Belgium

Bernard Peeters and Anne Van de Vijver
Tiberghien
Belgium

Belgium has considerably improved its tax climate in the past few years. The introduction of the notional interest deduction offers an attractive alternative for the Belgian coordination centres, providing intra-group financing services. Bernard Peeters and Anne Van de Vijver, of Tiberghien, discuss

The Belgian holding regime remains very attractive, featuring a participation exemption for capital gains without any holding requirements. In 2007 the Belgian government also introduced a substantial tax benefit for IP companies – the patent income deduction.

Based on ruling practice, Belgium also offers a beneficial taxation for the centralisation of certain functions and risks to Belgium (for example, central entrepreneur business models). Finally, Belgium has a very attractive tax regime for foreign expatriates.

Financing companies

In 2005 Belgium introduced the notional interest deduction (NID) as an alternative for the Belgian coordination centres providing intra-group financing services (which was abolished under EU pressure). The NID results in an effective tax rate varying between 5% to 25% depending on the actual interest rates charged to the group.

The notional interest deduction has a wider scope than the coordination centre regime and is open to all companies doing business in Belgium (including, for instance, foreign companies having a permanent establishment in Belgium or holding Belgian real estate). Under this regime, companies are entitled to deduct a notional interest from their taxable basis.

The notional interest equals a percentage of the company's adjusted equity, as shown in the Belgian (unconsolidated) annual accounts of the previous financial year under Belgian GAAP. The notional interest deduction is computed based on the company's equity, reduced with certain items such as the book value of participations and capital subsidies. The percentage equals the interest rate on linear long-term Belgian bonds (the 10-year OLO rate) and is currently capped at 3.8%. For assessment year 2012, the NID rate amounts to 3.425%.

Any deduction which cannot be used in a given year can be carried forward for a period of seven years.

Interest paid by a Belgian (finance) company is, in principle, subject to withholding tax of 15%. However, several exemptions apply:

Interest paid to qualifying group companies according to domestic legislation implementing European Interest & Royalty directive. Belgium has extended the exemption to indirect holdings of at least 25%;
Interest paid to banks established in the EEA or in a tax treaty country;
Interest paid by a Belgian eligible quoted company or an eligible intra-group finance company;
Interest from registered bonds issued by Belgian companies/branches to non-residents;
Additional exemptions are provided for in tax treaties with, for example, the Netherlands, Luxembourg and US.

Diagram 1: Effective tax rate with notional interest deduction of 3.425% (interest rate varying between 4% - 16%)

Holding companies

Under the Belgian participation exemption capital gains on shares are fully tax exempt without any holding requirement.

In order to benefit from the exemption the participation must meet the subject-to-tax requirement, in that the subsidiary distributing the dividend must be subject to Belgian corporate income tax, or a similar foreign tax (taxation requirement).

Special rules apply for offshore companies, investment companies and/or finance companies. Intermediary private equity funds, that have no legal personality (for example, Cayman Islands exempted limited partnership) are looked through for this test, in that the subject-to-tax condition is assessed at the level of the target company below the fund.

Dividends received by a Belgian holding company are tax deductible up to 95% provided that the Belgian company holds a minimum participation of at least 10%, or participation with an acquisition value of at least €2.5 million, in full ownership during an interrupted period of at least one year. Also the taxation requirement must be met (same as for capital gains).

The legislator has limited the deduction of dividends to 95% (instead of 100%) taking into account that all costs relating to the shares (including interest) are, in principle, tax deductible. As a general rule, interest payments made, or charges incurred, by a Belgian company, in relation to a bank debt or a shareholders loan, are, in principle, tax deductible, provided they are incurred in order to acquire or preserve taxable income.

Dividends distributed by the Belgian holding company are not subject to withholding tax under the conditions of the EU Parent-Subsidiary Directive.

Additionally, no withholding tax (WHT) is due on dividends paid to companies located in a tax treaty country (provided the treaty contains an exchange of information clause). This relief applies provided that the parent company: (i) is a resident of a country with which Belgium has a tax treaty; (ii) is subject to corporation tax or to a similar tax; (iii) is not subject to a tax regime which deviates from the common tax regime; (iv) holds a minimum shareholding of 10% in the distributing company for a period of at least one year; and (v) has a legal form similar to the forms entitling a company to benefit from the Parent Subsidiary Directive.

Finally, WHT exemptions are provided for in several tax treaties (for example, Belgium-US tax treaty) offering a tax-free exit out of Europe.

Intellectual property companies

In 2007 Belgium introduced the patent income deduction (PID), which provides for a deduction of 80% of the qualifying patent income resulting in an effective tax rate of maximum 6.8%. This effective tax rate may be further reduced taking into account, for example, the notional interest deduction. Belgian companies, as well as Belgian branches of foreign companies, are entitled to this deduction.

