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Het Protocol TUSSEN België en het Verenigd Koninkrijk is in werking getreden
Het Belgisch Ministerie van Financiën en zijn Britse tegenstander, Her Majesty's Revenue & Customs, hebben aangekondigd dat het Protocol tot wijziging van de Overeenkomst tussen de Regering van het Koninkrijk België en de Regering van het Verenigd Koninkrijk van Groot-Brittannië en Noord-Ierland tot het vermijden van dubbele belasting en tot het voorkomen van het ontgaan van belasting inzake belastingen naar het inkomen en naar vermogenswinsten (1987) in werking getreden is op 24 december 2012.

Hierna volgt een tekst in het Engels die gepubliceerd wordt in Tax Notes International.

On 24 June 2009, the Belgian Finance Minister and the British Chancellor of the Exchequer signed a protocol that must update the last double tax treaty that was signed 25 years ago, on 1 June 1987. 

Before a treaty or protocol can enter into force, the two Ministers have to exchange the ratification documents.  In Belgium, ratification is not quite as simple as in the UK ; ratification is a matter for Parliament that must sit down and vote to adopt the treaty or protocol.  However, Belgium's powers to negotiate double tax treaties had come to a standstill because it had become clear that all income tax treaties were mixed treaties and required the ratification by the Federal Parliament, the Flemish parliament, the Walloon parliament and the parliament for the Brussels-Capital Region as well as the two parliaments for the French and German Speaking Communities. 

The Belgian procedure to ratify the Protocol has now been finalized and the Act ratifying the Protocol, as well as the Protocol, were published in the Belgian Official Gazette of 28 December 2012. The protocol entered into force as of 24 December 2012.

What will change ?
The protocol amends the provisions of the double tax treaty that dealing with dividends, interest, royalties, employment income, directors' fees and pensions. Some of the major changes are as follows.

The UK does not withhold tax on dividends paid out but Belgium does. The Belgian domestic rate is 25 % and under the 1987 treaty, that percentage could be limited to 10% or 5 %.  If a dividend is paid out to a British company or individual, Belgium may still withhold 10 %.  However, Belgium must always exempt dividends paid to a British pension fund (provided that such dividends are not derived from the carrying on of a business by the pension scheme or through an associated enterprise) or dividends paid to a UK parent company that has held 10 % of the shares of the Belgian subsidiary for an uninterrupted period of at least 12 months.

This dividend withholding tax exemption is similar to the withholding tax exemption that exists in Belgium and that just an extension of EU Parent-Subsidiary Directive to treaty countries. However, the Parent Subsidiary Directive exemption is limited to certain types  of companies. 

In some situations, dividends paid by investment vehicles out of income derived from real property may be subject to a maximum dividend withholding tax rate of 15%.  That recognises the fact that REITs suffer no United Kingdom corporation tax on their underlying profits. Dividends paid out to a Belgian resident by a UK tax transparent entity will become liable to tax in Belgium unless the Belgian resident taxpayer has been liable to income tax in the UK on the income out of which these dividends are paid out (see below)

The Protocol also has a new interest article on interest that eliminates withholding tax on all interest paid between Belgian and British enterprises. 
Interest paid from Belgium is liable to a domestic withholding tax at a rate of 25 % (since 1 January 2013). Under the 1987 treaty, Belgium could withhold a maximum of 15 % tax on interest paid to a British company or individual, as of 1 January, Belgium may not withhold more than 10 %.  

Moreover, Belgium must always exempt interest paid to a British pension fund, interest paid to the other Contracting State, to one of its political subdivisions or local authorities or to a public entity, or interest paid between enterprises, irrespective of whether they belong to the same group. That is an improvement upon the exemption under the EU Interest and Royalty Directive which requires a 10% participation between the payer and the payee.

That means that virtually all cross-border interest between the two countries is free of tax in the source state.

The provisions on dividends, interest and royalties have been updated with an anti-abuse provision to make sure that the taxpayer has not put himself in a situation to get tax relief under these provision ; that must prevent tax treaty shopping.

Under the new provisions, profits from shipping and air transport will be taxed solely in the state of residence of the operator rather than the state of the place of effective management.

As for employment income, the current rules are reversed for employees employed in international transport (that is working aboard a ship, an aircraft or a road or railway vehicle operated in international traffic). In the past they were liable to tax in the country where the management of their employer was located which created an unintended double exemption for some Belgium residents received under the 1987 treaty.  As of 2013, a Belgian resident pilot or member of the Eurostar crew will be taxed at home.

