Introduction
The income that the Belgian company will receive from its foreign client will be classed as either business profit or a received royalty, based on the Double Tax Conventions (DTCs) that Belgium has made.
While business profits remain solely taxable in the receiving company's state of residence (Belgium) in principle, it is possible for the client to deduct what is known as withholding tax for royalties, based on the applicable DTC.
The difference in (internal judicial) classification means that levies are often incorrectly deducted abroad on remuneration paid to Belgian companies.
Today, it is even the case that states will attempt to deduct withholding tax from all outgoing payments from their country, which is due in part to the battle against tax avoidance (and the loss of tax income).
Poland, for example, deducts 15% withholding tax from every payment made by a company based in Poland to a foreign company. The United States of America even operates a 30% tariff for this. For the most part, however, this withholding tax can be avoided if the receiving business undertakes certain formalities. If, for example, it can be demonstrated by means of a residence certificate that the company to which the remuneration is paid legally resides in the member state in which it is based, this state being a party to the agreement, then no withholding tax (or only a limited amount, insofar as is permitted by the agreement concerned) will be deducted. The necessary formalities do need to have been completed prior to the payment being made.
Foreign levy
Where a Belgian company is facing a foreign deduction of withholding tax, the remuneration received will be lower than the invoice amount.
The first question that then arises is whether the foreign withholding tax was correctly deducted.
If the DTC stipulates that remuneration for technical support/knowledge should be classed as royalties and this same DTC also provides for withholding tax, then the client is justified in deducting withholding tax from the amount paid out.
India, for example, based on the DTC, will consequently be entitled to deduct withholding tax as a source state from the services provided by specialist technical consultants from a Belgian company for an engineering project.
Who should pay it?
The next question that arises is who should pay the foreign withholding tax deducted.
In theory, the withholding tax should be paid by the recipient of the income – the Belgian company. If a Belgian company does not wish to pay the withholding tax, it is therefore important to stipulate in the underlying agreement that the remuneration to be paid is 'grossed up' so that the net amount is the same as in a situation where there is no withholding tax whatsoever. In other words, it should be explicitly stipulated in the contract that any additional levies are not payable by the Belgian company, but instead by the counterparty.
Refundable in Belgium?
In the event that the foreign withholding tax was correctly deducted (and is not contractually payable by the counterparty), the final question that arises is whether the Belgian company can recoup this levy in Belgium.
The withholding tax will not be refundable initially, but it may be possible to recoup it by applying the SFTC system.
This is a measure provided for under Belgian law (the ‘SFTC system’), which allows for foreign withholding tax on royalties to be refunded, among other things, under certain conditions.
The SFTC (Standard Foreign Tax Credit) is a notional advance levy that represents a fixed amount of tax to which the royalty payment was subject abroad. This SFTC amounts to 15/85 of the net income in principle, prior to deduction of withholding tax and, where applicable, the residence levy. The SFTC is fully refundable on the part of the receiving Belgian company, but any balance cannot be reclaimed.
Please note that the SFTC system is only neutral where the foreign tax is equal to 15%.
SFTC
In order be able to use the SFTC system, the remuneration paid must fall under the scope of this measure.
However, the bulk of legal doctrine dictates that, in order to determine whether income is classed as a royalty for the application of SFTC, it is not the legal definition of the concept of “royalty” under the terms of the treaty that should be considered, but instead the classification in accordance with internal Belgian law.
And that might just prove too much when it comes to remuneration for technical support/knowledge.
After all, in accordance with Belgian law, the SFTC is among the things that can be refunded in relation to income from movable assets and capital.
Administrative commentary does not in any sense imply that remuneration for technical knowledge and/or support should be considered a “royalty” under the internal Belgian legal definition. Indeed, we are talking about a service provided, and not about a movable asset offered in settlement. In consequence of this, it would be difficult to suggest that remuneration for technical support/knowledge could fall under the scope of the SFTC system.
What about the precedence of the DTCs?
Given that DTCs are legal sources of international law, they should normally be given precedence over national legislation[1], in accordance with the general legal principle regarding the primacy of international law over national law. Logically, this ought to mean that, where a DTC stipulates that Belgium should reduce its taxation by the amount of tax paid abroad, Belgium is effectively obliged to do so.
However, where the DTC contains a supplementary clause to the effect that “this reduction is equal to the flat-rate element provided for in Belgian law” and this national legislation does not then stipulate an SFTC arrangement for that kind of income, a failure to grant SFTC does not strictu sensu violate the precedence of the agreement. Here, the DTC is doing nothing more than saying the national rules must be applied.
As a result, the reference to the Belgian SFTC system in the Double Taxation Conventions means that Belgium will only provide this SFTC where the income concerned qualifies as royalties under Belgian law. Given that remuneration for technical knowledge and/or support would struggle to qualify as a “royalty” under the internal Belgian legal definition (cf. supra), no SFTC will be obtainable as a result, even by referring to the agreement directly. This means that the foreign withholding tax will constitute an additional cost for the Belgian service provider.
It will only be mandatory for the tax credit to be granted where a DTC specifically regulates how Belgium must provide the tax credit from the SFTC system, even though the application criteria have not been met under internal national legislation. We see this in the Belgium-France DTC, which, after the reference to national law, then adds “although [the flat-rate element of foreign taxation] may not amount to less than 15 pct. of the stated net amount.” This therefore means that the refund should be provided in accordance with the national rules, although the refund may not amount to less than 15%.
Although the Belgian SFTC system does not apply to certain categories of income, Belgium is nonetheless obliged to allow a minimum refundable amount of 15% where such a clause is present in the applicable agreement. After all, international law has primacy over national law. This means that a failure to allow the refund – despite such express stipulations in the agreement – would constitute a violation of the DTC, as the Court of Cassation ruled in a judgement on 16 June 2017.[2] It should be noted that the Treasury has not yet accepted this ruling, and has adopted a ‘wait-and-see’ approach until the Court of Appeal in Antwerp (to which Cassation has referred the matter) has passed judgement on it.
Conclusion
Where a Belgian company receives remuneration from abroad, it should always check whether certain amounts may be deducted abroad based on the applicable taxation treaty.
If this is effectively the case, then it should check whether any such amounts deducted can be avoided by undertaking certain formalities (such as a residence certificate, for example) in advance. Indeed, where withholding tax has already been deducted incorrectly, experience has shown that it is not always straightforward to reclaim a refund of the excess withholding tax in practice.
Conversely, if withholding tax is a legitimate possibility abroad, then the preference is for a suitable clause to be included in the contract, to ensure that the Belgian company will receive the full amount invoiced in its account. Where such a clause is not possible (or if one was not implemented), then further checks should be made to see whether the SFTC system can be applied, which in some cases can even work out in the company's favour.
If a DTC solely refers to national legislation, i.e. the internal SFTC system, then the SFTC refund can only be granted (or indeed refused) on the basis of the internal rules. Conversely, where a DTC refers to national legislation, but with the explicit nuance that the refund may not amount to less than 15% in any event, then Belgium must permit a refund (even though this is not provided for under internal law).
[1] Cf. The general legal principle: “Lex superior derogat legi inferiori”.
[1] CoA 16 June 2017, FJF 2017/244.
