UNITED STATES TREASURY DEPARTMENT TECHNICAL EXPLANATION OF CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE KINGDOM OF BELGIUM FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME（一） TECHNICAL EXPLANATION OF U.S. - BELGIUM INCOME TAX CONVENTION, SIGNED JULY 9, 1970 　　(DEPARTMENT OF THE TREASURY) GENERAL EFFECTIVE DATE UNDER ARTICLE 30: 1 JANUARY 1970 TABLE OF ARTICLES Article 1----------------------------------Personal Scope Article 2----------------------------------Taxes Covered Article 3----------------------------------General Definitions Article 4----------------------------------Fiscal Domicile Article 5----------------------------------Permanent Establishment Article 6----------------------------------Income from Real Property Article 7----------------------------------Business Profits Article 8----------------------------------Shipping and Air Transport Article 9----------------------------------Associated Enterprises Article 10---------------------------------Dividends Article 11---------------------------------Interest Article 12---------------------------------Royalties Article 13---------------------------------Capital Gains Article 14---------------------------------Independent Personal Services Article 15---------------------------------Dependent Personal Services Article 16---------------------------------Director's Fees Article 17---------------------------------Social Security Payments Article 18---------------------------------Private Pensions and Annuities Article 19---------------------------------Governmental Functions Article 20---------------------------------Teachers Article 21---------------------------------Students and Trainees Article 22---------------------------------Income Not Expressly Mentioned Article 23---------------------------------Relief from Double Taxation Article 24---------------------------------Nondiscrimination Article 25---------------------------------Mutual Agreement Procedure Article 26---------------------------------Exchange of Information Article 27---------------------------------Assistance in Collection Article 28---------------------------------Miscellaneous Article 29---------------------------------Extension to Territories Article 30---------------------------------Entry into Force Article 31---------------------------------Termination Protocol ----------------------------------of 31 December, 1987 Exchange of Notes----------------------of 31 December, 1987 ARTICLE 1 Personal Scope 　　This Article, which is not found in other United States tax treaties, is similar to Article 1 of the Draft Double Taxation Convention on Income and Capital developed by the Fiscal Committee of the Organization for Economic Cooperation and Development and published in 1963 (hereinafter referred to as the OECD Model Convention). The Article does not have substantive importance. Its purpose is to generally delineate the persons who come within the scope of the Convention. The Article is not complete in its delineation of persons covered in that persons who are residents of one or both of the Contracting States are sometimes not covered in the Convention and that other persons who are not residents of either of the Contracting States are covered by this Convention. For example, Article 19 (Governmental Functions) applies to citizens of a third State who come to one of the Contracting States expressly for the purpose of being employed by the other Contracting State. While the title of Article 1 is "Personal Scope," the Convention, of course, is applicable to corporations and other entities as well as to individuals. ARTICLE 2 Taxes Covered This Article designates the taxes of the respective States which are the subject of the proposed Convention. With respect to the United States, the taxes included are the United States Federal income taxes imposed by the Internal Revenue Code. This includes, for example, the surtax and would also include such taxes as the temporary surcharge which was in force from 1968 to 1970. However, the Convention is not intended to apply to taxes which are in the nature of a penalty such as the taxes imposed under section 531 (accumulated earnings tax) and section 541 (personal holding company tax) of the Internal Revenue Code. With respect to Belgium, the taxes included are 　　(1) the individual income tax; 　　(2) the corporate income tax; 　　(3) the income tax on legal entities; 　　(4) the income tax on nonresidents; 　　(5) the prepayments and additional prepayments; and 　　(6) surcharges on any of the taxes referred to in (1) through (5), including the communal supplement to the individual income tax. 　　The Belgian individual income tax is payable by resident individuals on income from all sources but with reduced rates for foreign source income. 　　The Belgian corporate income tax is payable by resident Belgian companies on income from all sources but with reduced rates for foreign source income. 　　The Belgian income tax on legal entities is a tax payable in lieu of the corporate income tax and is imposed upon the political subdivisions of Belgium and those resident legal entities which are not engaged in business activity. This tax is levied solely on income from movable capital (generally dividend and interest income) and real property. 　　The Belgian income tax on nonresidents is payable by nonresident individuals, corporations, and other legal entities on income earned or received in Belgium. 　　