Taxation of Companies Under Belgian Income Tax Law

IFA Issue – Articles

Eric Osterweil and Marc Quaghebeur* Taxation of Companies under Belgian Income Tax Law

This article sets forth the principal features of 2. General Comments Belgium’s income tax system as applied to companies, focusing on selected aspects that With few exceptions, commercial entities that have legal may be of interest to foreign investors. After an personality are subject to the company income tax in introduction and some general comments, Belgium. Thus, entities in the form of a corporation, lim - the article discusses, among other things, ited liability companies and most types of partnerships the computation of a company’s taxable income, are subject to company income taxation. Belgium does the tax rates, withholding taxes and foreign tax not recognize fiscal transparency for any type of com - credits, the general and specific anti-avoidance pany having legal personality except in the case of Eco - rules in Belgian law, the tax treatment of non- nomic Interest Groupings and European Economic resident companies, and Belgian companies in Interest Groupings. international tax planning. Partnerships formed under company law that in other jurisdictions might be transparent for income tax pur - 1. Introduction poses are subject to the company income tax. Their part - ners are taxed only on the distribution of income to This article sets forth the principal features of Belgium’s them. income tax system as applied to companies with empha - sis on selected aspects that may be of interest to foreign Companies that are resident in Belgium are subject to investors. full company income taxation, while non-resident com - panies are generally subject to company income taxation As an EU Member State, Belgium is obliged to comply only on income derived from Belgian sources. Except as with Community law in all respects, including taxation. indicated below (see .), resident companies and non- As regards income taxation, however, the Member States resident companies with a permanent establishment in have few constraints – in contrast to value added taxa - Belgium are subject to virtually identical tax rules. tion, which is governed by detailed EC regulations. Nonetheless, the European Union has adopted various 3. Taxable Income of a Company legislative measures that have a significant impact on company taxation, such as the Merger Directive, the Companies formed in Belgium, as well as companies Parent-Subsidiary Directive, 2 the Savings Directive, the having their principal place of business or place of man - Interest and Royalties Directive, 4 and the Arbitration agement in Belgium and engaged in commercial activi - Convention. 5 Moreover, Belgium, like all the EU Mem - ties, are taxed on their worldwide income. Generally ber States, is bound by decisions of the European Court speaking, the taxable income of a resident company is of Justice (ECJ), which in recent years has decided cases where national tax rules have been deemed to infringe EU law. Income taxation in Belgium is governed by the provi - * © Eric Osterweil and Marc Quaghebeur, 2008. 6 Eric Osterweil, Counsel, Steptoe & Johnson LLP, Brussels; Marc sions of the Income Tax Code of 992 (ITC). The ITC Quaghebeur, Partner, Vandendijk & Partners, Brussels. contains extensive provisions governing the income tax - . Council Directive 90/44/EEC of 2 July 990 on the common system ation of individuals, companies and“other legal persons”, of taxation applicable to mergers, divisions, transfer of assets and exchanges such as charities, that are not strictly speaking engaged of shares concerning companies of different Member States, [990] OJ L in commercial activities. 225/. 2. Council Directive 90/45/EEC of 2 July 990 on the common system The ITC is implemented, sometimes in great detail, by of taxation applicable in the case of parent companies and subsidiaries of dif - ferent Member States, [990] OJ L 225/6, corrigendum in [99] OJ L 2/5. royal decrees. Additionally, interpretations of the law . Council Directive 200/48/EC of June 200 on taxation of savings may be found in administrative circulars and in abun - income in the form of interest payments, [200] OJ L 57/8. dant case law. 4. Council Directive 200/49/EC of June 200 on a common system of taxation applicable to interest and royalty payments made between associated Although Belgium is a federal state, divided into three companies of different Member States, [200] OJ L 57/49. 7 5. Convention 90/46/EEC on the elimination of double taxation in con - regions with fiscal powers of their own, the law on the nection with the adjustment of transfers of profits between associated under - income taxation of companies is determined at the takings, [996] OJ C 26 of January 996. national level. 6. Code des Impôts sur les Revenus 1992/Wetboek van de Inkomstenbelastin - gen 1992 . 7. The three regions are the Flemish and Walloon regions and the region of Brussels-Capital. The Walloon region includes a small German-speaking area in the east of the country.

