“The unity (of Belgian history) arises not from a community of race as in Germany, not from a centralizing action, as in England or France, but from the unity of social life”.

Henri Pirenne Histoire de Belgique

Foreword 1900

INTRODUCTION Belgian Tax Structure 1. Taxes must be enacted by Statute1. They must be renewed yearly2. Equality must be respected between taxpayers3 and the Constitutional Court will sanction laws contrary to this provision. Constitutional equality and fundamental rights of free movement guaranteed by the EU treaties apply simultaneously. When the violation of both is asserted, the law gives priority to the Constitution : a question must be asked to the Constitutional Court first. Belgium is a federal country. Most taxes are federal but the proceeds are shared with the Communities4 (Dutch, French and German-speaking)5 and the Regions (Flanders, Wallonia, Brussels)6. The Regions may levy surtaxes, grant tax reductions or operate general fiscal reductions and increases. Some taxes are regional taxes : - Inheritance duties of residents and transfer duties upon death of non-residents ; - Real property withholding tax ; - Stamp duties on transfers subject to payment of real property located in Belgium, except for transfers upon contribution to a company by an individual of a dwelling ; - Stamp duties on gifts of personal property or real property ; - Radio and television fees ; - Traffic tax on car vehicles ; - Circulation tax ; - Euro road tax.

1 Constitution, Art. 170, § 1. 2 Const., Art. 171. 3 Const., Art. 172. 4 Special law of 16 January 1984 concerning the financing of the Communities and the Regions. 5 Shared taxes : VAT, personal income tax. 6 Joined taxes : personal income tax.

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Income Tax 2. From 1919 to 1963, Belgium did not levy a uniform tax on total income. The income of individuals and corporations was taxed according to a schedular method based on its source. A Law of fiscal reform of November 20, 1962 replaced the schedular tax system by a system similar in principle to the U.S. income tax and to the tax systems of other EU countries. All income is subject to a single tax. However, withholding taxes (“précomptes – voorheffingen”) are due on income depending on its source. They are creditable against the final tax due, within certain limits, with the exception, however, of the real property tax7 which is improperly called real estate withholding tax (“précompte immobilier – onroerende voorheffing”). Within this system of a single income tax, a distinction is made between :

(a) Resident individuals, who are taxed on their global income, under the Individual Income Tax regime ;

(b) Resident corporations, which are taxed on their global income under the

Corporate Income Tax regime;

(c) Non-residents, both individuals and corporations, which are taxed on their income from Belgian sources under the Non-resident Income Tax regime ;

(d) Non-profit making organizations and government agencies, which are taxed on

certain categories of income under the Legal Persons Income Tax regime, which mainly consists of withholding taxes at source.

The Belgian income tax legislation was first coordinated into an Income Tax Code, by a Royal Decree (R.D.) of February 26, 1964. The main regulations implementing the provisions of this Code were embodied in the Royal Decree of March 4, 1965. A Royal Decree of April 10, 1992, coordinated the income tax legislation into an Income Tax Code 1992, hereinafter abbreviated CIT1992 or, generally, CIT. The main regulations implementing the provisions of this Code are embodied in the Royal Decree of execution of the 1992 Code of August 27, 1993, hereinafter abbreviated RD-CIT 1992 or RD-CIT.

7 By real property we mean property which is immovable according to the Civil Code (land, buildings …) and by personal property we mean property which is movable according to the same Code, being all other property, whether tangible such as chattel, machinery, etc. or intangible (“incorporal”) such as securities, claims, intellectual property rights.

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TITLE I –BELGIAN INDIVIDUAL AND CORPORATE

TAX LAW 3. The tax administration has issued :

- the Administrative Commentary of the Code of Income Taxes (Com.CIT), regularly updated on the Internet;

- the Administrative Commentary of Double Taxation Conventions (Com.DTT).

Belgium is a member of the OECD and follows the OECD Model in the drafting of its treaties. It has developed a model Belgian treaty draft 2010 (replacing a 2007 version)8.

Chapter I – Taxation of individuals Section I Taxation of resident individuals A. Taxable persons 4. The Belgian personal income tax is applicable to individuals who are considered to be residents of Belgium for tax purposes. B. Residence 1. Domestic Law 5. Individuals are considered residents for income tax purposes if they keep their permanent domicile or customary residence in Belgium or if the “centre of administration of their wealth” (Centre of economic interests) is established in Belgium9. The notion of “domicile” is characterized by the place where a person effectively lives or resides, while “the centre of administration of wealth” is the place where a person effectively manages her wealth. Temporary absence is not considered a change of domicile. A person registered in the National Register of inhabitants is deemed to be resident unless proven otherwise. The fiscal residence of married persons is located at the place where their household is established. The same presumption applies to people who have established a legal cohabitation.

8 De Broe, L., Belgium Tax Treaty Policy and the Draft Belgian Model Convention, Bull. Int. Taxation, 2008, p. 322 ; Schoonvliet, E., Unilateral and Treaty Measures in Belgium for the Avoidance of Double Taxation, Bull. Int. Taxation, 2008, p. 430. 9 CIT, Art. 2, 9, 1° ; Jorion, G., Le non-résident ou la société étrangère face à l’impôt belge, Bruxelles, Larcier, 2006, p. 73.

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Domicile The definition, developed by case-law and doctrine, of the main home or domicile10 for income tax purposes emphasizes its factual nature: it is a ‘specific and actual dwelling, that can be different from civil domicile or nationality, which is constituted, confirmed and consolidated by a whole sum of facts and circumstances and which is characterized by a certain permanence or continuity’.11 The main home is the centre of one’s vital interests12 (family related, professional, cultural, economical and other). As such it must not be deemed to change easily. The intention to return to the country of origin has no impact on the issue. Residence necessarily implies an element of permanence or continuity. The duration of a stay in a country is sometimes a sufficient criterion to determine whether a person is a resident, but the assessment of the stability in dwelling goes mostly beyond the mere temporal element. In their Commentary on income taxes the tax authorities admit that this stability cannot be the sole criterion without taking into account the situation of the family.13 Other elements can influence the determination of the main dwelling and reduce the importance of the duration of the stay in Belgium. Did the person leave all his possessions behind when coming to Belgium?14 What is the nature of his employment in Belgium?15 What is the reason of an (early) return abroad?16 Is the foreign employment continuously exercised on the same location or is one living out of a suitcase?17 Is one’s home connected to the Belgian telephone network18 and, if so, how high were the costs and where were the invoices sent to19 (the same applies to the use of water and electricity)? Is someone owning or renting a house?20 Where are a person and/or his property insured?21 Does the contract of employment stipulate a return to the country?22 Which address do official documents23, letters and name cards mention?24

