Article 10 provides rules for the taxation of dividends paid by a company that is a

resident of one Contracting State to a beneficial owner that is a resident of the other Contracting State. The article provides for full residence country taxation of such dividends and a limited source-State right to tax. Article 10 also provides rules for the imposition of a tax on branch profits by the State of source.

Paragraph 1

The right of a shareholder's country of residence to tax dividends arising in the source country is preserved by paragraph 1, which permits a Contracting State to tax its residents on dividends paid to them by a company that is a resident of the other Contracting State. For dividends from any other source paid to a resident, Article 20 (Other Income) grants the residence country exclusive taxing jurisdiction (other than for dividends attributable to a permanent establishment in the other State).

Paragraph 2

The State of source also may tax dividends beneficially owned by a resident of the other State, subject to the limitations of paragraphs 2 through 4. Paragraph 2 generally limits the rate of withholding tax in the State of source on dividends paid by a company

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resident in that State to 15 percent of the gross amount of the dividend. If, however, the beneficial owner of the dividend is a company resident in the other State and owns directly shares representing at least 10 percent of the voting power of the company paying the dividend, then the rate of withholding tax in the State of source is limited to 5 percent of the gross amount of the dividend. Shares are considered voting shares if they provide the power to elect, appoint or replace any person vested with the powers ordinarily exercised by the board of directors of a U.S. corporation.

The benefits of paragraph 2 may be granted at the time of payment by means of reduced rate of withholding tax at source. It also is consistent with the paragraph for tax to be withheld at the time of payment at full statutory rates, and the treaty benefit to be granted by means of a subsequent refund so long as such procedures are applied in a reasonable manner.

The determination of whether the ownership threshold for subparagraph a) of paragraph 2 is met for purposes of the 5 percent maximum rate of withholding tax is made on the date on which entitlement to the dividend is determined. Thus, in the case of a dividend from a U.S. company, the determination of whether the ownership threshold is met generally would be made on the dividend record date.

The term "beneficial owner" is not defined in the Convention, and is, therefore, defined as under the internal law of the country imposing tax ( i.e., the source country). The beneficial owner of the dividend for purposes of Article 10 is the person to which the dividend income is attributable for tax purposes under the laws of the source State. Thus, if a dividend paid by a corporation that is a resident of one of the States (as determined under Article 4 (Residence)) is received by a nominee or agent that is a resident of the other State on behalf of a person that is not a resident of that other State, the dividend is not entitled to the benefits of this Article. However, a dividend received by a nominee on behalf of a resident of that other State would be entitled to benefits. These interpretations are confirmed by paragraph 12 of the Commentary to Article 10 of the OECD Model.

Companies holding shares through fiscally transparent entities such as partnerships are considered for purposes of this paragraph to hold their proportionate interest in the shares held by the intermediate entity. As a result, companies holding shares through such entities may be able to claim the benefits of subparagraph (a) under certain circumstances. The lower rate applies when the company’s proportionate share of the shares held by the intermediate entity meets the 10 percent threshold, and the company meets the requirements of Article 1(6) (i.e., the company’s country of residence treats the intermediate entity as fiscally transparent) with respect to the dividend. Whether this ownership threshold is satisfied may be difficult to determine and often will require an analysis of the partnership or trust agreement.

Of note is the interaction of paragraph 2 and paragraph 4, with respect to dividends paid by a Belgian company. Under paragraph 2, the withholding tax imposed in Belgium may not exceed 5 percent if the beneficial owner of the dividend is a company resident in the United States and that U.S. resident company owns directly at least 10 percent of the voting stock of the Belgian company. However, under paragraph 4, no withholding may be imposed on the dividend payment if the U.S. resident company

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has owned directly at least 10 percent of the Belgian company for the 12 month period ending on the date the dividend is declared. Thus, although the ownership threshold is the same under subparagraph 2 a) and paragraph 4, there is an additional requirement in paragraph 4 that the U.S. resident company have held the stock for a 12 month period ending on the date the dividend is declared.

