Tax & Corporate Policy

  1. Introduction
    1. PIT
    2. CIT
    3. Branch vs. Subsidiary
    4. Legal entities: NV, BVBA, S-BVBA, E-BVBA
    5. Methods of Acquisition: Share deal vs. Asset deal
    6. CIT diagram
  2. Notional Interest Deduction
  3. Innovative Fiscal Measures for R&D
  4. Dividend Withholding Tax Exemptions
  5. Invest in Belgium – Increase you profits
  6. The international business and tax dimension (Mr. Dewitte)
  7. The need for business insight in international tax (Mr. Roels)

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  1. Tax credit vs. Tax deduction
  2. Economic double taxation vs. Juridical double taxation
  3. Business flows are tax flows
  4. “Above the line” vs. “Below the line”
  5. The arm’s length principle
  6. 10 reasons to invest in Belgium

I. Introduction  

1. PIT

  • Taxable income:

-       Real estate income

-       Investment income: 15% interest withholding tax, 25% dividend withholding tax.

-       Professional income/ Earned income: Profits/ Remuneration and salaries

-       Miscellaneous income

  • Tax planning opportunities for individuals:

-       Absence of net wealth tax.

-       Low flat tax rates on personal investment income: 15% on interest withholding and 25% on dividend withholding.

-       Absence of capital gains taxation on privately held assets.

-       Inheritance and estate planning opportunities

-       Foreign executives of MNEs: special tax regime (not taxed on their incomes in Belgium because they have been taxed in their home countries).

2. CIT

  • 08 steps to determine CIT:

-       1st step: Profit/ Loss

-       2nd step: Belgian income or foreign income (whether foreign income comes from a country with Double Taxation Convention or not)

-       3rd step: Deduct

+ Foreign income coming from DTC countries and;

+ Non-taxable items.

-       4th step: Received dividends

If a company pays a dividend to a foreign company, the foreign company will not be taxed on that dividend because it has been taxed in the original country.

-       5th step: Patent Income Deduction (80% income from patents is not taxed)

-       6th step: Notional Interest Deduction (3.8% or 4.3% on SMEs)

-       7th step: Tax loss

-       8th step: Investment deduction (Ex: Investments in R&D)

 

  • Reduced rates: when taxable net profit does not exceed 322,500EUR.
  • Additional conditions:

-       Activities of the company

-       Shareholding of the company: Entitlement to the reduced rates is not granted to companies of which at least 50% of the shares are held by one or more other companies.

-       Yield on capital: Entitlement to the reduced rates is also denied where the dividend yield on the registered capital effectively paid up which remains to be reimbursed at the beginning of the taxable period exceeds 13%.

-       Remuneration of management: In order to qualify for the reduced rates, the company is also required to charge, on the results of the taxable period, to one manager at least a remuneration which, if it is less than 36,000EUR, shall not be less than the company’s taxable income.

  1. Tax planning opportunities for corporate investors:

-       Special tax incentives & allowances:

+ Notional Interest Deduction (3.8% - 4.3%)

+ Dividend Withholding Tax Exemption (95%)

+ Patent Income Deduction (80%)

+ Tax treaty network.

-       Advanced tax ruling practice: clearance, legal certainty and guidance:

Free choice of the least tax route by the taxpayer is constitutionally protected right but introduction and broadening of general and specific anti-abuse provisions. It is to prove that, for your international tax planning, Belgium is the place to be, because the tax system and its incentives:

-       Are adapted to specific business needs;

-       Allow a tax friendly repatriating of profits;

-       Keep the global taxation level at a minimum.

 

3. Branch vs. Subsidiary

There are 02 options for a foreign company to establish a legal entity when investing in Belgium:

-       The establishment of a branch;

-       The incorporation of a subsidiary under any of the forms provided by Belgium Company Law.

3.1  Branch:

  • Branch of a foreign head office:

-       Considered to be the same legal entity as the foreign company;

-       Governed by the same regulations as Belgian companies;

-       CyCO does not include a definition of a “branch”.

  • Main characteristics:

-       Economic dependence of the branch;

-       Durability and relationship with economic activities of the head office;

-       Participation of the branch in commercial dealing in the Belgian market.

