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The development of the digital economy has fundamentally changed the business models applied by companies in order to improve productivity, enlarge market reach, and reduce operational costs. The general tax structures, however, continue to focus primarily on the physical world and have yet to address many of the challenges of this new world of bits and bytes. In this regard, payments made in relation to these new business models may give rise to characterization issues as new revenue models raise uncertainties regarding both the consistency of treatment of similar types of transactions and even the rationale behind the current categories of income for domestic and tax treaty purposes. The matter is of fundamental importance, provided that the characterization of such payments affects the way these digital transactions are treated for tax purposes in domestic tax law as well as bilateral tax treaties. For tax treaty purposes, the issue generally concerns whether such payments to non-residents qualify as royalties, capital gains or business profits. The difference is relevant especially in a cross-border context, as royalties and fees for technical services may be subject to withholding tax, depending on the terms of the applicable treaty, whereas business profits are generally solely taxable if attributable to a permanent establishment in the source state. In order to further comprehend these characterization issues, Part I first briefly provides an overview of the general regulations concerning digital transactions to evaluate their possible contribution to the classification of the related payments in the field of taxation. This analysis clearly illustrates that Belgium generally follows the European tendencies regarding the development of regulatory measures in order to address the various challenges arising from the digital economy, such as consumer protection, intellectual property rights and data protection. Consequently, the Belgian legal framework relating to digital transactions consists of various different statutes, which are widely dispersed and diverse. Furthermore, it should be considered that the majority of these rules were initially not designed to operate in a digital environment and will therefore often rely on subsequent adaptations as well as a teleological interpretation of the existing principles in order to keep pace.Alternatively, Belgium equally introduced regulations, which in fact specifically deal with transactions conducted in a digital environment. Subsequently, Part II provides an overview of the many characterization challenges, which may arise from the development of the digital economy. This analysis mainly assesses the impact of the digital economy on the existing principles regarding the taxation of cross- border income from a Belgian perspective. Consecutively, these challenges are addressed based on the qualification of the income as royalties, capital gains or general business profits. For tax treaty purposes, Belgium generally adheres to the OECD Model, as well as its interpretation by the Commentaries. As a result, the prior analysis by the OECD TAG on Treaty Characterization of Electronic Commerce Payments already provided a useful source of information regarding various characterization issues resulting from the use of e- commerce applications. Nevertheless, it should be noted that e-commerce is conceptually different from the digital economy as a whole. In this regard, newly developed business models have raised additional issues that have not yet been addressed by the TAG. Alternatively, regarding the domestic classification of digital transactions, the Belgian legal framework does not provide for a specific characterization in order to define the tax treatment of these payments. Moreover, the ITC does not include an explicit definition of 'royalties'. As a consequence, royalty payments will generally be classified as income from the renting, use and concession of movable goods as well as income from the concession of a copyright or any related rights. Finally, Part III provides a fictitious case study regarding cloud-computing contracts in order to illustrate the complexity of the matter by applying the current legal framework as set out in Part II. The provision of cloud-based services constitutes a new approach without the constraints of conventional business models. Consequently, the tax treatment of cloud- computing contracts poses one of the most important challenges arising from the digital economy, as these contracts are often complex and frequently involve a variety of different transactions. Furthermore, 'the cloud' is essentially a borderless set of modular IT-functions, whereas tax jurisdictions traditionally rely on a nexus with a limited geographical area.