Tax treaty between Belgium and China ratified and already in force
The tax treaty between Belgium and China, which was signed on 7 October 2009, has been ratified by all Belgian Parliaments since 20 November 2013. Both countries have now completed the ratification procedure procedure and according to a recent communication by the Belgian Tax Authorities the treaty entered into force on 29 December 2013.
This new treaty is basically on par with the income tax treaties of other preferred trading partners of China (such as Hong Kong and Singapore) and can be viewed as a confirmation of Belgium’s favorable position in the Asia Pacific region.
The new treaty generally follows the OECD Model Convention.
These are the most relevant differences from the 1985 treaty, which it will replace:
- Reduction of the maximum withholding tax on dividends from 10% to 5% in certain cases;
- Reduction of the maximum withholding tax on royalties from 10% to 7% in certain cases;
- Capital gains tax exemption on alienation of shares listed on stock exchanges;
- Extension of the Belgian participation exemption to low-taxed or untaxed Chinese subsidiaries engaged in an active trade or business;
- Broadened scope of the permanent establishment exceptions for building sites and the rendering of services;
The treaty changes the threshold period for the creation of a service PE from “six months within any 12-month period” to “183 days within any 12-month period.” This change is particularly beneficial to Belgian companies sending personnel to China to perform onsite services. Under the 1985 treaty, the Chinese tax authorities generally interpret the term “six-month” period to be six calendar months and only a consecutive 30-day period without any physical presence in China can be excluded as a one-month period. Accordingly, if a Belgian employee is physically present in China for one day during any given month, such month will count as one month in determining the six-month period. However, replacing the term “six-month period” with the “183 days within any 12-month period” changes the preceding interpretation and enables Belgian entities to apply the exemption for a full 183-day period.
Also, a building, construction, assembly or installation site or supervision in connection with such project constitutes a permanent establishment only if the building, construction, installation site or the supervision continues for more than 12 months. Under the 1985 treaty, the threshold was set at six months.
Withholding tax rates
The new treaty provides for a maximum withholding tax of 5% on dividends if the beneficial owner of the dividend is a company that has directly held at least 25% of the capital of the company paying the dividends for a consecutive 12-month period prior to the dividend payment. In all other cases, a 10% dividend withholding tax applies. Under the 1985 treaty, the maximum dividend withholding tax rate was set at 10%. Under Chinese domestic law, a 10% withholding tax rate applies.
As far as the Belgian domestic dividend withholding tax is concerned, it should be noted that Belgian domestic tax law is quite advantageous as it grants - under certain conditions - an exemption from the domestic dividend withholding tax of 25% on dividends for dividends paid to parent companies that are located in qualifying treaty jurisdictions, such as China.
The maximum withholding tax on interest under both the new treaty and the 1985 treaty is set at 10%. No withholding tax may be levied in certain specific cases (e.g., interest paid to the Chinese or Belgian State or a political subdivision and certain interest paid to government-owned banks).
Belgian domestic law generally imposes a 25% withholding tax on Belgian sourced interest but many exemptions are available, e.g. for qualifying Belgian finance companies and holding companies. China levies a 10% domestic withholding tax on interest.
The new treaty provides for a 7% withholding tax on royalties, whereas this maximum rate was 10% under the 1985 treaty.
This decrease may create further opportunities for Belgian royalty companies, taking into consideration the Belgian domestic tax credit and provided that the 7% royalty withholding tax is effectively levied in China under the treaty. Belgian domestic law offers a tax credit of 15/85 on the gross royalty received, minus the foreign withholding tax. This change results in a higher credit in Belgium than the amount effectively withheld in China. This credit can be used to offset the tax on royalty or other income generated by the Belgian company.
The 7% rate included in the new treaty is significantly lower than the Belgian domestic royalty withholding tax rate (25%) and the Chinese statutory rate (15%).
As under the 1985 treaty, capital gains arising from the alienation of a substantial (direct or indirect) shareholding (25% of the shares or more) may be taxed by the country where the company of which the shares are alienated is a resident. The new treaty expressly states that the this provision only applies if the alienation of such substantial shareholding occurs within a 12 month-period prior to the alienation.
The new treaty provides for an exception to this rule if the shares are substantially and regularly traded on a recognized stock exchange and the taxpayer does not alienate more than 5% of the quoted shares during the relevant year.
Elimination of double taxation in Belgium
The provisions on the elimination of double taxation in Belgium include some important changes which are based on the new Belgian Model Treaty. They provide, among others, for a broader application of the Belgian participation exemption, further enhancing Belgium’s attractiveness as a preferred holding company jurisdiction.
Under Belgian domestic law, dividends distributed by a Chinese company to a Belgian parent company only benefit from the Belgian participation exemption provided the Chinese company meets the “subject-to-tax” test. As a consequence, in some cases (e.g., when a company qualifies for certain tax holidays in China), Chinese dividends may not qualify for the Belgian domestic participation exemption. Under the new treaty, however, this “subject-to-tax” test does not apply to dividends received from low-taxed or untaxed operations of companies in China which are effectively engaged in the active conduct of a business in China. Consequently, the new treaty expands the scope of the Belgian participation exemption.
Under the new treaty, the exemption of Chinese branch profits in Belgium does not apply where such profits are derived by a permanent establishment which exclusively or mainly has passive income activities (e.g., a finance or royalty branch).
Entry into application
The ratification procedure for this treaty has now been completed by both countries . According to a first press release of the Belgian Tax authorities, the treaty entered into force on 4 January 2014. But on 27 January 2014, the Tax Authorities rectified the first communication : according to the new press release the treaty entered into application on 29 December 2013. This treaty is therefore applicable with respect to:
- withholding taxes : on income received as from 1 January 2014
- other income taxes : on revenue related to tax periods starting on or after 1 January 2014.
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