15 January 2025 Belgium issues administrative guidance on CFC amended rules
On 13 December 2024, the Belgian Tax Authorities issued additional guidance on the application of the controlled foreign corporation (CFC) rules, providing two new Circular Letters (nr. 2024/C/82 and nr. 2024/C/83). The first Circular Letter provides guidance on the application and computation rules, while the second Circular Letter discusses some specific procedural aspects, in addition to covering recent amendments to other anti-abuse rules. The new CFC rules are complex and have triggered a significant amount of discussion in practice. For purposes of determining whether a foreign company or foreign establishment should be considered a low-taxed entity for CFC purposes (i.e., to assess whether the foreign tax is at least half of the corporate tax that would have been due in Belgium), the qualified domestic minimum top-up tax (QDMTT) that may be levied in the foreign entity's home country cannot be taken into consideration as a qualifying income tax. This seems surprising, as CFC taxation is meant to tax low-taxed income. If such income is not low-taxed because of the local implementation of a global minimum tax through a domestic top-up tax, this could result in double taxation. With respect to the Belgian hypothetical tax calculation (i.e., calculation as if the foreign qualifying CFC entity were a Belgian tax resident), the new guidance confirms that the formal requirements to claim certain tax deductions in Belgium do not need to be met in the hands of the foreign qualifying CFC entity. The guidance refers to the submission of a Form 276K to apply the deferred taxation of capital gains (no form seems to be required, provided other substantive conditions for this regime are being met). This administrative confirmation is welcome and allows that the absence of formal requirements generally applicable under Belgian law would not prevent the application of specific tax deductions or tax regimes when making the hypothetical tax calculation for CFC purposes. For computing the Belgian hypothetical tax, the accounting result of the foreign company or establishment serves as the starting point. However, if the entity is located in a European Economic Area (EEA) Member State, the accounting figures may be based on the applicable local generally accepted accounting principles (GAAP) rules in that State. In any other jurisdiction, the foreign accounting figures should be converted into Belgian GAAP (BEGAAP). In view of the assessment of the taxation condition for determining the foreign tax, an adjustment is allowed for temporary differences identified between Belgium and the relevant foreign jurisdiction. However, such an adjustment is only possible to the extent the temporary difference relates to a period of less than five years (except for depreciation on tangible fixed assets and provisions of insurance companies — for which the five-year period does not apply). Permanent differences resulting from, for instance, disallowed expenses or nontaxable items constitute a lasting difference between the income tax due by the foreign entity and the theoretical corporate tax that would have been due in Belgium. The foreign tax cannot be adjusted with these permanent differences. For the assessment of the taxation condition of a foreign company's permanent establishment (PE), it is acceptable to take into account both the income tax due on the PE's profits in the country or jurisdiction where it is located and any income tax that may be due on those same profits in the country or jurisdiction where the foreign company is established. According to the Circular Letter, this approach allows for an evaluation of the overall tax burden borne by the foreign establishment, considering the taxation in the respective relevant jurisdictions. The Belgian Tax Authorities confirm the CFC rules should not be applied in cascade. This actually means that if a foreign entity has been identified as a CFC entity and this entity holds further participations, those should not qualify as CFCs for determining the hypothetical Belgian tax of the first-tier CFC. One has to be careful, however, as holding one share of the lower-tier subsidiary may also lead to qualifying as a CFC because the controlling shareholder is considered on a consolidated basis. If a foreign company or foreign establishment of the Belgian entity is part of a fiscal consolidation in its country of fiscal residence, the taxpayer can demonstrate which part of the foreign tax should be attributed to that company or establishment using a certain allocation key, hereby confirming what has been said previously by the Minister of Finance in this respect. However, it might be that the use of such allocation key does not provide an adequate solution. Under those circumstances, the taxpayer may opt for a so-called "stand-alone" approach, as if the foreign company or establishment is a stand-alone company. In this case, both the foreign tax and hypothetical Belgian tax will be determined as if the foreign company or foreign establishment is not part of a tax consolidation. The same can be applied for companies making use of the group contribution. Finally, the Circular Letter does not exclude a possible other methodology of computation, which the Belgian Tax Authorities will assess on a case-by-case basis. In applying the earnings before interest, taxes, depreciation and amortization (EBITDA) rules, the CFC entity should be considered as part of the group for calculating the hypothetical Belgian tax and, thus, should be considered with the other Belgian group companies in making the EBITDA calculation. As discussed for the consolidation rules, the taxpayer can also opt to apply the "stand-alone principle." This would mean that the minimum thresholds of €3m and 30% of the EBITDA should be assessed solely in the hands of the CFC entity in that case. Previous losses incurred by the foreign company or the foreign establishment may be deducted in view of assessing the taxation condition, within the limits and the applicable conditions of the Belgian tax rules. The Circular Letter however indicates that for previous losses existing at the end of the taxable period associated with tax year 2023, no recalculation according to Belgian standards is needed. These tax losses are thus grandfathered (but still subject to the Belgian deduction limitation rules). For losses generated as from tax year 2024, a recalculation will apply according to Belgian rules. With respect to the safe harbors, the Circular Letter makes some specific comments regarding the assessment of "substantial economic activity" to be performed by the foreign entity. To qualify for this safe harbor, the entity must demonstrate genuine business operations supported by the presence of personnel, equipment, assets and buildings. This should be assessed on a case-by-case basis and evidenced by any relevant facts and circumstances. Those conditions of personnel, equipment, assets and buildings should be applied cumulatively. However, the Circular Letter states that if the CFC's economic activity may not be supported by all the aforementioned legal criteria, the taxpayer should be permitted to demonstrate that a substantial economic activity takes place under the facts and circumstances. Unfortunately, no further guidance is added in this respect. The required activities of said personnel do not necessarily have to be performed by the entity's own employees. The overall personnel, equipment, assets and buildings available should be assessed to determine whether sufficient substance applied, considering the turnover and the economic activity that the entity is supposed to carry out. Reference should be made to the profit and loss accounts of the entity for the specific financial year under consideration. The Circular Letter indicates that holding companies will be considered as participating in the economic activity of the group if they actively participate in the management of the group over which they exercise control. However, if a holding company holds minority portfolio investments without any intention to participate in the management or influence the control of the companies, this activity is not to be considered a qualifying economic activity unless the taxpayer provides evidence to the contrary. Lastly, some general guidance on the formal reporting requirements related to the amended CFC rules (and some recent changes to other anti-abuse rules) is provided. Taxpayers must report on their tax returns when and if they hold a foreign company or establishment that qualifies as a CFC entity. The declaration should include detailed information about the CFC, such as its name, address, identification number, country of establishment, ownership percentage, and any applicable exemption. In this respect, the Tax Authorities confirm in the Circular Letter that the taxpayer should mention which type of the respective exemption is being claimed. This information will need to be added as an annex to the tax return, as the current format does not allow a taxpayer to mention this in the tax return itself (an annex to the tax return will be required in any event if the taxpayer declares more than one CFC entity). The issuance of the two Circular Letters further clarifying the new Belgian CFC rules is a welcome development for companies holding foreign entities and having to comply with those rules. Nonetheless, some questions remain unanswered, such as whether, in view of the hypothetical tax calculation, the minimum taxable basis should still be applied in the hands of a loss-making foreign entity (not paying any local taxes due to those losses). The Tax Authorities are expected to provide further guidance in additional Circular Letters. It will be important for affected CFCs to assess the impact that the two new Circular Letters could have on positions that have been taken in the tax return filed for tax year 2024, as well as the impact on any future tax filing positions still to be taken.
Document ID: 2025-0241 | ||||||