The Belgian CFC rules (‘Controlled Foreign Corporations’)
Do you have a Belgian company that exercises control over a (sub-)subsidiary abroad or over a foreign permanent establishment (of a subsidiary)? If so, special tax rules apply that are intended to ensure that all profits are taxed ‘normally’. Which obligations do you need to bear in mind?
What is a ‘Controlled Foreign Corporation’?
A Controlled Foreign Corporation (or CFC) is a foreign entity that is under the control of a Belgian company.
This may be:
- A (sub-)subsidiary
- A permanent establishment of the Belgian company
- A permanent establishment of a foreign (sub-)subsidiary
The tax authorities want to prevent profit, in such a situation, from being shifted to the country where it is taxed least. To this end, special tax rules have been developed: the Controlled Foreign Corporation rules, or CFC rules for short.
When do the CFC rules apply?
The CFC rules apply where two cumulative conditions are met:
Control condition: The Belgian company has (in)direct control over the foreign entity.
This means that it holds at least 50% of the voting rights in that foreign entity, holds at least 50% of the capital of that entity, or is entitled to at least 50% of the profit of that entity.
Please note! In the case of a permanent establishment of the Belgian company, this condition is in any event met.
Taxation condition: The foreign entity is not taxed, or is taxed at a low rate.
This means that it is not subject to income taxes, or is subject to a tax that is lower than half of the hypothetical Belgian corporate income tax that would apply to that profit if the foreign entity were established in Belgium. This concerns not only ‘tax havens’, but for example also Luxembourg, Malta or certain Swiss cantons.
What exactly do the CFC rules entail?
The Belgian CFC rules first of all entail that the Belgian company has a reporting obligation where it has (in)direct control over a foreign entity that is not
taxed or is taxed at a low rate.
Secondly, that Belgian company is taxed on the profits of the foreign entity that have not been distributed to it. Where that profit is not distributed
to the Belgian parent company, Belgium taxes that CFC profit by adding it to the profit of the Belgian company (via the so-called disallowed expenses).
Exclusions from CFC taxation?
In two cases the CFC profit of that foreign entity is nevertheless not taxed at the level of the Belgian company:
- Where the foreign entity itself has sufficient economic substance (read: carries on a substantive economic activity abroad).
- Where the foreign entity has limited passive income (less than 1/3 of its total income). For example, dividends, royalties and interest do not derive from genuine economic activity and are regarded as passive income. Where these amount to less than 1/3 of the foreign entity’s total income, they are not taxed in Belgium.
Please note! Even though, in these cases, the undistributed CFC profit is not taxed in Belgium, the Belgian company must still report, via its corporate income tax return, that it has control over a foreign CFC entity.
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