Country

2008 2009

United States $40 $45 Canada $25 $15 New Zealand $10 $20 United Kingdom $30 $35 Malaysia $10 $12 Philippines $ 7 $10 Singapore $10 $ 8 Indonesia $ 5 $10 $137 $155

For 2008, 10 percent of the gross income of this group is equal to $13.70. Only the United States, Canada, and the United Kingdom satisfy this requirement for that year. The other companies in the group may be aggregated to meet this requirement. Because New Zealand and Malaysia have a total gross income of $20, and the Philippines, Singapore, and Indonesia have a total gross income of $22, these two groupings of countries may be treated as the fourth and fifth members of the group for purposes of subparagraph (b).

In the following year, 10 percent of the gross income is $15.50. Only the United States, New Zealand, and the United Kingdom satisfy this requirement. Because Canada and Malaysia have a total gross income of $27, and the Philippines, Singapore, and Indonesia have a total gross income of $28, these two groupings of countries may be treated as the fourth and fifth members of the group for purposes of subparagraph (b). The fact that Canada replaced New Zealand in a group is not relevant for this purpose. The composition of the grouping may change from year to year.

Single Country Limitation

Subparagraph (c) provides that the business activities carried on in any one country other than the headquarters company's state of residence must generate less than 50 percent of the gross income of the group. If the gross income requirement under this subparagraph is not met for a taxable year, the taxpayer may satisfy this requirement applying the 50 percent gross income test to the average of the gross incomes for the four years preceding the taxable year. The following example illustrates the application of this subparagraph.

Example. BHQ is a corporation resident in Belgium. BHQ functions as a headquarters company for a group of companies. BHQ derives dividend income from a United States subsidiary in the 2008 taxable year. The state of residence of each of these companies, the situs of their activities and the amounts of gross income attributable to each for the years 2008 through 2012 are set forth below.

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Company Situs 2012 2011 2010 2009 2008 United States U.S. $100 $100 $ 95 $ 90 $ 85 Mexico U.S. 10 8 5 0 0 Canada U.S. 20 18 16 15 12 United Kingdom U.K 30 32 30 28 27 New Zealand N.Z. 40 42 38 36 35 Japan Japan 35 32 30 30 28 Singapore Singapore 25 25 24 22 20 $260 $257 $238 $221 $207

Because the United States’ total gross income of $130 in 2012 is not less than 50 percent of the gross income of the group, subparagraph (c) is not satisfied with respect to dividends derived in 2012. However, the United States’ average gross income for the preceding four years may be used in lieu of the preceding year’s average. The United States’ average gross income for the years 2008-11 is $111.00 ($444/4). The group’s total average gross income for these years is $230.75 ($923/4). Because $111.00 represents 48.1 percent of the group’s average gross income for the years 2008 through 2011, the requirement under subparagraph (c) is satisfied.

Other State Gross Income Limitation

Subparagraph (d) provides that no more than 25 percent of the headquarters company's gross income may be derived from the other Contracting State. Thus, if the headquarters company's gross income for the taxable year is $200, no more than $50 of this amount may be derived from the other Contracting State. If the gross income requirement under this subparagraph is not met for a taxable year, the taxpayer may satisfy this requirement by applying the 25 percent gross income test to the average of the gross incomes for the four years preceding the taxable year.

Independent Discretionary Authority

Subparagraph (e) requires that the headquarters company have and exercise independent discretionary authority to carry out the functions referred to in subparagraph (a). Thus, if the headquarters company was nominally responsible for group financing, pricing, marketing and other management functions, but merely implemented instructions received from another entity, the headquarters company would not be considered to have and exercise independent discretionary authority with respect to these functions. This determination is made individually for each function. For instance, a headquarters company could be nominally responsible for group financing, pricing, marketing and internal auditing functions, but another entity could be actually directing the headquarters company as to the group financing function. In such a case, the headquarters company would not be deemed to have independent discretionary authority for group financing, but it might have such authority for the other functions. Functions for which the headquarters company does not have and exercise independent discretionary authority are considered to be conducted by an entity other than the headquarters company for purposes of subparagraph (a).

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Income Taxation Rules

Subparagraph (f) requires that the headquarters company be subject to the generally applicable income taxation rules in its country of residence. This reference should be understood to mean that the company must be subject to the income taxation rules to which a company engaged in the active conduct of a trade or business would be subject. Thus, if one of the Contracting States has or introduces special taxation legislation that impose a lower rate of income tax on headquarters companies than is imposed on companies engaged in the active conduct of a trade or business, or provides for an artificially low taxable base for such companies, a headquarters company subject to these rules is not entitled to the benefits of the Convention under Paragraph 5.

In accordance with paragraph 3 of Article 28 (Entry Into Force), subparagraph (f) shall not have effect until January 1, 2011.

