Belgium

Belgium applies a tax consolidation mechanism with respect to corporate tax. Under this tax consolidation regime, which is also known as the 'group contribution' regime, Belgian companies (and Belgian PEs of foreign companies) may compensate taxable profits with current year tax losses if certain conditions are fulfilled, such as, amongst others:

• A 90% direct shareholding between the group companies (or via a common parent company) is required, limiting the scope to the parent, subsidiary, and sister companies and their Belgian PEs.
• The measure is limited to group companies that have been affiliated for at least the last five successive financial years.
• Some companies, such as investment companies and regulated real estate companies, are excluded.

The group companies must compensate each other for the tax burden of the group contribution; because of which, the tax consolidation is financially neutral on a group level. Transferred taxable profits can only be offset against current-year tax losses and not against carried forward tax losses that have been generated in the past. The scope of the tax consolidation regime is limited to certain qualifying companies and subject to various conditions. To benefit from the tax consolidation regime, the group companies concerned have to conclude a so-called 'group contribution agreement' that meets several conditions.

Transfer pricing

The arm's-length principle is formally codified in the Belgian Income Tax Code (BITC). A Belgian circular of 25 February 2020 provides an overview of the OECD transfer pricing guidelines for multinational enterprises and tax administrations.

In addition, the tax authorities can make use of other, more general, provisions in the BITC to assess the arm’s-length nature of transfer prices (e.g. the general rules on the deductibility of business expenses). The BITC contains provisions that tackle artificial inbound or outbound profit shifting. These are the so-called provisions on abnormal or gratuitous benefits.

If a Belgian tax resident company grants an abnormal or gratuitous benefit, the benefit should be added back to the taxable income as a disallowed expense unless the benefit was considered to determine the taxable basis of the beneficiary. Even if the abnormal or gratuitous benefit was included in the taxable basis of the beneficiary, the tax deductibility of the related expenses can still be denied in the hands of the grantor. Notwithstanding the above exception, the abnormal or gratuitous benefit should be added back to the taxable income when the benefit is being granted to a non-resident affiliated company. Such granted abnormal or gratuitous benefits can be offset against any tax-deductible items (e.g. tax losses carried forward, NID).

If a Belgian tax resident company receives an abnormal or gratuitous benefit, and to the extent that such benefit is received from a related company, the benefit received cannot be offset by the Belgian company against its current year or carried forward tax losses or other tax deductions. According to the position of the tax authorities (by the Minister of Finance), the taxable basis of a Belgian company equals at least the amount of the benefit received. This position has been confirmed by the Supreme Court.

Belgium has a special transfer pricing investigation unit with a mission to (i) build up and share transfer pricing expertise and (ii) carry out in-depth transfer pricing audits of multinationals present in Belgium through a subsidiary or PE. The number of transfer pricing audits being initiated in Belgium has increased significantly.

Belgian tax law has introduced specific transfer pricing documentation requirements. These requirements are based on Action 13 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project.

Belgian tax law requires a three-tier documentation approach as provided under BEPS Action 13: Master File, Local File, and Country-by-Country (CbC) Reporting. According to these documentation requirements, Belgian entities of a multinational group that exceed one of the following criteria:

• operational and financial revenue of at least EUR 50 million (excluding non-recurring revenue)
• balance sheet total of EUR 1 billion, or
• annual average number of employees of 100 full-time equivalents

need to submit to the tax authorities a master file and a local file (the detailed form that is part of the local file only when at least one of the business units of the entity has realised intra-group cross-border transactions of more than EUR 1 million).

Belgian ultimate parent entities of a multinational group with a gross consolidated group revenue of at least EUR 750 million should file a CbC report. Under certain conditions, the Belgian entity that is not the ultimate parent entity of the multinational group may be required to file the CbC report directly with the Belgian tax authorities.

The master file and CbC report should be filed no later than 12 months after the last day of the reporting period concerning the multinational group. The local file, however, should be filed with the tax return concerned.