46 BULLETIN FOR INTERNATIONAL TAXATION AUGUST/SEPTEMBER 2008 © IBFD IFA Issue – Articles the difference between the company’s net value at the Exceptionally, capital gains realized on the sale of partic - beginning of the fiscal year and its net value at the end. ipations qualifying for the participation exemption and capital gains realized on the exchange of shares of a 3.1. Accounting profits and taxable profits company engaged in a merger-type operation are not subject to tax. See 9. A company’s worldwide taxable income is computed on the basis of the profit (or loss) reflected in the annual For capital gains in respect of tangible and intangible accounts. Taxable profits are determined in accordance fixed assets that are realized involuntarily (due, for with the provisions of the accounting law unless the tax example, to damage or expropriation) or voluntarily (if law explicitly deviates from them. 8 the assets were held for more than five years), the com - pany can opt to defer taxation, provided the proceeds are Each year the company’s management prepares an reinvested in depreciable tangible or intangible fixed inventory of assets and annual accounts. The accounts assets. Such gains are then subject to tax at the normal include a balance sheet, a profit and loss account, and an rates over the depreciation period of the reinvested explanatory memorandum. 9 These documents must be assets (Art. 47 ITC). drawn up in accordance with the Companies Code, the accounting law and the various royal decrees imple - 3.3. Computing net taxable income menting these rules, as well as the generally accepted accounting principles as codified by the Belgian A company must divide its taxable income into three Accounting Standards Commission. 0 The annual discrete categories: () Belgian-source income, (2) for - accounts are submitted to the general meeting of share - eign-source income attributable to a permanent estab - holders or members for approval. lishment in a tax treaty country which is exempt from tax in Belgium, and () foreign-source income attributa - Although company groups are required to file consoli - ble to a non-tax treaty country which is taxed at one dated accounts in compliance with the accounting rules, quarter of the normal tax rate of .99%, i.e. generally Belgium does not have a system of consolidated 8.5%. accounts for income tax purposes. Interestingly, a form of consolidation is available under the value added tax The company may then successively deduct the follow - law. ing items: (a) income derived from tax treaty countries; 3.2. Determining the taxable profit (b) tax-deductible gifts; The profit or loss shown in a company’s annual accounts constitutes the basis for computing its worldwide tax - (c) dividends that qualify for the participation exemp - able income. Additionally, to arrive at the taxable tion (see 0..). Specifically, the company may deduct income, the company must add to its accounting profit 95% of the dividends received if it holds a participation or loss distributed dividends, reserves and disallowed that is at least 0% of the subsidiary’s nominal share cap - expenses. ital or if the shareholding is valued at EUR ,200,000, whichever is less. There is also a “subject to tax” require - 3.2.1. Deductible expenses ment which excludes dividends from subsidiaries in tax havens or in countries where they enjoy a substantially Generally, a Belgian company may deduct business more advantageous tax burden than under the Belgian expenses. The ITC defines business expenses as company income tax; see 7.2..; “expenses that the taxpayer has incurred or borne during the taxable period in order to acquire or preserve taxable (d) the patent income deduction. The company may income and which can be supported by appropriate doc - deduct 80% of the patent income from qualifying umentation or other proof permitted under law” (Art. 49 patents or extended patent certificates developed in its ITC). own R&D centre (Arts. 205/-205/4 ITC); see 0.2.; The depreciation of assets is generally based on the (e) the risk capital deduction generally calculated as acquisition or production cost. Companies may use 4.07% of the company’s equity (see 0..). The excess straight-line depreciation or the declining-balance may be carried forward for seven years (Arts. 205bis- method. Accelerated depreciation is permitted in certain 205novies ITC); circumstances. Salaries and social security contributions are major deductible items. Other allowable expenses include 8. Cour de Cassation, 20 February 997, Fiscale Jurisprudentie/Jurispru - charitable contributions, bad debts and reserves. dence fiscale , 97/526. 9. Art. 92 of the Companies Code. 3.2.2. Capital gains 0. See www.cnc-cbn.be. . Because the participation exemption may be claimed only after the two In general, capital gains on the sale or other disposal of preceding deductions, the company may not be able to deduct the full 95%. Two requests for a preliminary ruling have been submitted to the ECJ to company assets are not taxed until realized. When real - determine whether this practice is compatible with the Parent-Subsidiary ized, capital gains are treated as profits and therefore Directive ( Cobelfret v. Belgian State , Case C-8/07, and KBC Bank v. Belgian subject to the company income tax at the normal rates. State , Case C-49/07).

