What does the new double tax treaty between Belgium and France have in store?

One day, God created woman

A double tax treaty assigns the taxing power to one of the two countries to tax an income. Its aim is to minimise double taxation or non-taxation. The original double tax treaty with France is the very first one our country concluded and dates back to the 1960s. Although it was supplemented several times, a revision was welcome. Certain tax issues proved difficult to resolve. That is why it took some time for the new final text to take shape.
 

The saga of the SCI

A traditional bone of contention is the tax treatment of an SCI. In France, a natural person often acquires or owns real estate through a so-called société civile immobilière (SCI - real estate partnership). An SCI has legal personality in France for the purposes of French company law.

The Belgian tax authorities regard an SCI as a 'company’. The shareholder owns 'shares' that yield 'dividends' or 'capital gains on shares’. This is interesting, because capital gains realised on shares are exempt from personal income tax in Belgium.

On the French side, the tax authorities consider an SCI to be translucent. This means that the French tax authorities look through the SCI as if it were not there. The SCI's income is deemed to have been allocated directly to its French or foreign shareholders. On the basis of this characterisation, France as the source State may tax this 'real estate income', and Belgium as the State of residence must eliminate double taxation.

Both in Belgium and France these divergent views led to different positions and case law, but opinions have so far remained divided. The new treaty would settle this dispute by stating that France is in any case competent to tax capital gains realised on 'real estate shares’. These are generally companies with a balance sheet total of which more than 50% is comprised of property located in France.
 

All is fair at the border

Cross-border workers are natural persons who live on one side of the border and work on the other side. Provided that they meet certain conditions, they are taxed in their state of residence.

For Belgians, the special cross-border worker arrangement with France has already been abolished since 2012. A Belgian resident who usually works in France is taxable there and in Belgium benefits from the exemption with reservation of progression.

French residents, however, can still benefit from a cross-border worker arrangement. In France they are taxable on their salaries for their activities in the Belgian border region, provided that they work a maximum of 30 days per year outside the Belgian border region, e.g. at home in France.

The new treaty seeks to maintain this regime until 2033 provided that the person concerned already benefited from this arrangement before 1 January 2012 and his or her actual situation does not change.
 

I’ve come to tell you I’m leaving

The old double tax treaty between Belgium and France stipulates that Belgium must grant a credit (FTC - lump-sum foreign tax credit) for French withholding tax (usually 12.8%) withheld on dividends of French origin. This tax credit amounts to 15% of the net amount of the dividend, i.e. after deduction of the (lower!) French withholding tax.

The Belgian tax authorities did not agree because the FTC for individuals has been abolished in Belgian law since 1988. However, in a judgment of 15 October 2020, the Court of Cassation decided that the double tax treaty takes precedence over Belgian law and that the FTC therefore has to be offset against personal income tax.

In concrete terms, the result is that, in the case of a natural person, Belgium enjoys a 15% credit on dividends of French origin, provided of course that the dividend is expressly declared in a Belgian personal income tax return. The result is a pleasant and unique cash flow advantage for a Belgian investor! Unfortunately, the new treaty wants to exclude the application of this attractive tax credit...
 

J'aime, j'aime les VIE

In France, young people between 18 and 28 years of age can make use of a special status: les volontaires internationaux d'entreprise (VIE in the jargon - international volunteers). In short, VIEs are French young people who are temporarily sent to foreign offices of French multinationals to gain experience.

In France, they benefit from an attractive tax status for the allowances they earn during this internship. This means, however, that VIEs remain liable for tax in France during this internship period. On the basis of the article on interns of the double tax treaties, this is usually the case.

The State of employment must then agree to apply that article to VIEs. And that's where the problem lies. Unlike many other countries, Belgium applies the article on employees to VIEs. This makes them liable for tax in Belgium. The new double tax treaty seeks to remedy this.
 

OECD BEPS, et alors?

BEPS stands for Base Erosion and Profit Shifting. It is a report with 15 action points from the OECD to combat and discourage aggressive international tax planning. The new treaty is intended to reflect the BEPS philosophy.

One example is the stricter definition of a permanent establishment (PE). This is a factual situation where, for example, a Belgian company conducts its core business in France with local employees or through a local office. In this case, the Belgian company must pay part of the corporate income tax in France and benefits from an exemption from Belgian corporate income tax. A tax return must be filed in France. Thanks to treaty protection, activities of a purely preparatory nature do not lead to a taxable PE in the other country.

But where do so-called preparatory activities end and does the core business begin? With the introduction of an anti-fragmentation rule, the OECD wants to ensure that clearly interrelated activities are not separated from each other in order to become, each individually, covered by an exemption rule. This will also be expressly reflected in the new double tax treaty, as a result of which a Belgian company will sooner be faced with a taxable PE in France, and vice versa.
 

MLI: a false friend?

Once the new double tax treaty enters into force, its content must be reviewed against the MLI (Multilateral Instrument) to determine exactly which international treaty rule applies. The OECD MLI was formally signed by Belgium and 67 other countries in Paris on 7 June 2017. It has been in effect in Belgium since 2020.

The purpose of the MLI is to avoid one country having to bilaterally renegotiate all of its individual double tax treaties with every other treaty country. That would be a time-consuming process. The MLI aims to provide an efficient and workable solution by supplementing or amending the more than 3,000 double tax treaties worldwide. As a result, tax authorities in each country have much more flexibility to challenge aggressive cross-border structures and no longer have to wait for an existing double tax treaty to be renegotiated.

To make this possible, Belgium and France must each have their new double tax treaty formally ratified first as a so-called Covered Tax Agreement. With that ratification, the local tax authorities confirm that a specific double tax treaty is subject to the application of the MLI. The taxpayer will also need to verify whether the Belgian or French tax authorities have not adopted a special position with respect to certain MLI rules, because if the tax authorities express an objection to certain MLI provisions, they may not have any effect (yet).

The new double tax treaty between Belgium and France will clearly give a new tax dimension to many existing and future cross-border transactions, both private and business. Forewarned is forearmed!