PROTOCOL AND EXCHANGE OF NOTES TO THE 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 　　Technical Explanation of the Supplementary Protocol Signed at Washington. D.C. on December 31, 1987 Modifying and Supplementing the Convention Between 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, Signed at Brussels on July 9. 1970. 　　The Protocol signed at Washington, D.C. on December 31, 1987 (hereafter referred to as "the Protocol") amends the Convention signed on July 9, 1970 (hereafter referred to as " the 1970 Convention"). It is an intermediate step in the renegotiation of the 1970 Convention. 　　The technical explanation is an official guide to the Protocol. It reflects policies behind particular provisions and understandings reached with respect to the application and interpretation of the Protocol. ARTICLE 1 　　Article 1 of the Protocol replaces Article 10 (Dividends) of the 1970 Convention. The principal change is to reduce to 5 percent the maximum allowable rate of tax at source on direct investment dividends. 　　Paragraph 1 states that dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. This provision, which comes from the OECD Model Draft Income Tax Convention confirms the provision of paragraph 1 of Article 23 (Relief from Double Taxation) of the 1970 Convention that each State reserves the right to tax its residents. 　　Paragraph 2 provides that such dividends may also be taxed in the Contracting State of which the company paying the dividends is resident; but if the beneficial owner is a resident of the other State, the tax may not exceed specified limits. The tax is limited to 5 percent of the gross amount of the dividends if the beneficial owner is a company which directly owns at least 10 percent of the voting stock of the company paying the dividends, and to 15 percent of the gross amount of the dividends in all other Cases. The 10 percent direct ownership test for the 5 percent rate is consistent with the requirements of section 902 of the Internal Revenue Code for claiming an indirect foreign tax Credit. The Convention signed in 1970 limited the tax to 15 percent of the gross amount of the dividends without regard to the degree of ownership of the shareholder. 　　Paragraph 3 defines the term "dividends" for purposes of this Article. The first sentence is the same as the definition of dividends in the OECD Model Draft Income Tax Convention. The second Sentence permits Belgium to exercise an anti-abuse provision of its law by treating as dividends certain income with respect to capital invested by the owners of an unincorporated Belgian Company, for example interest on loans made to a closely-held general partnership by one or sore of its partners. A similar provision was included in the 1970 Convention. Paragraph 4 provides that, where the beneficial owner of the dividends is a resident of one Contracting State and the holding giving rise to the dividends is part of the assets of a permanent establishment or fixed base through which the owner carries on business or performs services in the other State, the dividends are not taxable in accordance with this Article, but in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), whichever applies. This similar rule is also carried over from the 1970 Convention. Paragraph 5 provides that dividends paid by a company which is a resident of a Contracting State to a resident of that same State shall be exempt from tax by the other State, except insofar as the dividends are paid with respect to a holding which forms part of the assets of a permanent establishment or fixed base in that other State. Where that exception applies, the dividends are covered under paragraph 4. Where the United States is the other Contracting State, it may also tax dividends paid by a Belgian company to a U.S. citizen resident in Belgium; the right to tax U.S. citizens is preserved in paragraph I of Article 23 (Relief from Double Taxation). 　　The United States generally may not impose a second level withholding tax on dividends paid to residents of Belgium; however, it may impose such a tax in accordance with its law (including other income tax treaties on dividends paid by a Belgian company to residents of third countries. 　　This provision is substantially similar to paragraph 4(a) of Article 10 (Dividends) of the 1970 Convention. Paragraph 6 confirms Belgium's right to tax, in accordance with its internal law, dividends derived from Belgian corporations by the Belgian permanent establishment of a U.S. resident. Under current Belgian law, dividends paid by Belgian corporations are subject to a withholding tax of 25 percent. When the shareholder is another Belgian corporation which has held the shares for the full tax year, 95 percent of such dividends are exempt from corporate tax and the withheld amount may be credited against the corporate tax on other income. When the shares are part of the assets of a Belgian permanent establishment of a foreign corporation, the same exclusion applies, but the 25 percent withholding tax is a final tax; it may not be claimed as a credit against the Belgian tax on other income of the permanent establishment. 　　