Belgium and United States: tax treaty – clarifying circular publishedMarch 5, 2013
On 19 February 2013, the Belgian administration published a clarifying circular (No. 3/203 (AFZ/097-0380) of February 2013) on the Belgium–United States Income Tax Treaty (2006) (the treaty).
The most important details of the circular are summarized below.
Business profits derived by hybrid entities
Articles 1(6) and 3(1)(c) of the treaty provide that hybrid entities are entitled to treaty benefits.
The benefits are granted if the following cumulative conditions are met:
- An entity is by one state classified as a non-transparent entity and by the other state as a transparent entity.
- The income derived by a transparent entity is attributed to the partners under the domestic law of the treaty state that classifies the entity as transparent. In that case, the partners are entitled to treaty benefits.
For the granting of the treaty benefits, it is irrelevant in which country the hybrid entity is incorporated, registered or established.
The circular clarifies that article 5 (permanent establishment (PE)), article 7 (business profits) and article 22 (avoidance of double taxation) apply to activities carried out by a Belgian resident partner in the US by means of an entity which Belgium regards as transparent.
The profits derived by the Belgian partner that can be attributed to a PE in the US are, in that case, subject to tax in the US, even if the Belgian resident does not carry out their activities by means of the PE in the US.
Dividends derived by a hybrid entity
The circular clarifies that a corporation that is resident in the US, and indirectly holds shares by means of an entity that is treated as a transparent vehicle in the US, is deemed to own those shares directly.
Income derived by a Belgian resident from a participation in a hybrid entity resident in the US
Belgium applies the exemption-with-progression method for the profits derived from participation in the US hybrid (article 22(1)(a) and (c) to (e) of the treaty).
Article 22(1)(b) of the treaty provides that dividends received by the Belgian resident partner from a participation in the US hybrid are exempt in Belgium if the partner in the US is taxed on their participation in the profits out of which those dividends are distributed.
This is the case if the entity is incorporated in the US and is treated there as a transparent entity, while the entity is treated as a non-transparent entity in Belgium.
This exemption applies in particular to dividends paid by a limited liability company (LLC) but not to US regulated investment companies (RICs) and US real estate investment trusts (REITS) because RICS and REITS in the US are treated as non-transparent entities.
The circular clarifies that, in the case of classification differences that are not solved by the treaty, the principles of the OECD Model Commentary to the provision on the avoidance of double taxation are followed.
This means that the residence state is obliged to avoid double taxation with respect to the income tax in the source state. The calculation may be based on the rules applicable in the residence state based on the income classification of that state.
The circular indicates that a trust that is subject to tax in the US may be regarded as a resident of the US even if the tax is not imposed on the trust but on the trustees.
This principle also applies if the trustees are not resident in the US.
Furthermore, if a trust in the residence state is regarded as the owner of the income, it will, for treaty purposes, be regarded as the beneficial owner of investment income.
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