There is a change for directors' fees as well.  Belgian resident directors of a British company pay tax in the UK if they work in the UK  This regime is clarified to make sure that it also applies to directors of a company that does not have a board of directors.

The protocol completely changes the rules for pensions, but then only for new pensioners who receive their pension for the first time after 1 January 2013 ; they will pay tax only in the country  from where their pensions are paid.  Belgium is one of the increasing number of countries that want to tax pensions when they have allowed tax relief on contributions from which the pensions are paid. However, the protocol preserves the existing treatment for pensions already in payment in the year in which the protocol enters into force. Pensioners who retire in 2012 at the latest will, continue to pay tax in the country where they live. 

Pensioners who retire in Belgium will pay British income tax on the pension they receive from the UK (including their UK state pension). British government pensions will continue to be taxable in the UK though. 

Pensioners who go back to the UK to enjoy their pensions will not be able to benefit from the advantageous combination of the exemption in Belgium on their lump sum pension and extra statutory concession ESC A10 in Britain which meant that they did not pay tax on their pensions.  Since 2013 they need some careful retirement planning.

Elimination of double taxation

Under the terms of the 1987 double tax treaty, Belgium must exempt income (other than dividends, interest or royalties) derived by a resident of Belgium irrespective of whether that income had  been taxed in the United Kingdom.

The Protocol introduces a 'subject to tax' clause ; Belgium must only exempt the income if it is 'taxed' in the United Kingdom in accordance with the provisions of the income tax treaty.  The term 'taxed' is then defined as meaning that the item of income is subjected to the tax regime that is normally applicable to such item according to the United Kingdom tax law.

The Protocol now clearly states that Belgium must also exempt income regarded as dividends under Belgian law, which is derived by a resident of Belgium from a participation in an entity that has its place of effective management in the United Kingdom, and has not been taxed as such in the UK, provided that the resident in Belgium has been 'taxed' in the United Kingdom proportionally to his participation in such entity. 

This must eliminate the risk of double taxation in case of a hybrid entities (e.g. an LLP) that is transparent in the United Kingdom ; each partners is personally liable to tax on his share of the partnership income.  In Belgium, the partnership is treated as a company and the Belgian partners would have been liable to tax on the profit distribution they receive from the LLP.

Belgium reserves the right to levy municipal taxes (additionnels communaux / gemeentelijke opcentiement) on income earned in the UK by a Belgian resident taxpayer, even if that UK-source income must be exempted from Belgian federal income tax.  A partner of an international partnership (e.g. a law firm) will normally see his income split over the different countries where the partnership has offices. The income relating to the UK is taxable in the UK, but must be exempt in Belgium. Belgium must not tax his non Belgian income, but it may determine the tax rate (on the Belgian income only) as the rate that would theoretically apply to his worldwide income.  The UK income remains exempt but Belgium will calculate the municipal tax (typically between 6 and 9 %) on the theoretical tax on the UK income.

 Procedural provisions

Furthermore, the protocol adapts the treaty to include up to date provisions allowing exchange of information between tax administrations in line with the new OECD standard in the exchange of information article.

A provision providing for binding arbitration has been inserted into the article dealing with mutual agreement in the event of there being a protracted dispute between the two taxing authorities. Companies welcome the certainty that arbitration brings and, while arbitration of transfer pricing disputes is already available under the EU convention, arbitration will now be available for all issues arising under the tax treaty.

A significant feature in UK tax law is the remittance basis : UK residents who are not domiciled or who are not ordinarily domiciled in the UK can opt to be taxed on foreign income or gains if they are remitted to the UK.  The double tax treaties signed by the UK often have a provision that allows the other state to tax the income that has not been remitted even if the double tax treaty would normally not have allowed the taxation. Belgium requested that the protocol would go even further : an individual resident in the UK will not be entitled to any treaty benefits from Belgium on income arising in the year for which he claims the remittance basis.

When will it change ?
In Belgium, the tax year coincides with the calendar year.  The Protocol will apply to income earned in tax year 2013 (year of assessment 2014) for individuals and for companies whose accounting year is 2013, in other words for the income made in 2013. 

If tax is to be withheld at source, the new rules will apply to income that is payable or that is credited (on a bank account) after 1 January 2013.

In the UK, the tax year runs from 6 April to 5 April. The old rules will continue to until 5 April ; the protocol will apply to income earned in the tax year 2013-2014. In respect of corporation tax, that will be for any financial year beginning on or after 1 April 2013.

Marc Quaghebeur
Partner De Broek Van Laere & Partners

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