m.b.h. which was oi>erating a semiconductor manufacturing plant in Germany and selling its products in Western Europe.

Under the present tax convention between Germany and the United States 

and present law, Clevite’s capital gain on this sale would be taxed by the Federal Republic of Germany at a rate of almost 50 percent even though Clevite has 

no office or business establishment in Germany and is not itself conducting business there. Moreover, while this capital gain is also taxable in the United 

States at the rate of 25 percent, the $2 million German tax on the gain would 

be allowed as a credit against the $1 million U.S. tax on it, and entirely eliminate the U.S. tax. Thus, under the present convention, Clevite would pay tax of 

about $2 million to Germany on the transaction and pay nothing into the 

U.S. Treasury.

If—but only if—the protocol now pending before you is ratified and becomes 

effective before the end of this year, entirely different tax consequences would 

ensue. The protocol contains a new provision, not found in the present convention, which would exempt, from German tax, sales or exchanges of capital assets 

by U.S. i>ersons or corporations having no permanent establishment in Germany, 

and such provision will be effective as of Ja nua ry 1 of the year in which instruments of ratification are exchanged. Accordingly, if instruments of ratification 

of the protocol are exchanged before December 31, 1965, this new provision 

would apply to Clevite’s sale of the equity capital of Interme tall and it will 

be exempt from German tax. Thus, if instrume nts of ratification are exchanged 

before December 31,196 5, instead of paying about $2 million tax to Germany and 

nothing to the United States Clevite would pay about $1 million to the U.S. 

Treasury and nothing to Germany.

While Clevite has no knowledge of other 1965 sales or exchanges of German 

‘ as sets by U.S. taxpayers which would be similarly affected by ratification, it 

seems reasonable to assume that other such sales have occurred or may occur 

before the end of the year.

Because of i ts own apparent financial interest and also because o f:

1. The favorable effect ratification in 1965 would have on U.S. ta x revenues 

(about $1 million add itional for U.S. revenues from Clevite alone) ; and

2. The f avorable effect ratification in 1965 would have on the U.S. balance 

of payments (about $2 million in Clevite’s case alone),

Clevite Corp, respectfully urges tha t your committee promptly recommend that 

the Senate ra tify the protocol as expeditiously as possible.

Very tru ly yours,

William G. Laffer, President.

Manufacturing Chemists’ Association, Inc.,

Washington, D.C., October 11, 1965.

Hon. William J. Fulbright,

Chairman, Committee on Fore ign Relations,

U.S. Senate, Washington, D.C.

Dear Mr. Chairman : The Manufacturing Chemists’ Association, Inc., wishes 

to advise you and your committee tha t it recommends favorable action on the 

tax protocol between the United States of America and the Federal Republic of 

Germany, signed at Bonn on September 17, 1965. The association urges that 

your committee take this favorable action as quickly as possible so tha t the 

Senate can give its advice and consent this year in order tha t the protocol will 

come into force for the full calendar year 1965.
TAX PROTOCOLS W IT H BEL GIU M AND GERMANY 47

The Manufacturin g Chem ists’ Association, Inc., is a nonprofit tra de association with 193 U.S. member corporations, large a nd small, which account for more 

tha n 90 percent of the productive capacity of the chemical industry in this 

country.

As indicated in the report of the Secretary of State, thi s protocol brings up 

to date the tre aty provisions in light of changes made in the tax system of the 

Federal Republic of Germany. In addition, various other beneficial changes 

are made in the tax relationship between the two countries.

Some revisions contained in th e protocol which effect s ubstantial improvements 

in the tax consequences flowing from the German convention are (1) the extension of the tre aty to certain Fed era l Republic taxes which are not income taxes. 

(2) the adoption of a basic principle throughout the entire protocol that the 

reduced rat es on investment income flowing from Germany will not be taken 

away merely because the U.S. enterprise has an unrelated perm anent establishment in Germany, (3) the broadening of the exemption from tax in the case of 

royalty paym ents to “know-how” payments, and (4) the exemption of capital 

gains from tax in Germany.

From an overall point of view, the protocol sets forth a more satisfactory tax 

rela tionship between the two countries.

It is requested th at thi s lette r be inserted in the record of the public hearing 

on the protocol with the Fed eral Republic of Germany to be held on October 13. 

1965, by your Subcommittee on Tax Conventions.

Very truly yours,

M. F. Crass, J r.

National Foreign Trade Council, Inc.,

New York, N.Y., October 11,1965.

Re tax protocol with Fed eral Republic of Germany (S. Ex. I, 89th Cong., 1st

Sess.).

Hon. Albert Gore,

Chairman, Subcommittee on- Tax Conventions,

Committee on Foreign Relations,

U.S. Senate, Washington, D.C.

Dear Sir : The National Foreign Tra de Council, which was founded in 1914, 

is a national orga niza tion composed of U.S. corporations engaged in all aspects 

of foreign tra de and business. Its purpose is to promote U.S. foreign tra de and 

business.

The income tax tre aty program long has been rega rded as a most imp orta nt 

method of promoting U.S. foreig n trade and business. Testimony, on liehalf of 

the National Foreign Tra de Council, has been presented to the Foreign Rela tions 

Committee concerning each of the income ta x treaties to which the United States 

is a party. At each ann ual convention of the Natio nal Foreign Tra de Council 

since the initiati on of the tax tre aty program, there has been included in its 

recommendations, a statem ent that the tax tre aty program be extended and 

improved.

The council recognizes the fact that the proposed protocol would be beneficial 

in several ways including the following:

1. Capital gains would not be subject to German income tax, except in 

certain circumstances.

2. The provision with regard to royalties has been clarified to make it 

clear that paym ents for “know-how’” will be exempt from German income 

tax in the same manner as payments for patent and sim ilar royalties. 

(However, the council believes th at this treatm ent was in the spirit of the 

original tre aty provision regarding royalties and tha t, therefore, it should 

have been retroa ctive to Janu ary 1, 1954. This ma tter is discussed fu rthe r 

in the attached memorandum.)

3. A tax payer who has a i>ermanent establish ment in Germany will not 

lose the tre aty benefits except on income effectively connected with the permanent establishment.

The NFTC suggests deletion or clarification of the term “a place of management” in the tre aty definition of “perm anent establishment” because the re is 

considerable doubt as to just how this term would be inte rpreted, particular ly 

by th e German tax authoritie s. The NFTC reasons for this suggestion and proposals as to the manner of clarification are explained in detail in the attached 

memorandum.
48 TAX PROTOCOLS W IT H BELG IUM AND GERMAN Y

While the National Foreign Trade Council understands the reasons given for 

the increased German withholding tax on reinvested dividends, it is concerned 

tha t other countries may attempt to use this concession in order to obtain an 

increase in withholding taxes under their treaties with the United States. 

This matte r is also discussed in the attached memorandum.

Despite its concern with reference to several provisions in the treaty which 

are discussed above, the National Foreign Trade Council does not believe that 

the Senate should delay its advice and consent to the ratification of the protocol 

between the United States and the Federal Republic of Germany (S. Ex. I, 89th 

Cong., 1st sess.).

It is requested tha t this letter and the attached memorandum be made part 

of the record of the hearings of the Subcommittee on Tax Conventions, Committee 

on Foreign Relations, scheduled to be held October 13, 1965, on the tax protocol 

with the Federal Republic of Germany (S. Ex. I, 89th Cong., 1st sess. I.

Very truly yours,

J os ep h B . Brady, Vice President.

Enclosure.

Detailed Com me nt s by N ation al F oreign T rade Cou nc il Concern ing

T ax P rotocol W it h F ederal R epub lic of Germany

NFTC COMMENT ON ARTICLE II CONCERNING THE TERM “a PLACE OF MANAGEMENT”

The proposed article 11(1) (c) provides in part that a permanent establishment shall include especially “a place of management.” The memorandum of 

understanding between the two delegations provides th at: “In the application 

of article II of the convention, a hotel room or similar place temporarily 

occupied by officials of an enterprise exercising management functions shall not 

be interpreted to constitute ‘a place of management’.”

The basic problem envisioned by the NFTC with regard to the term “place 

of management” is that there is considerable uncertainty as to ju st what it will 

mean in practice.

Recommendation

It is urged tha t the Senate request that best efforts be made to have the term 

“a place of management” in article 11(1) (c) deleted from the protocol, and that, 

in any event, it be clarified so that “a place of management” will refer only to 

a place where the board of directors of the enterprise regularly meets or a place 

from which the chief executive officers regularly direct the affairs of the enterprise. This clarification will negate any possible inference that the term “a 

place of management” includes the performance in Germany of activities by a 

U.S. shareholder, or its employees or representatives, in relation to the shareholder’s investment in a German corporation.

Comment

The memorandum of understanding states that a hotel room occupied temporarily by a company official shall not constitute “a place of management.” 

The NFTC fears tha t this could be interpreted to mean tha t a bit more than 

a hotel room, such as a room or rooms in the German subsidiary’s office building, frequently used for visitors from the U.S. parent or the loan of parent 

company personnel or the presence of parent company executives, could constitute a permanent establishment.

Conceivably, if the U.S. parent were to have “a place of management” in Germany which constitutes a i>ermanent establishment, the German tax authorities 

might claim tha t the parent would be subject to withholding tax at a rate of 

25 percent on part or all of the dividends it receives from the subsidiary. (The 

German tax authorities might also try to tax the dividend income at 49 percent.) This result could occur because of the proposed provision in paragraph 7 

of article VI. That paragraph would deny the reduced withholding tax if the 

recipient has dividend income which is “effectively connected with such permanent establishment.” The memorandum of understanding associated with the 

protocol provides in paragraph 3 that the term “effectively connected” shall be 

interpreted to apply where the activities of the permanent establishment are 

a material factor in realizing such items of income.

It should be made clear tha t the presence in Germany of executives of the 

U.S. parent does not ordinarily constitute “a material facto r” in the U.S. pa rent’s
TAX PROTOCOLS WITH BELGIUM AND GERMANY 49

realization of divide nd income from its German sub sidi ary. Thus, the lower 

withholdin g rate should apply in the typical case wher e the U.S. pa rent’s board 

of dire ctor s and chief execu tive officers are reg ularly located in the United 

State s.

However, unde r the protocol the German tax autho rities could attem pt to 

deny exemptio n from income tax with regard to intere st unde r art icle VII, 

roya lties under art icl e VIII and cap ital gains under art icle IX A : th at is, wher e 

the acti vities of the place of mana gement could be rela ted to the interest, roy alty 

or c apital gains as a m ate rial fac tor in reali zing such income or gains.

NFTC CO MM ENT ON ARTICLE II I CO NCERNIN G EL IM IN AT IO N

OF FORCE OF ATTRACTION RULE

The last sentence of parag rap h (2 ) of the proposed art icl e II I sta tes th a t: 

“oth er protits of the kind ref err ed to in par agr aph ( 1 ) ” shal l be trea ted as if derived thr ough the p erm anent establish ment.

Comment

It is subm itted th at this sentence can be read to mean th at any ind ust rial or 

commercial profits of a U.S. enterp rise may be tre ate d as if derived thro ugh the 

German perm anent esta blishme nt, because para gra ph (1 ) app arently r efe rs in its 

first sentence to all ind ust ria l and-co mmercial profits (pre sum ably from sources 

within Germany, thoug h even this is not cle ar) of the U.S. en terprise.

