In October 2011, the Democratic Republic of Congo (DRC) Senate finally ratified the avoidance of double taxation treaty with Belgium (the “Treaty”) that was signed on 23 May 2007 and already ratified by Belgium in January 2009. The ratification law was promulgated in the DRC on 24 December 2011. Its ratification remains to be notified to Belgium, after which the Treaty will become effective as from 1 January of the following year. This means that the Treaty will come into force at the earliest on 1 January 2013 and apply for fiscal year 2014.
The Treaty, the first of its kind ratified by the DRC (an avoidance of double taxation treaty with South Africa was signed in 2005 but is not yet effective), reflects the historical and business links between Belgium and its former colony, and is likely to promote Belgium as a hub for inward investment into the DRC. Investors in the DRC, subject to home country tax provisions, may have an interest in opening an intermediary holding company in Belgium in order to benefit from the advantages offered by the Treaty. DRC borrowers should also benefit from the withholding tax exemption on interest payments on loans with Belgian banks . The Treaty also contains a “most favoured nation clause” in favor of Belgium, according to which Belgium would be granted at least equally favourable withholding tax rates on dividends, interests or royalties as those granted to other EU Member States in the event the DRC would conclude further avoidance of double taxation treaties with such Member States. The Treaty contains the classic solutions for the avoidance of double taxation, but also offers some more original and attractive provisions.
Corporate Tax
Currently, a Belgian company opening an establishment in the DRC without creating a subsidiary will be taxed on its profits in both the DRC and in Belgium. The Treaty provides that profits generated through an establishment in the DRC will be taxed in the DRC and exempted in Belgium. The Treaty also provides for a series of situations that are not considered as constituting a stable establishment in the DRC and therefore not taxable in the DRC, such as a construction or assembly site of less than six months; installations for storage, display or delivery of goods; the storage of goods for warehousing, display or delivery; the storage of goods for processing; a fixed place of business used only for purchasing products or information gathering or performing any other sort of preparatory or auxiliary activities; or an accumulation of the above situations as long as all such activities have a preparatory or auxiliary nature.
Moreover, the DRC stable establishment of a Belgian company will not be subject to withholding tax on the profits made by the stable establishment that will be repatriated to Belgium, it being understood that such profits will be taxed in the DRC.
Dividends
For dividend payments between companies established in the DRC and Belgium, the Treaty provides that dividends paid by a DRC company are exempted from Belgian corporate tax under the conditions (i.e. holding for at least one year; DRC company subject to corporate taxation) and limitations (95 per cent exemption) provided by Belgian law.
Such dividends are subject to a 10 per cent withholding tax rather than the usual 20 per cent DRC withholding tax, or 15 per cent in the case that the DRC company benefits from a tax exemption under the DRC Investment Code or a particular law organising investment in certain sectors and the Belgian parent company directly holds at least 25 per cent of the share capital of the distributing company. Moreover, the Treaty provides that dividends received by a Belgian company from a DRC company benefiting from a tax exemption under the DRC Investment Code or a particular law organising investment in certain sectors, such as the Mining Code, are tax exempt for a period of 10 years from the entry into force of the Treaty, such period being automatically renewed for 10 years unless informed otherwise by the competent Belgian authority.
Thus, for mining companies the rate of withholding tax in the DRC on dividends is already set at a favourable 10 per cent, but in addition, dividends paid to a Belgian parent company will be exempt from corporate tax in Belgium for the above-mentioned period of 10 years, and this without need for the DRC company to meet the above-mentioned taxation conditions.
A reduction in withholding tax in the other direction is also provided by the Treaty, namely the distribution by a Belgian company of dividends to a DRC parent company. In this case the withholding tax will generally be reduced to 10 per cent, but may be reduced to 5 per cent if the DRC parent company directly holds at least 25 per cent of the share capital of the distributing company.
Interest and IP Royalties
The Treaty provides for a maximum 10 per cent (instead of 20 per cent) withholding tax by one contracting State on payments of interest and intellectual property royalties paid to a resident of the other contracting State. In this case, tax may be paid in both States, but it is limited to a maximum of 10 per cent in the State in which the interest or royalties arise. The Treaty provides a series of total tax exemptions in the State in which the interest arises on commercial loans and bank loans or for interest paid to public entities of the other State. For mining companies in the DRC, interest on loans is already totally exempted from the withholding tax by the Mining Code. However, interest on advances from affiliates of mining companies is only exempted if tested against market conditions.
Physical Persons
The Treaty also provides for the avoidance of double taxation, under certain conditions, of the remuneration of company managers or directors and seconded workers, as well as a series of other categories of physical persons. For instance, the Treaty allows temporary missions (i.e. less than 183 days) in the DRC by Belgian residents without rendering the latter subject to DRC taxation.
Belgium as a Hub for Doing Business in Congo
The above avoidance of double taxation and other benefits contained in the Treaty will no doubt place Belgium in a key position for those wishing to do business in Congo, in particular, operators from countries with which Belgium has already concluded double tax treaties.