On 12 October 2016, the new Belgium-Japan Income Tax Treaty was signed in Tokyo during the Belgian economic mission. Once in force and effective, the new treaty will replace the old Belgium-Japan Income Tax Treaty (1968) as amended by the protocols signed in 1998 and 2010.
The treaty will enter into force 30 days after the exchange of ratification instruments, and its provisions generally will apply from 1st of January following the entry into force. From experience, the period of time between the signature and the ratification may take a couple of years.
The new treaty provides for significant improvements for Japanese investors…
This new treaty provides for significant improvements as Japanese investors can now claim a withholding tax exemption on dividend, interest and royalty payments subject to certain conditions.
Indeed, under the new treaty, the maximum withholding tax rate on dividends amounts to 10 percent. An exemption can be claimed if the beneficial owner is a company that owns, for a six-month period ending on the date on which entitlement to the dividends is determined, directly or indirectly at least 10 percent of the company distributing the dividends. There is also an exemption foreseen if the beneficial owner is a pension fund.
The maximum withholding tax rate on interest payments amounts to 10 percent. An exemption is available on interest paid by a company beneficially owned by a company of the other contracting state. An exemption also applies to interest beneficially owned by a qualifying pension fund. Royalties will only be taxable in the beneficial owner’s state of residence.
With these amendments, Belgium reconfirms its status as the go-to holding location for the European activities of Japanese investors.
…but also provides for changes which can impact Japanese investors having operations in Belgium
Although the treaty generally follows the OECD Model convention, there are certain important BEPS inspired deviations which should be considered, e.g.:
- Anti-fragmentation rules preventing PE abuse;
- Broader definition of dependent and independent agents for PE purposes;
- Capital gain taxation of predominantly held real estate companies; and
- New LOB provisions similar to the ones provided in the US treaties, yet more beneficial for qualified holdings and headquarters.In our experience, most large Japanese multinational companies operating in Belgium should fall within the LOB provision as they would benefit from the listed qualifying entity or multinational headquarter.
The Belgium-Japan Double Tax Treaty is the first Belgian double tax treaty to take into account the recent OECD specific works on PE’s and some of the BEPS action points (action points 6 for the LOB provisions and 7 for PE’s).