New Preventive Double Taxation Treaty between Belgium and The Netherlands: What's Changing

On June 21, 2023, Belgium and the Netherlands signed a new preventive double taxation treaty, which is intended to replace the agreement that has been in place since 1970.

This new text, expected to come into effect on January 1, 2025, will introduce significant changes compared to the current treaty.

1. Expansion of the Concept of Permanent Establishment

One notable modification involves the concept of a permanent establishment, which has been significantly broadened.

• On one hand, the minimum duration required for a construction or assembly site to qualify as a permanent establishment remains set at 12 months. However, a new anti-fragmentation provision stipulates that when several closely related companies are involved in the same project, their respective activities must be combined to calculate the 12-month period, provided that each activity lasts longer than 30 days.

• On the other hand, the definition of a personal permanent establishment has been expanded. Now, it is no longer necessary for an individual to be authorized to conclude contracts to qualify as a personal permanent establishment. It suffices if the person habitually negotiates the essential elements of such contracts, without any substantial modifications being made by the company represented.

2. Dividend Exemption under Certain Conditions

Regarding dividends, the treaty introduces a full exemption from withholding tax for dividends paid to a corporate beneficiary that holds at least 10% of the distributing company’s capital for a continuous period of at least 365 days.

If these conditions are not met, a limited withholding tax of 15% will apply.

Distributions to pension funds remain exempt.

3. Elimination of Withholding Tax on Interest

For interest payments, the new treaty eliminates any withholding tax in the state of origin.

4. Impact on Securities Accounts

The annual tax on securities accounts, which is currently not applicable to Dutch residents under the existing treaty, will become applicable in the future.

The new treaty limits its scope to income taxes, thus excluding capital taxes.

5. Measure in Favor of Cross-Border Workers

For workers residing in the Netherlands but working in Belgium, a tax compensation mechanism has been introduced.

This mechanism aims to ensure that they are not fiscally disadvantaged compared to a situation where they would work in their country of residence. If the total tax burden in Belgium, including income tax and social security contributions, exceeds what they would bear in the Netherlands, they will be granted a tax reduction.

6. Increased Tax Transparency for Investment Funds

The treaty also introduces increased transparency for mutual funds and closed CFCs, allowing direct income allocation to participants.

7. Effective Taxation Obligation

Income exempt in Belgium must be effectively taxed in the Netherlands to benefit from the treaty provisions.

This clause resolves disputes regarding income not subject to effective taxation in the source state.

8. Directors’ Remuneration

The new treaty clarifies the taxation of directors’ remuneration based on the nature of the activities performed.

• Income specifically earned for duties as a director, such as those of board or supervisory council members, is taxable in the state where the company is established. Thus, Belgium or the Netherlands retain exclusive taxation rights based on the company’s tax residence.

• However, remuneration from other activities, such as consulting or management services, does not fall under this rule and follows the general provisions for employment income.

9. Specific Rules for Directors’ Migration

The new treaty establishes specific rules for directors transferring their tax residence from the Netherlands to Belgium.

• The Netherlands retains the right to tax latent capital gains on shares held before migration, in accordance with its domestic law.

• Additionally, for a period of 10 years following the transfer of residence, dividends and interest paid by a Dutch company to these director-shareholders remain subject to withholding tax in the Netherlands.

Conclusion

The new preventive double taxation treaty between Belgium and the Netherlands limits opportunities for abuse and enhances fiscal transparency.

The modernization of the rules, particularly the expanded concept of a permanent establishment, demands careful attention from Belgian taxpayers engaged in activities with the Netherlands.

If you are affected by these changes, Vanbelle Law Boutique is happy to assist you in meeting your tax obligations.

‍Walid Jaafari

‍Junior Associate