From withholding tax limitation to exemption
The limitation to withholding tax of 5% in case of distribution of dividends by a subsidiary to its parent company will be replaced by an exemption. Under the new treaty, the source state is no longer taxable in case of distribution to a parent company:
- who is the beneficial owner of the dividend; and
- who is a resident of the other State; and
- has a capital that is 'wholly or partly divided into shares'; and
- "immediately" has a holding of at least 10% in the distributing company and holds that holding for at least 365 days.
What is peculiar is that the parent company must have a capital divided 'wholly or partly' into shares. In principle, this is problematic for the Belgian BV (which (no longer) has a capital divided into shares since the WVV entered into force). The question remains whether a practical solution can be found for this on the occasion of the adoption of the Convention. The provision that the 10% shareholding must be held for 365 days appears at first sight to be new, but is not: pursuant to the application of the MLI to the current treaty, this rule already applies today. Moreover, any mergers or demergers do not break the 365-day period.
Incidentally, note that even the lump-sum benefits (currently 6.17%) from an exempt investment company (VBI) are explicitly regarded as dividends within the meaning of the convention (where the VBI itself is not party to the convention). A shareholder of a VBI residing in Belgium must also take into account the application of the Cayman tax: in principle, the income of the VBI is imputed to him and taxed in Belgium. The combination of the two systems is complex: it is thus best to consider annually whether the effective distribution of a dividend is opportune (in which case the Netherlands will omit the tax on the regular benefit), and if so what is the best timing of this from a Belgian perspective: after all, these dividends are also taxable in Belgium, unless it can be shown that this is a distribution of income received by the VBI that was already taxed in Belgium (in a previous taxable period) with the application of the Cayman tax. Please note that the Netherlands has announced that this regime will be restricted as of 2025 so that the importance of these issues will los their importance.
Furthermore, income obtained upon liquidation of a company or in case of repurchase of own shares remains to be regarded as dividend (except in case the special regime applies to natural person immigrated to Belgium). This is also the case under the current treaty.
Interest: taxing competence
Also for interest, the state of residence remains taxing jurisdiction. The source state's taxing competence will be removed under the new treaty. Under the current treaty, the source state can withhold up to 10% withholding tax. However, the current treaty provides for a number of treaty exemptions such as the exemption from withholding tax on interest paid to a company. The Netherlands does not currently operate a withholding tax on interest, so this deletion has no practical relevance from a Dutch perspective at present. As far as Belgium is concerned, the deletion is relevant, for example, in situations where interest is paid to a Dutch resident who does not qualify as a company (e.g. a Dutch private individual), and who currently cannot benefit from the exemption from withholding tax under the current treaty. What regularly occurs in practice is the annual payment of interest by parents residing in Belgium to their children residing in the Netherlands on gifts under debt recognition (a Dutch planning technique that regularly occurs among Dutch nationals immigrating to Belgium). Also, the exemption under the new treaty is not linked to conditions (which is the case under the Interest and Royalties Directive, for example).
At first glance, the changes in terms of moveable income are relatively limited. However, for Dutch nationals immigrating to Belgium, there are some peculiarities that we will explain in a subsequent article.
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