Recommendation

NFTC suggests th at the re should be some appro pri ate form of clarification to 

the effect th at the “oth er prof its” dea lt with by p ara gra ph (2 ) are only the additional profits ref err ed to in the second senten ce of p ara gra ph (1 ), namely, are d erived from sources wit hin Germany from sales of goods or merchandise of the 

same kind as those sold, or from othe r busine ss transa ctions of the same kind as 

those effected, thro ugh the p erm anent establish men t.

NFTC CO MM ENT ON ARTICLE VI CONCE RNING DIVID END W IT HH OLD IN G TAX

The new art icle VI to be inserted by the protocol would provid e th at the r ate of 

tax withheld on divid ends will be 15 percent, with the except ion th at if a U.S. 

company has an int ere st of 10. percent or more in the voting stock of a German 

company which pays it a dividend Germany may impose a withh oldin g tax as high 

as 25 perce nt on t he portion of the d ividen d deemed to be “ rein vested” in the German company. In the absence of tre aty restric tion s, German law at the present 

time does impose a with holding tax of 25 perce nt. Under par agr aph (5 ) of this 

art icl e any investme nt in the form of a direct or indirec t tra ns fer of money or 

oth er prop erty by the U.S. company to the Germany company which exceeds 7.5 

perc ent of the dividend s receive d in the yea r by the form er from the la tte r shall 

be deemed to be a rein vestmen t of divide nds and add itio nal tax of 10 percent will 

then be imposed on pa rt or all of dividends received in the proceeding year , the 

cu rre nt yea r or the followin g ye ar.

Comment

It is noted with reg ret that it has been considered necessary to acquiesce with 

the provision th at a 25-percent tax would apply to the amount of the dividend 

deemed reinvested in Germany if such reinvestme nt exceeds 7.5 percent of the 

dividend. However, it is understoo d tha t justificatio n for agreemen t to this 

high withh oldin g tax on reinveste d dividends arises from circu mstances pec ulia r 

in Germany. On th is basis, the NFTC does not object to inclusion of th is incr ease 

in rate but desir es to express its concern tha t thi s action may be consid ered to 

have estab lishe d a preceden t for othe r countrie s which may wish to negotiate or 

rene gotiate a tre aty w ith the Unite d State s.

In addition, the NFTC suggests th at—

(a ) The 7.5-pe rcent “max imum ” seems unre ason ably low and could penalize even a mod erat e flow of inves tment into the German comp any ;

(b ) The penalty on reinvestm ent, if the re is one, should apply only wher e 

contro l of the German company will be cert ain, i.e., where the voting stock 

intere st exceeds 50 perc ent ra th er being merely 10 perc ent or more;

(c ) The phrases “dire ctly or ind irec tly” and “as any other form of 

inve stment” in par agrap h (5 ) will likely leave too much scope for vary-
50 TAX PROTOCOLS WIT H BELGIUM AND GERMANY

ing inte rpr eta tions. Fo r example, would a gua ran tee by the U.S. company of a thi rd pa rty ’s loan to the German company or the tra ns fer to 

the German company of rights under a paten t con stit ute “rein vestmen t of 

divide nds” ? It would have been beneficial if the par agr aph or the supple ­

mentary memoran dum of und erst and ing had listed categories of tra ns ­

actio ns such as thes e as exam ples—but not as an all-inc lusive list—of tra ns ­

actio ns w hich would not be deemed 40 be re inve stments ;

(d ) Pa rag rap h (2 ) of the memorandum of und erstandin g may be inter ­

prete d to mean that tra de credit which is outstan ding longer tha n is normally the case between arm ’s-length partie s or th at differs from the usual 

form of credit in the tra de in any other respec t will be taken as rein vestment of dividends even though the par ties had no inten tion of creatin g a 

perm anent or long-term investm ent.

Recomm endation

It would be des irab le if app rop riate steps were take n by the Treas ury Departm ent to seek clarification of the items referr ed to in (c ) and (d ) above.

NFTC CO MM ENT ON ARTICLE V III CO NC ER NIN G ROYALTIES

The proposed revision of the langu age of art icl e VI II makes it clea r tha t 

exempti on from German tax extends to payments made after 1962 to a U.S. corporation in respect of “knowledge, experience or skill (know-ho w).” Clause 

4 of the memorandum of und erst and ing stip ulates th at the insertion of the 

term “know-how” and oth er changes in art icle VIII shall not affect int erpretation of the art icl e as it applied to paym ents made before 1963. Under 

the arti cle as now worded, paym ents for the rig ht to use (amo ng other thi ngs ) 

scientific works, patents, designs, plans and secre t processes and form ulas are 

exempt from German tax if the U.S. payee does not have a perm anen t establishm ent in the Fed eral Republic of Germany.

Comment

For a long period of time U.S. corp orati ons receiving paym ents from German 

companies in respec t of scientific info rmation and know-how have inte rpreted 

the words in art icle VII I referre d to above as exemp ting these paym ents from 

German tax. Ther efore, while art icle VI II is undoub tedly desirab le, it would 

have been prefera ble eit he r to make the amendmen ts to the wording of the 

arti cle retr oac tive to the beginning of the tre aty (Jan . 1, 1954) or to state 

clear ly in the memorandum of und erst and ing th at so fa r as tax assess ments 

not yet closed are concerned the change in the wordi ng of art icle VI II from 

Ja nu ary 1, 1963, in no w ay alt ers or adds to the m eaning or intent of the article 

as it applied to paym ents on account of scientific infor mati on and know-how 

made prior to th at date. If the effective date for the change in wordi ng has 

any significance at all in regard to such payments, it seems unreasonable, with 

the tre aty in effect now for 11 years, to select so rece nt a date when tax pay ers 

have long been actin g in the belief th at the art icle exempted these payments. 

Consequently, a much ear lie r effective date ought to have been selected for the 

change of language, and in such event (unle ss, as suggested above, the date 

was Janu ary 1, 1954) clause 4 of the memoran dum of und erstandin g would 

rema in unchanged.

National Foreign Trade Council, I nc.,

New York, N.Y., October 11, 1965.

Re Suppl ementary Income Tax Protocol With Belgium (S. Ex. G, 89th Cong., 

1st ses s.).

Hon. Albert Gore, Chairman , Subcommittee on Tax Conventions, Committee on

Fore ign R elations, U.S. Se nate, Washington, D.C.

Dear Sir : The National Foreign Tra de Council, which was founded in 1914,

is a nationa l orga nization composed of U.S. corpor atio ns engaged in al l aspects of 

foreign tra de and business. Its purpose is to promote U.S. foreign tra de and 

business.

The income tax tre aty prog ram long has been regarded as a most imp orta nt 

method of promoting U.S. foreig n tra de and business. Testim ony on behalf of
TAX PROTOCOL S W IT H BE LG IUM AND GERMANY 51

the National Foreign Tra de Council has been presented to the Foreign Relat ions 

Committee concerning each of the income t ax tre ati es to which the United States 

is a party. At each ann ual convention of the Nationa l Fore ign Tra de Council 

since the init iation of the tax tre aty progra m, the re has been included in its 

recommendations a sta tem ent th at the tax tre aty program be extended and improved.

The Nationa l Foreign Tr ade Council recommends th at the Senate give its 

advice and consent to the rati fica tion of the Supp lementary Income Tax Protocol 

with Belgium (S. Ex. G. 89 th Cong., 1st s es s.).

We note, however, th at the following r ecomm endations by th e Natio nal Foreign 

Tra de Council which were subm itted to the Tre asu ry Dep artm ent prior to 

negot iation of the Supp leme ntary Protocol With Belgium (pleas e see NFTC Ref. 

No. M-3593 entitled, “Pro posals in Connection With Prosp ective Revision of the 

Tax Tre aty Between the United Sta tes and the Kingdom of Belgium,” Feb ruary 

1964, copy at tached h ere to) have no t been included :

(1 ) turnov er tax on ro ya lti es ;

(2 ) reduced rate of 5 perc ent on certain dividen ds ;

(3 ) tre atm ent of cr edi t d ’impot as t ax on sh areholder’ ;

(4 ) elim inati on of precom pte mobilier prio r to amendment of tre aty ;

(5 ) elim inat ion of tax on in te re st ;

(6 ) liberalizati on of exemp tion for person al service compensation; and

(7 ) definition for cred it purpo ses of taxes imposed on company as opposed 

to th ose imposed on sh areh olde r.

We also note th at the re is no provision conta ined either in the convention or 

in the protocol relating to the “force of att rac tio n of the perm anent establ ishment” problem.

We also note th at the proposed protoctol is merely a stopgap in th at it will 

las t for a maximum of 6 years, by the e nd of which i»eriod i t is expected th at a 

completely new t reaty will be negotiated (see second parag rap h of a let ter dated 

Jul y 23, 1965, from the Sec reta ry of Sta te subm ittin g t he protocol of th e Presiden t 

(p. 2, S. Ex. G, 89th Cong., 1 st se ss .) ).

While we recommend th at the Senate give its advice and consent to ratif icati on 

of the protocol, we hoi>e th at in the nego tiatio ns for the perm anent tre aty the 

foregoing ma tters will be tak en care of.

We note th at the re is conta ined in art icle I (6 ), of the protocol amending 

art icle XII (2 ) of the basic convention, a provision th at a cred it be allowed 

by the Unite d Sta tes for Belgia n income taxes which is not to exceed th at proportion of U.S. tax es which net income from sources with in Belgian bears to the 

tota l net income of the U.S. taxpay er. We note fu rth er th at the protocol in no 

way amends art icle XX of the present convention, und er which it is provided 

th at the convention will not be cons trued to restr ict in any man ner a credit allowed under the laws of the United State s. Some concern has been expressed, 

however, that the amend ed art icl e XII (2 ) would dero gate from sections 901-905 

of the Int ern al Revenue Code of 1954, as amended, pa rticular ly section 904 (a ) 

(2 ). While we do not believe th at any thin g conta ined in the protocol will affect 

the appli catio n of sections 901-905, we suggest tha t, in view of the concern which 

has been expressed, the rep ort of the Committee on Foreign Rela tions conta in 

a specific stat ement to the effect th at nothing conta ined in the protocol will in 

any way limi t the appli catio n of sections 901-905 . We und ers tan d th at the 

techn ical memorandum of the Treas ury Departme nt concern ing the proposed 

protocol covers this point.

In conclusion, we urge th at the Committe e on Forei gn Rela tions recommend 

th at the Senate give its advice and consent to the ratif icat ion of the proposed 

protocol and th at the committee’s rep ort contain specific reference to the fac t 

th at the amendment of arti cle X II (2 ) of the basic convention does not limi t 

the appli catio n of sections 901 -90 5 of the Inter na l Revenue Code of 1954, as 

amended.

It is requested th at this let ter and the attach ed memorandum be made pa rt 

of th e record of the h ear ing s of the Subcommittee on Ta x Conventions, Committee 

on Forei gn Relations, schedule d to be held October 13. 1965, on the supplementar y income tax protocol with Belgium (S. Ex. G, 89th Cong., 1st sess. ). 

Very tru ly yours,

Enclosure .

J oseph B. Brady, Vice Preside nt.

PROPOSALS IN CONNECTION WITH PR OS PE CT IVE RE VIS IO N OF THE

TAX TREATY

B e t w e e n t h e

UN ITED STAT ES AND THE KINGDOM OF BELGIUM

N a t i o n a l F o r e i g n T r a d e C o u n c i l , I n c .

