Outline belgian tax law 2014 28.03.14


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[...] From 1919 to 1963, Belgium did not levy a uniform tax on total income. The income of individuals and corporations was taxed according to a schedular method based on its source.

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Outline belgian tax law 2014 28.03.14

  1. 1. “The unity (of Belgian history) arises not from a community of race as in Germany, not from a centralizing action, as in England or France, but from the unity of social life”. Henri Pirenne Histoire de Belgique Foreword 1900 INTRODUCTION Belgian Tax Structure 1. Taxes must be enacted by Statute1 . They must be renewed yearly2 . Equality must be respected between taxpayers3 and the Constitutional Court will sanction laws contrary to this provision. Constitutional equality and fundamental rights of free movement guaranteed by the EU treaties apply simultaneously. When the violation of both is asserted, the law gives priority to the Constitution : a question must be asked to the Constitutional Court first. Belgium is a federal country. Most taxes are federal but the proceeds are shared with the Communities4 (Dutch, French and German-speaking)5 and the Regions (Flanders, Wallonia, Brussels)6 . The Regions may levy surtaxes, grant tax reductions or operate general fiscal reductions and increases. Some taxes are regional taxes : - Inheritance duties of residents and transfer duties upon death of non-residents ; - Real property withholding tax ; - Stamp duties on transfers subject to payment of real property located in Belgium, except for transfers upon contribution to a company by an individual of a dwelling ; - Stamp duties on gifts of personal property or real property ; - Radio and television fees ; - Traffic tax on car vehicles ; - Circulation tax ; - Euro road tax. 1 Constitution, Art. 170, § 1. 2 Const., Art. 171. 3 Const., Art. 172. 4 Special law of 16 January 1984 concerning the financing of the Communities and the Regions. 5 Shared taxes : VAT, personal income tax. 6 Joined taxes : personal income tax.
  2. 2. 2 Income Tax 2. From 1919 to 1963, Belgium did not levy a uniform tax on total income. The income of individuals and corporations was taxed according to a schedular method based on its source. A Law of fiscal reform of November 20, 1962 replaced the schedular tax system by a system similar in principle to the U.S. income tax and to the tax systems of other EU countries. All income is subject to a single tax. However, withholding taxes (“précomptes – voorheffingen”) are due on income depending on its source. They are creditable against the final tax due, within certain limits, with the exception, however, of the real property tax 7 which is improperly called real estate withholding tax (“précompte immobilier – onroerende voorheffing”). Within this system of a single income tax, a distinction is made between : (a) Resident individuals, who are taxed on their global income, under the Individual Income Tax regime ; (b) Resident corporations, which are taxed on their global income under the Corporate Income Tax regime; (c) Non-residents, both individuals and corporations, which are taxed on their income from Belgian sources under the Non-resident Income Tax regime ; (d) Non-profit making organizations and government agencies, which are taxed on certain categories of income under the Legal Persons Income Tax regime, which mainly consists of withholding taxes at source. The Belgian income tax legislation was first coordinated into an Income Tax Code, by a Royal Decree (R.D.) of February 26, 1964. The main regulations implementing the provisions of this Code were embodied in the Royal Decree of March 4, 1965. A Royal Decree of April 10, 1992, coordinated the income tax legislation into an Income Tax Code 1992, hereinafter abbreviated CIT1992 or, generally, CIT. The main regulations implementing the provisions of this Code are embodied in the Royal Decree of execution of the 1992 Code of August 27, 1993, hereinafter abbreviated RD-CIT 1992 or RD-CIT. 7 By real property we mean property which is immovable according to the Civil Code (land, buildings …) and by personal property we mean property which is movable according to the same Code, being all other property, whether tangible such as chattel, machinery, etc. or intangible (“incorporal”) such as securities, claims, intellectual property rights.
  3. 3. 3 TITLE I –BELGIAN INDIVIDUAL AND CORPORATE TAX LAW 3. The tax administration has issued : - the Administrative Commentary of the Code of Income Taxes (Com.CIT), regularly updated on the Internet; - the Administrative Commentary of Double Taxation Conventions (Com.DTT). Belgium is a member of the OECD and follows the OECD Model in the drafting of its treaties. It has developed a model Belgian treaty draft 2010 (replacing a 2007 version)8 . Chapter I – Taxation of individuals Section I Taxation of resident individuals A. Taxable persons 4. The Belgian personal income tax is applicable to individuals who are considered to be residents of Belgium for tax purposes. B. Residence 1. Domestic Law 5. Individuals are considered residents for income tax purposes if they keep their permanent domicile or customary residence in Belgium or if the “centre of administration of their wealth” (Centre of economic interests) is established in Belgium 9 . The notion of “domicile” is characterized by the place where a person effectively lives or resides, while “the centre of administration of wealth” is the place where a person effectively manages her wealth. Temporary absence is not considered a change of domicile. A person registered in the National Register of inhabitants is deemed to be resident unless proven otherwise. The fiscal residence of married persons is located at the place where their household is established. The same presumption applies to people who have established a legal cohabitation. 8 De Broe, L., Belgium Tax Treaty Policy and the Draft Belgian Model Convention, Bull. Int. Taxation, 2008, p. 322 ; Schoonvliet, E., Unilateral and Treaty Measures in Belgium for the Avoidance of Double Taxation, Bull. Int. Taxation, 2008, p. 430. 9 CIT, Art. 2, 9, 1° ; Jorion, G., Le non-résident ou la société étrangère face à l’impôt belge, Bruxelles, Larcier, 2006, p. 73.
  4. 4. 4 Domicile The definition, developed by case-law and doctrine, of the main home or domicile10 for income tax purposes emphasizes its factual nature: it is a ‘specific and actual dwelling, that can be different from civil domicile or nationality, which is constituted, confirmed and consolidated by a whole sum of facts and circumstances and which is characterized by a certain permanence or continuity’.11 The main home is the centre of one’s vital interests12 (family related, professional, cultural, economical and other). As such it must not be deemed to change easily. The intention to return to the country of origin has no impact on the issue. Residence necessarily implies an element of permanence or continuity. The duration of a stay in a country is sometimes a sufficient criterion to determine whether a person is a resident, but the assessment of the stability in dwelling goes mostly beyond the mere temporal element. In their Commentary on income taxes the tax authorities admit that this stability cannot be the sole criterion without taking into account the situation of the family.13 Other elements can influence the determination of the main dwelling and reduce the importance of the duration of the stay in Belgium. Did the person leave all his possessions behind when coming to Belgium?14 What is the nature of his employment in Belgium?15 What is the reason of an (early) return abroad?16 Is the foreign employment continuously exercised on the same location or is one living out of a suitcase?17 Is one’s home connected to the Belgian telephone network18 and, if so, how high were the costs and where were the invoices sent to19 (the same applies to the use of water and electricity)? Is someone owning or renting a house?20 Where are a person and/or his property insured?21 Does the contract of employment stipulate a return to the country?22 Which address do official documents23 , letters and name cards mention?24 10 The words ‘domicile’ and ‘residence’ are used here as synonyms, and not in their English civil law meaning. 11 See for instance Cass., November 15, 1990, Pas. (1991), I, at 1226. 12 P. Hinnekens, Belasting der niet-inwoners (Kalmthout: Biblo, 1994), n° 6. 13 Com. IT 3/10 and 3/60. 14 Compare with: Antwerp, December 18, 1984, A.F.T. 1985, 140: a person moved furniture and appliances weighing 1020 kg to Tunisia together with his car. He was also accompanied by his wife. As such he can be considered a non-resident from then on. 15 Compare with: Liege, May 2, 1972, Bull. Bel. 511 (1973), at 2075: a person sent by his employer to the USA for ten months for training purposes did not reside their on a permanent basis. 16 Compare with: Brussels, September 25, 1990, R.G.F. (1991), at 216: a deputy program administrator whose contract obligated him to work at least 41 months in Arabia, but who had to return to Belgium because of failure of his employer, can still be considered a non-resident, because the return was not motivated by the intention of the employee. 17 Compare with: Liege, March 13, 1985, F.J.F., 85/130: person employed on different locations in different countries not considered to have become a Belgian non-resident. 18 See Cass., February 7, 1979, Bull. Bel. 611 (1979), at 2713; Liege, April 24, 1996, Fisc. Koer. (1996), at 383-386. 19 Liege, April 14, 1988, F.J.F. (1988), n° 209; also regarding other types of invoices: Cass., October 28, 1982, F.J.F. (1983), n° 41. 20 Antwerp, March 5, 1984, A.F.T. (1984), at 87; Antwerp, June 29, 1999, T.F.R. (2000), at 21, observation of Marc Delboo; Brussels, October 21, 1976, J.D.F. 1977, at 260; Brussels, May 4, 1982, F.J.F. (1982), n° 112; Brussels, September 17, 1998, Fisc. Koer. 1998, at 537. 21 Antwerp, February 18, 1982, F.J.F. (1982), n° 71; Liege, January 18, 1995, F.J.F. (1995), n° 149. 22 Liege, January 18, 1995, F.J.F. (1995), n° 149. 23 Trib. Nivelles, November 4, 2003, Rec. gén. Enr. Not. 1 (2004), at 31. 24 Antwerp, February 18, 1982, F.J.F. (1982), n° 71.
