Introduction
Residence
Permanent establishment
Dividends
Interest and royalties
Capital gains on shares
At the beginning of 2011 the double taxation treaty between Belgium and Chile for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital came into force.
The treaty was signed on December 6 2007. The treaty negotiations were based on the July 2005 Organisation for Economic Cooperatation and Development (OECD) Model Tax Convention and the United Nations Model Double Taxation Convention. Where the treaty deviates from the 2005 OECD model, it is often in accordance with the UN model and generally expands the taxing powers of the source state of the income.
This update discusses some of the treaty provisions which deviate from the OECD model.(1)
The treaty sets down an objective criterion only to deal with a situation where an individual is a resident of both Belgium and Chile pursuant to the residence provision of the treaty (Article 4.2). There is no such objective criterion for companies. Instead, the treaty provides that the Belgian and Chilean authorities should endeavour to settle the question by mutual agreement. In the absence of an agreement between the competent authorities, the company will not be entitled to any relief or exemption from tax under the treaty (Article 4.3). However, with respect to a tax resident of Belgium (which is also a tax resident of Chile), Belgium shall avoid double taxation of Chilean source income as provided for in the 'elimination of double taxation' provision of the treaty (Article 23.2). According to the Belgian Senate's explanatory memorandum to the Belgian law approving the treaty, double tax with respect to Belgian source income obtained by a resident of Chile (which is also a resident of Belgium) is avoided in Chile by the credit method applicable under Chilean law, even if the treaty does not contain a provision to this effect.
Pursuant to the treaty, a building site or construction or installation project and supervisory activities in connection therewith constitute a permanent establishment if the site, project or activities last more than six months (as opposed to 12 months in the OECD model).
Furthermore, the supply of services in a treaty state through employees or subcontractors by an enterprise of the other treaty state leads to a permanent establishment in the treaty state where the services are supplied if the services continue for a period or periods aggregating more than 183 days within any 12-month period. To prevent enterprises from avoiding the application of this provision, the protocol to the treaty provides that in case of associated enterprises, the activities of the associated enterprises are taken into account in determining the duration of 183 days, unless the activities are carried on at the same time by the associated enterprises and without regard to the activities of an associated enterprise which is a tax resident of the treaty state where the activities are carried on. There is no equivalent rule under the OECD model.
As a rule, the dividend withholding tax under the treaty is limited to 15%. Similar to a Belgian domestic dividend withholding tax exemption, dividend distributions by a tax resident of a treaty state to a tax resident of the other treaty state are exempt if, at the moment of payment of the dividend, the beneficial owner of the dividends is a company which holds and has held for an uninterrupted period of at least 12 months shares representing 10% of the capital of the distributing company.
In accordance with the OECD model, the treaty dividend withholding tax limitation does not affect the taxation of the company's profit out of which the dividends are paid. The treaty specifies that in the case of Chile, this taxation includes the additional tax. As a rule, in Chile, dividends paid to a non-Chilean tax resident are subject to an additional tax of 35%. The regular corporate income tax paid by the Chilean distributing company on its profit is fully creditable in computing the additional tax. Since the regular corporate income tax is lower than the additional tax, the Chilean source dividend distributed to a tax resident of Belgium is subject to 35% income tax in total. This tax burden is similar to that of a Belgian source dividend distributed to a tax resident of Chile, since a corporate tax resident of Belgium is subject to corporate income tax on its profit at a nominal rate of 34%.(2) The protocol to the treaty provides that Belgium and Chile will consult with each other in order to amend the treaty to restore the balance of benefits under the treaty if the regular Chilean corporate income tax should cease to be fully creditable in computing the amount of additional tax to be paid or if the additional tax should exceed 42%.
The dividend treaty article contains an anti-abuse clause, stating that the provisions of the article shall not apply if it was the main purpose or one of the main purposes of any person concerned to take advantage of the article by means of the creation or assignment of the dividend generating shares.
As a rule, the interest withholding tax under the treaty is limited to 15%. Interest withholding tax on interest paid in connection with loans granted by banks and insurance companies, interest on bonds or qualifying securities or interest in connection with the credit sale of machinery or equipment is limited to 5%.
As a rule, royalty withholding tax under the treaty is limited to 10%. Royalty withholding tax on royalties paid in connection with the use of or the right to use industrial, commercial or scientific equipment is limited to 5%.
With respect to interest and royalties, the protocol provides for a most-favoured nation clause, pursuant to which tax residents of Belgium and Chile will automatically benefit from more beneficial interest or royalties withholding tax exemptions or reductions which Chile would grant to residents of OECD member states other than Belgium pursuant to a tax treaty with such states entered into after December 6 2007 (ie, the signing date of the treaty).
The interest and royalties treaty provisions contain a similar anti-abuse clause to that in respect of dividends.
Capital gains on shares of a company which is a resident of a treaty state may be taxed in the treaty state of which that company is a resident if:
- the seller held shares representing (directly or indirectly) at least 20% of the company's capital at any time during the 12-month period preceding the share sale; or
- the gains derive more than 50% of their value (directly or indirectly) from immovable property situated in that state.
In other cases capital gains on shares of a company which is a resident of a treaty state may also be taxed in the treaty state of which that company is a resident, but the treaty limits the applicable rate to 16%.
Finally, capital gains on shares realised by a pension fund are exclusively taxable in the pension fund's state of tax residence.
For further information on this topic please contact Henk Verstraete or An Kuijpers at Liedekerke Wolters Waelbroeck Kirkpatrick by telephone (+32 25 51 15 15), fax (+32 25 51 14 14) or email ([email protected] or [email protected]).
Endnotes