1 0 R o c k e f e l l e r P l a z a N ew Y o r k , N . I . 1 0 0 2 0

F e b r u a r y 1 7 , 1 9 6 4

53
54 TAX PROT OCOLS W IT H BELG IUM AND GERMANY

The Treasury Department announced on November 7, 1963 that discussions 

would be held in the nea r future between Belgium and the United States on 

possible modifications in the existing Income Tax Convention. It was stated 

that the principal purpose of the discuss ion will be to consider revisions that 

may have been made necessary by recent amendments to the Eelgian tax system, 

although other matters are also likely to be discussed.

The recent amendments to the Belgian tax system to which reference 

was made apparently are those included in the Belgian T ax Act of November 20,

1962, which in the case of corporate tax is applicable as of the fiscal year 1963 

and in the case of individual and partner ship income as of the fiscal yea r 1964.

In practical terms, corporate income of 1962 and subsequent years will be taxed 

according to the new tax law, whereas individual and partnership income will be 

subject to the new system only as of January 1, 1963. A summary of these changes 

is contained in a memorandum entitled, "The New Belgian System of Taxation", 

made available to the National Foreign Trade Council through the courtesy of 

the Belgian Industrial Information Service, (NFTC Ref. No. M-2866).

Suggestions concerning changes whic h ought to be proposed by the 

United States Government are listed below:

1. Article I

Article I (1) (b) enumerates the Belgian income taxes which are covered 

by the convention. It states:

"(1) The taxes which are the subject of the present Convention are:

• • •

"(b) In the case of Belgium: The income taxes, the national crisis 

tax, and the personal complementary tax, including all additions to these taxes." 

Recommendation

(1) Presumably this list of taxes should no w be replaced by the 

following taxes:

(a) A tax on resident individuals and partnerships (impot des 

personnes physiques) payable on total income from all 

sources (calendar year 1963).
TAX PROTOCOLS W IT H BELG IUM AND GERMAN Y 55

(b) A tax on resident corporations and profit making 

organizations (impot des societes) payable on toted, 

income from all sources (calendar year 1962).

(c) A tax on non-profit making organizations (impot des 

personnes morales) (legal entity income tax) (calendar 

year 1962).

(d) A tax on non-resident individuals, companies and other 

leged entities (impot des non-residents) payable on 

income earned or received in Belgium (companies, etc.,

(calendar year 1962); individuals, (calendar year 196?)).

(It is understood that the liability to non-resident income tax on 

patent, royalties, dividends and interest is discharged ^by a non-resident 

compan^ (provided not received by a Belgian permanent establishment) by 

payment of the applicable withholding taxes.)

(2) Consideration also should be given to listing the tax prepayments 

which include the following:

(a) The"precompte mobilier” (personal property income tax prepayment).

The "precompte de controle" (withholding of tax on dividends 

paid to shareholders).

(b) The "precompte immobilier" (based on presumed rental income.)

(c) The "precompte professionnel" (withholding of tax on wages, 

salaries, of companies' directors, etc.).

Attention is invited to the statement on Page 4 of the memorandum 

entitled, "The New Belgian System of Taxation", (Appendix A) to the effect that: 

"In the case of non-reaidents, the 'precompte de controle* is not withheld on 

dividends distributed before January 1, 1965. This situation may become permanent 

depending on the provisions of tax conventions with other nations".

(5) It is understood that there is a turnover tax ("Taxe sur les locations 

mobil ieres") levied on patent royalties paid by a resident company to a nonresident company. The rate is 6 per cent.

Although this tax apparently is not an "income tax" it is urged that 

consideration should be given to alleviating the effect of this tax insofar as 

it affects royalties payable to United States persons. It will be recalled that 

an agreement concerning the applic ation of turnover taxes to royalties has been
56 TAX PROTOCOLS W IT H BELG IUM AND GERMANY

concluded between the United States and France and set forth in a Proces-Verbal 

signed in Paris, August h , 1955- (See Executive J, 8Uu> Congress, 2nd Session - 

"Legislative History of United States Tax Conventions", prepared by the Staff of 

the Joint Committee on Internal Revenue Taxation,. Volume 1, Page 1201 at Page 1206).

Article VIII

Article VIII (1), as supplemented and modified September 9, 1952 provides 

for a reduction of United States tax on certain dividends derived from sources within 

the United States corporation by a resident or corporation or other entity created 

or organized in Belgium not having a permanent establishment within the United States 

Article VIII (2) as amended provides that: "Belgium shall not impose on dividends 

derived from sources within Belgium by a resident or corporation or other entity 

of the United States not having a permanent establishment within Belgium any tax 

in the nature of a personal complementary tax or surtax thereon, or any tax 

similar to that withheld at the source on dividends under United States law in 

the case of nonresident aliens and foreign corporations".

Since the personal complementary tax has been eliminated, this 

Article apparently will have to be revised.

Recommendation

(1) It is recommended that this Article be amended to reflect the provisions 

of Article 10 (2) of the OECD Draft Double Taxation Convention on Income and 

Capital which provides, in part:

***"dividends may be taxed in the Contracting State of which the 

company paying the dividends is a resident, and according to the law of 

that State, but the tax so charged shall not exceed:

a) 5 percent of the gross amount of the dividends if the 

recipient is a company (excluding partnership) which 

holds directly at least 25 per cent of the capital 

of the company paying the dividends;

b) in all other cases, 15 per cent of the gross amount 

of the dividends.

The competent authorities of the Contracting S tates shall by mutual 

agreement settle the mode of application of this limitation.

This paragraph shall not affect the taxation of the company in respect 

of the profits out of which the dividends are paid".
TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y

(2) An explicit statement should be included in the treaty concerning 

those taxes which will be treated as withholding taxes. Specifically, the 

treaty should provide that:

(a) The "precompte de controle" which is not being withheld on 

dividends being distributed to non-residents before January 1, 1965 will not 

be withheld in the future.

(b) The "precompte mobilier" should be treated as a tax on the 

dividend (shareholder) and should be regarded as coming within the provisions 

of Article 10 of the Draft Double Taxation Convention on Income and Capital. 

Assuming that the "precompte mobilier" may be treated as a tax on the dividend 

for purposes of Article 10 of the Draft Double Taxation Conventio n and the 

revised Treaty between the United States and Belgium, attention is invited to 

the fact the 15 per cent "precompte mobilier" is applied to an amount the 

Belgians refer to as "gross dividend". This gross dividend includes not only 

the amount of the dividend before the payment of the "precompte mobilier" but 

also the "credit d'lmpot" or 15 per efent (Ji) of the 30 per cent company tax.

It is so included because the shareholder receives a credit based on the 15 

per cent of the 30 per cent company tax. (See Pages 3» and 5 of NPTC Ref.

No. M-2866, attached hereto as Appendix A).

A summary of the reasons indicating that the "precompte mobilier" 

should be treated as a tax on the dividend is set forth in Appendix B attached 

hereto.

(c) One half of the corporate taxes which are imposed at a 

standard rate of 30 per cent in the case of distributed income (credit d'impot) 

should be regarded as a tax on the shareholder.

(3) Any changes in the treaty in derogation of the existing provisions 

should be prospective. In this connection it will be recalled that Article VIII 

(2) provides that "Belgium 6hall not impose on dividends derived from sources 

withi n Belgium any tax similar to that withheld at the source on dividends 

under United States law in the case of non-resident aliens and foreign corporations." In this connection, it is urged specifically that in accordance with 

the provisions of Article VIII (2), as amended, Belgiu m may not impose the 

"precompte mobilier" on dividends payable to United States residents, corporations, or other entities not having a permanent establishment wi thin Belgium 

prior to the amendment of this Convention.
58 TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y

Article VIII(A)

Article VIII (A) as amended by the Supplementary Convention of 

September 9, 1952 provides that: "The rate of tax imposed by each of the 

Contracting States upon interest *♦* derived from sources within such State 

by a resident or corporation or other entity of the other State not having 

a permanent establishment within the former State shall not exceed 15 per cent". 

Recommendation

It is recommended that this provision should be changed to agree 

with the provisions contained in most treaties between the United States and 

other European countries to the effect that no tax should be withheld on interest 

derived within Belgium or the United States respectively by a resident 

corporation or other entity of the other State not havin g a permanent establishment there.

Article XI

Article XI of the United States-Belgium Tax Convention contains 

provisions concerning personal services compensation and other payments during 

temporary presence in the United States and Belgium respectively.

This provision contains several limitations which are more 

restrictive than those found in comparable provisions of other tax conventions 

to which the United States is a Party, e.g., Article IX of the Treaty between 

the United States and France which concerns the same subject is considerably 

more liberal than Article XI of the Belgian Treaty.

Recommendation

It is recommended that this provision of the Treaty be liberalized. 

Specifically, it is urged that the provisions of Article XI of the Treaty 

between the United States and France be regarded as a model.

Article XII (2)

Article XII (2) of the Convention provides that: "In accordance 

with the provisions of section 131 of the United States Internal Revenue Code 

as in effect on the day of the entry into force of the present Convention, the 

United States agrees to allow as a deduction from the income taxes imposed by 

the United States the appropriate amount of taxes paid to Belgium, whether paid directly 

by the taxpayer or by withholding".
TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y 59

Recommendation

(1) It is assumed that this Article may be amended. If it is amended, 

it is urged that the United States specify the taxes which will be allowed as 

a credit and particularly specify which of the Belgian taxes will be regarded 

as a tax on the shareholder and which of the taxes will be regarded as a tax on 

the company. The fact that the tax is one on the shareholder rather than one 

on the company can result in a practical difference insofar as the amount of 

credit which will be allowed the United States shareholder.

In this connection, there is attached as Appendix C calculations 

indicating the amount of net tax payable in the case of a direct credit and 

the amount payable in the case of an indirect credit. It is noted that the 

difference is substantial.

It is urged specifically that the United States grant a credit 

for payment of the "precompte mobilier".

(2) Assuming that there is a question as to whether or not the 

"precompte mobilier" is a tax on the shareholder, attention is invited to 

the provision in Article XIII (1) of the United Kingdom-United States Tax 

Convention which provides that: "the recipient of a dividend paid by a 

corporation which is a resident of the United Kingdom shall be deemed to have 

paid the United Kingdom income tax appropriate to such dividend if such 

recipient elects to include in his gross income for the purposes of United 

States tax. on the amount of such United Kingdom income tax".

It is urged that if there is a question as to whether or not the 

"precompte mobilier" is a tax on the shareholder that a provision similar to 

that contained in Article XIII (1) of the U. S. - United Kingdom Tax Convention 

be included in the U. S.-Belgian Tax Convention.

(3) Article XII (3) contains provisions to allow certain deductions

in Belgian tax "In order to take into account the Federal income taxes collected 

in the United States etc."

It is recommended that this treaty be amended to provide that Belgium 

will allow taxpayers to credit in full against Belgian tax liability any United 

States Federal income taxes paid on U. S. source income against Belgian tax 

liability on such income.
60 TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y

KFTC R ef. No . M-286 6

APPENDIX A

REFRODUCED BY NATIONAL FOREIGN TRADE COUNCIL, INC.

THE NEW BELGIAN SYSTEM OF TAXATION

In a cc o rd a n c e w it h th e Tax A ct o f No vemb er 2 0 , 1 9 6 2 , a new sy ste m o f t a x a t io n

wa s s e t up i n B elg iu m . In th e c a s e o f c o r p o r a te in co m e, t h i s la w i s a p p lic a b le a s

o f Jan uary 1 , 1 9 6 3 , an d i n th e c a s e o f in d iv id u a l an d p a r tn e r s h ip in co m e a s o f

Jan uary 1 , 1 9 6 4 .