  5. 5. 5 A practical question often heard is how long a stay in Belgium has to last before there can be a shift in residence at all. First of all, it is clear that for income tax purposes a stay of 183 days or even during the whole taxable period is normally insufficient to become a resident in Belgium, because the law itself contains special arrangements – within the tax on non-residents – for employees who live here for more than 183 days25 or who are keeping a (temporary) abode here during the whole taxable period.26 Secondly, we find a vast amount of case law27 vis à vis the required duration of the stay. So, for example, ten months were not long enough for an engineer, sent to the United States by his employer for training purposes, to lose his Belgian residency.28 For a pilot of Sabena on a mission of technical support to Air Congo thirty months in Zaire was also insufficient to become a non-resident of Belgium.29 Also, three years were considered insufficient for a person teaching at the faculty of law in Ouagadougou (Burkina Fasso) to lose her status as Belgian resident for tax purposes.30 But for a professor working in Canada eight years was a long enough period for a change of fiscal residence.31 In two of the so-called ‘Eurosystem cases’ (with regard to persons working in Arabia) a continuous stay abroad of respectively six and seven years sufficed.32 Remarkably, since 1990, a shortening of the required permanence in staying abroad, needed to free oneself from Belgian resident taxation, can be noticed.33 In the third Eurosystem case forty-one months sufficed in order to lose Belgian tax residency (even a shorter period because the forty-one months of employment stipulated in the contract were not all performed because of failure of the employer).34 The same was held for two years of detachment to China.35 The Court of Appeal of Antwerp found that periods of sixteen and fifteen months were already long enough for an employee of the Anhyp Bank in Luxemburg to change his residency for tax purposes to Luxemburg, even if he returned to Belgium when he was not supposed to work.36 Centre of administration of wealth The second legal criterion to determine residence is the centre of one’s economic interests (‘siège de la fortune’). This concept does not relate to the material location of one’s assets, but to the place from which the elements of one’s estate are managed37 , i.e. where the important decisions regarding the estate are taken. This place is inevitably characterized by a certain unity.38 It will, except in rare cases, coincide with the main dwelling.39 25 Article 228 §2 7° I.T.C. 26 Article 242 §1 1° and art. 244 1° I.T.C.; see Luc Hinnekens, “Het (niet-)rijksinwonerschap van de gedetacheerde werknemer volgens de laatste stand van wetgeving en rechtspraak”, A.F.T. (1995), at 275. 27 The following examples are taken from Luc Hinnekens, “Nieuwe krachtlijnen in de rechtspraak over het rijksinwonerschap”, A.F.T. (1991), at 21. 28 Liege, May 2, 1972, Bull. Bel. 511 (1973), at 2075. 29 Trib. Brussels, February 20, 1979, Rec. Gen. Enr. Not. (1980), at 216. 30 Brussels, March 21, 1989, F.J.F. (1989), n° 167, confirmed by Cass., November 15, 1990, R.G.F. (1991), at 218. 31 Brussels, January 9, 1979, J.D.F. (1980), at 283. 32 Brussels, May 15, 1990, R.G.F. (1991), at 218; Brussels, September 25, 1990, R.G.F. (1991), at 220. 33 Hinnekens, L., “Het (niet-)rijksinwonerschap van de gedetacheerde werknemer volgens de laatste stand van wetgeving en rechtspraak”, A.F.T. (1995), at 275. 34 Brussels (Court of Appeal), March 13, 1990, R.G.F. (1991), at 216. 35 Mons, April 10, 1992, A.F.T. (1993), at 27, observations Luc Hinnekens. 36 Antwerp, June 29, 1999, T.F.R. 2000, at 21, with disapproving observations of Marc Delboo. 37 Cass., February 7, 1979, Bull. Bel. 611 (1979), at 2713; Cass., October 28, 1982, F.J.F. (1983), n° 41; Cass., June 30, 1983, F.J.F. (1983), n° 139. 38 Liege, June 18, 1986, F.J.F. (1987), n° 94. 39 Malherbe, J., Droit fiscal international (Brussels : Larcier, 1994), at 28.
  6. 6. 6 Different elements are used in Belgian case law to locate a person’s centre of economic interests. Again, these elements have to be pondered bearing in mind their relative importance. A first element can be the country where a person holds immovable assets.40 In the Eurosystem-cases it was held, however, that an individual does not lose his status of non-resident when he remains the owner of a building in Belgium which is managed by his wife. This is also true when she does so by a general mandate in execution of decisions taken by her husband abroad41 , or by a mandate in the general council of the Belgian association of which the spouses hold the shares and which is the owner of the dwelling of the spouses.42 The same judgment also underlined the importance of the place where the spouses receive their main professional income (the husband in Arabia, the wife in Belgium)43 . Other criteria which can influence the position of the centre of economic interests are a (bank) account44 and the relative importance of the money deposited on such account as compared to the total estate, as well as other (movable) assets. In an interesting case, the Court of Appeal in Brussels put forward a new and peculiar criterion: the place from which an individual builds his career.45 A man of British nationality had built a career in Belgium by calling upon the Belgian employment market and by working for Belgian employers (with an international calling, but this was deemed irrelevant by the Court). Even when he was unemployed for a considerable time, he did not apply for a job outside Belgium. The court submitted that: “without elements to the contrary, which were not accounted for in this case, it is allowed to consider that his working capital comprises the main component of the fortune of a ‘homo economicus’, and that it is managed from the place where he constructs his career” (our translation). Relationship between the two criteria Knowing the importance of the centre of economic interests, the question arises as to the nature of its relation to the main dwelling-criterion. The law itself uses the word ’or’ to connect both notions. This would suggest that both criteria are used alternatively. This is also the view of the Cour de Cassation. In 1965, in the Derks-case46 , the Court ruled, after having reminded that Mr. Derks had his domicile in Monte-Carlo where he also actually resided, that he could still be considered a Belgian resident since he owned immovable assets and shares of the NV ‘Entreprises Derks’ and ‘Bureau d’Etudes Derks’ in Belgium. In doing so, the Court pointed out that the legislator has used both criteria as alternatives. This opinion is now unanimously followed by all Belgian courts. As a result, the notion of ‘centre of economic interests’ can be used as a sufficient criterion when it is not located in the same country as the main dwelling.47 40 Cass., September 7, 1965, Pas. (1966), I, at 34. 41 Brussels, May 15, 1990, R.G.F. (1991), at 217. 42 Brussels, March 13, 1990, R.G.F. 1991, at 216. 43 See also: Brussels, September 17, 1998, Fisc. Koer. (1998), at 537. 44 For example Brussels, October 21, 1976, J.D.F. (1977), at 260. 45 Brussels, October 14, 1993, F.J.F. (1994), n° 155. 46 Cass., September 7, 1965, Pas. (1966), I, at 34. 47 Com. IT 3/4. This view has been frequently criticized (See for example Zondervan, R., Les impôts sur les revenus et l’extranéité : étude théorique et pratique du régime fiscal belge en matière de revenus d'origine étrangère ou attribués à des "étrangers", (Brussels : Pauwels, 1967), at 87 and E. Schreuder, « L’habitant du Royaume », Ann. Not. Enr. (1967), at 6-33). One of the most ardent critics is surely Hinnekens, L. This author refers to the history of the law (investigated by DONNAYm-, M., “L’habitant du royaume”, Rec. Gén. Enr. Not. (1975), n° 21936, at 233) to submit that it does not support an alternative use of the concepts. The definition of Article 37 of the Coordinated Laws has his predecessor in art. 2 of the law of December 27, 1817 (now Article 1 of the Code of Succession). The project of that law contained an article stating that was liable to tax he who was an inhabitant of the Kingdom of the Netherlands. Fearing that this would lead to taxation of persons recently arrived in the kingdom, another definition was sought. It was found in an executive decree to the law concerning the
  7. 7. 7 Therefore, if individuals wish not to be subject to Belgian personal income tax and inheritance tax (both with worldwide tax liability) neither their main home (‘domicile’), nor the centre of their economic interest should be located in Belgium. 2. Treaty Law 6. Pursuant to Article 4-2 of the OECD model treaty, the criteria of residence are the following: - permanent home; - centre of vital interests; - habitual abode; - nationality. These general OECD model criteria are used in Belgian tax treaties. The Model Belgian tax treaty (2010) uses them also. 3. Income from Real Property a. “Cadastral Income” 6bis. Cadastral income48 (revenu cadastral / kadastraal inkomen) is attributed to all pieces of real property, whether or not built on, located in Belgium. It corresponds to the deemed net annual rental income, as determined by the tax authorities. Plant or equipment used for the exploitation of the real property concerned and belonging to the owner of the real property will also be considered real property and will be attributed cadastral income if they are permanently and materially attached to the property or if, in view of their size or other characteristics, they are intended to remain in place. Cadastral income with respect to buildings is based upon their normal net rental value on January 1 of the year preceding a general revision (péréquation / perekwatie) of all cadastral income. The net rental value is the gross rental value decreased by a lump-sum deduction for maintenance and repairs of 40% (buildings) or 10% (land). The gross rental value of buildings is determined by a comparison with rentals of similar buildings or with the cadastral income in respect of similar buildings that have been assessed, when the assessment has become final. In cases in which such comparison is not possible, the cadastral income is equal to the market value of the property multiplied by 5.3%. The cadastral income with respect to plant and equipment is calculated by multiplying their value for purposes of use, as established on January 1, 1975, by 5.3%. The value for purposes of use is deemed to be equal to 30% of the investment value, increased by transformation costs (if any). The last general revision of cadastral income was based upon market prices on January militia. But in this decree the conjunction used was ‘and’ instead of ‘or’. Without any obvious reason it was changed to ‘if’. It would not be the first time that a legislator made such a mistake out of sloppiness. (Hinnekens, L., “Nieuwe krachtlijnen in de rechtspraak over het rijksinwonerschap”, A.F.T. (1991), at 24). Hinnekens also points out that before the Derks-case jurisprudence always opted for a conjunctive interpretation of the definition (for example Trib. Brussels, November 30, 1895, Rec. Gén. Enr .Not., n° 12522). To him, main dwelling and centre of economic interests are merely different facets of one single residency concept (Hinnekens, L., “Rijksinwonerschap. De complexe feitenbalans van de hoedanigheid van (niet-) verblijfhouder”, A.F.T. (1985), at 125). 48 CIT, Arts. 471 to 486.
