Does new CFC law trigger Belgian profit tax on foreign subsidiaries?
June 2024 - On 22 December 2023, the federal parliament approved new legislation on Controlled Foreign Companies (CFCs). Since tax year 2024 - financial years ending on 31 December 2023 or later - as a Belgian business group or holding company, you have to take into account an extended scope of this regulation.
How purpose of the CFC regulations is to value undistributed profits of certain foreign subsidiaries/establishments on behalf of the Belgian shareholder company.
What is a CFC?
A CFC is a Controlled Foreign Company. Specifically, it is a low-tax foreign company or establishment associated with another company.
A CFC can be part of a tax planning technique when one concentrates profits (premiums, interest,?) in a CFC in a low-tax country. This often involves a company where there is little economic activity but provides services for a corporate group.
Conditions
To qualify a foreign company/establishment as a CFC, two conditions must be met: the participation condition and valuation condition.
Under the participation condition, the Belgian company must:
· whether or not together with associated entities, hold the majority of voting rights;
· own, together with associated entities or not, a participation of at least 50% in the capital of the foreign company;
· whether or not together with associated entities, have a right to at least 50% of the profits.
Associated entities are natural persons or legal entities that have an (in)direct connection with the Belgian company of at least 25%.
Regarding the taxation condition, the foreign entity meets this condition if it is not subject to income tax or is subject to an income tax that is only half of the corporate tax that would be due in Belgium. Under the new regulations, EU jurisdictions (think Hungary, for example) can also meet this taxation condition.
Grounds for exemption
If a foreign entity meets the participation and taxation condition, it qualifies as a CFC and the undistributed profits are taxed in Belgium. Three exemption grounds apply here, if it can be shown that:
· the CFC performs a substantial economic activity;
· the passive income is limited to 1/3rd of the total income of the CFC;
the CFC is a financial institution and no more than 1/3rd of its income derives from transactions with the Belgian company (or entities associated with the Belgian company).
If a CFC does not rely on any of these exemption grounds, then the undistributed passive income of the CFC (interest, royalties, dividends, rental income, capital gains on shares,?) will be taxed on behalf of the Belgian company-shareholder (in proportion to its shareholding in the CFC).