10 The words ‘domicile’ and ‘residence’ are used here as synonyms, and not in their English civil law meaning. 11 See for instance Cass., November 15, 1990, Pas. (1991), I, at 1226. 12 P. Hinnekens, Belasting der niet-inwoners (Kalmthout: Biblo, 1994), n° 6. 13 Com. IT 3/10 and 3/60. 14 Compare with: Antwerp, December 18, 1984, A.F.T. 1985, 140: a person moved furniture and appliances weighing 1020 kg to Tunisia together with his car. He was also accompanied by his wife. As such he can be considered a non-resident from then on. 15 Compare with: Liege, May 2, 1972, Bull. Bel. 511 (1973), at 2075: a person sent by his employer to the USA for ten months for training purposes did not reside their on a permanent basis. 16 Compare with: Brussels, September 25, 1990, R.G.F. (1991), at 216: a deputy program administrator whose contract obligated him to work at least 41 months in Arabia, but who had to return to Belgium because of failure of his employer, can still be considered a non-resident, because the return was not motivated by the intention of the employee. 17 Compare with: Liege, March 13, 1985, F.J.F., 85/130: person employed on different locations in different countries not considered to have become a Belgian non-resident. 18 See Cass., February 7, 1979, Bull. Bel. 611 (1979), at 2713; Liege, April 24, 1996, Fisc. Koer. (1996), at 383-386. 19 Liege, April 14, 1988, F.J.F. (1988), n° 209; also regarding other types of invoices: Cass., October 28, 1982, F.J.F. (1983), n° 41. 20 Antwerp, March 5, 1984, A.F.T. (1984), at 87; Antwerp, June 29, 1999, T.F.R. (2000), at 21, observation of Marc Delboo; Brussels, October 21, 1976, J.D.F. 1977, at 260; Brussels, May 4, 1982, F.J.F. (1982), n° 112; Brussels, September 17, 1998, Fisc. Koer. 1998, at 537. 21 Antwerp, February 18, 1982, F.J.F. (1982), n° 71; Liege, January 18, 1995, F.J.F. (1995), n° 149. 22 Liege, January 18, 1995, F.J.F. (1995), n° 149. 23 Trib. Nivelles, November 4, 2003, Rec. gén. Enr. Not. 1 (2004), at 31. 24 Antwerp, February 18, 1982, F.J.F. (1982), n° 71.

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A practical question often heard is how long a stay in Belgium has to last before there can be a shift in residence at all. First of all, it is clear that for income tax purposes a stay of 183 days or even during the whole taxable period is normally insufficient to become a resident in Belgium, because the law itself contains special arrangements – within the tax on non-residents – for employees who live here for more than 183 days25 or who are keeping a (temporary) abode here during the whole taxable period.26 Secondly, we find a vast amount of case law27 vis à vis the required duration of the stay. So, for example, ten months were not long enough for an engineer, sent to the United States by his employer for training purposes, to lose his Belgian residency.28 For a pilot of Sabena on a mission of technical support to Air Congo thirty months in Zaire was also insufficient to become a non-resident of Belgium.29 Also, three years were considered insufficient for a person teaching at the faculty of law in Ouagadougou (Burkina Fasso) to lose her status as Belgian resident for tax purposes.30 But for a professor working in Canada eight years was a long enough period for a change of fiscal residence.31 In two of the so-called ‘Eurosystem cases’ (with regard to persons working in Arabia) a continuous stay abroad of respectively six and seven years sufficed.32 Remarkably, since 1990, a shortening of the required permanence in staying abroad, needed to free oneself from Belgian resident taxation, can be noticed.33 In the third Eurosystem case forty-one months sufficed in order to lose Belgian tax residency (even a shorter period because the forty-one months of employment stipulated in the contract were not all performed because of failure of the employer).34 The same was held for two years of detachment to China.35 The Court of Appeal of Antwerp found that periods of sixteen and fifteen months were already long enough for an employee of the Anhyp Bank in Luxemburg to change his residency for tax purposes to Luxemburg, even if he returned to Belgium when he was not supposed to work.36 Centre of administration of wealth The second legal criterion to determine residence is the centre of one’s economic interests (‘siège de la fortune’). This concept does not relate to the material location of one’s assets, but to the place from which the elements of one’s estate are managed37, i.e. where the important decisions regarding the estate are taken. This place is inevitably characterized by a certain unity.38 It will, except in rare cases, coincide with the main dwelling.39

25 Article 228 §2 7° I.T.C. 26 Article 242 §1 1° and art. 244 1° I.T.C.; see Luc Hinnekens, “Het (niet-)rijksinwonerschap van de gedetacheerde werknemer volgens de laatste stand van wetgeving en rechtspraak”, A.F.T. (1995), at 275. 27 The following examples are taken from Luc Hinnekens, “Nieuwe krachtlijnen in de rechtspraak over het rijksinwonerschap”, A.F.T. (1991), at 21. 28 Liege, May 2, 1972, Bull. Bel. 511 (1973), at 2075. 29 Trib. Brussels, February 20, 1979, Rec. Gen. Enr. Not. (1980), at 216. 30 Brussels, March 21, 1989, F.J.F. (1989), n° 167, confirmed by Cass., November 15, 1990, R.G.F. (1991), at 218. 31 Brussels, January 9, 1979, J.D.F. (1980), at 283. 32 Brussels, May 15, 1990, R.G.F. (1991), at 218; Brussels, September 25, 1990, R.G.F. (1991), at 220. 33 Hinnekens, L., “Het (niet-)rijksinwonerschap van de gedetacheerde werknemer volgens de laatste stand van wetgeving en rechtspraak”, A.F.T. (1995), at 275. 34 Brussels (Court of Appeal), March 13, 1990, R.G.F. (1991), at 216. 35 Mons, April 10, 1992, A.F.T. (1993), at 27, observations Luc Hinnekens. 36 Antwerp, June 29, 1999, T.F.R. 2000, at 21, with disapproving observations of Marc Delboo. 37 Cass., February 7, 1979, Bull. Bel. 611 (1979), at 2713; Cass., October 28, 1982, F.J.F. (1983), n° 41; Cass., June 30, 1983, F.J.F. (1983), n° 139. 38 Liege, June 18, 1986, F.J.F. (1987), n° 94. 39 Malherbe, J., Droit fiscal international (Brussels : Larcier, 1994), at 28.

