On 21 June 2023, Belgium and the Netherlands signed a new bilateral tax treaty to replace the 2001 treaty currently in effect between the two countries.
The changes will impact both individuals and companies with activities in Belgium and/or the Netherlands. That being said, the new tax treaty does not include any rules for the taxation of cross-border remote work. However, we understand that negotiations on this issue are ongoing.
A memorandum of understanding is currently being prepared, following which the treaty will be submitted to the parliaments of both countries for ratification. The new treaty cannot enter into force before it has been approved by both parliaments and each country notifies the other that its domestic ratification process is complete. Consequently, the new treaty is expected to apply as from 1 January 2025, at the earliest.
This alert addresses the most significant aspects of the new treaty from a corporate tax perspective, including provisions relating to the tie breaker rule; permanent establishment (PEs); withholding taxes; relief of double taxation; and the avoidance of treaty abuse.
Despite the fact that the new treaty is based on the 2017 OECD Model Tax Convention (which provides for any dual residence situation to be resolved through a mutual agreement procedure (MAP) between the two contracting states), the tie breaker rule for dual resident companies in article 4 para. 5 still gives prevalence to the country where the place of effective management is located.
Article 5 of the new treaty contains a PE definition in accordance with the changes proposed by BEPS action 7. Two of the most important changes in this respect are the new agency PE definition in para. 9 (intended to prevent the artificial avoidance of a PE by means of, for example, commissionaire arrangements) and the anti-fragmentation rule in para. 8 (that broadly permits an aggregated PE assessment where activities in a country are “fragmented” between group companies to meet the exceptions for activities that are preparatory or auxiliary). Whereas the anti-fragmentation rule is already in effect under the 2001 treaty as a result of the application of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI); this is not the case with respect to the new agency PE definition.
Further changes to the new PE definition include the following:
As far as the exception for preparatory or auxiliary activities is concerned (para. 7), it is noteworthy that the Netherlands and Belgium have now adopted the MLI primary rule, i.e. all the activities listed in the subparagraphs of article 5 §7 will be exempt from PE status only if they meet the “preparatory or auxiliary” test. Hence, once the new treaty is in effect, those activities will no longer be considered to have a preparatory or auxiliary character per se.
The provision with respect to offshore activities (i.e. article 24 of the current applicable treaty) has now been included in paras. 4 to 6 of article 5 of the new treaty and has been broadened to cover in principle all activities which are carried on offshore (hence, no reference anymore to the exploration or exploitation of the seabed and subsoil and their natural resources). However, the new treaty specifies that offshore activities do not include preparatory or auxiliary activities, towing or anchoring by ships and the carriage of supplies or personnel by ships or aircraft in international traffic.
The new PE definition also contains, in para. 6, the MLI provision on splitting-up of contracts. This means that for determining the duration of a building site or construction or installation project, activities carried out by an enterprise of a contracting state in the other contracting state at a building site or construction or installation project for periods exceeding 30 days without exceeding 12 months are combined with connected activities carried on at the same building site or construction or installation project during different periods of time exceeding 30 days by one or more closely related enterprises. The same rule applies to offshore activities, albeit without any lower limit time duration requirement.
Finally, the provision regarding profit allocation to PEs has been updated as well. Article 7 of the new treaty is a duplicate of article 7 of the 2017 OECD Model Tax Convention, which is based entirely on the 2010 OECD Report on the Attribution of Profits to Permanent Establishments.
This implies a more outspoken reference to the independency fiction of the PE by adding to the text of para. 2 that the profits of the PE are the profits it might be expected to make, “in particular in its dealings with other parts of the enterprise”, as if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, “taking into account the functions performed, assets used and risks assumed by the enterprise through the permanent establishment and through the other parts of the enterprise”. The amount of profits is relevant for both the PE state and the residence state of the company, as the same amount should be taken into consideration for the application of article 7 and article 20 of the new treaty containing provisions for the taxation of business profits and relief of double taxation, respectively.