  8. 8. 8 1, 1975 and came into effect on January 1, 1980. The next general revision has been delayed. In the meantime, the cadastral income is adjusted annually on the basis of the retail price index. A new cadastral income is assessed for new or improved real property. Interim revisions may be made in areas where significant changes in the value of real property occur. The cadastral income with respect to newly constructed buildings must be established by the tax authorities at the latest for the year that follows the year of first occupancy and the taxpayer must be notified accordingly by registered mail. A taxpayer is entitled to lodge a claim against the cadastral income proposed by the tax authorities. b. Taxable Income 7. The determination of taxable income derived by resident taxpayers from real property is dependent upon: (i) the use made of the property; and (ii) the location of the property, i.e., in Belgium or abroad. The following four kinds of property may be distinguished: (i) Privately used real property located in Belgium; (ii) Real property used for professional purposes located in Belgium; (iii) Rented real property located in Belgium; and (iv) Real property located abroad. Real property privately used 8. If the real property is occupied by the owner for private dwelling purposes, the taxable income is the cadastral income with respect to the property (revenu cadastral/ kadastraal inkomen). Taxable income from second residences that are not rented is equal to the cadastral income increased by 40 %. Real property used professionally 9. If a building is used by its owner for the exercise of a professional activity, the cadastral income is deemed to be professional income and, thus, needs not be reported as real property income. If the real property is used for both private and professional purposes, the cadastral income is apportioned to determine the income portion that is taxable as real property income. Rented real property 10. If the real property is rented to an individual who uses the property exclusively for private habitation purposes, the taxable income is the cadastral income increased by 40%. If the lessee is a legal entity, such as a corporation or a nonprofit association, an entity without legal personality, or an individual who uses the property in whole or in part for business purposes, the taxable income derived from the rented real property will be equal to the cadastral income increased by that portion of the net rent received in excess of the cadastral income. The net rent corresponds to 90% (for land) or 60% (for buildings) of the gross rent received, the deductions inherent in these percentages representing maintenance and repair costs. However, the 40% lump-sum deduction for maintenance and repairs
  9. 9. 9 applicable to buildings may not exceed two-thirds of the cadastral income, as revalued annually by a coefficient defined by Royal Decree. If the lessee is an individual who uses the real property for both private and professional purposes, and provided the rent has been apportioned in the rental agreement to reflect the double use, the taxable income will be the sum of: (i) the cadastral income increased by 40% for the portion of the rent relating to the private use; and (ii) the total net rent received for the portion of the rent relating to the professional use. Foreign real property 11. Taxable income derived from real property located outside Belgium is determined on the basis of the rental value if the property is not rented, and on the basis of the actual rent and rental charges received if the property is rented. The gross amount of the rental value or of the actual rent and rental charges received is reduced by the foreign taxes directly related to the property and an additional 40% (for buildings) or 10% (for land) to cover maintenance and repair expenses. Belgium's tax treaties provide that income derived by Belgian residents from real property located in the other Contracting State is taxable only in that State. Hence, such income is exempted in Belgium. The income will nonetheless be included in the taxpayer's global taxable income, but only for purposes of determining the tax rate applicable to the total income from which the foreign real property income will have been deducted, under an "exemption with progression" (réserve de progressivité / progressievoorbehoud). If Belgium has no double taxation agreement with the country in which the real property is situated, Belgium grants unilateral tax relief by reducing by 50% the amount of Belgian income tax on the foreign real property income49 . Long-term leases 12. Real property income also includes amounts obtained upon the granting or assigning of a right to a long-term lease (emphytéose/erfpacht or superficie/opstal) or similar rights that are in the nature of property rights.50 Such amounts are taxable when received whether they cover the whole or only part of the duration of the long-term lease. The following are not considered to be such lease-related income: rents allowing the recovery of either the capital invested by the owner of a new building or the market value of an existing building plus interest or other charges, where at the end of the contract the right to the property is automatically transferred to the user, or where the contract provides for a purchase option in favor of the user.51 In that case, the interest component is income from capital52 . c. Exemptions, Reductions and Deductions Exemption for charitable purpose 49 CIT, Art. 156, 1°. 50 CIT, Art. 10, §1. 51 CIT, Art. 10, §2. 52 CIT, Art. 19, § 1, 2°.
  10. 10. 10 13. The cadastral income is tax-exempt if the real property is used for a charitable or nonprofit purpose, as a church, a school, a hospital, etc.53 Reductions 14. The cadastral income and, hence, the real property withholding tax is reduced on the grounds of "non productivity" when an unfurnished building is unoccupied and does not generate any income for at least 90 days in a taxable year.54 The amount of the reduction depends on the duration and the degree of the non productivity of the property. The non productivity of the property must be "involuntary," i.e., it may not be attributable to the owner. Thus, for example, no reduction is granted if the non productivity of the property is caused by reconstruction works or when it results from the fact that the owner puts the building up for sale without putting it up for rent at the same time. A reduction will also apply if the property or a part of it representing at least 25 % of the cadastral income is destroyed55 . Similar reductions apply to the cadastral income of plant and equipment. Exemption for residential use 15. The cadastral income is tax-exempt with respect to the house owned and occupied by the taxpayer, except as far as the real property withholding tax (see nr. 17) is concerned56 . This exemption is available only with respect to one house, designated by the taxpayer, where the taxpayer occupies more than one house. The exemption is not available for any part of a house that is used for professional purposes or is occupied by persons who are not part of the taxpayer’s household. Deduction of interest on debts 16. Interest paid on debts incurred for the sole purpose of acquiring or maintaining real property is deductible from real property income. Such interest may be deducted from total real property income, even if the loan on which the interest is paid was entered into for the purpose of acquiring or constructing only one of the houses owned by the taxpayer. Any interest exceeding total real property income may not, however, be deducted from other sources of income (for example, from income from capital or professional income), nor can it be carried over to previous or subsequent tax years.57 An additional interest deduction is granted to an individual taxpayer for interest paid and reimbursement of capital on a mortgage loan taken out to acquire or construct a new house located in Belgium. The additional interest deduction, which is a deduction from global taxable income rather than a deduction from real property income, only applies in respect of a single building acquired or constructed by the taxpayer58 . 53 CIT, Art. 12. 54 CIT, Art. 15, §1, 1°. 55 CIT, Art. 15, § 1 , 3°. 56 CIT, Art. 12, § 3. 57 CIT, Art. 14, 1°. 58 CIT, Art. 104, 9°, 115 and 116.
  11. 11. 11 d. Real Property Withholding Tax 17. Individual taxpayers are subject to a prepayment in the case of real property located in Belgium, i.e., the real property withholding tax (précompte immobilier / onroerende voorheffing).59 The real property withholding tax is levied on the value of the cadastral income with respect to the real property concerned. An assessment for real property withholding tax purposes is made in the calendar year during which the real property income is obtained. The tax is a regional tax. The basic rate of the prepayment is: 1.25% of the cadastral income in the Walloon or Brussels Region and 2.50% of the cadastral income in the Flemish Region. Provinces and municipalities levy additional taxes on the real property withholding tax. The prepayment is in principle paid by the individual who owns the building on January 1 of the taxable period, even where the property changes ownership between January 1 and the date on which the prepayment has to be made. Purchase deeds for real property located in Belgium will, therefore, generally contain a clause pursuant to which the purchaser is under the obligation to reimburse the seller that part of the prepayment that corresponds to the portion of the year after the date of the sale. Landlords typically shift the burden of the real property withholding tax to their tenants if this is not expressly prohibited by law, as in the case of residential loans. This convention, while legally valid as between the parties (provided the rented property is used for professional purposes), cannot be upheld against the tax authorities. Thus, a landlord is not entitled to invoke the nonpayment of the prepayment by his tenant vis-à- vis the State. Exemptions 18. Exemptions from the real property withholding tax are available for: (i) real property income that is exempted from income tax (for example, income from real property used for charitable purposes); (ii) the cadastral income with respect to real property falling within the "public domain," provided and to the extent that such property does not produce any income and is used for a public service or a service of general interest (both these conditions must be satisfied); and (iii) income from real property that benefits from special or temporary exemptions. Reductions 19. Reductions in the real property withholding tax may be granted at the request of the taxpayer. Most of these reductions take account of the taxpayer's situation (for example, the number of the taxpayer's dependents, the disability of the taxpayer). Other reductions are made available under social housing programs or on the basis of factual situations (for example, in the case of unfurnished buildings unoccupied for at least 90 days in a taxable year). The real property withholding tax pertaining to a taxpayer's principal private dwelling is not creditable against his final individual income tax liability60 . There is therefore a certain double taxation of real property income. 59 CIT, Art. 249. 60 CIT, Art. 271, abolished by Law of December 27, 2004. However, this provision will remain applicable if certain conditions are fulfilled (e.g. the loan acquiring the house was entered into before January, 1, 2005). See CIT, Art. 526.
  12. 12. 12 C. Determination of Gross Income Overview 20. The taxable income of a resident individual includes real property income, income from capital and personal property, professional income and certain miscellaneous income61 . Each class of income is subject to particular rules. Tax is assessed in principle at progressive rates on global income from domestic and foreign sources. Certain classes of income (such as income from capital, taxable capital gains, back pay, miscellaneous income) are taxed separately at flat rates if such taxation is more favorable to the taxpayer62 . Income that is exempt by virtue of a tax treaty is taken into account with other taxable income in order to determine the tax rate on income taxable in Belgium63 . Application 20bis. A couple, before receiving a pension capital, rents a house in Bray-Dunes, a beach resort in France close to Belgium and grants a lease on their house in Veurne (Belgium – 10 miles from there) to a company which they control. They pay for that house a municipal tax on a second residence. The Court applies the tie-breaker. They have a “lasting residence” in both countries but their closest links are with Belgium. The husband was director of a Belgian company which had no personnel. The couple had bank accounts in Belgium and could not prove expenses in France64 . 2. Income from Capital and Personal Property a. Introduction 21. Income from capital and personal property includes dividend income, interest income, royalties and rentals with respect to personal property, as well as annuity income other than pension income granted by legal entities or enterprises65 . A important distinction is made between income derived from capital or personal property that a taxpayer must include in his annual return because no withholding tax on such income has been collected, and income subject to a withholding tax, which need not be reported. In the latter case, the payment of the withholding tax discharges the taxpayer from paying any additional tax. Although income from capital or personal property not subject to withholding tax must be included in the annual tax return, it will be taxed at a separate flat rate identical to the withholding tax rate. A taxpayer may nevertheless elect to include the income subject to a withholding tax in his tax return and, hence, globalize it with other income items instead of the income being 61 CIT, Art. 6. 62 CIT, Art. 171. 63 CIT, Art. 155. 64 Ghent, June, 24, 2008, Fisc. Koer., 2008, p. 690. 65 CIT, Art. 17.
