Impact of expanded definition of permanent establishment on foreign companies

Expanded definition

Due to the expansion of ‘permanent establishment’ as a concept, since 2020, a foreign company may be considered permanently established in Belgium even if this was not the case before. Such companies must now file a non-resident corporate tax return, and may also need to deduct withholding tax. The effects of these changes are especially tangible for commercial representatives and construction activities.

Commercial representatives

Prior to the expansion, the presence of a commercial representative did not imply permanent establishment unless they had the authority to conclude final contracts. These days, if a commercial representative exerts a decisive influence on contract formation, this suffices for permanent establishment.

Construction work and activities

According to the OECD model treaty, an establishment is only considered permanent if the activities extend over more than twelve months. Belgium considers a period exceeding 30 days sufficient for permanent establishment, however. As a consequence, Belgium will already require you to file a tax return after 30 days of activities. Thanks to the double taxation treaty, however, the profits will not be taxable in Belgium.

Since the definition’s expansion, those 30 days are also considered to include ‘connected projects’ and ‘similar activities by associated enterprises.’ It is no longer enough to distribute such activities among multiple projects to avoid permanent establishment by the Belgian definition.

Consequences

Following the concept’s expanded definition, Belgian tax authorities are conducting targeted investigations of foreign corporations with a Belgian company number. These investigations make use of an extensive questionnaire. In some cases, the authorities will also question third parties such as the company’s clients. This means it is important for you to be prepared. Our experts are happy to be of assistance.