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Belgium and US sign new tax treaty and protocol

Belgium and the US signed, on 27 November 2006, a new tax treaty and protocol to replace the 1970 tax treaty currently in force. The new treaty has to be ratified by the two governments before it can enter into force.

The new treaty contains several modifications to provisions in the existing treaty. It eliminates withholding tax on some dividends and interest, which (combined with the absence of withholding tax on royalty payments) means that potentially no withholding tax will be imposed on passive investments. US and Belgian taxpayers, who hold investments in the other treaty country, may need to re-examine their international tax planning in light of the new treaty.

It also contains an extended and complicated limitation on benefits article to prevent treaty shopping and to ensure that only residents that satisfy the conditions of the provision enjoy treaty benefits. Like other recently concluded treaties by the US, the limitation on benefits article includes publicly traded, base erosion, derivative benefits and active business tests, as well as a competent authority determination provision.

The new treaty contains a specific provision in connection with hybrid entities. Under this provision, Belgium will grant an exemption for income derived from shares in a fiscally transparent entity in the US (such as a limited liability company), and which qualifies as dividend income under Belgian domestic tax law.

The treaty includes a mandatory arbitration provision through which the competent authorities are unable to resolve a dispute after two years or on the earliest date that the parties to the dispute agree not to disclose information received during the arbitration proceedings. The only other US treaty with a similar clause is the recent protocol to its German tax treaty.

The new treaty will generally be effective on 1 January of the year following ratification by both countries.

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