|
In the last of his three articles, Marc Quaghebeur, of Vandendijk & Partners continues his overview of the Belgium-US Double Tax Agreement with a look at the Limitation-On-Benefits provision and the new information exchange provisions.
 Marc Quaghebeur
The 1987 Protocol had introduced a limitation on benefits clause but that was limited to dividends, interest or royalties. The treaty introduces general anti-treaty-shopping provisions to prevent residents of third countries from benefiting from what is intended to be a reciprocal agreement between two countries. Instead of relying on a taxpayer's determination of purpose or intention, the treaty sets a series of objective tests. A resident of a Contracting State that satisfies one of the tests will receive benefits regardless of its motivations in choosing its particular business structure. Although the Limitation-On-Benefits Provision is reciprocal, it is clearly meant to protect the interests of the U.S. Treasury. Nevertheless, the Belgian negotiators have been able to extend the benefit to publicly-traded corporations listed on a stock exchange within the European Economic Area and to include a derivative benefits clause for 'equivalent beneficiaries' residing within the EEA. Apart from individuals, the States and their political subdivisions or local authorities, or tax exempt organizations (22(2)(d), companies may qualify under one of the following tests. Publicly-Traded Corporations This requires that the company's principal class of shares (and any "disproportionate class" of shares) are listed and regularly traded on one or more recognised stock exchanges; and either (a) its stock is primarily traded on a recognised stock exchange, in the U.S., Canada or Mexico (being parties to NAFTA), or in the European Union or the European Economic Area, or (b) the company's primary place of management and control is in its state of residence. Subsidiaries of Publicly-Traded Corporations qualify as well if at least 50 per cent of the aggregate voting power and value of their shares is owned directly or indirectly by five or fewer publicly traded companies. Ownership / Base Erosion To qualify under this test, the taxpayer is owned for more than half of the year by qualifying taxpayers (for at least half of each class of shares or beneficial interests in the company) residing in its state of residence. Moreover, the taxable base may not be eroded. This means that less than half of the taxpayer's gross income for the taxable year (as determined in his state of residence) is paid or accrued, directly or indirectly, to persons who are not qualifying residents of either contracting state in the form of payments deductible in the taxpayer's state of residence. Derivative Benefits A person, who is not a qualified person, may be entitled to benefits if at least 95% of the aggregate voting power and value of the company are owned, directly or indirectly, by not more than seven 'equivalent beneficiaries'. An equivalent beneficiary is a person resident in a Member State of the EU, the EEA or a party to NAFTA, or Switzerland but only if one of two alternative tests is satisfied. The equivalent beneficiary must be entitled to all the benefits of a comprehensive convention between the State granting the benefit and the EU/EEA Member State or NAFTA partner. Thus, if a Belgian corporation is owned by a French corporation, it must qualify for benefits under the French-U.S. treaty. Alternatively, if such treaty does not contain a comprehensive limitation on benefits provision, the person will be an equivalent beneficiary only if that person would be a qualified person. In short, in that situation, it must satisfy the Limitation-On-Benefits provisions applicable in the new treaty for Belgian or U.S. residents. Additionally, in order to qualify as an equivalent beneficiary, with respect to insurance premiums, dividends, interest, and royalties, the resident must be entitled under its treaty with the paying jurisdiction (either Belgium or the United States) to a rate of tax that is at least as low as the rate applicable to such income under the new treaty. An equivalent beneficiary must also satisfy a base erosion test. An equivalent beneficiary will be entitled to the derivative benefits if and only if less than 50 per cent of the company’s gross income is paid or accrued, directly or indirectly, to persons who are not equivalent beneficiaries in the form of deductible payments (but not including arm’s length payments in the ordinary course of business for services or tangible property and payments in respect of financial obligations to a bank that is not related to the payer). Active Trade or Business A resident of one State engaged in the active conduct of a trade or business in that State may obtain the benefits of the Convention with respect to an item of income derived in the other State. The item of