RegionsEEAUnderstanding the Impact of Belgium’s Interest and Royalty Directive

Understanding the Impact of Belgium's Interest and Royalty Directive

The Belgian Official Gazette of 31 December 2003 published the Royal Decree
of 22 December 2003[1] which implements the Council Directive 2003/49/EC of
3 June 2003 on a common system of taxation applicable to interest and royalty
payments made between associated companies of different EU Member States in
Belgian internal tax law (hereafter referred to as “the Interest and Royalty
Directive”).

Objective: no taxation at source on interest and royalty payments between
associated companies

The objective of the Royal Decree of 22 December 2003 (hereafter referred to
as “Royal Decree”) is to avoid double taxation on interest and royalty
payments between associated companies, resident within the European Union, by
means of an abolition of taxation at source of these types of income.

Scope of application: associated companies of an EU Member State

In order to benefit from the exemption of Belgian withholding tax, it is required
that the interest or royalty payments are made between associated companies
of an EU Member State. According to the Royal Decree, the debtor and beneficiary
of the income are considered “associated” if the following
conditions are met:

(i) the companies are considered to be resident within the European Union;
(ii) the companies comply with the definition of a “company of an EU Member
State” as laid down in the Interest and Royalty Directive[2];
(iii) one of both companies holds a direct or indirect participation of at
least 25% in the capital of the other company during an uninterrupted period
of at least one year;
(iv) a third company, resident within the European Union, holds a direct or
indirect participation of at least 25% of the capital of both the debtor and
beneficiary of the interest or royalty income during an uninterrupted period
of at least one year.

Therefore, the Royal Decree provides for a broader scope of application as
the Interest and Royalty Directive, which only provides for an exemption of
taxation at source in case of a direct participation of 25% between associated
companies.

Moreover, contrary to the Interest and Royalty Directive, which requires that
the associated companies have to be resident in different EU Member States,
the Royal Decree provides for an exemption from Belgian withholding tax in case
of associated companies resident within the European Union (without mentioning
that these companies have to be resident in different EU Member States). As
a consequence, although both for interest and royalty payments an exemption
was already available under existing domestic tax law, the exemption from Belgian
withholding tax on interest or royalty payments can be applied to interest or
royalty payments made by a Belgian debtor to a Belgian beneficiary (provided
all conditions as laid down in the Royal Decree are met).

Minimum holding period: an uninterrupted period of at least one year

According to the Interest and Royalty Directive, an EU Member State shall have
the option of not applying this Directive to a company of another EU Member
State in circumstances where the abovementioned conditions have not been maintained
for an uninterrupted period of at least two years. The Royal Decree has however
reduced this minimum holding period to an uninterrupted period of
at least one year
. Moreover, should the minimum participation of 25% not
have been held for an uninterrupted period of at least one year at the moment
the interest or royalty income is attributed or made payable[3], the exemption
of Belgian withholding tax will still apply in case the beneficiary of the interest
or royalty income or the third EU company provides the Belgian debtor with a
certificate which mentions:

(i) the date as of which the minimum participation of 25% has been uninterruptedly
held;
(ii) the commitment that the minimum participation of 25% will be held for an
uninterrupted period of at least one year and that the compliance with this
obligation will be immediately notified to the debtor of the income;
(iii) the commitment that the debtor of the income will be immediately notified
in case prior to the one-year period the participation has decreased below 25%.

Moreover, the Belgian debtor of the income has to commit himself to provisionally
withhold the Belgian withholding tax due at the moment the income is attributed
or made payable. In case the 25% participation would not be maintained for an
uninterrupted period of at least one year, the exemption condition will not
be fulfilled and the Belgian withholding tax, increased with interest for late
payments (if any), will have to be paid to the Belgian tax authorities.

Beneficiary of the income: ownership or usufruct

The Royal Decree explicitly mentions that the beneficiary of the income has
to be owner of the assets or rights (or keep them in usufruct) which give rise
to the payment of interest or royalty income and that these assets or rights
may not have been part of the assets of an establishment of the beneficiary
outside the European Union during the period in which they gave rise to the
interest or royalty income. For example, in case the beneficiary of the income
allocated his receivable on a Belgian debtor to his Swiss Finance Branch, he
will not be able to invoke the Royal Decree in order to become an exemption
from Belgian withholding tax (even if all other conditions as mentioned in the
Royal Decree have been met).

Entry into force: 1 January 2004

The Royal Decree has become applicable on interest and royalty income attributed
or made payable as of 1 January 2004 in case it concerns interest and royalty
income which relates to a period after 31 December 2003. Interest and royalty
income accrued but not yet attributed prior to 1 January 2004 will not benefit
from the newly installed Belgian withholding tax exemption, even if they are
attributed or made payable as of 1 January 2004. If necessary, the amount of
the income will therefore have to be split-up for Belgian withholding tax purposes.

However, European Commission would amend Interest and Royalty Directive!

On 30 December 2003 the European Commission proposed a directive to amend the
Interest and Royalty Directive[4]. The new directive would amend the existing
directive by adding a requirement that interest and royalty payments would only
be exempt in the EU Member State in which they arise in case the beneficial
owner of the interest or royalty income is effectively taxed on the interest
or royalty payments in another EU Member State. The proposed directive would
also amend the list of all EU Member States’ companies that are currently
covered by the Interest and Royalty Directive.

In case the Council would share the point of view of the European Commission
and adopt the proposed directive, all EU Member States would have to enact laws
to the implement the new directive in their internal tax law in order to come
into force by 31 December 2004 at the latest[5].

Kurt De Haen Tax Director, International Tax Structuring Network
PricewaterhouseCoopers Belgium

Since 1994, Kurt De Haen has specialized within PricewaterhouseCoopers in the
banking and financial services industry on various tax aspects of large banking
and capital markets clients with a focus on international taxation and corporate
structuring. This has included advising on several banking restructurings, the
use of foreign tax credits, withholding tax issues and dividend distribution
structures.
Kurt is part of PricewaterhouseCoopers’ International Tax Structuring
Network and serves various international clients. Kurt has built an extensive
experience in corporate taxation, international tax planning, finance tax structures,
holding structures, withholding tax optimization structures, international restructurings,
mergers and acquisitions, partnerships, etc. Finally, Kurt supervises tax compliance
work and is involved in the training of juniors.

[1] Royal Decree of 22 December 2003, published in the Belgian Official Gazette
of 31 December 2003 (2nd edition), p. 62.326.
[2] In order to benefit from the exemption of Belgian withholding tax, the Belgian
debtor of the royalty or interest income has to have the legal form of one of
the following companies under Belgian law: “naamloze vennootschap/société
anonyme, commanditaire vennootschap op aandelen/société en commandite
par actions, besloten vennootschap met beperkte aansprakelijkheid/société
à responsabilité limitée” and those public law bodies
that operate under private law.
[3] The notions “attributed” or “made payable” mean
that the interest or royalty is available for immediate collection although
not yet effectively paid out.
[4] COM (2003) 841 final 2003/0331(CNS): Proposal for a Council Directive amending
Directive 2003/49/EC on a common system of taxation applicable to interest and
royalty payments made between associated companies of different Member States.
[5] Article 2 of the Commissions proposal to amend the Interest and Royalty
Directive.

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