Corporate Tax Reform
Phase 2 measures | Effective as of tax year 2020
An outline of the Phase 2 tax measures in the Law of 25 December 2017 enacting the Corporate tax reform (hervorming vennootschapsbelasting | réforme impôt des sociétés), as amended by the 2018 repair law. These measures will be effective as of tax year 2020 (taxable periods starting on or after 1 January 2019). Any different effective dates are mentioned in the summary.
Last updated: 17 June 2019
GROUP CONTRIBUTION REGIME
A limited form of group taxation can be achieved by allowing the consolidation of tax losses within a group of companies, the so-called “deduction for group contribution”.
The deduction has to be made against payment of a compensation equal to the additional tax which would have been due absent the group contribution deduction. This compensation is exempt in the hands of the loss-making company (transferee) and disallowed in the hands of the profit-making company (transferor).
The following “group” conditions need to be satisfied:
- A minimum 90% capital affiliation must exist, i.e. the taxpayer holds 90% or more of the other company’s capital, or the other company holds 90% of the taxpayer’s capital, or both companies are held for at least 90% of their capital by a common Belgian or foreign company;
- A foreign company must be located in the EEA; and
- The domestic or foreign company must have been affiliated during an uninterrupted period of 5 taxable periods including the current taxable period (to be calculated as of 1 January of the 4th calendar year prior to the calendar year linked to the tax year).
No group contribution is possible by or with an entity that benefits from a special tax regime (e.g. tonnage tax regime).
The repair law also added new provisions that determine what happens if, during the 5-year affiliation period, one of the parties to a group contribution agreement was involved in, or incorporated pursuant to, a restructuring (whether or not tax-neutral). Three situations must be distinguished in this respect:
- a company has been incorporated pursuant to a transaction where (part of) the equity of one or more companies has been transferred to it: in order to benefit from the group contribution regime, this new company will have to demonstrate that the transferring company or companies satisfied the 5-year affiliation requirement;
- a company whose equity has been reduced pursuant to a restructuring, e.g. further to a partial demerger: no special rule needs to be introduced for such situation;
- a company whose equity has been increased further to a merger, demerger, contribution or assimilated transaction: in order to benefit from the group contribution regime, all companies involved (including the companies that owned the equity that was transferred to the company whose equity increased) must satisfy the 5-year affiliation requirement.
The group contribution requires the conclusion of a group contribution agreement that will have to meet various requirements.
According to the repair law, the group contribution agreement will have to be added to the tax return in order to benefit from the deduction. A model agreement still has to be issued by Royal Decree.
Subject to the same formalities and tax treatment, the new group contribution regime also allows the utilisation of tax losses from a qualifying foreign company, located in the EEA, in case this company definitively ceases its activities (assuming that these activities are not transferred to another group company within the 3-year period after cessation).
In case a definitive EEA cessation loss has been deducted and the activities of the foreign company concerned are restarted within a 3-year period, the previously deducted group contribution will have to be recaptured by adding it to the Belgian company’s taxable base for the tax year during which the activities have been restarted.
The new group contribution regime has been added, as last item, to the first, unrestricted basket of tax attributes for purposes of calculating the minimum taxable base (cf. Phase I measures).
TAXABLE BASE - ATAD MEASURES
ATAD - Interest limitation rule
30% EBITDA or EUR 3m
This rule is the new, ATAD-compliant thin cap or interest limitation rule. As of tax year 2020, any arm’s length “exceeding borrowing costs” (“financieringskostensurplus / surcoûts d’emprunt”) is, as a rule, only deductible up to the higher of maximum 30% of the taxpayer’s EBITDA or EUR 3m.
Exceeding borrowing costs are defined as the positive difference between the total of interest and other economically equivalent costs which are treated as deductible expenses of the taxable period and are not linked to a treaty-exempt permanent establishment, and the total of interest and other economically equivalent income, which is included in the taxable period’s profit and not treaty-exempt.
