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taxation.be

Friday
Jan 18th
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Anti-avoidance rules

Belgium does not have controlled foreign corporation (CFC) legislation, but it does have extensive anti-abuse rules designed to prevent tax evasion and avoidance. The principal features of Belgium's anti-abuse rules are set forth below.

The General anti-avoidance rule of Article 344 § 1 ITC

The Belgian Supreme Court has repeatedly held that taxpayers are free to structure transactions as they wish, provided they accept all the legal consequences of their structuring and do not violate any provision of the law even if the form they have chosen is not the most common one and even if they do so only to reduce the tax burden on the transactions.

It was not until 1993 that Belgium introduced a general anti-avoidance rule. Art. 344 § 1 ITC allows the tax authorities to disregard the legal qualification of a specific transaction if they can prove that the taxpayers chose that particular form instead of another for the sole purpose of avoiding the income tax. In that case, the tax authorities may recharacterize the transaction to assess the income tax on a less beneficial basis. The tax authorities can also use the general anti-avoidance rule when they have evidence that taxpayers split up what should be a single legal transaction into separate legal transactions only for tax reasons. The tax authorities may disregard the separate steps and treat them as a single operation. The taxpayer then has the burden of proving that there are legitimate financial and economic motives for the form chosen.

Art. 344 § 1 ITC is a potentially extremely potent legal provision, but it has been difficult to apply in practice.


Specific anti-avoidance rules

Dividends received from low-tax jurisdictions

Dividends received may in appropriate circumstances benefit from the participation exemption. Subject to rules derived from the Parent-Subsidiary Directive, domestic legislation and the applicable income tax treaties, the participation exemption is not available for dividends received from otherwise qualifying shareholdings if the paying company has been subject to tax at a rate of less than 15% (Art. 203 §§ 1 and 5 ITC). This provision of Belgian law is aimed at dividends emanating from tax haven jurisdictions. Dividends received from companies located in the EU Member States are not subject to this rule.

Non-deductibility of payments made to low-tax jurisdictions

Art. 54 ITC provides that certain payments of interest and royalties made to low-tax jurisdictions are disallowed unless the payments can be shown to have a legitimate business purpose. A low-tax jurisdiction is generally defined as one whose tax regime is significantly more advantageous than Belgium's tax system.

Disqualification of certain transactions

On the basis of Art. 344 § 2 ITC, the Belgian tax authorities may refuse to recognize for tax purposes certain transactions involving low-tax jurisdictions. These transactions include the sale, transfer or contribution of shares, bonds, debts, intellectual property or cash to persons in jurisdictions whose tax regime is significantly more advantageous to taxpayers than Belgium's tax system. The burden of proving that the transaction in question has a genuine financial or economic purpose is shifted to the taxpayer.

This provision is clearly intended to prevent the avoidance of tax by transferring assets to a special purpose vehicle in a low-tax jurisdiction.

 

Thin capitalization rules

Interest paid on loans taken out for business purposes is generally deductible to the extent it does not exceed the market interest rate (taking into account the risk, the debtor's credit rating and the duration of the loan), unless the payment corresponds to a normal business transaction and the amount is not abnormally high. If a Belgian resident company pays excessively high interest, the excess is added to its taxable income, unless the interest is included in the beneficiary's taxable income (Art. 26 ITC). Where interest is paid by a Belgian taxpayer to a Belgian resident company, the limitation on the deductibility of excessive interest does not generally apply.

Belgian law has two thin capitalization rules:

  • the "7:1" rule. Interest paid on loans (other than bonds and similar publicly issued debt securities) to a beneficiary that either is not subject to income tax or is subject to a tax regime that is substantially more advantageous than the normal tax regime in Belgium is not tax deductible for the part of the loans that exceeds seven times the paid-in capital and taxed reserves of the Belgian company (Art. 198(11°) ITC);
  • the "1:1" rule. Interest paid on loans (excluding bonds and similar publicly issued debt securities) granted by an individual shareholder or a foreign corporate director of the company is tax deductible only to the extent that the total loans do not exceed the company's paid-in capital and taxed reserves. The excess interest is recharacterized as a dividend distribution and is generally subject to a 25% withholding tax (Art. 18(4) ITC).

The fact that the loans are guaranteed by a parent company is irrelevant for purposes of applying these thin capitalization rules. In the case of cross-border interest payments, a question may arise as to whether the rules are compatible with the arm's length provision in tax treaties and EU law.

 

Transfer pricing rules

Belgian tax law allows upward adjustments to taxable income when a transaction with a foreign person is not at arm's length (Art. 26 ITC). Such adjustments generally apply to transactions between related parties, but they can also apply to transactions with unrelated foreign persons that are not subject to income tax in their residence state or are subject to an income tax regime that is substantially more beneficial than the normal income tax regime in Belgium.

In addition, income arising from gratuitous or benevolent advantages received by a Belgian resident enterprise from a transaction that does not meet the arm's length criterion cannot be offset by the tax losses and other specific tax deductions available to the enterprise.

There is a procedure for correlative adjustments of taxable income that corresponds to Art. 9(2) of the OECD Model Tax Convention.

Pursuant to Art. 185 § 2 ITC, a taxpayer may obtain a formal advance ruling in respect of the arm's length nature of a certain transaction from the Belgian Ruling Committee.

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