In addition to the above-enumerated taxes, prepayment of tax in the form of withholding by the payor is required by Belgian law in the case of income from movable capital (generally dividend and interest income) and income from real property. There is also a standard professional prepayment (withholding) which applies to wages and salaries, remuneration paid by a corporation to managers, directors and persons with similar functions, and to pensions, certain prizes and subsidies, and in the case of a nonresident recipient, alimony. These taxes are known as "les pré comptes." While Articles 2 also lists "additional prepayments" (complé ments de précomptes), that tax, which was an additional 15 percent prepayment on income from movable capital, has not been in force since January 1, 1967. It was included at the request of Belgium in the case such tax is reestablished, although even in the absence of an express reference, a new or reestablished tax would be covered by paragraph (2) of this Article. In the case of income from real property, Belgian law provides for an additional advance payment in the case of taxpayers subject to the income tax on nonresidents whose fiscal domicile is in a country with whom Belgium has concluded a double taxation agreement giving Belgium exclusive right to tax real property situated in her territory. Since, under the proposed Convention, Belgium does not have an exclusive right to tax United States residents on income from real property, there is no additional advance payment on such income paid to United States residents. Pursuant to paragraph (2) of this Article the proposed Convention would also apply to taxes substantially similar to those enumerated which are imposed in addition to or in place of the existing income taxes, after the date of a signature of this Convention (July 9, 1970). 　　This Article also provides that the competent authorities of the Contracting States are to notify each other of any amendments of the laws imposing the enumerated taxes and of the adoption of any taxes which are subsequently imposed by transmitting the text of any amendments or new statutes at least once a year. Further, the competent authorities are to notify each other of the publication by their respective States of any material concerning the application of this Convention, whether in the form of regulations, rulings, or judicial decisions, by transmitting the text of any such material at least once a year. ARTICLE 3 General Definitions 　　This Article sets out definitions of certain of the basic terms used in the proposed Convention. A number of important terms, however, are defined elsewhere in the Convention. 　　Any term used in this Convention which is not defined therein shall, unless the context otherwise requires, have the meaning which it has under the laws of the State which is imposing the tax. However, in a case where a term has a different meaning under the laws of Belgium and the United States or where the meaning under the laws of one or both of the States is not clear, the competent authorities may agree on a uniform definition. See Article 25 (Mutual Agreement Procedure). While treaties in the past did not specify the power of the competent authorities to resolve such differences in definitions, this power is nevertheless inherent in the authority set forth in the mutual agreement article of these treaties to resolve "difficulties or doubts." 　　This Article defines geographical Belgium and geographical United States to include their respective continental shelves. The addition of a definition of the continental shelf is intended to clarify what the Contracting States consider to be included within their respective jurisdictions to tax. The United States continental shelf is defined as the seabed and subsoil of the adjacent submarine areas beyond the territorial sea over which the United States exercises exclusive rights in accordance with international law for the purpose of exploration and exploitation of the natural resources of such area, but only to the extent that the person, property, or activity to which this Convention is being applied is connected with such exploration or exploitation. For example the income earned by a ship and its employees engaged in taking seismograph soundings on the United States continental shelf will be treated for tax purposes the same as the income from a comparable activity on the land of one of the States of the United States. A comparable definition is used in the case of Belgium. The definition of the continental shelf in the case of the United States only includes the continental shelf surrounding the 50 States. Thus, for example, the continental shelf surrounding Puerto Rico is not included. If the treaty were extended beyond the 50 States and the District of Columbia (see Article 29 - Extension to Territories) the continental shelf of the extended areas could also be covered. The defined continental shelf is only part of the United States or Belgium, as the case may be in limited situations. It is included only to the extent that a person or property or activity to which the Convention is being applied is connected with exploration or exploitation of the continental shelf. The phrase "connected with" does not require physical attachment to the continental shelf to be within the scope of the definition. 　　