This provision corresponds to the second sentence of paragraph 3 of Article 10 (Dividends) of the 1970 Convention. ARTICLE 2 　　Article 2 simply corrects a cross-reference. ARTICLE 3 　　Article 3 inserts a new Article 12A (Limitation on Benefits) to ensure that the reduced withholding rates at source on dividends, interest and royalties provided in the Convention, as amended by the Protocol, will not be the object of "treaty shopping" by residents of third countries. 　　Paragraph 1 provides that a resident of a Contracting State (other than an individual) shall not be entitled to relief from taxation at source under Articles 10 (Dividends), 11 (Interest) or 12 (Royalties) unless one of three conditions is met. The first condition has two parts. More than 50 percent of the beneficial interest in such person (or in the case of a company, more than 50 percent of the number of each class of its shares) must be owned by residents of a Contracting State, the States themselves or political subdivisions or local authorities thereof, or U.S. citizens. In addition, more than 50 percent of the gross income of the person may not be paid out as interest or royalties to persons who are not qualifying owners, as defined above. 　　The second test, which is an alternative to the first, is that the person derives the dividends, interest or royalties in connection with, or incidental to, the active conduct of a trade or business in the Contracting State of which it is a resident. For this purpose a business the principal activities of which are making or managing investments in the other State (where the income arises) does not qualify as the active conduct of a trade or business. 　　The third test, which is an alternative to the other two, is that the principal class of shares of the company deriving the dividends, interest, or royalties is substantially and regularly traded on a recognized securities exchange, or that more than 50 percent of each class of its shares is owned by a resident of the same Contracting State which meets the substantial and regular trading requirement. For this purpose a "recognized securities exchange" is defined (in paragraph 3) to mean a U.S. Securities exchange for purposes of the Securities Exchange Act of 1934, the NASDAQ System, the Belgian stock exchanges, and any other securities exchange agreed upon by the competent authorities of the United States and Belgium. 　　Paragraph 2 explains how each Contracting State will interpret the term "gross income" in applying this Article. The United States will use the definition in the Internal Revenue Code, applying it to worldwide gross income. Belgium does not have a corresponding statutory definition. In its case the measure will be gross receipts or, for an enterprise which produces goods, gross receipts less the direct costs of labor and materials attributable to such production and payable out of such receipts. ARTICLE 4 　　Article 4 provides the terms of the entry into force of the Protocol and the effective dates of its provisions. The Protocol, which will be an integral part of the 1970 Convention, is subject to ratification. The instruments of ratification will be exchanged at Washington, D.C. and the Protocol will enter into force on the fifteenth day after the date of that exchange. The provisions of the Protocol shall have effect retroactively with respect to dividends, interest, and royalties paid or credited on or after January 1, 1988. ARTICLE 5 　　Article 5 provides that the Protocol, as an integral part of the 1970 Convention, shall remain in force as long as the 1970 Convention remains in force and shall terminate simultaneously with that Convention. A special rule, however, permits separate termination of the Protocol after it has been in force for five years if either State gives Six months' notice of termination in writing through diplomatic channels. In such a case, the provisions of the Protocol would cease to have effect for amounts paid or credited on or after the first day of January of the year following the notice of termination, and the provisions of the 1970 Convention, as it applied prior to amendment by the Protocol, shall have effect with respect to such amounts. This special rule is included, not because of any anticipated dissatisfaction with the operation of the Protocol, but as an indication of the intent of both sides to complete renegotiation of a full new treaty as promptly as feasible. EXCHANGE OF NOTES 　　An exchange of notes, signed at the same time as the Protocol, confirms the understanding of the two delegations that the term beneficial interest', as used in paragraph 1(a)(i) of Article 12A (Limitation on Benefits) of the English text of the Protocol has the same meaning in the French and Dutch texts of the Corresponding provision, notwithstanding any imprecision in the translations of that phrase.