Belgium: Draft law proposes new stricter CFC rules

The government submitted new stricter rules to Parliament on the taxation of the undistributed income of a controlled foreign company (CFC) that shift from model B (targeting tax avoidance arrangements) to model A (focusing on taxation of passive income of low-taxed entities) in the EU Anti-Tax Avoidance Directive (ATAD). The essential elements of the new rules are described below.

Participation and taxation conditions apply in determining what entities are treated as CFCs.

• Participation condition: 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 permanent establishment (PE) automatically meets this condition.
• Taxation condition: 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.

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

The 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:

• First, in proportion to the part that has not been distributed
• Second, in proportion to the part that constitutes passive income, which includes:
  • Interest
  • Royalties
  • Dividends and income from sale of shares, bonds, and options
  • Rental income, including operational and financial leasing
  • Income from asset management, investment, insurance, banking and other financial activities
  • Income from purchase and sale of goods and services with little value added
• Finally, in proportion to the participation in the CFC

The following safe harbors 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 one-third of total income.
• The CFC belongs to the financial sector (as defined by the earnings stripping rules) and less than one-third of the passive income comes from transactions with the taxpayer.

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.

Reporting of the existence and identification of the CFC is to be added to the corporate tax return.

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 become effective for assessment year 2024 (financial years ending on or after 31 December 2023).

Read a December 2023 report prepared by the KPMG member firm in Belgium