Protocol amending the income tax treaty between Belgium and United Kingdom in force
On 24 June 2009, Belgium and the United Kingdom signed an amending protocol (further: the Protocol) to the income tax treaty of 1 June 1987 (further: the Treaty). The Belgian procedure to ratify the Protocol has now been finalized and the Protocol was published in the Belgian Official Gazette of 28 December 2012.
The Protocol brings the Treaty in line with the 2008 OECD Model Treaty (except for some deviations) and entered into force on 24 December 2012. The most welcomed changes introduced by the Protocol relate to interest withholding tax and to the tax treatment of income from hybrid entities. Those, and a selection of other changes, are briefly outlined below.
The Treaty provided for a general maximum dividend withholding tax rate of 10% and a reduced maximum withholding tax rate of 5% in case the beneficial owner of the dividends controlled at least 25% of the voting power in the company distributing the dividend.
The general maximum dividend withholding tax rate of 10% remains under the Protocol. However, the Protocol provides for a dividend withholding tax exemption if the beneficial owner of the dividends is:
- A company holding, for an uninterrupted period of at least 12 months, shares representing directly at least 10% of the capital of the company paying the dividends; or
- A pension scheme, provided that such dividends are not derived from the carrying on of a business by the pension scheme or through an associated enterprise.
In some circumstances, dividends paid by investment vehicles and paid out of income derived from immovable property may be subject to a maximum dividend withholding tax rate of 15%.
The dividend withholding tax exemption as meant under a) above is very similar to the Belgian domestic dividend withholding tax exemption (implementation of the EU Parent-Subsidiary Directive, extended to treaty countries), however the following differences have to be considered:
- In order to apply the treaty exemption, the 12 month holding condition has to be fulfilled on the moment of declaring the dividend, whereas it can be fulfilled after the dividend declaration for the application of the domestic exemption;
- The treaty exemption does not require the Belgian and the UK company to have a certain legal form, whereas the domestic exemption refers to the limited list of legal forms in the annexes to the EU Parent Subsidiary Directive;
- For treaty purposes, both the parent company and the subsidiary have to be residents based on the treaty, whereas the domestic exemption includes a more stringent subject to tax condition.
From a UK perspective, the change is less relevant because no dividend withholding tax is levied based on UK domestic law.
Other than the 2008 OECD Model Convention, the Protocol provides for an anti-abuse provision in order to prevent taxpayers from benefiting from treaty relief in cases for which it is not intended (the same anti-abuse measure is inserted in the interest article and the royalties article).
The Treaty originally allowed the source state to levy a maximum interest withholding tax rate of 15% and did not provide for any exemptions.
Under the Protocol, the source state may levy an interest withholding tax rate of maximum 10% and the Protocol provides for a withholding tax exemption for the following types of interest:
- Interest paid in respect of a loan of any nature granted by an enterprise to another enterprise;
- Interest paid to a pension scheme, provided that such interest is not derived from the carrying on of a business by the pension scheme or through an associated enterprise;
- Interest paid to the other Contracting State, to one of its political subdivisions or local authorities or to a public entity.
Since both Belgium (standard rate: 25%) and the UK (standard rate: 20%) levy interest withholding tax based on domestic tax law (unless other exemption/reductions apply), especially the interest withholding tax exemption for interest paid between two enterprises is a valuable provision of the Protocol, making the treaty exemption even more favorable than the interest withholding tax exemption as foreseen in the EU Interest and Royalty Directive (as implemented in Belgian domestic law) as no shareholder’s relationship between the payer and the beneficiary is required.
Elimination of double taxation
The Protocol requires Belgium to exempt income (not being dividends, interest or royalties) derived by a resident of Belgium if the income ‘is taxed’ in the United Kingdom in accordance with the provisions of the income tax treaty, whereas formerly based on the Treaty Belgium was required to exempt income (not being dividends, interest or royalties) derived by a resident of Belgium if the income ‘may be taxed’ in the United Kingdom in accordance with the provisions of the income tax treaty. Referring to the Belgian circular letter AFZ nr. 4/2010 of 6 April 2010 elaborating on the ‘subject to tax’ condition, the Protocol will be qualified as a type 2 treaty (Belgium only has to grant an exemption in case the income was subject to the tax regime normally applicable to such income in the source state) whereas the Treaty qualified as a type 1 treaty (Belgium had to grant an exemption, regardless of the actual tax treatment of the income in the source state).
The Protocol further brings a solution for the risk on double taxation in case of the use of hybrid entities, like the UK LLP, which is tax transparent in the United Kingdom, but is treated as a company for Belgian tax purposes. From a UK perspective, the income of an LLP is taxed in the hands of the partners in proportion to their partnership interest, whereas for Belgian tax purposes, the Belgian partners in a UK LLP would be taxable on the profit distribution they receive from the LLP, resulting in a double taxation. Although the tax ruling practice developed a pragmatic solution, the Protocol now clearly stipulates that Belgium will also exempt income regarded as dividends under Belgian law, which is derived by a resident of Belgium from a participation in an entity that has its place of effective management in the United Kingdom, and has not been taxed as such in the United Kingdom, provided that the resident in Belgium has been taxed in the United Kingdom proportionally to his participation in such entity.
The Protocol clarifies that income is considered to be subject to tax (‘taxed’) for the application of these provisions when the item of income has been subject to the tax regime that is normally applicable to such item according to the United Kingdom tax law.
For the application of the dividend received deduction regime to intercompany dividends derived by a Belgian company, the Protocol no longer includes the equal treatment clause (as mentioned in the Treaty), but instead, exempts these dividends under the conditions and within the limits provided for in Belgian law. This change is in line with the Belgian model treaty.
As opposed to the past, the Protocol introduces an autonomous tax credit regime for foreign (UK) dividend withholding tax. Paragraph (g) of the new article 23 provides that if dividends derived by a company which is a resident of Belgium from a company which is resident of the United Kingdom are not exempted from Belgian corporate income tax, Belgium shall deduct from the Belgian corporate income tax relating to those dividends the UK tax levied on those dividends in accordance with article 10 of the income tax treaty. The deduction cannot exceed that part of the Belgian corporate income tax which proportionally relates to those dividends.
Entry into application
In Belgium, the Protocol applies:
- As from 1 January 2013 for the application of the withholding taxes;
- As from the taxable period ending on or after 31 December 2013 for the other taxes.
In the United Kingdom, the Protocol applies:
- For any year of assessment beginning on or after 6 April 2013 in respect of income tax and capital gains tax;
- For any financial year beginning on or after 1 April 2013 in respect of corporation tax;
- For any chargeable period beginning on or after 1 January 2013 in respect of petroleum revenue tax.
The above is not a complete overview of the changes introduced by the Protocol, but only highlights a number of key changes. Other articles have been changed as well, mainly to bring the income tax treaty in line with the 2008 OECD Model Treaty. Existing and proposed structures should be carefully reviewed to assess the potential impact of the Protocol. Employers/companies should review the impact of the new treaty with respect to the above and to the other changes in the Protocol (e.g. compensation rule for employees and the new rules concerning directors’ fees and pensions).
Your Ernst & Young client team/contacts are available to provide you with assistance in this regard.