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A new treaty between the United States and Belgium to avoid double taxation has entered into force on December 28, 2007. The effective date for withholding taxes will be February 1, 2008.
The new treaty constitutes a “win-win” agreement for businesses in the U.S. and Belgium with transatlantic operations. It reduces double taxation of income, eliminates barriers to trade and investment, and facilitates cross-border capital movement.
Economic ties between the US and Belgium will be strengthened by the new treaty. With bilateral trade between the two countries valued at more than $35 billion annually, Belgium is the 18th trading partner for the United States, ahead of larger countries like India, Australia, Russia, and Spain. Some 1200 U.S. companies have already invested more than $52 billion in Belgium, whereas Belgian companies have invested more than $12 billion in the U.S., employing about 130,000 people.
The new tax treaty is but one more step in a series of measures the Belgian government has taken recently to increase Belgium’s attractiveness for foreign investors.
Since 2006, Belgium allows a deemed interest deduction for equity invested in a Belgian company or branch, thereby decreasing the effective tax burden. A recently enacted “Patent Income Deduction” effectively reduces the effective tax rate for patent income to maximum 6.8%, a rate substantially lower than the rates available for patent income in most other European countries. It significantly improves the prospects for patent development and holding companies in Belgium, licensing patents to U.S. affiliates. Finally, a new tax regime for pension funds went into effect last year, making Belgium the first European country offering multinationals a complete and comprehensive framework for the creation of both pan-European and international pension funds.
The US-Belgian Double Taxation Treaty contains a variety of interesting new features for U.S. companies with business plans in Europe.
1. It introduces a 0% withholding tax on dividend payments from a U.S. company in Belgium to its U.S. parent company, provided the U.S. entity in Belgium owns 10% or more of the Belgian company. This 10% ownership threshold is significantly lower than the threshold in other treaties recently concluded by the U.S. Combined with other general features of Belgium’s domestic tax system for holding companies, this may attract holding companies for holding the shares of U.S. affiliates. The exemption from withholding tax also applies to pension funds, provided the dividends are not the result of business activities by the fund.
2. It introduces a 0% withholding tax on interest. Together with the Notional Interest Deduction, this makes direct loans between the U.S. and Belgian affiliated companies more attractive, and increases possibilities for companies in Belgium to finance U.S. affiliates.
3. It is the first income tax treaty concluded by the U.S. to contain a binding arbitration procedure with a foreign country. The U.S. and Belgium have two years to resolve a tax dispute before arbitration starts, unless the two countries decide that the provision is not suitable for arbitration. An arbitration panel will decide one of two final last offers by both governments. It gives taxpayers the prospect of finality to a tax dispute within a specific timeframe.
4. Anti-abuse provisions designed to deny inappropriate use of the treaty were strengthened, to bring them into closer conformity with current U.S. treaty policy. On the other hand, new categories of taxpayers such as qualified charities or pension trusts will now be able to claim benefits.
5. It extends the benefits of the Treaty to companies owned by so-called “equivalent beneficiaries”, which may provide opportunities for multinational groups that are based in the EU, Switzerland or NAFTA.
Other changes in the new Treaty include a more tax friendly treatment of pension plan contributions and an extended information exchange provision. It allows, for example, for a tax deduction in the country of employment for payments made to a pension plan resident in the other country. The U.S. and Belgium will also, upon request by either government, exchange information held by a bank or other financial institution.
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