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Different elements are used in Belgian case law to locate a person’s centre of economic interests. Again, these elements have to be pondered bearing in mind their relative importance. A first element can be the country where a person holds immovable assets.40 In the Eurosystem-cases it was held, however, that an individual does not lose his status of non-resident when he remains the owner of a building in Belgium which is managed by his wife. This is also true when she does so by a general mandate in execution of decisions taken by her husband abroad41, or by a mandate in the general council of the Belgian association of which the spouses hold the shares and which is the owner of the dwelling of the spouses.42 The same judgment also underlined the importance of the place where the spouses receive their main professional income (the husband in Arabia, the wife in Belgium)43. Other criteria which can influence the position of the centre of economic interests are a (bank) account44 and the relative importance of the money deposited on such account as compared to the total estate, as well as other (movable) assets. In an interesting case, the Court of Appeal in Brussels put forward a new and peculiar criterion: the place from which an individual builds his career.45 A man of British nationality had built a career in Belgium by calling upon the Belgian employment market and by working for Belgian employers (with an international calling, but this was deemed irrelevant by the Court). Even when he was unemployed for a considerable time, he did not apply for a job outside Belgium. The court submitted that: “without elements to the contrary, which were not accounted for in this case, it is allowed to consider that his working capital comprises the main component of the fortune of a ‘homo economicus’, and that it is managed from the place where he constructs his career” (our translation). Relationship between the two criteria Knowing the importance of the centre of economic interests, the question arises as to the nature of its relation to the main dwelling-criterion. The law itself uses the word ’or’ to connect both notions. This would suggest that both criteria are used alternatively. This is also the view of the Cour de Cassation. In 1965, in the Derks-case46, the Court ruled, after having reminded that Mr. Derks had his domicile in Monte-Carlo where he also actually resided, that he could still be considered a Belgian resident since he owned immovable assets and shares of the NV ‘Entreprises Derks’ and ‘Bureau d’Etudes Derks’ in Belgium. In doing so, the Court pointed out that the legislator has used both criteria as alternatives. This opinion is now unanimously followed by all Belgian courts. As a result, the notion of ‘centre of economic interests’ can be used as a sufficient criterion when it is not located in the same country as the main dwelling.47

40 Cass., September 7, 1965, Pas. (1966), I, at 34. 41 Brussels, May 15, 1990, R.G.F. (1991), at 217. 42 Brussels, March 13, 1990, R.G.F. 1991, at 216. 43 See also: Brussels, September 17, 1998, Fisc. Koer. (1998), at 537. 44 For example Brussels, October 21, 1976, J.D.F. (1977), at 260. 45 Brussels, October 14, 1993, F.J.F. (1994), n° 155. 46 Cass., September 7, 1965, Pas. (1966), I, at 34. 47 Com. IT 3/4. This view has been frequently criticized (See for example Zondervan, R., Les impôts sur les revenus et l’extranéité : étude théorique et pratique du régime fiscal belge en matière de revenus d'origine étrangère ou attribués à des "étrangers", (Brussels : Pauwels, 1967), at 87 and E. Schreuder, « L’habitant du Royaume », Ann. Not. Enr. (1967), at 6-33). One of the most ardent critics is surely Hinnekens, L. This author refers to the history of the law (investigated by DONNAYm-, M., “L’habitant du royaume”, Rec. Gén. Enr. Not. (1975), n° 21936, at 233) to submit that it does not support an alternative use of the concepts. The definition of Article 37 of the Coordinated Laws has his predecessor in art. 2 of the law of December 27, 1817 (now Article 1 of the Code of Succession). The project of that law contained an article stating that was liable to tax he who was an inhabitant of the Kingdom of the Netherlands. Fearing that this would lead to taxation of persons recently arrived in the kingdom, another definition was sought. It was found in an executive decree to the law concerning the

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Therefore, if individuals wish not to be subject to Belgian personal income tax and inheritance tax (both with worldwide tax liability) neither their main home (‘domicile’), nor the centre of their economic interest should be located in Belgium. 2. Treaty Law 6. Pursuant to Article 4-2 of the OECD model treaty, the criteria of residence are the following:

- permanent home;

- centre of vital interests;

- habitual abode;

- nationality. These general OECD model criteria are used in Belgian tax treaties. The Model Belgian tax treaty (2010) uses them also. 3. Income from Real Property a. “Cadastral Income” 6bis. Cadastral income48 (revenu cadastral / kadastraal inkomen) is attributed to all pieces of real property, whether or not built on, located in Belgium. It corresponds to the deemed net annual rental income, as determined by the tax authorities. Plant or equipment used for the exploitation of the real property concerned and belonging to the owner of the real property will also be considered real property and will be attributed cadastral income if they are permanently and materially attached to the property or if, in view of their size or other characteristics, they are intended to remain in place. Cadastral income with respect to buildings is based upon their normal net rental value on January 1 of the year preceding a general revision (péréquation / perekwatie) of all cadastral income. The net rental value is the gross rental value decreased by a lump-sum deduction for maintenance and repairs of 40% (buildings) or 10% (land). The gross rental value of buildings is determined by a comparison with rentals of similar buildings or with the cadastral income in respect of similar buildings that have been assessed, when the assessment has become final. In cases in which such comparison is not possible, the cadastral income is equal to the market value of the property multiplied by 5.3%. The cadastral income with respect to plant and equipment is calculated by multiplying their value for purposes of use, as established on January 1, 1975, by 5.3%. The value for purposes of use is deemed to be equal to 30% of the investment value, increased by transformation costs (if any).

The last general revision of cadastral income was based upon market prices on January

militia. But in this decree the conjunction used was ‘and’ instead of ‘or’. Without any obvious reason it was changed to ‘if’. It would not be the first time that a legislator made such a mistake out of sloppiness. (Hinnekens, L., “Nieuwe krachtlijnen in de rechtspraak over het rijksinwonerschap”, A.F.T. (1991), at 24). Hinnekens also points out that before the Derks-case jurisprudence always opted for a conjunctive interpretation of the definition (for example Trib. Brussels, November 30, 1895, Rec. Gén. Enr .Not., n° 12522). To him, main dwelling and centre of economic interests are merely different facets of one single residency concept (Hinnekens, L., “Rijksinwonerschap. De complexe feitenbalans van de hoedanigheid van (niet-) verblijfhouder”, A.F.T. (1985), at 125). 48 CIT, Arts. 471 to 486.

