Belgium strengthens its CFC rules
Belgium strengthens its CFC rules
As from tax year 2024 - financial years ending per 31 December 2023 or later - Belgian groups and Belgian holdings will need to consider more stringent Controlled Foreign Corporation (CFC) rules, including at least a higher compliance burden.
Under CFC rules, undistributed, no or low taxed profits of a controlled foreign entity are immediately taxable in the controlling entity even if they are not repatriated as dividend.
Under the 2016 European Anti-Tax Avoidance Directive (ATAD I), all European member states were required to implement such anti-abuse rules to the example of the long existing regulations in a.o. the US and the UK. Belgium implemented the ATAD I CFC rules end of 2017, but now made various changes to these rules to ensure they are EU compliant and increase their effectiveness.
Under the new rules, a CFC is still deemed to exist when both the participation and taxation condition are met.
Under the first condition, for a CFC to exist, a minimum participation, be it in capital, voting rights or profit rights, of at least 50% directly or indirectly via associated companies (i.e. with a 25% link), in a foreign company or a foreign permanent establishment (PE) is required. Under the second condition, there is only a CFC if said company or PE is not subject to corporate income tax abroad or subject to less than 50% of the corporate tax that would have been due if it were a Belgian company or PE. This means recalculating the corporate tax due under Belgian domestic rules, which is quite complex. What is new in this area is that if the foreign jurisdiction is mentioned on either the Belgian or European tax havens list, there is a rebuttable presumption that the taxation condition is met.
The biggest change of the new rules however lies in the income that would be subject to tax in the hands of the Belgian controlling entity.
In the past, this was limited to income from wholly artificial arrangements involving an outbound transfer of activities whereby the “Significant People Functions” remained in Belgium, without being appropriately reflected in the transfer pricing (transactional method - Model B under the ATAD I). This led to the rules almost never being applied in practice given that only existing activities were in scope and given the variety of other rules within Belgian domestic tax law to target mismatches between profits and functions/assets/risks. To increase the effectiveness of the rules, Belgium is now shifting to the entity method (Method A under the ATAD I). Indeed, going forward, all passive income of the CFC will become immediately taxable in Belgium when not distributed in a certain year. Passive income is e.g. dividend, interest and royalty income, but - according to the Belgian text of the law - also rental and lease income and income from buy-sell activities or certain insourced services, with limited added value. A set of complex calculations should ensure to determine the appropriate amount of taxable CFC income.
However, there are still some safe harbours whereby the passive income of the CFC is exempt from Belgian corporate income tax:
1. if the CFC has less than 1/3 of passive income according to its financial statements;
2. if the CFC is active in the financial industry and at least 2/3 of its passive income is generated by third party dealings;
3. if the CFC has a genuine business activity, defined as the provision of goods or services on the market, and, on the basis of a factual analysis, sufficient substance (e.g. qualified personnel, assets, etc.) is available to perform this activity.
Note that no exception is foreseen for CFCs located in the EU.
Another difference compared to the prior set of rules, is that the taxable CFC income is limited to the percentage of the direct investment held by the Belgian entity in the CFC. In the past, all CFC income was fully taxable in Belgium irrespective of the level of participation and also indirect CFC income was taxable.
Note that a PE of a foreign subsidiary can qualify as a CFC even if the subsidiary itself is not a CFC.
To avoid double taxation, a carried forward but non-refundable credit of the tax paid by the CFC is allowed under the re-crafted rules. Belgium had to change this rule because it was not EU compliant. Also a special exemption is foreseen for dividends received from and capital gains realised on shares in a CFC whose income was already subject to Belgian tax before under the CFC rules.
In terms of compliance, Belgian corporate tax payers will need to consider that the law now requires them to disclose the existence of the CFC, as well as detailed information thereon, as from the moment the aforementioned participation and taxation condition are met. Notwithstanding that one of the three safe harbour rules might well lead to the CFC’s income not being taxable in Belgium up till the moment of actual distribution.
Especially the recalculation of the taxable income of and tax due by the CFC as if the CFC was a Belgian company/PE is very complex. Complicating elements include the tax treatment of write-downs/offs on shares, availability of tax losses having their origin in transactions that would not trigger a deductible loss under Belgian tax law, local tax incentives which are not available in Belgium or are applied less stringently abroad, etc. Also the interaction with local and Belgian Pillar 2 rules remains unclear.
Next to the ATAD 3, so-called “Unshell directive”, proposal at European level and active tax audits in Belgium relating to dividend received deductions and withholding tax exemptions, it is clear that with the redesigned CFC rules the focus remains on passive income streams and relevant economic substance of companies to participate in these income flows.