  13. 13. 13 taxed at a flat rate66 . This will be useful only if he has little or no income. In the latter case, indeed, the taxpayer may even receive a refund of the withholding tax levied. Income derived from capital or personal property used in the taxpayer’s profession is included in his professional income67 . It will, therefore, be taxable at ordinary rates on its full amount net of eventual expenses. This qualification does not, however, exclude the application of the withholding tax on such income. The withholding will be creditable and, if it exceeds the tax due, refundable. b. Income to Be Included in the Taxpayer’s Return 22. Income items that have to be included in the annual tax return, but will be taxable at a flat income tax rate equal to the withholding tax, are as follows68 : • income from a foreign source, collected outside Belgium; • income from loans secured by a mortgage on real estate located in Belgium; • all items of income which were not subject to a withholding tax, such as: - income from life annuities: if paid by a business or a legal entity, they are deemed to amount to 3% of the capital69 ; - income from temporary annuities; - royalties and rentals : a standard deduction of 15% of royalties or rentals derived from personal property which is not invested in a business is allowed, but this amount may be increased if it is justified70 . A deduction is allowed up to 85% for rentals of films and up to 50% for rentals of furniture in furnished dwellings (40% of the rent received on a furnished dwelling is considered to be rent for furniture)71 . c. Income Not to Be Included in the Taxpayer’s Return 23. Income derived from personal property subject to a withholding tax when collected in Belgium essentially includes investment income, i.e. dividend and interest income. (1) Dividends 24. Dividends include all benefits attributed to shares by a company, whatever their denomination or form. A reimbursement of capital is considered a dividend if it occurs without a legitimate decision of the general meeting of shareholders or, even when legally decided, to the extent that it exceeds effectively paid-up capital (including issuance premiums)72 . Thin capitalization Interest income paid or attributed on loans granted to a company by a director (whether individual or corporate) or by an individual partner or shareholder is assimilated to dividends insofar as either the interest income exceeds interest income calculated at a 66 CIT, Art.313. 67 CIT, Art. 37. 68 CIT, Art. 171, 2 bis and 3 bis ; Art. 519; Art. 313. 69 CIT, Art. 20. 70 R.D.-CIT, Art. 3, conversely, 60 % of the rent is income from real property. 71 R.D.-CIT, Art. 4. 72 CIT, Art. 18, 1°.
  14. 14. 14 “normal” rate (the market rate) taking into account the particular risk involved in the operation, or if the total amount of the loans exceeds the paid-up capital as of the end of the tax year plus the taxed reserves as of the start of the tax year73 . This provision is not applicable where loans have been granted by corporate directors if the corporation is a Belgian resident. The ECJ found this limitation to Belgian companies contrary to the freedom of establishment : the foreign company which was a director of the Belgian company and a lender was indeed its parent. The Belgian provision, however, applied irrespectively of a relationship of participation between the two companies : a directorship is enough. Such a provision could be justified only to counter an abuse, in the case of a wholly artificial scheme. The existence of a ratio of 1 to 1 between debt and equity is no evidence of an abuse74 . The restriction to the freedom of establishment is therefore disproportionate. The Court had taken the same decision in respect of a 3 to 1 ratio applicable in Germany75 . Dividends of corporations are subject to withholding tax at the rate of 25% (see infra at nr. 76) as is the excess of the repurchase price over investment value in the case of a corporation repurchasing its own shares76 and liquidation distributions. However, the withholding is reduced to 15 % on shares issued by small companies on new capital contributed in cash after July 1, 2013, when dividends are distributed after the third accounting year following the contribution. If the contribution is made after the second accounting year following the contribution, the withholding will be 20 %77 . The shares must remain in possession of the contributor. (2) Interest 25. Interest income is any income derived from fixed or variable income securities, loans, and deposits78 . Interest derived from fixed income securities (i.e., bonds, loans and other similar securities, including securities with capitalized interest or securities which do not give rise to a periodic payment of interest and which have been issued with a discount equal to the interest capitalized until the maturity date) includes every payment that exceeds the principal amount, whether or not the payment is made on the agreed maturity date of the securities79 . Interest is in principle subject to withholding tax at the rate of 25%. Interest awarded by a judgment or otherwise for late payment of a debt is not treated as income from capital. 73 CIT, Art. 18, 4°, and Art. 55. 74 ECJ, January, 17, 2008, Case C-105/07, SA Lammers & Van Cleeff v Belgian State. 75 ECJ, December, 12, 2002, Case C-324/00, Lankhorst-Hohorst. 76 CIT, Art. 269. 77 CIT, Art. 269, § 2. 78 CIT, Art. 19, § 1, 1°. 79 CIT, Art. 19, § 2.
  15. 15. 15 d. Tax Rules 26. It is the gross amount of the income derived from personal property that is taxable, i.e., the amount collected without deduction of expenses incurred plus the amount of the withholding tax. Conservation and collection expenses relating to that income are deductible only where the income is globalized with all other income items and is thus not taxed separately80 . Interest paid on loans entered into for the acquisition or conservation of income derived from personal property is not tax deductible. An exemption is, however, made for interest paid by remunerated directors of companies on loans contracted for the acquisition of shares in the company but it is deductible from professional income (see infra nr. 27)81 , not from personal property income. 3. Professional Income Introduction 27. Any enrichment directly or indirectly derived from the taxpayer’s professional activity82 is considered professional income83 whether or not the activity carried on is legal. Professional income is divided into five income categories84 : • business profits85 ; • profits derived from independent professions or independently performed services; • profits derived from a professional activity previously exercised; • wages and salaries derived from employment contracts, including severance payments and remuneration of directorships and leading independent functions in companies; • pensions, rents and periodic payments indemnifying a permanent loss of profits or wages. Some types of professional income are tax exempt (family allowances, some social advantages which cannot be individualized in an enterprise, …).86 Only the net amount of a taxpayer’s professional income is subject to tax. This net amount is obtained by deducting the following items from the gross amount : • professional expenses within the limits of the Code; • losses generated by the same or other professional activities during the tax year or losses resulting from previous tax years; and 80 CIT, Art. 22, § 1, 2°. 81 CIT, Art. 52, 11°. 82 For an interpretation of the notion of “professional activity” see Cass., September 2, 1969, Pas., 1970, I, 3. 83 CIT, Art. 23, 1st line. 84 CIT, Art. 23. 85 Willoqué, K. and Cassaer, E., Belgium, in Maisto, G., ed., The Meaning of « Entreprise », « Business » and « Business Profits » under Tax Treaties and EU Tax Law, IBFD, 2011 at 197. 86 CIT, Art. 38.
  16. 16. 16 • certain private expenses encouraged under the legislation. Copyright income, up to 37,500 €, is treated as income from capital87 . 4. Miscellaneous Income 28. This category includes income items, other than professional, which are either globalized with the other income items and taxed at progressive rates, or taxed separately at a flat tax rate. a. Globalized with Other Income and Taxed at Progressive Rates 29. Under certain conditions, 80% of the alimony paid during a tax year and received from a grantor who is bound by a legal obligation88 to support the taxpayer-beneficiary, when the latter is not part of the grantor’s household89 , will be taxable to the beneficiary and deductible from the grantor’s taxable income. b. Taxed Separately at a Flat Rate (1) Profits derived from Occasional or Speculative Activities90 30. This category includes profits derived from occasional or speculative activities or operations, not including profits derived from the normal administration of one’s private assets consisting of real property, securities, and tangible movable assets. Gains made upon the disposal of all other types of assets, even of a private nature, are taxable (know how, e.g.). These profits are taxed at a flat rate of 33% after deduction of expenses. The distinction between a taxable and a nontaxable private transaction is a difficult one to draw. The importance and frequency of such operations, the short time between acquisitions and sales evidencing the intent to realize quick and large profits, the sophistication of the means used in the transactions such as borrowing the necessary funds and the relationship with the taxpayer’s profession, are all elements which could make the transaction a taxable one. Purely private management activities, including sales and purchases of securities to improve the quality of a family portfolio, do not generate taxable income. The classification of income as miscellaneous income or as professional income is not always easy to operate, for example when the income is derived from an occasional activity that is related to the main professional activity of the taxpayer. Thus, the income derived by a lawyer from book copyrights and fees earned as an arbitrator was held to be derived from occasional activities, notwithstanding the fact that the activities were related to the lawyer’s principal activity. Consequently, the income was taxable as miscellaneous income91 . Tax base 87 CIT, Art. 17 § 1, 5°. 88 Between parents and descendants : Civil Code, Arts. 203, 205, 206 and 207; between spouses: Civil Code, Arts. 213, 221 and 223. 89 CIT, Art. 90 , 3°. 90 CIT, Art. 90, 1, Art. 97, Art. 103 and Art. 171, 10, a). 91 Trib. Brussels, November 2, 2000, Courr. Fisc. 2001, 33.
  17. 17. 17 A discussion arose as to the tax base in the event that the taxpayer had realized a capital gain on shares : the Supreme Court held that the provision did not tax the “normal” gain but only the portion which was due to actions going beyond private management, such as hiring an intermediary or using business connections92 . The law was then changed to make it clear that the whole gain was taxable as miscellaneous income93 . (2) Capital Gains Realized on Transfer of Land94 The taxable income of a resident individual (other than a real estate professional) includes gains realized on the disposal of unimproved real estate located in Belgium, acquired for consideration and held for less than eight years, or acquired by gift and sold within three years following the gift and less than eight years after the donor’s acquisition for consideration. The taxable amount corresponds to the difference between : (i) the consideration received, less the expenses incurred for the disposal of the property; and, (ii) the original acquisition price (or the donor’s purchase price or the market value at the time of gift or inheritance if the property was not purchased). The cost basis of property is increased by actual acquisition expenses, or, in the absence of supporting documents, by a flat amount of 25% of the base amount. It is further increased by 5% for each full year during which the property was held. The tax is assessed at : • 16.5% for gains on land transferred within eight years of acquisition, but held for more than five years; • 33% if the holding period was shorter. (3) Capital Gains Realized on Transfer of Buildings 31. Capital gains on the transfer for consideration (e.g., on the sale or the contribution to the capital of a corporation) of a building other than the main residence of the taxpayer, are taxable if the building95 : (i) is transferred within five years following the purchase; or (ii) was acquired by gift and is transferred within three years of the gift and five years after the purchase by the donor. The date of acquisition or transfer is the date of the relevant notarial deed. The tax also applies if a piece of land is acquired by purchase or gift and construction of a building starts within five years of acquisition for consideration by the taxpayer or the 92 Cass., November, 30, 2006. 93 CIT, Art., 90, 9°, first indent. 94 CIT, Art. 90, 8, Arts. 91 to 93, Art. 101 and Art. 171, 1, b) and 4, d). 95 CIT, Art. 90, 10° .