The new B e lg ia n ta x sy ste m i s c h a r a c te r iz e d by th e f o llo w in g f e a t u r e s :

1 . A s i n g l e ta x on t o t a l in co m e;

2 . Fou r d i f f e r e n t c a t e g o r ie s o f ta x p a y e r s who se in co m e i s s u b j e c t t o a

co r r e sp o n d in g s i n g l e t a x , nam el y:

a . I n d iv id u a ls r e s i d i n g i n B el giu m , s u b je c t t o th e "im pSt d e s

p erso n n e s p h y s iq u e s " ( I n d iv id u a l in co m e t a x )

b . C o rp o ra tio n s an d o th e r p r o fit -m a k in g o r g a n iz a t io n s , l i a b l e t o

th e "lm pot d e s s o c l 6 t 6 s " ( c o r p o r a te in co m e t a x )

c . N o n -p r o fit m ak in g o r g a n iz a t io n s , l i a b l e to th e "im pSt d e s

pe r so n n e s m o r a le s " ( l e g a l e n t i t y In co m e t a x )

d . N o n -r e s id e n ts , e i t h e r in d iv id u a ls o r co m p a n ie s, s u b j e c t to

th e "im p ot d e s n o n - r e s id e n t s 11 ( n o n - r e s id e n t in co m e t a x ) ;

3 . A sy st em o f p rep aym en ts , c a l l e d "pr^ co m pte s" , c r e d it e d a g a in s t th e s in g le

t a x on t o t a l in co m e an d l e v i e d on fo u r s o u r c e s o f in co m e: r e a l p r o p e r ty ,

p e r s o n a l p r o p e r ty , rem u n era ti o n s ( s a l a r i e s , w a g es, f e e s , p e n s io n s , an d

c o m p e n s a tio n s), m is c e lla n e o u s .

4 . T axes w hi ch w er e d e d u c t ib le a s e x p e n s e s from th e in co m e i t s e l f u nder

p r e v io u s l e g i s l a t i o n w i l l no lo n g e r e n jo y t h ia s i t u a t i o n , b ut t h e i r r a t e

h a s b ee n a d ju s te d a c c o r d in g ly . T a x a ti o n in c id e n c e on t o t a l in d iv id u a l

in co m e m us t n o t ex c eed 50 p er c e n t .

I , CORPORATE INCOME TAXATION

A. Tax able Base

The c o r p o r a te in co m e V*x a p p l ie s t o th e in co m e o f c o r p o r a tio n s an d o t h e r p r o f i t -

m ak in g o r g a n iz a t io n s e s t a b lis h e d u nder B e lg ia n la w or w it h t h e i r main a d m in is ­

t r a t i v e o r man agem ent o f f i c e s i n B elg iu m . How ev er , p a r t n e r s h ip s may e l e c t t o

h ave t h e i r p r o f i t s ta x e d a s p a r t o f th e in d iv id u a l in co m e o f th e p a r t n e r s . In

t h i s c a s e th e p a r tn e r s h ip i s n o t l i a b l e t o t a x a t io n .

G ro ss in co m e in c lu d e s a l l e a r n in g s r e s u lt i n g from th e a c t i v i t i e s o f th e com pany

o r o f th e p a r t n e r s h ip . D e d u c tib le it e m s c o n s is t o f b u s in e s s e x p e n s e s
TAX PROTOCOLS W IT H BELG IUM AND GERMAN Y 61

suc h as r e n ta ls , in te r e s t on lo an s, wag es, s a la r ie s , pen si on s, fe es, 

comm iss ions, co m pe ns at io ns , c a p ita l lo an s, and am o rt iz a ti o n . Co mp ensat ion s 

of co rp o ra ti o n s' d ire c to rs or a u d it o rs are d ed u cti b le in so fa r a6 th ey 

re mun erate a c tu a l and perm anent fu n cti o n s in th e co rp o ra ti o n .

In th e ca se o f earn in gs composed of div id ends or of an oth er form of income 

from in v este d c a p ita l, 85% o f th e net amount re ceiv ed by th e company may be 

de du cted in th e dete rm in ati o n o f th e ta x ab le base . Thi s ded uct io n may amount 

to 95% fo r comp anies eng age d in in d u s tr ia l a c t i v i t i e s which own sh are s th e 

in ve stm en t val ue o f which do es not excee d 50% o f th e p a id -in c a p ita l — 

re val ued i f necess ary — o r o f th e p a id -in c a p ita l p lu s ta xe d re serv es and 

c a p ita l g ain s w rit te n in th e bo ok s. In th e ca se of earn in gs in th e form of 

i n te r e s t, r o y a ltie s , and re a l e s ta te inc om e, ta x prep ay men ts are de du ct ed 

from th e amount of th e corp o ra te income ta x on th e company 's earn in g s.

Tax Ra te ’

The st andar d ra te o f th e co rp o ra te income ta x i s 30%. In th e ca se o f re ta in e d 

ea rn in gs in ex ce ss of B .F r. 5,0 00,0 00 (810 0,00 0)* th e ta x ra te i s 35% on th a t 

ex ce ss am ount. The 5% ta x pai d abo ve th e st andard ra te i s , how ever, re fu nd ed 

when th ese re ta in e d earn in g s are d is tr ib u te d .

Ret ai ne d earn in g s, in clu d in g re serv es and non-d educti ble ex pe ns es , belo w 

B .F r. 1 ,0 0 0 ,COO ($ 20 ,0 00 ) a re su b je ct to a 25% ta x .

A company e s ta b li s h e d in Belg ium ha s p r o f its bef ore ta x es am ounti ng 

to $6 00 ,000 . I f th e p r o f its are re ta in e d , th e co rp ora te income ta x 

i6 computed as fo llow s:

on p r o f its up to 81 00 ,000 : 8100 ,00 0 x 30% 8 30 ,000

on p r o f its ov er $1 00 ,000 : $500 ,00 0 x 35% = 8175.00 0 

T ota l $205,00 0

I f th e p r o f its are d is tr ib u te d , th e corp o ra te inco me ta x amoun ts to :

8600 ,00 0 x 30% = $1 80,00 0

I f th e p r o f its were d is trib u te d a f te r be in g ta xe d a s re ta in e d earn in g s, 

an amount of $2 5,00 0 would be re fu nd ed .

T ax at io n o f D'.vldwndj

When is su ed , div id en ds hav e alr ead y been su b je ct to th e co rp o ra te inco me ta x .

In fa c t, div id ends part ake o f corp o ra te income a s w el l as o f in d iv id u a l income. 

A cc or di ng ly , th e sh are h o ld er i s c re d it e d a g a in s t h is to ta l ta x l i a b i l i t y w ith 

h a lf o f th e co rp o ra te income ta x . This amoun t, u su a ll y eq ua l to 15%, i s 

re fe rre d to a s "c r e d it d 'i m p o t" (t ax c r e d it) .

Upon d is tr ib u tio n , th e company w ithh ol ds a 15% le vy c a ll e d "pr^ comp te m o b il ie r" 

(p er so nal p ro p ert y income ta x pre paym ent) on i t s d is trib u te d p r o f its . As p a rt

P a rit y : $1 .0 0 = B .F r.50
62 TAX PROTOCOLS W IT H BELGIUM AND GERMANY

of g ro ss div id ends, th e " c re d it d'ira pot" must be in cl uded in th e ta xab le 

base fo r th e dete rm in ati on o f th e "p ric om pte m o b il ie r" , which i6 a ls o 

cre d it e d a g a in st th e sh are h o ld ers to ta l ta x l i a b i l i t y . (No p a rt o f th e 

"p ric om pte m o b il ie r" , how eve r, may be re fu nd ed be fo re f is c a l yea r 19 66 .)

I t sh ou ld be no ted th a t th e same sys tem o f prepay ment a p p li e s to compensa ti o n s of d ire c to rs or a u d it o rs of co rp o ra ti o n s who do no t carr y on 

a c tu a l and perm anent a c t i v i t i e s in th e company. I t a ls o a p p li e s to th e 

income of p a rtn e rs der iv ed from in v este d c a p ita l.

Example

I f we consid er a h y p o th e ti c a l net p r o fit of 10 0, th e co rp ora te 

income ta x and prepayme nt w il l be computed a s fo llow s:

Net p r o f it befo re ta x. 100

Cor po ra te income ta x (15 i s cre d it e d

towa rd th e sh a re h o ld e r's payment of

i t s in d iv id u a l income ta x) 30

70

"Pr^c om pte m o b il ie r" (15% on 85) 12 .7 5

Net di vi de nd 57 .2 5

T ota l ta x in cid ence on d is trib u te d p r o f its 42.75%

In th e ca se of a company, as mentioned ab ov e, which ha s 86 00,00 0 in 

net p r o f its and d is tr ib u te s th es e earn in g s, th e "p rico m pte m o b il ie r" 

would be computed a s fo llow s:

P ro fits bef ore ta x es 860 0,0 00

Cor po ra te Income ta x a t 30% 18 0,00 0

842 0,0 00

Gross div id en ds (i n clu d in g "C re dit 

d'lm pot" or 15% o f p r o fits be fo re ta xes)

842 0,0 00 x g = 8510,00 0 

"Pr&compte m o b il ie r" : 8510, 000 x 15% <= 876,5 00

Net d iv id en d s- 8420, 000 - 876,5 00 - 83 4^,50 0

In th e ca se of re sid e n t st o ck h o ld ers , th e ag en t e ffe c tin g th e payment of 

div id ends, such a6 a bank or a st ockbro ker , must a ls o withh ol d an amount eq ua l 

to 15 per ce nt o f th e n et div id en d pa id ou t to th e sh are h o ld er, in th e ev en t 

th e l a t t e r do es no t a u th o ri ze th e ag en t to com munica te any in fo rm at io n 

r e la tin g to such pay ments to th e In te rn a l Reven ue. T hi s amount, c a ll e d 

"p r4compte de c o n tr o le ". i s a ls o c re d it e d ag ain st th e sin g le income ta x to 

which th e in d iv id u a l sh are hold er i s lia b le on h is t o ta l income . Any amount
TAX PROTOCOLS W IT H BELGIUM AND GERMANY

withh el d in ex ce ss o f h is ta x l i a b i l i t y i s re fu nded. (I n th e ca se o f nonre s id e n ts , th e "precompte de co n tr o le " i s no t w ithh el d on div id en ds d i s t r i ­

bu ted bef ore Ja nu ar y 1, 19 65. T hi s s itu a tio n may become per ma nent de pend ing 

on th e pro v is io n s of ta x co nven tions with o th er n a tio n s .)

When div id en ds on which a "precompte m obil ie r" ha s alr ead y bee n w it hhel d, are 

d is trib u te d to anoth er co rp o ra ti o n , 85 pe r ce nt (o r in some case s 95 per cent) 

o f th e net amount may be de du ct ed fo r ta x purp ose s. In a d d it io n , when th es e 

div id en ds are d is trib u te d again by th is sec ond co rp o ra ti o n , th e "prec om pte 

m obil ie r" i s due on ly on th e amount ex ce ed ing 85 pe r ce nt (o r 95 pe r cen t) of 

th ese. Thu6, th e ta x ab le ba se co rr es po nds to 15 pe r ce nt (o r 5 pe r cen t) of 

th e div id en ds to wh ich , how ever, i s add ed th e " c re d it d 'im p o t" . A cc or di ng ly , 

th e "pr eco mp te m o b il ie r" i s computed in e ffe c t on a ba se der iv ed a t by 

m ult ip ly in g th e ta x ab le p a rt o f th e div id en ds by 8^.