(f) losses carried forward from previous tax years may requirement of 5% (0% as of 2009) in accordance be set off against the profits of the current year. There is with the Parent-Subsidiary Directive; and a specific successive order for setting off losses against – dividends paid to a non-resident legal entity which profits depending on the origin of the losses, i.e. from tax does not exercise a business or professional activity treaty countries, from non-tax treaty countries or from and is exempt from income tax in its residence state Belgium itself. 2 In 2000, the ECJ found this rule to be (e.g. a foreign pension fund). 7 incompatible with the freedom of establishment of Art. Most of the bilateral tax treaties concluded by Belgium 4 of the EC Treaty, but the decision has not yet been provide for a reduction of the Belgian dividend with - implemented in Belgian tax law. holding tax rate to 5% and, in some cases, to 0% or 5% Losses may be carried forward indefinitely, but they may with respect to a substantial participation (often 25%) in not be set off against profits derived from abnormal or the capital of the Belgian company. Recent tax treaties, gratuitous advantages (Art. 207 ITC). Moreover, a com - e.g. the treaties with Hong Kong and the United States, pany loses its right to carry forward its tax losses if con - even provide for a 0% rate on dividends from a substan - trol of the company is acquired or changed 4 during a tax tial participation as defined in the relevant tax treaty. year, unless the change of control can be justified by legitimate financial and economic reasons. 5 It is possi - 5.2.2. Withholding tax on interest ble to apply for an advance ruling on the issue of Under Belgian law, interest payments are generally sub - whether the change of control is justified by legitimate ject to a 5% withholding tax. financial and economic reasons; and Belgium has implemented the Interest and Royalties (g) an investment deduction calculated as a percentage Directive. Accordingly, interest payments by a Belgian of the investments made. resident company to a related company in Belgium or in The amount obtained after these deductions is the tax - another EU Member State are exempt from withholding able income which will be subject to tax. tax, provided that, during the period to which the inter - est income relates, the underlying receivables were not 4. Tax Rates connected to a permanent establishment of the benefi - cial owner of the interest income located outside the The standard company income tax rate is % plus a sur - EU. 8 Companies are considered to be “related compa - charge of % of the tax, resulting in a rate of .99% (Art. nies” if either: 25 ITC). With some exceptions, reduced rates apply to – one of the companies directly or indirectly holds a companies whose profits do not exceed EUR 22,500. participation of at least 25% in the capital of the The basic tax rate is the same for distributed and other company for an uninterrupted period of at retained profits. However, certain profits and capital least one year; or gains may be temporarily exempt from tax, provided – a participation of at least 25% in the capital of both they are recorded on an equity account which cannot be companies is directly or indirectly held by an EU used for distributions, e.g. an account for the revaluation resident company for an uninterrupted period of at gains on fixed assets. least one year.

