Rev. Rul. 74-526

Advice has been requested as to whether the prepayment (PRECOMPTE mobilier) of the Belgian Income Tax on Nonresidents (L'IMPOT des NONRESIDENTS), that is imposed on Belgian-source dividends paid to a person described in section 901(b) of the Internal Revenue Code of 1954, and that was enacted by Article 153 of the Belgian tax law of November 20, 1962, (effective January 1, 1963), and as amended, may be claimed as a direct credit against that person's United States income tax.

Subject to section 904 of the Code, section 901 allows certain persons to claim a credit against their United States income tax for foreign income, war profits, and excess profits taxes paid or accrued, or deemed to have been paid or accrued within the taxable year. In order for a tax paid to a foreign country to qualify as an income tax, however, it must be shown that the tax imposed by the foreign country is a tax on income within the United States concept thereof, or a tax in lieu of such a tax. Biddle v. Commissioner, 302 U.S. 573, 578 (1938), 1938-1 C.B. 309.

Section 904(a) of the Code provides for alternate limitations on the amount of foreign tax that will be allowed as such a credit, that is, (1) a per-country limitation that restricts the amount of the credit to that portion of a taxpayer's Federal income tax that taxable income from sources within any foreign country to which the foreign taxes were paid, bears to his total taxable income, or (2) an overall limitation that restricts the amount of the credit to that portion of the taxpayer's Federal income tax that his taxable income from sources without the United States bears to his total taxable income.

In relevant part Article I(1)(b)(iv-v) of the United States-Belgium Income Tax Convention, T.D. 6160, 1956-1 C.B. 815, as amended by the Protocol brought into force August 29, 1966, 1967-1 C.B. 421, (hereinafter referred to as "Old Convention") and made retroactively applicable to the "PRECOMPTE mobilier" imposed on dividends distributed on or after January 1, 1963, identifies the "L'IMPOT des NONRESIDENTS" and the "PRECOMPTE mobilier" as categories of Belgian taxes that are included within the terms of such convention. In relevant part Article 2(1)(b)(iv-v) of the new United States-Belgium Income Tax Convention 1973-1 C.B. 619, that is effective for taxable years beginning on or after January 1, 1971 (hereinafter referred to as "New Convention"), contains an identical enumeration of categories. Moreover, both Articles I(2) of the Old Convention and 2(2) of the New Convention provide, in effect, that the respective Conventions shall apply to any tax of a substantially similar character that may be subsequently imposed after the signature date of such conventions.

In relevant part Articles XII(2) of the Old Convention and 23(2) of the New Convention provide, in effect, that subject to the provisions of United States law applicable to the taxable year, the United States shall allow as a credit against Federal income tax the appropriate amount of tax paid to Belgium. Those articles further provide in effect that the amount of the credit shall not exceed that portion of the taxpayer's United States tax that his taxable income from Belgian sources bears to his total taxable income.

Article XX(1) of the Old Convention provides, in effect, that the provisions of Article XII(2) of that convention shall not be construed to restrict in any manner any credit accorded by the laws of the United States in determining the tax imposed by the United States. Article 28(2) of the New Convention sets forth a similar savings paragraph with respect to Article 23(2) of that convention.

The "L'IMPOT des NONRESIDENTS" is a tax imposed on the Belgian-source income, including dividends, of nonresidents of item 4, of Article 1 of the Belgian Income Tax Code as enacted by the Belgian tax law of November 20, 1962, and as amended. The "PRECOMPTE mobilier" is a prepayment of the "L'IMPOT des NONRESIDENTS". Under Belgian law the payor of the dividends is liable solely for the collection of the "PRECOMPTE mobilier" by withholding it from dividends paid to its shareholders. The tax is levied only on the distribution of the dividends and not when the income out of which the dividends were paid is accrued or received by the payor. The tax is imposed on the shareholder. Wisconsin Gas & Electric Co. v. United States, 322 U.S. 526, 529 (1944), 1944 C.B. 522.

Accordingly, it is held that the "L'IMPOT des NONRESIDENTS" as enacted by the Law of November 20, 1962, and as amended, is an income tax within the United States concept thereof. It is further held that the "PRECOMPTE mobilier" which is imposed on dividends and which is a prepayment of the "L'IMPOT des NONRESIDENTS", is also an income tax paid by the recipient of the dividend for the entire period from January 1, 1963, through December 31, 1970. Therefore, it may be claimed as a direct credit against the recipient's Federal income tax pursuant to Articles I(1)(b) and XII(2) of the Old Convention. Moreover, to the extent that the "PRECOMPTE mobilier" as constituted subsequent to January 1, 1971, remains an income tax paid by the recipient of the dividend within the United States concept thereof, it likewise may be claimed as a direct credit against the recipient's Federal income tax, pursuant to Articles 2(1)(b) and 23(2) of the New Convention.

It should be noted that a taxpayer subject to the Belgian "PRECOMPTE mobilier" who chooses to apply the per-country limitation provided in Articles XII(2) of the Old Convention and 23(2) of the New Convention when said taxpayer could have elected the overall limitation contained in section 904(a)(2) of the Code, with respect to the Belgian "PRECOMPTE mobilier," must apply the per-country limitation of section 904(a)(1) with respect to creditable taxes paid to foreign countries other than Belgium. Also, a taxpayer who had previously elected the overall limitation contained in section 904(a)(2) and desires to change to the per-country limitation provided in Articles XII(2) of the Old Convention and 23(2) of the New Convention and section 904(a)(1) must secure the consent of the Commissioner of Internal Revenue as provided in section 904(b).

For taxable years prior to January 1, 1963, see Rev. Rul. 74-525, page 411, of this Bulletin, which holds that the Belgian "taxe mobiliere" that was in effect prior to January 1, 1963, may be claimed as a direct credit against United States income tax, subject to the limitations of section 904 of the Code, by the recipient of dividend income.