In an international context, double taxation agreements (DTAs) aim to avoid companies and private individuals being taxed twice on the same income. These bilateral agreements between countries have been signed with the purpose of avoiding double taxation, but also aim to eliminate (unintended) double non-taxation.
The general rule in practically all DTAs – based on the OECD Model Tax Convention – is that only tax residents of a certain state can invoke the benefits of a treaty concluded by that particular state.
- Resident or non-resident
In this respect, a ‘resident of a Contracting State’ typically means “any person who, under the domestic laws of that state, is liable to tax therein by reason of his domicile, residence, place of management (for corporate taxpayers) or other similar circumstance”. This, in general, “does not include persons who are liable to tax in that State in respect only of income from sources in that state or capital situated therein”.
If you only earn income from a Belgian source, but do not live in Belgium, you will not be considered a resident, but a non-resident taxpayer instead.
In practice, the question often arises how a taxpayer can demonstrate their tax residency in order to claim, for example, a reduction or exemption of withholding tax applied at source. This is where a Tax Residence Certificate (TRC) can be a useful instrument. Countries generally accept TRCs issued by the competent authorities of the other Contracting State to determine a person’s residency.
While some DTAs include provisions regarding the scope and applicability of a TRC, most treaties concluded by Belgium do not have such provision. Only in the context of Article 25 OECD Model Tax Convention, which includes a mutual agreement procedure for resolving difficulties arising from the application of the treaty, the requirement to provide a TRC is usually included.
- Legal value
Regarding the legal value of a TRC, it is generally accepted that a contracting state is not bound by the fact that the other state qualifies a taxpayer as their ‘resident’. While the qualification by the country of residence is therefore not legally binding, in practice, source states usually accept such statement. This likely has to do with the difficulties that the source state may encounter in correctly interpreting the concept of residency under the domestic laws of the other state.
We can conclude that if a person is considered a tax resident in the other state, it is not decisive as such for the determination of tax residency, but is in fact a strong indication.
Whether or not a TRC has any legal value, can normally be decided if the applicable DTA includes a specific provision in this respect.
If the DTA does not say anything specific on the TRC, the latter will have no legally binding value. It will only be a factual indication to determine where somebody is a tax resident. If the taxpayer refers to a TRC issued by their country of residence, the authority of the other state can certainly rely on such certificate to assess the taxpayer’s residency within the relevant DTA.
However, providing a TRC cannot be set as a necessary condition to apply the tax treaty and consequently invoke treaty protection. Whether somebody is a tax resident in one or the other country, can only be assessed on the basis of the criteria set out in the relevant DTA itself. The TRC issued cannot be considered decisive or binding in that respect.
If the relevant DTA, on the other hand, includes a specific provision regarding the TRC, the latter can effectively have a legally binding value. To what extent the TRC can be considered binding, will depend on the wording of the treaty. If it is stipulated in the DTA that a TRC must be provided to get access to a treaty benefit, this requirement needs to be met, but will only extend to claiming that respective benefit. It cannot, at the same time, be applied as a necessary condition to determine tax residency within the meaning of Article 4 DTA.
- Belgian context
Belgium has currently agreed to more than 100 DTAs, but the number of treaties including an explicit reference to a TRC is rather scarce. Today, this can only be found in the DTAs with Italy and (protocol to the treaty with) the UAE. The scope of these provisions is limited to tax refund requests.
Therefore, the requirement of a TRC in these DTAs is limited to the conditions set for claiming a treaty benefit. As already pointed out before, they cannot be automatically extended for determining tax residency within the meaning of Article 4 DTA.
By way of summary, it should be emphasized that submitting a TRC can, in general, not be perceived as a necessary condition to get access to treaty benefits, if no explicit provision regarding the certificate is included in the DTA.
- Practical relevance
In Belgium, several tax courts have taken the position that treaty benefits cannot be made dependent on additional formalities, such as submitting a TRC issued by the competent authority in the country of residence.
To give an example, the tax court in Ghent ruled back in 2004 that a reduced withholding tax on dividends cannot be refused for reason that the required application form (i.e. Form 276 Div), as required by the Belgian authorities, was not properly submitted. The court ruled that the form, which had to be certified by the country of residence of the recipient of the dividend income, cannot be considered a necessary condition for allowing the withholding tax exemption or reduction. If the treaty conditions are met, domestic tax law cannot stipulate additional conditions.
In a similar case, the tax court in Liège ruled in 2006 that the requirement of a TRC for claiming an exemption from Belgian income tax, adds an extra condition to the treaty. In practice, the Belgian authorities often require taxpayers to submit a TRC to allow an exemption from Belgian tax on employee remuneration. It is a fact that such exemption cannot be made dependent on submitting a TRC to the Belgian authorities. Once the treaty conditions are met, the tax exemption must be granted.
Another practical example is when a Belgian taxpayer pays alimony or financial support to a non-resident beneficiary abroad and deducts these payments in their Belgian income tax filing. Such payments in general need to be subject to a withholding tax in Belgium. This requirement does not apply if the relevant DTA gives the right to tax the financial support exclusively to the beneficiary’s country of residence (and not to Belgium as the country where the debtor lives). In that case, the Belgian authorities often require the taxpayer to submit a TRC drawn up by the competent authority of the beneficiary’s country of residence (which cannot always be obtained that easily, for example, in case of alimony paid as part of a divorce settlement).
However, this condition is not mentioned in any of the DTAs concluded by Belgium. If the taxpayer can demonstrate – by any other means available – that the beneficiary of the financial support is a resident in the other country, the Belgian authorities cannot consider submitting the TRC as a necessary condition in order to exempt the alimony from being subject to a Belgian withholding tax.