Paragraph 3

Paragraph 3 provides exclusive residence-country taxation ( i.e., an elimination of withholding tax) with respect to certain dividends distributed by a company that is a resident of the United States to a resident of Belgium. As described further below, this elimination of withholding tax is available with respect to certain inter-company dividends and with respect to pension funds.

Subparagraph (a) of paragraph 3 provides for the elimination of withholding tax on dividends beneficially owned by a Belgian company that has owned, directly or indirectly, 80 percent or more of the voting power of the U.S. company paying the dividend for the 12-month period ending on the date entitlement to the dividend is determined.

Eligibility for the elimination of withholding tax provided by subparagraph (a) is subject to additional restrictions based on, but supplementing, the rules of Article 21 (Limitation on Benefits). Accordingly, a company that meets the holding requirements described above will qualify for the benefits of paragraph 3 only if it also: (1) meets the “publicly traded” test of subparagraph 2(c) of Article 21 (Limitation on Benefits), (2) meets the “ownership-base erosion” and “active trade or business” tests described in subparagraph 2(e) and paragraph 4 of Article 21 (Limitation on Benefits), (3) meets the “derivative benefits” test of paragraph 3 of Article 21 (Limitation on Benefits), or (4) is granted the benefits of subparagraph 3(a) of Article 10 by the competent authority of the source State pursuant to paragraph 7 of Article 21 (Limitation on Benefits).

These restrictions are necessary because of the increased pressure on the Limitation on Benefits tests resulting from the fact that the United States has relatively few treaties that provide for such elimination of withholding tax on inter-company dividends. The additional restrictions are intended to prevent companies from re­ organizing in order to become eligible for the elimination of withholding tax in circumstances where the Limitation on Benefits provision does not provide sufficient protection against treaty-shopping.

For example, assume that ThirdCo is a company resident in a third country that does not have a tax treaty with the United States providing for the elimination of withholding tax on inter-company dividends. ThirdCo owns directly 100 percent of the issued and outstanding voting stock of USCo, a U.S. company, and of BelCo, a Belgian company. BelCo is a substantial company that manufactures widgets; USCo distributes those widgets in the United States. If ThirdCo contributes to BelCo all the stock of USCo, dividends paid by USCo to BelCo would qualify for treaty benefits under the active trade or business test of paragraph 4 of Article 21. However, allowing ThirdCo to

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qualify for the elimination of withholding tax, which is not available to it under the third state’s treaty with the United States (if any), would encourage treaty-shopping.

In order to prevent this type of treaty-shopping, paragraph 3 requires BelCo to meet the ownership-base erosion requirements of subparagraph 2(e) of Article 21 in addition to the active trade or business test of paragraph 4 of Article 16. Thus, BelCo would not qualify for the exemption from withholding tax unless (i) on at least half the days of the taxable year, at least 50 percent of each class of its shares was owned by persons that are residents of Belgium and eligible for treaty benefits under certain specified tests and (ii) less than 50 percent of BelCo’s gross income is paid in deductible payments to persons that are not residents of either Contracting State eligible for benefits under those specified tests. Because BelCo is wholly owned by a third country resident, BelCo could not qualify for the elimination of withholding tax on dividends from USCo under the ownership-base erosion test and the active trade or business test. Consequently, BelCo would need to qualify under another test or obtain discretionary relief from the competent authority under Article 21(7). For purposes of Article 10(3)(a)(ii), it is not sufficient for a company to qualify for treaty benefits generally under the active trade or business test or the ownership-base erosion test unless it qualifies for treaty benefits under both.

Alternatively, companies that are publicly traded or subsidiaries of publiclytraded companies will generally qualify for the elimination of withholding tax. Thus, a company that is a resident of Belgium and that meets the requirements of Article 21(2)(c)(i) or (ii) will be entitled to the elimination of withholding tax, subject to the 12­ month holding period requirement of Article 10(3)(a).

