After more than 20 years of negotiations, Belgium and France have recently signed a new double tax treaty (new treaty). The new treaty is more in line with the latest OECD standards for double tax treaties and thus includes the modifications introduced by the Multilateral Instrument (MLI).
The novelties/features in terms of content are numerous. We will discuss below the main features of the new treaty and will come back in more detail on some provisions in our upcoming newsletters.
The old treaty (which we will refer to as the "old treaty" for ease of reference) remains applicable until the new treaty comes into force. The new treaty will enter into force when each of the contracting states have notified each other of the completion of the ratification procedure. In Belgium, this procedure involves the consent of the federal and regional parliaments. In practice, the new treaty will probably not enter into force before 1 January, 2023.
French "translucent" entities remain resident under the new treaty
In order to benefit from a tax treaty, a taxpayer must be a "resident" of a contracting state. In accordance with the OECD model treaty, the new treaty makes the status of "resident" subject to the condition that the taxpayer is subject to tax in its State of residence.
As a reminder, the old treaty does not provide such a condition.
In other words, persons (i.e. individuals, companies or groups of persons) who are not subject to tax will not be able to benefit from the treaty protection.
However, the Protocol to the new treaty provides an exception for collective investment vehicles and pension funds established in a Contracting States that are not subject to tax. These entities will still be able to benefit from the advantages provided for in Articles 10 (dividends) and 11 (interest) of the new treaty.
French entities that benefit from the tax "translucency" regime (such as most real estate ‘civil companies’) will also be able to (continue to) benefit from treaty protection. Article 4, §4 provides that any partnership or similar entity is a resident within the meaning of the new treaty if:
- the place of effective management is in France;
- the entity is subject to taxation in France; and
- all the shareholders, partners or members are, pursuant to French tax law, personally subject to tax on the basis of their share in the profits of the partnership or other similar entity;
Elimination of double taxation and abolition of the FTC
With respect to Belgian residents, income, other than dividends, interest or royalties, or elements of capital which are taxed in France in accordance with the provisions of the new treaty, will be exempt from tax in Belgium. However, if the resident is an individual, Belgium will only exempt the income from tax to the extent that it is effectively taxed in France. This means, for example, that Belgian residents who have a second residence in France will henceforth pay personal income tax on rental income attributed to the real estate in question, since France does not levy personal income tax on that income (as a reminder, the taxable base will correspond to the cadastral income attributed to the said real estate by the Belgian tax authorities). Under the old treaty, this rental income is exempt from tax but is taken into account in determining the tax rate applicable to other taxable income in Belgium.
An important new feature is that Belgian companies receiving dividends from entities benefiting from the tax translucency regime (such as SCIs) will now be able to benefit from the Belgian participation exemption regime regime, as long as the so-called "quantitative" conditions are met (i.e. minimum shareholding of 10% or EUR 2,500,000 held in full ownership for at least one year). Until now, these dividends were excluded from the Belgian participation exemption regime because translucent entities do not meet the subject-to-tax condition.
Unfortunately, Belgian resident individuals who receive dividends of French origin will again be confronted with a situation of double taxation. The lump-sum foreign tax credit (FTC) - which the tax authorities had finally agreed to grant following a second decision of the Supreme Court on October 15, 2020 - is indeed abolished.
What about the application of the tax on securities accounts to French residents ?
Wealth taxes are now part of the taxes covered by the new treaty, which will avoid possible double taxation.
The text of the new treaty is not clear on this issue but,based on the parliamentary works of the bill introducing the tax on securities accounts, the new treaty should, in principle, allow French tax residents who have a securities account in Belgium to avoid the tax on securities accounts, which is not the case at present.
The withholding tax rate on dividends is reduced
The maximum withholding tax rate on dividends is reduced from 15% to 12.8% (which corresponds to the internal rate under French law).
The reduced rate of 10% provided for in the old treaty is replaced by a withholding tax exemption for dividends paid to companies of the other Contracting State provided that the recipient holds, throughout a period of 365 days including the day of payment of the dividends, a direct interest of at least 10% in the capital of the company distributing the dividend. The new treaty provides that the calculation of the holding period is not affected by changes in holding resulting from reorganizations such as a merger or division of the company holding the shares or paying the dividend.
The benefit of this reduced rate/exemption is also subject to the condition that the recipient of the dividend is the beneficial owner.
Withholding tax on interest payments abolished
The withholding tax on interest payments is simply abolished, provided that the beneficial owner of the interest is a resident of the other Contracting State (the old treaty provided for a reduced withholding tax rate of 15%).
France extends its right to tax capital gains on shares
Capital gains realized by former French tax residents
One of the particularities of the new treaty is that, under certain conditions, article 13, § 4, allows France to tax capital gains realized directly or indirectly by Belgian individual residents on substantial participations in French companies. We will dedicate a separate newsletter to this particularly sophisticated provision. It should be noted that it also applies to capital gains realized by an intermediate Belgian holding company, in proportion to the interest held by the individual concerned in the Belgian holding company.
Real estate companies
As expected, the new treaty also provides that gains from the disposal of a shareholding in a company of which more than half of the assets consist directly or indirectly of real estate situated in a Contracting State are taxable in that Contracting State. This provision applies only to the extent that the Contracting State in question treats such transfers of shares as transfers of immovable property for tax purposes. In other words, as French and Belgian law currently stand, France will be entitled to tax the capital gain realized by a Belgian resident on shares of a French real estate company. This provision does not apply to companies whose shares are listed on a regulated stock market in the European Economic Area.
Read more about this in our article "New tax treaty between Belgium and France - consequences for the real estate sector?"
Taxation of directors' fees
Under the old treaty, remunerations of any kind whatsoever and whether of a fixed or variable nature paid by virtue of their function to managing directors, supervisory directors, liquidators, managing partners and other persons performing similar functions in joint stock companies, partnerships limited by shares and co-operative societies, as well as French limited liability companies and Belgian private limited liability companies, were taxable only in the Contracting State of which the company was resident.
Henceforth, only members of a board of directors, a supervisory board or a similar body of a company of one of the Contracting States will be taxed on their directors' fees and other similar remuneration exclusively in the Contracting State of which the company is resident.
International volunteering enters the new treaty
The new tax treaty deals with the taxing rights on sums received by French students in the context of the international voluntary service scheme. In the past, several Belgian companies belonging to a French group have been subject to tax adjustments in this respect.
The new treaty provides that the amounts received by the students will only be taxable in Belgium to the extent that they are borne by a Belgian resident company (unless they are borne by a permanent establishment of the company located abroad) or a permanent establishment in Belgium.
Limitation of treaty benefits
In accordance with Article 7 of the MLI, a new anti-abuse measure limiting treaty benefits has been inserted in Article 28. According to this provision, a benefit under the new treaty shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the new treaty.
The new treaty does not prevent the application of the Cayman tax
Although the tax administration is of the opinion that double tax treaties entered into by Belgium do not prevent a look-through tax on entities targeted by the Cayman tax, Belgium has nevertheless found it useful to clarify that the provisions of the new treaty do not prevent Belgium from applying the Cayman tax provisions.