In case the taxpayer is part of a group, interest (and economically equivalent) income and costs are in principle be disregarded in case they arise in relation to a domestic company or Belgian establishment belonging to the same group.
The interest deduction is limited to 30% of EBITDA. EBITDA is calculated as follows:
- The result of the taxable period after the so-called “first operation”
- Plus: current tax year (i) tax deductible depreciations and write-offs and (ii) deductible exceeding borrowing costs;
- Minus: current tax year (i) dividends eligible for the 100% DRD, (ii) income eligible for the 85% IID, (iii) income eligible for the 80% PID, (iv) treaty-exempt profits, and (v) profits from a qualifying public private partnership.
By way of exception, the first bracket of EUR 3m is never caught by the interest limitation rule.
For purposes of calculating the interest limitation, tax consolidation has to be “simulated”. The taxpayer’s EBITDA has in principle to be adjusted with any intra-group amounts paid by, or to, a domestic company or Belgian establishment, provided that the latter have been part of the group during the entire taxable period. Similarly, the EUR 3m threshold will in principle be allocated proportionally among all domestic companies and Belgian establishments belonging to the same group during the entire taxable period.
Interest on the following loans is excluded from the calculation of the exceeding borrowing costs:
- Loans of which the taxpayer has demonstrated that they have been concluded prior to 17 June 2016 to which, as of this date, no “fundamental” modifications have been made (i.e. modifications relating to, for instance, the contracting parties, the interest rate or the duration of the loan); and
- Loans concluded in execution of a qualifying public private partnership, where the project operator, borrowing costs, assets and income are all in the EU.
The new interest limitation rule does not apply to certain companies active in the finance sector (e.g. credit institutions, investment companies, insurance companies, etc.) and “standalone” companies, i.e. companies that are not part of a group of companies, and satisfy certain other conditions. The repair law has added to this list companies with as sole or principal activity the financing of real estate through real estate certificates as well as certain finance lease and factoring companies.
Unlimited carry-forward of excess interest deduction (that has not been deducted during a previous taxable period) is available through a new exemption. This exemption is capped at an amount equal to the positive difference between the 30% EBITDA or EUR 3m maximum amount and the taxable period’s excess borrowing costs as defined above.
An annex will have to be added to the tax return, in order to benefit from the carry-forward deduction.
In case the taxpayer is part of a group, it is possible to conclude an interest deduction agreement, whereby the non-utilised interest deduction capacity under the limitation rule can be transferred to another Belgian company or establishment of an EEA company that has been part of the group during the taxable period and is not excluded from this provision’s scope of application. Although in principle the transfer agreement must be limited to any unused amount, it is possible to transfer more. In such hypothesis, however, the excess portion is disallowed in the hands of the transferor.
The interest deduction agreement may contain a compensation payment for the transfer of the interest capacity. Such compensation is exempt from tax in the hands of the transferor and disallowed in the hands of the transferee.
The interest deduction agreement must be added to the tax return. A model still needs to be issued by Royal Decree.
5:1 thin cap rule
The current 5:1 thin cap rule remains applicable to arm’s length interest payments for (1) interest paid to beneficial owners located in tax havens (regardless of the date) and (2) intra-group interest paid pursuant to a loan agreement of which it has been demonstrated that it has been concluded prior to 17 June 2016 and not “fundamentally” modified since then.
A CFC rule has been introduced in the context of the mandatory implementation of the Anti-Tax Avoidance Directive (ATAD).
A Belgian company is taxed on the “non-distributed profits” of a foreign company that is considered a CFC where such profits are arising from “non-genuine arrangements” which have been put in place for the essential purpose of obtaining a tax advantage.
A foreign company is considered as a CFC if the following two conditions are simultaneously satisfied:
- The control test: the Belgian taxpayer owns (directly or indirectly) the majority of voting rights of the foreign company, or has (directly or indirectly) a stake of at least 50% in the capital of this company, or is entitled to at least 50% of the profits of this company; and
- The taxation test: in the country or jurisdiction where it is situated, the foreign company is either not subject to income tax or subject to income tax less than half of the income tax if the company would have been located in Belgium.