The Article also defines "United States corporation" and "Belgian corporation." Because of the difference in concept, an entity could under Belgian law be considered to be a Belgian corporation and under United States law to be a United States corporation. For purposes of the proposed Convention, such a corporation would be treated as a corporation of neither State because of the provisions in the definitions of a corporation of the United States, and a corporation of Belgium, that an entity may not be considered a corporation of the United States, or Belgium, if it is a corporation of the other State under domestic law of that other State. While the benefits of the Convention would generally be unavailable in such cases, it is relatively easy for taxpayers to avoid dual residency. ARTICLE 4 Fiscal Domicile 　　This Article sets forth rules for determining "fiscal domicile" or residence of individuals,corporations and other persons for purposes of the proposed Convention. Residence is important because, in general, only a resident of one of the Contracting States may qualify for the benefits of the Convention. This Article is patterned generally after the fiscal domicile article of the OECD Model Convention. 　　The term "a resident of Belgium" means a corporation of Belgium as defined in Article 3 (General Definitions) and any person (other than a corporation) who is a resident of Belgium for purposes of its tax. The term "a resident of the United States" means a United States corporation as defined In Article 3 (General Definitions) and any person (except a corporation or any other entity treated as a corporation for United States tax purposes) resident in the United States for purposes of its tax. The language in parentheses is intended to deal with the problem of dual residency of a corporation. An entity which would be considered a Belgian corporation under Belgian law and a United States corporation under United States law would, under Article 3 (General Definitions) of the Convention, be neither a Belgium corporation nor a United States corporation. Therefore, it was necessary to make clear that such an entity is not included within the term "any person" for purposes of the second part of the definitions. In addition, the parenthetical language in the definition of a resident of the United States is intended to make clear that a foreign corporation, or other entity treated as a foreign corporation for United States tax purposes, which is a resident of the United States for certain purposes of its income tax law is not, under the Convention, a resident of the United States. 　　In the case of the United States, the definition provides that a partnership, estate, or trust is treated as a resident only to the extent that the income derived by such person is subject to United States tax as the income of a resident. This language, although different from the Income Tax Convention between the United States and France, signed July 28, 1967, is intended to achieve the same result. Under United States law, a partnership is never, and an estate or trust is often not, taxed as such. Under the proposed Convention, in the case of the United States, income received by a partnership, estate, or trust will not qualify for the benefits of the Convention unless such income is subject to tax in the United States. Thus, in effect, the status of income which is subject to tax only in the hands of the partners or beneficiaries, will be determined by the residence of such partners or beneficiaries. With respect to income taxed in the hands of the estate or trust, the residence of the estate or trust is determinative. This provision is nonreciprocal because of the absence of a similar problem under Belgian law. 　　An individual who is a resident of both States under the rules of domestic law employed by such States for determining residence will be deemed to be a resident of the State in which he has his permanent home, his center of vital interests (closest economic and personal relations), his habitual abode, or his citizenship, in the order listed. If the issue is not settled by these tests, the competent authorities will decide by mutual agreement the one State of which he will be considered to be a resident. Thus for purposes of the Convention, including the savings clause of Article 23(1), an individual can be resident in Belgium or the United States, but not both. ARTICLE 5 Permanent Establishment 　　This Article defines the term "permanent establishment." The existence of a permanent establishment is, under the terms of the proposed Convention, a prerequisite for one State to tax the industrial or commercial profits of a resident of the other State. The concept is also significant in determining the applicability of other provisions of the Convention, such as Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties), and Article 13 (Capital Gains). The definition of "permanent establishment" is a modernized version of the definition found in some of our older treaties including the 1948 Convention with Belgium. The new definition is similar to the definition found in our French Convention. 　　The term "permanent establishment" means "a fixed place of business through which a resident of one of the Contracting States engages in industrial or commercial activity." 　　