On November 6 2006 Belgium and Singapore signed a new agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (the treaty). Following a communication of the Belgium ministry of finance dated November 26 2008, with the improved treaty provisions, Singapore businesses will face lower tax barriers and enjoy tax certainty in their cross-border trade and investments in Belgium, and vice versa. In addition, the treaty confirms the traditional role Belgium is playing as gateway between east and west: indeed, in December 2003 Belgium was the first country ever to conclude a tax treaty with Hong Kong. Boey Yoke Ping (Singapore), Joseph Lam (Hong Kong) and Kurt De Haen (Belgium) of the Baker Tilly International Tax Network are pleased to share with you some real-life best-practice experience as regards such East-West tax planning opportunities.

The Treaty entered into force on November 27 2008 after the completion of ratification formalities. Meanwhile, both Belgium and Singapore have ratified the treaty so that it entered into force as of January 1 2009. In Belgium, the treaty was published in the Belgian official gazette dated December 11 2008. In Singapore, the full treaty text is available on the Inland Revenue Authority of Singapore's (IRAS) website.

Singapore has concluded 60 comprehensive double tax treaties.

To put things into perspective: back in 1819 Singapore was founded by the Englishman Stamford Raffles as a commercial hub for the East India Company. In 1965 Singapore became an independent nation and later one of the so-called fast-growing Asian Tigers. Indeed, the Singapore government policy is structurally aiming at long-term economical growth so as to be competitive against other countries like China and India. To that end, the Singapore government is focusing a lot on maintaining both industrial (25% of the GNP) and service (75% of the GNP) activities in the country. These are often called the Singapore Twin Engines.

The Singapore economy is also very much export-oriented. In particular, of chemical products as far as the cross-border trade between Belgium and Singapore is concerned which makes Singapore one of the most prosperous countries in the region. This is among others reflected in the Singapore credit rating (AAA) and the structural stability of the Singapore dollar.

Being located in the heart of Asia and given the country's efficient infrastructure (and corresponding connectivity), multinationals often choose Singapore to set up their Asia-Pac headquarters. Furthermore, together with Tokyo and Hong Kong, Singapore has the biggest and best-of-class financial centre of the region.

About 100 Belgium companies are present in Singapore. Conversely, about 50% of Singapore's direct investments are done abroad, of which around 10% take place in Europe. After the UK and the Netherlands, Belgium is Singapore's number three European outbound investment country. That is why both the Belgium and Singapore prime ministers agreed in November 2005 that it was high time to revisit the previous treaty dated February 8 1972 concluded between both jurisdictions, which ultimately resulted in the new 2008 treaty.

Singapore is also an attractive country from a tax perspective as it has very appealing rules for both holdings and operating companies.

Summarised, the standard Singapore corporate tax rate is 18% (and it has been proposed by the finance minister in his budget speech to parliament in early 2009 that the rate be reduced to 17%). The Singapore tax law provides the following features that are in particular attractive for non-resident investors:

• There is no Singapore capital duty when incorporating a company (only certain nominal registration fees are due);

• Following an explicit territorial rule laid down in Singapore tax law, offshore income is not taxable in Singapore if it is not received in Singapore. Without entering into details, for Singapore tax purposes, foreign sourced income is regarded as received in Singapore if it is (a) remitted to, transmitted or brought into Singapore, (b) applied in or towards satisfaction of any debt incurred in respect of a trade or business carried on in Singapore, or (c) applied to purchase any movable property which is brought into Singapore;

• Singapore grants tax exemption of foreign sourced dividend income received in Singapore by Singapore tax resident persons if tax has been paid in the source country and, at the time the dividend is received in Singapore, the source country's headline tax rate is at least 15%;

• There is no Singapore dividend witholding tax (WHT), regardless of who is the shareholder and where he resides;

As is the case for Singapore and Hong Kong Belgium has a strong tradition of being a preferred location for multinational companies in Europe.

This is, among others, explained by the following factors:

• Being located in the heart of Europe, Belgium is a most efficient hub for European headquarters; to illustrate: London, Paris, Amsterdam and Frankfurt are basically only one-hour's travel time away;

• For the same reason, Belgium is generally ranked number one as European distribution centre location;

• As Brussels is the capital of Europe, numerous multinationals want to be close to the European institutions for lobbying purposes;

• Antwerp is both the second biggest port of Europe and the worldwide number one location for the diamond sector;

• In particular for the chemicals sector, Antwerp is the preferred location number two after Houston (and is therefore nick-named Houston at the Scheldt);

• Belgium people typically are very fluent in at least French, Dutch and English which makes the country very appealing for say a shared services centre activity

The attractiveness of Belgium for multinationals is illustrated by the fact that, for many years, numerous multinationals have had a so-called Belgium co-ordination centre (BCC). This is in essence the in-house bank of an international grouping and is eligible for very low effective tax rates (until 2010, be it that the notional interest deduction is an attractive alternative – see below).

