ARTICLE 17 (PENSIONS — U.S. Income Tax Treaty

CHILD SUPPORT)

This Article deals with the taxation of private ( i.e., non-government service) pensions and annuities, social security benefits, alimony and child support payments.

Paragraph 1

Paragraph 1 provides that distributions from pensions and other similar remuneration beneficially owned by a resident of a Contracting State in consideration of past employment are taxable only in the State of residence of the beneficiary. This paragraph is subject to the provisions of paragraph 2 of Article 18 (Government Service), which generally provides for exclusive source state taxation for such payment when paid by, or out of funds created by, a Contracting State. The term "pensions and other similar remuneration" includes both periodic and single sum payments.

The phrase "pensions and other similar remuneration" is intended to encompass payments made by qualified private retirement plans. In the United States, the plans encompassed by Paragraph 1 include: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts and section 408(p) accounts), section 403(a) qualified annuity plans, and section 403(b) plans. Distributions from section 457 plans may also fall under Paragraph 1 if they are not paid with respect to government services covered by Article 18.

Pensions in respect of government services covered by Article 18 are not covered by this paragraph. They are covered either by paragraph 2 of this Article, if they are in the form of social security benefits, or by paragraph 2 of Article 18 (Government Service). Thus, Article 18 generally covers section 457, 401(a), 403(b) plans established for government employees, and the Thrift Savings Plan (section 7701(j)).

However, the State of residence, under subparagraph (b), must exempt from tax any amount of such pensions or other similar remuneration that would be exempt from tax in the Contracting State in which the pension fund is established if the recipient were a resident of that State. Thus, for example, a distribution from a U.S. "Roth IRA" to a resident of Belgium would be exempt from tax in Belgium to the same extent the distribution would be exempt from tax in the United States if it were distributed to a U.S. resident. The same is true with respect to distributions from a traditional IRA to the extent that the distribution represents a return of non-deductible contributions. Similarly, if the distribution were not subject to tax when it was "rolled over" into another U.S. IRA (but not, for example, to a pension fund in Belgium), then the distribution would be exempt from tax in Belgium.

Paragraph 2

The treatment of social security benefits is dealt with in paragraph 2. This paragraph provides that, notwithstanding the provision of paragraph 1 under which private pensions are taxable exclusively in the State of residence of the beneficial owner, payments made by one of the Contracting States under the provisions of its social security or similar legislation to a resident of the other Contracting State or to a citizen of the United States will be taxable only in the Contracting State making the payment. The reference to U.S. citizens is necessary to ensure that a social security payment by Belgium to a U.S. citizen who is not resident in the United States will not be taxable by the United States.

This paragraph applies to social security beneficiaries whether they have contributed to the system as private sector or Government employees. The Protocol provides that the phrase "similar legislation" is intended to refer to United States tier 1 Railroad Retirement benefits.

Paragraph 3

Under paragraph 3, annuities that are derived and beneficially owned by a resident of a Contracting State are taxable only in that State. An annuity, as the term is used in this paragraph, means a stated sum paid periodically at stated times during a specified number of years, under an obligation to make the payment in return for adequate and full consideration (other than for services rendered). An annuity received in consideration for services rendered would be treated as either deferred compensation that is taxable in accordance with Article 14 (Income from Employment) or a pension that is subject to the rules of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support).

Paragraphs 4 and 5

Paragraphs 4 and 5 deal with alimony and child support payments. Both alimony, under paragraph 4, and child support payments, under paragraph 5, are defined as periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support. Paragraph 4, however, deals only with payments of that type that are taxable to the payee. Under that paragraph, alimony paid by a resident of a Contracting State to a resident of the other Contracting State is taxable under the Convention only in the State of residence of the recipient. Paragraph 5 deals with those periodic payments that are for the support of a child and that are not covered by paragraph 4. These types of payments by a resident of a Contracting State to a resident of the other Contracting State are taxable only in the Contracting State where the payor is a resident.

