New bilateral tax treaty between the Netherlands and Belgium | Deloitte Nederland

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New bilateral tax treaty between the Netherlands and Belgium

The Netherlands and Belgium have signed a new bilateral tax treaty. The new treaty will replace the current treaty and features changes that are relevant for both companies and individuals with activities in Belgium and/or the Netherlands.

3 July 2023

Bilateral tax treaty between the Netherlands and Belgium updated

On 21 June 2023, the Netherlands and Belgium signed a new bilateral tax treaty. The treaty features multiple changes, the most important of which will be addressed below. These changes may impact both individuals and companies with activities in Belgium and/or the Netherlands.

Scope of application

Article 2 of the treaty reduces the scope of application as the wealth tax is no longer in scope. This entails that from a Belgian tax perspective, assuming the tax on securities accounts (TOSA) qualifies as a wealth tax, a Dutch tax resident having Belgian securities accounts held with a Belgian bank could no longer invoke an exemption based on the double tax treaty (to the extent the conditions to apply the TOSA are met).

Tie breaker rule for dual resident companies

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 MAP between the two contracting states), the tie breaker rule for dual resident companies in article 4(5) still gives prevalence to the country where the place of effective management is located.

Permanent establishment ("PE")

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 article 5(9) (intended to prevent the artificial avoidance of a PE by means of, for example, commission¬aire arrangements) and the anti-fragmentation rule in article 5(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 latter was already in effect under the current treaty because of the MLI, this was not the case with respect to the new agency PE definition.

The new PE definition also includes other relevant changes.

Preparatory or auxiliary activities
As far as the exception for preparatory or auxiliary activities is concerned (article 5(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 only be exempt from PE status if these meet the “preparatory or auxiliary” test. Hence, those activities will going forward no longer be considered to have a preparatory or auxiliary character per se.

Offshore activities
The provision with respect to offshore activities (article 24 of the current applicable treaty) has now been included in article 5(4-6) of the new treaty and has been broadened to cover in principle all activities carried on offshore (hence, no longer any reference 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.

Anti-abuse rule
Paragraph 6 of the new PE definition also contains the MLI provision on the splitting-up of contracts. This means the following for determining the duration of a building site or construction or installation project.
If an enterprise of a contracting state carries out activities in the other contracting state at a building site or construction or installation project for periods exceeding 30 days without exceeding twelve months, these 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 (30 days minimum) requirement.

Profit allocation
Finally, the provision re profit allocation to PEs has been updated as well. Indeed, article 7 in the new treaty is a duplicate of article 7 of the 2017 OECD Model Tax Convention, which is totally grounded in 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”.

What’s more, it should be noted that this 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 (i.e. the provisions regarding the taxation of business profits and relief of double taxation, respectively).

Another novelty is that the third paragraph of article 7 of the new treaty now specifies that if under the principles laid down in paragraph 2 a correction of the PE profit by one of the states were to be made, 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 double taxation resulting from this new provision.

Withholding taxes

Under the new treaty, there are a few important changes to the maximum rates of withholding taxes:

  • 15% on dividends (which has not changed), but 0% if the beneficial owner is a company which holds directly at least 10% of the capital of the dividend distributing company for more than 365 days (whereas this is 5% under the current applicable treaty)
  • 0% on interest (whereas this is in principle 10% under the current applicable treaty and 0% on an exception basis)
  • 0% on royalties (which has not changed)

Some other relevant changes are equally noteworthy.

Exit tax provision for dividends and interest
The treaty includes a new provision that provides that if a company pays a dividend or interest to an individual who (together with the company) has emigrated from the Netherlands to Belgium and who has been taxed (provisionally) on capital gains upon emigration, the Netherlands is still eligible to apply withholding tax. This is subject to the condition that the capital gains assessment is still outstanding. As far as dividends are concerned, article 10(9) further stipulates that in such a case the maximum rate is equal to half the regular (Belgian) withholding tax rate (i.e. 30% * ½ = 15%).

Liquidation bonus
Article 11 of the first protocol to the treaty clarifies that the income stemming from the liquidation of a company or from share buy-backs will be treated as dividends.

