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（二） ARTICLE 10 Dividends 　　The existing Convention provides that dividends derived from sources within one State by a resident of the other State not having a permanent establishment in the former State will be subject to tax in the former State at a rate not in excess of 15 percent. The proposed Convention continues the 15 percent rate on dividends. 　　As indicated above, the proposed Convention abandons the "force of attraction" concept in the existing Convention by providing that the reduced rate of tax on dividends is denied only if the shares with respect to which the dividends are paid are effectively connected with a permanent establishment which the recipient has in the State of source. The elimination of the "force of attraction" principle will make uniform the rate of tax levied on dividend income by a resident of one State from sources within the other State unless such income is effectively connected to a permanent establishment in the State of source. In those cases where the shares with respect to which the dividends are paid are so effectively connected, the dividends may be taxed as industrial and commercial profits under Article 7 (Business Profits). Income which is so effectively connected may be taxed at the normal rates applicable to such income in the State of source. This does not prevent Belgium from imposing its movable property prepayment in accordance with Belgian law, and this would be credited against the tax owed by the permanent establishment. 　　The dividend Article of the proposed Convention is patterned generally after the OECD Model Convention. However, the proposed Convention additionally provides that the term "dividends" includes income from invested capital received by members of Belgian companies other than companies with share capital where, under Belgian law, such income is taxable in the same way as dividends. These are companies whose shareholders are restricted to individuals and are generally similar to partnerships. Such companies are not entitled to an interest deduction on a loan made by a shareholder to the company. Interest payments by such a company to a shareholder are treated similarly to dividends for purposes of Belgian law and are treated as dividends under the proposed treaty. The companies covered by this latter rule are Sociétiés de Personnes à Responsabilité Limiteé, Sociétés en nom Collectif, Sociétés en Commandite Simple, and Sociétés Coopératives. 　　Under Belgian law dividends paid to an individual from sources outside of Belgium which are received within Belgium are subject to a 20-percent précompte mobiliere. The précompte is used by Belgium as a collection device since most securities are in bearer form and the residency of the owner is not readily determinable. Belgium has agreed under this Article to waive collection of the précompte on dividends paid by United States corporations to an individual who is a resident or citizen of the United States and not a resident of Belgium. Such individual when he goes to a Belgian bank to collect on a dividend will have to substantiate his citizenship (where applicable) and residency and it is anticipated that the Belgian Government will verify the fact that such person is the proper recipient of the dividend by submitting their names to the Internal Revenue Service. 　　In other cases, dividends paid by a corporation of one of the States to a person other than a resident of the other State are exempt from tax by the other Slate unless the dividends are effectively connected with a permanent establishment of the recipient maintained in the other State or the dividends are paid by a United States corporation and are received within Belgium by a person other than a citizen or resident of the United States. ARTICLE 11 Interest 　　The existing Convention provides that interest derived from sources within one State by a resident of the other State not having a permanent establishment in the former State will be subject to tax in the former State at a rate not in excess of 15 percent. 　　The proposed Convention retains the 15 percent rate on interest replacing the "force of attraction" principle by the effectively connected approach. In four important cases, however, the proposed Convention provides for exemption in the State of source. First, interest is exempt at source if it arises out of commercial credit - including credit which is represented by commercial paper - resulting from deferred payments for goods or merchandise or services supplied by a resident of one of the States to a resident of the other State. This exception would apply to interest derived by a bank or other financial institution which purchases paper which arose out of commercial credit which the seller of goods or services discounted at such bank or financial institution. It would also apply to interest derived by a finance company which is a subsidiary of a selling company and which is used by the parent to finance its sales. Second, interest paid between banks is exempt except on loans represented by bearer instruments. Under this provision, interest on advances between banks would be exempt as would interest on a loan from a United States bank to a Belgian bank, assuming that there was not a bearer instrument representing the indebtedness. Third, an exception is provided for interest arising from deposits, not represented by bearer instruments made in banks or other financial institutions. Fourth, interest beneficially derived by one of the States, or by an instrumentality of that State, not subject to tax by that State on its income, would be exempt from tax by the other State. Under this rule, interest income derived by the Export-Import Bank of the United States on loans made to Belgian residents would be exempt from tax in Belgium. This would still be the case if the Export-Import Bank sold interest-participation certificates on such a loan. On the other hand, this rule would not apply if the Export-Import Bank discounted or sell the instrument representing the loan. However, in such a case the exception for interest arising out of commercial credit may be applicable. 　　