Some US Citizens And Green Card Holders Resident In Belgium Are Excluded From Benefits Under The Tax Treaty Available To US Citizen Residents

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Prologue

I was recently alerted to a provision in the US Belgium Tax Treaty (a similar but not identical provision also appears in the US UK Tax Treaty – which I have explored in this earlier post.). Normally all US Citizens and Green Card holders are defined as “US Residents” under US tax treaties. The US Belgium Tax Treaty (and the US Uk Tax Treaty) contain an interesting exception to the general principle that US citizens and Green Card holders are “US Residents” under the Tax Treaty. Think of it as a “residency carve out”. The purpose of this post is to describe this “carve out” and explore the (some) practical implications of what this means. Interestingly it is one more example of how the US tax treatment of Americans abroad depends on their country of residence.

Just when you think the US tax treatment of Americans abroad couldn’t be worse, the US never ceases to amaze. Seriously, this is the tax treaty version of “Shock and Awe”! It demonstrates that any general discussion about tax treaties is, well just “general”. One must always understand the specific provisions of the specific treaty. Before, anybody gets overly upset, no need to worry. Even those US citizens who do get the benefits of the US Belgium tax treaty don’t (because of the “saving clause”) get much. Nevertheless, the US Belgium Tax Treaty affords a good opportunity to read tax treaties carefully. It also provides a good reminder that the “saving clause” excludes US citizens from most benefits of the tax treaty (even when US citizens meet the residency requirements of the treaty). Finally, this analysis reinforces how carefully tax treaties must be read. Does a provision talk about “citizens”, “nationals”, “residents” …?

The Readers Digest Version Of This Post

US citizens and Green Card holders are US tax residents wherever they live in the world. Most US tax treaties define citizens and Green Card holders as US tax residents. Yet, there are some treaties that “may” not define “US Persons Abroad” as “residents of the United States”. The treaties that “may not” define Green Card holders and citizens as “residents of the United States” include Belgium and the UK. It appears that Green Card holders are the biggest losers. That said, the Belgium and UK tax treaties demonstrate that “US Persons Abroad” may receive fewer tax treaty benefits than resident Americans. Significantly this means that there are certain US tax treaties that actually discriminate against US citizens and Green Card Holders who live outside the United States without a residential nexus to the United States.

Although perhaps enacted without considering the impact on “US Persons Abroad”, this demonstrates (yet again) how attempts to curb certain abuses create negative consequences for Americans abroad because and only because of citizenship taxation. We have seen these consequences in conjunction with the 877A Exit tax rules, the PFIC rules, Subpart F, the Transition Tax, GILTI and now “treaty shopping”.

Surely, this is one more example of the clear principle that US citizens abroad are subjected to a more punitive tax system than resident Americans.

It is absolutely essential that the United States end citizenship taxation and transition to residency based taxation that completely severs US citizenship from US tax residency..

For those who want to better understand this …

Background – The bottom line (before we get to the analysis) is that:

First, the tax treaty saving clause makes clear that regardless of anything the treaty might say, the US retains the right to impose worldwide taxation on US citizens (regardless of where they actually live and regardless of whether they the treaty defines them as tax residents of any country); and

Second, US citizens and Green Card holders who are tax residents of Belgium and have no connection to the United States are probably not “residents of the United States” (within the meaning of the treaty) and are therefore excluded from certain treaty benefits. In other words: some US citizens and Green Card holders receive certain treaty benefits and others do not.

Discrimination? How cool is that?

