Belgium: New income tax treaty signed with France

Representatives of the governments of Belgium and France on 9 November 2021 signed a new income tax treaty.

The new treaty includes several updates, among which is the removal of a provision that currently allows Belgian residents (individuals) to claim a foreign tax credit on French dividends.

The new Belgium-France income tax treaty could, assuming timely ratification by both countries, presumably apply as from 1 of January 2023 for withholding taxes and apply as from assessment year 2024 for income taxes

One change in the new treaty concerns the lump-sum amount of foreign tax that (under the existing treaty (1964), with cross-reference to Belgian domestic law) can be deducted from the Belgian individual (personal) income tax that is due on French dividends by a Belgian individual shareholder.

The Belgium domestic legislation that allowed for this lump-sum foreign tax credit for Belgian shareholders was repealed in 1988. However, the Belgian high court confirmed in several decisions (holding against the Belgian tax authorities) that the repeal did not hinder Belgian residents from claiming the tax credit based on the then-applicable Belgium-France income tax treaty. Hence, individual investors can in principle still benefit from the tax credit, as income tax treaties and international law prevail over domestic law.

In effect, this foreign tax credit can be claimed via the individual income tax return. Based on the same reasoning, this tax credit is in theory also available for French interest. In 2021, the Belgian tax authorities issued a circular letter in this respect.

However, the provision allowing a lump-sum amount of foreign tax on movable income to be credited against Belgian individual income tax is not in the new income tax treaty (that language has been removed) and this would result in an increased tax burden. This increased tax burden would seemingly be mitigated by a decrease of the maximum withholding tax rate for dividends, from 15% to 12.8%, as provided by the new income tax treaty (new Article 10). Though, currently, dividends that are distributed by a French company to non-resident individuals (such as Belgian residents) are generally already subject to a final withholding tax of 12.8%. Similarly, the new treaty provides a withholding tax exemption for interest, though in general, no French withholding tax is levied on interest paid to non-resident individuals. The mitigating aspects thus would generally remain without effect.

Other changes in the new income tax treaty include the fact that the treaty would also apply with respect to (taxes on) capital. This may be relevant for French residents that hold a securities account with a Belgian financial intermediary (such as a bank) that is in principle subject to the Belgian annual tax on securities account.

Further, the new treaty includes a clarification on the treatment of income obtained via an entity that is treated as tax transparent (refer to the Belgium-Cayman tax regime); a new provision on taxation of gains on immovable property including the taxation of capital gains on participations in companies that hold a substantial amount of immovable property; and a change to the 183-days rule with regard to employee remuneration.

The new treaty will enter into force after the exchange of instruments of ratification by Belgium and France.  

For Belgium, ratification can only be concluded after parliamentary approval in the federal and regional parliament(s). Ratification is generally expected to be concluded during 2022 at the earliest, and if this happens, the treaty would apply in Belgium as from 1 January 2023 for withholding taxes – assessment year 2024 for income taxes.  This would mean, for example that in principle it would still be possible for Belgian resident investors to claim a foreign tax credit for French dividends in the individual income tax return for dividends that will be received in 2022.

Read a November 2021 report prepared by the KPMG member firm in Belgium