5. Withholding Taxes and Foreign Tax Credits Domestic tax law also provides a withholding tax exemption for certain interest payments to non-resi - 5.1. Inbound dividends, interest and royalties dents, such as: – interest on receivables (other than bonds) that is Foreign tax credits are available for the taxes paid to for - paid to non-resident credit institutions located in a eign jurisdictions with respect to royalty and interest Member State of the European Economic Area 9 or income. Generally, the foreign taxes paid are included in taxable income on the grossed-up income. The credit is applied to the tax computed on the grossed-up income. The credit for the foreign taxes paid on royalty income is 2. Art. 75 of the Royal Decree of 2 August 99, as amended, implement - capped at 15 ⁄85 of the net amount received. ing the ITC (RD/ITC). . AMID v. Belgian State , Case C-4/99, 4 December 2000, [2000] ECR 5.2. Outbound dividends, interest and royalties I-69. 4. The term“control” here refers to the authority, in fact or in law, to have a 5.2.1. Withholding tax on dividends decisive influence on the appointment of the majority of the directors of the company or the orientation of its management. Under Belgian law, dividend distributions are generally 5. The financial and economic reasons justifying the acquisition of a loss- making company can be () that some or all of the company’s activities con - subject to a 25% withholding tax. This tax rate is reduced tinue to be carried out and the company retains some of its employees, or (2) to 5% for dividend distributions on certain qualifying that the change of control results from the transfer of shares or management shares issued as of 994. to a company that is part of the same consolidated group. 6. Belgium has unilaterally extended the benefit of the Parent-Subsidiary A full withholding tax exemption can be obtained for: Directive to parent companies in treaty countries; Art. 05 §§ 5, 6 and 6bis RD/ITC. – dividends paid to a parent company resident in Bel - 7. Id. gium, in another EU Member State or in a tax treaty 8. Art. 07 § 6 RD/ITC. country, 6 but subject to a minimum holding 9. The EU Member States plus Iceland, Norway and Liechtenstein.

48 BULLETIN FOR INTERNATIONAL TAXATION AUGUST/SEPTEMBER 2008 © IBFD IFA Issue – Articles

in a country with which Belgium has concluded a 7. Anti-Avoidance Rules bilateral income tax treaty; 20 Belgium does not have controlled foreign corporation – interest on receivables (other than bonds) that is (CFC) legislation, but it does have extensive anti-abuse paid by Belgian financial enterprises, including cer - rules designed to prevent tax evasion and avoidance. The tain listed holding companies and intra-group principal features of Belgium’s anti-abuse rules are set financing companies, to non-residents that do not forth below. use the receivables for professional activities in Bel - gium, subject to certain conditions; 7.1. General anti-avoidance rule – Art. 344 § 1 ITC – interest on registered bonds that is paid to non-resi - dents that do not hold the bonds for professional The Belgian Supreme Court has repeatedly held that activities in Belgium, subject to certain conditions; taxpayers are free to structure transactions as they wish, and provided they accept all the legal consequences of their – interest payments to Belgian permanent establish - structuring and do not violate any provision of the law ments of foreign banks. even if the form they have chosen is not the most com - mon one and even if they do so only to reduce the tax Some of Belgium’s bilateral tax treaties, e.g. the treaties burden on the transactions. 