The Madness Explained – Following Alice in her “Adventures In Wonderland” – Six Parts …

Part I – The Phrasing Of The “Saving Clause” – US Citizens Presumptively Do NOT Benefit From The Treaty
Part II – Exceptions To The Saving Clause – Circumstances Under Which “Residents” (as determined under the treaty) And
US Citizens Are Entitled To Treaty Benefits
Part III – The Article 4 Residence Rules – Not All US Citizens Or Green Card Holders Meet The Test Of Being A “resident of the United States”!
Part IV – “Some” Practical Implications Of The US Citizen Or Green Card Holder NOT Being Treated As A “resident of the United States” Under The Article 4 Residency Clause
Part V – “Some” Examples Of Treaty Provisions That May Require That One Be a “resident of the United States”
Part VI – Some Concluding Thoughts/Observations and Prognostications

Part I – The Phrasing Of The “Saving Clause” – US Citizens Presumptively Do NOT Benefit From The Treaty

Paragraph 4 of Article 1 reads as follows (read carefully and pay attention to the structure of the sentence):

“4. Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens.”

JR Commentary: Let’s parse the language as follows by breaking it into two parts …

“4. Except to the extent provided in paragraph 5, this Convention shall not affect (1) the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and (2) its citizens.”

In other words this should be understood to be two ideas expressed in one sentence as follows:

(i) Except to the extent provided in paragraph 5, this Convention shall not affect (1) the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)).

(ii) Except to the extent provided in paragraph 5, this Convention shall not affect (1) the taxation by a Contracting State of its citizens.”

Converting this into two sentences makes it easier to see that:

– one can be a resident and not be a citizen (Green Card holder)
– one might not qualify as a resident but could be a citizen (Accidental American living in Belgium under the terms of the current US Belgium tax treaty)

The fact that an individual does NOT qualify as a “resident” doesn’t mean that an individual is not a “citizen”! Read carefully.

Notice that (1) the “tax residency” for the purposes of the treaty is determined under the rules in Article 4 of the treaty. The right to tax “citizens” (2) is NOT subject to residency determinations under Article 4. Therefore, at least in theory (because Green Card holders are not citizens), Green Card holders can use the treaty tie break provisions to sever tax residency with the United States (and US citizens cannot)! This is a good reason for Green Card holders to NOT naturalize as US citizens!

Note that this point is confirmed in the Treasury technical interpretation of the US Belgium tax treaty which includes:

The fact that a U.S. citizen who does not have close ties to the United States may not be treated as a U.S. resident under the Convention does not alter the application of the saving clause of paragraph 4 of Article 1 (General Scope) to that citizen.

For example, a U.S. citizen who pursuant to the “citizen/green card holder” exception in paragraph 2 is not considered to be a resident of the United States still is taxable in the United States on his worldwide income under the generally applicable rules of the Code.

The right to tax citizens is not impacted by paragraph 4 of Article 1. But the right to tax “non-citizen residents” appears to be impacted by residency determinations under Article 4. For the purposes of specific provisions of the treaty, “residency” is determined by Article 4.

Part II – Exceptions To The Saving Clause – Circumstances Under Which “Residents” (as determined under the treaty) And US Citizens Are Entitled To Treaty Benefits

Paragraph 4 (the “saving clause”) reads:

“4. Except to the extent provided in paragraph 5, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens.”

Paragraph 5 provides “carveouts” to the “saving clause”. In other words, if:

(i) An individual who qualifies as a “resident” under the Article 4 rules (we will read those rules in the next section) is entitled to the treaty benefits described in paragraph 5 of Article 5.

(ii) An individual who is a US citizen is entitled to the treaty benefits described in paragraph 5 of Article 5.

The benefits described in Paragraph 5 are:

5. The provisions of paragraph 4 shall not affect:

a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), paragraphs 1 b), 2, 5, 6 and 9 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), and Articles 22 (Relief from Double Taxation), 23 (Non-Discrimination), and 24 (Mutual Agreement Procedure); and

b) the benefits conferred by a Contracting State under paragraph 7 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), Articles 18 (Government Service), 19 (Students, Trainees, Teachers and Researchers), and 27(Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.

This means that “residents” as defined under the Article 4 rules AND US citizens will have the benefit of the above treaty provisions. The next question is which US citizens and Green Card holders qualify as “residents” under Article 4.

