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PWC ITS EUROPEAN TAX UPDATE
On December 28,2007, the United States and Belgium officially exchanged instruments of ratification of the newU.S.-Belgium income tax treaty (Treaty) and accompanying protocol, bringing into force the Treaty that the two countries signed on November 27, 2006. The Treaty reduces tax-related barriers to trade and investment flows between the U.S. and Belgium, and creates new investment opportunities. One of the highlights of the Treaty is the elimination of sourcecountry taxation of qualifying dividends and interest, subject to certain conditions and a limitation-on-benefits (LOB) provision.
Background and objectives. The new Treaty and protocol replace the existing treaty of 1970 and the supplementary protocol of 1987 and bring several significant changes, serving to mitigate certain double taxation and treaty interpretation issues that existed under the previous treaty. In addition, they conform to new tendencies in respective tax treaty policies of the U.S. and Belgium-for example, the U.S. and Belgium each recendy issued new model income tax treaties-as well as to trends in their domestic tax laws. They underpin the long-standing relationship between the countries.
Exemption from sourcecountry tax on dividends. The Treaty eliminates the source-country tax on dividends paid by a company resident in one country to a parent company resident in the other country for (1) dividends paid by a Belgian subsidiary to a U.S. parent company, if the U.S. parent has owned directly at least 10% of the capital of the Belgian subsidiary for at least 12 months on the date that the dividend is declared; and (2) dividends paid by a U.S. subsidiary to a Belgian parent company, if the Belgian parent has owned at least 80% of the voting stock of the U.S. subsidiary for at least 12 months on the date that the dividend is declared. This elimination applies only if the Belgian parent company meets certain specified tests in the LOB Article. In addition, the beneficiary of the dividends must be eligible for treaty benefits under the LOB Article ( see below).
The new Treaty also introduces an exemption from source-country tax for dividends paid to pension funds, provided that the dividends do not derive from carrying on a business by the pension fund or through an associated enterprise in the other country.
Observation. The...