BNAInternational TaxPlanning International Review lnternationallnformation for lnternationalBusinesses A MonthlyPublication of TaxPlanning Developments

Tax Treaties OECD'spublic discussion draft on non-discrimination:A critical analysis. 3 RahulKrishna Mitra PricewaterhouseCoopers,India lnitialobservations on the Netherlandsand UnitedArab Emirates RichardGrotendorst recentdouble treaty 8 TheNetherlands In Brief tl Denmarkand Pakistan: Freight receipts taxability under Poland and Nigeria: New treaty still awaits ratification

Also in this issue New Germaninterest barrier in the caseof leveragedbuy-outs . 13 Marc P.Scheunemann Baker& McKenzie,Frankfurt Dealingwith trusts from a Germantax law perspective 19 Dr. FlorianHaase StrunkKolaschnik hrtnerschaft, Hamburg Belgium:Ataxhaven? . .21 StephanWijnkamp Henleyand Partners,Antwerp U.K.anti-hybrid rules: "Purpose" test and the clearanceprocedure. . 25 Ceoffrey Kay Baker& McKenzieLLP, London In Brief . 27 Australia:Tax scheme under scrutiny Qatar: FinancialCentre Regime introduced Russia:Ministry confirms rules do not apply to interest-freeloans Jäiwan: Regulationson apportionmentof coststo tax-exemptincome

Risk management Underthe microscopein the U.K.- Companiesat riskwith new HMRC PaulRoberts and HeatherSelf approach. 31 CrantThornton UK LLBLondon Greaterneed for lT securityto preventincreasing attacks. 32 lohn Dunne CrantThornton UK LLBLondon

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BNA InternationalInc., a subsidiaryof The Bureauof NationalAffairs,Inc., Washington, D.C., U.S.A. Belgium:A taxhaven?

StephanWijnkamp Henlevand Partners,Antwerp

Belgium,which is both multicultural and multilingual, is The deductionis calculatedon the basisof a fictitiousinterest undoubtedlyone of the mostattractive European on the adjustedequity capital. This adjustedequity capital countriesto considerfor establishinga company. includesshare capital, retained earnings, surpluses on revaluation,capital subsidies and sharepremiums. Nextto itspleasant lifestyle with itsrich cultural and historicalheritage, the countryoffers an attractive The NID rate is based upon the annualaverage interest rate businessenvironment with politicaland economic for the 1O-yearBelgian Government bonds. The basicrate for stability.Belgium is well knownas The Capital of Europe the tax year 2OO8is 3.781 percent(tax year 2008 means and is oftencalled the Essenceof Europe,due to its calendaryear 2007).lf a companyqualifies as small,it willbe distinctivecharacter and for beingan importantmeeting entitledto an additionaldeduction of 0.5 oercent. pointin WesternEurope. This means that Belgiumis an A companyqualifies as smallif the followingconditions are internationallyoriented country, with legislationand fulfilled: regulationsthat are based upon this principle in many areas. I Company'sturnover does not exceed€50 million; r Belgiumis one of the 15 countriesthat form the Company'sbalance sheet total is not higherthan €43 million; Schengenarea. If you havea residencepermit for Belgium,you may apply for a SchengenVisa. This visa r The companyhas lessthan 250 employees. enablesyou to travelto all otherSchengen countries In effect,a HoldingCompany will be entitledto a deductionof without individualvisa for eachof the country. almost4 percenton the equityof the company.

