BELGIUM: An Introduction to Tax

Introduction 

With its central location in Western Europe, its skilled employees and innovative ports (including the port of Antwerp), Belgium is an attractive location to do business. Although personal income tax rates are rather high, Belgium also has an interesting tax climate, in particular for R&D activities and due to a very large network of tax treaties with more than 100 countries. Also, for new hires as from 2022, a renewed expat regime in personal income tax applies to attract high-potential candidates to the Belgian job market. Taxation in Belgium is highly influenced by international trends and developments, in which the Belgian government would like to take a pioneering role. The implementation of the Pillar Two Directive in its internal legislation is one of the biggest developments in this regard.

General Position 

Belgian resident companies are subject to Belgian Corporate Income Tax (CIT) if their main establishment or place of effective management is located in Belgium. If their statutory seat is located in Belgium, they are presumed to be Belgian tax residents, which are in principle taxable on their worldwide income. Non-resident companies with permanent establishments in Belgium are only taxed on their Belgian-sourced income. Income of foreign permanent establishments are, as a result of tax treaties, exempt from Belgian CIT.

Specific deductions and other tax incentives exist, such as for investments, R&D activities, etc. An important incentive is the innovation income deduction, which provides for a deduction from the taxable income for 85% of qualifying net innovation income, multiplied with a (technical) nexus fracture. Another important tax incentive relates to a partial exemption on the obliged payment of wage withholding tax for researchers. This is presumably an important reason why a.o. the biochemical, pharma and chemical sectors have such a large footprint in Belgium.

As Belgium is an EU member state, the EU tax harmonisation measures apply. As a result, no withholding taxes are due on interest or royalty payments (Interest and Royalty Directive) or dividend payments (Parent-Subsidiary Directive) to (foreign) affiliated entities, if certain conditions are met. For example, dividends paid to a parent entity that holds or will hold, for a period of at least one year, a participation of 10% in a Belgian subsidiary, will be exempt from Belgian withholding tax. Belgium has adopted the general anti-abuse provision under the Parent-Subsidiary Directive (as required under Directive 2015/121 EU). Belgium has unilaterally extended the scope of the dividends-withholding tax exemption under the EU Parent-Subsidiary Directive to situations where the parent company of a Belgian company is established in a non-EU jurisdiction that has a tax treaty with Belgium with an exchange of information clause.

Dividends Received and Capital Gains 

Under the Belgian dividends-received deduction (DRD), qualifying dividends are initially included, but subsequently 100% deducted from the tax base of CIT. Dividends qualify for the DRD if certain conditions are fulfilled. In that regard, the parent entity should hold a participation of 10% or there should be an acquisition value of at least EUR2,5 million. Limitations to this dividend income deduction relate to subsidiaries that are not subject to corporate income tax or subject to an income tax that is much more favourable than the equivalent Belgian tax. It is presumed that a taxation of less than 15% does not meet that criterion. The announced – but not yet final – tax reform would include a transformation from a DRD to a full exemption.

The conditions are the same as for the tax exemption of capital gains on shares. Capital gains on such participations are, in principle, 100% tax exempt, except for so-called trading companies or low-taxed subsidiaries. The counterpart is that capital losses are non-deductible, except for these trading companies or in case of a liquidation of the subsidiary within certain boundaries.

Expenses related to the acquisition of shares are, in principle, tax deductible. Over the past few years, the supreme court in Belgium, the Court of Cassation, has taken a strict position regarding the non-deductibility of interest expenses related to a loan to finance a capital decrease or a dividend distribution.

Transfer Pricing Rules 

The Belgian tax authorities follow the “arm’s length” principle, as set forth in the Organization for Economic Cooperation and Development (OECD) transfer pricing guidelines.

Tax Rate 

The CIT tax rate has been 25% since 2020. A reduced rate applies to small and medium-sized enterprises, which are taxable at 20% on the first EUR100,000 of profit per taxable period, if certain conditions are met.

Other Developments 

Belgium does not have a general wealth tax, nor one for businesses. Since 2021 it has, however, levied a tax on securities accounts with an average positive balance of at least EUR1 million. The current tax rate is 0,15% and is due for Belgian tax residents (including companies) wherever they hold such account, as well as for non-Belgian tax residents which hold such account in Belgium (within the boundaries of an applicable tax treaty).

For financial years ending on or after 31 December 2023, the notional interest deduction is fully abolished. This deduction was introduced in 2005 to strengthen the equity position of Belgian companies. It provided for a tax deduction calculated as a percentage of the equity of the company. Since 2018, the notional interest deduction was already downsized; since then, only the increase of the equity over the last five financial years was taken into account. Finally, Belgium provided a tax credit for royalties received from foreign payers of 15%. This rate applied irrespective of the withholding tax actually withheld. As from 2023, the tax credit is calculated on the foreign tax effectively withheld at source.

International Trends; in Particular Pillar Two 

Belgium typically adheres quite rigorously to international and EU standards in taxation. Such is true for EU harmonisation measures, but also regarding the BEPS initiative and currently the Pillar Two initiative. The draft legislation is being prepared and the aim is indeed to comply by 31 December 2023 with the EU Pillar Two Directive. Such may have an impact on a number of tax incentives for the Pillar Two in scope entities. This impact is not yet entirely clear, but it has, for example, already been decided that a specific tax credit (for R&D investments) will be made refundable in four years, in order to qualify as a Qualified Refundable Tax Credit.