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1, 1975 and came into effect on January 1, 1980. The next general revision has been delayed. In the meantime, the cadastral income is adjusted annually on the basis of the retail price index. A new cadastral income is assessed for new or improved real property. Interim revisions may be made in areas where significant changes in the value of real property occur.

The cadastral income with respect to newly constructed buildings must be established by the tax authorities at the latest for the year that follows the year of first occupancy and the taxpayer must be notified accordingly by registered mail. A taxpayer is entitled to lodge a claim against the cadastral income proposed by the tax authorities. b. Taxable Income 7. The determination of taxable income derived by resident taxpayers from real property is dependent upon: (i) the use made of the property; and (ii) the location of the property, i.e., in Belgium or abroad. The following four kinds of property may be distinguished:

(i) Privately used real property located in Belgium; (ii) Real property used for professional purposes located in Belgium; (iii) Rented real property located in Belgium; and (iv) Real property located abroad.

Real property privately used 8. If the real property is occupied by the owner for private dwelling purposes, the taxable income is the cadastral income with respect to the property (revenu cadastral/ kadastraal inkomen). Taxable income from second residences that are not rented is equal to the cadastral income increased by 40 %. Real property used professionally 9. If a building is used by its owner for the exercise of a professional activity, the cadastral income is deemed to be professional income and, thus, needs not be reported as real property income. If the real property is used for both private and professional purposes, the cadastral income is apportioned to determine the income portion that is taxable as real property income. Rented real property 10. If the real property is rented to an individual who uses the property exclusively for private habitation purposes, the taxable income is the cadastral income increased by 40%. If the lessee is a legal entity, such as a corporation or a nonprofit association, an entity without legal personality, or an individual who uses the property in whole or in part for business purposes, the taxable income derived from the rented real property will be equal to the cadastral income increased by that portion of the net rent received in excess of the cadastral income. The net rent corresponds to 90% (for land) or 60% (for buildings) of the gross rent received, the deductions inherent in these percentages representing maintenance and repair costs. However, the 40% lump-sum deduction for maintenance and repairs

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applicable to buildings may not exceed two-thirds of the cadastral income, as revalued annually by a coefficient defined by Royal Decree.

If the lessee is an individual who uses the real property for both private and professional purposes, and provided the rent has been apportioned in the rental agreement to reflect the double use, the taxable income will be the sum of: (i) the cadastral income increased by 40% for the portion of the rent relating to the private use; and (ii) the total net rent received for the portion of the rent relating to the professional use. Foreign real property 11. Taxable income derived from real property located outside Belgium is determined on the basis of the rental value if the property is not rented, and on the basis of the actual rent and rental charges received if the property is rented. The gross amount of the rental value or of the actual rent and rental charges received is reduced by the foreign taxes directly related to the property and an additional 40% (for buildings) or 10% (for land) to cover maintenance and repair expenses. Belgium's tax treaties provide that income derived by Belgian residents from real property located in the other Contracting State is taxable only in that State. Hence, such income is exempted in Belgium. The income will nonetheless be included in the taxpayer's global taxable income, but only for purposes of determining the tax rate applicable to the total income from which the foreign real property income will have been deducted, under an "exemption with progression" (réserve de progressivité / progressievoorbehoud). If Belgium has no double taxation agreement with the country in which the real property is situated, Belgium grants unilateral tax relief by reducing by 50% the amount of Belgian income tax on the foreign real property income49. Long-term leases 12. Real property income also includes amounts obtained upon the granting or assigning of a right to a long-term lease (emphytéose/erfpacht or superficie/opstal) or similar rights that are in the nature of property rights.50 Such amounts are taxable when received whether they cover the whole or only part of the duration of the long-term lease. The following are not considered to be such lease-related income: rents allowing the recovery of either the capital invested by the owner of a new building or the market value of an existing building plus interest or other charges, where at the end of the contract the right to the property is automatically transferred to the user, or where the contract provides for a purchase option in favor of the user.51 In that case, the interest component is income from capital52. c. Exemptions, Reductions and Deductions Exemption for charitable purpose

49 CIT, Art. 156, 1°. 50 CIT, Art. 10, §1. 51 CIT, Art. 10, §2. 52 CIT, Art. 19, § 1, 2°.

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13. The cadastral income is tax-exempt if the real property is used for a charitable or nonprofit purpose, as a church, a school, a hospital, etc.53

Reductions 14. The cadastral income and, hence, the real property withholding tax is reduced on the grounds of "non productivity" when an unfurnished building is unoccupied and does not generate any income for at least 90 days in a taxable year.54 The amount of the reduction depends on the duration and the degree of the non productivity of the property. The non productivity of the property must be "involuntary," i.e., it may not be attributable to the owner. Thus, for example, no reduction is granted if the non productivity of the property is caused by reconstruction works or when it results from the fact that the owner puts the building up for sale without putting it up for rent at the same time. A reduction will also apply if the property or a part of it representing at least 25 % of the cadastral income is destroyed55.

Similar reductions apply to the cadastral income of plant and equipment. Exemption for residential use 15. The cadastral income is tax-exempt with respect to the house owned and occupied by the taxpayer, except as far as the real property withholding tax (see nr. 17) is concerned56. This exemption is available only with respect to one house, designated by the taxpayer, where the taxpayer occupies more than one house. The exemption is not available for any part of a house that is used for professional purposes or is occupied by persons who are not part of the taxpayer’s household. Deduction of interest on debts 16. Interest paid on debts incurred for the sole purpose of acquiring or maintaining real property is deductible from real property income. Such interest may be deducted from total real property income, even if the loan on which the interest is paid was entered into for the purpose of acquiring or constructing only one of the houses owned by the taxpayer. Any interest exceeding total real property income may not, however, be deducted from other sources of income (for example, from income from capital or professional income), nor can it be carried over to previous or subsequent tax years.57

An additional interest deduction is granted to an individual taxpayer for interest paid and reimbursement of capital on a mortgage loan taken out to acquire or construct a new house located in Belgium. The additional interest deduction, which is a deduction from global taxable income rather than a deduction from real property income, only applies in respect of a single building acquired or constructed by the taxpayer58.

53 CIT, Art. 12. 54 CIT, Art. 15, §1, 1°. 55 CIT, Art. 15, § 1 , 3°. 56 CIT, Art. 12, § 3. 57 CIT, Art. 14, 1°. 58 CIT, Art. 104, 9°, 115 and 116.