Another novelty is that article 7 para. 3 of the new treaty now specifies that if a correction of the PE profit by one of the states would be made on the basis of the principles laid down in para. 2, the other contracting state should provide for a corresponding adjustment of the PE profit (to avoid double taxation). If needed, the competent authorities of the states should engage in the MAP to fully eliminate any resulting double taxation.
Under the new treaty, there are a few important changes to the maximum rates of withholding taxes:
Other notable changes related to dividends and interest include:
A new provision is included in the treaty stating that if a dividend or interest is paid by a company that under Dutch domestic law is resident in the Netherlands, to an individual who (together with the payer company) has emigrated from the Netherlands to Belgium and who, upon emigration, has been (provisionally) taxed on capital gains on shares and similar assets in and receivables from a company, the Netherlands may apply withholding tax on the dividend or interest provided the assessment on the capital gains is still outstanding. As far as dividends are concerned, article 10, paragraph 9 further stipulates that in such a case, the maximum withholding tax rate is equal to one-half of the default Belgian domestic withholding tax rate on dividends paid to an individual (i.e., currently 30% x ½ = 15%).
Article 11 of the first protocol to the treaty clarifies that the income derived from the liquidation of a company or from share buy-backs will be treated as dividends.
Article 20 of the new treaty includes some amendments with respect to the method of eliminating double taxation.
From a Dutch perspective, the so-called “switch-over clause” is added. The effect of the clause is that where Belgium, in applying the treaty, grants an exemption for certain income, the Netherlands will no longer be required to grant its residents an exemption from tax on that income but only a credit. The switch-over could, in practice, become relevant for example where there is a different interpretation between the two treaty partners regarding the taxing rights over severance payments to cross-border workers.
From a Belgian perspective, the exemption method is complemented with a “subject to tax requirement,” meaning that the exemption will be granted only if it can be demonstrated that the Netherlands effectively taxes the relevant income. In additions, for the exemption of dividends received by a Belgian company from its Dutch subsidiary, the new treaty provides that the conditions of Belgian domestic tax law apply. It is also foreseen that Belgium will not grant an exemption for profits derived in other taxable periods of a PE where losses incurred by a Dutch PE of a Belgian company have previously been deducted from the profits of the Belgian company to the extent that those profits are also exempt from tax in the Netherlands by deduction of the losses at the level of the PE.
For the sake of completeness, it should be noted that the new treaty does not contain an arbitration clause.
According to article 21, the entitlement to treaty benefits will be denied if one of the principal purposes of an arrangement or construction was to obtain those benefits, unless granting the benefits is in line with the object and purpose of the relevant treaty provision. The inclusion of this provision is not unexpected as the principal purpose test was already in effect under the current treaty as a result of the application of the MLI.
The first protocol to the new treaty contains instructions on interpreting the treaty provisions.
Firstly, it provides that for interpretation purposes, in principle, the version of the commentary to the OECD model convention current at the time of treaty application should be used, rather than the version current at the date the treaty is concluded (i.e. a dynamic rather than a static interpretation).
Secondly, it is indicated that the treaty will not override the right of the states to effectuate their domestic anti-abuse and anti-avoidance measures.
Finally, it is explicitly mentioned that the new treaty does not prevent the application of Council Directive (EU) 2022/2523 of 14 December 2022 on the global minimum tax.
Tim is Partner in Deloitte Legal's Tax Advisory team of lawyers. His main focus is on corporate international tax, although he is also keen on handling real estate matters and registration duties as well. The tax advisory team headed by Tim has extensive expertise as a general tax advisor for numerous companies thereby assisting them with their (inbound) investments, reorganisations, holding activities and financing structures. They have also considerable experience in handling ruling requests with the Belgian tax administration. Tim has published numerous articles that span the legal domain of fiscal matters, touching upon subjects that include business restructurings, transfer pricing, permanent establishments, tax planning restraints and registration duties.