Global Tax Alert | 30 January 2014

New tax treaty between Belgium and China enters into force

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The tax treaty between Belgium and China (the New Treaty) which was signed on 7 October 2009, entered into force on 29 December 2013. The New Treaty became effective on 1 January 2014 for income earned and subject to tax at source. It is effective for taxable periods beginning on or after 1 January 2014 for other income taxes.

The New Treaty is primarily in line with income tax treaties with 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.1

Changes in the New Treaty

The most relevant changes in the New Treaty from the old treaty signed on 18 April 1985 are:

  • Broadened scope of the permanent establishment exceptions for building sites (a 6-month period is increased to a 12-month period) and the furnishing of services (a 6-month period is changed to a 183-day period);
  • Reduction of the withholding tax on dividends from 10% to 5%;
  • Reduction of the withholding tax on royalties from 10% to 7%;
  • Anti-abuse provisions for dividends, interest and royalties, i.e., provisions for reduced tax rates should not apply if the main purpose or one of the main purposes of forming a structure/transaction is to take advantage of these specific tax treaty articles;
  • China capital gains tax exemption on alienation of minority interest, provided that the shares are listed on stock exchanges;
  • Extension of the Belgian participation exemption to low-taxed or untaxed Chinese subsidiaries engaged in an active trade or business;
  • Full 100% participation exemption for dividends received from certain Chinese hybrid entities;
  • Limitation of the Belgian exemption on profits from Chinese permanent establishments engaged solely in passive activities and which are not taxed in China.

Implications

In general, the new treaty further improves the overall tax framework, supporting and strengthening Belgium’s favorable position with regard to various investments.

The new reduced 5% withholding tax on dividend distributions will enable a Belgian company to place a more tax efficient group structure by holding Chinese subsidiaries. In addition, the broader application of Belgium’s participation exemption includes dividends received from low-taxed or untaxed Chinese subsidiaries engaged in an active trade or business. Moreover a full 100% participation exemption is foreseen for dividends from Chinese hybrid entities (in case the Belgian investor is taxed in China on his share of the income of that entity).

The New Treaty combined with Belgium’s other withholding tax exemptions for dividend and interest payments (either based on domestic legislation or treaties) makes Belgium a consideration for international groups as a location for a Eurasian holding company. It is also important to note that Belgium’s overall approach to substance and anti-avoidance is more or less aligned with China’s approach, thus minimizing the risk for debate in this respect.

A reduction in royalty withholding tax to 7%2 further promotes R&D activities and exchange of the use of intellectual property between the two countries. Taking into consideration the favorable Belgian domestic tax credit regime, the Patent Income Deduction, R&D subsidies, favorable treaty network with regard to outgoing dividend, interest and royalty payments, among others, international groups also may consider to establish, relocate or further strengthen Belgian R&D activities for the benefit of their Chinese operations.

The New Treaty also resolves some uncertainties related to a determination of a service permanent establishment by providing more clarity and certainty.

Endnotes

1. For more details, see International Tax Alert, Belgium, China sign new income tax treaty, dated 30 October 2009.

2. The 7% withholding tax rate on royalties is the lowest overall rate recorded in any Chinese tax treaty.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Consultants SCCRL/BCVBA, Brussels
  • Herwig Joosten
    +32 2 774 9349
    herwig.joosten@be.ey.com
  • Werner Huygen
    +32 2 774 9404
    werner.huygen@be.ey.com
  • Steven Claes
    +32 2 774 9420
    steven.claes@be.ey.com
  • Kurt Van Der Voorde
    +32 2 774 9281
    kurt.van.der.voorde@be.ey.com
  • Peter Moreau
    +32 2 774 9187
    peter.moreau@be.ey.com
  • Arne Smeets
    +32 2 774 6363
    arne.smeets@be.ey.com
Ernst & Young LLP, Belgium-Netherlands Tax Desk, Global Tax Desk Network – New York
  • Bart Desmet
    +1 212 773 3068
    bart.desmet@ey.com
  • Sophie Vereecke
    +1 212 773 5893
    sophie.vereecke@ey.com
Ernst & Young Tax Services Limited, Hong Kong
  • Jane Hui
    +852 2629 3836
    jane.hui@hk.ey.com
  • Becky Lai
    +852 2629 3188
    becky.lai@hk.ey.com
  • Clement Yuen
    +852 2629 3355
    clement.yuen@hk.ey.com
Ernst & Young Tax Services Limited, China
  • Walter Tong
    +86 21 2228 6888
    walter.tong@cn.ey.com
  • Henry Chan
    +86 10 5815 3397
    henry.chan@cn.ey.com
  • Andrew Choy
    +86 10 5815 3230
    andrew.choy@cn.ey.com
  • Vickie Tan
    +86 21 2228 2648
    vickie.tan@cn.ey.com
Ernst & Young LLP, Chinese Tax Desk, New York and San Jose
  • Min Fei
    +1 212 773 5622
    min.fei@ey.com
  • Vickie Lin
    +1 212 773 6001
    vickie.lin@ey.com
  • Susan Qiu
    +1 212 773 9382
    susan.qiu@ey.com
  • Jessia Sun
    +1 212 773 5955
    jessia.sun@ey.com
  • Diana Wu
    +1 408 947 6873
    diana.wu@ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Bee-KhunYap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM4143