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June 29, 2023
2023-1163

Belgium-Netherlands tax treaty recently signed; ratification to follow

  • On 21 June 2023, the Belgian and Dutch Finance Ministers signed a new tax treaty and protocol. This new treaty will replace the current tax treaty that was concluded in 2001 and modified by the 2009 protocol.
  • In November 2021, Belgium and the Netherlands notified the 2001 treaty as a covered tax agreement for purposes of the Multilateral Instrument (MLI). The relevant MLI provisions are included in the new treaty text, in addition to other provisions that are not rooted in the MLI.
  • The new treaty will apply for fiscal years starting on 1 January of the year that follows the year in which both countries ratify the treaty. Assuming that ratification procedures will not be completed in 2023, the new treaty is not expected to become applicable before 1 January 2025.

Executive summary

On 21 June 2023, the Belgian and Dutch Finance Ministers signed a new tax treaty and protocol, published on 22 June 2023. (The treaty is available here in French and Dutch.)

This new agreement will replace the current Belgian-Netherlands tax treaty, which was concluded in 2001 and modified by the 2009 protocol. Awaiting 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 anti-abuse measures already applied to the 2001 treaty as of 1 January 2022 (e.g., a principal-purposes test and anti-abuse measures with respect to withholding tax relief and the permanent establishment concept).

In addition to including these MLI provisions in the new treaty text, Belgium and the Netherlands agreed to include various non-MLI provisions. This Alert summarizes the most relevant changes in a corporate environment.

Note that the protocol to the new treaty explicitly stipulates that the Organisation for Economic Co-operation and Development (OECD) Commentary should be applied as it reads at the time that treaty protection and/or treaty benefits are claimed (so-called "dynamic treaty interpretation").

Detailed discussion

Tax residency and hybrid entities

The new Belgium-Netherlands tax treaty contains a new hybrid-entity clause (although currently 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 by a resident of the contracting state — to the extent that the contracting state equally treats this income for tax purposes as income derived by 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 that must be satisfied 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 control of the same enterprise.

Any other MLI provisions with respect to PEs are not applicable to the 2001 treaty, due to reservations made by one or both countries under the MLI. However, in the new treaty text, Belgium and the Netherlands agreed on the following expansions of the PE concept:

  • An anti-abuse measure is included to help prevent the splitting of contracts to avoid reaching the duration test for building, construction and installation projects (i.e., 12-month period). This provision aligns with article 14 of the MLI, which — as stated above — is currently not applicable under the 2001 treaty.
  • The 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, in 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 the enterprise subsequently routinely concludes without material modifications. This provision aligns with article 12 of the MLI for which the Netherlands has made a full reservation and which is not applicable under the 2001 treaty.
  • Because of the full reservation to article 12 of the MLI by the Netherlands, the new Belgium-Netherlands tax treaty is one of the first Netherlands treaties (together with some other recently concluded or (re)negotiated treaties) to include this broadened (in)dependent agent PE concept. This is in line with the Dutch treaty policy to only include this provision in bilateral tax treaties and only if the treaty provides for adequate arbitrary provisions.
  • These changes effectively lower the thresholds for creating a taxable (PE) presence in these situations and thus could result in shifting taxing rights to the PE jurisdiction.

Consequently, the new treaty text includes all PE-related provisions that the MLI provides. Finally, as a non-MLI addition to the PE concept, the treaty includes a provision 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. These activities (not including towing/anchoring work and transporting 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, this specific PE provision, which is in line with Dutch tax treaty policy, includes an anti-abuse measure to discourage artificially splitting up contracts.

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% applies 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.

For most corporate structures, the domestic law of both Belgium and the Netherlands already provides a broad dividend withholding tax exemption for dividend distributions (subject to certain conditions). Hence, this new treaty provision is expected to have limited practical effect for dividend distributions.

Dividends to substantial (individual) shareholders migrated to Belgium

Article 10 of the new treaty includes a specific provision for substantial individual shareholders in a Dutch company who have migrated to Belgium, together with the migration of the Dutch company to Belgium. Based on this new clause, the Netherlands may, in such case, tax dividends up to a 10-year period after the migration of the shareholder to Belgium, to the extent that there still exists a Dutch exit tax claim in relation to the migration.

This clause is specifically designed to facilitate the application of a Dutch domestic tax provision in this respect. Because no such provision is currently included in Belgian domestic tax law, this treaty clause is only currently applicable for migrations from the Netherlands to Belgium.

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 emption also applies for royalties under the new treaty, although this is already included under the 2001 treaty.

Under Dutch domestic law, interest and royalty payments from the Netherlands to Belgium are not subject to withholding tax, except for intercompany payments in cases of abuse and/or certain specific hybrid structures. Hence, this new treaty provision is expected to have limited practical effect for interest and royalty payments out of the Netherlands.

Director fees

The scope of director fees provision in the 2001 treaty is broader than the OECD Model Convention, as the treaty does not require the director to act in the formal capacity of board member. Basically, any managerial activity or any daily management function of a commercial technical or financial nature is covered by this treaty provision. This broad scope deviates from the common international tax treaty standards 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 director fees provision under the new treaty, which is now aligned with the OECD Model Convention in this respect so that only the remuneration received in the formal capacity as director is covered by treaty provision regarding director fees.

The (part of the) salary that is not related to its services performed in the capacity as director are covered by the treaty provision relating to "wages." This underscores the importance of properly documenting the capacity in which the services are performed for which the salary is paid.

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 tax treaty. This may be relevant for taxpayers involved in disputes not settled by applying the mutual agreement procedure.

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

Subject-to-tax rules

Belgian residents receiving foreign income (other than dividends, interest and royalties) can be exempt from taxation in Belgium only if the foreign income is effectively taxed in the Netherlands. This is further defined in the protocol to the new treaty. According to the protocol, this subject-to-tax test should be met 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, the new treaty refers to the respective provisions in the Belgian tax legislation to credit foreign taxes against the Belgian tax liability.

Entry into force

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

The signed text still needs to be ratified by the parliaments of both States. As soon as these ratification procedures are completed in Belgium and the Netherlands, the tax treaty can enter into force. More specifically, the new treaty will be applicable for fiscal 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 2023, the new Belgium-Netherlands treaty is not expected to become applicable before 1 January 2025.

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

EY Brussels

EY Hasselt

EY Antwerp

Ernst & Young LLP, Belgian Tax Desk, New York

Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Amsterdam

Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Rotterdam

Ernst & Young LLP (United States), Netherlands Tax Desk, New York

Ernst & Young LLP (United States), Netherlands Tax Desk, Chicago

Ernst & Young LLP (United States), Netherlands Tax Desk, San Jose/San Francisco

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

 

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