2 with Germany, Luxembourg, the Netherlands and the United States, provide for an exemption from the inter - It was not until 99 that Belgium introduced a general est withholding tax in the source state. Other treaties anti-avoidance rule. Art. 44 § ITC allows the tax limit the rate of withholding tax to 0%. authorities to disregard the legal qualification of a spe - cific transaction if they can prove that the taxpayers 5.2.3. Withholding tax on royalties chose that particular form instead of another for the sole purpose of avoiding the income tax. In that case, the tax Under Belgian law, royalty payments are subject to a 5% authorities may recharacterize the transaction to assess withholding tax, but under many of Belgium’s bilateral the income tax on a less beneficial basis. The tax author - tax treaties, royalty payments are exempt from income ities can also use the general anti-avoidance rule when tax in the source state. In some treaties, however, the they have evidence that taxpayers split up what should exemption is limited to specific types of royalty pay - be a single legal transaction into separate legal transac - ments. tions only for tax reasons. The tax authorities may disre - Moreover, in execution of the Interest and Royalties gard the separate steps and treat them as a single opera - Directive, royalties paid by a Belgian resident company tion. The taxpayer then has the burden of proving that to a related company in another EU Member State are there are legitimate financial and economic motives for exempt from withholding tax, provided that, during the the form chosen. period to which the royalty income relates, the underly - Art. 44 § ITC is a potentially extremely potent legal ing assets or intellectual property for which the royalty provision, but it has been difficult to apply in practice. was paid were not held through a permanent establish - ment of the beneficial owner located outside the EU 7.2. Specific anti-avoidance rules (see 5.2.2.). 7.2.1. Dividends received from low-tax jurisdictions 6. Administration As explained above, dividends received may in appropri - Tax returns are generally due within six months after the ate circumstances benefit from the participation exemp - end of a company’s fiscal year. In the case of corpora - tion. Subject to rules derived from the Parent-Subsidiary tions and limited liability companies, a tax return must Directive, domestic legislation and the applicable be filed within 0 days following the annual general income tax treaties, the participation exemption is not shareholders’ meeting approving the annual accounts available for dividends received from otherwise qualify - and not later than six months after the end of the ing shareholdings if the paying company has been sub - accounting year. The income tax is generally assessed ject to tax at a rate of less than 5% (Art. 20 §§ and 5 before 0 June of the year following the tax year. How - ITC). This provision of Belgian law is aimed at dividends ever, the tax authorities may assess the tax during a emanating from tax haven jurisdictions. 22 Dividends three-year period starting on the day following the end received from companies located in the EU Member of the accounting period. The tax authorities have a fur - States are not subject to this rule. ther two years to assess the tax in cases of infringements of the tax law made fraudulently or with the intent to harm. 20. Art. 07 § 2, 5°(a) RD/ITC. Companies are expected to make prepayments of tax on 2. Cass., 6 June 96, Brepols , Pasicrisie , 96, I, at 082 (authors’ transla - a quarterly basis. Failure to comply with the prepayment tion):“There is no prohibited simulation and hence no tax evasion if, in order to enjoy a more favourable tax regime and without violating any statutory schedule means that the tax will be increased by an obligation, parties conclude agreements all of whose consequences they amount that is, in effect, an interest payment. The final accept, even if the form which they give to these agreements is not the most tax is payable within two months after the tax assess - common.” 22. The Belgian tax authorities have published a blacklist of tax haven juris - ment was issued. dictions. See also Art. 7/4 RD/ITC.