  18. 18. 18 donor, and if the land and building are sold within five years after first occupancy or first letting of the property. The tax rate is 16.5%. In computing the gain, the purchase price is increased by 5% per year elapsed since the purchase. (4) Capital Gains Realized on a Transfer of a Substantial Interest in a Belgian Company96 32. This category includes capital gains realized on the transfer of shares in Belgian companies to a foreign company, when the transferor (or his predecessor if the shares were acquired by gift or inheritance) owned, at any time during the five years prior to the transfer, alone or with close family members, more than 25% of the shares or rights in the company. Closely related taxpayers, for this purpose, include the spouse, ancestors, descendants, and relatives up to the second degree of kinship to the taxpayer or his spouse. The transfer to a Belgian company is not taxable. This was found by the ECJ to be a discrimination within the European Union insofar as the purchaser was an EU company. It was contrary to the freedom of establishment if the seller’s holding conferred on him an influence in management and contrary to the free movement of capital otherwise97 . The legislation was therefore changed to exclude sales to EEA companies. In the case of successive transfers during the 12 months preceding a taxable transfer, each transfer will be considered taxable if the required 25% holding existed at the time of the first transfer. The tax is levied at a 16.5% rate on the difference between the sales price and the acquisition price paid by the transferor’s predecessor. Gains are not taxable as miscellaneous income if realized on the occasion of the distribution of a company’s assets to its shareholders, the repurchase by a company of its own shares, or of a merger, division, or change in corporate form. Eventually, income from capital will be taxed In that case. But for the above exceptions, capital gains realized by individuals not engaged in business activities are, in principle, not taxable. 5. Treaty rules Treaties may change the tax regime of income under domestic law. Company Manager Under the Belgian Model Treaty, director’s fees and income received in the capacity of member of a board of directors are taxed in the country of the company; remunerations received in respect of activity such as day-to-day functions, either as a manager or as a partner in a company other than a company with share capital, is taxed as employment income. 96 CIT, Art. 90, 9°, Arts. 94 to 96, Art. 102 and Art. 171, 4, e). 97 ECJ, June, 8, 2004, Case C-268/03, De Baeck v Belgische Staat (Order).
  19. 19. 19 Capital gains Most treaties grant the State of residence the right tax capital gains. Some treaties grant it to the State of source for important participations or participations in real property companies. The treaty between Belgium and the Netherlands (2001)98 allows the Netherlands to tax the capital gain on an important participation (5 p.c.), if the seller has been resident in the Netherlands during the ten years preceding the granting of the benefit received and if a “conservatory” taxation took place upon the time of his emigration to Belgium. D. Tax rates 33. The applicable rates are the following : Taxable annual income Rates Below € 8,590 25 % From € 8,590 to 12,220 30 % From € 12,220 to € 20,370 40 % From € 20,370 to € 37,330 45 % Above € 37,330 50% A series of tax exemptions, tax reductions and tax increases must be taken into account in order to determine the final tax liability of a resident individual for a given assessment year. As seen above, certain types of income, however, are generally not included in the global taxable income (e.g. dividend and interest income, certain types of miscellaneous income such as taxable capital gains) but are taxed separately at flat rates if such taxation is more favorable to the taxpayer. Income from personal property (dividends, interest, royalties) is not longer taxed globally with other income. Tax applied at the rate of 25% (dividends, liquidations surpluses, interest, royalties) satisfies the total tax liability on such income. If no tax has been withheld (for instance on income paid abroad), the taxpayer must report the income and will be taxed at the same rate as would apply under the withholding technique (see supra al. 22). A municipal surcharge applies to tax on all income reported in the return (not to withholdings)99 . Where the withholding tax is final in Belgium for both national and foreign dividends (and interest), the foreign dividend or interest that has not borne the withholding tax must be reported in the individual tax return and is charged with a tax at the same rate as the withholding tax, increased by local taxes. Such local taxes discriminate against foreign dividends and interest, said the ECJ in Dijkman100 . The surcharge applies to professional income exempted by treaty if the treaty so allows101 . It is then computed on the individual income tax which would be due in Belgium, but for the treaty. 98 Art. 13 § 5. 99 CIT, Art. 465. 100 ECJ, 1 July 2010, Case C-233/09, Gerhard Dijkman, Maria Dijkman-Lavaleije v Belgische Staat. 101 CIT, Art. 466 bis.
  20. 20. 20 An amount of € 6,690 generally is exempted102 . A supplement per child is added. A taxpayer earning less than the exempt amount may report his income from capital : if his total income is lower than the exempt amount, the personal property withholding tax will be reimbursed to him. 33bis. Application John Wealthy has a son, Bill, who is good at baseball and goes to Duke University (N.C., USA) to study. It would be more advantageous for his father to pay him alimony (deductible up to 80 %, taxable to Bill, but at a low rate) than to count him as a dependent child. But does Bill still belong to the household of his parents or does he not ? Alimony is deductible only in the second case. There is considerable case law on the topic. The answer is no if Bill marries. But does he want to go that far ? Section II Taxation of non-resident individuals A. Overview 34. Non-resident individuals are subject to the non-resident income tax on income from Belgian sources. On certain types of income, they are subject to withholding tax that either may be credited against their tax liability or may be considered as their final liability. Only Belgian-source income is taxable, i.e., income produced or collected in Belgium. It includes103 : (a) Income from real property located in Belgium; (b) Income from capital or personal property income produced or collected in Belgium; (c) Income resulting from the status of partner in a partnership without legal personality; (d) Professional income, such as : - Business profits produced by a Belgian establishment. In some circumstances, business profits may be taxed even in the absence of any Belgian establishment (e.g., rental income and capital gains on Belgian real property) ; - Remuneration and pensions, either when paid by a Belgian debtor or when paid to a non-resident present in Belgium for more than 183 days per year. Remuneration for activities exercised abroad is not taxable, when paid by the foreign establishment of the Belgian paying entity ; 102 CIT, Art. 131. 103 CIT, Art. 228.
  21. 21. 21 - Income from independent professions or other occupations derived from activities exercised in Belgium ; (e) Miscellaneous income : - Occasional or speculative profits produced or collected in Belgium104 ; - Alimony paid by residents ; - Certain capital gains on land and buildings105 located in Belgium ; and - Capital gains on the sale of a substantial interest in a Belgian company to a non Belgian (other than an EEA) company. The amount of the taxable income is determined in the same way as for resident individuals106 . B. Assessment 35. For non-resident individuals, a global non-resident tax is assessed107 : (a) on income from real property located in Belgium when the taxpayer receives rental income or income from the grant or the assignment of a long-term lease; (b) on the total Belgian real property income, professional income (including income from personal property invested in professional assets) and gains on the sale of shares of closely held companies, of : - non-residents having a Belgian establishment; - non-residents receiving real property income, partnership income, profits from independent activities, remunerations and pensions, as well as capital gains on the sale of shares of closely held corporations. The tax is assessed as for resident individuals, including a surcharge equal to 7% of the tax for the State108 , but certain exemptions or reductions (family exemptions) are not granted109 . According to EU law, exemptions and reductions (including family allowances) available to residents are also granted to non-residents if : - they have kept a home in Belgium for the whole tax year; - or if they draw 75 p.c. of their professional income from Belgium110 . For non-residents who have no special connection with Belgium or who receive only miscellaneous income, the tax is deemed to correspond to the withholding taxes and the 104 Malherbe, J. and Verstraete, H., Belgium, Taxation of Capital Gains to Nonresident Aliens, 34 Tax Management International Forum, nr. 2, June 2013 at 8. 105 Subject to a special assessment under CIT, Art. 301, levied by the Registration Tax Administration when the deed is registered. 106 CIT, Art. 235, 1°. 107 CIT, Art. 232. 108 CIT, Art. 245. 109 CIT, Art. 243. 110 CIT, Art. 244.
  22. 22. 22 special assessment on the sale of land and buildings111 . The non-resident income tax is also equal to the withholding tax for income from partnerships and for income from real property when the latter does not exceed € 2.500. Applications 36. An Italian heart surgeon is involved in a contract enabling him to perform surgery in Belgium. Does he have a permanent establishment (fixed base) in the Belgian hospital ? No, because, he does not have any exclusive right to use the facilities. The management rests with the Belgian hospital and the foreign doctor do not even have a key112 . 37. A truck driver should be taxed on his remunerations in the country where he physically works. It was held that he was taxable in the country of his employer whereas this exception applies only to employment on ships or aircraft113 . A lower Court disagreed and taxed a truck driver in the country where his employment was exercised. As he failed to inform the administration about kilometers driven in various countries, he was considered to work in Belgium114 . 38. A Belgian resident is director of a Luxembourg company. He is also remunerated for additional activities performed for the company. He claims to be taxable only in Luxembourg on such remunerations because : - they remunerate a director’s function ; - or they have a fixed base at the seat of the company. The Court considers that the remunerations are taxable in Belgium. They are received in another capacity than the capacity of director and the taxpayer has no office in Luxembourg115 . Chapter II – Taxation of companies The creation of a company may be related to individual tax planning : there is always an alternative between holding assets personally or through a company. Section I Taxation of resident companies 39. A company is resident and therefore subject to Belgian corporate income tax on its worldwide income if it has a statutory seat or principal establishment, or its seat of management in Belgium116 . A. Taxable persons 111 CIT, Art. 248. 112 Antwerp, May, 13, 2008, F.J.F., nr. 2008/276, 1044. 113 Cass., November 9, 2007, May 28, 2004, November 6, 2000. 114 Mons, October 22, 2008. See De Broe, TRV, 2010, 125. 115 Civ. Mons, December 20, 2007, F.J.F., nr. 2009/187. 116 CIT, Art. 179 and Art. 1, 5°, b) ; Osterweil, E., and Quaghebeur, M., Taxation of Companies under Belgian Income Tax Law, Bull. Int. Taxation, 2008, p. 346.