In Connection With or Incidental to Trade or Business

Subparagraph (g) requires that the income derived in the other Contracting State be derived in connection with or be incidental to the active business activities referred to in subparagraph (b). This determination is made under the principles set forth in paragraph 4. For instance, assume that a Belgian company satisfies the other requirements in paragraph 5 and acts as a headquarters company for a group that includes a United States corporation. If the group is engaged in the design and manufacture of computer software, but the U.S. company is also engaged in the design and manufacture of photocopying machines, the income that the Belgian company derives from the United States would have to be derived in connection with or be incidental to the income generated by the computer business in order to be entitled to the benefits of the Convention under paragraph 5. Interest income received from the U.S. company also would be entitled to the benefits of the Convention under this paragraph as long as the interest was attributable to the computer business supervised by the headquarters company Interest income derived from an unrelated party would normally not, however, satisfy the requirements of this clause.

Paragraph 6

Paragraph 6 deals with the treatment of interest or royalty income in the context of a so-called "triangular case." The paragraph provides special rules applicable to U.S. source interest or royalties that are attributable to permanent establishment that a Belgian company has in a third state, and that are otherwise exempt from taxation in Belgium. The paragraph is intended to authorize the United States to collect a tax at source when there is not a significant level of double taxation.

The term "triangular case" refers to the use of the structure described below by a resident of Belgium to earn, in this example, interest income from the United States. The Belgian resident, who is assumed to qualify for benefits under one or more of the provisions of Article 21 (Limitation on Benefits), sets up a permanent establishment in a third jurisdiction that imposes only a low rate of tax on the income of the permanent

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establishment. The Belgian resident then lends funds into the United States through the permanent establishment. The permanent establishment, despite its third-jurisdiction location, is an integral part of a Belgian resident. Therefore the income that it earns on those loans, absent the provisions of paragraph 6, is entitled to exemption from U.S. withholding tax under the Convention. However, assume the income of the permanent establishment is exempt from Belgian tax. Thus, the interest income is exempt from U.S. tax, is subject to little tax in the host jurisdiction of the permanent establishment, and is exempt from Belgian tax.

Because the United States does not exempt the profits of a third-jurisdiction permanent establishment of a U.S. resident from U.S. tax, either by statute or by treaty, this paragraph only applies with respect to U.S. source interest, or royalties that are attributable to a third-jurisdiction of a Belgian resident. Paragraph 6 replaces the otherwise applicable rules in the Convention for interest and royalties with a 15 percent withholding tax for these amounts, if the actual tax paid on the income in the country where the permanent establishment is located is less than 60 percent of the tax that would have been payable in Belgium if the income were earned in Belgium by the enterprise and were not attributable to the permanent establishment in the third state.

In general, the principles employed under Code section 954(b)(4) will be employed to determine whether the profits are subject to an effective rate of taxation that is above the specified threshold.

Notwithstanding the level of tax on income of the permanent establishment, paragraph 6 does not apply under certain circumstances.

Subparagraph a) provides that in the case of interest as defined in Article 11 (Interest), the paragraph does not apply if the interest is derived in connection with, or is incidental to, the active conduct of a trade or business carried on by the permanent establishment in the third state. The business of making, managing or simply holding investments for the person’s own account is not considered to be an active trade or business, unless these are banking or securities activities carried on by a bank or registered securities dealer.

Subparagraph b) provides that in the case of royalties defined in Article 12 (Royalties), the paragraph does not apply if the royalties are received as compensation for the use of, or the right to use, intangible property produced or developed by the permanent establishment.

Paragraph 7

Paragraph 7 provides that a resident of one of the States that is not entitled to the benefits of the Convention as a result of paragraphs 1 through 6 still may be granted benefits under the Convention at the discretion of the competent authority of the State from which benefits are claimed. In making determinations under paragraph 7, that competent authority will take into account as its guideline whether the establishment, acquisition, or maintenance of the person seeking benefits under the Convention, or the conduct of such person's operations, has or had as one of its principal purposes the

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obtaining of benefits under the Convention. Benefits will not be granted, however, solely because a company was established prior to the effective date of a treaty or protocol. In that case a company would still be required to establish to the satisfaction of the Competent Authority clear non-tax business reasons for its formation in a Contracting State, or that the allowance of benefits would not otherwise be contrary to the purposes of the treaty. Thus, persons that establish operations in one of the States with a principal purpose of obtaining the benefits of the Convention ordinarily will not be granted relief under paragraph 7.

The competent authority's discretion is quite broad. It may grant all of the benefits of the Convention to the taxpayer making the request, or it may grant only certain benefits. For instance, it may grant benefits only with respect to a particular item of income in a manner similar to paragraph 4. Further, the competent authority may establish conditions, such as setting time limits on the duration of any relief granted.

For purposes of implementing paragraph 7, a taxpayer will be permitted to present his case to the relevant competent authority for an advance determination based on the facts. In these circumstances, it is also expected that, if the competent authority determines that benefits are to be allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty provision or the establishment of the structure in question, whichever is later.

Finally, there may be cases in which a resident of a Contracting State may apply for discretionary relief to the competent authority of his State of residence. This would arise, for example, if the benefit it is claiming is provided by the residence country, and not by the source country. So, for example, if a company that is a resident of the United States would like to claim the benefit of the re-sourcing rule of paragraph 3 of Article 22, but it does not meet any of the objective tests of paragraphs 2 through 6, it may apply to the U.S. competent authority for discretionary relief.

Paragraph 8

Paragraph 8 defines several key terms for purposes of Article 21. Each of the defined terms is discussed above in the context in which it is used.