  • Definition by the Belgian Supreme Court:

-       Regularly carrying out activities in Belgium;

-       Represented by a representative who may bind it with respect to third parties;

-       Branch is considered to be a permanent, economically dependent establishment of the head office.

3.2  Subsidiary:

A company is incorporated by an agreement, whereby 02 or more parties agree to put something in common with the intention to carry out one or more precisely defined activities and with a view to provide the shareholders with a direct or indirect economic benefit.

Main characteristics:

-       Contractual agreement between private parties;

-       For a definite or indefinite period of time;

-       The attention of the parties to engage in a JV together and to share all benefits and risks of this venture;

-       At least 02 founders and partners/ shareholders for a company (exception: single owner BVBA, only one shareholder and founder or starters BVBA);

-       The aim is to realize economic benefits for the partners/ shareholders;

-       Formation by a private deed or notary’s deed (certainly when limited liability).

3.3  Comparison between a branch and a subsidiary:

Branch

Subsidiary

Founders’ liability

No founders’ liability. The opening of a Belgian branch does not entail founders’ liability because no company is incorporated.

Yes. The incorporation of a Belgian subsidiary would entail the founders’ liability. For example, the founders of a subsidiary can be held severally liable for their company’s engagements in the event that the company goes bankrupt within a period of 03 years of its incorporation.

Tax implications

Cost of opening a branch is different from a subsidiary.

Minimum capital for a corporation (SA/NV) amounts to 1,500EUR)

No dividend withholding tax. The after tax profits of the Belgian branch can be remitted to the foreign head office without any withholding tax.

Yes. The after tax profits distributed by the Belgian subsidiary to its foreign parent company would in principle be subject to Belgian withholding tax (rate???). However, the rate of that withholding tax could be reduced according to the applicable tax treaty reduction and it could be zero if the EU parent-subsidiary directive applies.

Direct offsetting of tax losses. The tax losses of the Belgian branch can in most countries be directly offset against the profits of its foreign head office.

No direct offsetting of tax losses. The tax losses of the Belgian subsidiary can in most countries not be directly offset against the profits of its foreign parent company.

Determination of the taxable basis: the same as subsidiary: 33.99%

33.99%

Commercial aspects

A Belgian branch enjoys less commercial status than a subsidiary. The fundamental reason for that distinction is the fact that it can be closed at any moment.

In principle, a Belgian subsidiary enjoys a higher commercial status than a Belgian branch because it can only cease its Belgian existence by applying the liquidation procedures provided by the Belgian company law.

Publication in Belgium of the financial statements of the foreign head office.

Publication in Belgium of only the financial statements of the subsidiary.

Statutory auditor

No requirement except if it has 100 employees or more.

A statutory auditor must be appointed to certify the financial statements of the Belgian subsidiary.

For a foreign company planning to enter the Belgian market, which legal entity, branch or subsidiary, do they often prefer?

4. Legal entities: NV, BVBA…  

5. Methods of acquisition: Share deal vs. Asset deal

There are 02 ways to acquire or buy a company: share deal & asset deal. Both parties in an acquisition need to take into account:

-       Taxation liabilities

-       Responsibilities that the buyer takes over

-       Loans? Can one party deduct interest in both deals? If yes, is it from capital or operational income?

  • Share deal is the purchase of shares in exchange for cash or shares.

-       If a company sells its shares to another company, it will not be taxed in case of capital gain on that deal. However, on the contrary, it could not deduct in case of capital loss.

-       The buyer will be liable for everything related to the purchased shares. The shares Belco A bought are not deductible.

-       Interests on loans for the acquisition of shares Belco B from Belco C are not deductible from company profits of Belco B.

 

  • Asset deal = the purchase of asset

-       The applicable procedure may be different depending whether the assets are considered:

+ A mere collection of assets, or;

+ A branch of activity, being “a unit which conducts a business activity autonomously from a technical and operational perspective and which is capable of functioning by itself, or;

+ A universality of goods.

-       For tax purposes, the opposability of a transfer of a universality of goods or a branch of activity is subject to a notification to the tax collector’s office.

