ARTICLE 5

Permanent Establishment

This Article defines the term "permanent establishment." The existence of a permanent

establishment is, under the terms of the proposed Convention, a prerequisite for one State to tax the industrial or commercial profits of a resident of the other State. The concept is also significant in determining the applicability of other provisions of the Convention, such as Article 10 (Dividends), Article 11 (Interest), Article 12 (Royalties), and Article 13 (Capital Gains). The definition of "permanent establishment" is a modernized version of the definition found in some of our older treaties including the 1948 Convention with Belgium. The new definition is similar to the definition found in our French Convention.

The term "permanent establishment" means "a fixed place of business through which a resident of one of the Contracting States engages in industrial or commercial activity." Illustrations of the concept of a fixed place of business include a seat of management, a branch, an office, a factory, a workshop, a warehouse, a place of extraction of natural resources, or a building site or construction or installation project which exists for more than 12 months. As a general rule, any fixed facility through which an individual, corporation or other person conducts industrial or commercial activity will be treated as its permanent establishment unless it falls in one of the specific exceptions described below. The proposed Convention uses the term "a seat of management" which was the term used in our Convention with France. The technical explanation of our French Convention explains the definition of the term "a seat of management" and its difference in meaning from the term "a place of management" as follows:

It should be noted that this convention uses the term "seat of management" where the OECD Model Convention and prior agreements to which the United States is a party used the term "place of management"; both terms are translations of the French term "un siege de direction" and it is believed the translation found in this convention is the more accurate. Prior agreements in which the term "place of management" appears will be interpreted therefore as if the words "seat of management" had been used.

That explanation is applicable to the proposed Belgian Convention.

This Article specifically provides that a permanent establishment does not include a fixed place of business of a resident of one of the Contracting States which is located in the other Contracting State if it is used only for one or more of the following (1) the use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident;

(2) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display, or delivery;

(3) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;

(4) the maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information, for the resident;

(5) the maintenance of a fixed place of business for the purpose of advertising, or the supplying of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident; or

(6) the maintenance of a building site or construction or installation project which does not exist for more than 12 months.

The building site or construction or installation project exception is merely a clarification of the rule that such an activity for more than 12 months is a permanent establishment and, accordingly, such an activity for 12 months or less is not a permanent establishment. These exceptions are cumulative and a site or facility used solely for more than one of these purposes will not be considered a permanent establishment under the proposed Convention. The 12-month construction project rule is a physical test under which the resident must be actively engaged in the project during that 12-month period.

This Article also provides that notwithstanding the provisions described in the preceding paragraph if three conditions are met, a resident of one State will have a permanent establishment in the other State. The conditions are:

1. The resident has a fixed place of business in that other State (a) which consists of facilities for the storage, display or delivery of goods or merchandise belonging to the resident;

(b) which consists of a stock of goods or merchandise belonging to the resident which is held for processing by another person; or

(c) which is used for the purpose of purchasing goods or merchandise for the resident; 2. The goods or merchandise described in paragraph 1 above are either subject to substantial processing in that State (whether or not purchased there) or are purchased in that other State (and are not thereafter subject to substantial processing in another State); and

3. All or part of such goods or merchandise is sold by the resident or his agent for use, consumption, or disposition in that other State.

Under this rule, the taxpayer will have a permanent establishment whether or not he maintains a sales office in the other State.

Thus, for example, if an independent agent acting for a United States corporation arranges the sales of the corporation's goods in Belgium the United States corporation will, nevertheless, be deemed to have a permanent establishment in Belgium if those goods were purchased in Belgium through a fixed place of business of the corporation (ordinarily a purchasing office would not constitute a permanent establishment) and then resold therein without having been subjected to processing outside Belgium prior to such resale.

Notwithstanding the other provisions of this Article, a person will be considered to have a permanent establishment if he engages in business through an agent, other than an independent agent, who has and regularly exercises authority to conclude contracts in the name of such person unless the agent only exercises such authority to purchase goods or merchandise.

With respect to an independent agent, the proposed Convention also provides that a resident of one State will not be deemed to have a permanent establishment in the other State if such resident engages in industrial or commercial activity in such other State through an independent agent, such as a broker or general commission agent, if such agent is acting in the ordinary course of his business. This rule does not apply with respect to a broker or agent acting

on behalf of an insurance company if such broker or agent has, and habitually exercises, an authority to conclude contracts in the name of that company. It was agreed, however, that an insurance company of one State writing reinsurance contracts in the other State would not for that reason be treated as having a permanent establishment, but since it was understood that foreign companies writing reinsurance on Belgian risks do not authorize Belgian brokers or agents to conclude reinsurance contracts in the name of the foreign reinsurance company, it was not necessary to specifically exclude reinsurance contracts from the exception.

The determination of whether a resident of one State has a permanent establishment in the other State is to be made without regard to any control relationship of such resident with respect to a resident of the other State or with respect to a person which engages in industrial or commercial activity in that other State (whether through a permanent establishment or otherwise).

Although this Article is generally drafted with reference to a resident of one of the States engaging in industrial or commercial activity in the other State, for certain purposes the proposed Convention deals with a nonresident engaging in industrial or commercial activity in one of the States or a resident of one of the States engaging in industrial or commercial activity in a third State. For these purposes, the principles set forth in Article 5 are to be applied in determining whether there is a permanent establishment.