Tax Alert: Netherlands and Belgium notify tax treaty under the Multilateral Instrument

On November 25, the Dutch and Belgian authorities notified the Belgium-Netherlands tax treaty as a Covered Tax Agreement under the Multilateral Instrument with the OECD. The countries opted to apply a shorter period than nine calendar months for the entry into effect of the Multilateral Instrument, having the MLI enter into effect as of (financial years starting on or after) January 1, 2022.

Effect on the tax treaty

As the countries have both opted for a shorter period than nine calendar months for entry into effect, the following measures should enter into force as of (financial years starting on or after) January 1, 2022.

At this stage, there are still several notification mismatches, as Belgium has not yet identified the relevant tax treaty provisions that should be amended. However, we expect these notifications to be put forward shortly and the notification mismatches to be remedied before January 1, 2022.

Minimum standards

The notification of the Belgium-Netherlands tax treaty as a Covered Tax Agreement means the minimum standards implemented by the Multilateral Instrument will also be implemented in the Belgium-Netherlands tax treaty. This means that the treaty will have modified preamble language, a principal purpose test and the improved mutual agreement procedure.

Hybrid entity clause

The Belgium-Netherlands tax treaty already contained two hybrid entity clauses in the protocol. However, these hybrid entity clauses will be replaced with the hybrid entity clause included in the Multilateral Instrument.

Tax residency

Under the Belgium-Netherlands tax treaty, the tax residence of a company is determined by its place of effective management (the corporate tie-breaker). Under the Multilateral Instrument, it is possible to change this to a tie-breaker by means of a mutual agreement procedure (the MAP tie-breaker). In such cases, the tax treaty residence of a company (and therefore access to the tax treaty) would only be determined after this has been agreed in a mutual agreement procedure. The Netherlands is in favor of including a MAP tie-breaker. However, as Belgium has made a reservation in this regard, it will not be included in the Belgium-Netherlands tax treaty.

365-day holding period

The Belgium-Netherlands tax treaty does not currently have any minimum holding period for the reduced dividend withholding tax rate of 5%. Both Belgium and the Netherlands, however, have opted to introduce the 365-day minimum holding period by means of the Multilateral Instrument.

Mandatory and binding arbitration

The Belgium-Netherlands tax treaty does not currently contain an arbitration mechanism (only the mutual agreement procedure). However, given that Belgium and the Netherlands are both EU Member States, the EU Arbitration Convention (which only applies to transfer pricing cases) and, as of financial years starting on or after January 1, 2018, the EU Dispute Resolution Directive (which applies to transfer pricing cases and interpretation cases) already applied, under which mandatory and binding arbitration was already possible.

Both Belgium and the Netherlands have, however, opted for mandatory and binding arbitration under the Multilateral Instrument as well, giving taxpayers another option for arbitration if a dispute is not settled by means of the mutual agreement procedure.

Our observations

The Netherlands and Belgium had previously excluded the Belgium-Netherlands tax treaty, as they were in the process of renegotiating the existing tax treaty and likely both intended to include the MLI provisions they agreed upon in a new bilateral tax treaty or protocol to the existing tax treaty.

The reason for deciding to notify the Belgium-Netherlands tax treaty as a Covered Tax Agreement at this stage may be a (significant) delay in negotiations between the two countries, where there is agreement on including the minimum standards in the Multilateral Instrument and a couple of optional provisions of the MLI.

As Belgium has made a large number of reservations under the Multilateral Instrument, only a limited number of optional provisions will apply to the Belgium-Netherlands tax treaty. The inclusion of mandatory and binding arbitration in the tax treaty, in addition to the mechanisms that were already available to taxpayers, is a welcome addition for taxpayers in cases where the Belgian and Dutch competent authorities cannot reach mutual agreement.