Belgium and Netherlands Sign New Double Tax Treaty: Key Changes and Timeline

On 21 June 2023, the Finance Ministers of Belgium and the Netherlands finalized a new double tax treaty and protocol, which was officially published on 22 June 2023 (NL – FR).

This latest agreement is set to replace the existing Belgian-Netherlands double tax treaty, which was established in 2001 and later amended in 2009 through a protocol. Anticipating the introduction of this new treaty, the Belgian and Dutch tax authorities already acknowledged the 2001 treaty as a covered tax agreement for applying the Multilateral Instrument (“MLI”) in November 2021. Consequently, certain Base Erosion and Profit Shifting (BEPS) measures have already been in effect for the 2001 treaty since 1 January 2022.

In addition to incorporating MLI provisions related to withholding tax relief, the concept of permanent establishment, and the introduction of a principal purpose test, among others, the new treaty includes various other provisions agreed upon by Belgium and the Netherlands. These changes have significant implications for the corporate environment. For specific details pertaining to employers and employees, a separate alert will be provided.

Notably, the first protocol to the new treaty explicitly states that the OECD Commentary should be applied when claiming treaty protection and/or treaty benefits, referring to it as “dynamic treaty interpretation.”

Key Changes in the New Belgium-Netherlands Tax Treaty:

1. Tax Residency and Hybrid Entities: The new treaty features a hybrid entity clause that was already applicable through the MLI. It states that income derived from an entity or arrangement treated as tax-transparent for Belgian or Dutch tax purposes is considered income from a resident of the contracting state, as long as that state equally treats this income for tax purposes as income from a tax resident.
2. Permanent Establishments: Following the application of the MLI, the definition of a permanent establishment (PE) under the 2001 treaty was supplemented with an anti-fragmentation rule, requiring certain conditions to be met to claim non-PE status for local presence with a preparatory or auxiliary character. The new treaty further expands the PE concept and includes anti-abuse measures.
3. Withholding Taxes on Dividends: The new treaty replaces the previous 5% dividend withholding tax rate with a full exemption, provided the beneficial owner of the dividends is a company located in the other contracting state holding at least 10% of the distributing company’s capital for a 365-day holding period. A specific provision allows the Netherlands to tax dividends for up to 10 years after the migration of shareholders to Belgium.
4. Withholding Taxes on Interest and Royalties: Under the new treaty, withholding taxes on interest and royalties are fully exempt, unlike the 10% withholding tax rate applicable in the 2001 treaty for interest.
5. Director Fees: The new treaty aligns the scope of director fees with the OECD Model Convention, removing the broader coverage that the 2001 treaty had, which could lead to complexities under Belgian domestic tax legislation.
6. Mutual Agreement Procedure (MAP): While the 2001 treaty included a MAP, the new treaty text surprisingly omits the arbitration mechanism present in the MLI. For this mechanism to apply to the new treaty, both countries need to notify it as a covered tax agreement.
7. Subject-to-Tax Rules: The protocol to the new treaty defines the conditions under which Belgian residents can be exempt from taxation for foreign income (excluding dividends, interest, and royalties). It also outlines the procedure for crediting foreign taxes against Belgian tax liability for Dutch-sourced interest and royalties.

Entry into Force:

Despite ongoing discussions concerning cross-border workers working from home, both countries decided to sign the treaty. The ratification procedures in the parliaments of Belgium and the Netherlands will determine the official entry into force. Assuming these processes are not completed before 2023, the new Belgium-Netherlands treaty is expected to take effect from 1 January 2025, applicable to income years starting from that date.