As noted above, the proposed Convention abandons the "force of attraction" principle. 　　Thus, the reduced rates of tax applicable to interest apply unless the recipient has a permanent establishment in the State of source and the indebtedness giving rise to the interest is effectively connected with such permanent establishment. In such a case, the interest may be taxed as industrial or commercial profits. 　　Interest is defined generally as income from any kind of debt-claim or any income treated as interest under the tax law of the State of source. In cases in which excessive interest is paid by reason of a special relationships between the payor and the recipient, the provisions of the interest Article do not apply to the excess part of the payments. Excess interest payments may be taxed according to the law of the State from which the interest is derived. In the case of excess interest derived from the United States, the excess interest may be taxed as dividend. Under Belgian law, the excess interest is disallowed as a deduction, but, in the hands of the recipient, continues to retain its character as interest. However, the recipient is not entitled to the benefitsof this Article with respect to such excess. Thus, for example, in the case of the United States the rules provided in section 482 of the Internal Revenue Code would be applicable if excess interest is paid between related persons. On the other hand, if a Belgian resident pays excess interest to a United States related person, the Belgian tax authorities would disallow such excess as a deduction to the Belgian resident. And would continue to treat such excess as interest, and subject such excess to the 20-percent rate of withholding, as provided under Belgian domestic law. since such excess is not entitled to treatybenefits. 　　The term "interest" does not include amounts which are considered as dividends as discussed above in connection with Article 10 (Dividends). In the case of Belgium, the term "interest" includes prizes on lottery bonds. 　　Interest is from sources within a State when the payer is that State, a political subdivision,a local authority thereof or a resident of that State. However, if the payor has a permanent establishment in one of the States and the indebtedness on which the interest is paid is effectively connected with such permanent establishment and the interest is borne by such permanent establishment, such interest shall be deemed to be sourced within the State in which the permanent establishment is located. In addition, if a permanent establishment which a resident of one of the Contracting States has in a third State borrows money from a resident of the other Contracting State, for purposes of the treaty, the interest paid by the permanent establishment will be treated as from sources within the third State if the loan is effectively connected with, and interest is borne by, such permanent establishment. 　　In other cases, interest paid by a resident of one of the States to a person other than a resident of the other State is exempt from tax by the other State unless the interest is effectively connected with a permanent establishment of the recipient maintained in the other State or the interest is paid by a United States corporation and is received within Belgium by a person other than a citizen or resident of the United States. 　　As in the case of dividends, the interest Article also contains a special rule dealing with interest from sources within the United States which is received within Belgium by a resident of the United States or a citizen of the United States who is not a resident of Belgium. In such a case Belgium has agreed to waive its withholding tax. ARTICLE 12 Royalties 　　The existing Convention provides that royalties derived from sources within one of the States by a resident of the other State shall be exempt from tax by the former State. The proposed Convention continues this exemption for royalties. 　　The term "royalties" is defined to include 　　(a) payments of any kind made as consideration for the use of, or the right to use, copyrights of literary, artistic, or scientific works (but not including copyrights of motion picture films or films or tapes used for radio or television broadcasting), patents, designs, models, plans, secret processes or formulae, trademarks, or other like property or rights, or knowledge, experience, or skill (know-how) and 　　(b) gains derived from the sale, exchange or other disposition of such rights or property, but only if payment is contingent on productivity, use, or disposition of the property. If the payments are not so contingent, the capital gains Article applies. 　　The provisions of this Article do not apply if the recipient of a royalty has a permanent establishment in the State of source and the rights or property giving rise to the royalty is effectively connected to such permanent establishment. In such a case, the royalty may be taxed as industrial or commercial profits under Article 7 (Business Profits). Thus, the "force of attraction" principle is also abandoned with respect to royalties. 　　