Belgian tax authorities release circular letter on new CFC rules

Last year, Belgium changed course on the taxation of the non-distributed income of a Controlled Foreign Company (CFC) in Belgium. The new regime focuses on the taxation of passive income of low-taxed entities (cfr. our earlier coverage). The tax authorities have now published two circular letters with some important clarifications on the new CFC rules, especially on the taxation condition and the safe harbors.

To qualify as a CFC, in addition to meeting the participation condition, the foreign company or establishment must either not be subject to income tax or be subject to an income tax rate that is less than half of the corporate income tax that would apply if the foreign entity were a Belgian tax resident.

The circular letter gives amongst others the following clarifications:

• The domestic minimum top-up tax ((Q)DMTT) levied in the country of the foreign entity cannot be considered as an income tax to calculate if the taxation condition has been fulfilled.
• While calculating if the taxation condition is fulfilled, the taxpayer can start from the accounting result according to local GAAP for foreign companies/establishments in an EEA member state. For entities outside the EEA, a conversion to Belgian GAAP must be made first.
• Permanent timing differences (like disallowed expenses) must be included in the calculation. In respect of temporary differences, no adjustment must be made for differences lasting no more than 5 years. For differences lasting longer than 5 years, an adjustment must be made except for depreciation on material fixed assets and for provisions of insurance companies.
• The circular letter confirms that the Belgian CFC regime should not be applied in cascade. This means that the subsidiaries of a CFC do not affect the calculation of the taxation condition, nor the calculation of the taxable income of the CFC.
• Previous losses from assessment year 2023 and before are grandfathered. Only tax losses as from assessment year 2024 must be recalculated based on the Belgian tax rules.
• In case the foreign company/establishment is part of a foreign tax consolidation regime, an allocation key can be applied to demonstrate which part of the foreign tax is attributable to the CFC. However, for pragmatic reasons, the tax authorities accept that the foreign company/establishment is treated as a stand alone company.
• If a group contribution regime is applied by the foreign entity, the Belgian group contribution rules must be followed.
• Similarly, for the purposes of the earnings stripping rules the foreign company/establishment is deemed to form a group with the taxpayer (and other Belgian members of the group), but here as well the stand alone principle can be applied.

The CFC income is exempt if a safe harbor applies. The main safe harbor is the safe harbor for economic activity, i.e. when the CFC exercises a substantial economic activity (= offering of goods or services on the market) supported by personnel, equipment, assets and buildings.

Regarding this safe harbor, the circular letter contains some important comments:

• A legal entity that is part of a group and only offers intra group services also exercises an economic activity if that group offers goods or services on the market and the intra group services constitute an essential element of the value chain of the economic activity of the group. Intra group services needs to be performed at arm’s length conditions to benefit from the substance safe harbor.
• Holding companies can be part of the economic activity of the group if the holding actively participates in the management of the group. If the holding company only exercises its rights as a shareholder, no economic activity will be presumed, but evidence to the contrary can be submitted.
• If the economic activity is not supported by personnel, equipment, assets and buildings the taxpayer can still demonstrate that there is a substantial economic activity.
• Finally, even if no CFC income is taxable in Belgium because of a safe harbor, the existence of the CFC must still be reported in the corporate tax return.

Although the circular letter brings some useful clarifications to the application of the new CFC regime, the new rules remain very complex. Our team can assist you in assessing the qualification as a CFC and with the tax calculations of the taxation condition/ taxable income. Should you have any further questions in this regard, do not hesitate to contact your KPMG advisor.