A draft law was introduced into parliament to change the Belgian CFC regime, which was introduced as part of the EU Anti-Tax Avoidance Directive (hereafter “ATAD directive”) in 2017.
The CFC regime 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 (option B). Basically, this option required that the significant people functions generating the CFC income were located in Belgium.
The draft law foresees a change as the focus now is on the taxation of passive income – namely interest, royalties, dividend, income from disposal of shares, but amongst others also rental income and income from invoicing companies that earn sales and services income from goods and services with adding no or little economic value – subject to low taxation abroad (defined as half of the taxation that would occur under the Belgian rules), unless the taxpayer can prove that sufficient substance is available locally.
Based on the current provisions of the draft Program Law, a two-step analysis is to be followed to determine if a proportion of the income of a CFC should be allocated to the Belgian parent entity (subject to the normal Belgian corporate income tax regime).
- First, the (Belgian) taxpayer needs to determine whether it has an (in)direct interest in (one or more) CFC(s). A foreign company qualifies as a CFC if both the participation and the taxation condition are met:
- A permanent establishment (“PE”) of a Belgian taxpayer is deemed to fulfill this condition;
- In general, in case the Belgian taxpayer by itself or together with associated companies holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of capital or is entitled to receive more than 50% of the profits of that entity;
Foreign entities or PEs that are not subject to income tax or subject to income tax that is less than half of the corporate income tax that would have been due if this foreign entity would be a Belgian taxpayer (for some countries, a rebuttable presumption applies).
- If the foreign entity (or PE) qualifies as a CFC, the amount of income/profit to be allocated to the Belgian taxpayer needs to be calculated/assessed according to Belgian accounting and tax rules (recalculation is thus necessary). The foreign profits are then allocated to the Belgian taxpayer taking into account the following parameters:
- The profits must be limited in proportion to the part of the profits that is not distributed;
- The profits are limited in proportion to the CFC’s income that qualifies as passive income;
- The profits are proportionally to be allocated based on the taxpayer’s direct controlling interest in the CFC.
For the additional taxable basis in Belgium, a tax credit of the foreign tax effectively paid would be available.
There are also some exceptions (‘safe harbours’) foreseen that, when applicable, would safeguard certain foreign income from taxation at the Belgian taxpayer’s level, more specifically when:
- The Belgian taxpayer can provide evidence that sufficient substance (‘substantial economic activity’) is available in the CFC;
- Less than 1/3 of the total income of the CFC qualifies as passive income;
- The CFC qualifies as a financial undertaking (subject to certain conditions).
In addition, from a tax compliance perspective, it is expected that more detailed information will need to be included in the Belgian corporate income tax return going forward.
The new CFC rules are in practice set to apply retroactively, as their entry into force is scheduled for the assessment year 2024, which pertains to accounting years ending on or after 31 December 2023.
The proposed amendments to the CFC legislation would clearly result in a shift in focus of the type of foreign income (passive income) that is potentially at risk to be subject to Belgian corporate income taxation. Belgian taxpayers that have an (in)direct interest in foreign entities or have a PE will need to evaluate the potential impact when this new legislation is enacted. MNE groups that are subject to the Pillar 2 rules may also need to consider the interplay with Pillar 2.