A foreign establishment, the profits of which are exempt or benefit from a tax reduction in Belgium, is considered a CFC if it meets the afore-mentioned taxation test. In case profits of these foreign establishments arise from “non-genuine arrangements”, they are attributed to (and taxed in the hands of) the head office.
An arrangement (or series thereof) is regarded as “non-genuine” (artificial) to the extent that the foreign company or foreign establishment would not own the assets, or would not have undertaken the risks, which generate all (or part of) its income, if it were not controlled by a company where the significant people functions (which are relevant to those assets or risks) are carried out and are instrumental in generating the CFC income. A non-genuine arrangement exists where assets are owned by a CFC but the strategic decisions are made by the Belgian taxpayer or its employees. Similarly, a non-genuine arrangement also exists where risks are borne by the CFC but the strategic decisions are made in Belgium.
“Non-distributed profits” are the CFC’s profits for the taxable period closed during the Belgian taxpayer’s taxable period that are not distributed in the same taxable period to the Belgian taxpayer or another domestic company. These profits are limited to the amounts generated through the assets and risks which are linked to significant people functions carried out by the taxpayer.
To avoid double taxation in respect of CFC shareholdings, dividends distributed by a CFC are eligible for DRD provided and to the extent that (i) these dividends do not benefit from the “ordinary” DRD and (ii) the profit has already been taxed in a previous taxable period in the hands of the domestic company as CFC income.
Capital gains on shares in a CFC are also eligible for DRD provided and to the extent that the profit of this foreign company (i) has already been taxed in a previous taxable period in the hands of the domestic company as CFC income and (ii) has not been distributed before and still exists at the time of alienation of the shares on a liabilities and shareholders’ equity account.
The Belgian shareholder has to demonstrate that the amount of such CFC dividends (for which DRD has been claimed) does not exceed the subsidiary’s total profit that has been taxed as CFC income during previous taxable periods.
In order to incentivise taxpayers to examine whether the CFC rule applies, a new reporting obligation has been introduced for corporate taxpayers (both residents and non-residents). Taxpayers must mention in their tax return the existence of a foreign company (including its full name, legal form, address and identification number) or a foreign establishment (including its address and identification number) that has to be treated as CFC and hence whose profits are taxed in Belgium (foreign company) or not allocated to the foreign establishment.
Exit tax upon transfer to treaty-exempt foreign PE
Belgium is entitled to tax the hidden gains that exist at the time of the transfer of assets of a Belgian company to its foreign establishment, the profits of which are exempt in Belgium under a tax treaty. Hidden gains are defined as the positive difference between the fair market value of an asset and its acquisition or investment value reduced with the accepted write-offs and depreciations.
This new taxable event has been added to the list of transactions where a deferred exit tax payment can be applied for.
Inbound transfers – resident corporate tax
In case of the transfer of assets from a foreign permanent establishment, the profits of which are exempt under a tax treaty with Belgium, to the Belgian head office or another Belgian establishment, the Belgian initial tax value (for future depreciations, capital gains and losses, etc.) is the fair market value at the time of the transfer. This fair market value also has to be applied for the acquisition by a Belgian company of a foreign establishment or foreign assets further to a merger, demerger or assimilated transaction and the transfer by a foreign company of its seat to Belgium.
For all of these transactions, the value established by the exit state is presumed to be the fair market value, unless counterproof. This presumption, however, only applies subject to compliance with two conditions:
(1) the gain has been effectively included in the taxable base in the exit state; and
(2) Belgium has concluded a tax treaty, TIEA, etc. with the exit state that allows for an exchange of information.
