Belgium - Response to BEPS

Belgium - Response to BEPS

Until recently, Belgian tax policy has been geared to meeting budgetary challenges, especially in the wake of the economic crisis. As public anger in Belgium rose over the tax practices of some multinationals, Belgium’s previous government realized that the fight against aggressive tax planning could help smooth the passage of certain measures through Parliament.

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The tax focus of Belgium’s current government, elected in May 2014, continues to be on job creation and economic growth. With salary costs in Belgium becoming prohibitively high relative to its neighbors, Belgium is seeking to reduce its reliance on tax revenue from labor, and to increase revenue from other sources (e.g. energy and natural resource companies, consumption taxes). At the same time, the fight against tax fraud – a key responsibility of Belgium’s Minister of Finance – remains high on the political agenda.

As a founding member of the OECD, Belgium has fully supported the BEPS initiative but has not been an early adopter. So far Belgium has not implemented specific anti-BEPS measures in direct response to the OECD project. However, certain anti-abuse rules to safeguard the tax base of individuals and corporations against aggressive planning have existed for quite some time, and recently the government has taken further steps that are in line with the spirit of the OECD’s BEPS project.

Stepped up enforcement of anti-BEPS rules

Specific anti-abuse rules backed-up with a general anti-abuse rule (GAAR) have been in place for decades. Interest, royalties and service fees paid to tax havens are not deductible unless the taxpayer can prove that the expenses are connected to transactions actually carried out and do not exceed normal limits. Under the GAAR, a transaction as a whole cannot be opposed to the tax authorities, if they demonstrate by presumptions or any other evidence,that fiscal abuse is one of the transaction’s main drivers.

Recent years have seen significantly stepped-up audits aimed at detecting international tax fraud. A specialized team of about 100 auditors has been allocated to this area, and this centralized team is steering the audits of large multinationals across Belgium.

BEPS trends in Belgian tax rules and practice

  • Tackling offshore regimes. The previous government introduced a rule requiring individuals to report in their tax returns whether they are the founder or the beneficiary of legal constructions such as trusts, foundations and foreign low-taxed entities. The rule applies as from assessment year 2014. The current government has now gone a step further with its so-called ‘Cayman tax’. Under this transparency tax, income received by the legal construction will be taxable to the resident individual/legal entity that is the founder of the legal construction, as if the founder had received the income directly. The tax does notapply if the founder or beneficiary can demonstrate that the low-taxedentity’s income is effectively taxed at a rate of at least 15 percent or, under certain conditions related to the possible exchange of information, that the legal construction has genuine activity and economic substance.
  • Tax haven transparency. In an effort to tackle the improper use of tax havens, Belgian tax law requires companies to report payments exceeding 100,000 euros (EUR) to recipients based in a tax haven. A ‘tax haven’ is defined as any country with a level of taxation below 10 percent or any jurisdiction on the OECD blacklist. This information already points in the direction of potential aggressive or abusive transactions and thus facilitates tax audits.
  • Transfer pricing. Belgium’s tax administration established a small team of auditors specialized in transfer pricing to examine transfer pricing issues, with a focus on intangibles, risk and capital. This team has been expanded, and training is being conducted in local tax offices with the goal of increasing local transfer pricing expertise and establishing ‘satellite’ transfer pricing audit centers. A strong supporter of the OECD’s proposals on transfer pricing documentation and CbyC reporting, the Belgian government is also studying the feasibility of introducing formal transfer pricing documentation regulations.
  • Thin capitalization. Designed to address interest deductibility, the recently revised thin cap rule imposes a 5:1 debt-to-equity ratio limit. Finance charges are deductible provided they are at arm’s length and that the loan does not exceed 5 times the sum of the taxed reserves and the paid-up capital. The rule applies to finance charges paid to tax havens and between group companies.
  • Fair share of tax. Targeting large Belgian companies and Belgian establishments of large foreign companies, the so-called ‘fairness tax’ that was introduced in 2013 is due if a company distributes dividends but pays little or no tax on this dividend because of over-use of ‘bad’ deductions (losses carried forward, notional interest deductions). ‘Good’ deductions (participation exemptions, patent income deductions, investment deductions) will not trigger the fairness tax. The fairness tax rate is 5.15 percent. The fairness tax comes on top of the standard corporate income tax.

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