Background

The Law of 19 December 2023 implements Pillar II in Belgium (European Council Directive 2022/2523 of 15 December 2022).

The law includes a coordinated system of rules designed to ensure that large (domestic/MNE) groups with a consolidated revenue exceeding EUR 750 million for at least two of the four previous years, are subject to a minimum effective tax rate of 15%.

How did Belgium implement the EU Directive?

In general, the Belgian law closely follows the EU Directive and therefore the OECD Model Rules.

The key takeaways are the following:

Key takeaways

• Belgium (like other European countries) introduced a domestic top-up tax (“QDMTT”) that is aimed to qualify for the QDMTT Safe Harbour as well as the Income Inclusion Rule (“IIR”, or taxes collected by the ultimate parent) and the Under-Taxed Payment Rule (“UTPR”, or backstop rule).
• The Transitional (“CbCR”) Safe Harbours are included in the law in line with the guidance released by the OECD on 20 December 2022. With respect to the qualifying CbC Report, reference is made to the Belgian legislation introducing transfer pricing documentation.
• The law is applicable to financial years beginning on or after 31 December 2023. However, the UTPR additional tax is only due for reporting years starting on 31 December 2024.
• The Belgian ruling office will not grant advance rulings on questions regarding this Pillar II law.
• Since the Pillar II legislation is in force, the Belgian government officially announced that the ratio under the loss limitation rule (limiting the use of a.o. carried forward tax losses that may offset taxable income exceeding EUR 1 million) will increase again from 40% (applicable for FY 2023) to 70%.

What if a top-up-tax has to be paid?

For groups with multiple Belgian entities, taxes due resulting from the QDMTT or UTPR will by default be payable by the Belgian entity with the largest (net qualifying) income. However, the law provides that groups may opt to identify another entity to pay the amount (in the first instance). Any compensation for this entity will be exempt in line with the principles of the Belgian group contribution regime/exceeding borrowing cost.

Top-up taxes due under the QDMTT and IIR will be included in the prepayment schedule for Belgian corporate income tax. This means that in the event of insufficient prepayments made during the year, the company will be subject to a tax increase. In principle the top-up taxes due can be paid in four installments to avoid the tax increase, but for 2024, companies have until 20 December 2024 to fulfill the requirements.

Reporting obligations:

The following tax returns have been introduced:

• a QDMTT return to be submitted to the Belgian tax authorities before the last day of the 11th month following the end of the financial year. For groups that have accounting periods ending on 31 December 2024, the first QDMTT return deadline is 30 November 2025.
• a GloBE return (only in some cases) before the last day of the 15th month following the end of the financial year. For the first year, groups have 18 months. For groups that have accounting periods which follow the calendar year, the first GloBE return deadline is 30 June 2026.

Miscellaneous

Group entities shall be jointly and severally liable for the payment of any top-up taxes arising under the law.

In the event of a violation of the provisions of the law, a fine of EUR 2,500 to EUR 250,000 may be imposed.

The most recent administrative guidance from the OECD in the framework of Pillar II, issued in July and December 2023, is not yet included in the law. The Council of State pointed out that any updates to the GloBE Rules included in the Directive will in principle have to be made through amendments to be transposed by the Member States. Therefore, it is expected that additional legislation will be published to cover this additional guidance.

Background

A draft law was introduced into parliament to change the Belgian CFC regime, which was introduced as part of the EU Anti-Tax Avoidance Directive (hereafter “ATAD directive”) in 2017.

The CFC regime Belgium introduced back in 2017 taxed non-distributed income arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage (option B). Basically, this option required that the significant people functions, generating the CFC income, were located in Belgium.

Proposed changes

The draft law foresees a change as the focus now is on the taxation of passive income – namely interest, royalties, dividend, income from disposal of shares, but amongst others also rental income and income from invoicing companies that earn sales and services income from goods and services with adding no or little economic value – subject to low taxation abroad (defined as half of the taxation that would occur under the Belgian rules), unless the taxpayer can prove that sufficient substance is available locally.

Based on the current provisions of the draft Program Law, a two-step analysis is to be followed to determine if a proportion of the income of a CFC should be allocated to the Belgian parent entity (subject to the normal Belgian corporate income tax regime).

First, the (Belgian) taxpayer needs to determine whether it has an (in)direct interest in (one or more) CFC(s). A foreign company qualifies as a CFC if both the participation condition (i.e. Belgian taxpayer (by itself or together with associated companies) holds a direct / indirect participation of more than 50% of the voting rights or owns directly or indirectly more than 50% of capital or is entitled to receive more than 50% of the profits of that entity) and the taxation condition (i.e. foreign entity / PE is not subject to income tax that is less than half of the corporate income tax that would have been due if this foreign entity would be a Belgian taxpayer) are met.

If both conditions are met, the amount of income/profit to be allocated to the Belgian taxpayer needs to be calculated/assessed according to Belgian accounting and tax rules (recalculation is thus necessary).

The foreign profits are then allocated to the Belgian taxpayer taking into account the following parameters:

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

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

Please note that exceptions (“safe harbours”) are foreseen within the proposal. When applicable, certain foreign income shall be safeguarded from taxation at the Belgian taxpayer’s level, more specifically when:

• The Belgian taxpayer can provide evidence that sufficient substance (‘substantial economic activity’) is available in the CFC;
• Less than 1/3 of the total income of the CFC qualifies as passive income;
• The CFC qualifies as a financial undertaking (subject to certain conditions).

In addition, from a tax compliance perspective, it is expected that more detailed information will need to be included in the Belgian corporate income tax return going forward.

The new CFC rules are in practice set to apply retroactively, as their entry into force is scheduled for the assessment year 2024, which pertains to accounting years ending on or after 31 December 2023.