Part III – The Article 4 Residence Rules – Not All US Citizens Or Green Card Holders Meet The Test Of Being A “resident of the United States”!

Let’s read Article 4 with particular emphasis on Paragraphs 1 and 2 …

Article 4

RESIDENT

1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or of profits attributable to a permanent establishment in that State.

JR Commentary: Okay, US citizens and Green Card holders are presumptive “residents” under Article 4. But hold on. There is an exception on Paragraph 2 introduced by the words “only if”.

2. An individual who is a United States citizen or an alien admitted to the United States for permanent residence (a “green card” holder) is a resident of the United States only if the individual has a substantial presence, permanent home or habitual abode in the United States and if that individual is not a resident of a State other than Belgium for the purposes of a double taxation convention between that State and Belgium.

JR Commentary: Let’s break this down beginning with the words “only if” …

“only if (1) the individual has a substantial presence, permanent home or habitual abode in the United States AND (2) if that individual is not a resident of a State other than Belgium for the purposes of a double taxation convention between that State and Belgium.”

In order to qualify as a “resident” under Article 4, a US citizen or Green Card holders is required to have “a substantial presence, permanent home or habitual abode in the United States”. Many US citizens or Green Card holders who are “residents” of Belgium will NOT qualify as US residents under the US Belgium tax treaty and will NOT be entitled to certain benefits under that treaty! They will be specifically excluded from the benefits that require one to be a “resident of the United States”!


Can this really be true? Apparently the answer is YES. The Treasury interpretation of the US Belgium tax treaty provides the following commentary:

Under the exception of paragraph 2, a U.S. citizen or green card holder will be treated as a resident of the United States for purposes of the Convention, and, thereby entitled to treaty benefits, only if he meets two conditions. First, he must have a substantial presence (see section 7701(b)(3)), permanent home or habitual abode in the United States. This rule requires that the U.S. citizen or green card holder have a reasonably strong economic nexus with the United States. Second, he must not be treated as a resident of a state other than Belgium under any treaty between Belgium and a third state. This rule prevents a U.S. citizen or green card holder who is a resident of a country other than the United States or Belgium from choosing the benefits of the Convention over those provided by the treaty between Belgium and his country of residence. If the U.S. citizen or green card holder’s country of residence does not have a treaty with the Belgium, however, then he will be treated as a resident of the United States as long as he meets the first requirement of an economic nexus. If such a person is a resident of both the United States and Belgium, whether or not he is to be treated as a resident of the United States for purposes of the Convention is determined by the tie-breaker rules of paragraph 4.

Thus, for example, an individual resident of the United Kingdom who is a U.S. citizen by birth, or who is a United Kingdom citizen and holds a U.S. green card, but who, in either case, has never lived in the United States, would not be entitled to benefits under the Convention. However, a U.S. citizen who is transferred to the United Kingdom for two years would be entitled to benefits under the Convention if he maintains a permanent home or habitual abode in the United States and is not a resident of the United Kingdom for purposes of the Belgium-U.K. tax treaty. If he were treated as a resident of the United Kingdom under the Belgium-U.K. tax treaty, he could claim only the benefits of that treaty, even if the Convention would provide greater benefits.

The fact that a U.S. citizen who does not have close ties to the United States may not be treated as a U.S. resident under the Convention does not alter the application of the saving clause of paragraph 4 of Article 1 (General Scope) to that citizen. For example, a U.S. citizen who pursuant to the “citizen/green card holder” exception in paragraph 2 is not considered to be a resident of the United States still is taxable in the United States on his worldwide income under the generally applicable rules of the Code.

The technical interpretation explains the rationale for the rule in paragraph 2 as follows:

This rule prevents a U.S. citizen or green card holder who is a resident of a country other than the United States or Belgium from choosing the benefits of the Convention over those provided by the treaty between Belgium and his country of residence.

The purpose was to prevent an individual from finding the most favorable treaty AKA “treaty shopping”.

