Belgium US Tax Treaty Rules for Individuals & Businesses

The United States and Belgium share a bilateral income tax treaty to prevent the double taxation of income. Signed in 2006, the agreement establishes rules for how income earned by a resident of one country may be taxed by the other, covering various forms of income for individuals and businesses. The treaty also serves as a tool for fiscal authorities to prevent tax evasion through mutual cooperation and information exchange.

Determining Tax Residency Under the Treaty

Eligibility for treaty benefits hinges on being a resident of either the U.S. or Belgium. This term applies to any person liable to tax in either country based on factors like domicile, residence, or place of management. For corporations, residency is determined by the place of management or incorporation, and a company is a resident of Belgium if its principal establishment is located there.

When an individual is considered a resident of both countries, the treaty uses a series of tie-breaker tests to assign residency to a single country. The first test is where the individual has a permanent home. If a permanent home exists in both countries, the next test identifies the individual’s center of vital interests by examining where their personal and economic relations are closer.

If the center of vital interests is unclear, the next test is the individual’s habitual abode, or where they spend more time. If this is also inconclusive, residency is assigned based on nationality. In the rare case that all tests fail, the competent authorities of the U.S. and Belgium will settle the question by mutual agreement.

Taxation of Personal Income

Income from Employment

Income from employment is taxable in the country where the work is performed. For example, if a U.S. resident works in Belgium, Belgium has the primary right to tax the income earned from those services.

An exception, known as the 183-day rule, allows the income to be taxed only in the individual’s country of residence. This applies if the employee is present in the other country for 183 days or less in any 12-month period. The remuneration must also be paid by an employer who is not a resident of the host country and not be borne by a permanent establishment of the employer in the host country.

Pensions and Social Security

The treaty has distinct rules for retirement income. Private pensions and similar remuneration for past employment are taxable only in the recipient’s country of residence. For example, a U.S. resident receiving a private Belgian pension would only be taxed on that income by the United States.

U.S. Social Security payments made to a resident of Belgium receive special treatment under the treaty. The agreement allows these payments to be taxed by the United States, ensuring the U.S. retains a right to tax benefits from its government social security system.

Government Service

Remuneration, excluding pensions, paid by one of the countries for services rendered to that state is taxable only by that state. For example, a salary paid to a U.S. federal employee at an embassy in Belgium would be subject to U.S. tax and exempt from Belgian tax.

This rule does not apply if the services are related to a business carried on by the government entity. The exclusive taxing right may also not apply if the individual is a citizen of the other country or did not become a resident of that country solely to render the services.

Students and Trainees

A student or business trainee who is a resident of one country and is present in the other solely for education or training is exempt from tax in the host country. This exemption applies to payments received from sources outside the host country for their maintenance, education, or training. The funds must originate from outside the country where the student or trainee is temporarily residing.

Directors’ Fees

Fees derived by a resident of one country as a member of the board of directors of a company in the other country may be taxed in that other country. This means if a U.S. resident serves on the board of a Belgian corporation, Belgium retains the right to tax the fees earned for those duties.

Taxation of Business Profits

A business from one country is not subject to tax on its profits in the other country unless it operates through a Permanent Establishment (PE) located there. If a PE exists, the host country may tax profits attributable to that establishment. A PE is defined as a fixed place of business, such as a place of management, branch, office, factory, or workshop.

Certain activities do not create a PE, even if conducted through a fixed place of business, because they are considered preparatory or auxiliary. These activities include:

• Using facilities solely for the storage, display, or delivery of goods belonging to the enterprise.
• Maintaining a stock of goods for the purpose of processing by another enterprise.
• Maintaining a fixed place of business solely for purchasing goods or collecting information.
• Carrying out any other activity of a preparatory or auxiliary character for the enterprise.

Taxation of Investment and Other Income

Dividends

The treaty provides reduced withholding tax rates on dividends paid by a company in one country to a resident of the other. The withholding tax is limited to 5% if the beneficial owner is a company that owns at least 10% of the voting power of the paying company. For all other dividend payments, the treaty caps the withholding tax at 15%. These reduced rates are a significant benefit, as without the treaty, such payments could be subject to withholding taxes as high as 30% in the U.S.

Interest

Interest arising in one country and paid to a resident of the other is taxable only in the recipient’s country of residence. This results in a 0% withholding tax rate on interest payments flowing between the two countries.

Royalties

Royalties arising in one country and beneficially owned by a resident of the other are taxable only in the country of residence, resulting in a 0% withholding tax at the source. Royalties include payments for the use of copyrights, patents, trademarks, and similar intellectual property.

Capital Gains

Gains from the sale of real property may be taxed by the country where the property is located. For gains from the sale of other types of property, such as stocks or bonds, the exclusive right to tax rests with the seller’s country of residence.

Claiming Treaty Benefits and Key Provisions

Relief from Double Taxation

The United States provides relief from double taxation primarily through the foreign tax credit. A U.S. citizen or resident can claim a credit against their U.S. income tax for taxes paid to Belgium on Belgian-source income. This credit ensures the total tax paid does not exceed the higher of the two countries’ rates.

Belgium primarily uses the exemption method for its residents. Under this method, income that may be taxed in the U.S. under the treaty is exempt from Belgian tax. Belgium may sometimes apply an exemption with progression, where the exempt income is still considered when determining the tax rate on the resident’s remaining income.

The Saving Clause

A standard feature of U.S. tax treaties is the Saving Clause, which allows the United States to tax its citizens and certain former citizens as if the treaty did not exist. This means a U.S. citizen residing in Belgium cannot use the treaty to reduce U.S. tax on their worldwide income. The U.S. instead relies on the foreign tax credit to prevent double taxation.

There are exceptions where the treaty overrides the Saving Clause, ensuring U.S. citizens can access certain benefits. Provisions not subject to the Saving Clause include the rules for Social Security payments, students and trainees, and the mutual agreement procedure for resolving disputes.

Treaty-Based Return Position Disclosure

Taxpayers who claim a treaty benefit that overrides or modifies U.S. tax law must often disclose this position to the IRS by filing Form 8833, Treaty-Based Return Position Disclosure. Filing is required when a treaty position reduces the taxpayer’s tax or results in a different treatment of an income item.

The form must be attached to the taxpayer’s income tax return for the year the position is taken. It requires the taxpayer to identify the specific treaty article relied upon and provide a brief summary of the facts and the benefit being claimed.