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.