Rev. Rul. 59-85

Advice has been requested whether income taxes paid to France on income arising in that country, by a Belgian citizen who is a resident of the United States, may be credited against United States income taxes under the provisions of section 901(b)(3) of the Internal Revenue Code of 1954.

Section 901(b)(3) of the Internal Revenue Code of 1954 provides for the allowance of a credit for income taxes paid or accrued during the taxable year to any foreign country by an alien resident of the United States or an alien individual who is a bona fide resident of Puerto Rico during the entire taxable year, provided the foreign country of which the alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country.

Article XII (3) of the Income Tax Convention between the United States and Belgium, C.B. 1954-2, 626, allows a citizen of the United States who is residing in Belgium a credit against Belgium tax only with respect to income from sources within and taxed by the United States. It does not allow a credit for taxes paid on income derived from sources within any other foreign country.

Section 1.901-1(b)(2) of the regulations Under the 1954 Code reads as follows:

Taxes of foreign country other than one of which alien resident is citizen or subject. An alien resident of the United States may claim a credit for income taxes paid or accrued by him to a foreign country other than the one of which he is a citizen or subject if the country of which he is a citizen or subject either-

(i) Allows a credit to a United States citizen residing therein for income taxes paid or accrued by him to such other foreign country; or

(ii) In imposing its income taxes, exempts from taxation the income of a United States citizen residing therein from sources within such other foreign country.

Pursuant to the `Convention for the Prevention of Double Taxation and the Settlement of Certain Fiscal Questions' between France and Belgium, signed on May 16, 1931, impersonal direct taxes of the two countries are levied on some items of income by the country of source of income whereas other items of income are taxed by the country of the domicile of the recipient. By administrative agreement the Belgian complementary tax and the French progressive surtax are generally imposed only by the country in which the taxpayer is domiciled.

Under the tax convention and the administrative agreement certain items of income derived from sources within France by residents of Belgium are exempt from taxation by Frances and taxed by Belgium. Exemption from taxation by France of income derived from sources within France which is subject to taxation by Belgium is equivalent, however, neither to allowance by Belgium of credit for income taxes paid to France nor to exemption from taxation by Belgium of income taxed in France.

Accordingly, it is held that Belgium does not satisfy the similar credit requirement of section 901(b)(3) of the Internal Revenue Code of 1954 with respect to income taxes paid to France, and a Belgian citizen who is residing in the United States is not allowed a credit against his United States income tax for income taxes paid to France on income arising within that country.