Illustrations of the concept of a fixed place of business include a seat of management, a branch, an office, a factory, a workshop, a warehouse, a place of extraction of natural resources, or a building site or construction or installation project which exists for more than 12 months. As a general rule, any fixed facility through which an individual, corporation or other person conducts industrial or commercial activity will be treated as its permanent establishment unless it falls in one of the specific exceptions described below. The proposed Convention uses the term "a seat of management" which was the term used in our Convention with France. The technical explanation of our French Convention explains the definition of the term "a seat of management" and its difference in meaning from the term "a place of management" as follows: 　　It should be noted that this convention uses the term "seat of management" where the OECD Model Convention and prior agreements to which the United States is a party used the term "place of management"; both terms are translations of the French term "un siege de direction" and it is believed the translation found in this convention is the more accurate. Prior agreements in which the term "place of management" appears will be interpreted therefore as if the words "seat of management" had been used. 　　That explanation is applicable to the proposed Belgian Convention. 　　This Article specifically provides that a permanent establishment does not include a fixed place of business of a resident of one of the Contracting States which is located in the other Contracting State if it is used only for one or more of the following - 　　(1) the use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident; 　　(2) the maintenance of a stock of goods or merchandise belonging to the resident for the　purpose of storage, display, or delivery; 　　(3) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person; 　　(4) the maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information, for the resident; 　　(5) the maintenance of a fixed place of business for the purpose of advertising, or the supplying of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident; or 　　(6) the maintenance of a building site or construction or installation project which does not exist for more than 12 months. 　　The building site or construction or installation project exception is merely a clarification of the rule that such an activity for more than 12 months is a permanent establishment and, accordingly, such an activity for 12 months or less is not a permanent establishment. These exceptions are cumulative and a site or facility used solely for more than one of these purposes will not be considered a permanent establishment under the proposed Convention. The 12-month construction project rule is a physical test under which the resident must be actively engaged in the project during that 12-month period. 　　This Article also provides that notwithstanding the provisions described in the preceding paragraph if three conditions are met, a resident of one State will have a permanent establishment in the other State. The conditions are: 　　1. The resident has a fixed place of business in that other State (a) which consists of facilities for the storage, display or delivery of goods or merchandise belonging to the resident; 　　(b) which consists of a stock of goods or merchandise belonging to the resident which is held for processing by another person; or 　　(c) which is used for the purpose of purchasing goods or merchandise for the resident; 　　2. The goods or merchandise described in paragraph 1 above are either subject to substantial processing in that State (whether or not purchased there) or are purchased in that other State (and are not thereafter subject to substantial processing in another State); and 　　3. All or part of such goods or merchandise is sold by the resident or his agent for use, consumption, or disposition in that other State. 　　Under this rule, the taxpayer will have a permanent establishment whether or not he maintains a sales office in the other State. 　　Thus, for example, if an independent agent acting for a United States corporation arranges the sales of the corporation's goods in Belgium the United States corporation will, nevertheless, be deemed to have a permanent establishment in Belgium if those goods were purchased in Belgium through a fixed place of business of the corporation (ordinarily a purchasing office would not constitute a permanent establishment) and then resold therein without having been subjected to processing outside Belgium prior to such resale. 　　Notwithstanding the other provisions of this Article, a person will be considered to have a permanent establishment if he engages in business through an agent, other than an independent agent, who has and regularly exercises authority to conclude contracts in the name of such person unless the agent only exercises such authority to purchase goods or merchandise. 　　With respect to an independent agent, the proposed Convention also provides that a resident of one State will not be deemed to have a permanent establishment in the other State if such resident engages in industrial or commercial activity in such other State through an independent agent, such as a broker or general commission agent, if such agent is acting in the ordinary course of his business. This rule does not apply with respect to a broker or agent acting on behalf of an insurance company if such broker or agent has, and habitually exercises, an authority to conclude contracts in the name of that company. It was agreed, however, that an insurance company of one State writing reinsurance contracts in the other State would not for that reason be treated as having a permanent establishment, but since it was understood that foreign companies writing reinsurance on Belgian risks do not authorize Belgian brokers or agents to conclude reinsurance contracts in the name of the foreign reinsurance company, it was not necessary to specifically exclude reinsurance contracts from the exception. 　　