Marc Quaghebeur

Introduction

Belgium has discovered that tax treaties can be an instrument to attract investments. Finance Minister Reynders has geared a number of tax measures to make Belgium more attractive, and he has been the driving force to sign new beneficial double tax treaties with the United States and Hong Kong. His dream is to position Belgium as the gateway for U.S. investors into the far East and vice versa.

A combination of ten tax rules makes Belgium an attractive location for holding companies and group financing companies.

1. No capital duty

Belgium has done away with the capital duty on the shares issued when a company is incorporated or when its share capital is increased. 

2. Zero rate on inbound dividends

Belgium has implemented the Parent Subsidiary Directive so that no tax is withheld at source on dividends paid from an EU subsidiary in which a Belgium company holds a 15% participation (see footnote 1) for at least a year.

3. Zero rate on inbound interest and royalties

Belgium has implemented the Interest and Royalty Directive (see footnote 2). No tax is withheld at source on the payment of interest or royalties from related EU companies in which the Belgium company or a related third EU company holds a 15 % participation (10 percent from 2009) for at least a year.

4. VAT group treatment

Since 1 April, Belgium allows a group of companies to apply for a group treatment as a single VAT taxpayer. This means that transactions between group members remain exempt of VAT. This will result in administrative simplification, an optimisation of the VAT cash flow and a saving in expenses. This will not give the group a higher VAT deduction, but it will give significant VAT savings in particular for VAT exempt or mixed taxpayers (e.g. banks and insurance companies that outsource IT services now pay VAT on the HR cost).

5. The Belgian holding company regime

Belgium does not have any particular holding company regime but the general corporate income tax system provides for a 95 % exemption of dividends received from qualifying participations and a full exemption of capital gains on these participations.  The Belgian holding company must hold a participation of either 5 percent of the nominal share capital of the subsidiary, or of an acquisition value of EUR 1,200,000 or more. For the dividend exemption, the subsidiary must meet a “subject-to-tax” condition.

Belgium has very lenient thin capitalization rules and no controlled-foreign company (CFC) rules.

6. Minimizing the corporate income tax liability

The Risk Capital Deduction (commonly known as notional interest deduction) allows a Belgian company or a Belgian permanent establishment of a foreign company to deduct a percentage of their equity from their taxable profit.  To create a level playing field for equity and debt financing, the measure allows companies to deduct a notional interest on their equity. The percentage of the deduction is linked to the interest rate paid by the Belgian Treasury on ten year linear bonds. The percentage for the current year is 3.781% (4.281 for small and middle sized enterprises).

The equity to be taken into account is the company's share capital and its retained earnings with a number of exclusions to avoid double dips and other unintended uses. In particular, financial fixed assets consisting of shareholdings in group companies because the dividends qualify for the participation exemption.  Also to be excluded are assets that are held by way of investments that do not produce a regular taxable income (e.g. art, precious metals, etc). 

Even with these exclusions and anti avoidance measures, the Risk Capital Reduction offers possibilities of double dipping, in particular if the parent company has taken out a bank loan to subscribe the newly issued share capital of the Belgian company that will claim the risk capital deduction.  The parent company will be entitled to an interest deduction, while the Belgian subsidiary can cancel out the tax on the dividends it distributes by deducting a notional interest. Moreover, because the Risk Capital Deduction must encourage treasury centers and financing companies in a group of companies, one could imagine a scenario where the parent company borrows from the Belgian treasury centre to subscribe its share capital.

In 2005 and 2006, Finance Minster Reynders organized road shows in Asia, the US and India to advertise the deduction. They were accompanied by representatives of some banks and tax firms who explained how the Risk Capital Deduction could be used for group finance companies and treasury centers, for acquisition structures and for post acquisition restructuring (see http://invest.belgium.be/).  The examples given appear to sanction constructions where the overseas parent and group companies are able to deduct the interest paid to the Belgian treasury centre. The treasury center could then convert this interest income into dividends that did not attract any taxation because of the risk capital deduction.

The Risk Capital Deduction can be combined with other tax exemptions such as the tax exemption of € for additional staff assigned full-time in Belgium to scientific research, the development of the technological potential of the company, or for the jobs of head of the export department or head of the "total quality management" department. This exemption is € 25,570 if the person recruited is a highly qualified researcher assigned to scientific research.  Corporate income taxpayers are entitled to a tax exemption of 150 per cent of the funds they invest in the production of Belgian audiovisual work; the investment is limited to one third of their taxable profits before tax (limited to €750,000). This tax exemption can be carried forward indefinitely.

7. Advance rulings

Since 2003, Belgium has a new, broad system of advance tax rulings, to give investors legal certainty.  Taxpayers can obtain a binding ruling in respect of all federal taxes (and some regional taxes) relating to a specified project.  Generally speaking, a taxpayer can request a ruling on all tax issues, except if the situation or transaction is identical to a situation or transaction which the taxpayer has already implemented. A ruling cannot be granted if essential elements of the situation or transaction involve a tax-haven blacklisted by the OECD or if there is no economic substance in Belgium.

The system was reorganized in 2005 and a new autonomous department has been set up to allow a more efficient handling of the cases. The applicant taxpayer or his adviser can meet the officials in charge of the request at several stages of the administrative procedure. Pre-filing meetings on a no names basis are possible as well. 

