The federal government has submitted new rules to Parliament on the taxation of the non-distributed income of a Controlled Foreign Company (CFC) in Belgium. With the new rules, Belgium changes tack and shifts from model B to model A in the EU Anti-Tax Avoidance Directive (ATAD). The previous regime targeted income arising from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage. It required that the significant people functions generating the CFC income were located in Belgium. Whilst the impact of the previous regime was rather limited because of the overlap with the transfer pricing rules, the new regime focuses on the taxation of passive income of low-taxed entities.

What entities are targeted?

In order to qualify as a CFC, a participation and taxation condition must be met.

  • Participation condition: the taxpayer, alone or together with associated companies, has the majority of voting rights, at least 50% of the capital, or is entitled to at least 50% of the profits of a foreign company. A foreign PE automatically meets that condition.
  • Taxation condition: the foreign company or PE is not subject to income tax or is subject to income tax that is less than half of the corporate income tax that would have been due if the foreign entity would be a Belgian taxpayer; for entities established in jurisdictions on the EU or Belgian list of tax havens, it is presumed that this condition is met, but the presumption is rebuttable.

What income is taxed?

The non-distributed passive income of the CFC is taxed with the Belgian taxpayer in proportion to the participation in the CFC.

Starting point is the (taxable) profit of the CFC determined according to the Belgian accounting and tax rules. The following fractions must be applied thereon:

  • Firstly, limitation in proportion to the part which has not been distributed;
  • Secondly, limitation in proportion to the part which constitutes passive income. This includes:
    • interest,
    • royalties,
    • dividends and income from sale of shares, bonds, options,
    • rental income, including operational and financial leasing
    • income from asset management, investment, insurance, banking and other financial activities, and
    • income from purchase and sale of goods and services with little value added.
  • Finally, limitation in proportion to the participation in the CFC.

Are there any ‘safe harbours’?

The following ‘safe harbours’ can apply:

  • A substantial economic activity is exercised, supported by personnel, equipment, assets and buildings (reference is made to the offering of goods or services on a market).
  • The passive income constitutes less than 1/3 of total income.
  • The CFC belongs to the financial sector (as defined by the earnings stripping rules) and less than 1/3 of the passive income comes from transactions with the taxpayer.

Can double taxation be avoided?

Double taxation can be avoided in case of later distribution of profits or realization of capital gain on shares. The credit of foreign taxes is also possible.

Are there any reporting obligations?

The legislation provides in a reporting in respect of the existence and identification of the CFC, to be added to the corporate tax return.

When will the new rules enter into force?

The new rules are expected to be approved before the end of the year. According to the current draft law, the new CFC rules will already enter into force as from assessment year 2024 (financial years ending on or after 31 December 2023). Belgian taxpayers that have an (in)direct interest in foreign companies or have a foreign PE will thus need to evaluate the potential impact of this new complex legislation, and for those taxpayers where the financial year follows the calendar year, the new rules will have an impact on a financial year that will be virtually closed by the time of the vote in the parliament on the new legislation.