New double tax treaty between Belgium and the Netherlands recently signed

On 21 June 2023, the Belgian and Netherlands Finance Ministers signed a new double tax treaty and protocol, published on 22 June 2023 (NL – FR).

This new agreement will replace the currently existing Belgian-Netherlands double tax treaty, which was concluded in 2001 and modified by the 2009 protocol. Awaiting for this new treaty, the Belgian and Dutch tax authorities already notified the 2001 treaty in November 2021 as a covered tax agreement for the purposes of applying the Multilateral Instrument (“MLI”). Hence, certain treaty-related BEPS measures already applied to the 2001 treaty as from 1 January 2022 (see our previous alert).

In addition to including these MLI provisions (with respect to withholding tax relief, permanent establishment concept, introduction of a principal purpose test, etc.) into the new treaty text, various other (non-MLI) provisions were agreed upon between Belgium and the Netherlands. This alert summarizes the most relevant changes in a corporate environment. The new particularities for employers and/or employees are summarized in a separate alert.

Note that the first protocol to the new treaty explicitly stipulates that the OECD Commentary should be applied at the time when treaty protection and/or treaty benefits are claimed (so-called “dynamic treaty interpretation”).
 

Tax residency and hybrid entities

The new Belgium-Netherlands tax treaty contains a new hybrid entity clause (although already applicable through the MLI). According to this provision, income derived by or through an entity or arrangement that is treated as tax transparent for Belgian or Dutch tax purposes is deemed to be income derived from a resident of the contracting state – to the extent that this contracting state equally treats this income for tax purposes as income derived from a tax resident of that state.
 

Permanent establishments

Following the application of the MLI, the definition of a permanent establishment (“PE”) as described in the 2001 treaty was already supplemented with an anti-fragmentation rule to be satisfied, in order to claim non-PE status for local presence with a preparatory or auxiliary character. The anti-fragmentation clause basically aggregates the activities performed by closely related enterprises, for determining whether or not a PE is deemed to exist. Enterprises are related if one has control (more than 50% of vote and value) of the other or if both are under the control of the same enterprise.

Any other MLI provisions with respect to PEs are not applicable to the 2001 treaty, due to notification mismatches. However, according to the new treaty text, Belgium and the Netherlands agreed on the following expansions of the PE concept:

• Anti-abuse measure for avoiding the split-of of agreements in order not to reach the duration test for building, construction, and installation projects (i.e. 12-month period). This provision aligns with Article 14 of the MLI, which is currently not yet applicable under the 2001 treaty.

• Definition of an independent agent is restricted (excluding persons acting exclusively, or almost exclusively, for one or more enterprises to which this agent is closely related), whereas the definition of a dependent agent is broadened. In addition to situations where a person is acting on behalf of an enterprise and habitually concludes contracts, a dependent agent PE is also deemed to exist where this person habitually exercises the principal role leading to the conclusion of contracts that are subsequently routinely concluded by the enterprise without material modifications. This provision aligns with article 12 of the MLI, which is currently not yet applicable under the 2001 treaty.

Consequently, the new treaty text includes all PE-related provisions that the MLI provides for. Finally, as a non-MLI addition to the PE concept, a rather particular provision is included related to activities performed by an enterprise of one state in the territorial sea in which the other state may exercise jurisdictional or sovereign rights. Such activities (not including towing/anchoring work and transportation of supplies or personnel by ships or aircraft in international traffic) may trigger a PE, provided that the activities take more than 30 days in total during any 12-month period. Also for this specific PE provision, an anti-abuse measure for artificially splitting up contracts is foreseen.
 

Withholding taxes on dividends

Based on the 2001 treaty, dividend withholding taxes cannot be higher than 5% of the gross amount of the dividend if the beneficial owner is a company that holds directly at least 10% of the capital of the company distributing the dividends. This minimum participation requirement is subject to a 365-day holding period, according to the MLI. A reduced rate of 15% is applicable in all other cases.

Under the new treaty, the 5% rate is replaced by a full exemption, provided that the beneficial owner of the dividends is a company situated in the other contracting state holding directly at least 10% of the capital of the company paying the dividends and respecting a 365-day holding period.

Finally, article 10 of the new treaty includes a specific provision for shareholders and directors having their own companies, who migrated to Belgium. Based on this new clause, the Netherlands are allowed to tax dividends for up to a 10-year period after the emigration of the shareholders to Belgium, even if their company relocated to Belgium as well. This clause is specifically designed to facilitate the application of a Dutch domestic tax provision in this respect. Since no such provision is currently foreseen in Belgian domestic tax law, this treaty clause is only currently applicable in one direction.
 

Withholding taxes on interest and royalties

Withholding taxes on interest cannot be higher than 10% of the gross amount under the 2001 treaty, whereas the new treaty provides for a full withholding tax exemption. A withholding tax exemption will also apply for royalties under the new treaty, but this is already foreseen under the 2001 treaty.
 

Director fees

The scope of director fees in the 2001 treaty is broader than the OECD Model Convention, since it is not required for the director to act in the formal capacity of the board member. Basically, any managerial activity or any daily management function, having a commercial technical or financial nature, is covered by this treaty provision. This broad scope is exceptional from an international treaty perspective and may trigger certain complexities under Belgian domestic tax legislation (e.g. a possible application of the so-called “catch-all provision”). This broad scope is eliminated in the new treaty, which is now aligned with the OECD Model Convention in this respect.
 

Mutual agreement procedure

The 2001 treaty provides for a mutual agreement procedure (“MAP”) but does not include a binding arbitration mechanism. However, under the MLI, both Belgium and the Netherlands opted to include a mandatory and binding arbitration, as an additional dispute resolution mechanism to the Belgium-Netherlands double tax treaty. This may be relevant for taxpayers in case a dispute is not settled by applying the mutual agreement procedure.

Surprisingly, the new treaty text only refers to the mutual agreement procedure, but does not include the arbitration mechanism. Consequently, in order for this arbitration mechanism to also apply to the new treaty, both Belgium and the Netherlands should then still notify this new double tax treaty as a covered tax agreement.
 

Subject-to-tax-rules

Belgian residents receiving foreign income (not being dividends, interest and royalties) can be exempt from taxation in Belgium only if it is effectively taxed in the Netherlands. This is further defined in the protocol to the new treaty. According to the protocol, this should be the case when the income item is taxed in the Netherlands without benefitting from any exemptions. These are useful clarifications considering the interpretation discussions in the past.

With respect to Dutch-sourced interest and royalties, reference is made to the respective provisions in the Belgian tax legislation in order to credit foreign taxes against the Belgian tax liability.
 

Entry into force

Despite the fact that discussions are still ongoing between Belgium and the Netherlands regarding the situation of cross-border workers that are working from home, both countries decided to already sign the treaty, without waiting for the outcome of these discussions.

The signed text should still be ratified by the parliaments of both States. As soon as these ratification procedures are completed in Belgium and the Netherlands, the double tax treaty can enter into force. More specifically, the new treaty will be applicable for income years starting on 1 January of the year that follows the year in which the treaty is ratified. Assuming that the ratification procedures will not be completed in the course of 2023, the new Belgium-Netherlands treaty isn’t expected to enter into force before 1 January 2025.