On 24 December 2011, the Democratic Republic of Congo (D.R.C.) finally ratified the income tax treaty it signed with Belgium on 23 May 2007. The treaty was ratified by Belgium in January 2009. The treaty became effective 1 January 2012. The treaty, which is the first of its kind ratified by the D.R.C. (a tax treaty with South Africa was signed in 2005 but has not yet become effective), is likely to promote Belgium as a hub for inward investment into the D.R.C. Investors in the D.R.C., subject to home-country tax provisions, may have an interest in opening an intermediary holding company in Belgium to benefit from the advantages offered by the treaty. D.R.C. borrowers should also benefit from the withholding tax exemption on interest payments on loans with Belgian banks.
The treaty also contains a most favored nation clause, under which Belgium would be granted at least equally favorable withholding tax rates on dividends, interest, and royalties as those granted to other EU member states in the event that the D.R.C. concludes income tax treaties with those member states. The treaty contains the classic solutions for the avoidance of double taxation, but also offers some more original and attractive provisions.
Currently, a Belgian company opening a permanent establishment in the D.R.C. without creating a subsidiary will be taxed on its profits in both the D.R.C. and in Belgium. The treaty provides that profits generated through a PE in the D.R.C. will be taxed in the D.R.C. and exempted in Belgium.
The treaty also establishes a series of situations that are not considered as constituting a PE in the D.R.C. and are therefore not taxable in the D.R.C., including:
- a construction or assembly site of less than six months;
- installations for the storage, display, or delivery of goods;
- the storage of goods for warehousing, display, or delivery;
- the storage of goods for processing;
- a fixed place of business used only for purchasing products, information gathering, or other preparatory or auxiliary activities; and
- an accumulation of the above, as long as all those activities have a preparatory or auxiliary nature.
Moreover, a Belgian company’s PE in the D.R.C. will not be subject to withholding tax on the profits made by the PE that will be repatriated to Belgium, because those profits will be taxed in the D.R.C.
For dividend payments between companies established in the D.R.C. and Belgium, the treaty provides that dividends paid by a D.R.C. company are exempted from Belgian corporate tax under the conditions (that is, holding for at least one year and the D.R.C. company being subject to corporate taxation) and the limitations (the 95 per cent exemption) provided by Belgian law.
Those dividends are subject to a 10 per cent withholding tax rather than the usual 20 per cent D.R.C. withholding tax, or 15 per cent if the D.R.C. company benefits from a tax exemption under the D.R.C. Investment Code or a particular law regulating investment in specific sectors; and the Belgian parent company directly holds at least 25 per cent of the share capital of the distributing company.
Moreover, the treaty provides that dividends received by a Belgian company from a D.R.C. company that benefits from a tax exemption under the D.R.C. Investment Code or a particular law regulating investment in specific sectors (such as the Mining Code) are tax-exempt for a period of 10 years from the entry into force of the treaty, with an automatic 10-year renewal unless informed otherwise by the Belgian competent authority.
Interest and Intellectual Property Royalties
The treaty provides for a maximum 10 per cent withholding tax (instead of 20 per cent) by one contracting state on payments of interest and intellectual property royalties to a resident of the other contracting state. In this case, tax may be paid in both states, but it is limited to a maximum of 10 per cent in the state in which the interest or royalties arise.
The treaty provides for a series of total tax exemptions in the state in which the interest arises on commercial loans and bank loans or for interest paid to public entities of the other state.