Need help in understanding these new rules and their impact on your organisation? Do not hesitate to contact one of our International Tax experts, Michaël Vangenechten, Olivier Michiels or Werner Lapage, or your trusted BDO advisor.
Under the 2016 European Anti-Tax Avoidance Directive (ATAD I), all European member states were required to implement such anti-abuse rules to the example of the long existing regulations in a.o. the US and the UK. Belgium implemented the ATAD I CFC rules end of 2017, but now made various changes to these rules to ensure they are EU compliant and increase their effectiveness.
Under the new rules, a CFC is still deemed to exist when both the participation and taxation condition are met.
Under the first condition, for a CFC to exist, a minimum participation, be it in capital, voting rights or profit rights, of at least 50% directly or indirectly via associated companies (i.e. with a 25% link), in a foreign company or a foreign permanent establishment (PE) is required. Under the second condition, there is only a CFC if said company or PE is not subject to corporate income tax abroad or subject to less than 50% of the corporate tax that would have been due if it were a Belgian company or PE. This means recalculating the corporate tax due under Belgian domestic rules, which is quite complex. What is new in this area is that if the foreign jurisdiction is mentioned on either the Belgian or European tax havens list, there is a rebuttable presumption that the taxation condition is met.
The biggest change of the new rules however lies in the income that would be subject to tax in the hands of the Belgian controlling entity.
In the past, this was limited to income from wholly artificial arrangements involving an outbound transfer of activities whereby the “Significant People Functions” remained in Belgium, without being appropriately reflected in the transfer pricing (transactional method - Model B under the ATAD I). This led to the rules almost never being applied in practice given that only existing activities were in scope and given the variety of other rules within Belgian domestic tax law to target mismatches between profits and functions/assets/risks. To increase the effectiveness of the rules, Belgium is now shifting to the entity method (Method A under the ATAD I). Indeed, going forward, all passive income of the CFC will become immediately taxable in Belgium when not distributed in a certain year. Passive income is e.g. dividend, interest and royalty income, but - according to the Belgian text of the law - also rental and lease income and income from buy-sell activities or certain insourced services, with limited added value. A set of complex calculations should ensure to determine the appropriate amount of taxable CFC income.
However, there are still some safe harbours whereby the passive income of the CFC is exempt from Belgian corporate income tax:
1. if the CFC has less than 1/3 of passive income according to its financial statements;
2. if the CFC is active in the financial industry and at least 2/3 of its passive income is generated by third party dealings;
3. if the CFC has a genuine business activity, defined as the provision of goods or services on the market, and, on the basis of a factual analysis, sufficient substance (e.g. qualified personnel, assets, etc.) is available to perform this activity.
Note that no exception is foreseen for CFCs located in the EU.
Another difference compared to the prior set of rules, is that the taxable CFC income is limited to the percentage of the direct investment held by the Belgian entity in the CFC. In the past, all CFC income was fully taxable in Belgium irrespective of the level of participation and also indirect CFC income was taxable.
Note that a PE of a foreign subsidiary can qualify as a CFC even if the subsidiary itself is not a CFC.
To avoid double taxation, a carried forward but non-refundable credit of the tax paid by the CFC is allowed under the re-crafted rules. Belgium had to change this rule because it was not EU compliant. Also a special exemption is foreseen for dividends received from and capital gains realised on shares in a CFC whose income was already subject to Belgian tax before under the CFC rules.
In terms of compliance, Belgian corporate tax payers will need to consider that the law now requires them to disclose the existence of the CFC, as well as detailed information thereon, as from the moment the aforementioned participation and taxation condition are met. Notwithstanding that one of the three safe harbour rules might well lead to the CFC’s income not being taxable in Belgium up till the moment of actual distribution.
Especially the recalculation of the taxable income of and tax due by the CFC as if the CFC was a Belgian company/PE is very complex. Complicating elements include the tax treatment of write-downs/offs on shares, availability of tax losses having their origin in transactions that would not trigger a deductible loss under Belgian tax law, local tax incentives which are not available in Belgium or are applied less stringently abroad, etc. Also the interaction with local and Belgian Pillar 2 rules remains unclear.
Next to the ATAD 3, so-called “Unshell directive”, proposal at European level and active tax audits in Belgium relating to dividend received deductions and withholding tax exemptions, it is clear that with the redesigned CFC rules the focus remains on passive income streams and relevant economic substance of companies to participate in these income flows.
Need help in understanding these new rules and their impact on your organisation? Do not hesitate to contact one of our International Tax experts, Michaël Vangenechten, Olivier Michiels or Werner Lapage, or your trusted BDO advisor.