Belgium has concluded more than 85 tax treaties with other countries which clearly underpins the country's willingness to put tax policy high on the agenda. Some key features of the Belgium tax regime include:

• The notional interest deduction (NID) basically is a deduction for tax purposes only and, as a matter of principle, allows both Belgium companies and branches to design and monitor their own effective tax rate (see also below). Government statistics show that, without further planning, the NID reduces the 33,99% standard corporate tax rate to say 23-35%;

• There is no CFC legislation in Belgium;

• There is no capital duty when incorporating a company or increasing its capital;

• There are no general thin capitalisation rules;

• Tax treaty parents generally benefit from 0% Belgium dividend WHT;

• Belgium tax law is featured by numerous interest WHT exemptions;

• Belgium tax law contains very attractive rules for IP/R&D activities;

• Belgium has a very attractive participation exemption regime (see also below);

• It is possible to utilise another currency than the EUR for both Belgium GAAP and tax purposes;

• Belgium has an excellent upfront ruling practice;

• Belgium has a very attractive expatriate tax regime for both the employer and the individuals concerned;

The new treaty concluded between Belgium and Singapore contains some very interesting rules that are very relevant in cross-border transactions.

First of all, a building site, a construction, installation or assembly project, or supervisory activities connected therewith, constitutes a permanent establishment only if it lasts more than 12 months. Under the previous treaty, the period threshold was six months. The period threshold for the furnishing of services has also increased from 90 days to 183 days in any 12-month period.

The maximum interest WHT rate has been reduced from 10% (old treaty) to 5% (new treaty). This is significant as the domestic interest WHT rate in Singapore is 15%. Belgium tax law offers numerous exemptions for non-residents.

The maximum royalty WHT rate has been reduced from 5% under the old treaty to 3%. This may allow a tax planning opportunity for Belgium investors suffering such 3% Singapore WHT as, following Belgium domestic tax rules, they are eligible for a 17.6% foreign tax credit in Belgium, as shown in diagram 1.

Diagram 1: Withholding tax

The 0% dividend WHT clearly is one of the crown jewels of the new treaty. Please be informed that this in line with Belgium's recent tax treaty policy as we are also noticing a 0% dividend WHT in the treaties that Belgium concluded with Hong Kong (same conditions as with Singapore), US, Chile and so on.

Nonetheless, it should be emphasised that a 0% dividend WHT also applies in a Belgium-Singapore cross-border context since:

• There is no dividend WHT pursuant to Singapore domestic tax law;

• Following Belgium domestic tax law, 0% dividend WHT also applies if a Singapore parent holds at least 10% of a Belgium subsidiary for at least one year (before or after the dividend distribution date) if the Singapore normally taxed parent has a normal legal form and without having to satisfy any limitation-on-benefits test.

Hereafter we will be highlighting some best-practice Belgium-Singapore cross-border investment structures. For the sake of comparison, we will benchmark these with some traditional Belgium-Hong Kong investment structures.

In a first case, a Belgium company (BelCo) is developing a business activity in Singapore by incorporating a subsidiary (SingCo) over there. Diagram 2 depicts this situation

Diagram 2: Singapore inbound investment

Hence, net taxable profit derived by SingCo is subject to the 18% Singapore corporate tax rate (to be reduced to 17% on income derived in a financial year ending in or after 2009).

In the event that SingCo would be distributing dividend income to BelCo, the question arises whether BelCo is eligible for the Belgium participation exemption. To that end, the following quantitative conditions need to be satisfied:

• BelCo needs to hold at least €1.2 million ($1.7 million) or 10% in the capital of SingCo;

• BelCo needs to hold such shares at least one year before or after the dividend distribution date;

• BelCo needs to hold such shares in full legal ownership and needs to record them as financial fixed assets for Belgium GAAP purposes.

In addition, a so-called qualitative condition needs to be complied with as well which basically comes down to a subject-to-tax condition in the hands of SingCo. In other words, SingCo needs to be subject to a tax regime whose features are in line with generally accepted international tax principles. On this point, it must be noted that the Belgium tax authorities have a so-called (non-exhaustive) black list of countries whose tax regime is deemed to conflict with such prerequisite criteria: this implies that dividends and capital gains originating from these countries are taxable at 33.99% for a Belgium corporate shareholder.

