Withholding tax exemption under EU law
In the event of an allocation or payment of interest from a Belgian company to a company incorporated under foreign law, a withholding tax of – in principle – 30% is levied at source. However, the Interest and Royalty Directive (the "IRD") foresees an exemption.
In addition to the substantive requirements, which are not addressed here, the following conditions must be met to qualify for this exemption:
- The beneficial owner must be a company or a permanent establishment situated in an EU Member State (and which takes one of the forms listed in the Annex to the IRD);
- The two companies must be "associated companies". To do so, it is necessary that: (i) either one of the two companies holds at least 25% of the capital of the other; or (ii) both companies are directly or indirectly owned at least 25% by the same company; and
- The beneficial owner must meet the "taxation condition" of the DIR. This means that he is subject to one of the listed, identical or substantially similar taxes, without being exempt.
The SAS under French law is, for example, not listed in the Annex among the companies under French law covered by the benefits of the IRD. The European Commission introduced on 11 November 2011 a proposal to amend the IRD to (i) extend its scope, (ii) modify the participation threshold (from 25% to 10%) and (iii) limit the benefit of the IRD to companies receiving interest or royalties which are not exempt from corporate income tax on such income1. This proposal included amending the Annex to the IRD to include the French SAS, but was not adopted.
With regard to the Belgian law transposing the IRD, the Belgian legislature requires, among others, that the company receiving the interest is established according to one of the forms of companies listed in the Annex to the IRD for the application of the exemption from withholding tax. According to the current legislative framework and as confirmed by the Belgian Tax Administration in a circular letter, in the absence of a modification of the Annex to the IRD or of the Belgian internal provisions, the SAS under French law cannot benefit from this exemption for interest received from Belgian subsidiaries.
Reduction of the rate of withholding tax on the basis of treaty or domestic law
If an exemption from withholding tax on the basis of the IRD is not possible, there may still be an exemption based on domestic or treaty law.
In this respect, the rate of withholding tax retained at source on allocations or payments of interest from a Belgian to a French company or permanent establishment may be reduced pursuant to the current Belgium-France double tax treaty of 1964 ("1964 DTC"). Under this treaty, the state of residence may tax the interest, but the state of source may also levy withholding tax. The applicable rate may, however, not exceed 15% of the gross amount of the interest paid.
As a result, interest paid by a Belgian company to a French SAS company is currently subjected to a 15% Belgian withholding tax.
As announced in a previous newsletter, on 9 November 2021 Belgium and France signed a new double tax treaty ("2021 DTC"). After its entry into force, interest payments from a Belgian (or French) resident to a French (or Belgian) resident are only taxable in the State of residence. Therefore, as soon as the 2021 DTC comes into force - at the earliest on 1stJanuary 2023 in view of the time limits for parliamentary procedures - the allocation or payment of interest from a Belgian company to a French SAS will be eligible for an exemption from withholding tax. It should be noted that the treaty provision does not provide for any participation condition in order to benefit from the exemption; it is only necessary that the interest paid is at arm’s length (the exceeding interest amount cannot benefit from the exemption).
International groups with a Belgian subsidiary held by a French SAS are not uncommon. The SAS is a flexible company form that has gained popularity in France. It is important to ensure that Belgian law is properly applied when allocating or paying interest to such a legal entity, and to also meet the reporting obligations in Belgium. As a reminder, the withholding tax due must be paid to the Belgian Treasury within 15 days of the allocation or payment of the interest and a declaration to the withholding tax must be made within the same period.
Ahmed El Jilali - Senior Associate (firstname.lastname@example.org)
Justine Smeets - Associate (email@example.com)
Tiberghien’s international tax team will continue to monitor these and other tax developments relevant for Belgium / Luxembourg based multinational enterprises. Our editorial board consists of:
Koen Morbée (International and EU corporate tax, firstname.lastname@example.org);
Michiel Boeren (International and EU corporate tax, email@example.com);
Ahmed El Jilali (International and EU corporate tax, firstname.lastname@example.org)
Katrien Bollen (HR tax and global mobility, email@example.com);
Ben Plessers (Transfer Pricing and Valuations, firstname.lastname@example.org);
Gert Vranckx (VAT, customs, excises and other indirect taxes, email@example.com);
Rik Smet (International and EU corporate tax, firstname.lastname@example.org).
In case you have further questions on this publication or want to discuss a tax query, please do not hesitate to contact the author(s) or one of the members of the editorial board.
This newsflash is for information purposes only and cannot be relied upon as legal advice.