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d. Real Property Withholding Tax 17. Individual taxpayers are subject to a prepayment in the case of real property located in Belgium, i.e., the real property withholding tax (précompte immobilier / onroerende voorheffing).59 The real property withholding tax is levied on the value of the cadastral income with respect to the real property concerned. An assessment for real property withholding tax purposes is made in the calendar year during which the real property income is obtained. The tax is a regional tax. The basic rate of the prepayment is: 1.25% of the cadastral income in the Walloon or Brussels Region and 2.50% of the cadastral income in the Flemish Region. Provinces and municipalities levy additional taxes on the real property withholding tax. The prepayment is in principle paid by the individual who owns the building on January 1 of the taxable period, even where the property changes ownership between January 1 and the date on which the prepayment has to be made. Purchase deeds for real property located in Belgium will, therefore, generally contain a clause pursuant to which the purchaser is under the obligation to reimburse the seller that part of the prepayment that corresponds to the portion of the year after the date of the sale.

Landlords typically shift the burden of the real property withholding tax to their tenants if this is not expressly prohibited by law, as in the case of residential loans. This convention, while legally valid as between the parties (provided the rented property is used for professional purposes), cannot be upheld against the tax authorities. Thus, a landlord is not entitled to invoke the nonpayment of the prepayment by his tenant vis-à-vis the State. Exemptions 18. Exemptions from the real property withholding tax are available for: (i) real property income that is exempted from income tax (for example, income from real property used for charitable purposes); (ii) the cadastral income with respect to real property falling within the "public domain," provided and to the extent that such property does not produce any income and is used for a public service or a service of general interest (both these conditions must be satisfied); and (iii) income from real property that benefits from special or temporary exemptions.

Reductions 19. Reductions in the real property withholding tax may be granted at the request of the taxpayer. Most of these reductions take account of the taxpayer's situation (for example, the number of the taxpayer's dependents, the disability of the taxpayer). Other reductions are made available under social housing programs or on the basis of factual situations (for example, in the case of unfurnished buildings unoccupied for at least 90 days in a taxable year).

The real property withholding tax pertaining to a taxpayer's principal private dwelling is not creditable against his final individual income tax liability60. There is therefore a certain double taxation of real property income. 59 CIT, Art. 249. 60 CIT, Art. 271, abolished by Law of December 27, 2004. However, this provision will remain applicable if certain conditions are fulfilled (e.g. the loan acquiring the house was entered into before January, 1, 2005). See CIT, Art. 526.

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C. Determination of Gross Income Overview 20. The taxable income of a resident individual includes real property income, income from capital and personal property, professional income and certain miscellaneous income61. Each class of income is subject to particular rules. Tax is assessed in principle at progressive rates on global income from domestic and foreign sources. Certain classes of income (such as income from capital, taxable capital gains, back pay, miscellaneous income) are taxed separately at flat rates if such taxation is more favorable to the taxpayer62. Income that is exempt by virtue of a tax treaty is taken into account with other taxable income in order to determine the tax rate on income taxable in Belgium63. Application 20bis. A couple, before receiving a pension capital, rents a house in Bray-Dunes, a beach resort in France close to Belgium and grants a lease on their house in Veurne (Belgium – 10 miles from there) to a company which they control. They pay for that house a municipal tax on a second residence. The Court applies the tie-breaker. They have a “lasting residence” in both countries but their closest links are with Belgium. The husband was director of a Belgian company which had no personnel. The couple had bank accounts in Belgium and could not prove expenses in France64. 2. Income from Capital and Personal Property a. Introduction 21. Income from capital and personal property includes dividend income, interest income, royalties and rentals with respect to personal property, as well as annuity income other than pension income granted by legal entities or enterprises65. A important distinction is made between income derived from capital or personal property that a taxpayer must include in his annual return because no withholding tax on such income has been collected, and income subject to a withholding tax, which need not be reported. In the latter case, the payment of the withholding tax discharges the taxpayer from paying any additional tax. Although income from capital or personal property not subject to withholding tax must be included in the annual tax return, it will be taxed at a separate flat rate identical to the withholding tax rate. A taxpayer may nevertheless elect to include the income subject to a withholding tax in his tax return and, hence, globalize it with other income items instead of the income being

61 CIT, Art. 6. 62 CIT, Art. 171. 63 CIT, Art. 155. 64 Ghent, June, 24, 2008, Fisc. Koer., 2008, p. 690. 65 CIT, Art. 17.

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taxed at a flat rate66. This will be useful only if he has little or no income. In the latter case, indeed, the taxpayer may even receive a refund of the withholding tax levied. Income derived from capital or personal property used in the taxpayer’s profession is included in his professional income67. It will, therefore, be taxable at ordinary rates on its full amount net of eventual expenses. This qualification does not, however, exclude the application of the withholding tax on such income. The withholding will be creditable and, if it exceeds the tax due, refundable. b. Income to Be Included in the Taxpayer’s Return 22. Income items that have to be included in the annual tax return, but will be taxable at a flat income tax rate equal to the withholding tax, are as follows68:

• income from a foreign source, collected outside Belgium;

• income from loans secured by a mortgage on real estate located in Belgium;

• all items of income which were not subject to a withholding tax, such as:

- income from life annuities: if paid by a business or a legal entity, they are deemed to amount to 3% of the capital69;

- income from temporary annuities; - royalties and rentals : a standard deduction of 15% of royalties or rentals derived

from personal property which is not invested in a business is allowed, but this amount may be increased if it is justified70. A deduction is allowed up to 85% for rentals of films and up to 50% for rentals of furniture in furnished dwellings (40% of the rent received on a furnished dwelling is considered to be rent for furniture)71.

c. Income Not to Be Included in the Taxpayer’s Return 23. Income derived from personal property subject to a withholding tax when collected in Belgium essentially includes investment income, i.e. dividend and interest income. (1) Dividends 24. Dividends include all benefits attributed to shares by a company, whatever their denomination or form. A reimbursement of capital is considered a dividend if it occurs without a legitimate decision of the general meeting of shareholders or, even when legally decided, to the extent that it exceeds effectively paid-up capital (including issuance premiums)72. Thin capitalization Interest income paid or attributed on loans granted to a company by a director (whether individual or corporate) or by an individual partner or shareholder is assimilated to dividends insofar as either the interest income exceeds interest income calculated at a 66 CIT, Art.313. 67 CIT, Art. 37. 68 CIT, Art. 171, 2 bis and 3 bis ; Art. 519; Art. 313. 69 CIT, Art. 20. 70 R.D.-CIT, Art. 3, conversely, 60 % of the rent is income from real property. 71 R.D.-CIT, Art. 4. 72 CIT, Art. 18, 1°.

