EXPLANATION OF PROPOSED INCOME TAX TREATY BETWEEN THE UNITED STATES AND BELGIUM Scheduled for a Hearing Before the COMMITTEE ON FOREIGN RELATIONS UNITED STATES SENATE On July 17, 2007 ____________ Prepared by the Staff of the JOINT COMMITTEE ON TAXATION July 13, 2007 JCX-45-07 CONTENTS Page INTRODUCTION .......................................................................................................................... 1 I. SUMMARY........................................................................................................................ 2 II. OVERVIEW OF U.S. TAXATION OF INTERNATIONAL TRADE AND INVESTMENT AND U.S. TAX TREATIES .................................................................... 4 A. U.S. Tax Rules .............................................................................................................. 4 B. U.S. Tax Treaties .......................................................................................................... 6 III. OVERVIEW OF TAXATION IN BELGIUM................................................................... 8 A. National Income Taxes................................................................................................. 8 B. International Aspects of Taxation in Belgium............................................................ 10 C. Other Taxes................................................................................................................. 12 IV. THE UNITED STATES AND BELGIUM: CROSS-BORDER INVESTMENT AND TRADE.................................................................................................................... 13 A. Introduction................................................................................................................. 13 B. Overview of International Transactions Between the United States and Belgium..... 14 C. Income Taxes and Withholding Taxes on Cross-Border Income Flows .................... 17 D. Analyzing the Economic Effects of Protocols to Income Tax Treaties...................... 18 V. EXPLANATION OF PROPOSED TREATY AND PROTOCOL .................................. 19 Article 1. General Scope.................................................................................................. 19 Article 2. Taxes Covered ................................................................................................. 22 Article 3. General Definitions.......................................................................................... 22 Article 4. Resident ........................................................................................................... 24 Article 5. Permanent Establishment................................................................................. 26 Article 6. Income from Real Property.............................................................................. 28 Article 7. Business Profits................................................................................................ 29 Article 8. Shipping and Air Transport ............................................................................. 33 Article 9. Associated Enterprises..................................................................................... 34 Article 10. Dividends....................................................................................................... 35 Article 11. Interest ........................................................................................................... 41 Article 12. Royalties ........................................................................................................ 44 Article 13. Gains .............................................................................................................. 45 Article 14. Income from Employment............................................................................. 47 Article 15. Directors’ Fees............................................................................................... 47 Article 16. Entertainers and Sportsmen ........................................................................... 48 Article 17. Pensions, Social Security, Annuities, Alimony, and Child Support.............. 50 Article 18. Government Service ...................................................................................... 54 i Article 19. Students, Trainees, Teachers and Researchers .............................................. 55 Article 20. Other Income ................................................................................................. 56 Article 21. Limitation on Benefits ................................................................................... 57 Article 22. Relief from Double Taxation......................................................................... 68 Article 23. Non-Discrimination ....................................................................................... 72 Article 24. Mutual Agreement Procedure........................................................................ 73 Article 25. Exchange of Information and Administrative Assistance ............................. 79 Article 26. Assistance in Collection................................................................................. 80 Article 27. Members of Diplomatic Missions and Consular Posts.................................. 81 Article 28. Entry into Force ............................................................................................. 81 Article 29. Termination.................................................................................................... 82 VI. ISSUES ............................................................................................................................. 83 A. Arbitration................................................................................................................... 83 B. Treaty Shopping.......................................................................................................... 92 C. Zero Rate of Withholding Tax on Direct Dividends .................................................. 96 D. Students, Trainees, Teachers and Researchers ......................................................... 101 ii INTRODUCTION This pamphlet,1 prepared by the staff of the Joint Committee on Taxation, describes the proposed income tax treaty between the United States and Belgium as supplemented by a protocol (the “proposed protocol”). Unless otherwise specified, the proposed treaty and the proposed protocol are hereinafter referred to collectively as the “proposed treaty.” The proposed treaty was signed on November 27, 2006. The Senate Committee on Foreign Relations (the “Committee”) has scheduled a public hearing on the proposed treaty for July 17, 2007.2 Part I of the pamphlet provides a summary of the proposed treaty. Part II provides a brief overview of U.S. tax laws relating to international trade and investment and of U.S. income tax treaties in general. Part III contains a brief overview of Belgian tax laws. Part IV provides a discussion of investment and trade flows between the United States and Belgium. Part V contains an article-by-article explanation of the proposed treaty. Part VI contains a discussion of issues relating to the proposed treaty. 1 This pamphlet may be cited as follows: Joint Committee on Taxation, Explanation of Proposed Income Tax Treaty Between the United States and Belgium (JCX-45-07), July 13, 2007. References to “the Code” are to the U.S. Internal Revenue Code of 1986, as amended. 2 For a copy of the proposed treaty, see Senate Treaty Doc. 110-3. 1 I. SUMMARY The principal purposes of the proposed treaty are to reduce or eliminate double taxation of income earned by residents of either country from sources within the other country and to prevent avoidance or evasion of the taxes of the two countries. The proposed treaty also is intended to promote close economic cooperation between the two countries and to eliminate possible barriers to trade and investment caused by overlapping taxing jurisdictions of the two countries. As in other U.S. tax treaties, these objectives principally are achieved through each country’s agreement to limit, in certain specified situations, its right to tax income derived from its territory by residents of the other country. For example, the proposed treaty contains provisions under which each country generally agrees not to tax business income derived from sources within that country by residents of the other country unless the business activities in the taxing country are substantial enough to constitute a permanent establishment (Article 7). Similarly, the proposed treaty contains certain exemptions under which residents of one country performing personal services in the other country will not be required to pay tax in the other country unless their contact with the other country exceeds specified minimums (Articles 14 and 16). The proposed treaty provides that dividends and certain gains derived by a resident of either country from sources within the other country generally may be taxed by both countries (Articles 10 and 13); however, the rate of tax that the source country may impose on a resident of the other country on dividends may be limited by the proposed treaty and source-country tax may be eliminated on certain dividends in which certain ownership thresholds and other requirements are satisfied (Article 10). The proposed treaty provides that, subject to certain rules and exceptions, interest and royalties derived by a resident of either