  23. 23. 23 40. The Belgian corporate income tax applies to resident “companies”, i.e. companies, associations, establishments and organizations that are engaged in profit-making activities or in the operation of a business. Only entities with legal personality are subject to corporate income tax117 . Resident legal entities that are not engaged in profit-making activities or in the operation of a business are subject to the income tax on legal entities. Non-resident entities, with or without legal personality, which have a form comparable to the above-mentioned legal entities, are subject to the income tax on non-residents and treated as corporations (see infra nr. 55). B. Residence 41. Resident corporations are corporations having their registered office, principal establishment or their seat of management in Belgium. In general, this will be the place indicated in the articles of incorporation. However, a company having its official seat abroad, but which is effectively managed in Belgium, will be considered a resident corporation. On the other hand, if a company is managed abroad and only has a branch in Belgium, it will be subject to the non-resident income tax. The Belgian Company Code distinguishes between two basic types of business entities : "capital" companies which issue shares which are in principle freely transferable, including the société anonyme – naamloze vennootschap (SA/NV) and the société en commandite par actions – commanditaire vennootschap op aandelen (SCA/VGA) and "personal" companies, which issue “participations” which are in principle not freely transferable and where the person of the partners is essential, including the société en nom collectif – vennootschap onder firma (SNC/VOF), the société en commandite simple – gewone commanditaire vennootschap (SCS/VEG) and the société privée à responsabilité limitée – besloten vennootschap met beperkte aansprakelijkheid (SPRL/BVBA). In the "société en nom collectif", partners are jointly and severally liable. In the "société en commandite simple", and in the "société en commandite par actions", unlimited partners are, limited partners are not. Both categories of companies and the société cooperative – samenwerkende venootschap (SC/SV) are subject to corporate income tax118 . This also applies to non-profit making organizations when regularly engaged in business or seeking a profit. The nature of foreign corporations having their head office in Belgium is determined by analogy to comparable forms of legal entities in Belgium. C. Principles 1. Taxation of Worldwide Income 42. The taxable income of a corporation is its total income derived from business activities and from other sources, including foreign source income. Corporate income is, by definition, business income. 117 CIT, Art., 179 and Art. 1, 5°, a). 118 Hinnekens, Ph., Taxation of Partnerships in Belgium : An Imbroglio ?, Bull. Int. Taxation, 2008, p. 353.
  24. 24. 24 Taxes are often levied through prepayments in the form of withholding taxes at the moment the payment occurs or the benefit is granted. Withholding taxes are creditable against the final tax on global income, except for the real estate withholding tax119 . Amounts withheld in excess of the tax due are refundable. Corporations may (but need not) estimate and pay in advance the entire annual corporate income tax. Failure to pay in advance will subject the taxpayer to a surcharge. Income from Foreign Sources The gross income of corporations includes all revenue from whatever source, including foreign source income. Hence, the corporate taxable income includes net foreign source interest, dividends, interest and royalties and income from foreign branches. Credits or exemptions are, however, granted under certain conditions so as to avoid double taxation of foreign source income. 2. Accounting 43. The determination of taxable income is generally based on the financial accounts of the company. However, in case of lack of reliability of the financial accounts, the tax administration may substitute an estimated amount of corporate income to the reported income. Accounting standards are defined in the Law of July 17, 1975, and the Royal Decree of implementation of the Company Code, governing the annual accounts of enterprises. Failing an exception in the tax law, accounting rules will apply for the determination of taxable income. D. Determination of Gross Income 1. Overview 44. Gross income of corporations includes all revenue from whatever source. All income of a corporation is considered professional income: the concept of exempt income generated by a purely private activity, which may allow an individual to exclude such income from gross income, does not apply to corporations120 . The gross income of a corporation is computed on the basis of its accounting records; it is equal to the increase in the net asset value of the enterprise from one year to the other. Gross income of a corporation includes technically121 : • reserved profits; • disallowed deductions; and • profits distributed as dividends. Income from patents is taxable only on 20 % of their amount, meaning an effective corporate tax rate of 6,8 % down from the general 33,99 %. 80 % of the income is deductible. 119 CIT, Art. 277. 120 Cass. , June 7, 1966, Pas., I, 1281; Cass., January 28, 1969, Pas., I, 489. 121 CIT, Art. 185
  25. 25. 25 2. Capital Gains a. General principles 45. Capital gains are equal to the difference between the realization value and the acquisition value less the amount of the write-offs and depreciation annuities that have been deducted tax-wise122 . Capital gains realized by corporations are, in principle, part of their gross income and subject to the standard corporate tax rate. However, capital gains realized on tangible and intangible assets held for more than five years by the enterprise may be rolled over, upon condition of reinvestment of the sale proceeds in depreciable assets within a three – or five - year period123 . The determination of taxable income closely relates to the valuation of fixed assets, inventory, and other assets in the balance sheet. The tax authorities will, in principle, accept a valuation made in accordance with rules on annual accounts, subject to certain qualifications. By way of exception, long term capital gains realized on shareholdings are mostly tax exempt subject to certain conditions being met (see nr. 47). b. Unrealized Capital Gains 46. Unrealized capital gains are not taxed, except when they relate to the revaluation of raw materials, products, or merchandise, or to the recapture of allowable capital losses on shareholdings and securities up to original cost124 . c. Long-Term Gains and Involuntary Gains 46 bis. Gains resulting from involuntary disposals of capital assets, such as following an accident or expropriation, as well as gains on any disposal (sale, exchange, contribution to the capital of a corporation) of fixed assets recorded as such by the enterprise for more than five years are rolled over if the indemnity or the sales proceeds are reinvested in depreciable assets used in the business in Belgium within a three-year period125 . This reinvestment period starts at the end of the tax year during which the indemnity was paid or on the first day of the year during which the sale occurs; in any event, the reinvestment must be made before the business is wound up126 . The capital gains that have been temporarily exempt are taxed according to the depreciation schedule of the assets acquired as reinvestment of the indemnity or sales proceeds. This is the equivalent of a roll-over. In a roll-over, the basis (cost for tax purposes) of the old asset carries over to the new asset. The three-year investment period is extended to five years if the reinvestment is made in buildings, ships or airplanes127 . 122 CIT, Art. 43. 123 CIT, Art. 47. 124 CIT, Art. 24, 3 and 44, § 1, 1°. 125 CIT, Art. 47. Is the limitation to Belgian assets in conformity with the principle of freedom of establishment under the Treaty of Rome ? 126 CIT, Art. 47, § 3. 127 CIT, Art. 47, § 4. For those assets in the case of voluntary disposals, the reinvestment period may also start two years before the year of the sale, the reinvestment being made in anticipation of the sale.
  26. 26. 26 In the absence of reinvestment within the prescribed period, the gain will be taxable during the year in which such period expires. Interest is assessed on the amount of tax due from the year during which the exemption was granted128 . In order to benefit from the temporary exemption of the capital gain, the enterprise is required to book the gain in a special account on the liabilities side on the balance sheet; it may not serve as a basis for the calculation of the legal reserve nor for any remuneration or distribution129 . d. Capital Gains on Shares Sales or contributions to capital 47. Capital gains on shares realized by a Belgian company are in principle taxable at the ordinary corporate income tax rate, unless the gains relate to shares the income from which qualifies for the dividends received deduction130 . Unlike under the dividends received deduction, however, the minimum holding requirement (i.e., 10 % of the shares or a holding with a value of at least € 2,5 million) is not a condition for the application of the tax exemption, e.g. the special tax rates for capital gains on shares. It follows that the relevant conditions for the tax treatment of capital gains on shares are the taxation condition and the minimum holding period requirement under the dividends received deduction, as follows : (i) if the gains relate to shares that meet both the taxation condition and the minimum holding period requirement, they are fully tax exempt if realized by a company other than a large company ; if realized by a large company, such gains are subject to tax at a rate of 0.4 % (to be increased by the 3 % crisis surcharge, resulting in an effective rate of 0.412 %) ; (ii) if the gains relate to shares that meet the taxation condition but not the minimum holding period requirement, they are taxable at a special rate of 25 % (to be increased by the 3 % crisis surcharge, resulting in an effective rate of 25.75 %) ; (iii) if the gains relate to shares that do not meet the taxation condition, they are taxable at the standard corporate income tax rate. According to the tax authorities, if part of the dividends that could have been distributed by the company do not fall under the participation exemption regime, the total gain is subject to tax131 . Capital gains on shares are unconditionally exempt or eligible for the special tax rates; their amount must not be recorded under a distinct heading on the liabilities side of the balance sheet. On the other hand, capital gains and losses or reductions in value on the “trading portfolio” of banks, investment companies and companies managing UCITS will be subject to the normal regime of taxation of gains and deduction of charges. The transfer from their investment portfolio to their trading portfolio will be considered as a realization. 128 CIT, Art. 47, § 6. 129 CIT, Art. 190, § 1. 130 CIT, Art. 192 ; Navez, E.J., Belgium, in Maisto, G., ed., Taxation of Companies on Capital Gains on Shares under Domestic Law, EU Law and Tax Treaties, IBFD, 2013 at 409. 131 Administrative Circular of March 9, 1993.
  27. 27. 27 Reorganizations 47bis. Gains resulting from exchanges of shares due to mergers, divisions, “mixed divisions”, change of the form of a company are tax-exempt only if the corporations concerned are established either in Belgium or elsewhere in the EU and the applicable tax law exempts the corporate reorganization from taxation. The basis of the old shares and their date of acquisition will be rolled over to the new shares132 . The one-year holding period required fro the application of the capital gains exemption must be calculated by reference to the date of acquisition of the shares exchanged (i.e., the date on which the exchanged shares had initially been acquired) and not as of the date of acquisition of the shares received in exchange as a result of the transaction133 . When certificates are issued in exchange for shares - under a so called “certification” of shares - , any resulting capital gain is treated as unrealized. The basis of the shares carries over to the certificates134 . Gains are also exempt when realized upon a contribution of shares to a Belgian or intra- European company135 by which the acquiring company acquires 50 p.c. of the shares or increases a 50 p.c. plus participation and no cash payment of more than 10 p.c. of the nominal or par value of the shares is made136 . e. Capital losses 48. Capital losses and write-offs on shares are not deductible, whether or not they relate to shares which meet the above taxation requirement. By way of exception, capital losses will be deductible when incurred upon liquidation and to the extent of the real paid-up capital of the liquidated company137 . If the paid-up capital has been reduced to absorb losses, the capital reduction will not be taken into account in determining a capital loss on the disposal of shares, which will be allowed up to the capital of the liquidated company, as if the reduction had not taken place138 . E. Deductible expenses - Limitations Expenses are deductible, if paid or incurred during the taxable year in order to preserve or acquire business income139 . 1. Interest and Royalties 132 CIT, Art. 45, § 1, 1°. 133 CIT, Art. 192, § 1. 134 Law of July 15, 1998, relating to the certification of shares by commercial companies, Art. 13, § 2. 135 An intra-european company is a non-resident company having on the forms cited in the Tax Merger Directive and resident in a State of the EU without being considered under a double tax treaty as resident in a third country outside of the Union, subject to corporation tax without a possibility of option for another tax regime or exemption (CIT, Art., 1, 5°, b bis)). 136 CIT, Art. 45, § 1, 2°. 137 CIT, Art. 198, § 1, 7°. 138 CIT, Art., 198, last §. 139 CIT, Art. 49.
