The new double taxation treaty that was signed between Belgium and China on 7 October 2009 (the “New Treaty”) entered into force on 29 December 2013, replacing the currently applicable treaty of 18 April 1985 (as amended in 1996) (the “1985 Treaty”). The New Treaty applies to income arising as from 1 January 2014 (in respect of withholding taxes) or to income pertaining to fiscal years beginning as from 1 January 20141.
The English, Chinese, Dutch and French versions all have equal authenticity; however the English version prevails in case of differences in interpretation.
The New Treaty ranks amongst China’s most beneficial treaties, putting Belgium on near par with gateways like Hong Kong, Singapore, the Netherlands and/or Luxembourg for structuring Chinese inbound and outbound investments.
In this Newsletter, we will highlight certain key features of the New Treaty and elaborate on its most important aspects.
1. Key features
The New Treaty is mainly based on the OECD Model Convention 2008. There are some deviations however, most notably so with regards to the anti-abuse measures introduced to prevent tax structuring the main purpose of which, or one of the main purposes of which, is to take advantage of the New Treaty. This new general anti-abuse provision is however in line with the most recent international treaties (including the one concluded between China and the Netherlands on 31 May 2013).
Also, the definition of permanent establishments was extended in that it now also includes the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purposes, but only where such activities continue (for the same or a connected project) within a Contracting State for a period or periods aggregating more than 183 days within any twelve month period. This is derived from the UN Model Convention of 2011.
1.2. Withholding taxes
One of the key features of the New Treaty is the reduction of withholding tax rates on dividends (from 10% to 5-10%) and on royalties (from 10% to 7%).
The general withholding tax on dividends that can be levied by the Contracting State of which the company paying the dividends is a resident is limited to 5% if the beneficial owner is a company (other than a partnership (“personenvennootschap”/ “société de personnes”)) which, prior to the moment of the payment of the dividends, has been holding, for an uninterrupted period of at least twelve months, directly at least 25% of the capital of the company paying the dividends. In all other cases, the rate is set at 10%, which was the sole rate applicable under the 1985 Treaty.
The New Treaty specifically mentions that the lower dividend withholding tax will not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividends are paid to take advantage of the article by means of that creation or assignment.
Contrary to certain other double taxation treaties concluded by China (such as the new treaty with the Netherlands, which is yet to enter into force), no exemption of withholding tax applies to dividends in case the beneficial owner is a Government of the other Contracting State. However Chinese SOEs investing into Belgium through a Belgian subsidiary should be able to achieve a zero withholding tax rate nonetheless based on domestic Belgian laws.
The Contracting State in which the interest arises, can levy a withholding tax up to 10%. This rate has remained unchanged compared to the 1985 Treaty.
The exemption of withholding tax that applied under the 1985 Treaty with regards to state owned banking and credit institutions has been extended and modified. The New Treaty prescribes that interest arising in a Contracting State and paid to the Government of the other Contracting State, a political subdivision, a local authority or the Central Bank thereof or any financial institution wholly owned by the Government of the other Contracting State, or paid on loans guaranteed or insured by the Government of a Contracting State, a political subdivision, a local authority or the Central Bank thereof or any financial institution wholly owned by the Government of such Contracting State, shall be exempt from tax in the first-mentioned State.
The same general anti-abuse provision that is part of the dividend article is introduced with regards to interest payments. Therefore no Contracting State has to extend the benefits of the article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this article by means of that creation or assignment.
The withholding tax on royalties that can be levied by the Contracting State in which they arise has been lowered from 10% to 7%.
The scope of the term “royalties” is wider than the one in the model convention. For purposes of the New Treaty, the term also includes films or tapes for radio or television broadcasting as well as payments for the use of, or the right to use, industrial, commercial, or scientific equipment.
Again, the article provides for a general anti-abuse measure which is similar to the one introduced with regards to dividend and interest payments.
1.3. Capital gains
Capital gains on shares have long been, and for the most part (subject to certain taxation and holding requirements) still are, fully exempted under Belgian law. This exemption has traditionally been one of the pillars and one of the most well-known characteristics of the Belgian tax regime.
The New Treaty, as did the old one, does provide however that in case the alienator is a resident of one Contracting State and sells shares he owns in a company that is a resident of the other Contracting State, that in that case the other Contracting State has the right to tax the capital gain. This provision only applies on the condition that the alienator, at any time during the twelve-month period preceding the alienation has owned directly or indirectly at least 25% of the shares of that company.
Shares in which there is substantial and regular trading on a recognized stock exchange are excluded from the above mentioned provision, provided that the total of the shares alienated by the resident during the fiscal year in which the alienation takes place does not exceed 5% of the quoted shares.
Also, gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
The amending protocol furthermore stipulates that if, in a Contracting State, the rate of taxation on the capital gains exceeds 10%, the competent authorities shall consult each other.
Both provisions are more detailed and elaborate versions of the ones that were already part of the 1985 Treaty.
1.4. Exchange of information
The article dealing with the exchange of information has been modernized and now specifically stipulates that the grounds for refusal of a Contracting State to exchange information may not be invoked to decline the supply of information held by banks or other financial institutions.
The limitations on the exchange of information may not be construed to permit a Contracting State to decline the supply information solely because it has no domestic interest in such information.
1.5. Anti-abuse measures
As already mentioned, the dividend, interests and royalties articles explicitly mention that the treaty benefits will not be extended to those taxable persons of which (one of) the main purpose(s) is/are to “take advantage” of the New Treaty. As mentioned above, this new general anti-abuse provision is however in line with the most recent international treaties (including the one concluded between China and the Netherlands on 31 May 2013).
Furthermore, in its miscellaneous provisions, the New Treaty provides that a Contracting State is not prevented by the treaty to apply its domestic laws and measures concerning the prevention of tax evasion and avoidance, insofar as they do not give rise to taxation contrary to the New Treaty
2. Concluding remarks
In general, the New Treaty largely follows the OECD Model Convention of 2008. It follows the international trend of more elaborated and effective anti-abuse measures and it is in that respect rather a modernization of the 1985 Treaty than a general overhaul.
The New Treaty notably provides for significant reductions of withholding tax rates and for more detailed and elaborate rules on capital gains. In particular, the new withholding tax rate on dividends is the lowest rates available under Chinese tax treaties. Such reduced withholding tax rates, combined with the Belgian domestic exemption on most capital gains, its other domestic tax incentives and certain non-fiscal considerations (such as its central location, excellent hard and soft infrastructure and its hosting of the EU decision-making institutions), offer ample opportunity for Chinese companies to structure their European investments via headquarters in Belgium.
In this respect, readers may be reminded that Belgium was the first country to sign a tax treaty with Hong Kong (in 2003). Since then, Hong Kong/Belgium structures have often been used for China-originated investments into Europe. This has resulted into a wealth of expertise which is available to be tapped into for purposes of using the new and improved treaty with the People’s Republic of China also.
- The exact date of entry into force was initially subject to debate. However, it has been retroactively clarified by the governments of both Contracting States (on 21 January 2014 (China) and 27 January 2014 (Belgium)) that the internal legal procedures had been completed on 28 November 2013, so that the new treaty applies to income arising as from 1 January 2014 (in respect of withholding taxes) or to income pertaining to fiscal years beginning as from 1 January 2014.
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