-       Asset deals are based on “market value”.

-       Sale of assets: capital gains -> “spread taxation” if certain conditions are met or loss (deductibility limitation).

-       Belco A can:

+ Depreciate on new market value;

+ Interests on loans for acquisition are deductible (can be deducted from income provided by “take over” activities)

 

  • Example: Belco C is the owner of shares of Belco B. Belco A wants to acquire activities/ assets from Belco B. Then, Belco B can sell all assets and liabilities to Belco A = Asset deal.

-       Belco A must pay for all assets at the normal market value.

-       In case of capital gains, if an asset worth 100 is sold at 150, Belco B or C has to pay taxes in the form of Abnormal Benevolent Advantage tax (ABA tax).

+ Seller attack: B has a capital gain and must pay taxes.

+ Buyer attack: A has to pay the ABA tax if it buys the asset for 50 because A benefits from a capital gain.

+ Spread taxation: If A has a capital gain of 50 at the moment of the deal, this will not be immediately taxed, A can spread it over 10 years and each year 5 will be taxed.

-       In case of capital losses, if A incurs a capital loss, this loss is deductible. This is contrary to a share deal in which a capital loss is not deductible.

+ Depreciation on new market value, if A pays more for an asset than the market value, this cost can be deducted.

Thus, we must always check whether all the losses are deductible or not, or limited deductible.

-       Logical interest deduction: interests on loans for acquisition are deductible. If A has to take a loan to pay B, the interest paid on the loan can be deducted from the income generated from the activities that are taken over.

 

  • Belco C is the owner of the shares of Belco B. Capital from B is 20 (represented in shares). These shares are assets of C. A is going to buy the shares from C for a price of 30 (10 gain for C).

-       The shares will disappear from the asset side balance sheet of C and appear on the asset side balance sheet of A.

-       C is making a capital gain on the sale of shares. This gain is fully exempted from taxation >< Asset deal: ABA tax.

-       If C sells for 10, they are making a capital loss. Capital losses are not deductible for the seller.

-       Step up of shares can’t be depreciated for the buyer.

-       Goodwill on shares = no depreciation for buyer.

-       Interests on loans for the acquisition are not deductible from company profits of Belco B. If A takes a loan to take over the shares from C, the interest from the loan can only be deducted from the profit and loss account of the buyer >< Asset deal: the interest is deductible from the operational income from the activities of the company that has been taken over.

-       The buyer takes over all tax responsibilities at the moment of the take-over.

 

II. Notional interest deduction

1. What is it?

-       NID is a new, innovative measure in international tax law.

-       It enables all companies subject to Belgian corporate tax to deduct from their taxable income a fictitious interest calculated on the basis of their shareholder’s equity.

2. Purpose:

-       NID aims to reduce the tax discrimination between debt financing and equity financing.

-       Interest paid is deductible.

-       Dividends are taxable.

3. Positive effects:

-       General reduction of the effective corporate tax rate and a higher return after tax on investment.

-       Promotion of capital intensive investments in Belgium.

4. Principle:

-       NID = Notional interest rate x Adjusted equity.

5. Interest rate:

-       3.8% for CIB

-       4.3% for SME

-       NID helps increase attractiveness of Belgium for capital intensive companies, equity funded headquarters and treasury.

6. The qualifying equity:

-       The “equity capital” includes capital, share premiums, revaluation gains, reserves, carrying forward of profits and losses, and capital investment subsidies.

-       This “equity capital” will be adjusted.

7. Special features:

-       If the company makes insufficient profit, the deduction can be carried forward to the following 07 years.

-       There is neither condition of investment in intangible or tangible assets, nor of blocking or freezing the amount on a separate account of the company’s balance sheet applies.

-       No withholding tax on NID.

-       The only formal condition to comply with is the completion of an enclosure with the corporate tax return.

8. Advantages:

-       The NID is a valuable tool to maintain or even locate in Belgium activities which were previously allowed under the special tax regime of a Belgian coordination centers.

-       NID creates a considerable tax benefit for companies that have good solvency ratios, reducing the taxable base and generating a higher return after tax.