A ruling is delivered within three months and it is binding for the tax authorities, unless the facts were misrepresented, the taxpayer does not abide with the conditions in the ruling, or the ruling infringes a tax treaty, or domestic or EC law.  If the law changes subsequently the ruling may become invalid.   A ruling is generally valid for five years, bus is renewable. Most rulings are also published anonymously.

Belgium has made its ruling practice more efficient, business-minded and proactive and the ruling committee has an impressive track record to date.

8. A wide treaty network

Belgium has a wide treaty network covering some 87 states, including the major economies as well as most emerging economies (Argentina, Australia, Brazil, Canada, the P.R. of China, Egypt, India, Indonesia, Israel, the Republic of Korea, Kuwait, Malaysia, Mexico, Pakistan, Russia, Singapore, South Africa, Thailand, Turkey, Ukraine, the United States, Venezuela, and Vietnam.

Belgium prides itself on having the first ever comprehensive double tax treaty with Hong Kong that allows Belgian to profile itself as a gateway for the repatriation of profits from the Far East.  The treaty provides an exemption of withholding tax on dividends if the beneficial owner is a company resident in the other state holding a participation of 25% for at least 12 months.  Dividends from a Hong Kong subsidiary are not liable to any withholding in Hong Kong (see footnote 3) and qualify for the dividend exemption in a Belgian holding company.  Alternatively, a Belgian company that has a permanent establishment can repatriate its profits tax free, even if the majority of the profit consists of offshore income (including royalties and interest) that is tax exempt in Hong Kong.

Belgium has also signed a new double tax treaty with the U.S. that is likely to enter into force on 1 January 2008. US source dividends will be exempt from US withholding tax provided the beneficial owner is a Belgian resident company, owning directly or indirectly at least 80 percent of the voting power in the company paying the dividends for a 12-month period prior to the dividend attribution and satisfies an extensive limitation on benefits test.  Belgian source dividends will be exempt from Belgian withholding tax provided the beneficial owner is a US resident company, owning directly at least 10 percent of the capital, and has been holding the participation for a 12-month period prior to the dividend attribution.

9. Zero rate for outbound dividends

As explained under 2 above, dividends paid to a parent company in an EU Member State are exempt of withholding tax if the parent company holds a direct participation of at least 15 percent (10 percent in 2009).

Since January 1, 2007, Belgium has extended the benefits of the EU Parent-Subsidiary Directive (see footnote 4) to parent companies established in a country that has signed a double taxation convention with Belgium.  To qualify for the withholding tax exemption, the parent company must be resident in the tax treaty country and it must have a corporate legal form that is analogous to one of the forms listed in the annex to the Directive. Since most corporate legal forms existing in one or other EU Member State, that should not be a problem.  The parent company must hold a direct participation of at least 15 percent (10 percent from 2009) in the capital of the Belgian subsidiary without interruption for twelve months (see footnote 5).

If they can claim the benefit of the Directive, parent companies will be entitled to the zero rate on dividends. The parent company also avoids the general limitation of benefits provisions that can be found in most double taxation conventions.  There is, however, a new double limitation on benefits provision. The parent company must be liable to corporate income tax and not enjoy a tax regime that substantially departs from the ordinary tax regime.  Moreover, there must be an adequate exchange of information for the proper application of domestic tax legislation in the contracting states (see footnote 6). 

10. Zero rate for outbound interest and royalties

In accordance with the Interest and Royalty Directive, no tax is withheld on the payment of interest or royalties to related EU companies (see 3 above). Under the double tax treaties, Belgium generally reduces the interest paid to 10 or 15 percent. As for royalties, they are exempt if paid to Iceland, Liechtenstein, Norway, South Africa, Switzerland, some former USSR republics that are still held by the old USSR tax treaty or the United States.

More generally, Belgium exempts interest on loans paid to foreign entities by Belgian group financing companies. These are Belgian companies or permanent establishments that exclusively or mainly provide services of a financial nature to the exclusive benefit of group companies. They must be financed exclusively by legal entities outside Belgium (with the exclusion of individuals) and they are not allowed to hold shares for more than 10% of their net assets.

These ten tax rules make Belgium a winning combination.

November 2007

Footnotes

1 This minimum participation will be reduced to 10 percent on 1 January 2009, in accordance with Council Directive 2003/123/EC.

2 EC Directive 2003/49/EC of 9 June 2003 introducing a common system of taxation applicable to interest and royalties made between associated EU companies.

3 Hong Kong does not have a dividend withholding tax.

4 Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (O.J., L 225, 20 August 1990, p. 6-9, as amended by Council Directive 2003/123/EC of 22 December 2003 (O.J. L 7, 13 January 2004, p. 41-44), see http://www.europa.eu/scadplus/leg/en/lvb/l26037.htm

5 The exemption is subject to the delivery of a certificate to the subsidiary confirming that the parent company qualifies and has held the minimum participation required for a period of at least one year. Moreover, if the parent company has held the participation for less than a year, it can qualify by holding on to the participation, but in that case, the Belgian subsidiary must retain the withholding tax until the end of the one year period.

6 That can be either in the double tax treaty, or in another agreement. The Minister of Finance has explained that only the former USSR republics (Kyrgyzstan, Moldova, Tajikistan and Turkmenistan) would be excluded.  Switzerland does not have an adequate double taxation convention, but a Swiss parent company that has held a participation of 25 percent for two years without interruption, would qualify under the Agreement between the European Union and the Swiss Confederation.

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