On 21 June 2023, Belgium and the Netherlands signed the new double tax treaty. This treaty was a long-awaited one since the last version dated from 5 June 2001 (as amended by the protocol in 2009) (the 2001 treaty). The new treaty includes many new aspects compared to the 2001 treaty. We are summarizing some of the aspect that are relevant for the Financial Services industry.
Scope
Unlike the 2001 treaty, the scope of the new treaty is limited to income tax, and it will no longer have any relevance for wealth taxes. This is particularly bad news for Dutch residents (both individuals and legal entities) holding a securities account of minimum EUR 1,000,000.00 in Belgium or via a Belgian financial institution. Under the current treaty, they were exempted from the Belgian annual tax on securities accounts on basis of the 2001 treaty. As soon as the new treaty will enter into force, this will no longer be the case.
For the same reason, the new treaty may also affect Dutch investment funds which are registered with the Belgian financial authority. Under the 2001 treaty, Belgium has no authority to levy the annual tax on Undertakings for Collective Investments because only the residence State is allowed to levy wealth taxes. Once the new treaty will have entered into force, Dutch investment funds may be subject to the Belgian annual tax on Undertakings for Collective Investments to the extent that the fund shares or units are being held by Belgian investors. Exemption on the basis of the treaty will no longer apply.
Withholding taxes
Dividends paid to individuals are still subject to a withholding tax of up to 15% whereas dividends paid to companies holding a participation of at least 10% for a period of at least one year will be fully exempt if certain conditions are met (under the 2001 treaty, they were subject to a withholding tax of up to 5%). We expect the impact of this adjustment to be limited given that many dividend payments were already fully exempt under the Parent Subsidiary Directive.
Moreover, for qualifying pension funds the new treaty also provides a full exemption from withholding tax on dividends in the source state. The term ‘qualifying pension fund’ of one of the contracting states has been defined under the new treaty as a person that is resident of one of the states (1) whose activities (almost) exclusively consist in the administration of pension plans, the implementation of pension plans or the payment of pension benefits or (2) that derives income for one or more persons as mentioned under (1). Additionally, such person should, in the case of Belgium, be supervised by the Financial Services and Markets Authority (FSMA) or the national bank of Belgium or be subject to the supervision of an independent auditor recognized by the FSMA. Subject to analysis of positions to be taken by the tax administrations of the two contracting States with respect to the interpretation of the new treaty, a Belgian pension fund recognized by the Belgian FSMA under the Act of 27 October 2006 should in our opinion qualify for the 0% tax rate. In the case of the Netherlands, the person should be subject to supervision of the Authority for the Financial Markets (AFM) or the Dutch central bank (DNB).
All interest paid will be fully exempt from withholding tax (previously, interest was subject to tax up to 10%). The exemption also applies to royalties (already included in the 2001 treaty).
The Dutch tax exempt (Fiscal) Investment Institution
Under Dutch tax law, there are two favorable tax regimes for investment structures: the Exempt Investment Institution (EII) (“vrijgestelde belegginsinstelling”) and the Fiscal Investment Institution (FII) (“fiscale belegginsinstelling”).
It has been clarified that certain treaty advantages do not apply to EIIs. This means that e.g. Belgium can still apply the full domestic withholding tax rate on e.g. dividends and interest paid to the EII. Furthermore, it has been clarified that the deemed income certain Belgian investors derive from EIIs under Dutch tax law should be considered a dividend for tax treaty purposes. This means that such income will be taxed by the Netherlands at the national withholding tax rate of 15%.
Under Dutch tax law, the domestic withholding tax exemption for dividends is not applicable to dividends paid to and by an FII. It has now also been clarified in the new Protocol that therefore the tax treaty exemption does not apply to dividends paid to or by an FII either.
Collective investment funds
The Protocol to the new treaty states that income and benefits of Dutch closed-end funds for mutual account (“besloten fonds voor gemene rekening”) and Belgian closed-end mutual funds (“gemeenschappelijke beleggingsfonds”) will be allocated to their participants on a pro rata basis. The managers of the funds can claim the benefits under the tax treaty on behalf of the participants if they have not done so yet. The 2001 treaty already had a more or less comparable arrangement although there are some differences. For example, the scope of the arrangement in the 2001 treaty entailed dividends and interest whereas the scope under the new treaty will be extended to also include real estate income, royalties and capital gains.
Capital gains
According to the new treaty, only the residence State is – as a general rule - competent to tax capital gains regarding movable assets such as shares. There is however a derogating rule in situations where a resident individual of one of the contracting states has migrated to the other contracting state. In such situations, the first contracting state remains competent after the migration to tax the increase in value of the shares, profit certificates, call options, usufruct on shares or profit certificates or receivables until the moment of migration (and the immigration state refrains from taxing that increase in value). In such a case, special rules apply with respect to the competence to tax dividends as well.
Principle purpose test
Article 21 of the new treaty provides that the application of the treaty benefits is subject to a principle purpose test.
Pillar 2
In the Protocol to the new treaty contains an interesting clause, providing that the Pillar Two directive on global minimum taxation prevails over the provisions of the new treaty. It is the first time that such a clause with respect to the Pillar Two directive is included in a tax treaty. It is subject to debate why this clause forms part of the new treaty as in the view of some scholars EU directives always prevail over tax treaties concluded between EU Member States. It seems that both Belgium and the Netherlands wanted to eliminate every doubt on this topic with respect to their tax treaty.
What is next?
A memorandum of understanding is still being prepared by both states after which the new treaty will be sent to the Belgian and Dutch parliaments for ratification. As a result, the old treaty still applies and the new one is expected to be applicable as from 1 January 2025 at the earliest.
If you wish to discuss these topics, please contact:
Tiberghien Lawyers/Atlas Tax Lawyers
