New tax treaty between Belgium and Hong Kong: Belgium as an attractive location for investments in Europe and Asia Given the issue recently of a Belgian administrative circular regarding the application and the explanation of the new double tax treaty concluded between Belgium and Hong Kong, it is time for a short overview of the most important opportunities of this new treaty for both Hong Kong and Belgian companies. General On 10 December 2003 the Belgian government has signed, as first country of the EU, with the government of the Hong Kong Administrative Region of the People’s Republic of China (i.e. Hong Kong) a new double tax treaty and accompanying protocol. The treaty entered into force on 7 October 2004. However, the provisions of the treaty and the accompanying protocol will be applicable as from 1 January 2004 in Belgium and as from 1 April 2004 in Hong Kong. This new double tax treaty makes Belgium an attractive investment location for companies located in Hong Kong and conversely, for companies located in Europe investing in Hong Kong and Asia. Withholding taxes on dividends, interest and royalties: zero or low rate The payments of dividends, interest or royalties from a corporation established in one country to a corporation in another country, will under certain conditions benefit from a zero or low rate of withholding tax. In this respect, the tax treaty concluded between Belgium and Hong Kong foresees in the following maximum withholding tax rates: Dividends o 0% if there is a minimum holding of 25% held for an uninterrupted period of at least 12 months; o 5% if there is a minimum holding of 10%; o 15% in other cases. Interest o 0% On commercial debts-claims represented by commercial paper, resulting from deferred payment for goods, merchandise or services supplied by an enterprise; On debt-claims or loans of any nature (not represented by bearer instruments) paid to banking enterprises; On deposits made by an enterprise with a banking enterprise;
1
On certain loans related to the Hong Kong or Belgian governments; o 10% in other cases. Royalties o 5% in all cases.
Focus on Belgium as prior investment location The new tax treaty leads to substantial tax advantages for companies located in Hong Kong, which are investing or are planning to invest in Europe, through the use of Belgian (holding) companies. In this respect Belgian companies will be able to pay dividends, interest and royalties, under certain conditions, to Hong Kong at a zero or low rate of withholding tax. Besides the favorable provisions of this new tax treaty, one should also take into account the fact that Belgium has a very favorable holding company regime (i.e. participation exemption), an extensive network of double tax treaties with EU and non-EU countries and as a member of the EU, Belgium has access to the benefits of the EU parentsubsidiary directive and the interest-royalty directive (i.e. no withholding tax). Hong Kong as an attractive investment location for Belgian investors The new tax treaty creates also a number of (fiscal) opportunities for Belgian companies with interests and investments in Hong Kong. In this respect the tax treaty foresees that Belgian companies, which are receiving dividends from Hong Kong companies, under certain conditions, can benefit from the participation exemption or a special tax credit if the participation exemption can not be applied. In this respect the recent administrative circular confirms that the general tax regime in Hong Kong is not more favorable than in Belgium and that Hong Kong does not appear in the list of countries where the general tax regime is substantially more favorable than in Belgium. As a result Belgian companies receiving dividends from Hong Kong based companies can in principle benefit from the participation exemption. Furthermore, the administrative circular confirms also that Belgian companies can apply for the participation exemption, when receiving dividends from Hong Kong companies which benefit from a favorable tax treatment with respect to foreign source income. This given the fact that these companies are not benefiting from a tax regime which deviates from the general tax regime in Hong Kong. Example Please note that in this respect we want to draw your attention to a very (tax) attractive route, which can be illustrated by the following example:
2
- 0% withholding tax within EU - Reduced withholding tax rates under Belgian tax treaties
Parent
Dividend
- 95% exemption on dividends - 100% exemption on capital gains on shares
Belgium
Dividend
- Foreign source income is not subject to tax - No withholding tax on dividends
Hong Kong
Conclusion Considering the above, the new tax treaty concluded between Belgium and Hong Kong is expected to bring about important tax savings to Hong Kong, Belgian and also European investors doing business in each other’s country with respect to certain types of income. Finally it should be noted that Belgium wishes to negotiate soon new agreements similar to the one concluded with Hong Kong, this to emphasize the privileged position of Belgium in the center of Europe and to offer unique chances to foreign investors thanks to the attractive Belgian fiscal system. For further information contact: Gert Van den Berg Tax adviser HLB Belgium Email: gvandenberg@hlb.be
3