ARTICLE 23

Relief from Double Taxation

Under the existing Convention the United States provides relief from double taxation by allowing a credit for Belgian tax which credit shall not exceed that proportion of the United States tax which the net income from sources within Belgium bears to the total net income of such citizen or resident.

The proposed Convention employs the same method of avoiding double taxation. It provides that subject to the provisions of United States law applicable for the taxable years, a credit against United States tax will be allowed to a citizen or resident of the United States for Belgian tax paid. The credit is based upon the amount of tax paid to Belgium but may not exceed the amount of United States tax attributable to such income. Except for the special source rules provided by the Convention, this provision does not add to the rights which a United States citizen or resident has to the foreign tax credit. but is for the purpose of giving treaty recognition to such rights. Modifications in United States law after the effective date of the Convention which concern the foreign tax credit will be applicable with respect to Belgian source income if such modifications do not contravene the general principle of the Convention.

The proposed Convention also contains the traditional savings clause under which the United States reserves the right to tax its citizens and residents as if the Convention had not come into effect. However, the savings clause does not apply in several cases in which its application would contravene policies reflected in the Convention. Thus, the savings clause does not affect the provisions with respect to the foreign tax credit, social security payments, nondiscrimination, or mutual agreement procedure. Moreover, the savings clause will not deny the benefits of the Convention to governmental employees or teachers or students unless such individuals are citizens of the United States or have immigrant status in the United States.

In the case of Belgium the Article provides a detailed procedure for the avoidance of double taxation. Generally, the method used is the exemption method but in some circumstances, it is the credit method. This system of avoidance of double taxation is similar to that found in the existing Convention. The provisions are based upon the law of Belgium relating to the imposition of tax on Belgians receiving income from outside Belgium. However, under this Article, present Belgian statutory law is liberalized with respect to

(1) United States source dividends received by a Belgian corporation. (2) United States source business and personal services income, and (3) certain items of United States source income received by a citizen of the United States who is a resident of Belgium.

These provisions are contained in paragraph (3) of Article 23 of the proposed Convention. Subparagraph (a) of paragraph (3) corresponds to subparagraph (f) of paragraph (3) of Article 12 of the existing Convention. Under this provision, items of income which are not subject to the provisions of subparagraphs (b) through (d) and which have been taxed by the United States in

accordance with the provisions of Articles 6 through 21, are exempt by Belgium from tax. But, Belgium may take such items of 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 included in this provision are

(1) industrial and commercial profits subject to United States tax by reason of their being attributable to the maintenance by the taxpayer of a permanent establishment in the United States;

(2) income from real property situated in the United States; (3) salaries. pensions, and annuities paid by the United States or by any political subdivision thereof to United States citizens or other individuals who qualify for the governmental exemption and reside in Belgium;

(4) compensation for labor or personal services performed in the United States and taxed by the United States in accordance with the dependent or independent personal services Articles, and

(5) any other business or personal service income which may be taxed by the United States in accordance with the Convention.

Also included within the scope of subparagraph (a) are items of income that are covered by subparagraph (g) of the existing Convention. These items are interest, dividends, and royalties which are taxed by the United States by reason of the fact that they are effectively connected with a permanent establishment in the United States maintained by a Belgian taxpayer.

Subparagraph (b) conforms generally to subparagraphs (c) and (d) of the existing Convention. Subparagraph (b) grants a credit based upon existing Belgian law subject to any subsequent modification thereof which, however, may not affect the principles of existing law, for dividends received by an individual and interest and royalties received by any resident of Belgium. The credit is allowed against the tax imposed on the net amount of dividends from corporations in the United States as well as of interest and royalties from sources in the United States which have been taxed there. At the present time the credit is an amount equal to 15 percent. This is fixed by Belgian law regardless of the amount of tax paid.

Subparagraph (c) is a new provision dealing with income not expressly mentioned which is taxable by the State of source under Article 22 (Income Not Expressly Mentioned). Under this provision where a resident of Belgium receives income which has been taxed by the United States under Article 22 (Income Not Expressly Mentioned) the amount of Belgian tax proportionately attributable to such income shall not exceed the amount which would be imposed in accordance with Belgian law if such income were taxed as earned income derived from sources outside Belgium and subject to foreign tax. In the case of corporations, the rate would be one-fourth the normal rate. In the case of individuals, the rate would be one-half the normal rate.

