Spotlight on the new Franco-Belgian Treaty
On 9 November 2021, Belgium and France signed a new tax treaty aimed at modernising the rules contained in the treaty currently in force that dates from 1964. That previous treaty was no longer in line with the latest international standards. In particular, the new treaty contains a new definition of residence and provisions on permanent establishments and anti-abuse measures. It also allows both States to retain the right to tax capital gains from real estate and from substantial transfers in shareholdings.
The new treaty will enter into force once the forthcoming legislative ratification process concludes. It was foreseen that it would apply to income earned from 1st January 2023, but it seems that the particularly complicated ratification process in Belgium will push back the entry into force to 1st January 2024. In the following paragraphs, we will try to give you an initial overview of the changes that have already caught our attention.
Secondary residence in France
The rule relating to the taxation of real estate income remains unchanged: It is the State in which the property is located that has the power to tax the income from that property.
Imagine a Belgian resident with a second residence in France. The real estate income generated is taxed exclusively in the latter state and is therefore completely exempt from tax in Belgium. It should be noted, however, that French real estate income must be included in the Belgian taxpayer's tax base in order to determine, in Belgium, the progressivity of the tax applicable to other income. This method involves making a hypothetical tax calculation, as if the income from real estate earned in France were taxable in Belgium, and then deducting from that amount of hypothetical tax the share relating to the income earned in France. This method makes it possible to calculate the rate applicable to all the taxpayer’s income.
The new treaty comes up to date with the introduction of an effective tax criterion: If the property is actually taxed in France, Belgium can no longer tax it. But what if the second home in France does not generate any income because it is not rented out? In this case, France levies only a simple housing tax and no tax on property income. According to the new treaty, in the absence of this effective taxation in France, Belgium would recover its taxation powers.
It remains to be seen whether Belgium will use this option to tax such French properties that are not rented out. It is highly likely that by way of a circular, it will waive this possibility by specifying the reasons. In the meantime, however, the question still stands.
What if the French real estate is held through an SCI?
In these situations, the question is how income distributed by a real-estate holding company, a société civile immobilière (SCI), is taxed. These companies are tax transparent so that, effectively, their shareholders are taxed directly. This topic has been the subject of numerous setbacks and controversies in recent years.
As a reminder, in 2004, the Belgian Court of Cassation recognised that the income paid by these SCIs was classified as real-estate income in accordance with French law and that it should therefore be exempted in Belgium, subject to the question of tax progression.
Unfortunately, in 2016 and 2017, the Court of Cassation returned to this favourable ruling for taxpayers, with a legal development which has always left us somewhat confused. In brief, the Court of Cassation held that the income derived from an SCI’s corporate rights was not ultimately real-estate income within the meaning of the treaty such that Belgium was not required to exempt it. The Belgian tax authorities accordingly treated the income distributed by these SCIs as dividends in Belgium and, as such, taxed it at a rate of 30%.
This income is therefore subject to double taxation (at least economically) since it is taxed in France as property income and in Belgium as dividends.
To the great disappointment of many, the new tax treaty does not rectify this situation since point 12 of the supplementary protocol on the prevention of double taxation provides that SCI income is classified in accordance with domestic Belgian legislation.
According to our sources, a commission is reviewing this situation. It is hoped that Belgium’s position could change. Indeed, this double economic taxation restricts the freedom of movement of SCI-shareholder French residents, who cannot settle in Belgium due to the (effective) double taxation of this income and whose cumulative tax rates are confiscatory in nature.
Furthermore, the new treaty definitively supports the position of the French Council of State (CE 24 February 2020 n°436392) by specifically providing that the capital gains realised on the sale of SCI shares are taxable in France. This is not, therefore, a new tax issue but a confirmation of the French tax authorities' position for the last ten or so years on this subject.
In this respect, it should be noted that article 13 of the new treaty goes beyond the simple SCI framework and more broadly covers the taxation of all gains made by Belgian residents on the sale of unlisted shareholdings in companies whose assets in real estate in France comprise more than 50% of their value, directly or indirectly. These capital gains are taxable in France. Thus, for example, a shareholder of an SAS (a simplified limited company) that qualifies within the meaning of the aforesaid article as a company predominantly focused on real estate, would be taxed in France in the event of a capital gain realised upon the sale of his or her shareholding.
Taxation of major capital gains?
The new article 13 of the treaty provides for a new tax regime for substantial shareholdings in Belgian or French companies when the shareholder has transferred their tax residence.
Under the treaty, a shareholding is considered to be substantial “when a legal person or a natural person alone or with related persons, has, directly or indirectly, shares or units, the total of which gives entitlement to 25% or more of the company’s profits”.
As soon as a French resident holds such a substantial shareholding (and provided that certain conditions are met), he/she would remain liable to capital gains tax in France if it was made within 7 years of his/her change in residence.
The provision must be read alongside the domestic provision in French exit tax law, the scope of which is limited to the unrealised capital gain on the day of departure and which expires after a period of 5 years.
The new provision therefore creates a more severe form of exit tax since, if a substantial transfer of holdings were to take place within 7 years after the change in residence, the full capital gain realised would be taxable in France (and therefore even the capital gain arising after the change in residence).
Please note that this article is not unique to the Franco-Belgian treaty. Replications of it can be found in all the other treaties that France has recently negotiated.
The end of the QFIE tax credit
In a judgment of 16 June 2017, the Court of Cassation ruled that, pursuant to the Franco-Belgian treaty of 1967, a flat-rate foreign tax credit (QFIE) of 15% could be applied to the Belgian tax due on dividends from French shares.
After a long legal battle, the Belgian tax authorities had authorised, for the 2020 tax year, income from 2021, that Belgian taxpayers could obtain the QFIE deduction directly via their tax return. The tax gain is relatively substantial for the Belgian taxpayer since it allows the tax burden on a French source dividend for 2021 to be reduced from 38.96% to 25.88%.
Unfortunately, as from the entry into force of the new treaty, the option to apply the QFIE will no longer be available, since the former article 19 of the treaty has been amended.
In the meantime, Belgian taxpayers can still benefit from the favourable ruling of the Court of Cassation in terms of the QFIE until 1st January 2024, the date of the planned entry into force of the new tax treaty.
Artists and sportspersons
The new treaty includes a specific provision for artists and sportspersons, who from now on will be taxed in the source State as long as their gross income exceeds €15,000. If the €15,000 threshold is not reached, the State of residence retains the authority to tax.
The new treaty also aims to combat structuring aimed at creating shell companies that would receive artists’ or sportsperson’s income to circumvent taxation rules.
As we can see, the new tax treaty undoubtedly makes significant changes in some matters, but also causes some uncertainties. For the sake of completeness, it has obviously not been possible for us to discuss all the new measures. Taxpayers who fall within the scope of this treaty are advised to review their tax situation with regard to the new provisions that will shortly enter into force.
ABN AMRO and its Wealth Solutions team are at your disposal to assist you.