The source rule on royalties is different front the source rule found in most of our recent treaties and the rule in Section 861(a)(4) of the Internal Revenue Code. The proposed Convention provides that royalties shall be treated as income from sources within one of the States if paid by such State, a political subdivision, or a local authority thereof, or by a resident of that State.However, 　　(a) if the person paying the royalty has a permanent establishment in one of the States with which the right or property giving rise to the royalty is effectively connected and such royalties are borne by such permanent establishment, or 　　(b) if the person paying the royalty is a resident of one of the Contracting States and has a permanent establishment in a third State with which the right or property giving rise to the royalty is effectively connected and such royalties are borne by such permanent establishment such royalties are deemed to be from sources within the State in which the permanent establishment is located. This source rule is similar to the interest source rule found in Article 11 (Interest) of the proposed Convention and to the source rule for royalties under Belgian domestic law. On the United States side, since royalties are exempt at source, the source rule on royalties is relatively unimportant. However, on the Belgian side, because of the treatment given under Belgian law for excessive royalty payments, the source of royalty has importance. Under the proposed Convention, if excessive royalties are paid because the payor and the recipient are related, the provisions of the royalty Article apply only to so much of the royalty as would have been paid to an unrelated person. The excess payment may be taxed according to its own law by the State from which the royalty is derived. In the case of Belgium, Belgium would deny a deduction for the excess royalty payments, but, in the hands of the recipient, the payment would still be considered to be a royalty under Belgian domestic law. However, the recipient is not entitled to the benefits of this Article with respect to such excess. 　　If a nonresident has a permanent establishment in Belgium or the United States, royalties attributable to effectively connected with such permanent establishment are not subject to withholding but are subject to tax in Belgium or the United States at the rates normally applicable to industrial or commercial profits. ARTICLE 13 Capital Gains 　　The existing Convention provides no special rules for gains derived in one State from the sale or exchange of stock securities, commodities, or other capital assets by a resident of the other State. The proposed Convention provides that such gains shall be exempt from tax by the State of source. However, the exemption does not apply if 　　(1) the gain derived by a resident of one State arises out of the sale or exchange of property described in Article 6 (Income from Real Property) which is situated within the other State, (2) the recipient of the gain has a permanent establishment or maintains a fixed base, or 　　(3) the recipient of the gain being an individual resident of the first State is present in that other State for a period or periods aggregating 183 days or more in the taxable year. 　　Gains which are effectively connected with a permanent establishment may be taxed as industrial or commercial profits under Article 7 (Business Profits). Gains on real property are subject to the provisions of Article 6 (Income from Real Property) which permits taxation of such gains by the State in which the real property is situated. The Belgians do not tax capital gains of individuals arising from a casual sale of nonbusiness assets. ARTICLE 14 Independent Personal Services 　　The existing Convention provides that an individual resident of one State shall be exempt from tax by the other State if he meets either of two conditions: 　　(a) he is present in that other State for not more than 183 days and his　compensation is for services performed as a worker or employee of, or under contract with, a resident of the first State who bears the actual burden of the remuneration or 　　(b) he is temporarily present within that other State for a period or periods not exceeding 90 days during the calendar year and the compensation received for such services does not exceed $3,000 in the aggregate. 　　The 90-day, $3,000 rule under the existing Convention does not apply to remuneration of "administrateurs," "commissaires," or "liquidateurs" of,. or of other individuals exercising similar functions in, corporations created or organized in Belgium, nor to remuneration of officers and directors of United States corporations. 　　The proposed Convention generally deals with personal services in two articles and creates a distinction based upon whether the services are independent or dependent personal services. The proposed Convention also provides a special rule for independent individuals who are artists or athletes, and a separate Article dealing with directors' fees. Thus, for example, a doctor or lawyer typically renders independent personal services. Also an entertainer who under common law concepts is an independent contractor is considered as rendering independent personal services. 　　Generally, under Article 14 of the proposed Convention, income earned by an individual resident of one State from independent personal services performed in the other State may not be taxed in that other State. However, such income will be subject to tax in the State of source (i.e., where the services are performed) if the recipient is present in that State for a period or periods aggregating 183 days or more in the taxable year or if the individual maintains a fixed base in that other State for a period or periods aggregating 183 days or more in the taxable year and the income is attributable to such fixed base. 　　Independent personal services means services performed by an individual for his own account where he receives the proceeds or bears the losses arising from such services. 　　Commercial, industrial, or agricultural activities are not considered independent personal services and the income therefrom is taxed as industrial or commercial profits under Article 7(Business Profits). 　　