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Marc Quaghebeur, of Vandendijk & Partners continues his overview of the Belgium-US Double Tax Agreement with a look at directors’ fees and pension and maintenance payments.(Part III to follow).
 Marc Quaghebeur
Under the old treaty, directors’ fees could only be taxed in the State of residence of the paying company insofar as the director's fees were treated as a distribution of profits. This reflected old legislation which was abolished in 1987. Directors’ fees are generally deductible for the Belgian company paying the fees and were, therefore, treated as 'income not expressly mentioned' and taxed in the State of residence of the Director while the other Contracting State could also tax the income if it was derived from sources within that State.
This condition is now abandoned and directors’ fees may be taxed in the State of residence of the company paying the fees and other compensation subject, however, to the services being rendered in that State. This Article is subject to the saving clause of Article 1 (4): the United States may tax the full remuneration which a U.S. citizen residing in Belgium derives as a director of a U.S. corporation. The new Protocol clarifies that remuneration in respect of day-to-day functions of a managerial or technical, commercial or financial nature by a director or by a partner in a company other than a company with share capital, shall be taxable in accordance with the provisions of Article 14 (Income from Employment), to the extent that the company is a Belgian company. However, a partner's share of the income of an entity that is treated as fiscally transparent, such as a U.S. partnership, shall be treated as business income (Article 7). Pensions and Maintenance payments (Article 17) Pensions The treaty confirms the principle that pensions and other similar remuneration in consideration of past employment are taxable only in the State of residence of the beneficiary, with the exception of social security pensions. The treaty also provides for a number of measures to eliminate discontinuities regarding the deductibility of pension contributions in order to remove barriers to the free movement of personal services relating to the deductibility of pension contributions, The term 'pensions and other similar remuneration' includes both periodic and single sum payments. The old treaty did not cover single sum payments, which could, therefore, be taxed in both countries. The Protocol clarifies that the term ‘other similar remuneration' refers to United States tier 1 Railroad Retirement benefits. The term encompasses various qualified plans ; if these U.S. pensions are exempt for U.S residents, Belgium has to grant the same exemption (and vice versa). Alimony paid shall be taxable in the state of residence, it being understood that these are periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, which payments are taxable to the recipient under the laws of the State of which he is a resident. Remarkably, though, maintenance payments for child support are taxable in the country of residence of the payer. The U.S. Model provides that it shall be tax exempt in both countries. Pension funds Apart from the zero withholding tax rate on dividends mentioned in the first article, pension funds are entitled to some other benefits. Income earned by a pension fund in one State may not be taxed as income of an individual residing in the other State, unless it is paid out from the pension fund to – or for the benefit of – that individual. Transfers between pension funds in the same State cannot be taxed. The treaty provides for tax-free rollover of pension contributions to qualifying plans in the same Contracting State, but not for cross border transfers. Cross border contributions to a pension fundIf an (employed or self employed) person pays cross border contributions to a pension plan in one State and works in another, these are tax deductible or (in case they are paid on his behalf) excluded in computing his taxable income. In this respect it is irrelevant whether the individual takes up residence in the State where he works. However, that State cannot be obliged to give more relief than it grants its residents for respectively a pension plan established in the U.S., or a pension plan recognised for tax purposes in Belgium. The person must have been participating in the fund before going to work in the other State, he must not have been working in the other State for more than ten years, and the competent authority of the other State must have accepted the pension plan. U.S. relief for contributions to Belgian pension fundsSpecifically for a U.S. citizen working and resident in Belgium, the treaty deals with contributions to a Belgian pension fund (or a fund in a comparable third State), provided that his income from that employment is taxable in Belgium and the contribution is borne by a Belgian employer or a Belgian permanent establishment of the employer. First his contributions to the pension plan during his employment in Belgium that are attributable to the employment, shall be deductible (or excludible) in computing his taxable income in the United States. Furthermore, any benefits accrued under the pension plan, as well as his employer's contributions, during and attributable to the employment, shall not be treated as part of his taxable income in computing his U.S. taxable income. This U.S. tax benefit shall not exceed the lesser of either the corresponding relief in the U.S. or the amount of the contributions or benefits that qualify for tax relief in Belgium. Furthermore, for determining whether the individual has exceeded the annual limitation on contributions to an individual retirement account, the U.S. can take account of the contributions to a Belgian pension fund. Finally, for these tax benefits to apply, Belgian pension funds must be approved by the U.S. Treasury. Pension funds in a third State may be assimilated to a U.S. or Belgian pension fund if they are established in a Member State of the EEA or NAFTA or Switzerland, provided these countries grant comparable favourable treatment for contributions to a Belgian or U.S. pension fund that is a resident of the Contracting State and if it has an information exchange provision with the Contracting State that is providing benefits for cross border contributions to a pension fund. Other income (Article 20)Under the old treaty 'income not expressly mentioned' was only taxable in the State of residence, but the other Contracting State may also tax that income if it is derived from sources within that State. The new treaty eliminates the right for the other Contracting State to tax that income. In the final article, we will deal with the tightened Limitation-on-Benefit provisions and the new information exchange provisions.
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