In addition, under Article 10(3)(a)(iii), a company that is a resident of Belgium may also qualify for the elimination of withholding tax on dividends if it satisfies the derivative benefits test of paragraph 3 of Article 21. Thus, a Belgian company that owns all of the stock of a U.S. corporation may qualify for the elimination of withholding tax if it is wholly-owned, for example, by a U.K., Dutch, Swedish, or Mexican publicly-traded company and the other requirements of the derivative benefits test are met. At this time, ownership by companies that are residents of other European Union, European Economic Area or North American Free Trade Agreement countries would not qualify the Belgian company for benefits under this provision, as the United States does not have treaties that eliminate the withholding tax on inter-company dividends with any other of those countries. If the United States were to enter into such treaties with more of those countries, residents of those countries could then qualify as equivalent beneficiaries for purposes of this provision.

A company also may qualify for the elimination of withholding tax pursuant to Article 10(3)(a)(iii) if it is owned by seven or fewer U.S. or Belgian residents who qualify as an “equivalent beneficiary” and meet the other requirements of the derivative benefits provision. This rule may apply, for example, to certain Belgian corporate joint venture vehicles that are closely-held by a few Belgian resident individuals.

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If a company does not qualify for the elimination of withholding tax under any of the foregoing objective tests, it may request a determination from the relevant competent authority pursuant to paragraph 7 of Article 21. Benefits will be granted with respect to an item of income if the competent authority of the Contracting State in which the income arises determines that the establishment, acquisition or maintenance of such resident and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the Convention.

Subparagraph (b) of paragraph 3 of Article 10 of the Convention provides that dividends beneficially owned by a pension fund (as defined in subparagraph (k) of paragraph 1 of Article 3) may not be taxed in the Contracting State of which the company paying the dividends is a resident, unless such dividends are derived from the carrying on of a business, directly by the pension fund or indirectly through an associated enterprise.

This rule is necessary because pension funds normally do not pay tax (either through a general exemption or because reserves for future pension liabilities effectively offset all of the fund’s income), and therefore cannot benefit from a foreign tax credit. Moreover, distributions from a pension fund generally do not maintain the character of the underlying income, so the beneficiaries of the pension are not in a position to claim a foreign tax credit when they finally receive the pension, in many cases years after the withholding tax has been paid. Accordingly, in the absence of this rule, the dividends would almost certainly be subject to unrelieved double taxation.

Paragraph 4

Paragraph 4 provides for exclusive residence country taxation on certain dividends paid by a company that is a resident of Belgium to a company that is resident in the United States.

Subparagraph a) provides that a where the company paying the dividend is a resident of Belgium, and the beneficial owner of such dividend is a company that is a resident in the United States, no withholding tax will be collected in Belgium, provided the United States company has owned directly shares representing at least 10 percent of the capital of the Belgian company for a 12-month period ending on the date the dividend is declared.

Subparagraph b) provides a rule that corresponds to subparagraph b) of paragraph 3 of this Article. Accordingly, dividends paid by a company resident in Belgium to a pension fund that is a resident of the United States may not be taxed in Belgium, unless such dividends are derived from the carrying on of a business, directly by the pension fund or indirectly through an associated enterprise.

Paragraph 5

Paragraph 5 provides that paragraphs 2 through 4 do not affect the taxation of the profits out of which the dividends are paid. The taxation by a Contracting State of the income of its resident companies is governed by the internal law of the Contracting State, subject to the provisions of paragraph 4 of Article 23 (Non-Discrimination).

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Paragraph 6

Article 10 generally applies to distributions made by a RIC or a REIT. However, distributions made by a REIT or certain RICs that are attributable to gains derived from the alienation of U.S. real property interests and treated as gain recognized under section 897(h)(1) are taxable under paragraph 1 of Article 13 instead of Article 10. In the case of RIC or REIT distributions to which Article 10 applies, paragraph 6 imposes limitations on the rate reductions provided by paragraphs 2 and 3.