Subparagraph (d) corresponds to subparagraph (a) of the existing Convention. This provision has the effect of incorporating into the Convention the present statutory treatment of corporations or other entities. It provides that dividends taxed by the United States under paragraph (2) of Article 10 (Dividends) of the Convention at the reduced 15-percent rate shall be exempt from Belgian corporate income tax to the extent that such exemption would be granted

under Belgian law if both corporations were Belgian corporations subject to the Belgian corporate income tax. The Belgian law to be applied is the Belgian law applicable at the time the dividends were received by the Belgian corporation. Under present Belgian law the amount of the exemption is 95 percent (90 percent in the case of portfolio holding companies) of the amount of the dividend after reduction for all taxes including the United States withholding tax and the Belgian personal property prepayment (précompte mobilier). This provision does not prohibit the withholding from these dividends of such précompte as imposed by Belgian law. The present rate of tax is 10 percent of the amount of the dividend actually received by the Belgian corporation.

Subparagraph (e) corresponds generally to subparagraph (b) of the existing Convention and provides an exception in favor of United States source dividends to the rules provided in subparagraph (d) dealing with the imposition by Belgium of the tax on dividends (précompte mobilier) received by a Belgian corporation or other entity subject to Belgian corporate tax. This exception is in addition to the exemption provided in subparagraph (d). Under this provision a Belgian corporation which receives dividends from a United States corporation on stock which has been directly owned by that Belgian corporation during the whole of the accounting period of the United States corporation which is subject in the United States to tax on its profits may elect to have such dividends exempted from the Belgian personal property prepayment (précompte mobilier) ordinarily applicable to such dividends. A Belgian corporation may elect this treatment by making a written request for such exemption when filing its annual tax return or before the expiration of the period allowed for the filing of such return. Under this provision the Belgian corporation deriving a dividend from a United States corporation (after the withholding of United States tax at the source at the 15-percent treaty rate)

(1) will not be required to pay the personal property prepayment otherwise due on receipt, and

(2) will be permitted to calculate its statutory corporate income tax exemption (as provided in subparagraph (d)) on the full dividend received.

This permits the qualified Belgian corporation receiving dividends from United States corporations to accumulate or reinvest a larger portion of such dividends than would be the case under Belgian law in the absence of this treaty provision. However, dividends accorded this exemption can not be deducted for purposes of determining the personal property prepayment applicable to dividends distributed by the recipient corporation or other entity to its shareholders or members. This provision differs from the existing provision in that, if Belgian legislation ever imposed a 10-percent ownership requirement for eligibility of the 90 and 95 percent dividend exemption for intercorporate dividends, then such similar 10-percent ownership requirement would also apply in order for a Belgian corporation to obtain the benefits of this provision.

Subparagraph (f) is generally comparable to subparagraph (e) of the existing Convention. This provision contains special relief with respect to certain income derived by a citizen of the United States who is a resident of Belgium and thus liable to income tax in both States on a worldwide basis. The existing provision provides that the Belgian individual income tax proportionately attributable to dividends, interest, pensions, 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 that income after allowance of the lump-sum foreign tax credit. Though

residence in Belgium would ordinarily entitle individuals to an exemption from, or reduction in the rate of, United States tax on specified items of income under the Convention. such benefits are not available to United States citizens. The existing and proposed provisions provide 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 proposed provision provides that the Belgium income tax proportionately attributable to the dividends, interest, or royalties received by a citizen of the United States residing in Belgium from sources within the United States may not exceed 20 percent of that income after allowance of the lump-sum foreign tax credit. The existing provision was based on a personal property prepayment at the rate of 15 percent, which is now 20 percent. In the case of other income concerned, the amount of tax which would be imposed is the amount which would he imposed if such income were taxed as earned income derived from sources outside Belgium and subject to a foreign tax. This provision only applies to income which is not exempt from Belgian tax under subparagraph (a) or covered by subparagraph (c) which covers items of income not expressly mentioned.

Subparagraph (g) generally corresponds to subparagraph (h) of the existing Convention. Proposed subparagraph (g) provides that when, in accordance with Belgian law, losses incurred by a resident of Belgium in a permanent establishment situated in the United States have been effectively deducted from the profits of that resident for purposes of his taxation in Belgium, the exemption provided in subparagraph (a) should not apply in Belgium to the profits of other taxable periods attributable to the permanent establishment to the extent that those profits have also been reduced for United States tax purposes by reason of allowance of such losses.

Paragraph (4) provides for relief from double taxation in accordance with the principles of paragraphs (2) and (3) in the case of a corporation which is treated as a United States corporation for United States tax purposes and a Belgian corporation for Belgian tax purposes.