Example

Assuming th a t th e company ha s re ceiv ed a net div id en d o f 57 .25 

(s ee exam ple on Page J ), th e ta x ab le amount upon a second 

d is trib u tio n o f th is div id en d i s :

57 .2 5 x 15% = 8.5 9

However, th e ta xable base i s computed as fo llow s:

8.5 9 x | | - 10 .^3

Acc or di ng ly , th e "pr ecom pte m o b il ie r" w il l be :

ID.U3 x 15% = 1. 56

I f fo r in sta n c e , Company B owns 50 pe r ce nt o f th e st ock of 

Company A (s ee example on Page J) and th us re c e iv e s 8171,75 0 

as i t s sh ar e in div id en ds is su ed by Company A, i . e . 33^5,50 0 ▼ 2, 

th e amount of div id en ds to be in cl uded in Company P’ s ta xable 

income w il l be :

8171 ,75 0 x 15% = 825 ,76 2

Upon d is tr ib u tio n o f th ese "secon d gen era ti o n " d iv id ends, th e 

"prec om pte m o b il ie r" w il l be computed as fo llow s:

Ta xable ba se : 817 1,7 50 x 15% » 825 ,76 2

8 2ff,7 62 x = 831,2 82

"Prec om pte m o b il ie r" : 8 31 ,282 x 15% «■ 8 ^,69 2

Tax at io n of I n te r e s t, R o y a lt ie s, and o th er Income from Per so na l Pro per ty

I n te re s t, r o y a ltie s , and o th e r income from per so nal p ro pert y (suc h a s lo an s, 

d ep o sit s and r e n ta ls ) are in cl uded in co rp ora te p r o f its and a re th us su b je ct 

to th e corp ora te income ta x . However, th e 15% "p recompte m o b il ie r" le v ie d on 

su ch income i s c re d it e d a g a in st th e payment o f th e co rp o ra te income ta x .
64 TAX PROTOCOLS W IT H BELGIUM AND GER MANY

i,'. Ta x a tio n o f C a p ita l G ain s

As a r u le , c a p i ta l g a in s a re s u b je c t to tl.e c o rp o ra te inco me ta x . However, 

some c a p i ta l g a in s a re ta x ex em pt when th ey f a l l in to one o f th e fo ll o w in g 

c a te g o r ie s :

a . C a p ita l g a in s r e l a t i n g to la n d , b u il d in g s , equip m ent, o r s to c k , owned 

f o r more th an f iv e y e a rs an d i f th ey re m ai n in th e comp any, pro vid ed 

th e y do n o t ex ce ed th e a s s e t s v a lu e a d ju s te d on th e b a s is o f a le g a i 

c o e f f i c i e n t , fro m which d e p r e c ia tio n on su ch a s s e t s h as be en d e d u cte d . 

C a p ita l g a in s ex ceed in g t h i s am ou nt , ho wev er , a re ta x e d a t a 35 per 

c e n t r a t e .

b . C a p ita l g a in s re in v e s te d in fix e d a s s e t s , eq uip m ent, o r s to c k fo r th e 

purp ose o f c r e a tin g a new com pany o r fo r c a p i ta l in c r e a s e , a s pro v id ed 

f o r by a J u ly 15, 1959 , la w . F o u r - f if th s o f th e se g a in s a re ex em pted 

under t h i s la w . Ho we ver, t o t a l ex em ption i s g ra n te d i f th e re in v e stm e n t 

ta k e s p la c e in a devel opm en t a r e a .

F . D is s o lu ti o n o f a Company

In th e ev en t o f a d is s o lu t io n , th e com pany pays a J0% ta x on am ou nt s d i s t r i ­

bu te d in e x ce ss o f th e p a id - in c a p i t a l — re v a lu e d i f n e c e s sa ry — th a t do 

n o t ex ce ed th e am ount o f p re v io u s ly r e ta in e d e a rn in g s an d a 15% ta x on am ou nt s 

in e x c e ss o f th e l a t t e r . (T he c a p i t a l o f co m pa ni es fo un ded b e fo re 19 50 i s 

re v a lu e d in accord ance w it h a s p e c if i c s c a le fo r a c c o u n ti n g p u rp o s e s .)

As a r ex am pl e, l e t us c o n s id e r th e case o f a com pany which d i s t r i b u t e s a s s e ts 

am ounting to 8 5 ,0 0 0 ,0 0 0 , which h a s a re v a lu e d c a p i t a l o f 8 2 ,0 0 0 ,0 0 0 an d 

r e ta in e d e a rn in g s o f 8 2 ,5 0 0 ,0 0 0 . The ta x a b le am ount in e x c e ss o f th e c a p i ta l 

w ill be:

85,0 0 0 ,0 0 0 - 1 2 ,0 0 0 ,0 0 0 = 85,0 00,0 00

Tax co m p u ta ti o n : 50% on 8 2 ,5 00,0 00 = 87 50, 000

15% on 8 500, 000 = 8 75 ,0 0 0

T o ta l 88 25, 000

In th e e v en t s h a re s is s u e d by th e com pany a re re p u rc h a se d by i t s e l f , a 50% 

s p e c ia l ta x i s a p p lic a b le on t h a t p a r t o f th e c o s t whi ch e x ceed s th a t am ount 

o f th e p a id - in c a p i t a l re p re s e n te d by th e purc h ase d s h a r e s .

G. F o re ig n Ear ne d Income

a-. Inc om e fro m a fo re ig n bra nch

The r a t e o f th e c o rp o ra te inco me ta x i s re duced to o n e -fo u r th . 

A cco rd in g ly , i t w ill am ou nt to 7 .5 p e r c e n t (o r to 8 .7 5 p e r c e n t 

on th a t p a rt o f r e ta in e d e a rn in g s exceed in g B .F r.5 ,0 0 0 ,0 0 0 o r 

81 0 0 ,0 0 0 ).
TAX PROTOCOLS W IT H BELG IUM AND GERMAN Y 65

b. Incom-1

 fror., re a l e s ta te

The ra te o f th e co rp o ra te inco me ta x i s re du ce d to o n e-f o u rt h . I t 

w il l th us amount to 7 .5 p er ce nt or to 8.7 5 per c e n t.

c . Dividends

The "pr ecom pte m o b il ie r" of 15 pe r ce nt i s w ithh el d a t th e so ur ce 

by th e f i r s t in te rm edia ry e s ta b li s h e d in Belg ium or i s pa id by th e 

b en efi cia ry i f th e div id en d was c o ll e c te d ab ro ad . The se div id en ds 

become p a rt o f ta x ab le p r o f its . However, 85 o r 95 per ce nt of th e 

net amount o f div id en ds re ceiv ed may be ded uc te d, and as a co ns equ en ce , th e corp ora te income ta x a ffe c ts on ly an amount eq ua l to 15 

per ce nt o r 5 per ce nt o f n et div id en ds re ceiv ed from a fo re ig n 

so urc e.

I f a Bel gia n company in i t s tu rn d is tr ib u te s div id en ds from th is 

fo re ig n ea rn ed inc om e, th e ba se fo r th e co m pu tation o f th e income 

ta x pre pay me nt ("prec om pte m ob il ie r" ) i s a rri v e d a t by de du ct in g 

from th e amount o f inco me fo r d is trib u tio n 85 per ce nt o r 95 pe r 

ce nt of th e amount in n et div id en ds re ceiv ed from a fo re ig n so urc e.

Example

A. Bel gi an company ha s to ta l p r o fits o f $1 ,0 00 ,0 00 , in clu din g 

31 00,00 0 in div id ends from fo re ig n so urc es. A 15% "prec om pte 

m obil ie r" i s pai d on th ese div id en ds and th u s net re ce iv ed 

div id en ds amount to $8 5,00 0.

I f p r o f its a re re ta in e d , th e corp ora te income ta x i s computed 

as fo llow s:

Amount exem pted: $8 5,0 00 x 85% = $72,2 50 

Ta xable bas e: $1 ,0 00 ,0 00 - $7 2,25 0 = $9 27,75 0

Cor po ra te income ta x: $10 0,0 00 x 30% = $ 30 ,000 

$8 27,75 0 x 35% = $28 9,7 13

331 9,7 13

I f th e p r o f its are l a t e r d is trib u te d , th e "precompte m obil ie r" 

to be w it hhel d on fo re ig n ea rn ed div id en ds i s de term in ed as 

fo llow s:

De du ction o f exe mpted amount:

$100 ,00 0 - $72,2 50 = $27,7 50

Ta xable ba se which must in clu de " c re d it d'im p o t" :

$2 7,75 0 x | | = $33 ,69 6

"Prdc om pte m o b il ie r" : $33 ,69 6 x 15% = 35,05 4 

Net div id ends: $100 ,00 0 - $5,05 4 - $94,9 46
TAX PROTOCOLS W IT H BEL GIU M AND GERMANY

The income ta x pre pay m en t (" pre com pte m o b il ie r" ) o f 15 p e r c e n t 

mu st be paid on n e t i n t e r e s t re c e iv e d fro m fo re ig n s o u rc e s . T h is 

pr ep ay m en t may be ded u cte d fro m th e c o rp o ra te inco me ta x to be p a id 

by th e comp any. In th e e v en t i n t e r e s t has a lr e a d y be en ta x e d ab ro a d , 

th e company r e c e iv in g t h i s i n t e r e s t i s e n t i t l e d to cla im a 15 p er 

c e n t ta x c r e d i t .

Fo r in s ta n c e , i f a B elg ia n com pan y re c e iv e s SQC.OCO in i n t e r e s t from 

a fo re ig n so u rc e and a 10% ta x h as a lr e a d y be en w it h h e ld abro ad on 

g ro s s i n t e r e s t e q u iv a le n t to 5100,0 00, th e ta x in c id e n c e i n Be lgium 

i s co mpu ted a s fo ll o w s :

T axable b a s e : 5100,0 00 - 510, 000 = 59 0, 000 

"P re co m pte m o b il ie r" : 590, 000 x 15% = 51 5, 500 

C o rp o ra te inco me ta x : 590,0 00 x 50% = 52 7,0 00

D educti ons: a . "P re co m pte m o b il ie r" 51 5, 500

b . F o re ig n ta x a t 15% 51 3, 500

Rem aining to be p a id : 0

R o y a lti e s

R o y a lti e s a re s u b je c t to th e c o rp o ra te inc om e ta x . I f r o y a l t i e s ha ve 

a lr e a d y be en ta x e d a b ro a d , th e B elg ia n ta x p a y e r may cla im a 15 p e r

c e n t ta x c r e d i t .

R ea l P ro p e rty T ax ati o n

In th e case o f a com pan y e s ta b lis h e d in Belgi um , a c tu a l r e a l p ro p e rty inco me 

i s s u b je c t to th e s in g le c o rp o ra te inco me ta x . Ho we ver, a pre paym ent, c a lle d 

" pr ec om pt e im m o b il ie r" i s le v ie d on th e v a lu e o f th e c a d a s tr a l in co m e. The 

c a d a s tr a l in co m e, whi ch was a d ju s te d in 19 62 , i s th e a s s e s s e d inco me wh ich 

th e ta x p a y e r d e riv e d from th e r e a l p ro p e rty he ow ns, a s l i s t e d i n th e Land 

R e g is te r .