As was already the case before the reform law, the acquisition or investment value less any write-offs and depreciations according to the Belgian Income Tax Code is the initial value in case of a seat transfer of a “tax haven” company, unless if that company is located in an EU member state where it is subject to the standard tax regime.
Where the exit state’s fair market value rule does not apply, the fair market value is deemed equal to the acquisition or investment value less any write-offs and depreciations according to the Income Tax Code, unless counterproof.
Inbound transfers – non-resident corporate tax
This new provision covers the following 3 inbound asset transfers:
- Transfer from a foreign company’s head office to its Belgian establishment;
- Transfer from a foreign company’s foreign establishment to its Belgian establishment; and
- Transfer from a foreign establishment to Belgium (hence becoming a Belgian establishment).
In these instances, the initial tax value of the transferred assets is their fair market value at the time of the transfer. For these 3 transactions the value established by the exit state is presumed to be the fair market value, unless counterproof. This presumption only applies subject to compliance with two conditions:
(1) the gain has been effectively included in the taxable base in the exit state; and
(2) Belgium has concluded a tax treaty, TIEA, etc. with the exit state allowing for the exchange of information.
Where the exit state value rule does not apply, the fair market value is deemed to equal the acquisition or investment value less the write-offs and depreciations in accordance with the Belgian Income Tax Code, unless counterproof.
Definitions of hybrid mismatch, hybrid entity and hybrid transfer are introduced in Belgian tax law.
A hybrid mismatch is an arrangement resulting in either (a) a double deduction of expenses for both a Belgian company (or a Belgian PE) and a foreign enterprise (or establishment thereof), or (b) a deduction for one of these taxpayers and a non-inclusion in taxable income for the beneficiary (deduction without inclusion).
A hybrid mismatch can only exist in case of associated enterprises, that are part of the same enterprise or that act under a structured arrangement. No hybrid mismatch can exist when the non-inclusion is due to the application of a tax regime that derogates from the standard tax law or to differences in the value attributed to a payment, including differences resulting from the application of transfer pricing rules.
A hybrid entity is any entity or arrangement that is regarded as a taxable entity under the laws of one jurisdiction and whose income or expenditure is treated as income or expenditure of one or more other persons (i.e. as a transparent entity) under the laws of another jurisdiction.
A hybrid transfer is any arrangement to transfer a financial instrument where the underlying return on the financial instrument is treated for tax purposes as derived simultaneously by more than one of the parties to the arrangement.
There are 4 new taxable events to tackle hybrids.
(1) Disregarded PE mismatch rule – Belgian companies are taxable on profits that are attributable to a foreign permanent establishment (PE) and that should be exempted pursuant to a tax treaty with an EU member state. However, this only happens provided that this profit (i) has been realised in the context of a hybrid mismatch and (ii) is not taxable in the PE’s jurisdiction because of its being disregarded there.
(2) Reverse hybrid entity mismatch rule – Belgium considers a hybrid entity, incorporated or established in Belgium, as a taxable person where one or more associated non-resident entities are located in a jurisdiction (or jurisdictions) that regard the Belgian entity as a taxable person. In such hypothesis, the hybrid entity’s income is taxed in Belgium to the extent that income is not otherwise taxed under the laws of Belgium or any other jurisdiction. This rule does not apply to collective investment vehicles.
(3) Financial instrument mismatch – secondary rule – A taxable hybrid mismatch exists where, due to a difference in characterisation of the instrument or its income, a financial instrument leads to a deduction in the hands of a foreign enterprise or its establishment, without inclusion in the hands of the Belgian company or establishment that is the (deemed) beneficiary under the laws of the other jurisdiction. This rule is subject to the so-called “financial trader” exception in relation to on-market hybrid transfers.
(4) Hybrid entity mismatch – secondary rule – A hybrid mismatch exists where income paid by a foreign hybrid entity (or an establishment thereof) is deductible abroad from non-dual inclusion income, i.e. without inclusion in the taxable base of the Belgian company or establishment to which the income has been (deemed) paid under the other jurisdiction’s laws. This targets the situation where a foreign hybrid entity is considered as transparent in Belgium but as a taxable entity in the jurisdiction where it is located.