Paragraph 6

Paragraph 6 provides that, if a resident of a Contracting State participates in a pension fund established in the other Contracting State, the State of residence will not tax the income of the pension fund with respect to that resident until a distribution is made from the pension fund. Thus, for example, if a U.S. citizen contributes to a U.S. qualified plan while working in the United States and then establishes residence in Belgium, paragraph 6 prevents Belgium from taxing currently the plan's earnings and accretions with respect to that individual. When the resident receives a distribution from the pension fund, that distribution may be subject to tax in the State of residence, subject to paragraph 1.

Paragraph 7

Paragraph 7 provides certain benefits with respect to cross- border contributions to a pension fund, subject to the limitations of paragraphs 8 and 9 of the Article. It is irrelevant for purposes of paragraph 7 whether the participant establishes residence in the State where the individual renders services (the "host State").

Subparagraph (a) of paragraph 7 allows an individual who exercises employment or self-employment in a Contracting State to deduct or exclude from income in that Contracting State contributions made by or on behalf of the individual during the period of employment or self-employment to a pension fund established in the other Contracting State (or in a similar fund that is a resident of a comparable third state). Thus, for example, if a participant in a U.S. qualified plan goes to work in Belgium, the participant may deduct or exclude from income in Belgium contributions to the U.S. qualified plan made while the participant works in Belgium. The benefits provided under subparagraph (a) by the host State are limited. In the case where the United States is the host State, the benefits granted by subparagraph (a) apply only to the extent the United States would provide relief if the plan were established in the United States. In the case where Belgium is the host State, the benefits granted by subparagraph (a) apply only to the extent that Belgium would provide relief if the plan was recognized for Belgian tax purposes. A “similar fund that is a resident of comparable third State” is discussed with respect to paragraph 10, below, and is applicable for paragraphs 7 through 9 of this Article.

Subparagraph (b) of paragraph 7 provides that, in the case of employment, accrued benefits and contributions by or on behalf of the individual's employer, during the period of employment in the host State, will not be treated as taxable income to the employee in that State. Subparagraph (b) also allows the employer a deduction in computing its taxable income in the host State for contributions to the plan. For example, if a participant in a U.S. qualified plan goes to work in Belgium, the participant's employer may deduct from its taxable income in Belgium contributions to the U.S. qualified plan for the benefit of the employee while the employee renders services in Belgium.

As in the case of subparagraph (a), the benefits of subparagraph (b) are limited. In the case where the United States is the host State, the benefits granted by subparagraph (b) apply only to the extent that the United States would provide relief if the plan were established in the United States. In the case where Belgium is the host State, the benefits of subparagraph (b) apply only to the extent that Belgium would provide relief if the plan were recognized for Belgian tax purposes. Therefore, where the United States is the host State, the exclusion of employee contributions from the employee's income under this paragraph is limited to contributions not in excess of the amount specified in section 402(g) for elective contributions. Deduction of employer contributions is subject to the limitations of sections 415 and 404. The section 404 limitation on deductions is calculated as if the individual were the only employee covered by the plan.

Paragraph 8

Paragraph 8 limits the availability of benefits under paragraph 7. Under subparagraph (a) of paragraph 8, paragraph 7 does not apply to contributions to a pension fund unless the participant already was contributing to the fund, or his employer already was contributing to the fund with respect to that individual, before the individual began exercising employment in the host State. This condition would be met if either the employee or the employer was contributing to a fund that was replaced by the fund to which he is contributing. The rule regarding successor funds would apply if, for example,

the employer has been taken over by a company that replaces the existing fund with its own fund, rolling membership in the old fund over into the new fund.

In addition, under subparagraph (b), the participant must not have performed personal services in the host State for a cumulative period that exceeds ten years.

Further, under subparagraph (c) of paragraph 8, the competent authority of the host State must determine that the pension plan to which a contribution is made generally corresponds to a pension plan recognized for tax purposes in the host State. Generally, for this purpose, the U.S. pension plans eligible for the benefits of paragraph 7 would include qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k)), individual retirement accounts, individual retirement annuities, section 408(p) accounts and Roth IRAs under section 408A, section 403(a) qualified annuity plans, section 403(b) plans, section 457(b) plans and the Thrift Savings Plan (section 7701(j)). However, the competent authorities shall agree upon the list of pension plans that are acceptable under this paragraph.

