December 10, 2021
Belgium: Double tax treaty with Netherlands now subject to MLI
On 25 November 2021, the Belgian and Dutch tax authorities notified the Belgium-Netherlands double tax treaty as a covered tax agreement under the Multilateral Instrument (MLI).
The pending treaty negotiations between Belgium and the Netherlands were the reason for not notifying the Belgium-Netherlands treaty as a covered tax treaty before. However, following a certain delay in this negotiation process, both countries decided to now implement the tax treaty-related Base Erosion and Profit Shifting (BEPS) measures into the Belgium-Netherlands double tax treaty. However, the negotiations on the other treaty provisions will continue.
Both countries have opted to apply a shorter period than the nine months following the notification for the MLI to be effective. In applying the shortened period of one month and six days, the MLI will be applicable to the Belgium-Netherlands double tax treaty as from (financial years starting on or after) 1 January 2022.
Implementation of the MLI
In 2016, the Organisation for Economic Co-operation and Development released the MLI to implement its tax treaty-related BEPS measures into existing bilateral tax treaties in a swift, coordinated and consistent manner. Now that the double tax treaty between Belgium and the Netherlands is a covered tax agreement, this means that the MLI must be applied alongside the 2001 treaty (as modified by the 2009 protocol), changing or completing various treaty provisions.
Following this MLI application, certain adjustments to the concept of permanent establishments (PEs) were made and a hybrid entity clause, an improved mutual agreement procedure (MAP) and the principal purpose test (PPT) were introduced. According to this PPT, access to treaty benefits can be disallowed when claiming the benefits was one of the principal purposes of an arrangement or transaction, exclusively or mainly lacking solid business motives.
Tax residency and hybrid entities
Under the MLI, corporate resident conflicts (in a treaty context) can be resolved applying a MAP. Although the Netherlands opted for this new tie-breaker rule, Belgium did not and made a reservation in this respect. This means that the place of effective management, as currently provided in the Belgium-Netherlands double tax treaty, remains in place as the only relevant criterion for determining the corporate tax residency for treaty purposes.
The MLI provides for the introduction of new hybrid entity clause. 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.
Following the application of the MLI, the definition of a PE as described in the 2001 treaty is supplemented with an anti-fragmentation rule to be met in order to claim a 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 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 (including the broader definition of the dependent agent PE and an anti-abuse measure for avoiding the split up of agreements to not reach the duration test for building, construction, and installation projects) are currently not applicable to the Belgium-Netherlands double tax treaty due to notification mismatches.
According to article 10 of the Belgium-Netherlands double tax treaty, any dividend withholding taxes should be capped at 5% of the gross amount of the dividend, if the beneficial owner is a company which holds directly at least 10% of the capital of the distributing company. A reduced rate of 15% is applicable in all other cases.
Following the MLI, the 5% withholding tax rate (not the 15% rate though) will be subject to a 365-day holding period going forward. When calculating the 365-day holding period, any changes that directly result from a reorganization of the corporate shareholder (such as a merger or a demerger) may be disregarded.
Improved mutual agreement procedure
The Belgium-Netherlands treaty currently provides for a MAP, but does not include an arbitration mechanism. Under the MLI, both Belgium and the Netherlands opted to include a mandatory and binding arbitration, which will therefore be 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 MAP.
Entry into force
New covered tax agreements enter into force for financial years beginning on or after the expiration of a nine-month period, unless the countries involved notify that they intend to apply a shorter period. On 25 November 2021, both Belgium and the Netherlands opted to apply a shorter period, being one month and six days. Hence, the MLI will be applicable to the Belgium-Netherlands double tax treaty as from (financial years starting on or after) 1 January 2022.
For withholding taxes in a Belgium-Netherlands context, the MLI will enter into force on or after the first day of the next calendar year that starts on or after 30 days after the notification. As the notification was made on 25 November 2021, the MLI also is effective as from 1 January 2022 for withholding taxes.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United States), Belgian Tax Desk, New York