  28. 28. 28 49. Interest on capital borrowed from third parties that has been used within the enterprise, and all charges and analogous fees relating to such borrowings are deductible business expenses140 . Interest is deductible as a business expense, provided the interest rate is fixed at a market rate taking into account the risks relating to the operation, namely the financial situation of the debtor and the duration of the loan141 . No limit applies, however, to interest paid by Belgian banks and Belgian branches of foreign banks. Neither does any limit apply to interest paid by any taxpayer on publicly issued bonds or interest paid to Belgian banks or insurance companies as well as Belgian branches of foreign banks or foreign insurance companies142 . 2. Taxes Corporation tax is not deductible143 . Foreign taxes are deductible. 50. Taxes that are specifically regional, i.e. instituted by the Regions, are no longer deductible for federal corporation tax purposes 144 . F. Losses 51. Losses are deductible in the year during which they are incurred, but may be carried forward without any time limit to be set-off against profits in future years145 . They cannot be carried back. Reserve for future losses 52. Where a company considers it likely that it will incur a loss in a foreseeable future, it may make a provision against the anticipated loss and deduct this provision from taxable profits. This to some extent replaces the carry-back of losses that many other countries allow146 . G. Rates 53. The basic rate of Belgian corporate income tax is 33%147 . However, this rate is increased to 33,99% through the application of a 3% austerity surcharge. The abolition of this additional austerity surcharge remains a goal, as well as a decrease of the basic rate to 30%. 140 CIT, Art. 52, 2°. 141 CIT, Art. 55. 142 CIT, Art. 56. 143 CIT, Art. 198, § 1, 1°. 144 CIT, Art. 198, § 1, 5°. 145 CIT, Art. 206, § 1. 146 CIT, Art. 48 and RD-CIT, Art.22 ff. 147 CIT, Art. 215.
  29. 29. 29 The following reduced rates apply to companies with a taxable income lower than € 322,500 : Income Rate Below € 25,000 24,25 % From € 25,000 to € 90,000 31 % From € 90,000 to € 322,500 34,5 % These rates are increased through the application of the 3% austerity surcharge to 24.98%, 31.93% and 35.54% respectively. The reduced rates are not applicable to : - companies owning participations exceeding certain limits (financial companies)148 ; - companies whose shares are at least 50% owned by one or more companies; - companies whose dividend distributions exceed 13% of the paid-up capital at the beginning of the financial year; - companies which do not pay a remuneration of at least € 36.000149 to at least one of their directors (if the taxable income of the company is less than € 36.000, the remuneration should be equal to the taxable income. 53bis. “Secret commissions” Salaries, commission, rebates, fees and other similar expenses that constitute earned income are deductible if the identity of the beneficiary is disclosed in a special annex to the tax return. These expenses must be supported by individual fee slips and a comprehensive statement of all such expenses, which must be provided before June 30 of the year following the year in which they were paid150 . Commissions and fees not supported by such individual records are taxed as “secret commissions” at a flat rate of 300 % (309 % including the crisis surcharge of 3 %), unless it can be proven that they are taxed in the hands of the beneficiary151 . The latter condition is met if the commissions and fees are taxed within the ordinary 3-year assessment period (Article 354 of the ITC) in the hands of the beneficiary and with the beneficiary’s consent. The Circular Letter of July 22, 2013 extends this “tolerance” to final tax assessments in the hands of the beneficiary without his/her consent and/or outside the 3-year assessment period. The special levy on secret commission, to the extent applicable, is deductible as a business expense152 . The secret commissions themselves, provided that they are taxed at the level of the beneficiary, also constitute deductible business expenses, absent such taxation, they are disallowed expenses, in the latter case, however, the Minister of Finance can allow the deductibility of the secret commissions themselves as business expenses if : 148 The value of the shares they hold, to the extent such shares represent less than a 75% participation in the capital of the issuing company(ies), exceeds 50% of the higher of their (reevalued) paid-up capital or their paid in capital plus taxed reserves and booked capital gains. 149 This amount is not indexed yearly whereas most amounts stated in Euros in the Code are. 150 CIT, Art. 57, 1°. 151 CIT, Art. 219. 152 CIT, Art. 197, 1°.
  30. 30. 30 (i) the payment of secret commissions can be regarded as current practice in the relevant sector of the economy ; (ii) the taxpayer applies for this favorable tax regime beforehand ; (iii) the commissions paid are not excessive ; and (iv) the taxpayer pays a flat rate on these commissions (as fixed in the Royal Decree granting the request), which cannot be lower than 20 % of the commissions paid153 . The Ministry of Finance cannot allow the deduction of secret commissions paid for the acquisition or maintenance of a public market (for example, the granting of a public tender) or administrative authorizations. H. Groups of companies 54. In contrast with French and German rules, no tax consolidation is possible in Belgium. Section II Taxation of non-resident companies A. Domestic Law 1. Definition 55. Formerly, the non-resident tax was applied to non-resident corporations, organizations and other institutions with or without legal personality having their statutory seat, principal establishment or seat of management outside Belgium. Today, non-resident associations without legal personality are no longer subject to non- resident tax as such unless they are set up under a form analogous to one of the legal forms provided by Belgian company law154 . 2. Tax base of foreign companies 56. A foreign corporation is subject to non-resident income tax in Belgium, either because it has an establishment in Belgium or because it receives Belgian-source income. Any partner or member of a partnership without legal personality which has its statutory seat, principal establishment or seat of management in Belgium or which has at its disposal an establishment in Belgium, is deemed to have a Belgian establishment155 . Even without an establishment, a foreign corporation may be taxed on its profits (other than personal property income). Thus : - all rental income and capital gains derived from Belgian real property owned by non-residents are subject to income tax156 by way of assessment157 ; 153 CIT, Art. 58. 154 CIT, Art. 227, 2°. 155 CIT, Art.229, § 3. 156 CIT, Art. 228, § 2, 3°, a. 157 CIT, Art. 232, 1°.
  31. 31. 31 - directors’ fees received by a non-resident corporation are taxed158 by way of a withholding tax159 ; - profits realized by a foreign company providing artistic or sporting services160 in Belgium are taxable. When a non-resident company has no establishment in Belgium (and does not have income referred to above), it is subject to non-resident income tax by way of a withholding tax on certain Belgian-source income (mainly income from capital or personal property). 3. Method of taxation 57. If a non-resident corporation has a Belgian establishment, a distinction should be made between the income attributed to the Belgian establishment and the other income. The following income is allocated to the establishment : - business income produced through the establishment, including161 . - income from capital and personal property (such as dividends, interest and royalties) if the property is invested in the business activity of the establishment in Belgium; Rental income and capital gains relating to Belgian real property may also be assessed even in the absence of any establishment of the foreign company in Belgium. Income allocated to an establishment and the income referred to above is subject to non- resident income tax by way of assessment162 . Other types of income are subject only to a withholding tax, which is not credited against the tax due by the branch163 . If a foreign corporation does not have a Belgian establishment or real property income in Belgium, only income produced or collected in Belgium is taxable, including income from capital and personal property. Such income is subject only to withholding taxes. No tax assessment is made. B. Treaty rules 58. When a tax treaty applies, the taxpayer is subject to the particular treaty rule if it is more favorable. In all conventions following the OECD or the Belgian model, a foreign corporation will only have to pay tax in Belgium if it has a permanent establishment i.e. a fixed place of 158 CIT, Art. 228, § 2, 3°, d. 159 CIT, Art. 248. 160 CIT, Art. 228, § 2, 8°. 161 CIT, Art. 233. 162 CIT, Art. 233 and 246. 163 CIT, Art. 248.
  32. 32. 32 business through which the business of an enterprise is wholly or partly carried on or if it derives real property income from Belgium. Unrelated income is subject to withholding tax only within the limits of the relevant treaty provisions.
  33. 33. 33 TITLE II – INTERNATIONAL ASPECTS – INBOUND AND OUTBOUND INCOME Chapter I – Business income Section I Inbound business income: income earned abroad by Belgian residents A. Domestic law : double taxation 59. For individuals, the part of the tax that proportionally relates to real property or business income from a foreign source is reduced by half. The amount of exempt income is however added to the other income to determine the applicable tax rate (reserve of progressivity)164 . For corporations, the tax on foreign-source income that, in the absence of other treaty relief, was reduced to one-fourth, does not benefit any more from any reduction165 . Foreign taxes are deductible. Double taxation will deter a Belgian company to create a permanent establishment in a non-treaty country. Interest and royalty income realized and taxed abroad is subject to the reduced rate (for an individual) only if the income-producing asset is invested in an establishment abroad. If the asset producing foreign interest or royalty income is invested in a Belgian establishment, the normal rate will apply, but, if the income has been taxed abroad, the taxpayer may, under certain circumstances, be granted a foreign tax credit. Dividends on foreign or domestic shareholdings received by a foreign branch are excluded up to 95% of their amount from income in the same conditions as intercorporate dividends received by the head office (see infra nr. 79); the balance is subject to tax at the standard rate. Foreign losses are deductible and can offset domestic income. B. Treaties : exemption a. Income 60. All foreign source income attributable to a foreign permanent establishment is exempt from Belgian tax. However, Belgium reserves the right to take such income into account to determine the progressive rate of tax applying to other income. Under the Belgian Code of Income Tax, the provision taking foreign source income into account to determine the progressive tax rate applies only to individuals, not to corporations166 . The exemption applies to dividends, interest, and royalties when the income-producing asset is invested in a permanent establishment abroad. 164 CIT, Art. 155 and 156. 165 CIT, Art. 217, abolished. 166 CIT, Art. 155.
