ARTICLE 7

Business Profits

This Article sets forth the typical treaty rule that industrial or commercial profits of a resident of one State are taxable in the other State only if the resident has a permanent establishment in that other State. Where there is a permanent establishment only the profits attributable to the permanent establishment can be taxed by that other State. For purposes of Article 23 (Relief From Double Taxation) which, among other things, provides that a foreign tax credit will be allowed by the United States, such profits are considered to be from sources within

the State in which the permanent establishment is located.

While under the existing Belgian Convention, as under the old French Convention, industrial or commercial profits are not taxed in the absence of a permanent establishment once there is a permanent establishment the existing Convention, as did the old French Convention, provides that the provisions reducing the tax rates on interest and dividends and exempting royalties are not applicable. This rule is known as the “force of attraction “ principle and is replaced in the proposed Convention, as in our new treaty with France, with the effectively connected concept. Under the new approach, only those interest, dividends and royalties which are effectively connected with the permanent establishment are taxable as part of the industrial or commercial profits and do not benefit from the reduced rate or exemption.

In determining the proper attribution of industrial or commercial profits under the proposed treaty, the permanent establishment is generally to be treated as an independent entity and considered as realizing the profits which would be realized if the permanent establishment dealt with the resident of which it is a permanent establishment on an arm’s-length basis. Expenses, wherever incurred, which are reasonably connected with profits attributable to the permanent establishment, including executive and general administrative expenses, will be allowed as deductions by the State in which the permanent establishment is located in computing the tax due to such State. However, it is not necessary to allow a profit to the head office for ancillary services furnished to the permanent establishment as long as the permanent establishment is allowed to deduct the allocable costs incurred by the head office.

The mere purchase of goods or merchandise in a State by the permanent establishment, or by the resident of which it is a permanent establishment, for the account of such resident will not cause attribution of profits to such permanent establishment

While some of our more recent conventions attempt a broad definition of “industrial or commercial profits” by setting forth examples of activities which will be considered as giving rise to such profits, this Convention is limited to setting forth three rules of inclusion and exclusion. In spite of the difference in approach, the term “industrial or commercial profits” has a meaning generally similar to that in our other recent treaties. It includes income derived from manufacturing, mercantile, agricultural, fishing, or mining activities, from the operation of ships or aircraft, from the furnishing of personal services of others, from the rental of tangible personal property, and from insurance activities.

This Article specifically provides that the term “industrial or commercial profits” includes rents or royalties derived from motion picture films or films or tapes used for radio or television broadcasting or from copyrights thereof and rents derived from the leasing of tangible personal property.

The Article further provides that the term does not include items of income specifically dealt within other articles of this Convention except as provided in such articles. Thus, income derived from real property and natural resources and dividends, interest, royalties (as defined in paragraph (2) of Article 12 (Royalties)), capital gains, and income described in Article 22

(Income Not Expressly Mentioned) constitute industrial or commercial profits only if the right or property giving rise to such amounts is effectively connected with a permanent establishment which the recipient, being a resident of one of the States, has in the other State. Where such amounts do not constitute industrial or commercial profits, they may be taxed separately or together with industrial or commercial profits in accordance with the laws of the State whose tax is being determined, but the limits on the rate of taxation to which such amounts may be subject must be observed.

For example, if a Belgian bank without a permanent establishment in the United States loaned money to a United States manufacturer in the United States, the interest paid by the United States manufacturer to the Belgian bank would be treated as interest and not as industrial or commercial profits and would be governed by Article 11 (Interest) of the proposed Convention which provides for either an exemption or a 15-percent withholding rate.

In the reverse situation where a United States bank with a branch in Belgium derives interest from Belgium which is not effectively connected with its Belgian branch, Belgium could tax the interest together with the income of the permanent establishment as long as the rate of tax on the gross amount of the interest did not exceed the 15-percent limitation.

Income from independent and dependent personal services are specifically dealt within Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services) and, therefore, are not treated as business profits. It is noted that in some of our other recent conventions, there is an express provision excluding such services from the terms "industrial or commercial profits." While there is no such provision in the Belgian Convention, the result is the same.