-       It provides flexibility, because it is possible to carry forward any unused amount of the deduction.

-       It strengthens the financial position of Belgian companies and branches by use these to finance new investments.

-       For international groups, it opens possibilities for allocating new activities to a Belgian entity such as intra-group financing, centre procurement or factoring.

9. Conclusion

-       The NID combines with the extensive treaty network, the tax regime for expatriates, the access to EU directives and the Belgium ruling practice. This large set of measures makes Belgium an attractive location for capital-intensive companies, equity-funded headquarters and treasury centers.

 

III. Innovative fiscal measures for R&D

10 reasons to invest in R&D in Belgium:

-       Patent Income Deduction

-       Investment deduction for investments in R&D centers

-       R&D tax credit

-       Exemption salary withholding tax for researchers

-       Tax allowance for additional employees

-       Innovation premium

-       Expat status in R&D

-       Tax exoneration for regional grants

-       Accelerated depreciation of R&D intangibles

-       Deductible gifts

1. Patent income deduction

-       80% income from patents is deducted from taxation. This is applicable for Belgian companies or Belgian establishment of foreign companies.

+ Patents must be self-developed by a Belgian company or branch in R&D centers in Belgium or abroad.

+ Patents are acquired by or licensed to a Belgian company or branch provided that they are further developed in R&D centers in Belgium or abroad.

-       Particularities:

+ No carry forward or carry back;

+ Compliant with EU rules;

+ Formalities: an enclosure to join to the tax return.

-       Highly competitive measure:

+ Very low effective tax rate of maximum 6.8% and absence of any capping rules;

+ Tax deduction in addition to normal tax deductibility of R&D related expenses.

+ Can be combined with notional interest deduction for invested equity.

2. Investment deduction for investments in R&D centers

-       In one go: 13.5% of the investment value.

-       Spread deduction: 20.5% of the annual depreciation.

-       In case of insufficient profits, the deduction can be carried forward to an unlimited period

3. R&D tax credit

-       Tax credit is the amount of money that the taxpayer is able to subtract from the amount of tax they own to the government.

-       Corresponds to the tax saving linked with the investment deduction. Example, investment of 100,000EUR => Tax credit = 100,000 x 13.5% x 33.99% = 4,588.65EUR

-       Advantage: improve presentation in accounting terms of the cost price of R&D in Belgium.

-       In case of insufficient profits, the tax credit can be carried over to the subsequent 04 tax years. The part not used after 05 years is refunded in cash from the government.

-       Unlike tax reductions, tax credits reduce the actual amount of tax owned.

-       Tax reduction is a reduction on the taxable income.

4. Exemption salary withholding tax for researchers

-       Principle: the withholding tax is normally retained on the remuneration paid to the researchers, but the employers are exempt from paying to the Belgium treasury.

-       Researchers: master degree or equivalent.

-       Exemption: 75% for all categories of researchers.

5. Tax allowance for additional employees:

-       Exemption of 14,140EUR (2011) from the enterprise profits for the manager of export or TQM department.

6. Innovation premium

7. Expat status in R&D

-       Attractive conditions for foreign executives and researchers:

+ Exclusion from the taxable remuneration of expatriation allowances:

è Max 29,750EUR per year for repetitive expenses (cost of living, housing, tax equalization)

è Tax free reimbursement of installation costs, school fees…

+ Exclusion from the taxable remuneration of workdays performed outside Belgium.

-       Attractive conditions for employers: reduction of employment cost for expats with simple proceedings.

8. Tax exoneration for regional grants

-       Regional grants are exempted from taxation.

-       Subsidized assets or intellectual property out of a subsidized project can not be transfer during a 03 year period.

9. Accelerated depreciation of R&D intangibles

-       Tax depreciation rules on R&D investments (intangibles): accelerated depreciation in 03 years instead of 05, according to the straight-line method of depreciation.

10. Deductible gifts

-       Cash contributions aiming at sponsoring public R&D programs are deductible from the net taxable income. Maximum 5% of the net income or 500,000EUR.