  34. 34. 34 b. Losses 61. Foreign losses are deductible. Double deduction of losses incurred in treaty countries is prevented by the levy of a Belgian tax on foreign-source income arising in subsequent years if such income is not taxed abroad because it is set off against a loss previously deducted from income taxable in Belgium. The company must demonstrate each year that the foreign loss has not been deducted from the profits of the foreign establishments. The loss may not be deducted if it can be set off against exempt profits of other foreign establishments of the company167 . This provision may be contrary to the freedom of establishment in the EU as it discriminates between foreign and Belgian branches. Besides, if the foreign establishment is transferred to another company by way of contribution, merger, division or an assimilated transaction, the deductible foreign loss will be recaptured168 . Losses incurred in non-treaty countries are deductible without any recapture, as the business income arising in such countries is taxable at the full corporate rate. If a loss is incurred by a Belgian company in Belgium and the company’s permanent establishment (PE) abroad has generated profits in the same year that are exempt under the tax treaty between the foreign country and Belgium, Belgium required the company to set off the Belgian loss against the profits of the foreign PE rather than allowing the carryover of the loss to a subsequent tax year. This position had been upheld by Belgian case law because the computation of losses is not a treaty matter, despite the fact that it denies the carryover of losses and that it de facto nullifies the foreign income treaty exemption. However, the European Court of Justice (ECJ) has held that this rule was contrary to the principle of freedom of establishment guaranteed under the European Union Treaty. According to the ECJ, the freedom of establishment principle precludes a Member State from applying legislation under which a company incorporated under national law and having its seat in that Member State may, for purposes of corporation tax, deduct a loss incurred the previous year from the taxable profit for the current year only on the condition that the loss was not susceptible of being set off against the profit made during that same previous year by one of its PE's situated in another Member State, when the loss, although set off, cannot be deducted from taxable income in the Member States concerned, whereas it would be deductible if the establishments of that company were situated exclusively in the Member State in which it has its seat169 . The Belgian position is therefore no longer applicable in the case of PE's created within the EU, but may continue to be applied with respect to non-EU countries. c. Determination of profits 62. The problem just referred to above arose from the way in which the taxable profits of a Belgian corporation are computed. 167 CIT, Art. 185, § 3. 168 CIT, Art. 206, § 1. 169 ECJ, December 14, 2000, Case C-141-99, AMID ; Hinnekens, L., European Union, AMID : The Wrong Bridge or a Bridge too far ? An Analysis of a Recent Decision of the European Court of Justice, Eur. Tax., June 2001, p. 206.
  35. 35. 35 The taxable profit of a company is determined in the following sequence : (1) The elements of the tax base, i.e., reserved profits, disallowed expenses and dividends paid, are added up. Exempt capital gains and exempt reserves, including reserves created by a transfer of capital (in a capital reduction) or in respect of premiums on issuance of shares, are excluded from the tax base. (2) Profits are broken down according to their source, that is : • Belgian profits; • foreign profits realized in non-treaty countries which were formerly taxable at a reduced rate170 ; • foreign profits exempted by a tax treaty. If losses were incurred in Belgium and abroad, they are deducted as follows: • losses incurred in a country where profits are exempted by treaty: first from profits so exempted, then from profits realized in non-treaty countries formerly taxable at the reduced rate, and then from Belgian profits; • losses incurred in a non-treaty country the profits of which were formerly taxable at the reduced rate: first from profits in non-treaty countries, then from profits exempted by treaty, and then from Belgian profits; • losses incurred in Belgium: first from Belgian profits, then from profits in non- treaty countries formerly taxable at the reduced rate, and then from profits exempted by treaty. (3) The following amounts are deducted : • foreign-source profits exempted by a tax treaty; • exempted gifts; non-taxable items. If there are foreign source profits arising in non-treaty countries, the deduction applies first to Belgian source profits. (4) Deductible dividends and liquidation surpluses are deducted (see infra nr. 79 intercorporate dividend deduction). Belgian source dividends and liquidation surpluses are deducted from Belgian source profits and foreign source dividends and surpluses arising from shares invested in branches located in non-treaty countries are deducted first from foreign source income. (5) Income from patents up to 80 p.c. (see nr. 174) ; (6) Notional interest (see nr. 157) ; (7) Losses from previous years are deducted in the following order : (a) losses from treaty countries (not set off against profits exempted by treaty): 170 This category does not make sense, but remains on the books.
  36. 36. 36 • first from profits in non-treaty countries formerly taxable at the reduced rate; • then from Belgian profits; (b) losses from non-treaty countries : • first from profits in non-treaty countries formerly taxable at the reduced rate; • then from Belgian profits; (c) Belgian losses: • first from Belgian profits; • then from profits in non-treaty countries formerly taxable at the reduced rate171 . (8) The investment deduction, where applicable, or the deduction carried forward172 is deducted from the remaining amount of Belgian source profits173 . Corporate gifts to authorized institutions are deductible up to 10 % of income with a maximum of € 500,000 (indexed). Section II Outbound business income: income earned in Belgium by foreign residents A. Domestic law 1. Definitions 63. A distinction should be made between a domestic subsidiary, a branch of a nonresident corporation and a non-resident corporation without a Belgian branch: • a domestic subsidiary is an entity having legal personality which is subject to the Belgian corporate income tax because its statutory seat or principal office is located in Belgium; • a branch of a foreign corporation is a commercial concept. Tax-wise, a branch constitutes, in principle, an establishment of a foreign corporation in Belgium. The concept of a Belgian establishment is similar to but broader than the treaty concept of a “permanent establishment”; • a nonresident corporation which does not have an establishment in Belgium may, however, receive Belgian source income. 2. Tax base of a Foreign Corporation 64. A foreign corporation will be subject to nonresident income tax in Belgium, either because it has an establishment in Belgium or because it receives Belgian source income. 171 R.D.-CIT, Art. 75, 2d indent. The reference to the reduced rate only applies until assessment year 2003. 172 A special deduction – rarely – granted for some new investments, in the nature of a tax expenditure. 173 R.D.-CIT, Arts. 74 to 79.
  37. 37. 37 A Belgian establishment is defined as any fixed installation through which a foreign corporation conducts part or all of its professional activities in Belgium174 . The term “Belgian establishment” includes especially : • a place of management; • a branch; • an office; • a factory; • a workshop; • an agency; • a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; • a building site, construction or installation project if it lasts more than 30 days; • a warehouse; • an inventory of goods or merchandise175 . For such an establishment to exist, there must be an element of permanence. Business profits need not be produced directly by such establishment, as long as it participates in producing the business profits176 . Any person – other than an agent having an independent status acting in the ordinary course of his business – acting in Belgium on behalf of a nonresident, must be considered a Belgian establishment, even if such person does not have the authority to conclude contracts in the name of the nonresident177 . Any partner or member of a partnership without legal personality that has its statutory seat, principal establishment or seat of management in Belgium or that has at its disposal an establishment in Belgium, is deemed to have a Belgian establishment178 . If reciprocal treatment is afforded by the country of domicile of the enterprise, the employment of an agent whose activity is limited to soliciting orders does not constitute a Belgian establishment. A Belgian establishment will also exist if services are supplied by individuals present in Belgium during more than 30 days during a 12 months period for a same or connected projects179 (“service establishment”). 174 Denys, L., Belgium : The Concept of Permanent Establishment Revisited and Other Reflections Beyond, Bull. Int. Taxation, 2008 at 440 ; Faes, P., Belgium, Tax Ramifications to a Foreign Corporation of Using a Service Provider in Host Country, 33 Tax Management International Forum, nr. 3, September 2012 at 8. 175 CIT, Art. 229, § 1. 176 Dierckx, F., How « Permanent » should a « Material Permanent Establishment » be ?, Eur. Tax., 2009, p. 34. 177 CIT, Art. 229, § 2. 178 CIT, Art. 229, § 3. 179 CIT, Art. 229, § 2.1.
  38. 38. 38 Activities of associated enterprises will be taken into account. Business profits of international shipping and air transport companies are exempt from tax under the same reciprocity condition180 . Foreign insurance companies collecting insurance premiums in Belgium, other than from reinsurance, are subject to tax even if they do not have a permanent establishment in Belgium181 . An establishment in Belgium is deemed to exist where a non-resident company reveals its presence through agents’ mail on letterheads, advertising, or in any other manner. When a foreign corporation has an establishment in Belgium, all its profits connected with the activities of the Belgian establishment (including income from personal property which is invested in the Belgian establishment) are subject to income tax in Belgium. As seen above, in exceptional circumstances, a foreign corporation may be taxed on its profits (other than income from capital and personal property) even without having a Belgian establishment : • All rental income and capital gains derived from Belgian real property owned by non-residents are subject to income tax182 by way of assessment183 . • Director’s fees received by a nonresident corporation are taxed184 by way of withholding tax185 . • Profits realized by a foreign company performing artistic or sports services186 are taxed by way of withholding tax. When a non-resident company has no establishment in Belgium (and does not have income such as referred to above), it may be subject to nonresident income tax by way of a withholding tax on certain Belgian source income (mainly income from capital and personal property). 3. Method of Taxation 65. If a non-resident corporation has a Belgian establishment, a distinction should be made between the income attributed to the Belgian establishment and other income. The following income is allocated to the establishment : • business income produced through the establishment, including187 ; • income from capital and personal property (such as dividends, interest and royalties) if the asset is invested in the business activity of the establishment in Belgium; 180 CIT, Art. 231, § 1, 3. 181 CIT, Art. 231, § 1, 3. 182 CIT, Art. 228, § 2, 3, a. 183 CIT, Art. 232, 1. 184 CIT, Art. 228, § 2, 3, d. 185 CIT, Art. 248. 186 CIT, Art. 228, § 2, 8. 187 CIT, Art. 233.