The introduction of CFC legislation in Belgium
The Corporate Income Tax Reform Act of 25 December 2017 has implemented a CFC rule in Belgium. The rule applies as of tax assessment year 2020 relating to the taxable period starting the earliest at 1 January 2019. The main characteristics of this new rule are explained below.
In its final BEPS action 3 report, the OECD recommended jurisdictions to implement a Controlled Foreign Company (CFC) rule that has the effect of re-attributing the income of a low-taxed controlled subsidiary to its parent company.
Via the Anti-Tax Avoidance Directive (“ATAD I”), a coordinated implementation of this anti-BEPS measure was agreed upon at an EU level. As a member of the EU, Belgium is obliged to enact CFC legislation pursuant to this Directive.
Definition of a CFC
A foreign company qualifies as a CFC if the following conditions are met:
- The Belgian taxpayer owns directly or indirectly the majority of voting rights, or holds directly or indirectly at least 50% of the capital, or is entitled to receive at least 50% of the profits of the foreign company (control test);
- The foreign company is in its country of residence either not subject to an income tax or is subject to an income tax that is less than half of the income tax if the company would be established in Belgium. In calculating this income tax, the profits that this foreign company would have realized through a PE is disregarded if a double tax treaty applies between the country of the foreign company and the country in which the PE is located that exempts this profit (taxation test).
A draft Repair Bill adds foreign PE’s of a Belgian taxpayer to the scope of application if the profits of the PE are exempt in Belgium by virtue of a double tax treaty and the taxation test is met.
Belco holds in total more than 50% of the capital of company B (i.e. 40% directly + 51% indirectly). According to the Belgian rules, the taxable income of company B would amount to EUR 100.000.
Case scenario 1
According to local rules, the taxable income of company B amounts to EUR 90,000. The corporate income tax that company B pays in its country of residence amounts to EUR 9,000 (10% x EUR 90,000). Since this amount is lower than half of the income tax that would be due if the company would be established in Belgium (i.e. EUR 12,500 (12.5% X EUR 100,000)), the company qualifies as a CFC.
Case scenario 2
According to local rules, the taxable income of company B amounts to EUR 150,000. The corporate income tax that company B pays in its country of residence amounts to EUR 15,000 (10% x EUR 150,000). Since this amount exceeds half of the income tax that would be due if the company would be established in Belgium (i.e. EUR 12,500 (12.5% X EUR 100,000)), the company does not qualify as a CFC.
Income to be included under the CFC rules
The ATAD I left Member States the option to either include non-distributed specific types of income as defined in the ATAD (i.e., interest, dividends, income from the disposal of shares, royalties, income from financial leasing, income from banking, insurance and other financial activities, income from invoicing associated enterprises as regards goods and services where there is no or little economic value added) or to include non-distributed income arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.
Belgium has opted for the latter approach. An arrangement shall be regarded as non-genuine to the extent that the CFC would not own assets or would not have undertaken risks if it were not controlled by the Belgian taxpayer where the significant people functions, which are relevant to those assets and risks, are carried out and are instrumental in generating the controlled company's income. The attribution of income is then limited to the income attributable to the significant people functions carried out by the Belgian controlling taxpayer. This approach applies to companies established in a Member State in the same way as they apply to companies established in a third country.
Elimination of double taxation
If the CFC distributes profits to the taxpayer and those distributed profits are or were previously taxed in the hands of the Belgian taxpayer, these profits shall be fully deducted from the tax base when calculating the amount of tax due on the distributed profits. The draft Repair Bill provides that capital gains realised on the disposal of shares of a CFC will be exempt to the extent that the profits of the CFC have already been taxed in the hands of the Belgian taxpayer as CFC income and these profits have not yet been distributed and still exist on an equity account prior to the alienation of the shares.
Double taxation is however not fully eliminated. The taxes that the CFC pays in its country of residence (for example in scenario 1 referred to above) are not allowed as a deduction from the Belgian tax. Moreover, the current rules do not foresee that the allocation of the profit of the CFC to the Belgian taxpayer is proportionate to the taxpayers’ participation in the CFC.
For more information on the Corporate Income Tax reform, reference is made to our Corporate Income Tax Reform brochure.
Natalie ReypensPartner Attorney at Law
Natalie Reypens is a member of the Loyens & Loeff International Tax Services Practice Group and heads the Belgian Transfer Pricing Team. She is a partner in our Brussels office. She focuses on corporate and international tax law.T: +32 2 743 43 37 E: firstname.lastname@example.org