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“normal” rate (the market rate) taking into account the particular risk involved in the operation, or if the total amount of the loans exceeds the paid-up capital as of the end of the tax year plus the taxed reserves as of the start of the tax year73. This provision is not applicable where loans have been granted by corporate directors if the corporation is a Belgian resident. The ECJ found this limitation to Belgian companies contrary to the freedom of establishment : the foreign company which was a director of the Belgian company and a lender was indeed its parent. The Belgian provision, however, applied irrespectively of a relationship of participation between the two companies : a directorship is enough. Such a provision could be justified only to counter an abuse, in the case of a wholly artificial scheme. The existence of a ratio of 1 to 1 between debt and equity is no evidence of an abuse74. The restriction to the freedom of establishment is therefore disproportionate. The Court had taken the same decision in respect of a 3 to 1 ratio applicable in Germany75. Dividends of corporations are subject to withholding tax at the rate of 25% (see infra at nr. 76) as is the excess of the repurchase price over investment value in the case of a corporation repurchasing its own shares76 and liquidation distributions. However, the withholding is reduced to 15 % on shares issued by small companies on new capital contributed in cash after July 1, 2013, when dividends are distributed after the third accounting year following the contribution. If the contribution is made after the second accounting year following the contribution, the withholding will be 20 %77. The shares must remain in possession of the contributor. (2) Interest 25. Interest income is any income derived from fixed or variable income securities, loans, and deposits78. Interest derived from fixed income securities (i.e., bonds, loans and other similar securities, including securities with capitalized interest or securities which do not give rise to a periodic payment of interest and which have been issued with a discount equal to the interest capitalized until the maturity date) includes every payment that exceeds the principal amount, whether or not the payment is made on the agreed maturity date of the securities79. Interest is in principle subject to withholding tax at the rate of 25%. Interest awarded by a judgment or otherwise for late payment of a debt is not treated as income from capital.

73 CIT, Art. 18, 4°, and Art. 55. 74 ECJ, January, 17, 2008, Case C-105/07, SA Lammers & Van Cleeff v Belgian State. 75 ECJ, December, 12, 2002, Case C-324/00, Lankhorst-Hohorst. 76 CIT, Art. 269. 77 CIT, Art. 269, § 2. 78 CIT, Art. 19, § 1, 1°. 79 CIT, Art. 19, § 2.

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d. Tax Rules 26. It is the gross amount of the income derived from personal property that is taxable, i.e., the amount collected without deduction of expenses incurred plus the amount of the withholding tax. Conservation and collection expenses relating to that income are deductible only where the income is globalized with all other income items and is thus not taxed separately80. Interest paid on loans entered into for the acquisition or conservation of income derived from personal property is not tax deductible. An exemption is, however, made for interest paid by remunerated directors of companies on loans contracted for the acquisition of shares in the company but it is deductible from professional income (see infra nr. 27)81, not from personal property income. 3. Professional Income Introduction 27. Any enrichment directly or indirectly derived from the taxpayer’s professional activity82 is considered professional income83 whether or not the activity carried on is legal. Professional income is divided into five income categories84 :

• business profits85;

• profits derived from independent professions or independently performed services;

• profits derived from a professional activity previously exercised;

• wages and salaries derived from employment contracts, including severance

payments and remuneration of directorships and leading independent functions in companies;

• pensions, rents and periodic payments indemnifying a permanent loss of profits

or wages. Some types of professional income are tax exempt (family allowances, some social advantages which cannot be individualized in an enterprise, …).86 Only the net amount of a taxpayer’s professional income is subject to tax. This net amount is obtained by deducting the following items from the gross amount :

• professional expenses within the limits of the Code;

• losses generated by the same or other professional activities during the tax year or losses resulting from previous tax years; and

80 CIT, Art. 22, § 1, 2°. 81 CIT, Art. 52, 11°. 82 For an interpretation of the notion of “professional activity” see Cass., September 2, 1969, Pas., 1970, I, 3. 83 CIT, Art. 23, 1st line. 84 CIT, Art. 23. 85 Willoqué, K. and Cassaer, E., Belgium, in Maisto, G., ed., The Meaning of « Entreprise », « Business » and « Business Profits » under Tax Treaties and EU Tax Law, IBFD, 2011 at 197. 86 CIT, Art. 38.

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• certain private expenses encouraged under the legislation.

Copyright income, up to 37,500 €, is treated as income from capital87. 4. Miscellaneous Income 28. This category includes income items, other than professional, which are either globalized with the other income items and taxed at progressive rates, or taxed separately at a flat tax rate. a. Globalized with Other Income and Taxed at Progressive Rates 29. Under certain conditions, 80% of the alimony paid during a tax year and received from a grantor who is bound by a legal obligation88 to support the taxpayer-beneficiary, when the latter is not part of the grantor’s household89, will be taxable to the beneficiary and deductible from the grantor’s taxable income. b. Taxed Separately at a Flat Rate (1) Profits derived from Occasional or Speculative Activities90 30. This category includes profits derived from occasional or speculative activities or operations, not including profits derived from the normal administration of one’s private assets consisting of real property, securities, and tangible movable assets. Gains made upon the disposal of all other types of assets, even of a private nature, are taxable (know how, e.g.). These profits are taxed at a flat rate of 33% after deduction of expenses. The distinction between a taxable and a nontaxable private transaction is a difficult one to draw. The importance and frequency of such operations, the short time between acquisitions and sales evidencing the intent to realize quick and large profits, the sophistication of the means used in the transactions such as borrowing the necessary funds and the relationship with the taxpayer’s profession, are all elements which could make the transaction a taxable one. Purely private management activities, including sales and purchases of securities to improve the quality of a family portfolio, do not generate taxable income. The classification of income as miscellaneous income or as professional income is not always easy to operate, for example when the income is derived from an occasional activity that is related to the main professional activity of the taxpayer. Thus, the income derived by a lawyer from book copyrights and fees earned as an arbitrator was held to be derived from occasional activities, notwithstanding the fact that the activities were related to the lawyer’s principal activity. Consequently, the income was taxable as miscellaneous income91. Tax base 87 CIT, Art. 17 § 1, 5°. 88 Between parents and descendants : Civil Code, Arts. 203, 205, 206 and 207; between spouses: Civil Code, Arts. 213, 221 and 223. 89 CIT, Art. 90 , 3°. 90 CIT, Art. 90, 1, Art. 97, Art. 103 and Art. 171, 10, a). 91 Trib. Brussels, November 2, 2000, Courr. Fisc. 2001, 33.