The n a tio n a l "p re co m pte im m o b il ie r" am ou nt s to 5 p e r c e n t. Ho wever, p ro v in c e s 

and m u n ic ip a litie s a re a u th o riz e d to le v y an a d d itio n a l ta x . As a conse quence 

th e t o t a l pre pa ym en t am oun ts to a b o u t 20 p e r c e n t o f th e c a d a s tr a l inco me an d 

i s c r e d ite d a g a in s t th e c o rp o ra te inco me ta x up to 20 p e r c e n t . I t i s , 

how ev er , n o t re fu n d a b le . I t sh o u ld be n o te d th a t r e a l p ro p e rty inco me may be 

ex em pt ed fro m ta x a tio n f o r a f iv e y e a r p e ri o d w it h in th e fram ew or k o f th e 19 59 

l e g i s l a t i o n f o r th e enco ura gem en t o f i n d u s t r i a l in v e s tm e n ts .
TAX PROTOCOLS W IT H BELG IUM AND GERMANY

i i , individual income taxation

Tax ab le Bas e

Eve ry in h a b ita n t o f th e Kingdom o f Be lg ium i s s u b je c t to th e in d iv id u a l inco me 

ta x on h is in co m e, an in h a b ita n t i s d e fi n e d a s "a n in d iv id u a l who i s a r e s i ­

d e n t o f Be lgium o r has th e r e th e s e a t o f h is p r o p e r ty 's m an ag em en t."

The t o t a l n e t income fro m a l l s o u rc e s an d o f a l l k in d s fo rm s th e ta x a b le o a se . 

Income o f sp o u se s a re co mbine d f o r ta x p u rp o se s.

C a te g o rie s o f Incom e

The re a re fo u r c a te g o r ie s o f in co m e, na m el y: income fro m r e a l p ro p e rty ; 

inco me fro m p e rs o n a l p ro p e rty in c lu d in g c a p i t a l ; inco me fro m o c c u p a ti o n s ; 

an d inco me fro m m is c e ll a n e o u s s o u rc e s .

1 . I ncome fre m Rear Pr o p e r ty

The inco me fro m r e a l p ro p e rty in c lu d e s :

a . The " c a d a s tr a l" inco me o f r e a l p ro p e rty lo c a te d in B el gi um .

T his i s n th e o r e t i c a l inco me base d on th e a s s e s s e d v a lu e o f 

th e r e a l p ro p e rty . An abate m ent am ounting to 2 /3 o f th e 

" c a d a s tr a l" inco me (w it h in c e r ta in min ima an d maxim a) i s 

g e n e r a lly g ra n te d i f th e ow ne r h im s e lf o c c u p ie s th e p ro p e rty .

I f th e le a s e d p ro p e rty i s use d by th e te n a n t f o r b u s in e s s 

p u rp o se s, th e ta x a b le base in c lu d e s th a t p a r t o f th e n e t re n t 

in e x c e ss o f tw ic e th e " c a d a s tr a l" in co m e.

b . The n e t am eu nt o f th e r e n t o r o f th e re n tin g v a lu e o f th e 

r e a l p ro p e rty lo c a te d a b ro a d . "N et am ou nt " i s e q u iv a le n t to 

3 A o f th e g ro s s r e n t (o r th e g ro s s re n tin g v a lu e ) i n th e

case o f b u i l t p ro p e rty an d to 9 /1 0 , in th a t o f u n b u ilt p ro p e rty .

2 . Inc om e fro m P e rs o n a l P ro p e rty

T h is c a te g o ry o f inco me d e riv e d fro m B elg ia n o r fo re ig n s o u rc e s in c lu d e s :

a . D iv id ends fro m s to c k ;

b. Incom e o f c a p i t a l in v e s te d by p a r tn e r s ( a c tiv e o r n o t) in 

p a r tn e r s h ip s (" so c ). 6 te de p e rs o n n e s " ). T his in c lu d e s 

i n t e r e s t fro m lo a n s made to th e company by th e p a r tn e r s ;

c . Inc om e fro m go ver nm en t s e c u r i t i e s w it h th e e x c e p ti o n o f 

s e c u r i t i e s ex em pt ed fro m ta x a tio n in a cco rd an ce w it h p a rt i c u l a r le g a l p ro v is io n s ;

d . Inc om e fro m bonds, d e b ts , an d lo a n s ;
68 TAX PROTOCOLS W IT H BELG IUM AND GER MANY

e . Income fro m s a v in g s o r ba nk d e p o s its ;

f . Income fro m th e re n tin g o f p e rs o n a l p ro p e rty .

3 . Income fro m O ccupati on an d B u sin e ss

T h is c a te g o ry o f inco me in c lu d e s :

a . S a la r ie s , wag es , p e n sio n s , com pensa ti ons o f d ir e c to r s an d 

a u d ito r s (" c o m m is sa ir e s") o f s to c k c o rp o ra ti o n s ;

b . F ees, r e t a i n e r s an d o th e r re m u n e ra ti o n s o f in d e p e n d en t 

p ro fit -m a k in g a c t i v i t i e s ;

c . P r o f i t s d e riv e d fro m i n d u s t r i a l , com m erc ia l, o r a g r i c u l t u r a l 

b u s in e s s , a s s o le p r o p r ie t o r o f o r a s a p a r tn e r i n su ch a 

b u s in e s s .

Exe m pt io ns fro m T a x a ti o n

Some ty p e s o f inco me may be ex em pt ed fro m ta x a tio n su ch a s : 

c e r ta in a ll o w a n ce s an d p e n sio n s o f a s o c ia l n a tu re ; re im burs em ent 

to em pl oy ee s o f e x p en ses in c u r r r e d by tr a v e lin g fro m t h e i r home to 

t h e i r p la c e o f work; c e r t a i n c a p i t a l g a in s ; an d c e r t a i n re s e r v e s 

fo r "d o u b tf u l d e b ts " .

D educt io ns from G ro ss Inc om e

a . Exp en se s in c u rre d d u ri n g th e ta x a b le p e rio d fo r th e purp ose o f 

a c q u irin g o r p re s e rv in g inco me d e ri v e d fro m o c c u p a ti o n s may be 

d e d u cte d .

b . In s te a d o f d e d u c ti n g a c t u a l e x p en se s, a sta n d a rd d e d u c ti o n may 

be ta k e n a s fo ll o w s :

- In th e c a s e o f em plo yee s an d se lf -e m p lo y e d in d iv id u a ls :

20% i f th e inco me does n o t ex ce ed B .F r.8 5 ,0 0 0 (3 1 ,7 0 0 ), 

minimum d e d u c ti o n : B .F r.7 ,5 0 0 (# 15 0)

15% i f th e inco me f a l l s be tw ee n B .F r.8 5 ,0 0 0 an d B .H r. 300,0 00 

(# 6 ,0 0 0 ), minimum d e d u c ti o n : B .F r.1 7,0 00 (#3^*0)

10% i f th e inc om e ex ceed s B .F r.3 00,0 00 (8 6 ,0 0 0 ), minimum 

d e d u c ti o n B .F r. U 5 ,0 0 0 (# 900) an d maximum d e d u c ti o n 

B .F r.6 0,0 00 (# 1 ,2 0 0 )

- A 5% d e d u c ti o n w it h a maximum o f B .F r.6 0,0 00 (# 1 ,2 0 0 ) may

be d e ducte d fro m t h e i r re m u n e ra ti o n s by com panie s' d i r e c t o r s , 

a u d ito r s , an d p a r tn e r s ( in th e c ase th e p a r tn e r s h ip i s 

s u b je c t to th e c o rp o ra te inco me t a x ) , when th e s e re m u n e ra ti o n s 

a re not' p a id to th e p a r tn e r s a s inco me fro m in v e s te d c a p i t a l .
TAX PROT OCOLS W IT H BELG IUM AND GERMAN Y 69

c . O th er it e m s may a ls o be deducte d from g ro s s inco me under 

c e r ta in c o n d it io n s an d w it h in c e r ta in l i m i t s . The y in c lu d e :

- Premiu m pa ym en ts on h e a lth an d d i s a b i l i t y in s u ra n c e , 

c o n tr a c te d i n a d d itio n to s o c ia l s e c u r it y in s u ra n c e ;

- Premiu m pa ym en ts on l i f e in s u ra n c e ;

- M or tgag e p a y re n is under c e r ta in c o n d itio n s ;

- C o n tr ib u ti o n s to B elg ia n u n i v e r s i t i e s an d to o rg a n iz a ti o n s 

a s s i s t i n g ne- ’l y d e v elo p in g t e r r i t o r i e s .

d . From th e n e t inco me d e riv e d fro m o c c u p a ti o n s , a 5% d e d u cti o n 

co mpu ted on th e t o t a l am ount o f t h i s inco me may a ls o be ta k e n . 

T h is d e d u c ti o n mu st n o t be l e s s th a n B.F r.5» OO O (8 100) o r more 

th a n B .F r. 1 0 .0 0 0 (3 2 0 0 ).

J o in t R etu rn s

In th e c ase o f j o i n t hu sb an d an d w if e r e tu r n s , AO% o f th e w if e ’ s 

inco me d e riv e d fro m h e r o c c u p a ti o n o r b u s in e s s may be d e d u cte d . 

T h is d e d u c ti o n mus t n o t be l e s s th a n B .F r. 1 7 ,5 0 0 (8 55 0) o r more 

th a n B .F r. 2 5 ,0 0 0 (3 5 0 0 ).

4 . Income fro m Mis c ell .a n e o u s Sourc es

T his c a te g o ry o f inco me in c lu d e s th e fo ll o w in g :

a . P r o f i t s d e riv e d from o c c a s io n a l p ro fit -m a k in g a c t i v i t i e s , w it h 

th e e x c e p ti o n o f p r o f i t s d e riv e d fro m no rm al ma nagem ent o f 

p r iv a te p ro p e rty ;

b . Aw ard s, s u b s id ie s , and go ve rn m en t a n n u itie s g ra n te d to 

s c i e n t i s t s , w r ite r s , o r a r t i s t s ;

c . Support pa ym en ts su ch a s ali m ony;

d . P ers o n a l D ro p e rt y inco me in c lu d e d i n th e p ro c e ed s o f th e 

s u b le a s in g o r le a s e t r a n s f e r o f a fu rn is h e d b u il d in g o r 

p a r t o f i t ;

e . P r iz e s p e r ta in in g to c e r t a i n ty p e s o f bonds;

f . P ro ceed s from th e /—a n tin g o f th e r i g h t to h u n t, f i s h o r t r a p . 

D educt io ns f ro m _2.otr.l_ Ne t In come

From th e t o t a l o f th e n e t am ou nt o f income d e riv e d fro m th e c a te g o r ie s l i s t e d 

above, some e x p en ses a re d e d u c tib le under c e r ta in c o n d itio n s . The se d e d u c tib le 

exp en ses a r e :

a . C ost o f in s u r in g r e a l an d p e rs o n a l p ro p e rty ;

b . C e r ta in i n t e r e s t p a id ;
70 TAX PROTOCOLS W IT H BELGIUM AND GERMANY

c . Su pp or t pa ym en ts .

Minimum Tax ab le Income

The in d iv id u a l inco me ta x i s n o t du e when th e t o t a l ta x a b le inco me i s un d er:

B .F r.2 5,0 00* 

" 30,0 00 

" 35,0 00 

" 40,0 00

" 60,0 00 

" 60,0 00

fo r ta x p a y e rs w it h no depen d en ts

II •• 1

II

II 2

II 3

II

II •• 4 ••

to which i s ad de d 3 . F r . 30,0 00 fo r 

eac h depen dent a f t e r th e f o u r th .

N ote : The ta x p a y e r h im s e lf i s n o t in c lu d e d i n th e nu mb er o f d e p en d e n ts .