There are also specific transfer pricing documentation penalties, ranging from EUR 1,250 to EUR 25,000.

Advance pricing agreements (APAs) can be concluded (unilaterally, bilaterally, and multilaterally) via which the taxpayer can obtain upfront certainty.

Thin capitalisation

Old thin capitalisation rule (until tax year 2019 with grandfathering)

Belgian tax law provides for a general thin capitalisation rule (5:1 debt-equity ratio) according to which interest payments or attributions in excess of a 5:1 debt-equity ratio are not tax deductible.

For the purposes of the thin capitalisation rule, equity is defined as the sum of the taxed reserves at the beginning of the taxable period and the paid-up capital at the end of the taxable period.

For the purposes of the thin capitalisation rule, debt is defined as:

• all loans, whereby the beneficial owner is not subject to income taxes, or, with regard to the interest income, is subject to a tax regime that is substantially more advantageous than the Belgian tax regime, and
• all intra-group loans.

Bonds and other publicly issued securities are excluded, as well as loans granted by financial institutions.

Interest payments or attributions in excess of the 5:1 ratio are not tax deductible. The thin capitalisation rule is not applicable to loans contracted by (movable) leasing companies and companies whose main activity consists of factoring or immovable leasing (within the financial sector).

In case the loans are guaranteed by a third party or in case loans are funded by a third party that partly or wholly bears the risk related to the loans, the third party is deemed to be the beneficial owner of the interest if the guarantee or the funding has tax avoidance as its main purpose.

To safeguard companies having a centralised treasury function in Belgium, a netting for thin capitalisation purposes is allowed at the level of the interest payments and interest income related to the centralised financing function/cash pool function.

The thin capitalisation rule existed until and including tax year 2019. As of tax year 2020 (financial years ending 31 December 2019 or later), the EBITDA-based rule applies.

However, the thin capitalisation rule remains applicable in case of (i) grandfathered loans (i.e. loans granted before 17 June 2016, in case no 'fundamental' modifications have been made) and (ii) interest paid to a beneficiary located in a tax haven.

EBITDA-based rule (as of tax year 2020)

The EBITDA-based rule is in line with the EU Anti-Tax Avoidance Directive (ATAD) I requirements. Exceeding borrowing costs are only tax deductible up to the highest of (i) 30% of the taxpayer’s fiscal EBITDA or (ii) EUR 3 million. The exceeding borrowing costs that could not be deducted in the current taxable period can be carried forward for an unlimited time. Furthermore, upon certain conditions, taxpayers belonging to the same group also have the possibility to transfer unused EBITDA capacity to other group companies.

A grandfathering clause applies for loans granted before 17 June 2016. However, the old thin capitalisation rule remains applicable for interest payments to tax havens.

Controlled foreign companies (CFCs)

The Belgian CFC regime was introduced in 2017 as part of the EU Anti-Tax Avoidance Directive (ATAD). The first version of the CFC regime taxed non-distributed income arising from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage (transactional approach). Basically, this approach required that the significant people functions generating the CFC income were located in Belgium.

From tax year 2024, the CFC regime has been reformed based on an entity approach, as it now focuses on the taxation of passive income subject to low taxation abroad (defined as half of the taxation that would occur under the Belgian rules), unless the taxpayer can prove that sufficient substance is available locally.

A foreign company qualifies as a CFC if both the participation and the taxation condition are met:

• The participation condition is met if the Belgian taxpayer, whether or not together with its ‘associated companies’ (as specifically defined), holds a participation of more than 50% of the voting rights, owns more than 50% of capital, or is entitled to receive more than 50% of the profits of that entity. A PE of a Belgian taxpayer is deemed to fulfil this condition.
• The taxation condition is met if the foreign entity (or PE) is not subject to income tax or subject to income tax that is less than half of the CIT that would have been due if this foreign entity would be a Belgian taxpayer. Some 'tax havens' are deemed to fulfil the taxation condition, until proven otherwise. These tax havens are defined as a jurisdiction included on (i) the EU list of non-cooperative jurisdictions (see Dividend income in the Income determination section) and (ii) a national list of jurisdictions where the nominal corporate tax rate is less than 10% (see Payments to foreign affiliates in the Deductions section).