The first sentence of subparagraph 6(a) provides that dividends paid by a RIC or REIT are not eligible for the 5 percent rate of withholding tax of subparagraph 2(a) or the elimination of source country withholding tax under subparagraph 3(a).

The second sentence of subparagraph 6(a) provides that the 15 percent maximum rate of withholding tax of subparagraph 2(b) applies to dividends paid by RICs and that the elimination of source-country withholding tax of subparagraph 3(b) applies to dividends paid by RICs and beneficially owned by a pension fund.

The third sentence of subparagraph 6(a) provides that the 15 percent rate under subparagraph 2(b) for dividends paid by a REIT and the exemption from source State withholding under subparagraph 3(b) for dividends paid by REITs and beneficially owned by a pension fund, apply only if one of the three following conditions is met. First, the beneficial owner of the dividend is an individual or a pension fund, in either case holding an interest of not more than 10 percent in the REIT. Second, the dividend is paid with respect to a class of stock that is publicly traded and the beneficial owner of the dividend is a person holding an interest of not more than 5 percent of any class of the REIT's shares. Third, the beneficial owner of the dividend holds an interest in the REIT of not more than 10 percent and the REIT is "diversified."

Subparagraph (b) provides a definition of the term "diversified", which is necessary because the term is not defined in the Code. A REIT is diversified if the gross value of no single interest in real property held by the REIT exceeds 10 percent of the gross value of the REIT's total interest in real property. Foreclosure property is not considered an interest in real property, and a REIT holding a partnership interest is treated as owning its proportionate share of any interest in real property held by the partnership.

The restrictions set out above are intended to prevent the use of these entities to gain inappropriate U.S. tax benefits. For example, a company resident in Belgium that wishes to hold a diversified portfolio of U.S. corporate shares could hold the portfolio directly and would bear a U.S. withholding tax of 15 percent on all of the dividends that it receives. Alternatively, it could hold the same diversified portfolio by purchasing 10 percent or more of the interests in a RIC. If the RIC is a pure conduit, there may be no U.S. tax cost to interposing the RIC in the chain of ownership. Absent the special rule in paragraph 6, such use of the RIC could transform portfolio dividends, taxable in the United States under the Convention at a 15 percent maximum rate of withholding tax, into direct investment dividends taxable at a 5 percent maximum rate of withholding tax or eligible for the elimination of source-country withholding tax.

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Similarly, a resident of Belgium directly holding U.S. real property would pay U.S. tax on rental income at either a 30 percent rate of withholding tax on the gross income or at graduated rates on the net income. As in the preceding example, by placing the real property in a REIT, the investor could, absent a special rule, transform rental income into dividend income from the REIT, taxable at the rates provided in Article 10, significantly reducing the U.S. tax that otherwise would be imposed. Paragraph 6 prevents this result and thereby avoids a disparity between the taxation of direct real estate investments and real estate investments made through REIT conduits. In the cases in which paragraph 6 allows a dividend from a REIT to be eligible for the 15 percent rate of withholding tax, the holding in the REIT is not considered the equivalent of a direct holding in the underlying real property.

Paragraph 7

Paragraph 7 defines the term dividends broadly and flexibly. The definition is intended to cover all arrangements that yield a return on an equity investment in a corporation as determined under the tax law of the State of source, as well as arrangements that might be developed in the future.

The term includes income from shares, or other corporate rights that are not treated as debt under the law of the source State, that participate in the profits of the company. The term also includes income that is subjected to the same tax treatment as income from shares by the law of the State of source. Thus, a constructive dividend that results from a non-arm's length transaction between a corporation and a related party is a dividend. In the case of the United States the term dividend includes amounts treated as a dividend under U.S. law upon the sale or redemption of shares or upon a transfer of shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-2 C.B. 69 (sale of foreign subsidiary's stock to U.S. sister company is a deemed dividend to extent of the subsidiary's and sister company's earnings and profits). Further, a distribution from a U.S. publicly traded limited partnership, which is taxed as a corporation under U.S. law, is a dividend for purposes of Article 10. However, a distribution by a limited liability company is not taxable by the United States under Article 10, provided the limited liability company is not characterized as an association taxable as a corporation under U.S. law.