Thus, for example, if a physician, resident in one State, has an office available in the other State for a period aggregating 183 days or more during the taxable year, the income he earns from the performance of services within the other State will be subject to tax in that other State regardless of whether he is physically present in that other State for 183 days or more during the taxable year and regardless of whether others make use of his office in his absence. An individual who derives income from independent personal services as a public entertainer is nevertheless subject to tax in the other State if his stay in such State exceeds 90 days during the taxable year or his income is in excess of $3,000 or its equivalent in Belgian francs during the taxable year. ARTICLE 15 Dependent Personal Services 　　Generally, under the proposed Convention income from labor or personal services as an employee may be taxed in the State in which such labor or personal services are performed (except as provided in Article 20 (Teachers) and Article 21 (Students and Trainees)). However, such income will be exempt from tax in the State of source if 　　(1) the recipient, being a resident of one of the Contracting States, is present in the State of source for a period or periods aggregating less than 183 days during the taxable year; 　　(2) the recipient is an employee of a resident of the State of his residence (or a permanent establishment located in the State of his residence); and 　　(3) the remuneration is not borne as such by a permanent establishment which the employer has in the State of source. Thus, the rule applicable to dependent personal services is similar to that contained in the existing Convention. 　　However, income from personal services performed in Belgium by a United States resident who is employed by a Belgian permanent establishment maintained by a United States corporation would no longer be exempt from tax in Belgium (nor would there be an exemption from United States tax in the reverse situation). In addition, the proposed Convention would eliminate the rule in the existing Convention generally exempting a resident of one State from taxation by the other State of compensation received for services performed in the other State where such resident is temporarily present in the other State for a period aggregating 90 days or less during the taxable year and the compensation received for such services is not in excess of $3,000. The proposed Convention also adds a rule that income from personal services aboard ships or aircraft registered in one State and operated by a resident of that State in international traffic will not be taxed in the other State so long as the services are rendered by a member of the regular complement of the ship or aircraft. 　　This Article of the proposed Convention is substantially similar to the OECD Model Convention except that, under the proposed Convention, an individual temporarily present in one State who is an employee of a permanent establishment located in the other State and maintained by a corporation of the first-mentioned State will be exempt from taxation by the first-mentioned State on wages earned while temporarily present therein if the other requirements are met. ARTICLE 16 Director's Fees 　　Under the existing Convention, compensation received by an individual who is a resident of one State as a director of a corporation of the other State is taxable by the other State. This result is obtained by the exclusion of such individuals from the 90-day, $3,000 rule. The proposed Convention continues this treatment, in part, in a specific Article dealing with the treatment of director's fees. The Article provides that a director's fee derived by an individual who is a resident of one of the States in his capacity as a member of the board of directors of a corporation of the other State may be taxed by the other State. This rule is limited to fees which an individual receives as a director as contrasted to fees that he might receive as an officer or employee of a corporation, by providing that a director's fee does not include fixed or contingent payments derived by an individual in his capacity as an officer or employee of a corporation. Further, to be a director's fee the payment must be of the type which cannot be taken as a deduction by the corporation paying the fee but is treated as a distribution of profits. These types of payments are typically made by Belgian corporations. 　　Director's fees taxable by Belgium under this Article are treated as Belgian source income for purposes of the United States foreign tax credit limitation regardless of where such services as a director are performed. This rule, which differs from the normal United States source rule, is designed to avoid double taxation. ARTICLE 17 Social Security Payments 　　This Article provides that social security payments paid by one State to an individual who is a resident of the other State will be taxed, if at all, by the payor State. Also included under this Article are other public pensions such as railroad retirement benefits. Neither the existing Convention nor the OECD Model Convention contains a comparable provision. ARTICLE 18 Private Pensions and Annuities 　　The existing Convention provides that private pensions and annuities derived from sources within one State by an individual resident of the other State are exempt from tax in the State of source. The proposed Convention continues the existing rule by providing that pensions and other similar remuneration paid in consideration of past employment and annuities received by a resident of a State will be taxable only in the State of residence. However, pensions coming within the scope of Article 19 (Governmental Functions) will be taxable only by the State making payment. 　　The proposed Convention also provides that alimony paid to a resident of a State will be taxable only in the State of residence. A United States resident making alimony payments to a Belgian resident may deduct such payments (unless section 71(d) or 682 of the United States Internal Revenue Code applies). 　　The term "annuities" is defined as a stated sum paid periodically at stated times during life. or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than for services rendered). The term "pensions" is defined as periodic payments made after retirement or death in consideration for services rendered, or by way of compensation for injuries received in connection with past employment. The effect of this provision is generally the same as that of the OECD Model Convention.