16 April 2024

Will the profits of your foreign subsidiary/establishment soon be taxed in Belgium?

by Febe Louage and Stephanie Vanmarcke

The new legislation on Controlled Foreign Companies (CFCs), published at the end of December 2023 and applicable from the 2024 tax year (financial years ending on or after 31 December 2023), significantly extends the scope of the CFC regime. The purpose of the regulations is to tax the undistributed profits of certain foreign subsidiaries/branches on behalf of the Belgian shareholder company. In this article, we briefly explain what exactly a CFC is, which incomes are targeted and what the reporting obligations are.

What is a CFC?

A CFC is a low-taxed foreign company or establishment that is connected to another company. Two conditions must be met for a foreign company/establishment to qualify as a CFC.

1. Participation condition

The Belgian company:

  • Holds, either alone or together with associated entities, the majority of the voting rights;

  • Holds, either alone or together with associated entities, a shareholding of at least 50% in the capital of the foreign entity;

  • Has, either alone or together with associated entities, the right to at least 50% of the profits.

Associated entities are natural or legal persons who have a (direct) relationship of at least 25% with the Belgian company. The wording whether or not together with associated entities implies that the Belgian company must have a direct participation in the foreign company.

In the case of foreign establishments, the participation requirement is always deemed to be met.

2. Taxation condition

The foreign entity is not subject to income tax or is subject to income tax at half the rate of corporate tax that would be due in Belgium. There is no exemption for entities established in the EU, so companies in countries such as Bulgaria and Hungary are considered CFCs.

If a foreign entity meets the participation and taxation conditions, it is considered a CFC and the undistributed profits are taxed in Belgium. However, there are 3 exceptions:

  • It is demonstrated that the CFC carries out a substantial economic activity.

  • It is demonstrated that passive income is limited to 1/3 of the total income of the CFC.

  • The CFC is a financial institution, and a maximum of 1/3 of its income arises from transactions with the Belgian company (or with entities associated with the Belgian company).

Targeted incomes

If a CFC cannot rely on any of the exemption grounds, the undistributed passive incomes of the CFC will be taxed in the hands of the Belgian company-shareholder (in proportion to its participation in the CFC).

Examples of passive income include: interest, royalties, dividends, capital gains on shares, rental income, income from purchase and sale of goods and services.

To avoid double taxation, some measures have been taken. For example, the dividend received deduction can be applied if the incomes are distributed later, and a tax credit is introduced for taxes paid abroad.

Reporting obligations

Once the participation and taxation conditions are met, the CFC must be reported in the tax return. Subsequently, the Belgian company must indicate whether one of the 3 exemption grounds applies.

The new legislation therefore has far-reaching consequences for Belgian companies with foreign subsidiaries and establishments. When filing corporate tax returns for financial years ending on or after 31.12.2023, particular attention must be paid to the qualification as a CFC.

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