On 13 December 2024, the Belgian tax authorities published the long-awaited administrative guidance regarding the application of the Belgian controlled foreign company (CFC) legislation which is effective for financial years ending on or after 31 December 2023. Circular 2024/C/82 (Dutch I French) provides welcome clarification in a number of areas, but many open questions remain. This alert discusses the key features of the guidance and highlights the areas of continuing uncertainty.
Important principles confirmed
The circular confirms some important principles which are key to ring fence the scope of the new legislation:
- The taxpayer must have a direct stake in the foreign company for them to meet the participation condition (already confirmed in the notice to the corporate tax return).
- The participation condition is assessed at the end of the taxpayer’s taxable period.
- The CFC rules do not apply at the level of the CFC itself (i.e., there is no successive application (application “in cascade”)), that could possibly trigger the application of the provisions to indirect subsidiaries.
Tolerances
Acknowledging practical issues that would arise from a strict application of the taxation condition whereby hypothetical Belgian tax calculations need to be performed for CFC purposes, the Belgian tax authorities provide several tolerances:
- For CFCs based in the European Economic Area, the CFC’s local GAAP can be used without the need to make a formal conversion to Belgian GAAP.
- With respect to tax consolidation and the EBITDA (earnings before interest, taxes, depreciation, and amortisation) interest deduction rule, the tax authorities accept a “stand alone” approach, i.e., the taxpayer may determine the Belgian taxable base of the CFC as if the entity was not part of a group. For the assessment of the taxation condition, the foreign tax charge must also be recalculated accordingly to ensure its comparability.
- The impact of timing differences can be neutralised provided these differences reverse within a period of five years. However, a more lenient approach is accepted, i.e., the five-year condition does not apply as far as it relates to the depreciation of tangible assets and the provisions of insurance companies. The circular does not provide any definition of a timing difference, nor any guidance on how to ascertain the five-year condition, which creates uncertainties on matters such as the impact of the use of tax losses carried forward.
The application of these tolerances is not mandatory; taxpayers may still choose to follow a stricter application of the Belgian legislation
Substantive economic activity exemption
Following the position adopted by the minister of finance during parliamentary discussions, the circular provides a very strict interpretation of the substance exemption. It requires an economic activity to be carried out (i.e., goods or services to be offered on a determined market), which should be substantial, and supported by personnel, equipment, assets, and premises.
The additional guidance provided by the circular to apply these criteria is quite restrictive:
- Strict conditions for CFCs rendering only intercompany services.
- A requirement for CFCs that are holding companies to actively manage their subsidiaries.
- Personnel may be outsourced, but must have the necessary qualifications and be located in the CFC jurisdiction (or sufficiently close); 100% remote working is not tolerated. Directors may also be considered in determining whether the condition of sufficient personnel is met, provided they are remunerated on a monthly basis or more frequently.
- Premises may be rented (including from another group company, provided the lease is at arm’s length).
Unanswered questions
Despite providing some important clarifications, the circular leaves many key questions unanswered. For example, it does not address a large number of uncertainties with respect to the application of the CFC legislation to permanent establishments.
The circular also provides that a (qualified) domestic minimum top-up tax does not qualify as income tax for the application of the taxation condition, possibly leading to a combined application of both the Pillar Two rules (in the jurisdiction of the CFC) and the CFC rules (in the jurisdiction of the Belgian taxpayer).
Finally, on 13 December 2024, the Belgian tax authorities published another administrative circular regarding procedural matters (Circular 2024/C/83 (Dutch I French)). With respect to CFCs, it is largely descriptive and does not address important issues such as the sanctions applicable in the event of incorrect CFC reporting or the statute of limitation applicable to taxpayers having CFCs.