These new provisions disallow the deduction of expenses in Belgium in the context of hybrid mismatches.
(1) Double deduction rule – Hybrid mismatch payments are disallowed to the extent that (and as long as) there is a double deduction, for both the Belgian company or establishment and a foreign enterprise or establishment, whether during the taxable period of payment or any subsequent taxable period, from non-dual inclusion income (i.e. income that is not also included in the taxable income of the foreign enterprise or establishment).
(2) Deduction without inclusion rules – The deduction of hybrid mismatch payments are disallowed in 6 instances where a payment is deductible in Belgium without corresponding inclusion abroad:
- Financial instrument mismatch – primary rule – A payment under a financial instrument where (i) the deduction without inclusion would be due to a difference in characterisation of the instrument or its income, and (ii) the payment is not included in the taxable income of the beneficiary within a “reasonable period of time” (subject to financial trader exception).
- Reverse hybrid entity mismatch rule – Another instance where a hybrid mismatch payment is disallowed is where such payment is made to a reverse hybrid entity, i.e. an entity that is considered as a taxpayer under Belgian laws and as a transparent entity under the laws of another jurisdiction.
- Hybrid allocation mismatch rule – A payment is not deductible if made to an entity with one or more establishments, where the non-inclusion abroad is the result of differences in the allocation of payments made to the hybrid entity’s head office and its establishment, or between two or more establishments of that same entity, under the laws of the jurisdictions where the entity operates. The head office’s jurisdiction allocates the payments to the establishment located in another jurisdiction, while the latter allocates them to the head office, resulting in non-taxation of the income.
- Hybrid PE mismatch rule – A payment to an establishment that is regarded as a PE under the laws of its head office but that is disregarded as such under the laws of the establishment’s jurisdiction. By way of exception, the payment is deductible if the corresponding income is taxable under the laws of the head office’s jurisdiction.
- Hybrid entity mismatch – primary rule – A hybrid mismatch payment is disallowed to the extent that it would have been deducted without inclusion in the beneficiary’s taxable income. This targets situations where a Belgian entity is treated as taxable in Belgium but as transparent in the recipient’s jurisdiction.
- Deemed PE payments mismatch rule – A deemed payment between the head office and its establishment, or between two or more establishments, is not deductible to the extent that it would have been deducted from non-dual inclusion income.
(3) Imported hybrid mismatches – This cover situations where hybrid mismatches established between interested parties in foreign jurisdictions but where the consequences are shifted to Belgium. This is the case, for instance, when a Belgian entity contracts an ordinary loan with a foreign entity that itself has concluded a hybrid loan with another foreign entity.
In such hypothesis, payments made in the context of a hybrid mismatch are disallowed to the extent they finance (directly or indirectly) expenditure deductible in the hands of several foreign enterprises, a foreign enterprise and its establishment, several establishments of the same foreign enterprise, or a foreign enterprise or its establishment where no corresponding income is included in the beneficiary’s taxable base. By way of exception, these payments are deductible where one of the jurisdictions involved has made an equivalent adjustment in respect of such hybrid mismatch.
(4) Tax residency mismatch rule – Finally, payments are not deductible if they are made by a Belgian domestic company that is equally considered as a domestic company by one or more other jurisdictions, where the payments are deductible from income that is non-dual inclusion income. Deduction is allowed, however, where the other jurisdiction is an EU member state with which Belgium has concluded a tax treaty that treats the company as a Belgian resident.
Foreign tax credits
To counter hybrid transfers that lead to multiple tax credits in various jurisdictions for the same withholding at source, the foreign tax credit has to be limited proportionally to the part of the corporate tax that relates to the net taxable income from the hybrid transfer (i.e. gross income less payments in respect of the same hybrid transfer).