income, however, must be derived in connection with or be incidental to that trade or business. Making or managing one's own investments is not a trade or business unless conducted by a bank, an insurance company, or a registered securities dealer as part of their business. This general rule is subject to a further condition in cases where the trade or business generating the item of income in question is carried on either by the person deriving the income or by any associated enterprise. In that case, the trade or business carried on in the State of residence, under these circumstances, must be substantial in relation to the activity in the State of source. This requirement is intended to prevent a limited case of treaty-shopping abuses in which a company attempts to qualify for benefits by engaging in de minimis connected business activities in the treaty country in which it is resident (i.e., activities that have little economic cost or effect with respect to the company business as a whole). The determination of substantiality is made based upon all the facts and circumstances and takes into account the comparative sizes of the trades or businesses in each Contracting State, the nature of the activities performed in each Contracting State and the relative contributions made to that trade or business in each Contracting State. In any case, in making each determination or comparison, due regard will be given to the relative sizes of the economies in the two Contracting States. To determine whether a company is engaged in an active trade or business, the treaty attributes the activities of related persons to the company. Persons are considered connected if one possesses at least 50 percent of the aggregate vote and value or beneficial interest in the other, or if another person possesses, directly or indirectly, at least 50 percent of the aggregate vote and value or beneficial interest in each person. Other tests A resident of either state that functions as a headquarters company for a multinational corporate group may qualify if it meets a set of conditions. A Belgian company which derives interest or royalties from the U.S. via a permanent establishment in a third country will not be entitled to the benefits of article 11 and 12 if the permanent establishment does not pay at least 60 percent of the tax that would have been payable in Belgium. If a resident does not qualify under any of the other tests, it may still seek approval by the competent authority of the source state to the effect that the principal purpose of the establishment, acquisition or maintenance of such person and the conduct of its operations is not to obtain treaty benefits. The competent authority shall not deny the benefit without consulting with the competent authority of the other state. Relief from double taxation (Article 22)Belgium grants relief from double taxation in accordance with the exemption with progression method for income other than dividends, interest and royalties. In its Explanatory Memorandum to the Senate (Parliamentary Documents, Senate, 2006-2007, 3-2344/1, p. 35), the Government explains that the 'subject to tax provision' is to be read in the light of the case law of the Supreme Court (Cass. September 15, 1970, Pasicrisie, 1971, I, 37) and means that the income has been subjected to the tax regime that normally applies, even if that means that the income is in fact tax exempt. Therefore, Belgium will exempt income from U.S. real property, income from an enterprise or capital gains realised by a Belgian resident via a U.S. partnership (i.e. a vehicle that is not a body corporate and is treated in the United States as transparent for tax purposes). What is remarkable is that the Government spells out that it is giving two other forms of relief. - Belgium will exempt income that is treated as dividends under Belgian law, that is paid out by an entity that is a corporation but that is not taxed as such (in particular LLCs that are liable to tax directly in the hands of their shareholders). The Belgian resident shareholder must, however, have been taxed by the United States proportionally to his participation in the entity, on the income out of which the ‘dividends’ are paid (nb Even if the income is tax exempt, the Belgian resident, must, however declare the income so that the municipal surcharge on the income tax can be computed).
- A Belgian resident parent company is entitled to the participation exemption if the U.S. subsidiary meets the conditions under Belgian law (nb a minimum participation of 10% or €1,200,000. Moreover, the subsidiary must not fall within any of the specific anti-avoidance exclusions, which in practice implies that the subsidiary must meet a "subject to tax" condition). If it does not meet these conditions, it will be entitled to credit against the Belgian corporate income tax the U.S. tax levied in accordance with Article 10.