The determination of whether a resident of one State has a permanent establishment in the other State is to be made without regard to any control relationship of such resident with respect to a resident of the other State or with respect to a person which engages in industrial or commercial activity in that other State (whether through a permanent establishment or otherwise). 　　Although this Article is generally drafted with reference to a resident of one of the States engaging in industrial or commercial activity in the other State, for certain purposes the proposed Convention deals with a nonresident engaging in industrial or commercial activity in one of the States or a resident of one of the States engaging in industrial or commercial activity in a third State. For these purposes, the principles set forth in Article 5 are to be applied in determining whether there is a permanent establishment. ARTICLE 6 Income from Real Property 　　This Article which is similar to an article in the existing treaty provides that a resident of one State may be subject to tax in the other State on income from real property and royalties in respect of natural resources if the property or natural resource is located in such other State. This Article does not, as do the existing treaty and the 1967 treaty between the United States and France, provide for an election by the resident to compute his tax on such income on a net basis since under the internal laws of Belgium and, since 1967, the United States this can be done. The income referred to in this Article includes gain from the sale or exchange of such property or such natural resource rights, but does not include interest on mortgages and similar instruments. The latter type of income is covered by Article 11 (Interest). ARTICLE 7 Business Profits 　　This Article sets forth the typical treaty rule that industrial or commercial profits of a resident of one State are taxable in the other State only if the resident has a permanent establishment in that other State. Where there is a permanent establishment only the profits attributable to the permanent establishment can be taxed by that other State. For purposes of Article 23 (Relief From Double Taxation) which, among other things, provides that a foreign tax credit will be allowed by the United States, such profits are considered to be from sources within the State in which the permanent establishment is located. 　　While under the existing Belgian Convention, as under the old French Convention, industrial or commercial profits are not taxed in the absence of a permanent establishment once there is a permanent establishment the existing Convention, as did the old French Convention, provides that the provisions reducing the tax rates on interest and dividends and exempting royalties are not applicable. This rule is known as the "force of attraction " principle and is replaced in the proposed Convention, as in our new treaty with France, with the effectively connected concept. Under the new approach, only those interest, dividends and royalties which are effectively connected with the permanent establishment are taxable as part of the industrial or commercial profits and do not benefit from the reduced rate or exemption. 　　In determining the proper attribution of industrial or commercial profits under the proposed treaty, the permanent establishment is generally to be treated as an independent entity and considered as realizing the profits which would be realized if the permanent establishment dealt with the resident of which it is a permanent establishment on an arm's-length basis. 　　Expenses, wherever incurred, which are reasonably connected with profits attributable to the permanent establishment, including executive and general administrative expenses, will be allowed as deductions by the State in which the permanent establishment is located in computing the tax due to such State. However, it is not necessary to allow a profit to the head office for ancillary services furnished to the permanent establishment as long as the permanent establishment is allowed to deduct the allocable costs incurred by the head office. 　　The mere purchase of goods or merchandise in a State by the permanent establishment, or by the resident of which it is a permanent establishment, for the account of such resident will not cause attribution of profits to such permanent establishment While some of our more recent conventions attempt a broad definition of "industrial or commercial profits" by setting forth examples of activities which will be considered as giving rise to such profits, this Convention is limited to setting forth three rules of inclusion and exclusion. In spite of the difference in approach, the term "industrial or commercial profits" has a meaning generally similar to that in our other recent treaties. It includes income derived from manufacturing, mercantile, agricultural, fishing, or mining activities, from the operation of ships or aircraft, from the furnishing of personal services of others, from the rental of tangible personal property, and from insurance activities. 　　This Article specifically provides that the term "industrial or commercial profits" includes rents or royalties derived from motion picture films or films or tapes used for radio or television broadcasting or from copyrights thereof and rents derived from the leasing of tangible personal property. 　　