On November 9, 2021, Belgium and France signed a new convention to avoid double taxation. This updated treaty is currently undergoing ratification in both countries and will take effect in Belgium from the first income year after the year in which both ratifications are completed. The Belgian authorities now announces that they expect the new treaty to enter into force as of January 1, 2025.
This alert outlines key changes in the new treaty, which may impact many individual taxpayers with cross-border income.
1) Employment Income
The treaty provision covering employment income between Belgium and France will be replaced, introducing major changes for certain situations.
The general rule remains that wages, salaries, and similar income earned by a resident of Belgium will only be taxable in Belgium unless the employment is exercised in France (and vice versa). This rule will continue under the new tax treaty (new Article 14§1).
However, to align with the OECD model, Belgium and France modified the second paragraph covering exceptions to the general principle (new Article 14§2):
The current treaty (Article 11 §2) stipulates that income a resident of one contracting state earns from employment in the other contracting state (the “Working State”) is taxable only in the resident’s state if the following conditions are met:
– The recipient is in the Working State for no more than 183 days within the calendar year.
– The remuneration for the work during this period is paid by an employer established in the residency state.
– The employee does not work at the expense of a permanent establishment or fixed place of business of the employer in the Working State.
Changes in the New Treaty:
– The 183-day period will now refer to any twelve-month period beginning or ending in the relevant fiscal year, not limited to the calendar year.
– Instead of requiring the employer to be established in the residency state, the new treaty states that income remains taxable in the residency state if the remuneration is not borne by a resident of the Working State.
Example:
A Belgian resident working 130 days in France for a company based in Luxembourg, where the salary is fully paid by the Luxembourg employer:
– Current Treaty: Under the general principle, income earned for days worked in France would be taxable in France, as the employer is not a Belgian resident.
– New Treaty: Under the exception, Belgium could tax the income from French working days if the costs are not borne by a French entity, provided the employee spends less than 183 days in France over any twelve-month period and the remuneration is not paid by a French establishment.
2) Other Key Changes
a) dividends
The current treaty provides a foreign tax credit to prevent double taxation on dividends. The new treaty does not include this credit, likely increasing the Belgian tax burden on dividends by 50%.
b) Interest
Under the new treaty, interest income earned in one contracting state and beneficially owned by a resident of the other state is only taxable in the recipient’s state. The 15% withholding tax limit from the current treaty will no longer apply.
c) Director Fees
Currently, fixed or variable remuneration paid to directors, supervisory directors, liquidators, managing partners, and similar roles in companies, joint-stock companies, partnerships limited by shares, and cooperative societies are taxable only in the contracting state where the company resides.
The new treaty limits exclusive taxation to board members or those in similar roles, narrowing the scope considerably.
d) Students
Previously, there was ambiguity over whether Belgian authorities would consider income received by French students (or international volunteers) under a French Volunteering Program (VIE contracts) as taxable in Belgium. The new treaty clarifies that such income will only be taxable in Belgium if the cost is borne by a Belgian company or a permanent establishment in Belgium.
e) Capital Gains
The new treaty includes a “Capital Gains” provision.
Capital gains from the sale of real estate are taxable in the state where the property is located. Gains from the sale of shares or similar rights in a company, trust, or similar entity are taxable in the state where the company resides if:
– More than 50% of the company’s assets consist of real estate in that state.
– The state’s internal laws treat these gains similarly to gains from real estate sales.
This change primarily aims to allocate taxing rights to France in cases of cross-border sales of shares in a French real estate company (formerly known as SCI), given Belgium’s favorable treatment of capital gains.