Paragraph 9

Paragraph 9 generally provides U.S. tax treatment for certain contributions by or on behalf of U.S. citizens resident in Belgium to pension funds established in Belgium (or a similar fund that is a resident of a comparable third State) that is comparable to the treatment that would be provided for contributions to U.S. funds. Under subparagraph (a), a U.S. citizen resident in Belgium may exclude or deduct for U.S. tax purposes certain contributions to a pension fund established in Belgium. Qualifying contributions generally include contributions made during the period the U.S. citizen exercises an employment in Belgium if expenses of the employment are borne by an employer or permanent establishment in Belgium. Similarly, with respect to the U.S. citizen's participation in the pension fund in Belgium, accrued benefits and contributions during that period generally are not treated as taxable income in the United States.

The U.S. tax benefit allowed by paragraph 9, however, is limited under subparagraph (b) to the lesser of the amount of relief allowed for contributions and benefits that qualify for relief in Belgium and the amount of relief that would be allowed for contributions and benefits under a generally corresponding pension fund established in the United States.

Subparagraph (c) provides that the benefits an individual obtains under paragraph 9 are counted when determining that individual's eligibility for benefits under a pension fund established in the United States. Thus, for example, contributions to a pension fund recognized for tax purposes in Belgium may be counted in determining whether the individual has exceeded the annual limitation on contributions to an individual retirement account.

Under subparagraph (d), paragraph 9 does not apply to pension contributions and benefits unless the competent authority of the United States has agreed that the pension fund recognized for tax purposes in Belgium generally corresponds to a pension fund

established in the United States. Since paragraph 9 applies only with respect to employees, however, the relevant plans are those that correspond to employer plans in the United States. The competent authorities shall agree upon the list of pension plans that are acceptable under this paragraph.

Paragraph 10

Paragraph 10 provides guidance for the application of paragraphs 7 and 9 by delineating when a similar fund that is a resident of a State other than a Contracting State will be considered to be a resident of a “comparable third State.” The paragraph requires that such a state will be considered a comparable third State only if the following three requirements are met: 1) the third State is a member state of the European Union or any other European Economic Area state or any party to the North American Free Trade Agreement or Switzerland, 2) the third State provides, under a tax treaty or otherwise, comparable favorable treatment for contributions to a pension fund that is a resident of the Contracting State that is providing benefits under paragraph 7 (i.e., host state) or paragraph 9 (i.e., the United States), and 3) the third State has an information exchange provision in a tax treaty or other arrangement with the Contracting State that is providing benefits under paragraph 7 or paragraph 9 that is satisfactory to that Contracting State.

Subparagraph (b) provides that a pension plan is recognized for tax purposes in a Contacting State if contributions to the plan would qualify for tax relief in that Contracting State.

Relationship to other Articles

Paragraphs 1 (a), 3 and 4 of Article 17 are subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, a U.S. citizen who is resident in the other Contracting State, and receives either a pension, annuity or alimony payment from the United States, may be subject to U.S. tax on the payment, notwithstanding the rules in those three paragraphs that give the State of residence of the recipient the exclusive taxing right. Paragraphs 1(b), 2 and 5 are excepted from the saving clause by virtue of subparagraph 5(a) of Article 1. Thus, the United States will not tax U.S. citizens and residents on the income described in those paragraphs even if such amounts otherwise would be subject to tax under U.S. law.

Paragraphs 6 and 9 of Article 17 are excepted from the saving clause of paragraph 4 of Article 1 by virtue of paragraph 5(a) of Article 1. Thus, the United States will allow U.S. citizens and residents the benefits of paragraphs 6 and 9. Paragraph 7 is excepted from the saving clause by subparagraph 5(b) of Article 1 with respect only to persons who are not admitted for permanent residence or citizens. Accordingly, a person who becomes a U.S. permanent resident or citizen will no longer receive a deduction for contributions to a pension fund established in the other Contracting State.