On 13 December 2024, the Belgian tax authorities issued a circular letter (Circular Letter 2024/C/82 December 13, 2024) regarding the new Belgian Controlled Foreign Corporation (CFC) regulations and a circular letter (Circular Letter 2024/C/83 December 13, 2024) regarding changes from a tax procedural perspective.
Almost one year ago, the program law of 22 December 2023 introduced the new Belgian CFC rules, effective for financial years ending on or after 31 December 2023. For many taxpayers this meant that the first year in which the rules needed to be applied was financial year 2023.
The EU ATAD (Anti Tax Avoidance Directive – Council Directive (EU) 2016/1164) determines how such CFC rules can be implemented in an EU context. The CFC regime (option B of the EU ATAD) that Belgium introduced back in 2017 taxed non-distributed income arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. Basically, this option required that the significant people functions, generating the CFC income, were located in Belgium.
In 2023 Belgium made the decision to adjust the CFC legislation, which was under pressure from the EU, and enacted option A of the ATAD CFC rules into the Belgian legislation. Given the complexity of the application of CFC rules in certain situations, these rules can also impose an important additional administrative burden on Belgian taxpayers. There were a number of elements in the Belgian CFC rules that were not clear in practice and created thus a lot of uncertainty around the correct application.
In 2020 the Belgian tax authorities published a circular letter (Circular Letter 2020/C/79, June 9, 2020) with guidance on the application of the Belgian CFC rules that were introduced back in 2017 (Option B – approach). Since the enactment in 2023 of the new Belgian CFC rules the content of that circular letter was outdated.
The newly released circular (2024/C/82) elaborates quite extensively on the different aspects of the updated Belgian CFC rules, including the interpretation of the Belgian tax authorities on how taxpayers are expected to apply these rules.
In this newsalert, we provide an overview of the main points that are addressed by this circular letter.
Some Key Elements of the Circular
Participation Condition
The circular provides extensive clarification on the interpretation of the participation condition, including a number of examples. It confirms that the participation condition is only fulfilled if the Belgian taxpayer holds at least one share in the foreign entity, excluding ‘sister’ entities (and indirect subsidiaries) from qualifying as a CFC of the Belgian taxpayer.
Taxation Condition
- For foreign entities within the EEA, local GAAP accounts do not need to be converted into Belgian GAAP, reducing the compliance burden for EEA-based entities held by a Belgian taxpayer. For entities outside the EEA, the circular letter explicitly states that a conversion to Belgian GAAP financials is required.
- Certain formalities related to Belgian corporate income tax provisions may not be fulfilled by the foreign entity. In such cases, these provisions can still be considered for recalculating the deemed Belgian taxable base.
- If a QDMTT is levied in the jurisdiction of the foreign entity, it will not be considered an income tax for assessing the taxation condition under the Belgian CFC rules.
- The circular also provides:
- Additional clarifications on temporary and permanent differences (temporary differences can be excluded subject to certain conditions), the interplay with foreign fiscal consolidation regimes and interest limitation rules (a stand-alone entity approach is mentioned) and relevance of carried-forward losses/tax assets of the foreign entity;
- Confirmation that the Belgian CFC rules are not applied in ‘cascade’, meaning they do not need to be considered to determine the recalculated Belgian tax base of a foreign entity that holds (potential) CFCs.
Safe harbours
As a reminder, the Belgian CFC rules include three situations, so-called ‘safe harbours’, wherein the qualification of the foreign entity as a CFC should not give rise to a CFC pick-up at the level of the Belgian taxpayer:
- Substantial economic activity safe harbour;
- Limited passive income safe harbour;
- Financial undertaking safe harbour.
The circular letter focusses especially on the uncertainty linked to the substantial economic activity safe harbour and tries to nuance certain parts of the parliamentary works. As reiterated in the circular letter, the application of the substance safe harbour is a safe harbour that is to be assessed on a case-by-case basis.
Some elements linked to this that have been further clarified in the circular:
- Goods and services delivered in an intra-group context are not automatically excluded to determine the presence of a ‘substantial economic activity’.
- Outsourced activities can also be considered in assessing whether a ‘substantial economic activity’ is deemed present;
- Foreign holding companies can be part of the group’s economic activities, assuming the holding company actively participates in managing the enterprises it holds.
Before this circular letter there was no real written guidance on the interpretation of ‘substantial economic activity’. This circular letter at least provides for a framework that can be used as a starting point by tax payers to evaluate if applying the substantial economic safe harbour can be defended for a specific case. In practice it remains to be seen how the interpretation is applied, as the circular letter is clear that it needs to be assessed on a case-by-case basis, and whether the guidance provided is sustainable in an EU context.
Key Takeaways
Overall, the new circular letter brings additional clarifications on how the Belgian tax authorities envisage the application of the Belgian CFC rules. For the rules that focus on the qualification of a foreign entity as CFC (participation and taxation condition) the circular letter is helpful as it confirms the key mechanics.
The guidance included in the circular letter on the economic substance safe harbour is quite extensive but – as a case by case assessment is essential – the uncertainty may continue to exist in a number of cases.
Finally, the interplay of the Belgian CFC rules with a potential QDMTT in the foreign entity’s jurisdiction could have an impact on groups that are subject to the Pillar 2 rules.
