Article 1 of the Protocol replaces Article 10 (Dividends) of the 1970 Convention. The

principal change is to reduce to 5 percent the maximum allowable rate of tax at source on direct investment dividends.

Paragraph 1 states that dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. This provision, which comes from the OECD Model Draft Income Tax Convention confirms the provision of paragraph 1 of Article 23 (Relief from Double Taxation) of the 1970 Convention that each State reserves the right to tax its residents.

Paragraph 2 provides that such dividends may also be taxed in the Contracting State of which the company paying the dividends is resident; but if the beneficial owner is a resident of the other State, the tax may not exceed specified limits. The tax is limited to 5 percent of the gross amount of the dividends if the beneficial owner is a company which directly owns at least 10 percent of the voting stock of the company paying the dividends, and to 15 percent of the gross amount of the dividends in all other Cases. The 10 percent direct ownership test for the 5 percent rate is consistent with the requirements of section 902 of the Internal Revenue Code for claiming an indirect foreign tax Credit. The Convention signed in 1970 limited the tax to 15 percent of the gross amount of the dividends without regard to the degree of ownership of the shareholder.

Paragraph 3 defines the term “dividends” for purposes of this Article. The first sentence is the same as the definition of dividends in the OECD Model Draft Income Tax Convention. The second Sentence permits Belgium to exercise an anti-abuse provision of its law by treating as dividends certain income with respect to capital invested by the owners of an unincorporated Belgian Company, for example interest on loans made to a closely-held general partnership by

one or sore of its partners. A similar provision was included in the 1970 Convention.

Paragraph 4 provides that, where the beneficial owner of the dividends is a resident of one Contracting State and the holding giving rise to the dividends is part of the assets of a permanent establishment or fixed base through which the owner carries on business or performs services in the other State, the dividends are not taxable in accordance with this Article, but in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), whichever applies. This similar rule is also carried over from the 1970 Convention.

Paragraph 5 provides that dividends paid by a company which is a resident of a Contracting State to a resident of that same State shall be exempt from tax by the other State, except insofar as the dividends are paid with respect to a holding which forms part of the assets of a permanent establishment or fixed base in that other State. Where that exception applies, the dividends are covered under paragraph 4. Where the United States is the other Contracting State, it may also tax dividends paid by a Belgian company to a U.S. citizen resident in Belgium; the right to tax U.S. citizens is preserved in paragraph I of Article 23 (Relief from Double Taxation). The United States generally may not impose a second level withholding tax on dividends paid to residents of Belgium; however, it may impose such a tax in accordance with its law (including other income tax treaties on dividends paid by a Belgian company to residents of third countries. This provision is substantially similar to paragraph 4(a) of Article 10 (Dividends) of the 1970 Convention.

Paragraph 6 confirms Belgium's right to tax, in accordance with its internal law, dividends derived from Belgian corporations by the Belgian permanent establishment of a U.S. resident. Under current Belgian law, dividends paid by Belgian corporations are subject to a withholding tax of 25 percent. When the shareholder is another Belgian corporation which has held the shares for the full tax year, 95 percent of such dividends are exempt from corporate tax and the withheld amount may be credited against the corporate tax on other income. When the shares are part of the assets of a Belgian permanent establishment of a foreign corporation, the same exclusion applies, but the 25 percent withholding tax is a final tax; it may not be claimed as a credit against the Belgian tax on other income of the permanent establishment. This provision corresponds to the second sentence of paragraph 3 of Article 10 (Dividends) of the 1970 Convention.