 

IV. Dividend Withholding Tax exemption

  1. Conditions

-       Be resident in a country with which Belgium has concluded a double tax treaty.

-       The beneficiary holds a participation of at least 10% in a Belgian subsidiary, for an uninterrupted period of at least 12 months = low participation threshold.

-       Be subject to corporate income tax in its country or residence.

-       Have one of the legal forms mentioned by the EU Parent-Subsidiary Directive, or similar if outside the EU.

2. Withholding tax exemptions on interest payments

-       Belgium domestic law foresees several withholding tax exemptions on interest payments. Exemptions that are regularly used are:

+ Interest paid to qualifying group companies. Later exemption is based on the European Interest & Royalty Directive where Belgium extended the exemption to indirect holdings of at least 25%;

+ Interest paid to banks established in the E.E.A. or in a tax treaty country;

+ Interest paid by a Belgian eligible quoted company or an eligible intra-group finance company;

+ Interest from registered bonds issued by a Belgian companies/ branches.

-       The domestic withholding tax rate (15%) may also be reduced by application of a double tax treaty (subject to the conditions off course of the treaty). Hence, interest payments to, for example, the US, Netherlands, Luxembourg are exempt of withholding tax.

3. Withholding tax exemption on dividend distributions

-       Dividends up streams are not subject to withholding tax under the conditions of the EU Parent-Subsidiary Directive.

-       No WHT is due on dividends paid to companies in a tax treaty country.

The latter relief will apply if the parent company:

+ is a resident of a country with which Belgium has a tax treaty;

+ is subject to the corporation tax or a similar tax;

+ is not subject to a tax regime which deviates from the common tax regime;

+ hold a minimum shareholding of 10% in the distributing company for a minimum period of one year;

+ has a legal form similar to the forms entitling a company to benefit from the Parent-Subsidiary Directive.

Is DWT exemption 95% or 100%?
 

 

V. Invest in Belgium – Increase your profits

-       Ruling

-       Notional Interest Deduction

-       Dividend Withholding Tax exemption

-       Patent Income Deduction

-       Other incentives

1. Ruling

2. What is ruling?

-       Advanced decisions or ruling is about creating confidence to invest in Belgium.

-       The investor describes the facts, allowing the tax administration to determine, in advance, how the tax laws are to applied on a CASE BY CASE basis.

-       It ensures a legally binding accurate forecast of all the tax implications of your investment projects.

3. Characteristics of the Belgian ruling:

-       Ruling on almost all topics.

-       Case-by-case ruling in a new open culture.

-       Legal certainty for investors.

-       Accordance with international rules.

-       Open to potential and existing investors.

-       Legally binding for a 05 year renewable period.

-       Economic “substance” required.

4. Unlimited application field for ruling:

-       Transfer pricing.

-       Depreciations.

-       Deductible expenses.

-       Provisions.

-       Financing.

-       Branches.

-       Tax treaty matters.

-       Bonded warehouses.

 

VI. The international business & tax dimension (Mr. Dewitte)

1. International tax strategy – A journey through current trends

04 main tools of an efficient international tax strategy:

-       How to choose holding locations: opportunities and threat?

-       From long term financing to cash pooling: current trends and threats.

-       IP management: IP regimes across Europe.

-       HOs and principle business strategies: the ultimate stage of group tax optimization.

2. Holding locations – How to choose your holding location?

3. Ideal holding location:

-       Earning repatriation: no withholding tax

+ Dividends to EU/ DTC countries;

+ Interest;

+ No complex TP rules;

+ Flexible thin cap;

+ Deductible regardless of the lender.

-       International tax planning

+ Advance tax analysis practice;

+ Treaty network;

+ Efficient tax structure: IP, financing, supply chain.

-       Earnings taxation: 100% exemption

+ Dividends and capital gains;

+ Deductibility of capital losses;

+ No passive incomes/ CFC rules;

+ Interest deductibility on participation.

-       Setting up/ Maintenance

+ No transfer taxes on capital injections;

+ No valuation reports for equity contributions;

+ Flexible substance requirements;

+ Flexible reporting and accounting;

+ Legal, political stability.