Surprisingly,Belgium is notwell knownworldwide as an To promotecapital equity-financing, the Belgiangovernment attractivecountry to establisha company.The same has abolishedthe 0.5 percentregistration on capital appliesto itsHolding Company or FinancingCompany contributions. structures. The NIDcomplies with existingE.U. law and thus offers Thisis probablydue to the factthat Belgiumalways companiescertainty. ranksat the top of the Iistof the Organisationfor EconomicCooperation and Development(OECD)for its Patent income 6.8 percent high individualand rates. Belgiumhas recentlydecided to implementa favourable However,there are other factors that are more important regimein respectof patentincome, applicable to income than rates. derivedfrom the licensingof patentsor the use of patented products.This patent incomededuction (PlD) reduces Insteadof focusingon the tax ratesone shouldrather the tax burdenon the net incometo 6.8 percentinstead of the focuson the severaltax incentivesand tax treaties normalcorporate income rate of 33.99 percent. Belgiumhas concluded. As a resultof theseincentives andtreaties, the effectiverate will be much lowerand The Belgianruling system could be evenzero when carefully planned. As of 2003,it is possibleto consultthe tax authoritiesin order Basedupon this legislation, Belgium is an interesting to obtainan earlydecision in particularsituations. As a result, placeto livein andundoubtedly a sound choice to it is possibleto obtain 100 percentcertainty about the tax establisha company,however paradoxical it mayseem. burdenbefore actually restructuring the company.This offers advantagesespecially to multinationalsand is thereforeworth considering. Interestingfactors to consider Belgian participation exemption Notional Interest Deduction, fictitious deduction on equity In principle,there is a 95 percentparticipation exemption for dividendsreceived provided that certainconditions are met. As of January1,2006: Belgiumgrants a newtax incentjveto Oneof theseconditions is thatthe dividendsshould be paid companies:the interestdeduction for riskcapital, better by a companythat is subjectto a normaltax regime.In knownas the NotionalInterest Deduction (NlD). The NID principle,this is the case if a companyis taxed at a rate of at allowsBelgian companies and foreigncompanies with a least15 percent.When a companyis situatedwithin the Belgiantaxable branch to deduct a fictitiousinterest from their EuropeanUnion the tax rate is not relevant.The sharesin the tax base. distributingcompany must be held for one year at leastand

06/07 lax Planninglnternational Review BNA ISSN0309-7900 Belgium:A ? the quantityof sharesin the subsidiaryshould not be less Basedon Europeanlegislation, Belgium has exempted the than 10 percent. withholdingtax for countrieswith which Belgium has concludedtax treaties. Capital gains on shares are tax exempt Thereare some conditionswhich haveto be met by the Capitalgains on sharesare'100 percent exempt except for corporateshareholder. The shareholderhas to be residentin a fixedincome securities. This is withouta reinvestmentcondition treatycountry and must hold at least15 percentof the shares or any othercondition. The conditionrelating to the in the Belgiansubsidiary. The sharesmust also be heldfor at participationthreshold as mentionedabove is not applicableto least12 months, capitalgains. This allowsa BelgianCompany to hold a porlfolio underfavourable conditions. When carefullyplanned, a very Thus, a corporatestructure having a DubaiCompany as a low taxationcan be achieved. HoldingCompany and a Belgiancompany for financing purposesis an exampleof a tax effectivestructure, Belgian-Hong Kong tax treaty, the gateway to Asia Belgiumhas closeda very beneficialtreaty with Hong Kong, New tax treaty between Belgium and the United States Whileusing this treaty E.U. entrepreneurs and evenU.S. The treatywith the UnitedStates has been signedbut has not entrepreneurs(in cases where the new U.S.-Belgiantreaty is taken effectyet. However,it is expectedto becomeeffective effective)active in Chinaand Hong Kong can transfertheir this year. profitsin a very beneficialway to Belgiumwhile Asian investorsin Europecan transfertheir profitstax free,without This treatyappears to be very beneficialsince undercedain anywithholding tax to Asiaor HongKong. conditions,no withholdingtax is leviedon dividends,royalties and interestbetween a BelgianHolding and a UnitedStates How does it work? subsidiaryas wellas betweena U.S.Holding and a Belgian Whendoing business in Chinaone can set up a companyin subsidiary.lt appearsto be verypromising. Combined with HongKong. This company is liableto a tax rateof 17.5 the very beneficialtreaty between Belgium and Hong Kong, percent.However, this tax rate is only applicableto profits Belgiumcould be America'sgateway to Asia. Dividendscan arisingfrom a , professionor businesswhich has taken be distributedwithout any withholdingtax from Hong Kong vn placein HongKong only. So whendoing business in China, Belgiumto the UnitedStates and vice versa. the taxpayeris not doing businessin Hong Kong and lndividual therefore,there will be no taxationin Hong Kong In terms of taxes,Belgium is a very interestingcountry to Inthe casewhere a BelgianHolding Company holds the consider,not onlyfor companiesbut alsofor individuals. sharesof the Hong Kong Company,the dividendsdistributed to the BelgianHolding Company will be exemptedbased Thereis no capitalgains tax on the saleof shares.Moreover, uponthe Belgianparticipation exemption. The Belgian there is no taxationon the capitalgains on the sale of shares authoritieshave stated that the participationexemption is in a fullyowned company. applicableeven if the HongKong Company is not actually taxed but only liableto a tax rate of 17.5 percent. Interestis taxed at a finalrate of 15 oercent.Dividends are taxed at a rate of 25 percent.There are insuranceproducts Furthermore,Hong Kong does not imposea withholdingtax that are not taxable,it is possiblenot to pay inheritanceor gift on dividendsdistributed to Belgium. tax, and thereis no wealthtax.

