The new tax treaty between Belgium and France was signed on 9 November 2021. It will enter into force at the end of its ratification process by both countries. Belgium is unique in that each level of government must ratify the new treaty.
In order to better understand the upcoming changes in the structuring of real estate investments between Belgium and France, you will find below our first comments on the new Franco-Belgian convention (which we will refer to as the "new treaty" hereafter for ease of reference, although it is not yet in force).
Please note that no official text has yet been published. These comments are therefore based on the version of the new convention that we had the opportunity to consult, before its signature.
For a tax treaty to apply to a particular person (the individual, company or association of persons), that person must be considered "resident" in a Contracting State.
The double taxation treaty currently in force between Belgium and France (which we will refer to as the "old tax treaty" for ease of reference, although it is still in force) applies, in particular, to legal entities, which are deemed to be residents of the Contracting State where their effective management is located. In contrast to many treaties, the old tax treaty does not provide for any condition of taxation or even “subject-to-tax” condition on the part of legal persons in order for the latter to benefit from the old treaty.
The new tax treaty now includes a definition of "tax resident", taken directly from the OECD model: "the term resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of the person's domicile, residence, place of management or any other criterion of a similar nature [...]".
The consequence of this “subject-to-tax” condition will, in principle, be to deny resident status to investment funds benefiting from a “non-taxable” regime. However, the Protocol to this new treaty will provide that, notwithstanding any other provision, collective investment undertakings and pension funds established in France or Belgium will benefit from the advantages of Articles 10 and 11 of the new tax treaty (i.e. dividends and interest).
In addition, the new tax treaty deals with the special case of "transparent" and "translucent" French companies. The status of resident is also recognised for any company or group of persons:
- whose place of effective management is in France;
- who is subject to tax in France; and
- of which all unit holders, partners or members are, under French tax law, personally liable for tax on their share for the profits of these companies or associationss of persons.
On this basis, partnerships under French law that are subject to a tax translucent regime should benefit from the advantages of the new tax treaty.
With regard to "income from immovable property", the new tax treaty follows the OECD model, which does not differ in substance from the old tax treaty. In this respect, income from immovable property (including income from agriculture or forestry) derived by a resident of a Contracting State situated in the other Contracting State may be taxed in that other State, and the term "immovable property" shall have the meaning which it has under the law of the Contracting State where the property is situated.
General provision. The maximum dividends withholding tax rate would be reduced to 12.8%, compared to 10% or 15% under the old tax treaty. A full exemption from withholding tax is also available for dividends paid by a company of a Contracting State to a company resident in the other Contracting State which holds directly at least 10% of the share capital of the distributing company for a period of 365 days, including the date of payment of the dividend. Changes in the holding which are the direct result of a reorganisation of the parent company, such as a merger or a division of the shareholder company or of the company paying the dividends, shall be disregarded in assessing this 365-day period.
It should also be noted that the company receiving the dividends must be the beneficial owner in order to be able to claim full exemption from withholding tax.
Real estate investment funds. Different situations may arise. Firstly, with regard to "funds" and depending on their tax regime, either they will qualify as residents within the meaning of the new tax treaty, or they will be able to benefit from the protection of the new tax treaty by virtue of the Protocol. This second category includes only undertakings or funds (i) within the meaning of Directive 2009/65/EC (UCITS) or (ii) within the meaning of Directive 2011/61/EU (AIF), as well as, on the Belgian side, regulated real estate companies (BE-REIT). Funds that are neither resident nor included in this second category do not benefit from the protection of the new tax treaty. In the cases below, we assume that the "fund" enjoys the benefits of the new tax treaty.
- Belgian-sourced dividends paid by a normally taxed company to a French "fund". Under the new tax treaty, and provided the minimum shareholding condition is reached, these dividends will benefit from an exemption from withholding tax.
- French-sourced dividends paid by a normally taxed company to a Belgian "fund". Under the new treaty, and provided that the minimum shareholding is reached, these dividends will benefit from an exemption from withholding tax.
- Dividends, of Belgian or French source, distributed by an investment vehicle (i) which distributes the largest part of its income annually and (ii) whose income or gains from real estate are tax exempt. A withholding tax reduction will also be available if and only if the beneficial owner of the dividends holds directly or indirectly a participation of less than 10% in the capital of the investment fund. In other cases (i.e., 10% or more), the dividends will be taxable at the rate provided for by the domestic law of the Contracting State where they arise. In this case, a withholding tax of 30% will apply to Belgian-sourced dividends; it is then to be determined to what extent the French investor will be able to benefit from the tax credit provided for by the new tax treaty.