If the foreign entity (or PE) qualifies as a CFC, the amount of income/profit to be allocated to the Belgian taxpayer needs to be calculated/assessed according to Belgian accounting and tax rules (recalculation is thus necessary). The foreign profits are then allocated to the Belgian taxpayer taking into account the following parameters:

• The profits must be limited in proportion to the part of the profits that is not distributed by the CFC.
• The profits are limited in proportion to the CFC’s income that qualifies as passive income.
• The profits are proportionally to be allocated based on the taxpayer’s direct controlling interest in the CFC.

For the additional taxable basis in Belgium, a tax credit of the foreign tax effectively paid would be available.

There are also some exceptions (‘safe harbours’) foreseen that, when applicable, would safeguard certain foreign income from taxation at the Belgian taxpayer’s level, more specifically when:

• the Belgian taxpayer can provide evidence that sufficient substance (‘substantial economic activity’) is available in the CFC
• less than 1/3 of the total income of the CFC qualifies as passive income, or

• the CFC qualifies as a financial undertaking (subject to certain conditions).

From a tax compliance perspective, all entities qualifying as CFCs have to be reported in the Belgian CIT return.

Circular letter of 13 December 2024

On 13 December 2024 the Belgian tax administration issued a circular regarding the CFC rule (Circular 2024/C/82). It elaborates quite extensively on the different aspects of the updated Belgian CFC rules, including the interpretation of the Belgian tax authorities on how taxpayers are expected to apply these rules. The key elements that are addressed by this circular letter are the following:

Participation Condition

The circular provides extensive clarification on the interpretation of the participation condition, including a number of examples. It confirms that the participation condition is only fulfilled if the Belgian taxpayer holds at least one share in the foreign entity, excluding ‘sister’ entities (and indirect subsidiaries) from qualifying as a CFC of the Belgian taxpayer.

Taxation Condition

For foreign entities within the EEA, local GAAP accounts do not need to be converted into Belgian GAAP, reducing the compliance burden for EEA-based entities held by a Belgian taxpayer. For entities outside the EEA, the circular letter explicitly states that a conversion to Belgian GAAP financials is required.

Certain formalities related to Belgian corporate income tax provisions may not be fulfilled by the foreign entity. In such cases, these provisions can still be considered for recalculating the deemed Belgian taxable base.

If a (Q)DMTT under Pillar 2 is levied in the jurisdiction of the foreign entity, it will not be considered an income tax for assessing the taxation condition under the Belgian CFC rules. This could have an impact on groups that are subject to the Pillar 2 rules.

The circular also provides additional clarifications on temporary and permanent differences (temporary differences can be excluded subject to certain conditions), the interplay with foreign fiscal consolidation regimes and interest limitation rules (a stand-alone entity approach is mentioned) and relevance of carried-forward losses/tax assets of the foreign entity.

Finally, it confirms that the Belgian CFC rules are not applied in ‘cascade’, meaning they do not need to be considered to determine the recalculated Belgian tax base of a foreign entity that holds (potential) CFCs.

Safe harbours

The circular letter focusses especially on the uncertainty linked to the substantial economic activity safe harbour and tries to nuance certain parts of the parliamentary works. As reiterated in the circular letter, the application of the substance safe harbour is a safe harbour that is to be assessed on a case-by-case basis. Some elements linked to this that have been further clarified in the circular:

Goods and services delivered in an intra-group context are not automatically excluded to determine the presence of a ‘substantial economic activity’.

Outsourced activities can also be considered in assessing whether a ‘substantial economic activity’ is deemed present.

Foreign holding companies can be part of the group’s economic activities, assuming the holding company actively participates in managing the enterprises it holds.