As regards Singapore origin dividend income, on April 15 2008, the Belgium ruling commission issued an upfront ruling decision confirming that a Singapore origin dividend is eligible for Belgium participation exemption. In that specific fact pattern, the Singapore subsidiary was only generating onshore profit taxable at (theoretically) 18% corporate tax, but was benefitting from a five-year Singapore tax holiday, resulting in a 5% Singapore corporate tax rate, following the local development and expansion incentive regulations.

To the extent that SingCo would also be receiving offshore income, as defined for Singapore tax purposes, the Belgium participation exemption is available if the tax treatment in Singapore regarding such offshore income does not deviate from the common tax treatment following Singapore tax law. The Belgium participation exemption also applies to Singapore dividends funded by offshore income since:

• The Singapore offshore tax regime is of common Singapore tax law as it is explicitly laid down in Singapore tax legislation;

• The Singapore offshore tax regime is available for all Singapore taxpayers and hence not ring-fenced for certain business industries only;

• The Belgium tax authorities have (rightfully so) confirmed before that the Hong Kong offshore tax regime (which is very comparable to the Singapore one) does not prevent a Belgium corporate shareholder from claiming the Belgium participation exemption;

• On November 28 2008 the Belgium minister for entrepreneurial activities, Vincent Van Quickenborne, confirmed in Belgium press coverage that Belgium companies will not be taxed on income derived from a Singapore business that benefits from the attractive Singapore tax regime whose tax rates vary between 4.5%-18%.

The Belgium participation exemption for dividend income (including currency results) is 95%. Hence, a maximum 1.7% (or 33.99% of 5%) effective tax rate for dividend income arises. Nevertheless, note that the 5% dividend taxable basis can be swiftly base-eroded (even to 0%) if the Belgium parent has at arm's-length interest charges (there is no general thin capitalisation rule following Belgium tax law) or other tax relief (for example current-year or carry-forward tax losses).

It should also be noted that realised net capital gains (including currency gains) on shares are 100% tax-free if only the above qualitative condition is satisfied. In other words, there is no minimum detention period test to be met.

In a second case, a Belgium company has incorporated a Singapore subsidiary to utilise it as a holding company (possibly combined with some headquarter functions) for the Asia-Pac region as illustrated hereunder:

If BelCo wants to apply the Belgium participation exemption to dividends and capital gains derived from the SingCo shares, it also needs to be ascertained that the tax regime in the hands of the subsidiaries held by SingCo comply with the above subject-to-tax test. On that point, as we will also be explaining hereafter, Singapore is often used as a holding location for PRC subsidiaries. The question arises whether the Belgium participation exemption is still available if a PRC subsidiary would be benefitting from, for example, a local tax holiday in China as that subsidiary may hence have a very low effective tax rate.

The Belgium ruling commission, in line with administrative guidance regarding the Belgium participation exemption legislation, has confirmed before that the Belgium participation exemption is not at risk if the rationale of a local tax holiday is to support and incentivise the local economy. In specific cases, positive ruling decisions have hence already been issued regarding China, Singapore, Poland, Sri Lanka, Thailand and other tax holidays.

Assume however that the rationale of a certain local tax holiday would not meet the above intrinsic test, then the Belgium participation exemption is still available if:

• SingCo would be taxed on the dividend received from the BadHolidayCo, or;

• SingCo is normally taxed and is quoted on a good stock exchange. The Singapore stock exchange should qualify since, on March 27 2007, the Belgium ruling commission has confirmed that the Hong Kong stock exchange is such a good stock exchange and since both Hong Kong and Singapore are best-of-class financial centres in the region.

As regards European inbound investments, Asian investors have many reasons to choose Belgium as point of entry into Europe (and beyond).

The merits of the Belgium participation exemption are one of them. In addition, thanks to the conversion of the EU parent-subsidiary directive there is generally no dividend WHT within the EU. Also, dividend distributions by a Belgium (holding and/or operating) company should be eligible for 0% Belgium WHT, either following Belgium domestic tax law, or by following the Belgium-Singapore (or Belgium-Hong Kong) treaty.

Diagram 3 depicts a European inbound investment structure that is often seen in the market.

Diagram 3: European inbound investment

One of the particularities of this structure is the use of a Belgium finance company (Bel FinCo). The location of a treasury centre of an international group is indeed a very strategic and important matter. As said before, Belgium has a long and strong tradition as location for treasury centres (including the above-mentioned Belgium co-ordination centres, BCC). Given the announced phase-out of BCCs, the Belgium government has introduced the notional interest deduction (NID) in 2005.