According to Article 11 of the new tax treaty, interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall be taxable only in that State. No withholding tax would apply on interest payments under the new tax treaty. This provision will be welcomed in Belgium, where domestic law still provides for a 30% withholding tax, which was reduced to 15% under the old tax treaty, of course if no other exemption under domestic law was applicable.
Not surprisingly, the new tax treaty includes a "real estate rich company" clause, which was absent from the old tax treaty. Capital gains from the sale of shares of a company listed on a regulated stock market in the European Economic Area are not covered by this provision.
This "real estate rich company" clause provides that gains from the alienation of shares or other rights in a company, trust or comparable institution, the value of whose assets consists, directly or indirectly, for more than 50% in real estate and which is situated in a Contracting State, may be taxed in that State if they are subject, under the laws of that State, to the same taxation regime as gains deriving from the alienation of real estate. Two conditions shall apply for the Contracting State in which the immovable property is situated to be given the power to tax: (i) the value of the assets of the company whose shares are sold must derive, directly or indirectly, for more than 50% from immovable property located in that State and (ii) that State, according to its own legislation, must subject this sale of shares to the same tax regime as the sale of immovable assets. If this "real estate rich company" clause does not apply, then the residual rule remains the allocation of the power to tax to the State of residence of the seller.
From a Belgian point of view and as the legislation currently stands, this clause will not apply, as Belgium does not assimilate transfers of shares to transfers of real estate assets for tax purposes. This means:
- if the target company is Belgian resident and the seller is a French resident: France is given the power to tax the realized capital gain;
- if the target company is French resident and the seller is a Belgian resident: France will be granted the power of taxation if the quantitative criterion of the preponderance of real estate is met, otherwise this power will be attributed to Belgium.
This reference to the tax regime applicable under domestic law to transfers of real estate assets is reminiscent of the decision of the French Council of State of 24 February 2020. In that case, the French Council of State validated the position of the French tax authorities, according to which the power to tax the transfer of shares in a French "real estate" civil company by a non-resident (Belgian) company had to be attributed to France, despite the absence of any "real estate rich company" clause in the old tax treaty. The French tax authorities argued that the notion of "real estate" is not defined by the old tax treaty, which refers to the laws of the Contracting State where the property is located, and that this reference, in view of its generality, should be interpreted as including both tax law and civil law. Although shares in French "real estate" civil companies are not real estate assets under French civil law, French tax law is treating the sale of such shares by non-residents as a capital gain on real estate that is taxable in France. In view of this position, France would therefore have the power to tax the transfer of shares in a French "société civile à prépondérance immobilière" by a non-resident (Belgian) company, by reference to its domestic tax laws under the old tax treaty.
Elimination of double taxation
For French residents, the new tax treaty uses the tax credit method to avoid double taxation on income of a French resident that is taxable (only) in Belgium, where such income is not already exempt from French corporate income tax.
This tax credit, which can be deducted from French taxation, corresponds to
- the amount of the Belgian taxation, without however exceeding the French taxes that are due, when the income in question is (inter alia) Belgian-sourced dividends;
- the amount of French taxation corresponding to this income, provided that it is actually subject to Belgian taxation.
A legal entity resident in France within the meaning of the new tax treaty that has invested in real estate in Belgium through a BE-SREIF (FIIS / GVBF) could therefore benefit from a tax credit corresponding to the Belgian withholding tax on the dividends distributed by this BE-SREIF (FIIS / GVBF), this tax credit being itself limited to French taxation on these dividends.
As regards Belgian residents, the new tax treaty provides for a double system of exemption and imputation.
In this respect, income taxed in France and received by a Belgian resident is exempt from tax in Belgium (subject to progressivity) when it does not consist of dividends, interest or royalties. However, this income will be taken into account for the determination of the additional Belgian municipal taxes.
Dividends received by a Belgian resident company from a French resident company are exempt from corporate income tax in Belgium under the conditions provided for by Belgian law. When these dividends are distributed by a (civil) company or a grouping of persons, they are also exempt from corporate income tax in Belgium under the conditions provided for by Belgian law, but the so-called taxation condition does not apply, subject to the taxation of the Belgian resident company in France on the result of the (civil) company or the grouping of persons in proportion to the rights held.
Finally, if the dividends received by a Belgian resident company cannot be exempted from corporate income tax in Belgium under the conditions provided for by Belgian law, the French withholding tax is deducted from the Belgian tax relating to these dividends, without however exceeding Belgian taxes that are due on these dividends.
Inspired directly by the Multilateral Instrument, the new tax treaty provides that an advantage shall not be granted if it is reasonable to conclude, having regard to all the facts and circumstances of the case, that the granting of that advantage was one of the main purposes of an arrangement or transaction by which it was directly or indirectly obtained, unless it is established that the granting of that advantage in those circumstances would be consistent with the object and purpose of the relevant provisions of the new tax treaty.