Congressional Commentary When The US Belgium Treaty Was Signed

The following 2007 commentary from the “Senate Consideration Of Treaty Document 110-3” confirms that interpretation:

The proposed Treaty also strengthens the Convention’s provisions preventing so-called treaty shopping, which is the inappropriate use of a tax treaty by third-country residents, and applies particularly strong anti-treaty shopping rules in the case of a Belgian company claiming exemption of taxation on dividends from an 80-percent-owned U.S. corporation.

Part IV – “Some” Practical Implications Of The US Citizen Or Green Card Holder NOT Being Treated As A “resident of the United States” Under The Article 4 Residency Clause

Green Card Holders And The Ability To Sever Tax Residency Through A Tie Break Provision

Paragraph 4 of Article 4 of the US Belgium Tax Treaty contains a typical treaty tie break provision. It begins with the following language:

4. Where, by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows:

The Green Card holder must be a “resident of BOTH contracting states, including the United States” to be eligible to use this provision. Note that the Green Card holder must be a resident of the United States under the definition in paragraph 1 to be eligible to use the treaty tie break. Hence, the Paragraph 2 “carve out” should not apply.

Both Green Card Holders and US citizens may be ineligible (even if an exception to the “saving clause”) to use a treaty provision that is dependent on being a “resident of the United States”


Part V – “Some” Examples Of Treaty Provisions That May Require One Be a “resident of the United States”

Example: Paragraph 2 of Article 17 of the US Belgium Tax Treaty. (Notice that paragraph also qualifies as an exception to the “saving clause”.)

2. Notwithstanding the provisions of paragraph 1, payments made by a Contracting State under provisions of the social security or similar legislation of that State to a resident of the
other Contracting State or to a citizen of the United States shall be taxable only in the first-mentioned State.

Hypothetical: A US Green Card holder does NOT maintain a sufficient nexus to the United States to qualify as a “resident of the United States” under the US Belgium tax treaty. He receives a Belgium Social Security type payment. He does NOT get the benefit of paragraph 2 of Article 17. This is because Belgium is paying the Social Security payment to a person who is NOT a “resident of the United States”. This means that the United States is permitted to tax the Belgian Social Security payment under the Internal Revenue Code. If the Green Card holder was a “resident of the United States” under Article 4 then he would NOT be taxable on the Social Security payment from Belgium.

Part VI – Some Concluding Thoughts/Observations and Prognostications

US citizens and Green Card holders are US tax residents wherever they live in the world. Most US tax treaties define citizens and Green Card holders as US tax residents. Yet, there are some treaties that “may” not define “US Persons Abroad” as “residents of the United States”. The treaties that “may not” define Green Card holders and citizens as “residents of the United States” include Belgium and the UK. It appears that Green Card holders are the biggest losers. That said, the Belgium and UK tax treaties demonstrate that “US Persons Abroad” may receive fewer tax treaty benefits than resident Americans. Significantly this means that there are certain US tax treaties that actually discriminate against US citizens and Green Card Holders who live outside the United States without a residential nexus to the United States.

Although perhaps enacted without considering the impact on “US Persons Abroad”, this demonstrates (yet again) how attempts to curb certain abuses create negative consequences for Americans abroad because and only because of citizenship taxation. We have seen these consequences in conjunction with the 877A Exit tax rules, the PFIC rules, Subpart F, the Transition Tax, GILTI and now “treaty shopping”.

Surely, this is one more example of the clear principle that US citizens abroad are subjected to a more punitive tax system than resident Americans.

It is absolutely essential that the United States end citizenship taxation and transition to residency based taxation that completely severs US citizenship from US tax residency..

John Richardson – Follow me on Twitter @Expatriationlaw

One thought on “Some US Citizens And Green Card Holders Resident In Belgium Are Excluded From Benefits Under The Tax Treaty Available To US Citizen Residents”

  1. Margaret Conrad

    No wonder so many Americans living abroad are giving up their US citizenship. It is a noose around your neck.

    Reply ↓

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