How Does the US Belgium Tax Treaty Work?

The United States and Belgium maintain a tax treaty to prevent individuals and companies with financial ties to both countries from paying tax on the same income in both jurisdictions. Signed in 2006, the agreement establishes rules that determine which country has the primary right to tax different types of income. The treaty also provides procedures for resolving tax disputes and promotes cooperation between the U.S. Internal Revenue Service (IRS) and Belgian tax authorities to combat tax evasion. It covers U.S. federal income taxes and various personal and corporate income taxes in Belgium.

Determining Tax Residency Under the Treaty

Applying the U.S.-Belgium tax treaty begins with determining a person’s tax residency, which dictates which country has the primary right to tax their worldwide income. A person is considered a resident of a state if they are liable for tax there based on domicile, residence, or a similar criterion. When an individual qualifies as a resident of both countries under their respective domestic laws, they are a “dual resident.”

The treaty provides a series of “tie-breaker” rules to assign residency to a single country. The first test is whether the individual has a permanent home available in only one of the countries. If a permanent home is available in both, the next test is the “center of vital interests,” which examines where the individual’s personal and economic relations are closer.

Should the center of vital interests be indeterminate, residency is assigned to the country of “habitual abode,” where the individual spends more time. If residency cannot be determined by this test, the final tie-breaker is citizenship. For entities like corporations, residency is determined by the place of management or incorporation.

Taxation of Specific Income Types

Income from Real Property

Income a resident of one country derives from real property in the other country may be taxed where the property is located. For an American resident who owns a rental apartment in Brussels, Belgium has the primary right to tax the rental income. The definition of real property is determined by the law of the country where it is situated.

Business Profits

The business profits of an enterprise are taxable only in its country of residence unless it operates through a “permanent establishment” in the other country. A permanent establishment is a fixed place of business, such as an office, branch, or factory. If a U.S. company has a permanent establishment in Belgium, Belgium may tax the profits attributable to it.

Dividends

Dividends paid by a company in one country to a resident of the other may be taxed in the recipient’s country. The source country may also tax the dividends, but the rate is limited to 15%. A lower 5% rate applies if the owner is a company holding at least 10% of the voting stock, and a 0% rate may apply for qualifying parent companies.

Interest

Interest arising in one country and paid to a resident of the other is generally exempt from tax in the source country. For example, interest a Belgian resident receives from a U.S. bank is not subject to U.S. withholding tax. However, certain types of interest may still be subject to a 15% withholding tax in the source country.

Royalties

Royalties arising in one country and owned by a resident of the other are taxable only in the recipient’s country of residence. This applies to payments for copyrights, patents, trademarks, and similar intellectual property. For instance, royalties a U.S. author receives from a Belgian publisher are exempt from Belgian tax and taxed only in the U.S.

Capital Gains

Gains from selling real property may be taxed where the property is located. Gains from selling movable property that is part of a permanent establishment may be taxed where the establishment is situated. For most other capital gains, such as from selling stocks, the right to tax belongs to the seller’s country of residence.

Income from Employment

Income from employment is taxed in the country where the work is performed. However, the income is taxable only in the individual’s country of residence if three conditions are met. The recipient is present in the other country for 183 days or less in a 12-month period, the employer is not a resident of the other country, and the pay is not borne by a permanent establishment in the other country.

Pensions and Annuities

Pensions and similar remuneration for past employment are taxable only in the recipient’s country of residence. A pension a U.S. resident receives from a former Belgian employer is subject to tax only in the United States. This rule does not apply to social security payments.

Social Security Payments

Social Security payments and other public pensions paid by one country to a resident of the other are taxable only in the country making the payment. Therefore, U.S. Social Security benefits paid to a resident of Belgium are taxable only by the United States. This is an exception to the general rule for pensions.

Government Service Remuneration

Pay, other than a pension, from one of the countries for government service is taxable only in that country. For example, the salary of a U.S. diplomat in Brussels is subject only to U.S. tax. This rule does not apply if the services relate to a business carried on by the government.

Key Treaty Provisions

The Savings Clause

A “Savings Clause” allows both countries to tax their citizens and residents as if the treaty did not exist. For the United States, this means it retains the right to tax its citizens on their worldwide income, regardless of where they reside. A U.S. citizen living in Belgium cannot use the treaty to avoid U.S. tax on income that is otherwise taxable under U.S. law.

The Savings Clause has exceptions that preserve certain treaty benefits. For example, the provisions for relief from double taxation remain in effect, allowing a U.S. citizen to claim a foreign tax credit for Belgian taxes. Other exceptions include the rules for Social Security and child support payments, which override the Savings Clause.

Relief from Double Taxation

The treaty provides methods to relieve double taxation. The United States uses the foreign tax credit, allowing a U.S. resident or citizen to credit income taxes paid to Belgium against their U.S. tax liability on foreign-source income. This credit is calculated subject to U.S. law, as detailed on IRS Form 1116.

Belgium primarily uses the “exemption with progression” method for its residents. This means income taxed in the U.S. is exempt from Belgian tax, but Belgium may consider that income when setting the tax rate on the resident’s other income. For certain income like dividends and interest, Belgium provides a foreign tax credit.

Limitation on Benefits

The treaty includes a “Limitation on Benefits” (LOB) article to prevent “treaty shopping.” This occurs when a resident of a third country creates an entity in the U.S. or Belgium to gain treaty benefits. The LOB article contains objective tests a resident must meet to qualify for these benefits, such as being a publicly traded company or meeting specific ownership tests, ensuring a substantive connection to the country of residence.

Claiming Treaty Benefits

Individuals and corporations claiming benefits under the U.S.-Belgium tax treaty must disclose their position to the IRS if a treaty provision is used to reduce tax. Failure to disclose this can lead to penalties. This disclosure is made using IRS Form 8833, Treaty-Based Return Position Disclosure.

On the form, the taxpayer must cite the specific treaty article that justifies their position and provide a summary of the facts supporting the claim. The completed Form 8833 must be attached to the taxpayer’s U.S. tax return for the year the position is taken. For individuals, this is Form 1040, and for corporations, it is Form 1120.