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A discussion arose as to the tax base in the event that the taxpayer had realized a capital gain on shares : the Supreme Court held that the provision did not tax the “normal” gain but only the portion which was due to actions going beyond private management, such as hiring an intermediary or using business connections92. The law was then changed to make it clear that the whole gain was taxable as miscellaneous income93. (2) Capital Gains Realized on Transfer of Land94 The taxable income of a resident individual (other than a real estate professional) includes gains realized on the disposal of unimproved real estate located in Belgium, acquired for consideration and held for less than eight years, or acquired by gift and sold within three years following the gift and less than eight years after the donor’s acquisition for consideration. The taxable amount corresponds to the difference between : (i) the consideration received, less the expenses incurred for the disposal of the property; and, (ii) the original acquisition price (or the donor’s purchase price or the market value at the time of gift or inheritance if the property was not purchased). The cost basis of property is increased by actual acquisition expenses, or, in the absence of supporting documents, by a flat amount of 25% of the base amount. It is further increased by 5% for each full year during which the property was held. The tax is assessed at :

• 16.5% for gains on land transferred within eight years of acquisition, but held for more than five years;

• 33% if the holding period was shorter.

(3) Capital Gains Realized on Transfer of Buildings 31. Capital gains on the transfer for consideration (e.g., on the sale or the contribution to the capital of a corporation) of a building other than the main residence of the taxpayer, are taxable if the building95 : (i) is transferred within five years following the purchase; or (ii) was acquired by gift and is transferred within three years of the gift and five years after the purchase by the donor. The date of acquisition or transfer is the date of the relevant notarial deed. The tax also applies if a piece of land is acquired by purchase or gift and construction of a building starts within five years of acquisition for consideration by the taxpayer or the

92 Cass., November, 30, 2006. 93 CIT, Art., 90, 9°, first indent. 94 CIT, Art. 90, 8, Arts. 91 to 93, Art. 101 and Art. 171, 1, b) and 4, d). 95 CIT, Art. 90, 10° .

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donor, and if the land and building are sold within five years after first occupancy or first letting of the property. The tax rate is 16.5%. In computing the gain, the purchase price is increased by 5% per year elapsed since the purchase. (4) Capital Gains Realized on a Transfer of a Substantial Interest in a Belgian Company96 32. This category includes capital gains realized on the transfer of shares in Belgian companies to a foreign company, when the transferor (or his predecessor if the shares were acquired by gift or inheritance) owned, at any time during the five years prior to the transfer, alone or with close family members, more than 25% of the shares or rights in the company. Closely related taxpayers, for this purpose, include the spouse, ancestors, descendants, and relatives up to the second degree of kinship to the taxpayer or his spouse. The transfer to a Belgian company is not taxable. This was found by the ECJ to be a discrimination within the European Union insofar as the purchaser was an EU company. It was contrary to the freedom of establishment if the seller’s holding conferred on him an influence in management and contrary to the free movement of capital otherwise97. The legislation was therefore changed to exclude sales to EEA companies. In the case of successive transfers during the 12 months preceding a taxable transfer, each transfer will be considered taxable if the required 25% holding existed at the time of the first transfer. The tax is levied at a 16.5% rate on the difference between the sales price and the acquisition price paid by the transferor’s predecessor. Gains are not taxable as miscellaneous income if realized on the occasion of the distribution of a company’s assets to its shareholders, the repurchase by a company of its own shares, or of a merger, division, or change in corporate form. Eventually, income from capital will be taxed In that case. But for the above exceptions, capital gains realized by individuals not engaged in business activities are, in principle, not taxable. 5. Treaty rules Treaties may change the tax regime of income under domestic law. Company Manager Under the Belgian Model Treaty, director’s fees and income received in the capacity of member of a board of directors are taxed in the country of the company; remunerations received in respect of activity such as day-to-day functions, either as a manager or as a partner in a company other than a company with share capital, is taxed as employment income.

96 CIT, Art. 90, 9°, Arts. 94 to 96, Art. 102 and Art. 171, 4, e). 97 ECJ, June, 8, 2004, Case C-268/03, De Baeck v Belgische Staat (Order).

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Capital gains Most treaties grant the State of residence the right tax capital gains. Some treaties grant it to the State of source for important participations or participations in real property companies. The treaty between Belgium and the Netherlands (2001)98 allows the Netherlands to tax the capital gain on an important participation (5 p.c.), if the seller has been resident in the Netherlands during the ten years preceding the granting of the benefit received and if a “conservatory” taxation took place upon the time of his emigration to Belgium. D. Tax rates 33. The applicable rates are the following :

Taxable annual income Rates Below € 8,590 25 %

From € 8,590 to 12,220 30 % From € 12,220 to € 20,370 40 % From € 20,370 to € 37,330 45 %

Above € 37,330 50% A series of tax exemptions, tax reductions and tax increases must be taken into account in order to determine the final tax liability of a resident individual for a given assessment year. As seen above, certain types of income, however, are generally not included in the global taxable income (e.g. dividend and interest income, certain types of miscellaneous income such as taxable capital gains) but are taxed separately at flat rates if such taxation is more favorable to the taxpayer. Income from personal property (dividends, interest, royalties) is not longer taxed globally with other income. Tax applied at the rate of 25% (dividends, liquidations surpluses, interest, royalties) satisfies the total tax liability on such income. If no tax has been withheld (for instance on income paid abroad), the taxpayer must report the income and will be taxed at the same rate as would apply under the withholding technique (see supra al. 22). A municipal surcharge applies to tax on all income reported in the return (not to withholdings)99. Where the withholding tax is final in Belgium for both national and foreign dividends (and interest), the foreign dividend or interest that has not borne the withholding tax must be reported in the individual tax return and is charged with a tax at the same rate as the withholding tax, increased by local taxes. Such local taxes discriminate against foreign dividends and interest, said the ECJ in Dijkman100. The surcharge applies to professional income exempted by treaty if the treaty so allows101. It is then computed on the individual income tax which would be due in Belgium, but for the treaty.

98 Art. 13 § 5. 99 CIT, Art. 465. 100 ECJ, 1 July 2010, Case C-233/09, Gerhard Dijkman, Maria Dijkman-Lavaleije v Belgische Staat. 101 CIT, Art. 466 bis.