4. Choosing the intermediate holding location:

-       Capital gains in Belgium: 100% exemption from taxation.

-       Dividends distributing to parent companies: 95% exemption.

-       Dividends paid to Belgium: 100% exemption from taxation.

-       If a company pays a dividend to a company in Hong Kong, this dividend is taxed at

+ 5%, if the company in Hong Kong holds at least 25% of the capital of the company in Indonesia;

(5% is the tax rate or the amount of dividends to be taxed?)

+ 10% in all other cases.

-       Singapore: 10% and 15%

-       The Netherlands: 10%

-       In case of capital gains: 100% tax exemption.

  • Threat 1: Respect the location – Residency test
  • Threat 2: Anti-Avoidance rules/ CFC rules

-       The Controlled Foreign Corporations rules are applied in order to prevent erosion of the domestic tax base and to discourage residents from shifting income to jurisdictions that do not impose tax or that impose tax at lower rates.

  • Threat 3: Beneficial Ownership Test
  • Group financing techniques

How to choose your financing location?

-       Debt push down: basics

-       Combination of holding and financing activities

-       Threats: Transfer Pricing circulars: The Netherlands and Luxembourg

-       Practical examples in Asia.

6.1  Debt push down:

-       Overall purpose: Reduce the tax basis of the company to the lowest:

+ Strategy 1: Leaving only a taxable spread;

+ Strategy 2: Hybrid debt instrument. This is done by exploiting cross-border tax asymmetries that treat the hybrid instruments as equity in Luxembourg and as debt in Foreign Co jurisdiction. As return is viewed as dividend, it is eligible for exemption regime.

6.2  Transfer pricing on intra-group financing activities:

What is transfer pricing?

-       The basic principle, which underpins the whole analysis of transfer pricing as laid down in the OECD TP Guidelines, is the arm’s length principle.

“A transaction between related entities should be established as if it would have been taken place with an unrelated party under the same circumstances and terms and conditions”.

Why is TP important?

-       Transfer pricing has a direct effect on the localization of profits before taxes;

-       Transaction between related parties should meet the arm’s length standard on both sides of the transactions.

 

VII. The need for business insight in international tax

1. 03 tax layers:

-       Domestic tax law;

-       Tax conventions;

-       EU tax law.

2. Business flows are tax flows:

-       Goods: customs duties, VAT, TP

-       Services: sharing costs

-       Intangibles: R&D, patents, trademarks

-       Finance: cash and cash flow, debts, dividends repatriation, holding

-       People: salary cost, pension rights

3. Business impact of international tax:

Financial parameters are affected by tax:

-       Earnings per share;

-       P/E ratio;

-       Credit ratings;

-       Hold/ buy/ sell.

The ETR is a very important factor internally and externally.

 

VIII. Highlights for the examination

1. Tax credit vs. Tax deduction

-       Tax credit is an amount of money that a tax payer is able to subtract from the amount of tax that they own to the government.

-       Tax reduction is a reduction on the taxable income.

-       Unlike tax reduction, tax credits reduce the actual amount of tax owned.

2. Economic double taxation vs. Juridical double taxation

-       Economic double taxation refers to the taxation of two different taxpayers with respect to the same income. Economic double taxation occurs, for example, when income earned by a corporation is taxed both to the corporation and to its shareholders when distributed as a dividend.

-       Juridical double taxation refers to circumstances where a taxpayer is subject to tax on the same income in more than one jurisdiction. For example, a resident of Belgium who is also considered to be considered to be a resident of Germany would be potentially subject to concurrent full taxation in both countries. Bilateral tax treaties generally tend to eliminate (or at least reduce) the possibility of juridical double taxation.

3. Business flows are tax flows

-       Goods: customs duties, VAT, transfer pricing

-       Services: sharing costs

-       Intangibles: R&D, patents, trademarks

-       Finance: cash and cash flow, debt, dividend repatriation, holdings

-       People: salary cost, pension rights

4. “Above the line” vs. “Below the line”

-       “The line” means the adjusted gross income (AGI). As AGI determines the tax rate, you want to have as many “above the line” deductions as possible.