7.2.2. Non-deductibility of payments made to low-tax The fact that the loans are guaranteed by a parent com - jurisdictions pany is irrelevant for purposes of applying these thin capitalization rules. In the case of cross-border interest Art. 54 ITC provides that certain payments of interest payments, a question may arise as to whether the rules and royalties made to low-tax jurisdictions are disal - are compatible with the arm’s length provision in tax lowed unless the payments can be shown to have a legit - treaties and EU law. imate business purpose. A low-tax jurisdiction is gener - ally defined as one whose tax regime is significantly 7.4. Transfer pricing rules 26 more advantageous than Belgium’s tax system. Belgian tax law allows upward adjustments to taxable 7.2.3. Disqualification of certain transactions income when a transaction with a foreign person is not at arm’s length (Art. 26 ITC). Such adjustments generally On the basis of Art. 44 § 2 ITC, the Belgian tax authori - apply to transactions between related parties, but they ties may refuse to recognize for tax purposes certain can also apply to transactions with unrelated foreign transactions involving low-tax jurisdictions. These persons that are not subject to income tax in their resi - transactions include the sale, transfer or contribution of dence state or are subject to an income tax regime that is shares, bonds, debts, intellectual property or cash to per - substantially more beneficial than the normal income sons in jurisdictions whose tax regime is significantly tax regime in Belgium. more advantageous to taxpayers than Belgium’s tax sys - tem. The burden of proving that the transaction in ques - In addition, income arising from gratuitous or benevo - tion has a genuine financial or economic purpose is lent advantages received by a Belgian resident enterprise shifted to the taxpayer. from a transaction that does not meet the arm’s length criterion cannot be offset by the tax losses and other spe - This provision is clearly intended to prevent the avoid - cific tax deductions available to the enterprise. ance of tax by transferring assets to a special purpose vehicle in a low-tax jurisdiction. There is a procedure for correlative adjustments of tax - able income that corresponds to Art. 9(2) of the OECD 7.3. Thin capitalization rules Model Tax Convention. Interest paid on loans taken out for business purposes is Pursuant to Art. 85 § 2 ITC, a taxpayer may obtain a generally deductible to the extent it does not exceed the formal advance ruling in respect of the arm’s length market interest rate (taking into account the risk, the nature of a certain transaction from the Belgian Ruling debtor’s credit rating and the duration of the loan), 2 Committee. unless the payment corresponds to a normal business transaction and the amount is not abnormally high. If a 8. Ruling Policy Belgian resident company pays excessively high interest, Taxpayers can obtain a binding ruling in respect of fed - the excess is added to its taxable income, unless the eral taxes (and some regional taxes) relating to a speci - interest is included in the beneficiary’s taxable income fied project. Generally speaking, a taxpayer can request a (Art. 26 ITC). Where interest is paid by a Belgian tax - ruling on all tax issues, unless the situation or transac - payer to a Belgian resident company, the limitation on tion is identical to one that the taxpayer has already the deductibility of excessive interest does not generally implemented. A ruling cannot be granted if the essential apply. elements of the situation or transaction involve a tax Belgian law has two thin capitalization rules: haven blacklisted by the OECD or if the situation or transaction has no economic substance in Belgium. (a) the “7:” rule. Interest paid on loans (other than bonds and similar publicly issued debt securities) to a The ruling system was reorganized in 2005 and a Ruling beneficiary that either is not subject to income tax or is Committee within the central tax administration was subject to a tax regime that is substantially more advan - established to allow for a more efficient handling of tageous than the normal tax regime in Belgium is not tax cases. The applicant taxpayer or his adviser can meet the deductible for the part of the loans that exceeds seven officials in charge of the request at several stages of the times the paid-in capital and taxed reserves of the Bel - administrative procedure. Pre-filing meetings on an gian company (Art. 98, ° ITC); and anonymous basis are possible as well. (b) the “:” rule. Interest paid on loans (excluding bonds and similar publicly issued debt securities) 2. Art. 55 ITC. There is no limitation on the deduction of interest paid by granted by an individual shareholder 24 or a foreign cor - or to Belgian banks and financial institutions or Belgian establishments of 25 foreign banks or interest paid on bonds issued to the public and other similar porate director of the company is tax deductible only loans. to the extent that the total loans do not exceed the com - 24. An individual shareholder, his/her spouse and children under the age pany’s paid-in capital and taxed reserves. The excess of 8, provided the shareholder has the legal benefit of the income of his/her spouse or vice versa. interest is recharacterized as a dividend distribution and 25. The ECJ struck down this rule in NV Lammers & Van Cleeff , Case is generally subject to a 25% withholding tax (Art. 8(4) C-05/07, 7 January 2008. ITC). 26. For further discussion, see Cauwenbergh, Patrick, Ann Gaublomme and Luc Hinnekens, “Transfer Pricing in Belgium – Rulings and Practice”, in this issue of the Bulletin .