1 . Income under B .F r.l 6 0 ,0 0 0

The ta x i s g ra d u a te d a c c o rd in g to a s c a le an d ra n g e s fro m B .F r. 3 0 0 

to B .F r. 2 8 ,3 0 0 .

2 . Income o v er B .F r.l 6 0 ,0 0 0

B .F r.28 ,3 O O f o r inco me am oun ting to B .F r.l 6 0 ,0 0 0

27.5% fo r th a t p a rt o f income bet w ee n B .F r.1 60 ,0 00 an d B .F r.2 00,0 00

30 % II II II II 11 " " 200,0 00 II " 300,0 00

35 % II II II II 11 " " 30 0, 000 II " 400,0 00

37.5% II II II II 11 " " 400,0 00 II " 50 0, 000

40 % II II II II 11 " " 50 0, 000 II " 750,0 00

42.5% II II II II 11 " " 750,0 00 II " 1 ,0 0 0 ,0 0 0

45 % II II II II 11 " " 1 ,0 0 0 ,0 0 0 II " 3 ,0 0 0 ,0 0 0

50 % II II II II 11 " " 3 ,0 0 0 ,0 0 0 II " 5 ,0 0 0 ,0 0 0

55 % II II II II 11 ab ov e B .F r.5 ,0 0 0 ,0 0 0

Note 1 In no case mus t th e t o t a l ta x exce ed 50% o f th e ta x a b le 

in com e;

Note 2 That p a r t o f th e ta x which c o rr e sp o n d s to inco me d e ri v e d 

fro m o c c u p a ti o n s — o th e r th a n s a l a r i e s an d wa ges — i s 

i n p r in c ip le in c re a s e d by 15% o f th e ta x i f th e ta x i s 

n o t p a id in adv an ce, a t th e l a t e s t w it h in 15 days a f t e r 

th e f i r s t se m e ste r o f th e ta x a b le y e a r . I t i s in c re a s e d 

by 7)4% only f o r ta x pa ym en ts made w it h in 15 days a f t e r 

th e en d o f th e ta x a b le y e a r . No in c r e a s e a p p lie s to th a t

P a r it y : $1.0 0 - B .F r. 5 0
TAX PROT OCOLS W IT H BELG IUM AND GERMANY 71

p a rt o f tiie ta x which c o rre sp o n d s to " c r e d it d 'i r .p o t" , 

tiic " p re c c n p te p ro f e s s io n n e l" , o r t i e "p re co m pte 

m o b il ie r" , o r to th e e sti m a te d am ount o f ta x w it h h e ld 

abro ad (s e e f u r t h e r ) . ’

C. D educti ons fo r D ep en den ts

The se d e d u c ti o n s co mpu ted on th e ta x i t s e l f a r e :

5% fo r ta x p a y e rs w it h 1 depen dent 

10*36 " " " 2 depen d en ts

20% " " " 3 "

30% " " " 4 "

50% " " " 5 "

70% " " " 6 "

90% " " " 7 "

1CO% f o r ta x p a y e rs w it h more th a n 8 d e p en d e n ts

Note 1 No re d u c ti o n i s a p p lic a b le to th e am ou nt o f ta x which

c o rre sp o n d s to t h a t p a r t o f th e ta x a b le inco me exceed in g 

B.Fr.25O,O OO in c re a s e d by B.Fr.2 5,OOO fo r ea ch depen dent 

a f t e r th e f o u r th .

Note 2 Members o f th e ta x p a y e r’s fa m il y a re re g a rd e d a s d ep en d en ts 

i f th ey ha ve n o t e arn ed a n e t income e x ceed in g B .f Y .2 0 ,0 0 0 

d u ri n g th e ta x a b le y e a r .

D. Sy stem o f Tax Pre paym ents

Tax pre pay m en ts c a l le d "p re co m p te s" a re c o lle c te d on th e v a rio u s so u rc e s 

o f in co m e, nam el y r e a l p ro p e rty , p e rs o n a l p ro p e rty , re m u n e ra ti o n s ( s a l a r i e s , 

w ag es , f e e s , p e n sio n s , an d c o m p e n sa ti o n s), an d on inco me fro m m is c e ll a n e o u s 

s o u rc e s . Th es e pre paym ents a re c r e d ite d a g a in s t th e s in g le ta x on th e t o t a l 

in d iv id u a l in co m e.

1 . Tax Pr ep ay m en t on Rea l P ro p e rty Inc om e (" P re co m pte Im m o b il ie r" )

T h is pre pa ym en t i s co mpu ted on th e c a d a s tr a l inco me o f r e a l e s t a t e 

lo c a te d in B el gi um . I t s r a te am ou nt s to 3% a s f a r a s th e p a rt 

le v ie d by th e n a tio n a l gov er nm en t i s c o n ce rn e d . Ho we ver, p ro v in c e s 

an d m u n ic ip a litie s c o l l e c t an a d d itio n a l r e a l e s t a t e ta x w hi ch , a s 

a r u le , b rin g s th e a c tu a l pre pay m en t r a te up to a b o u t 20%.

2 . Tax Pr ep ay m en t on P e rs o n a l P ro p e rty Incom e (" P re co m pte M o b il ie r" )

P e rs o n a l p ro p e rty inco m e o f B elg ia n o r fo r e ig n o r ig i n i s s u b je c t to 

a ta x pre pa ym en t o f 15%, which i s w it h h e ld by th e inco me d e b to r o r 

by th e f i r s t B elg ia n in te rm e d ia ry .
72 TAX PROTOCOLS W IT H BELGIUM AND GERMANY

In th e c a se o f d iv id e n d s fo r in s ta n c e , ass um in g c o rp o ra te p r o f i t s 

fo r d i s t r i b u t i o n o f 10 0, a s to c k h o ld e r wo uld in f a c t re c e iv e a 

d iv id e n d o f 70 s in c e th e c o rp o ra te inc om e ta x s ta n d a rd r a te i s 30%. 

Ho wever, h a l f o f t h i s ta x o r 15 i s re g a rd e d a s a ta x c r e d i t fo r th e 

s to c k h o ld e r, an d th e p e rs o n a l p ro p e rty pre paym ent, co mpu ted th u s on 

a g ro s s d iv id e n d o f 85, am ou nt s to 85 x 15% = 1 2 .7 5 .

A su pple m enta ry p e rs o n a l p ro p e rty inc om e ta x pr ep ay m en t (" pre com pte 

de c o n tr o le " ) am ounting to 15% o f th e n e t d iv id e n d p a id o u t to th e 

s to c k h o ld e r mu st in some c a s e s be w it h h e ld an d i s a ls o c r e d ite d 

a g a in s t th e s in g le in d iv id u a l income ta x an d an y p o s s ib le e x ce ss 

o v e r th e ta x i s re fu n d e d .

3 . Tax Pre pa ym en t on R em uner at io ns (" P re co m pte P r o fe s s io n n e l" )

A pr ep ay m en t i s w it h h e ld a t th e so u rc e by th e d e b to r o f th e inc om e 

on re m u n e ra ti o n s su ch a s s a l a r i e s , wag es , p e n sio n s , an d com pensa ti ons 

o f com panie s' d i r e c t o r s o r a u d ito r s . The am ou nt o f pr ep ay m en t i n th e 

case o f wages an d s a l a r i e s i s dete rm in ed by o f f i c i a l ta b le s (s e e 

M oniteur B eig e, De c. 5, 1 9 6 2 ). Any p o s s ib le pa ym en t i n e x ce ss o f th e 

in d iv id u a l inco me ta x i s re fu n d e d .

E. F o re ig n Ear ne d Inc om e

Inc om e o f fo r e ig n o r ig in i s ta x a b le when re c e iv e d by a B elg ia n r e s id e n t . 

S e v e ra l r u le s a p p ly to su ch in co m e. Ho wever, t h e i r a p p lic a tio n may be 

m o dif ie d by i n t e r n a tio n a l c o n v e n ti o n s f o r th e p re v e n ti o n o f double ta x a ­

ti o n . Inc om e ex em pted from ta x a tio n in a cco rd an ce w it h th e p ro v is io n s 

o f a ta x co n v en ti o n i s , n e v e r th e le s s , ta k e n in to a cc o u n t to d ete rm in e th e 

r a te o f th e in d iv id u a l inco me ta x .

1 . Income fro m Rea l P ro p e rty

In th e case o f inco me d e riv e d fro m r e a l p ro p e rty lo c a te d ab ro a d , 

th a t p a r t o f th e ta x c o rr e sp o n d in g to su ch an inc om e i s re duced 

by h a l f .

2 . Incom e fro m P e rs o n a l P ro p e rty

A pr ep ay m en t o f 15% i s le v ie d on su ch inco me in c lu d in g d iv id e n d s 

an d o th e r inco me fr om in v e s te d c a p i t a l , i n t e r e s t , an d r o y a l t i e s 

when inco me e n te r s B el gi um . T h is inco me i s s u b je c t to th e i n d i ­

v id u a l inco m e ta x . Ho we ver, in a d d itio n to th e 15% "p re co m pt e 

m o b il ie r" , a n o th e r 15% d e d u c ti o n may be ta k e n on inco m e a lr e a d y 

ta x e d a b ro a d .

3. Inc om e fro m O ccu pation

Suc h inco me i s ta x a b le in B el gi um . Ho wever, th e ta x c o rr e sp o n d in g to 

t h i s inco me i s re duced by h a l f , when i t h as a lr e a d y been ta x e d ab ro ad
TAX PROTOCOLS W IT H BELG IUM AND GERMAN Y 73

I I I . LEGAL ENTITY INCOKE TAXATION

The B elg ia n S ta te , B elg ia n p ro v in c e s an d m u n ic ip a litie s , an d B elg ia n n o n - p r o f it 

o rg a n iz a ti o n s a re s u b je c t to th e le g a l e n t i t y inco me ta x .

A. , T ax ab le Bas e

I t c o n s is ts o f th e t o t a l inco me d e ri v e d fro m c a p i t a l , p e rs o n a l p ro p e rty an d 

r e a l p ro p e rty .

B. Tax

The le g a l e n t i t y inco me ta x c o rre sp o n d s to th e pay m en ts made a s "p re co m pte 

im m o b il ie r" ( r e a l e s t a t e inco me ta x p re paym ent) , "p re co m pte ro o b il ie r" 

(p e rs o n a l p ro p e rty inco me ta x pre paym ent) , an d to th e " c r e d it d 'i m p o t" 

(inc om e ta x c r e d i t ) .

IV . NON-RESIDENTS INCOME TAXATION

In d iv id u a ls who a re n o t r e s id e n t s o f Belgi um , co m pan ie s an d p a r tn e r s h ip s which 

do n o t ha ve t h e i r he ad o f f ic e n o r t h e i r ma in e s ta b li s h m e n t in Belgi um , an d fo r e ig n 

s t a t e s o r t h e i r p o l i t i c a l s u b d iv is io n s a re s u b je c t to th e n o n -r e s id e n t inco me ta x .

A. T ax ab le Base

I t c o n s is ts o f th e t o t a l inco me pro duce d o r c o lle c te d in B el gi um . ( I t sh o u ld 

be p o in te d o u t t h a t in th e c a se o f n o n -r e s id e n ts who p o s s e s s a d w e ll in g in 

Bel gi um , th e t o t a l am ount o f ta x a b le income mus t n ot be l e s s th a n tw ic e th e 

" c a d a s tr a l" inco me o f t h a t d w e llin g .)