This tax legislation allows all companies and branches (irrespective of the nature of their business) to deduct a notional (in other words, without cash-outflow or accounting charge) interest deduction for equity invested in such Belgium company or branch. The current NID rate is 4.473% and is adjusted annually in function of market interest rates. The NID basis is the prior-year Belgium GAAP equity, subject to certain corrections to avoid double use and abuse.

To illustrate the impact of the NID on the above case, it is worthwhile mentioning that:

• A corporate tax deduction is achieved for the borrowing subsidiaries as regards fair market interest paid to Bel FinCo;

• Interest payments to Bel FinCo allow Bel HoldCo to have a 0% effective tax rate;

• Pursuant to the implementation of the EU interest and royalty directive (or domestic tax law or a tax treaty), there is generally 0% interest WHT;

• If there would be local interest WHT, Bel FinCo can claim a foreign tax credit in Belgium;

• Bel FinCo has a low effective tax rate thanks to the NID;

• There is 0% Belgium dividend WHT on the dividend distribution to SingCo;

• NID is generally compliant with foreign CFC rules, if any;

• The Belgium expatriate tax regime allows tax-efficient substance of the structure

As mentioned before, Belgium also has a strong tradition of being a gateway with Asia via a Hong Kong company. Hence, it is not a coincidence that Belgium was the first country ever to conclude a tax treaty with Hong Kong back in December 2003. Hong Kong has four tax treaties in place, one of which is with the People's Republic of China. Most, not to say all, of the business related features mentioned as regards Singapore equally apply to Hong Kong. Still, unlike Singapore, Hong Kong is less aiming at developing a local industrial activity but is moreover focussing on regional headquarters. Furthermore, Hong Kong has that (geographically) closer connectivity with the People's Republic of China.

The standard corporate tax rate in Hong Kong is 16.5% at present. As is the case for Singapore, there is no local dividend or interest WHT; Hong Kong royalty WHT is 4.95% (provided that the payer and the overseas licensor are not associated). There is no goods and services tax in Hong Kong (while there is 5% GST in Singapore).

The Hong Kong tax regime also is a territorial tax regime, in other words onshore profit is taxable at 16.5% whereas offshore profit is not taxable in Hong Kong. The term offshore profit means a profit derived from a geographical source outside Hong Kong. For Hong Kong tax purposes however, there is no statutory rule that clearly defines the sources of different kinds of profits. Instead, reference is often made to:

• Hong Kong case law: where the broad guiding principle is that one should look to see what the taxpayer has done to earn the profit at hand and where the actions took place. This reflects the position that the locality of profits is usually a question of fact and that there is no hard and fast rule to govern every situation;

• The departmental interpretation and practice notes number 21 (revised 1998) (DIPN 21), a kind of administrative circular letter which is not legally binding.

To illustrate the relevance and added-value of both Hong Kong and Singapore in Asian tax planning, it is worthwhile pointing at the tax treaties both jurisdictions respectively have concluded with PRC. Table 1 compares some PRC domestic tax rates and the tax treaty protection rates offered by both the PRC-Hong Kong and PRC-Singapore treaty. Both tax treaties are very competitive.

Table 1: Rates comparison
Income	PRC domestic tax law	PRC-HK treaty	PRC-Singapore treaty
Dividend	10%	5% (*) -10%	5% (*) -10%
Interest	10%	7%	7%-10%
Royalty	10%	7%	6%-10%
Capital gains:
Real estateCo	25%	25%	25%
OtherCo	25%	0% (**)	0%
(*) : if minimum 25% shareholding (**) : if less than 25% shareholding

Over the last couple of years, the Belgium tax authorities have confirmed on numerous occasions that the Hong Kong tax regime is a good tax regime for Belgium tax relief purposes. Specifically, the application of the Belgium participation exemption has been confirmed by among other things:

• Belgium case law of April 2004 and June 2005;

• A Belgium tax circular letter dated March 2005;

• The answer of the minister of finance to a parliamentary question dated March 2006

• Various decisions of the Belgium ruling commission.

Most of those ruling decisions related to a situation whereby a Hong Kong subsidiary operated via a PRC representation office as illustrated in diagram 4.

Diagram 4: Hong Kong subsidiary and Chinese representative office

Gateway open

The above real-life best-practice cases undoubtedly confirm the role of Belgium as a gateway for investments between east and west. The Belgium-Hong Kong route has been a traditional one for many years. The new treaty between Belgium and Singapore underpins such tradition and further profiles Singapore as another Asian Tiger in the Asia-Pac region.

Boey Yoke Ping (yokeping@tfwlcl.com) (Singapore), Joseph Lam (josephlam@bakertillyhk.com) (Hong Kong) and Kurt De Haen (k.dehaen@bakertillybelgium.be) (Belgium) of Baker Tilly.