Finally, a payment denominated as interest that is made by a thinly capitalized corporation may be treated as a dividend to the extent that the debt is recharacterized as equity under the laws of the source State.

Paragraph 8

Paragraph 8 excludes from the general source country limitations under paragraphs 1 through 6 dividends that are business profits attributable to a permanent establishment in the source country. In such case, the rules of Article 7 (Business Profits) shall apply. Accordingly, the dividends will be taxed on a net basis using the rates and rules of taxation generally applicable to residents of the State in which the permanent establishment is located, as such rules may be modified by the Convention. An example of dividends that are business profits attributable to a permanent establishment would be

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dividends derived by a dealer in stock or securities from stock or securities that the dealer held for sale to customers.

Paragraph 9

The right of a Contracting State to tax dividends paid by a company that is a resident of the other Contracting State is restricted by paragraph 9 to cases in which the dividends are paid to a resident of that Contracting State or are attributable to a permanent establishment in that Contracting State. Thus, a Contracting State may not impose a "secondary" withholding tax on dividends paid by a nonresident company out of earnings and profits from that Contracting State. In the case of the United States, the secondary withholding tax was eliminated for payments made after December 31, 2004 in the American Jobs Creation Act of 2004.

The paragraph also restricts the right of a Contracting State to impose corporate level taxes on undistributed profits, other than a branch profits tax. The paragraph does not restrict a State's right to tax its resident shareholders on undistributed earnings of a corporation resident in the other State. Thus, the authority of the United States to impose taxes on subpart F income and on earnings deemed invested in U.S. property, and its tax on income of a passive foreign investment company that is a qualified electing fund is in no way restricted by this provision.

Paragraph 10

Paragraph 10 permits a Contracting State to impose a branch profits tax on a company resident in the other Contracting State. The tax is in addition to other taxes permitted by the Convention. The term "company" is defined in subparagraph 1(b) of Article 3 (General Definitions).

A Contracting State may impose a branch profits tax on a company if the company has income attributable to a permanent establishment in that Contracting State, derives income from real property in that Contracting State that is taxed on a net basis under Article 6 (Income from Real Property), or realizes gains taxable in that State under paragraph 1 of Article 13 (Gains). The imposition of such tax is limited, however, to the portion of the aforementioned items of income that represents, in the case of the United States, the amount of such income that is the "dividend equivalent amount,” and, in the case of Belgium, an amount that is analogous to the dividend equivalent amount. This is consistent with the relevant rules under the U.S. branch profits tax, and the term dividend equivalent amount is defined under U.S. law. Section 884 defines the dividend equivalent amount as an amount for a particular year that is equivalent to the income described above that is included in the corporation's effectively connected earnings and profits for that year, after payment of the corporate tax under Articles 6 (Income from Real Property), 7 (Business Profits) or 13 (Gains), reduced for any increase in the branch's U.S. net equity during the year or increased for any reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg. section 1.884-1. The dividend equivalent amount for any year approximates the dividend that a U.S. branch office would have paid during the year if the branch had been operated as a separate U.S. subsidiary company.

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As discussed in the Technical Explanations to Articles 1(2) and 7(2), consistency principles require that a taxpayer may not mix and match the rules of the Code and the Convention in an inconsistent manner. In the context of the branch profits tax, the consistency requirement means that an enterprise that uses the principles of Article 7 to determine its net taxable income also must use those principles in determining the dividend equivalent amount. Similarly, an enterprise that uses U.S. domestic law to determine its net taxable income must also use U.S. domestic law in complying with the branch profits tax. As in the case of Article 7, if an enterprise switches between domestic law and treaty principles from year to year, it will need to make appropriate adjustments or recapture amounts that otherwise might go untaxed.