The PID more specifically covers:

Patents or extended patent certificates owned by a Belgian company or Belgian branch as a result of its own patent-development activities in R&D centres in Belgium or abroad; and
Patents or extended patent certificates acquired by a Belgian company or establishment, provided it has further developed the patented products or processes in the company's research centres in Belgium or abroad. To benefit from the deduction, the research centre should qualify as a so-called line of business. In essence, it should be an entity or a division of an entity that is capable of operating autonomously.

The Belgian company or Belgian branch can use the patents, owned by it or licensed to it, to manufacture patented products, have them manufactured on its behalf or to provide services. Alternatively, it can licence the patents to other parties.

In addition to the patent income deduction, Belgium has a wide network of tax treaties, providing withholding tax exemptions for royalties. Also, Belgian tax law provides for a very beneficial foreign tax credit for royalties.

Excess profit ruling: opportunities for multinational groups to reorganise their business

In 2004, Belgium introduced the arm's-length principle in Belgian tax law. This provision is copied from article 9 of the OECD model tax treaty. The provision makes it possible for multinational enterprises to obtain an advance ruling on the allocation of profits and/or on the at-arm's-length character of transactions.

Subject to confirmation in an advance pricing agreement (APA), the provision also provides a downward adjustment for profits that are shifted from abroad to Belgium and would not have been realised if it were a stand alone enterprise (excess profit). The excess profit is excluded from the taxable basis of the Belgian company. Appropriate transfer pricing documentation has to be submitted in order to determine the arm's-length profit that should have been realised by the Belgian company.

This provision offers opportunities to multinational groups concentrating, for example, on central entrepreneur functions and risks in one single location in Europe.

Expatriate regime

Belgian tax law also provides for a special regime for expatriates. This regime is available for expatriates not having the Belgian nationality and who are either seconded from abroad to Belgium or recruited abroad. The regime applies to employees and company directors.

Under the special regime the expatriates are entitled to receive certain tax-free allowances. In addition, the expatriates benefit from a so-called travel exclusion, in that, a percentage of the remuneration is tax exempt in Belgium. This percentage presents the time that the expatriate travels outside Belgium.

Tailor-made investment vehicles

Belgian Private Privak

In 2003 the Belgian legislator introduced an investment vehicle for private equity investments called the Private Privak. Under the Private Privak regime, Belgian and foreign investors can receive dividends, liquidation and share redemption proceeds, free from withholding tax. The Private Privak itself benefits from a limited tax basis under which capital gains and dividends are fully tax exempt. In addition, the Private Privak is entitled to the benefits of double tax treaties and EU Directives.

Pan European pension fund (OFP)

In 2006, Belgium adopted the so called IORP directive by providing a comprehensive legal, prudential and fiscal framework for multinationals that aim to create pan-European and international pension funds. The legal framework is based on the principles of flexibility and contractual freedom: Parties setting up the fund can structure according to their own needs and wishes provided an appropriate division of operational responsibilities (board of directors) and supervision responsibilities (general assembly) is ensured.

The pension fund in Belgium takes the legal form of an OFP and may, when authorised by the CBFA (banking, Finance and Insurance Commission), start operating several pension plans providing for retirement benefits. The Belgian law does not require that one or more sponsor undertakings is located in Belgium, nor that at least one pension plan, which the OFP operates, applies to workers in Belgium. The prudential framework is mainly focused on qualitative, rather than quantitative rules, both for the determination of the technical provisions and for the investments (prudent person principle). In addition to the advantageous legal and prudential framework, the OFP benefits from a favourable tax regime resulting in a zero corporate taxation. Knowing, furthermore, that the OPF is benefiting from a favourable indirect tax treatment (VAT), and (as an entity being subject to corporate income tax) should be able to claim double tax treaty benefits, Belgium should definitely be a prime location for international and pan-European funds.

Tax ruling practice

Under the Belgian tax ruling practice, it is possible to obtain upfront certainty on the application and the interpretation of the Belgian tax law. It is also possible to start discussions with the ruling commission on an informal basis during pre-filing meetings. When a ruling request is being introduced, one can normally expect to receive an answer within a period of three months, sometimes much sooner.

The ruling commission deals with any question regarding the application of the tax law, including the application of the notional interest deduction, participation exemption and patent income deduction, business reorganisations, transfer pricing issues, tax treatment of partnerships (for example, US general partnership, UK LLP, German KG), application of tax shelter for movies and the Belgian tax regime for the shipping industry.

Bernard Peeters (bernard.peeters@tiberghien.com) is a partner and

Anne Van de Vijver (anne.vandevijver@tiberghien.com) is a senior associate of Tiberghien