For an economy that depends on international trade, whose borders are not more than an hour away, and is home to an important international community, double taxation can be a real killer – and treaties to avoid it are a must. Put simply, double tax treaties can open the country for inbound investments – which is why Belgium has 90 double tax treaties, more than most countries.

 

What some people don’t realize is that double tax treaties can serve another purpose.  In 2009, Belgium found itself on the OECD grey list of tax havens – essentially a strict regime of accelerated negotiations to sign new income tax treaties and protocols that contain a provision for the exchange of information that complies with international standards. By July 2009, Belgium had signed twelve tax information exchange agreements and was promoted to the OECD's white list. Since 2009, Belgium has signed 52 treaties and protocols in total.

 

But times have changed, and the entire treaty ratification procedure came to a halt when the Council of State reviewed these treaties in April 2010, finding they should have been negotiated by the federal and regional authorities together and then ratified by both the federal and regional parliaments.  

 

All of this is the result of a new provision in the constitution that was introduced … eighteen years ago. 

 

 

In 1993, Belgium went through a state reform that transferred powers to the regions to sign treaties and international agreements with other countries, assuming they found someone who was willing to enter into discussions with them. It didn’t take long for politicians to find out that this was not just a theoretical possibility. For some matters, both the federal and the regional authorities have competence, in which case they agreed they should work together on an equal footing to negotiate and sign treaties. 

 

Treaties that fall within the competence of the federal and regional authorities are ‘mixed’ treaties, which double tax treaties clearly fall into. The regions have competence for some aspects of the annual real property levy, which is considered income tax. And the provision that forbids any discrimination based on nationality is not limited to the federal income tax, as it also applies to taxes levied by such political subdivisions as the regions. 

 

One would never have thought it would take 17 years for someone to find out that the regions should have been involved all along. Nevertheless, no one seemed to notice until the Council of State noted that the provision relating to the exchange of information between tax authorities of different countries also applied to political subdivisions, i.e. the regions and communities. The Minister of Finance was taken by surprise and tried to shrug it off with some legalistic arguments that ultimately failed to convince the Council of State.  

 

 

In a federal state, there is an appropriate procedure for holding discussions between the regional and federal authorities and that procedure has been started, but it takes time… a lot of time.  The problem has been noted, but this does not mean there is a solution. 

 

The problem is that the international conventions should have been negotiated together by all the parties. So does this mean the negotiations must be started all over again, or can the regional parliaments just rubberstamp the signed conventions? 

 

And this is just to correct the past! 

 

More importantly, how are new treaties supposed to be negotiated? Does this mean federal negotiators will have to bring along three or four colleagues from the communities and regions, or will they be allowed to negotiate on their behalf?

 

The issue becomes all the more pressing as the regions are set to gain additional fiscal autonomy. They will soon be allowed to levy a regional income tax rate on top of the federal tax rate, even if the federal state will continue to collect the tax on behalf of the regions. As we explained in A New Government, A New Budget and What it all Means, this does not mean the tax will go up, but that the existing federal income tax rate will be split between a federal and a regional income tax rate, with the regions then having some (very limited) autonomy to vary the regional rate.

 

The Council of State may have raised the alarm, but the only effect seems to be that the international tax policy is frozen solid … just like the weather these days.