-       “Above the line” deductions are those that you have subtracted on the top portion of your tax return, before your AGI has been determined. “Above the line” deductions are important in helping you reduce your adjusted gross income which is the key to reducing your tax liability.

-       Example of “above the line” deductions: rental deductions, stock losses, moving expenses, student loan interests paid, alimony…

-       “Below the line” deductions are those that you will subtract from your AGI sum at the bottom of the tax return. So your AGI has been determined when you utilize “below the line” deductions.

-       Example of “below the line” deductions: charitable donations, medical expenses, tax, interest expenses…

-       “Above the line” deductions are more advantageous to the taxpayer. Additional, “below the line” deductions are not allowable unless in excess of the required AGI percentage. For example, “medical expenses” are “below the line” deductions; however, they are only allowable if they exceed 7.5% of the taxpayers’ AGI.

-       “Above the line” deductions are invaluable in the sense that they are fully allowable even in the event the tax payer takes standardized deductions as apposed to itemized.

5. The arm’s length principle

What is transfer pricing?

-       Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services or use of property.

-       Transfer price is the price at which divisions of a company transact with each other.

-       Transfer prices are significant to both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.

-       The basic principle, which underpins the whole analysis of transfer pricing as laid down in the OECD TP Guidelines, is the arm’s length principle.

“A transaction between related entities should be established as if it would have been taken place with an unrelated party under the same circumstances and terms and conditions”.

Why is TP important?

-       Transfer pricing has a direct effect on the localization of profits before taxes;

-       Transaction between related parties should meet the arm’s length standard on both sides of the transactions.

10 reasons to invest in Belgium:

-       Advanced tax ruling practices: clearance, legal certainty and guidance:

+ are adapted to specific business needs;

+ allow a tax friendly repatriating of profits;

+ keep the global taxation at a minimum.

-       Notional interest deduction

-       Patent income deduction

-       Dividend withholding tax exemptions

-       Tax treaty network

-       Expat status

+ For employers: attractive conditions for employers – reduction of employment cost for expats with simple proceedings.

+ For employees: attractive conditions for foreign executives – tax free allowances (living and housing costs, schooling costs for children, etc.); travel exclusion (of workdays performed outside Belgium).

-       Belgium holding regime:

+ Dividends-received deduction of 95%;

+ Deductibility of interest paid to acquire shares;

+ Exemption of realized capital gains.

-       Other main R&D incentives

+ Tax credit in some cases;

+ 75% income tax reduction for researchers.

-       Tax shelter for audio-visual sector.

-       Bonded warehouse: a type of financial protection that assures an individual or business keeping goods in a storage facility that any losses will be covered if the facility fails to meet the terms of its contract. If the warehouse owner or operator fails to meet its obligations, a third party company called a surety will act as an intermediary and compensate the client for his or her loss.

 

  1. What happens if a company has insufficient profits for NID, PID, R&D investment deduction and R&D tax credit

-       Patent income deduction: no carry forward or carry back.

-       Investment deduction on investments in R&D centers: in case of insufficient profits, the deduction can be carried forward to an unlimited period.

-       R&D tax credit: in case of insufficient profits, the tax credit will be carried over to the subsequent 04 tax years, the part not used after 05 years is refunded in cash from the government.

-       Notional interest deduction: in case of insufficient profits, the deduction can be carried forward to the following 07 tax years. 

  1. Hybrid instruments strategy

-       Hybrid entity:

+ Entity with features of both a corporation (in principle non-transparent) and a partnership (in principle transparent);

+ Consequence: entity is treated as transparent in one jurisdiction and as non-transparent in the other jurisdiction.

-       Hybrid instrument:

+ Instrument with features of both equity and debt;

+ Consequence: instrument is treated as equity in one jurisdiction and as debt in the other jurisdiction.

-       What can hybrids achieve?

+ Tax deferral through mismatch of hybrid classification;

+ Double deduction of finance costs, start-up losses and royalty expenses;

+ Step up in asset basis due to transfer of assets through hybrids;

+ Withholding tax benefits;

+ Matching company law/ accounting flexibilities with attractive tax regimes.

 
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