Turning your permanent establishment into a subsidiary: the benefits and concerns
You operate as a foreign company in Belgium, and for tax purposes you have a permanent establishment here so that the profits you earn in Belgium are also taxed here. You are now considering turning that permanent establishment into a genuine Belgian subsidiary (‘’filialisation‘’), instead of continuing to operate with a ‘half-hearted’ permanent establishment. What should you pay attention to in that conversion?
Assessing tax implications properly
The incorporation of a permanent establishment into a Belgian subsidiary can be done in a ‘tax-neutral’ way, both in terms of direct taxes and registration duties, and any existing losses can be used by the new corporation to compensate taxable profits in the future. However, all the rules of the game have to be respected for this to happen. Given the complexity of this, it is best to call on an experienced advisor.
Why switch to a subsidiary?
There may be several reasons for this. One important reason is to limit your foreign company's liability for the liabilities and debts of your Belgian branch. But a better anchoring in Belgium and ‘giving more cachet’ to your company in Belgium can also be good reasons.
You can read all about the difference between working with a permanent establishment (‘branch’) or a Belgian subsidiary here. You can read more about the tax implications of having a permanent establishment in Belgium here.
What should you pay attention to?
Accounting
A Belgian subsidiary is subject to Belgian accounting legislation. This is not the case for a permanent establishment, although it must also comply with fairly extensive accounting obligations from a tax point of view.
In order to correctly determine the profits taxable in Belgium for non-residents, a permanent establishment is required to keep evidential accounting records for tax purposes. As a result, switching to the full Belgian accounting obligations will generally not be a big deal.
Bringing the permanent establishment into the corporation
To transfer from a permanent establishment to a corporation, you basically set up a Belgian corporation and then transfer that permanent establishment into it.
The permanent establishment basically includes everything you use in Belgium to carry out your activity. This may include a building (or a rental contract), equipment, vehicles, employment contracts with your staff in Belgium, the clientele you have already built up in Belgium, etc.
All these elements that together form your permanent establishment are what we call a ‘general asset’. You contribute this universality to the company as capital, in exchange for company shares. Those shares end up in the assets of your foreign company. It thus becomes the ‘parent company’ of your Belgian subsidiary.
When this contribution is made according to the rules of (tax) art, it is ‘tax neutral’. This means that the transfer from the permanent establishment to the company will not give cause for taxation.
Good to know. You can also sell that permanent establishment to your newly incorporated company (instead of contributing it as capital), but in that case you will, in theory, be taxed on the capital gains established or realised in the process.
Tip. When transferring the universality of the permanent establishment to the corporation, in theory no registration tax on the transfer of the real estate is payable. Only the fixed fee of 50 euros is due.
Carry forward losses?
Suppose your permanent establishment has a certain amount of losses carried forward (e.g. due to high start-up costs). Can the newly created corporation then take over those losses and deduct them from its profits taxable in Belgium in the future? Under certain conditions and depending on the concrete circumstances, yes. So be sure to consult your SBB advisor beforehand.
Dividends
If the Belgian subsidiary distributes (part of) its profits by way of a dividend to your foreign parent company, the latter will - if certain conditions are met - not be taxed on these dividends (after all, they have already been taxed at the Belgian subsidiary).
Want to know more?
If you would like concrete advice regarding the conversion of the Belgian branch into a Belgian company, do not hesitate to contact your SBB advisor.
