New Belgium-Netherlands double tax treaty - Permanent establishment provisions amended in line with MLI 

February, 2024 - Rik Smet

The new double tax treaty between Belgium and the Netherlands will introduce significant changes  compared to the current Article 5 on permanent establishments. Due to the positions of Belgium and the Netherlands to the Multilateral Instrument (MLI), only the anti-fragmentation rule is applied under the current treaty. Under the new treaty, alignment is sought and found with the other changes proposed by the MLI for permanent establishments. These include amongst others the inclusion of the anti-abuse provision on building and construction activities and a reduction of the threshold for a so-called “agency permanent establishment”. The specific provision on "offshore activities" does not necessarily change, but will be incorporated into the article on "permanent establishments” . Indeed, under the current treaty, this provision is embedded in its own distinct treaty provision. Finally, the attribution of profits to permanent establishments is aligned with the OECD Model Tax Convention 2017.


Anti-fragmentation rule

Pursuant to the application of the MLI, the anti-fragmentation rule for so-called negative cases (which are not deemed to be permanent establishments) applies to the current treaty. This rule is now also directly inserted in the new treaty. Note that, in our view, this rule under the MLI is only applicable to taxable periods starting from 25 August 2022.

This provision seeks to discourage the (tax-inspired) splitting-up of different activities among multiple (associated) enterprises. Whereas separately, these activities would not constitute a permanent establishment, because of their preparatory or auxiliary character, when considered together, they would exceed this threshold. This rule is not new given the entry into force of the MLI .

Building and construction activities

The rule that a building site or construction or installation project “constitutes a permanent establishment only if it lasts more than twelve months" does not change. In addition, business activities exceeding 30 days, carried on by closely related enterprises at the same place, are aggregated for determining the 12-month period requirement for such permanent establishments. Thus, the (artificial) splitting-up of contracts over short periods of time and/or different associated enterprises is not sufficient to avoid constituting a permanent establishment in the other state. Belgium has chosen not to apply this provision through the MLI to covered tax treaties. Indeed, our country considers that the principal purpose test pursuant to the treaty or MLI and article 229, §2/2 of the Income Tax Code 1992 (ITC92) is sufficient to prevent such avoidance. The new treaty with the Netherlands does include this provision.

Agency permanent establishment

The threshold for an agency permanent establishment is lowered under the new treaty. I.e., (dependent) agents or other intermediaries will constitute an agency permanent establishment if they "habitually play the principal role" leading to the conclusion of contracts for a foreign enterprise, with the signing being performed "routinely without material modification" by the foreign enterprise. The contracts referred to are no longer only those concluded “in the name of the company”, but also those concluded "for the transfer of ownership" (or the granting of the right to use) in respect of property owned by th  enterprise, or “for the provision of services” by the enterprise. In addition, one can no longer use the exception for an independent agent if he acts (almost) exclusively on behalf of enterprises with which he is "closely related".

Offshore activities

In addition to the provisions relating to the MLI, a particular paragraph has been adopted with respect to carrying on offshore activities . These activities are deemed to be carried on through a permanent establishment if they continue for a period exceeding, in the aggregate, 30 days in a 12-month period. The new treaty specifies that offshore activities do not include "towing or anchor handling by ships primarily designed for that purpose" or "the transport of supplies or personnel by ships or aircraft in international traffic". Such provision is known to sometimes be included in double tax treaties concluded by the Netherlands and was also already provided for in the current treaty, albeit hidden in another treaty article.

Profit attribution

Article 7 of the new treaty on profit attribution was amended in accordance with Article 7 of the 2017 OECD Model Tax Convention. This provision is in line with the 2010 OECD Report on the Attribution of Profits to Permanent Establishments. More concretely, profit (or loss) should be attributed to a permanent establishment according to the authorized OECD approach, based on a functional analysis, considering the permanent establishment as a separate stand-alone entity. If either Belgium or the Netherlands makes an adjustment to the profit between head office and permanent establishment, whilst that profit has already been taxed in the other state, both states will by mutual agreement "establish" that any resulting double taxation is avoided. How exactly this is to be achieved is not specified in detail.

Editorial board:

Rik Smet ([email protected])

Griet Vanden Abeele ([email protected])



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