Mutual Agreement Procedure (Article 24 and Article 6 of the Protocol)The protocol introduces a mandatory binding arbitration mechanism for settling certain issues that cannot be resolved through the normal competent authority process. A similar provision had been agreed recently in the tax protocol signed between the U.S. and Germany on 1 June 2006. The U.S. business community had been asking for such provision to speed up the resolution of issues submitted to the competent authorities, to moderate the positions taken by the tax authorities, and to ensure possible relief from double taxation. Issues relating to individual residence, permanent establishments, business profits, associated enterprises and royalties generally must be submitted to binding arbitration if they cannot be settled within two years. The arbitration panel consists of three members: each competent authority appoints one member, and these two members appoint a third. This third member, who cannot be a citizen of either treaty country, chairs the panel. After the appointment of the chair, each competent authority has 60 days to submit a proposed resolution and a position paper and another 60 days to submit a reply. The panel must adopt the resolution of one of the two parties within six months of the chair’s appointment. The arbitration model opted for is often referred to as the “baseball arbitration model” (the panel must chose between two proposed resolutions). It is not the preferred option of the OECD or the European Union, but the U.S. Treasury has expressed its preference for this model, because it obliges the competent authorities to take the most reasonable approach, because they want their approach to be the one that is adopted. And that should make the process faster and less protracted (Benedetta Kissel, quoted in US to arbitrate US tax disputes, International Tax Review, March 2007). The determination of the panel is binding on the competent authorities. The taxpayer does not have the right to submit a proposed determination, but the protocol gives him the right to walk away from the process and to reject the panel’s determination. He has the right to opt out of the process within 30 days of receiving the determination.
All parties to the proceeding must agree to terms of confidentiality, and the arbitration panel will not provide a rationale for its determination, which will have no precedential value. Exchange of information (Article 25)When President Bush agreed to renegotiate the Belgium double tax treaty, the U.S. Treasury was not keen to do so. They had previously aborted discussions regarding a new treaty because the Belgian negotiators were refusing to budge on the Belgian banking secrecy rules. Under Belgium law, Belgian banks cannot give information about their clients to the tax authorities. However, fiscal bank secrecy is being eroded by new money laundering rules, and the qualified intermediary system. Moreover, last year, the Belgium Parliament adopted a law providing that banks could no longer invoke the privilege in dealings with tax collectors. As mentioned above, the U.S. Treasury has made the benefit of the zero withholding dividend tax rate dependent on compliance with article 25. What is more, the U.S. Treasury has imposed provisions that would specifically oblige Belgium to change its tax legislation. Paragraphs 5 to 8 are indeed not standard in the US Model Treaty. The Belgian tax authorities must have the power to ask for the disclosure of tax information and to conduct investigations and hearings, even if that is contrary to, or outside the time limits, under Belgian domestic tax law. If a person refuses to give information requested by the United States, the Belgian tax authorities would need to have the power to impose penalties and to bring appropriate enforcement proceedings, e.g. by way of summary proceedings. The Belgian negotiators have, however, been able to include an exception in the Protocol. Banking records will be exchanged only upon request in which both the taxpayer and the bank or financial institution are specifically identified. If that is not the case, the Belgian competent authority may decline to obtain any information that it does not already possess. Given that the standard applicable statute of limitations for investigating tax returns is three years (and five years if the Income Tax legislation has been infringed with a fraudulent intention or with the intention to harm), ratifying the double tax convention required a change to the Belgian tax procedures. Finance Minister Reynders has taken a practical approach. Rather than changing the domestic rules, the Minister counts on the fact that the Treaty overrides the domestic legislation, and he has included some provisions in the Act ratifying the treaty to the effect that when they are carrying out an investigation for the U.S. Treasury, the Belgian Tax Authorities can investigate bank accounts even outside the situation of serious organized fraud or even outside the ordinary time limits (Articles 5 to 7 relating to articles 318 and 333 of the Income Tax Code). In respect of the time limits, Belgium has shorter time limits for keeping accounting documents, and before the House of Representatives, the Minister has confirmed that it had informed the U.S. Treasury that these time limits could prevent the exchange of information and that older information could only be provided if the information could be retrieved in the Tax Authorities’ own files (Parliamentary Documents, House of Representatives, 2006-2007, 51/ 3054/002, p. 11).
As for the Belgian Tax Authorities, they are allowed to use the information they receive from the U.S. Tax Authorities but only if they have been gathered by the latter outside the Belgian territory. The Minister also confirmed that this excluded the use of information which the Belgian Tax Authorities gathered on behalf of the U.S. Tax Authorities or the use of information they had requested from the U.S. Tax Authorities outside the domestic time limits (Ibid. p. 10).
|
