Last week, the Belgian Ruling Office granted an advanced tax decision (not published yet) recognising the non-application of the upcoming Belgian CFC (‘Controlled Foreign Company’) law for two foreign companies owned by a Belgian parent company.
Salient points of this decision
This advance tax decision covering the inapplicability of the CFC regime is of particular interest for the following reasons:
- The facts and circumstances of the case concern a restructuring to take place, so most of the transfer pricing analyses performed have been performed ex ante.
- The Ruling Office conducted a thorough substance review in order to identify unambiguously the significant people functions controlling risks in the foreign companies.
- The Ruling Office did not rule on each condition of the law separately, but confirmed in the end that undistributed profits of the foreign entities are not subject to Belgian CFC regime.
- The applicants provided a detailed comparison between the corporate income taxes due abroad and that which would have been due in Belgium, taking into account the specificities of those tax regimes (e.g. minimal taxable basis, notional interest deduction, conditions for deductibility) in order to determine the effective tax rates.
- The Ruling Office asked the applicant to consider the so-called ‘Belgacom Arrest’ (23 November 2017, case: 2014/AF/271 on the place of effective management) within the technical framework for the tax residency of the various companies, as well as for the support provided by the Belgian parent company to its foreign subsidiaries.
Recap on the Belgian CFC regime
In force as from 1 January 2019, the Belgian CFC regime implements the ATAD (‘Anti Tax Avoidance Directive’) European directive, which results from the work of the OECD (Action 3 of the BEPS project). It has been transposed into Belgian tax law in article 185/2 of the Belgian Corporate Income Tax (‘CIT’) code. This new regime is an anti-abuse measure aiming to tax the undistributed profits earned in or through low-tax foreign subsidiaries or permanent establishments in the hands of their Belgian controlling shareholders.
To be characterised as a CFC, the Belgian CIT code requires the foreign entity to fulfil the following three conditions:
- be legally or economically directly or indirectly controlled (not de facto control);
- have undistributed profits arising from artificial arrangement(s) set up with the essential purpose of obtaining a tax advantage;
- pay less than half of the corporate income taxes it would have paid if it was established in Belgium.
The above conditions consist of the transactional approach i.e. it reflects the application of the arm’s length principle – and in particular with regards to the Significant People Function concept – when it comes to the assessment of the genuine character of the arrangements.
For more details or a discussion to understand its concrete implications for your business or for any questions, please contact Alexis De Méyère or reach out to your regular PwC Global Tax & Transfer Pricing team.