by Biene Ongenaert
Profit shifts have been a top priority for the OECD, the G20 and Europe for some time. The result of this is the various measures that were implemented, inter alia, under the BEPS action plan. With the introduction of the transfer pricing documentation requirement, Belgium took a first major step in the fight against international tax avoidance in 2016. From 1 January 2019, the new CFC legislation came into effect in Belgium. With this, Belgium is taking the next step. Whereas the first measure is limited to a documentation obligation, the CFC legislation is a lot more proactive. This allows the Belgian administration, under certain conditions, to tax foreign profits vis-à-vis the Belgian controlling shareholders.
The purpose of the CFC (Controlled Foreign Company) legislation is to combat profit shifts to countries with a low tax rate. The new anti-abuse provision makes it possible to tax foreign (undistributed) profits of a controlled subsidiary through the Belgian controlling parent company / shareholder. This immediately puts an end to the current basic principle that profits of foreign subsidiaries or establishments do not fall under Belgian tax jurisdiction.
Obviously, not all foreign profits can be taxed in Belgium as such. Under Belgian CFC law, only undistributed profits of a foreign entity arising from artificial arrangements set up with the essential purpose of obtaining a tax advantage may be taxed. For example, the provision covers, inter alia, the undistributed foreign income of subsidiaries which was, in fact, derived from key functions exercised in Belgium.
Example (from the explanatory memorandum): a Belgian company transfers the intellectual rights of a computer programme developed by it to a subsidiary in Hungary. However, this computer programme is still regularly updated by employees of the Belgian company. It is clear that the relevant key functions in this situation are in Belgium. Based on the CFC rules, the profits that the Hungarian company has earned as a result of the sale or rental of licenses for the use of this programme can be taxed in Belgium.
For the application of Belgian CFC legislation, four conditions must be cumulatively met:
The Belgian taxpayer must be part of a multinational group (i.e. located in more than one country). This concept must be interpreted very broadly, so that foreign permanent establishments and transparent entities are also subject to CFC legislation.
The foreign entity must be situated in a country with a low tax rate. A tax rate is considered 'low' if the foreign rate is less than half of the Belgian rate that would apply if the company was established in Belgium. In order to determine whether a low tax rate is involved, both the tax rate and the taxable base must therefore be taken into account. This can best be demonstrated based on an example.
A foreign subsidiary has a taxable base of EUR 100 in 2018 in a country with a tax rate of 15 percent. The foreign tax due is therefore EUR 15. At first glance this does not seem to be a 'low tax rate' because 15 percent is more than half of the Belgian corporate tax rate (29 percent from 2018).
However, if we were to determine the taxable base of the foreign company under Belgian law, the taxable base would be EUR 200. In that case, the subsidiary is indeed located in a country with a low tax rate. The effective foreign tax rate, taking into account the Belgian taxable base, is only 7.5 percent (EUR 15 equals 7.5 percent of the Belgian taxable base of EUR 200).
The Belgian taxpaying entity must exercise direct or indirect control over the foreign entity. This means that the Belgian taxpaying entity must have more than 50 percent of the voting rights, a participation of at least 50 percent or be entitled to most of the profits.
Belgium opted for the 'transactional approach' when introducing the CFC legislation. As a result, under Belgian CFC legislation, only the foreign unpaid profits that are actually linked to Belgian key functions are targeted.
Other European countries have opted for the 'entity approach' whereby certain categories of passive income such as dividends, royalties and interest can be taxed under CFC legislation, without taking into account the activities of the parent company.
The Belgian administration has already significantly increased its audits in the field of transfer pricing in recent years. The audit officers of the large companies now include transfer pricing on their checklist (with the support of the transfer pricing cell). Having a transparent and consistent transfer pricing policy is becoming more and more essential.
For companies that have their transfer pricing policy in order, the impact of the CFC legislation will thus be very limited. After all, a good transfer pricing policy ensures a market-based remuneration between affiliated companies, taking into account the functions, risks and existing assets that are supported. In this way, for example, an at-arm's-length fee was already included in the profits of the Belgian company for its intervention in the key function.
Although things are still relatively quiet regarding the new CFC legislation, the possible consequences for the Belgian controlling shareholders of a multinational group should not be underestimated. Moreover, CFC legislation was introduced in all European countries on 1 January 2019.
Do you have questions about your transfer pricing policy or about the impact of the new CFC legislation on your company? Please feel free to contact one of our specialists via email@example.com.
In our opinions, we rely on current legislation, interpretations and legal doctrine. This does not prevent the administration from disputing them or from changing existing interpretations.
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