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It is possible that both the Netherlands and Belgium consider an entity as their tax resident. In order to avoid double taxation, the Netherlands and Belgium must determine the tax residency for tax treaty purposes. Older tax treaties usually specify that this is determined by the effective place of management. Under the new treaty with Belgium, the effective place of management remains the determining factor. This is surprising, as the Netherlands expressed its preference to include a mutual agreement procedure in order to determine the tax residency. The downside of this is that only after this procedure is closed, avoidance of double taxation can be claimed.
Dutch companies can become taxable in Belgium when these companies obtain income in Belgium through a permanent establishment. Several changes have been made to the permanent establishment definition. The most important reason for these changes is to prevent companies from structuring their activities in such a way that these no longer fall under the definition of a permanent establishment.
We have highlighted the most important changes to the permanent establishment definition below.
Based on the current treaty, a company is deemed to have a permanent establishment if a person – other than an agent of an independent status - is acting on behalf of an enterprise and has, and habitually exercises, an authority to conclude contracts on behalf of the enterprise, the so-called ‘permanent representative’.
In the new tax treaty, this definition is broadened. In addition to the definition as described above, persons who habitually play the principal role leading to the conclusion of contracts will be considered permanent representatives under the new tax treaty. This is in line with the OECD definition.
A construction site or installation project is considered a permanent establishment if the duration of the activity exceeds twelve months.
To avoid exceeding the twelve-month threshold and thus be considered a permanent establishment, companies could split the activities between related companies.
To prevent this, a new provision was added to the treaty. Based on the new provision, activities carried out on the same construction site or installation project by closely associated companies will be combined to determine the total duration of the project.
Activities which are considered as preparatory or auxiliary are not considered a permanent establishment. Under the current treaty companies can split their activities between related companies to avoid a permanent establishment. To prevent this fragmentation of activities, a new provision has been added, which states that the activities of closely associated companies in the same country have to be taken into account to determine if activities are preparatory or auxiliary.
Recommendations
If your company has employees or activities in Belgium, we recommend reviewing the current tax position of your company regarding the new permanent establishment rules. We would be happy to assist you with this further review.
The new Article 7(3) stipulates that when a country applies an adjustment to the profits attributable to a permanent establishment that results in double taxation, the other State also applies an adjustment, unless it disagrees with the correction. Then this should be resolved by mutual agreement between both countries.
The current tax treaty with Belgium allows the Netherlands and Belgium to impose a 15% withholding tax unless the dividend is paid to parent company which holds more than 10% of the shares in the subsidiary. In that case, the dividend withholding tax rate must be reduced to 5%.
In the new treaty, the lowest acceptable withholding tax rate will be 0% instead of 5%. The reduced rate of 0% is only applicable when the parent company holds an interest of at least 10% in the subsidiary for at least 365 days.
If the reduced rate is applicable, the new tax treaty will lead to a reduction of dividend withholding tax from 5% to 0%. However, if the new requirement of holding the 10% interest for at least 365 days is not met, the reduced rate is not applicable. The dividend withholding tax will then increase from 5% to 15%. It is therefore important to assess whether the reduced rate of dividend withholding tax will apply.
Under the current tax treaty with Belgium, the Netherlands and Belgium are allowed to impose a maximum withholding tax on interest payments of 10% on interest payments to the beneficiaries in the other country. In the new tax treaty, it is specified that only the State of the recipient of interest may impose taxation on the interest. In principle, no withholding tax may be imposed (unless there is abuse).
In most tax treaties it is specified that income that does not fall within the scope of specific provisions in the tax treaty, may only be taxed in the country of the recipient of the income. That also applies to the current and future tax treaties with Belgium. On top of this existing measure, there is a new anti-abuse measure in this category of income. This anti-abuse rule specifies that when the income is derived from assets or income components that were not effectively taxed in the other State, the State of the recipient is allowed to impose taxes.
A new general anti-abuse provision has been added to the treaty. Treaty benefits will not be granted if one of the principal purposes of a transaction or structure is to obtain a tax treaty benefit. The exception to this rule is when the granting of the benefits is in line with the purpose and intent of the relevant treaty provision. This is the implementation of the principle purpose test in the tax treaty with Belgium. Which is in line with the latest OECD Model Convention.
The new tax treaty will affect companies with cross-border activities in Belgium. It is therefore important to assess how the abovementioned changes will impact your business. We would be happy to assist with this assessment. Please contact us if you would like to receive more information in this regard.