Similady,Chinese companies investing in Europecan alsouse For expatriateemployees who are part of an international a BelgianHolding Company. lf a BelgianHolding is placed group,there is a specifictaxation regime. This regimeapplies betweena EuropeanCompany and a Hong Kong Holding to employeeswith temporarycontracts at the Belgian Company,European profits can be transferredto Hong Kong company.They haveto be recruiteddirectly from abroador almosttax-free. secondedby an internationalgroup company and may be directorsor specialists.These employees will be regardedas The BelgianHolding Company will receive dividends under the non-residenttaxpayers in Belgium,which means that the conditionsof the Belgianparticipation exemption. This Belgian employeewill only be taxedfor work actuallydone withinthe HoldingCompany can distributethe dividendsreceived from Belgianterritory its Europeansubsidiaries to the HongKong Holding without anywithholding tax. For instance,in the casewhere the employeeworks 20 percentoutside of Belgium,only 80 percentof his incomewill No withholding tax for dividends derived from Belgian be taxed.The incomerelated to his foreignactivities will be companies calculatedon the basisof the workingdays spent outside Belgiumhas a very largetax treatynetwork, having concluded Belgium.Furthermore, the employermay grant the employee tax treatieswith morethan 70 countries.ln principal,all an expenseallowance of €30,000at most. treatiesare accordingto the OECD Model.For international tax planningopportunities it hasto be stressedthat Belgium How the Belgiancompany works even has a treatywith the UnitedArabian Emirates; Dubai is one of thosecountries. Forinternational companies, a Belgianbranch can playan importantpaft in reducingthe overalltax burden. Presently,some treatieshave already been signedbut are not yet effective.Amongst them arethe new treatieswith the The use of the NIDtogether with the treatynetwork and the UnitedStates and with the Sevchelles. zerowithholding tax makesBelgium a particularlychoice. Belgium:A tax haven? Structure portfoliomay be heldor loansto othercompanies may be Hong Kong granted. Dubai The HoldingCompany can contributeto the sharesof Belco. I As mentioned,there is no capitaltax. Belcocan lendout the I dividends I I share moniesto othercompanies. The profitfrom Belcocan be I I capital distributedtax-free to companiessituated in other(treaty) I V countries.In the casewhere no loansare grantedto other companies,Belco can also keepthe portfolioinvestment in a tax-friendlymanner.

Thereis no taxationon capitalgains on sharesin the company. I loan interest lf, for example,a relativecompany in an internationalgroup wantsto investand this investmentmust be financedby V anothergroup company or bank,establishing a Belgium companymay createsome tax advantages.