The Article further provides that the term does not include items of income specifically dealt within other articles of this Convention except as provided in such articles. Thus, income derived from real property and natural resources and dividends, interest, royalties (as defined in paragraph (2) of Article 12 (Royalties)), capital gains, and income described in Article 22 (Income Not Expressly Mentioned) constitute industrial or commercial profits only if the right or property giving rise to such amounts is effectively connected with a permanent establishment which the recipient, being a resident of one of the States, has in the other State. Where such amounts do not constitute industrial or commercial profits, they may be taxed separately or together with industrial or commercial profits in accordance with the laws of the State whose tax is being determined, but the limits on the rate of taxation to which such amounts may be subject must be observed. For example, if a Belgian bank without a permanent establishment in the United States loaned money to a United States manufacturer in the United States, the interest paid by the United States manufacturer to the Belgian bank would be treated as interest and not as industrial or commercial profits and would be governed by Article 11 (Interest) of the proposed Convention which provides for either an exemption or a 15-percent withholding rate. 　　In the reverse situation where a United States bank with a branch in Belgium derives interest from Belgium which is not effectively connected with its Belgian branch, Belgium could tax the interest together with the income of the permanent establishment as long as the rate of tax on the gross amount of the interest did not exceed the 15-percent limitation. Income from independent and dependent personal services are specifically dealt within Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services) and, therefore, are not treated as business profits. It is noted that in some of our other recent conventions, there is an express provision excluding such services from the terms "industrial or commercial profits." While there is no such provision in the Belgian Convention, the result is the same. ARTICLE 8 Shipping and Air Transport 　　This Article provides that, notwithstanding the rules of Article 7 (Business Profits) and Article 13 (Capital Gains), income which a resident of one of the States derives from the operation in international traffic of ships registered in that State and gains which a resident of one of the States derives from the sale, exchange, or other disposition of ships operated in international traffic by such residents and registered in that State shall be exempt from tax by the other State. 　　A resident of one of the States will also be exempt from tax in the other State on income derived from the operation in international traffic of aircraft registered in either State or In a State with which the other State has an income tax convention exempting such income. Gains which a resident of one of the States derives from the sale, exchange, or other disposition of aircraft are accorded the same treatment. An exchange of notes specifically exempting income from the operation of aircraft from tax in the respective States is not considered as an income tax convention exempting such income. 　　This Article also will apply to income derived from the leasing, to a person engaged in the operation of ships or aircraft, of a ship or aircraft under a full or bareboat charter, where the lessor is engaged in the operation of ships or aircraft if such lease is ancillary to the lessor's other operations. For example, if an airline of one of the Contracting States which has excess equipment in the winter months leases several aircraft which are excess during that period to an airline in the other Contracting State, the lessor is not subject to tax by that other Contracting State. 　　The exemption provided by this Article is also applicable to profits derived from any activities incidental to the operation of ships or aircraft in international traffic. Thus, for example, commissions derived by a Belgian international air carrier from the sale of passenger tickets in the United States as agent for other persons operating ships or aircraft, if incidental to its own international operations, will be exempt from United States tax under Article 8. Further, a Belgian airline company might have facilities at an international airport in the United States which are used to service and maintain its own aircraft in order to make maximum use of the facilities, the company might also service and maintain aircraft of other companies. The profits derived from the furnishing of such services to others would be exempt under Article 8 unless such activity ceased to be only an incidental activity. However, income derived by a Belgian airline company from the operation of a hotel in the United States would not be incidental to the operation of aircraft and would not be exempt. ARTICLE 9 Associated Enterprises 　　This Article complements section 482 of the Internal Revenue Code of 1954 and confirms the power of each government to allocate items of income, deduction, credit, or allowance in cases in which a resident of one State is related to a resident of the other State if such related persons impose conditions between themselves which are different from conditions which would be imposed between independent persons. This provision is similar to the provision contained in the OECD Model Convention. 　　Provision is made in Article 25 (Mutual Agreement Procedure) for consultation and agreement between the two States where an allocation by either State results or would result in double taxation.