Double taxation can be a significant concern for individuals and businesses operating in both Romania and Belgium. This issue arises when the same income is taxed in more than one jurisdiction, leading to an unfair financial burden on taxpayers. To avoid such situations and to promote cross-border trade and investment, Romania and Belgium have signed a Double Taxation Agreement (DTA) that aims to prevent income from being taxed twice — once in Romania and once in Belgium. Below, I’ll provide a comprehensive overview of how double taxation is handled between these two countries in 2024, highlighting the key provisions and implications for taxpayers.

Overview of the Double Taxation Agreement  between Romania and Belgium

The DTA between Romania and Belgium is meticulously designed to allocate taxing rights between the two countries and provide relief to taxpayers who might otherwise be subject to double taxation. The current DTA, which is based on the OECD Model Tax Convention, covers various types of income, including business profits, employment income, dividends, interest, royalties, and capital gains. This agreement not only facilitates smoother economic relations between the two nations but also encourages individuals and businesses to engage in cross-border activities without the fear of being taxed excessively.

The DTA serves as a framework that outlines how different types of income will be taxed, ensuring that taxpayers are not penalized for earning income in a foreign country. By clarifying the tax obligations of residents and non-residents, the DTA helps to foster a more predictable and stable tax environment, which is essential for international business operations.

Key provisions of the DTA

1. Residence:
   • A person (individual or company) is considered a resident of the country in which they are domiciled, have a permanent home, or conduct their primary economic activities. This definition is crucial as it determines the tax obligations of the individual or entity under the DTA.
   • In cases where residency is disputed, tie-breaker rules such as the location of a permanent home, center of vital interests, or habitual residence are used to establish residency. These rules are essential for resolving conflicts and ensuring that individuals and businesses are taxed fairly.
2. Dividends:
   • Dividends paid by a company in Romania to a Belgian resident are generally taxed in Romania at a reduced withholding tax rate of 5%, provided the Belgian company holds at least 10% of the shares in the Romanian company for at least one year. This provision encourages long-term investment and participation in the Romanian market by Belgian investors.
   • Belgian tax treatment: The dividends may also be taxed in Belgium, but a foreign tax credit or exemption may be available to avoid double taxation. This means that Belgian residents receiving dividends from Romania can offset the Romanian tax against their Belgian tax liability, ensuring that they are not taxed twice on the same income.
3. Interest:
   • Interest payments from a Romanian entity to a Belgian resident are generally subject to a reduced withholding tax rate of 5% in Romania, provided certain conditions are met. This reduced rate is designed to promote the flow of capital between the two countries and make it more attractive for Belgian residents to invest in Romanian businesses.
   • If the interest is subject to tax in Belgium, a tax credit is usually granted for the Romanian withholding tax paid. This provision ensures that taxpayers are not unduly burdened by taxation on interest income, allowing for a more favorable investment climate.
4. Royalties:
   • Royalties paid from Romania to a Belgian resident are taxed at a reduced rate of 3% in Romania under the DTA. This lower rate is intended to encourage the transfer of technology and intellectual property between the two countries, fostering innovation and collaboration.
   • Belgium may also tax these royalties but typically provides relief through a foreign tax credit. This means that Belgian residents receiving royalties from Romania can claim a credit for the tax paid in Romania, further mitigating the risk of double taxation.
5. Capital Gains:
   • Generally, capital gains from the sale of movable property (e.g., shares) are taxed only in the country of residence of the seller. This provision simplifies the taxation of capital gains and encourages investment in movable assets across borders.
   • However, capital gains from the sale of immovable property (real estate) are taxed in the country where the property is located. This distinction is important for investors and property owners, as it clarifies where tax obligations lie in relation to real estate transactions.
6. Employment Income:
   • Salaries, wages, and other similar income earned by a resident of Belgium from employment in Romania are typically taxed in Romania. However, if the individual is present in Romania for a limited period, specific exemptions may apply, allowing for a more favorable tax treatment. This provision is particularly beneficial for expatriates and professionals working temporarily in Romania.
7.  Elimination of Double Taxation: 