Withinthe group,a companymay get a bankloan. Interest on thisloan could be deductiblein the countryin whichthis companyis situated.This company in turn depositsthe monies In a situationin which a HoldingCompany located in a low tax derivedfrom the bank in the sharecapital of a Belgian jurisdictionlike Hong Kong or Dubaiwants to financeactivities company.In Belgium,the NIDdeduction will be applicable.The in Europe,a withholdingtax couldapply according to the Belgiancompany shall grant a loanto the companyin which countryof interest.Furthermore, tax regulationscould apply the investmentsshould take olace. underwhich interestpaid to low tax countriesis not deductible. A BelgianHolding may be a solutionin thiscase. See Diagrambelow Forexample, the HoldingCompany (Dubai or Hong Kong) ln thisexample a doubledip, two timesdeduction within the contributes€30 millionto the sharecapital of the Belgian group,can be reached.However, one shouldalways check Companynamed Belco. Belco lends this moneyto another whetheror not tax deductionin the countriesoutside Belgium groupcompany situated somewhere in Europeat an interest will be grantedbased upon the respectivelegislation. rateof 4.5 percent.The interestwill be deductibleaccording to In the caseof an acquisitionof patents,Belgium offers a tax the tax regulationsin the countryof the payer,resulting, in this incentive.Most of the incomederived from oatentsis tax free.lt case,in a deductibleamount of €1.350.000. is possibleto combinethe NIDwith this royaltyexemption. One The interestreceived will be addedto the resultof Belco. can combinethe above-mentionedway of financingthe However,the NlD, in this case calculatedaI €1.2 millioncan be acquisitionof the patentwith the NlD. deductedfor tax purposesfrom the tax base.Thus, €150.000 In the caseof an acquisitionof patentsas describedabove, a will be the tax base in Belgiumat a rateof almost34 percent. groupcompany deposits share capital in a Belgiancompany. Thismeans that the tax burdenin Belgiumcould be €01,000. Of course,there will be operationalcosts in Belgiumthat also This Belgiancompany in turn willacquire the patentwith the may be deducted,so the actualtax burdenwill be evenlower. moniesacquired. Because of the NlD,almost 4 percentof the equitycan be deducted.Furlhermore, percent The effectivetax rate in this exampleis lessthan 4 percent 80 of the royalty incomeis tax free.When the group companythat has whilethe profitof €1,299,000, can be distributedtax-free to the HoldingCompany. depositedthe sharecapital ln the Belgiancompany attracts this depositedshare capital from a bank,the tax situationwill even lf a Holding Companyis situatedin any othercountry the be morefavourable if the interestin the countryof this group Belgian companycan act as a financingcompany in whichthe companyis deductible.The tax deductionof the group company,NID deduction of the Belgiancompany and 80 The structure can be outlined as follows: percenttax exemptionon royaltyincome in Belgiumcan be achievedin such a case. Ioan For mergersand acquisitions,using a Belgiancompany may

----t also be highlytax-effective when capitalincreases. As I InteresL mentioned,the NIDis basedupon the equityof the company. Thuswhen equityincreases tax deductionincreases too.

The private holding

Forprivate shareholders of the holdingcompany there are possibilitiesto be secondedto the Belglancompany. In these situations,possibilltles such as split-employmentmay be rnterest beneficial. An individualwho actuallyresides in Belgiumhas the possibility of transferringhis equitytax-free. Please be awareof the fact that thereis no capitalgains tax on the saleof sharesof the I HoldingCompany.

06/O7 Tax PlanningInternational Review BNA |SSN0309-7900 Belgium:A tax haven?

Belgianresidence and citizenship combinationwith otherjurisdictions, a verytax-effective structurecan be built.Furthermore, besides the tax incentives, Basedupon the currentlegislation there are several possibilities Belgiumcan be hostileto individualswho resideand laterapply for individualsinvesting in Belgiumto applyfor a residentpermit for citizenship.Being a Belgianresident also offers many tax and evenBelgian citizenship after three years. A Belgian benefitsto individuals. residencepermit allows visa-free travel to all Schengen countries.These opportunities will certainly exist when investing Perhapsat first Belgiumappears to be an expensivecountry in Belgiumthrough a company. due to hightax rates,but when all its tax opportunitiesare takeninto considerationit can indeedprove to be a tax haven I shall.however. not describethis in detailin this article. for individualsand companies. StephanWijnkamp is a lawyer and partner of Henley and Conclusion Partners,Antwerp, Belgium.For further informationplease Belgiumis a countrywith hightax rates.However, it seemsto contactStephan Wijnkamp by e-mailat: j havea tax systemwhich is veryinternationally orientated and Step ha n.Wi n ka m p@h e n I ey gl o b al. co m veryfriendly to companiesand individualsfrom abroad.In @Henley and Partners2007