Professors, artists and athletes

Since the specific provisions featured in the current treaty regarding the remunerations earned by professors, artists and athletes, are not included in the new treaty, the right to levy tax on these items of income will now be governed by the regular provision on wage from employment (article 14) or the provision on profit (article 7), and also possibly by the provision on governmental functions (article 17), for instance if it concerns a state-employed professor.

Company officers

Article 15 of the treaty provides that the remuneration received by a resident of a state in its capacity of a member of management board or supervisory board (or a similar organ) of a company in the other state may be taxed in the state where the company is established. However, in case the board member also receives a remuneration in another capacity than mentioned above (e.g. daily management), this remuneration may be taxed in accordance with the regular provision on wage from employment. This is an important change compared to the current treaty, that stipulates that executive directors are taxable on their remuneration for daily management in the country where the company is established. Going forward such remuneration will in principle need to be split between Belgium and the Netherlands based on the physical presence in both countries.

Compensation rule for stock options

Article 23 of the new treaty maintains the compensation rule for Dutch cross-border workers. Under this rule, if the total Belgian-Dutch taxes paid by a resident of the Netherlands exceeds the amount that would have been paid in a 100% Dutch situation, the difference will be reimbursed.

The new treaty now provides for an exception regarding income from stock options, when stock options are taxed in Belgium in a different calendar year than in the Netherlands.

So, if stock options are taxed at grant in Belgium (under the stock option law) and taxed in The Netherlands at exercise or when the shares become tradeable, the Netherlands will not consider the stock options when applying the compensation rule.

Relief of double taxation

As far as article 20 of the new treaty is concerned, a few changes have been included on how to eliminate double taxation.

From a Dutch perspective, the so-called 'switch-over clause' has been added. If Belgium, in applying the treaty, were to grant an exemption for the income at stake, under this clause the Netherlands would no longer have to grant to its residents an exemption. A credit would then suffice. In practice, the switch-over could become relevant, e.g. if the two countries have a different interpretation of the taxing rights in respect of severance payments to cross-border workers.

From a Belgian perspective, the exemption method has been complemented with a ‘subject to tax requirement’, i.e., the exemption will only be granted if it can be demonstrated that the Netherlands effectively taxes the relevant income. What’s more, for the exemption of dividends received by a Belgian company from its Dutch subsidiary, the new treaty provides for application of the conditions of Belgian domestic tax law.

Finally, a Belgian company may have incurred Dutch PE losses that have formerly been deducted from the profits of that company to the extent that these profits are also exempt from tax in the Netherlands because they are deducted at the level of the PE. In that case, Belgium is likewise expected not to grant an exemption to a PE's other taxable periods.

For sake of completeness, it should be noted that the new treaty does not contain an arbitration clause.

Avoidance of treaty abuse

Under 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 does not come as a surprise since the principal purpose test was already in effect under the current treaty because of the MLI.

Miscellaneous

The Netherlands and Belgium have included some relevant interpretational instructions in the protocol to the treaty.

The first being that while interpreting the treaty provisions, in principle, the version of the commen¬tary to the OECD Model Convention at the moment of treaty application should be used, rather than the version of the commentary at the moment the treaty is concluded (i.e. a dynamic interpretation rather than a static interpretation).

Secondly, it is indicated that the treaty will not override the right of the treaty parties to effectuate their domestic anti-abuse and anti-avoidance measures. Furthermore, it is explicitly mentioned that the new tax treaty does not prevent the application of the EU Directive 2022/2523 of 14 December 2022 on the global minimum tax.

Next steps

A memorandum of understanding is currently being prepared by the treaty partners. The new treaty will subsequently be shared with the parliaments of both countries. They can adopt and, thus, ratify the treaty, after which it may enter into effect. As the new treaty cannot enter into force before parliamentary approval in both countries, the new tax treaty will likely enter into force on 1 January 2025, at the earliest.

Lastly, it can be observed that the new tax treaty does not include any rules for the taxation of cross-border workers that work from home. Apparently, negotiations on this issue are still ongoing between both countries.

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