A ruling is issued within three months. It is binding on Belgium’s favourable approach to holding companies is the tax authorities unless the facts have been misrepre - reinforced by the absence of withholding tax on divi - sented or if the taxpayer does not comply with the con - dends received from Belgian and EU subsidiaries and ditions in the ruling or the ruling infringes a tax treaty or from subsidiaries in a treaty country, by the exemption domestic or EU law. If the law changes after the ruling from withholding tax on outgoing dividends to compa - was issued, the ruling may become invalid. A ruling is nies in Belgium and the other EU Member States, and by generally valid for five years, but is renewable. Most rul - the reduced withholding tax under tax treaties. ings are published anonymously. 10.2. Patent companies 0 Belgium has made its ruling practice more efficient, businesslike and proactive, and the Ruling Committee Belgian companies and permanent establishments are has an impressive track record. entitled to an 80% deduction for the royalty income from patents or extended patent certificates that were 9. Restructuring of Companies (partly or fully) developed in their own R&D centre and from products or processes built on acquired patents. A merger, a division or a partial division between two The patents can be used for manufacturing (even via a Belgian companies can be carried out on a tax-free basis contract manufacturer) or for granting licences to third if the operation is justified by legitimate financial and parties. However, they may not have been used for sup - economic reasons. 27 In the case of a tax-free merger, the plying services or goods to third parties before 2007. assets and liabilities of the absorbed company are taken over by the receiving company at the value they had for The deduction is equal to 80% of the net royalties from tax purposes in the absorbed company. This means, inter qualifying patents licensed out. Only arm’s length royal - alia, that the reserves, provisions, amount of share capital ties are taken into account, and this may be particularly and value of assets are taken over“as such” by the receiv - relevant if the licensee is a related party. For patents used ing company. in manufacturing, the company calculates the theoreti - cal licence fee if the licence is granted to an unrelated If the absorbed company has carry-forward losses, the party. 2 The patent income is reduced by the deprecia - losses continue to be available to the receiving company tion taken on the acquisition or investment value of in proportion to the net tax value of the absorbed com - patents and the arm’s length compensation for obtaining pany compared with the net tax value of the receiving ownership of, or a licence in, the patents. The deduction company. The receiving company may carry forward its is not capped, but it cannot be carried forward. losses in proportion to its net tax value before and after the operation. The obvious tax advantage is that R&D companies only pay tax on their patent income at the rate of 6.8% – At this time, an upstream merger into a non-resident instead of the .99% standard rate of the company company cannot be carried out tax free. This means that income tax. a Belgian company merging into a foreign company will be deemed to be wound up, and the company income tax 10.3. Coordination centres and group financing will be due on the capital gain, i.e. the difference between companies the value of the assets for the merger and their value for tax purposes. The income tax will also be due on the Belgium was well known for its coordination centres, exempt reserves, but not on the paid-up share capital or which were used primarily to finance group companies. the previously taxed but undistributed reserves. However, the European Commission decided in 200 that Belgium would have to abolish the coordination A bill is pending before Parliament to fully implement centre scheme because it violated the EC rules on state the Merger Directive as amended in 2005. 28 The bill is aid. designed in particular to facilitate (outbound and inbound) mergers with an EU receiving company and to introduce the concept of exchange of shares.

