New Tax Treaty concluded between Belgium and France - individual tax implications

On November 9th 2021, Belgium and France have signed a new convention for the avoidance of double taxation.  The new version  of the treaty is currently following ratification process in both jurisdictions and will apply in Belgium as from the 1st income year following the year of the second ratification. Therefore,  if the ratification process is completed in both Belgium and France by the end of 2022, the new treaty will enter into force as from 1 January 2023.

The purpose of the present  alert is to summarize the main changes of this new bilateral treaty which might impact the situation of numerous individual taxpayers receiving cross-border income.

1)  Income from employment

The current provision covering the employment income in the tax treaty between Belgium and France will be replaced by a new treaty provision which will lead to some major changes in specific situations.

As a general principle, wages, salaries and other similar remuneration received by a resident of Belgium in respect of an employment shall be taxable only in Belgium unless the employment is exercised in France (and vice-versa). This general rule will remain applicable with the new Tax treaty (new art. 14§1).

However, in order to be aligned with the OECD model, Belgium and France made some changes to the second paragraph covering the exceptions to the general principle (new art 14§2):

The current treaty (art 11 §2) states that remuneration which a resident of a contracting State receives in respect of employment income in the other contracting State (i.e. Working State) is taxable only in the residency State if the following conditions are simultaneously fulfilled

1. the recipient is present in the Working State for a period or periods not exceeding in aggregate 183 days during the calendar year; and
2. the remuneration for the activity carried out during this sojourn is borne by an employer established in the Residency State; and
3. the employee does not carry on her/his activity at the expense of a permanent establishment or a fixed place of business of the employer situated in the Working State.

The following changes have been made in the new tax treaty between Belgium and France:

• The period of reference for the rule of 183 days is now defined as “ any twelve month period commencing or ending in the fiscal year concerned and not anymore to the calendar year.
• While the current treaty states that the employment income for the activities carried out in the other State should be borne by an employer established in the same residency State to remain taxable in the residency State, the new treaty states that the employment income should remain taxable in the residency State if the remuneration is not borne by a resident of the Working State.

Concrete example: a Belgian resident who works physically 130 days in France on behalf of a company established in Luxembourg where the employee's remuneration is fully paid and borne by a Luxembourgian employer:

• Application of the current tax treaty provision : general principle (Working State)
  The remuneration relating to working days performed in France will be taxable in France considering that the employer is not a Belgian resident.
• Application of the new tax treaty provision: exception (Residency State)
  Belgium will have the right to tax the remuneration relating to French working days considering that the costs are not borne by a French entity (assuming the employee spent less than 183 days in France during any twelve month period and that the said remuneration is not borne by a French establishment).

2) Other changes

a) Dividends

The current double tax treaty provided a foreign tax credit system enabling individual taxpayers to avoid the double taxation of dividend income.  .  Under the new tax treaty, the tax credit system is not mentioned anymore and will lead to a situation where the Belgian resident will be more heavily taxed leading to a 50 increase of the Belgian tax burden (see the alert prepared by our colleagues of EY Law).

As an example, French company distributes dividends to a Belgian resident. The value of distributed dividends is 100€.

b) Interests

As per the new tax treaty, the interest arising in one contracting State and beneficially owned by a resident of the other contracting State shall be taxable only in that State. The withholding tax with a ceiling of 15% provided as provided in the current tax treaty will not be applicable anymore.

c) Taxation of director fees

Under the current  treaty, remunerations of any fixed or variable nature paid in the context of their function to managing directors, supervisory directors, liquidators, managing partners and other persons performing similar functions in joint stock companies, partnerships limited by shares and co-operative societies, as well as French limited liability companies and Belgian private limited liability companies, were taxable only in the contracting State of which the company was resident.

With the new treaty, only members of a board of directors, a supervisory board or a similar body of a company of one of the Contracting States will benefit from the exclusive taxation in the Contracting State where the company is residing. This will therefore limit considerably the scope ratione personae .

d) Students

In the past, the treatment of disbursements received by French students (or international volunteers) assignees in Belgium in the context of a French Volunteering Program (VIE contracts) was subject to discussion with the Belgian tax authorities tempted to consider such income as taxable in the Working State. The new treaty states that the income received in such context will only be taxable in Belgium if the related cost is borne  by a Belgian resident company or a permanent establishment in Belgium.

e) Capital Gain

A provision related to “ Capital Gains” is included in the new tax treaty.

The capital gains from the sale of immovable goods are taxable in the State where the immovable goods are located.  However, gains from the alienation of shares or other rights in a company, trust or comparable institution are taxable in the Contracting State where the company is residing if the below conditions are fulfilled :

• more than 50 per cent of the value of the company assets consists, directly or indirectly, in immovable property situated in this Contracting State; and
• the internal legislation of this Contracting State states that those gains are subject to the same tax treatment as gains deriving from the alienation of immovable property.

This is mainly aimed at supporting the allocation of taxation rights to France in case of cross-border transfer of shares owned in a French real estate company (used to be called SCI) considering the favorable treatment applied in Belgium on capital gain income.

Related updates

On December 6^th 2021, the Belgian-French agreement on home-working in the context of Covid-19 crisis has been extended until March 31^st, 2022 with a tacit renewal of 3 month unless denounced by written notification by one of the competent authorities at least one week before March 31^st, 2022.  As a reminder this agreement allows to apply a fiction that employees who work from home due to the Covid-19 crisis can remain taxable in the State where they previously practiced their work before the outbreak of the Covid-19 crisis.

The French assignees eligible for the Belgian new tax regime who decide to opt-in for such regime will become Belgian tax resident if they are not considered as French resident. As a consequence, French assignees will be taxed on their worldwide income and the above listed changes will be also applicable to this population. Please find below the link of the relevant alerts with respect to this subject: A new tax regime for inbound taxpayers and researchers (ey.com).