Paragraph 11

Paragraph 11 provides that the branch profits tax shall not be imposed at a rate exceeding the direct investment dividend withholding rate of five percent.

The branch profits tax will not be imposed at all, however, if certain requirements are met. In general, these requirements provide rules for a branch that parallel the rules for when a dividend paid by a subsidiary will be subject to exclusive residence-country taxation (i.e., the elimination of source-country withholding tax). Accordingly, the branch profits tax may not be imposed in the case of a company that (1) meets the “publicly traded” test or subsidiary of a publicly traded company under subparagraph 2(c) of Article 21 (Limitation on Benefits), (2) meets the “ownership-base erosion” and “active trade or business” tests described in subparagraph 2(e) and paragraph 4 of Article 21, (3) meets the “derivative benefits” test described in paragraph 3 of Article 21, or (4) is granted such benefit with respect to the branch profits tax by the relevant competent authority pursuant to paragraph 7 of Article 21.

Thus, for example, if a Belgian company would be subject to the branch profits tax with respect to profits attributable to a U.S. branch and not reinvested in that branch, paragraph 11 may apply to eliminate the branch profits tax if the company meets the “publicly traded” test, subsidiary of a publicly traded company, the combined “ownership-base erosion and active trade or business” test, or the “derivative benefits” test. If, by contrast, the Belgian company did not meet any of those tests, but met the ownership-base erosion test (and thus qualified for treaty benefits under subparagraph 2(a)), then the branch profits tax would apply at a rate of 5 percent, unless the Belgian company is granted benefits with respect to the elimination of the branch profits tax by the U.S. competent authority pursuant to paragraph 7 of Article 21.

Paragraph 12

Paragraph 12 contains two provisions that may operate to terminate the zero rate of withholding tax that may apply for dividends paid by a U.S. resident company under paragraph 3. Subparagraph (a)(i) provides that paragraph 3 shall cease to be effective for amounts paid or credited on or after January 1 of the 6 ^th year following the year in which the Convention enters into force, unless by June 30 of the 5 ^th year following entry into force, the United States Secretary of the Treasury, based on a report from the Commissioner of the Internal Revenue Service, certifies to the Senate of the United

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States that Belgium has satisfactorily complied with its obligations under Article 25 (Exchange of Information and Administrative Assistance).

Subparagraph (a)(ii) provides an additional method by which the United States may terminate paragraph 3. This additional method provides that the United States may terminate paragraph 3 at any time by providing written notice to Belgium, through the diplomatic channel, on or before June 30 in any year. In such a case, paragraph 3 shall cease to be effective for amounts paid or credited on or after January 1 of the year next following that in which such notice is given. Further, subparagraph (a)(ii) provides that the United States will not provide notice of termination under subparagraph (a)(ii) unless it has determined that Belgium’s actions with respect to Article 24 (Mutual Agreement Procedure) and 25 have materially altered the balance of benefits of the Convention.

Subparagraph b) provides that the United States and Belgian competent authorities shall consult at least annually regarding any issues that otherwise might trigger a termination under subparagraph (a).

As discussed in Article 25 (Exchange of Information and Administrative Assistance), if the provisions of this paragraph are used to terminate paragraph 3 of Article 10, then Belgium will be relieved of its obligations under paragraph 5 of Article 25 to provide certain information, including bank information.

Relationship to Other Articles

Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax dividends received by its residents and citizens, subject to the special foreign tax credit rules of paragraph 4 of Article 22 (Relief from Double Taxation), as if the Convention had not come into effect.

The benefits of this Article are also subject to the provisions of Article 21 (Limitation on Benefits). Thus, if a resident of Belgium is the beneficial owner of dividends paid by a U.S. corporation, the shareholder must qualify for treaty benefits under at least one of the tests of Article 21 in order to receive the benefits of this Article.