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Belgium-Hong Kong

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Belgian Minister of Finance clarified application of Belgium–Hong Kong tax treaty

The Belgian Minister of Finance has clarified recently the application of the participation exemption and the definition of "beneficial owner" under the Belgium-Hong Kong tax treaty on income and capital of 10 December 2003 (the treaty).

Hong Kong only taxes domestic profits and not foreign profits. Under the treaty, the withholding tax on dividends is 0% if the beneficial owner at the time of the payment has held directly for an uninterrupted period of at least 12 months shares representing at least 25% of the capital of the company paying the dividends. Furthermore, the treaty does not contain a limitation on benefits (LoB) provision.

In a circular letter of 31 March 2005, the Belgian tax authorities already confirmed that:

-   the Hong Kong corporate tax regime, which is based on the territoriality principle is held to be not "substantially more advantageous" than the Belgian tax system; and
-   the Hong Kong offshore regime does not deviate from the Hong Kong common tax regime.

This means that under the Belgian domestic legislation, the participation exemption applies to dividends received from Hong Kong if:

-   the shareholder owned for a continuous period of at least 1 year, 10% of the capital of the subsidiary or a participation with an acquisition value of at least 1.2 million; and
-   the foreign subsidiary is subject to corporate income tax or a similar tax and not resident in a jurisdiction whose normal regime is "substantially more advantageous" than the normal Belgian tax regime.

From the clarification, it becomes apparent that the second test is met. Also the provision that the participation exemption does not apply to dividends from a company, to the extent its income (other than dividends) has its source outside the state of residence and benefits from a special tax regime in that state, does not apply to Hong Kong companies. The provision would only apply if the territoriality principle only applies to certain companies.

However, the participation exemption does not apply to dividends received from a Hong Kong intermediary company, unless at least 90% of the dividends received by the intermediary qualify for the participation exemption.

The Minister of Finance also clarified that when a Hong Kong company is interposed between a Belgian subsidiary and a foreign parent, the Hong Kong company qualifies as the beneficial owner of the dividends, because the treaty does not contain a LoB provision.

The Minister of Finance indicated that the legal owner of a participation is the beneficial owner of the dividends received from that participation. An individual that only acts as a representative of the legal owner of the participation may not be regarded as the beneficial owner and is, therefore, not entitled to the treaty benefits.

Finally, the Minister indicated that the Belgian general anti-abuse provision of Art. 344(1) of the Income Tax Code is not applicable in this case.

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