B. Tax

The ta x a tio n v a r ie s a c c o rd in g to th e fo ll o w in g c a te g o r ie s :

1 . P r o f i t s o f a b ra n ch o f a fo r e ig n com pany a re ta x e d a t a s in g le r a te 

o f 35%.

2 . The ta x r a t e i s th e same a s th a t o f th e in d iv id u a l inco me ta x in th e 

c ase o f an in d iv id u a l p o s s e s s in g a d w e ll in g o r d e riv in g an inco me in 

Be lg ium a s an a c t iv e p a r tn e r , o r a s a d i r e c t o r p e rf o rm in g an a c tu a l 

an d pe rm an en t fu n c ti o n i n a B elg ia n c o rp o ra ti o n o r a B elg ia n bra nch 

o f a n o n -r e s id e n t comp any, o r a s a member o f a p a r tn e r s h ip , i f ta x a tio n 

i s base d on th e in d iv id u a l inco me o f th e p a r tn e r s .
74 TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y

3« In th e ca se of an in d iv id u a l whose income in Belg ium i s der iv ed on ly 

from re a l e s ta te , c a p ita l and per so nal p ro p ert y , a p ro fe ssio n , or 

from v ari o u s o th e r so urc es, th e ta x co rr es po nd s to th e "c re d it 

d'im pot" (t ax c r e d it) , "p rico m pt es " (p re pa ym en ts), o r p o ssib le 

"co mp lim ents de pr ic om pte s" (sup plem en tary pr ep ay m en ts).

In th e ca se of in d iv id u a ls who on ly re ceiv e co mpe ns ations as a 

com pany's d ire c to r or a u d it o r, s a la rie s o r wages from Belgi an so urc es, 

th e ta x r a te co rr es ponds to th a t of th e in d iv id u a l income ta x .

Sho uld th ese ta xpay er s d eri ve als o an income from Belgi an so urc es 

a s un de r 3, th e ta x a p p li c a b le to th is income would co rres po nd to 

th e prep ay men ts or p o ssib le su pp lemen tary pr ep ay men ts.

B el gi an In d u s tria l In fo rm at io n Ser vic e 

50 R ockefe ll er Pl az a 

New York 20, New York Ja nu ar y 1963
TAX PROT OCOLS W IT H BELGIUM AND GERMANY

appendix b

The Belgian "precompte raobilier" should be regarded as a tax on 

dividends within the meaning of Article 10 of the Draft Double Taxation 

Convention on Income and Capital and within the meaning of the revised 

Article VIII of the Income Tax Convention between the United States and 

Belgium.

Generally, the limitation or reduction in the rate of tax 

applicable to dividends paid by a company which is a resident of a foreign 

country to a United States person should not be judged by the standards 

as to whether or not such tax is a tax on the shareholder within the meaning 

of section 901, as opposed to section 902. Apparently Article VIII (2) of 

the United States - Belgian Income Tax Convention is the only Treaty which 

specifically states that /Belgii±roJ7 the other contracting State will not 

impose "any tax similar to that withheld at the source on dividends under 

United States law in the case of nonresident aliens and foreign corporations." 

Certainly, it seems that there are taxes on dividends which although they 

fall within the test of being similar to the United States tax on dividends 

nevertheless they are a tax on dividends contemplated by Article 10 of the 

Draft Convention and similar articles.

The "precompte mobllier" is imposed only whe n dividends are declared 

and imposed at the time they are declared. It is not imposed on the profits 

of the company which are later distributed as dividends.

The memorandum "The New Belgian System of Taxation", made available 

to the National Foreign Trade Council through the courtesy of the Belgian 

Industrial Information Service on Page 2 reviews the "precompte mobiller" 

under the heading "Taxation of Dividends". In connection with the taxation 

of individuals, it 6tated spec ificall y tax prepayments called precomptes" 

are collected on various sources of income ••*. These prepayments are 

credited against the single tax on the total individual income. Under the 

heading "Tax Prepayment on Personal Property Income ("Precompte Mobil ler" ) 

it is stated "personal property income of Belgian or foreign origin is subject 

to a tax prepayment of 15%, which is withheld by the income debtor or by the 

first Belgian intermediary" (Page 12, "The New Belgian System of Taxation)".
76 TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y

The fact that the tax (the "precompte mobilier") is on the dividend 

rather than on the company is indicated by the comments on Article 10 of the 

Draft Double Taxation Convention on Income and Capital. Specifically, the table 

set forth on Page 98 of the Draft Double Taxation Convention on Income ano 

Capital, Report of the O.E.C.D. Fiscal Committee, 1963, indicates that the taxation 

borne by shareholders, both resident and non-resident is 15 percent of 85, 

e.g., 15 percent of 100 les6 the company tax of 30 percent plus 15 percent of 

the company tax, which is added back because the shareholder receives a credit 

based on it.

"The New Belgian System of Taxation" states that there is a single tax 

on corporations and a single tax on shareholders. The rate of the single tax 

on the company is generally 30 percent. The "precompte mobilier" is separate 

and distinct from this tax and is not imposed on the company. Thus, it may be 

distinguished from the personal property tax (the taxe mobiliere under the old 

law) which the Belgians asserted was imposed on corporate profits, (see "The 

Belgian System of Taxation in its relation to Corporations", Ministere des Affaires 

Etrangeres et du Commerce Exterieur, December, 1959, Table 1).

The Belgian shareholder is allowed to take a deduction from his taxable 

income in the case of companies and a credit against his tax in the case of 

individuals. Calculations seem to indicate that the deduction allowed to companies 

achieves the same result as though the company were required to take into its 

income the "gross dividend" and were allowed to credit against its tax the same type 

of credits allowed to an individual. The deduction apparently is allowed in the 

case of a company because company tax is generally fixed at 30 percent, apparently 

it can not be allowed in the case of individuals because individual income is 

subjected to taxation at varying rates of tax. The fact that a shareholder is 

granted credit for taxes paid strengthens the statements made in several places 

that the tax is on the dividend and as 6uch should be subjected to a limitation 

or reduction.

Probably one of the more difficult problems from a practical point of 

view will be that the Belgians will contend that their corporate rate is 

comparatively low and that if they granted a reduction in the rate applicable to 

the "precompte mobilier" the income will not be subject to sufficient taxation.

As a matter of conjecture it would seem that if the Belgian company tax were at 

a rate comparable to the U. S. corporate tax and their "precompte mobilier" at a 

rate comparable to our withholding tax on non-resident shareholders there might 

be less hesitancy on the part of the Belgians than may be anticipated under 

existing conditions. It may be pointed out to the Belgians, however, that the
T A X P R O T O C O L S W I T H B E L G IU M A N D G E R M A N Y 77

United S ta te s in co nce din g th e n o n -a p p li c a b il it y o f i t s co rp ora te r a te to

c e r ta in income which migh t oth er w is e be su b je c t to th e co rp ora te r a te i s " giv in g

up" a grea te r ra te than Bel giu m i s " g iv in g up".
78 TAX PROTOCOLS W IT H BELGIUM AND GERMANY

xppaunx c

A r tic le X II (2 ) should be amended to s p e c if i c a lly in d ic a te wh ich 

r e lg ia n ta x e s w ill be al lo w ed a s a d e d u cti o n and which as a c r e d it and 

w het her o r n o t th e d e d u cti o n s o r c r e d i t s w ill be al lo w ed as ta x e s on th e 

s h a re h o ld e r under s e c tio n 901 ( h ) , o r on th e comp any unde r s e c tio n 902 IRC.

In t h i s c o n n e c ti o n , i t i s urg ed th a t th e tr e a t y p ro v id e th a t th e " pr ec om pte 

m o b il ie r" be re g a rd e d as a ta x on th e s h a re h o ld e r r a th e r th a n on th e comp any.

A ttached i s a c a l c u la tio n which d e m o n str a te s th a t th e n e t d iv ia e n J 

payab le to a U nited S ta te s s h a re h o ld e r a f t e r d e d u cti o n o f B elg ia n and U nited 

S ta te s ta x e s i s le s s i f th e " pr ec om pt e m o b il ie r" i s re g a rd e d fo r U .S . ta x c r e d i t 

purp ose s a s a ta x on th e B elg ia n comp any r a th e r th a n a ta x on th e U.S . s h a re h o ld e r

As in d ic a te d in App en dix B, th e B elg ia n ta x sy st em pu t in to e f f e c t 

in Novem ber, 1962 in te n d e d to im pose on th e company a s in g le ta x a t th e r a t e o f 

30 p e rc e n t. F u rth e r, in th a t memorandum i t was em ph as iz ed th a t i n o f f i c i a l 

d e s c rip tio n s o f th e B elg ia n la w i t has be en s ta t e d th a t th e "p re co m pte m o b il ie r" 

i s im posed on th e s h a re h o ld e r.

The d e s i r a b i l i t y o f c le a r ly a g re e in g a t th e tim e th e tr e a ty i s 

co ncl uded wha t d e d u c ti o n s w ill be g ra n te d wo uld te n d to e li m in a te ele m ents 

o f fu tu r e c o n f lic t an d m is u n d e rs ta n d in g which may a r is e a t a l a t e r ti m e .
TAX PROTOCOLS W IT H BELGIUM AND GERMAN Y 79

DIRECT ANO INDIRECT TAX CREDIT - 

PRECOHPTE MOblLIER

Foll ow in g i s an ex am ple co m pa ring th e tr e a tm e n t o f 1

 p reco mpte 

in o b ille r 1

 a s a ta x on th e sh a re h o ld e r to wh ich a " d ir e c t" c r e d it 

i s al lo w ed f o r purp ose s o f U. S . ta x w it h th e tr e a tm e n t o f th e 

’ prec om pt e m o b llie r' a s a ta x on th e comp any fo r which an " in d ir e c t" 

c r e d it i s all o w e d . .

In th e a tt a c h e d ex am ple , A i s a U. S. c o rp o ra ti o n wni ch owns 

100% o f th e s to c k o f B, a B elg ia n c o rp o ra ti o n . B e a rn s 1100 o f 

wh ich i t d i s t r i b u t e s o n e -h a lf.

T ax ab le Income o f B 100

C o rp o ra te Income Tax 30

Ne t Income A fte r Tax 70

G ro ss D iv id en d D ec la re d by B to A 35

Pr ec om pt e M o b il ie r (15% x 85/7 0 x 35) 6.3 75

Ne t D iv id en d R ec ei ve d by A 28.6 25

D ir e c t C re d it fo r U. S . Tax Purp ose s

(G ro ss -U p) D iv id en d T axable to A in U .S . (3 5 - .7 ) 5 0 .0

U. S. Tax ((3 50% r a te ) ’ 2 5 .0

fo re ig n Tax C re d it

D ir e c t 6.3 75

I n d ir e c t 15 .0 00 (3 5 /7 0 x 30 )

21.3 75 21.3 75

Net U. S. Tax Payable 3.6 25

I n d ir e c t C re d it fo r U. S . Tax Purp ose s

(C ro ss -U p) D iv id en d T axable to A in U .S . (2 8.6 25 - 63 .6 2 5 ) 44.9 9

U. S. Tax (« 50% r a t e ) ’ 2 2 .^ 9 5

f o r e ig n Ta x C re d it

I n d ir e c t (4 4 .9 9 - 2 8 .6 2 5 ) 16 .3 65
80 TAX PROTOCOLS W IT H BELGIUM AND GERMANY

Senator Gore. The committee will adjourn.

(Whereupon, at 10:20 a.m., the committee was adjourned.)

o