        Both Romania and Belgium utilize the credit method to eliminate double taxation, ensuring that taxpayers are not unfairly burdened by taxes in both jurisdictions:

• Belgium: The Belgian tax authorities grant a tax credit for taxes that have been paid in Romania on income that is taxable in both countries, effectively reducing the overall tax liability for the taxpayer.
• Romania: Similarly, Romania provides a comparable credit for taxes that have been paid in Belgium, allowing taxpayers to offset their tax obligations in Romania against the taxes already paid abroad.

In conclusion, the Double Taxation Agreement between Romania and Belgium plays a vital role in facilitating economic cooperation and investment between the two countries. By providing clear guidelines on how various types of income are taxed, the DTA helps to alleviate the burden of double taxation, promoting a more favorable environment for individuals and businesses engaged in cross-border activities.

Employment taxation in Romania

Employment in Romania is generally subject to taxation within the country if the work is performed there. However, there are specific conditions under which taxation may differ. For instance, if an employee spends less than 183 days in Romania within a 12-month period, and if the employer is not a Romanian entity, the income earned may be taxed solely in Belgium. This provision is particularly relevant for expatriates and cross-border workers, as it allows for a more favorable tax treatment depending on the duration of their stay and the nature of their employment

Example of how the Double Taxation Agreement works

Let’s consider a practical example to illustrate how the DTA operates in real-world scenarios. Suppose a Belgian resident receives dividends from a Romanian company in which they hold shares:

• The Romanian company withholds tax at a rate of 5% on the dividends paid to the Belgian shareholder. This withholding tax is a standard practice to ensure that the Romanian government collects its due revenue from foreign investors.
• The Belgian shareholder will then declare the dividend income in Belgium, where it may be subject to taxation again at the domestic rate applicable to such income.
• However, the Belgian tax authorities will grant a foreign tax credit for the 5% Romanian withholding tax that has already been paid. This mechanism effectively reduces the overall tax liability for the Belgian taxpayer, ensuring that they are not taxed twice on the same income.

Additional considerations

• Permanent Establishment (PE): A business that operates in both Romania and Belgium may be subject to taxation in the country where it has a permanent establishment, such as a branch, office, or other fixed place of business. This provision is crucial for multinational companies as it determines where they will be liable for corporate taxes.
• Social Security Contributions: It is important to note that the DTA generally does not cover social security contributions. However, there exists an EU regulation aimed at coordinating social security systems to avoid double contributions for cross-border workers. This regulation ensures that individuals working in multiple EU countries are not required to pay social security contributions in more than one jurisdiction.

Recent updates (as of 2024)

• In recent years, both Romania and Belgium have been increasingly aligning their tax policies with EU directives. This alignment is particularly focused on addressing issues such as base erosion and profit shifting (BEPS) and enhancing cross-border tax transparency.
• The EU's DAC7 (Directive on Administrative Cooperation) has introduced new reporting obligations for digital platforms, which can significantly affect companies operating across borders. This directive aims to improve tax compliance and ensure that all income is reported accurately, thereby reducing the risk of tax evasion.

Practical Recommendations

To optimize tax liabilities and ensure compliance with the provisions of the DTA, it is advisable for individuals and businesses with activities in both countries to:

1. Keep detailed records of income, taxes withheld, and credits claimed. Maintaining accurate documentation is essential for substantiating claims for tax credits and ensuring compliance with tax regulations.
2. Leverage the benefits of the DTA to avoid double taxation. By understanding the provisions of the DTA and applying them correctly, taxpayers can minimize their tax burden and avoid complications that may arise from cross-border income.

By understanding and properly applying the provisions of the DTA between Romania and Belgium, taxpayers can effectively minimize their tax burden and avoid complications that may arise from navigating the complexities of international taxation.

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