10. Belgian Companies in International Tax 27. Art. 2 ITC. The same rule applies where a foreign company con - tributes a Belgian branch of its activities to a Belgian resident company Planning (Art. 2 § ITC). 28. Belgium has formally been requested by the European Commission to 29 10.1. Holding companies transpose into its national law Council Directive 2005/9/EC that amended the Merger Directive; see EU Press Communiqué IP/08/2 dated January Belgian tax law does not have a specific tax regime for 2008. holding companies. Belgium’s approach to holding com - 29. For further discussion, see Dierckx, Frank,“Belgium’s Holding Company Regime – Past, Present and Future”, in this issue of the Bulletin . panies – both for resident companies and for Belgian 0. For further discussion, see Van Den Berghe, Pieter and Patrick L. Kelley, establishments of foreign companies – is a combination “New Patent Deduction in Belgium: A Powerful Incentive”, in this issue of the of the 95% tax deduction for dividends and a full exemp - Bulletin . . It is not required that the company obtain additional patent certificates tion for capital gains on the sale of qualifying sharehold - for these improvements. ings. There is no minimum participation requirement for 2. If the income includes income other than patent income, the income the capital gains exemption, but the subsidiary must have attributable to the patents must be separated to calculate the tax deduction. . For a history of the demise of coordination centres, see Commission been subject to a normal income tax regime (see 7.2..). Decision 2008/28/EC of November 2007.

After the European Commission ordered Belgium to As indicated above, the income of a Belgian establish - repeal its advantageous tax regime for coordination cen - ment or a Belgian permanent establishment of a non- tres, Belgium introduced the risk capital deduction (see resident company is subject to tax in much the same way ..), also called the “notional interest deduction”, which as the income of a Belgian company. However, one issue was designed to create a level playing field for equity and that has raised considerable controversy over the years is debt financing. 4 the so-called “specificity rule”: expenses are tax deductible only if they were incurred or borne exclu - A Belgian company or Belgian permanent establishment sively for the sole purpose of the Belgian establishment. may deduct a notional interest based on its equity capi - This rule can limit the deductibility of the interest, royal - tal. The percentage of the deduction is linked to the ties and overhead expenses attributed to a Belgian interest rate paid by the Belgian Treasury on ten-year branch by the head office of a non-resident company. linear bonds; for 2008, the rate is 4.07% (4.807% for On the other hand, the administrative commentary small and medium-sized enterprises). The equity to be makes an exception to this rule with respect to loans taken into account is the company’s share capital and its made by a foreign bank to its Belgian branch. retained earnings with a number of exclusions to avoid double dips and other unintended uses. In particular, While most non-resident companies choose to do busi - financial fixed assets consisting of shareholdings in ness in Belgium through a separate Belgian company, group companies must be excluded because the divi - there are potential tax advantages to be derived from dends qualify for the participation exemption. Also to be forming a Belgian branch. The reason for this is that Bel - excluded are investments that do not produce regular gium does not levy a “branch tax” on distributions taxable income – for example, works of art and precious deemed to be attributed by a Belgian establishment to its metals. home office. The risk capital deduction can substantially reduce the company income tax. It can reduce the average tax rate 12. Conclusion from .99% to about 26%, or less if the company is Although Belgium can hardly be characterized as a highly capitalized. There is no limitation on distributing low-tax jurisdiction, it is nonetheless competitive as the benefit of the deduction in the form of a dividend. a situs for holding companies with neighbouring The deduction is of particular interest for group finan- countries such as Luxembourg and the Netherlands, cing companies. The interest they receive on loans can as well as with other European jurisdictions such as be largely offset by the notional interest to which they Switzerland, known for their tax incentives. are entitled on their equity. Moreover, Belgium encourages foreign industrial 11. Non-Resident Companies and commercial investment in Belgium by a number of tax measures. These tax benefits are supplemented Non-resident companies doing business in Belgium are by a host of non-tax incentives offered by the subject to tax on the income they derive from the activi - regional authorities. ties of a “Belgian establishment” (Art. 229 ITC). While similar to the expression“permanent establishment” that appears in the OECD Model, the term “Belgian estab - lishment” is broader than the OECD terminology in some respects. The distinction is unlikely to be of importance except where the non-resident company is a resident of a jurisdiction that does not have a tax treaty 4. For further discussion, see Haelterman, Axel and Henk Verstraete, “The with Belgium. ‘Notional Interest Deduction’ in Belgium”, in this issue of the Bulletin .