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An amount of € 6,690 generally is exempted102. A supplement per child is added. A taxpayer earning less than the exempt amount may report his income from capital : if his total income is lower than the exempt amount, the personal property withholding tax will be reimbursed to him. 33bis. Application John Wealthy has a son, Bill, who is good at baseball and goes to Duke University (N.C., USA) to study. It would be more advantageous for his father to pay him alimony (deductible up to 80 %, taxable to Bill, but at a low rate) than to count him as a dependent child. But does Bill still belong to the household of his parents or does he not ? Alimony is deductible only in the second case. There is considerable case law on the topic. The answer is no if Bill marries. But does he want to go that far ? Section II Taxation of non-resident individuals A. Overview 34. Non-resident individuals are subject to the non-resident income tax on income from Belgian sources. On certain types of income, they are subject to withholding tax that either may be credited against their tax liability or may be considered as their final liability. Only Belgian-source income is taxable, i.e., income produced or collected in Belgium. It includes103 :

(a) Income from real property located in Belgium;

(b) Income from capital or personal property income produced or collected in Belgium;

(c) Income resulting from the status of partner in a partnership without legal

personality;

(d) Professional income, such as :

- Business profits produced by a Belgian establishment. In some circumstances, business profits may be taxed even in the absence of any Belgian establishment (e.g., rental income and capital gains on Belgian real property) ;

- Remuneration and pensions, either when paid by a Belgian debtor or when paid

to a non-resident present in Belgium for more than 183 days per year. Remuneration for activities exercised abroad is not taxable, when paid by the foreign establishment of the Belgian paying entity ;

102 CIT, Art. 131. 103 CIT, Art. 228.

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- Income from independent professions or other occupations derived from activities exercised in Belgium ;

(e) Miscellaneous income :

- Occasional or speculative profits produced or collected in Belgium104 ;

- Alimony paid by residents ;

- Certain capital gains on land and buildings105 located in Belgium ; and

- Capital gains on the sale of a substantial interest in a Belgian company to a non

Belgian (other than an EEA) company. The amount of the taxable income is determined in the same way as for resident individuals106. B. Assessment 35. For non-resident individuals, a global non-resident tax is assessed107 :

(a) on income from real property located in Belgium when the taxpayer receives rental income or income from the grant or the assignment of a long-term lease;

(b) on the total Belgian real property income, professional income (including income

from personal property invested in professional assets) and gains on the sale of shares of closely held companies, of :

- non-residents having a Belgian establishment;

- non-residents receiving real property income, partnership income, profits from

independent activities, remunerations and pensions, as well as capital gains on the sale of shares of closely held corporations.

The tax is assessed as for resident individuals, including a surcharge equal to 7% of the tax for the State108, but certain exemptions or reductions (family exemptions) are not granted109. According to EU law, exemptions and reductions (including family allowances) available to residents are also granted to non-residents if :

- they have kept a home in Belgium for the whole tax year; - or if they draw 75 p.c. of their professional income from Belgium110.

For non-residents who have no special connection with Belgium or who receive only miscellaneous income, the tax is deemed to correspond to the withholding taxes and the

104 Malherbe, J. and Verstraete, H., Belgium, Taxation of Capital Gains to Nonresident Aliens, 34 Tax Management International Forum, nr. 2, June 2013 at 8. 105 Subject to a special assessment under CIT, Art. 301, levied by the Registration Tax Administration when the deed is registered. 106 CIT, Art. 235, 1°. 107 CIT, Art. 232. 108 CIT, Art. 245. 109 CIT, Art. 243. 110 CIT, Art. 244.

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special assessment on the sale of land and buildings111. The non-resident income tax is also equal to the withholding tax for income from partnerships and for income from real property when the latter does not exceed € 2.500. Applications 36. An Italian heart surgeon is involved in a contract enabling him to perform surgery in Belgium. Does he have a permanent establishment (fixed base) in the Belgian hospital ? No, because, he does not have any exclusive right to use the facilities. The management rests with the Belgian hospital and the foreign doctor do not even have a key112. 37. A truck driver should be taxed on his remunerations in the country where he physically works. It was held that he was taxable in the country of his employer whereas this exception applies only to employment on ships or aircraft113. A lower Court disagreed and taxed a truck driver in the country where his employment was exercised. As he failed to inform the administration about kilometers driven in various countries, he was considered to work in Belgium114. 38. A Belgian resident is director of a Luxembourg company. He is also remunerated for additional activities performed for the company. He claims to be taxable only in Luxembourg on such remunerations because :

- they remunerate a director’s function ; - or they have a fixed base at the seat of the company.

The Court considers that the remunerations are taxable in Belgium. They are received in another capacity than the capacity of director and the taxpayer has no office in Luxembourg115. Chapter II – Taxation of companies The creation of a company may be related to individual tax planning : there is always an alternative between holding assets personally or through a company. Section I Taxation of resident companies 39. A company is resident and therefore subject to Belgian corporate income tax on its worldwide income if it has a statutory seat or principal establishment, or its seat of management in Belgium116. A. Taxable persons 111 CIT, Art. 248. 112 Antwerp, May, 13, 2008, F.J.F., nr. 2008/276, 1044. 113 Cass., November 9, 2007, May 28, 2004, November 6, 2000. 114 Mons, October 22, 2008. See De Broe, TRV, 2010, 125. 115 Civ. Mons, December 20, 2007, F.J.F., nr. 2009/187. 116 CIT, Art. 179 and Art. 1, 5°, b) ; Osterweil, E., and Quaghebeur, M., Taxation of Companies under Belgian Income Tax Law, Bull. Int. Taxation, 2008, p. 346.

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40. The Belgian corporate income tax applies to resident “companies”, i.e. companies, associations, establishments and organizations that are engaged in profit-making activities or in the operation of a business. Only entities with legal personality are subject to corporate income tax117. Resident legal entities that are not engaged in profit-making activities or in the operation of a business are subject to the income tax on legal entities. Non-resident entities, with or without legal personality, which have a form comparable to the above-mentioned legal entities, are subject to the income tax on non-residents and treated as corporations (see infra nr. 55). B. Residence 41. Resident corporations are corporations having their registered office, principal establishment or their seat of management in Belgium. In general, this will be the place indicated in the articles of incorporation. However, a company having its official seat abroad, but which is effectively managed in Belgium, will be considered a resident corporation. On the other hand, if a company is managed abroad and only has a branch in Belgium, it will be subject to the non-resident income tax. The Belgian Company Code distinguishes between two basic types of business entities : "capital" companies which issue shares which are in principle freely transferable, including the société anonyme – naamloze vennootschap (SA/NV) and the société en commandite par actions – commanditaire vennootschap op aandelen (SCA/VGA) and "personal" companies, which issue “participations” which are in principle not freely transferable and where the person of the partners is essential, including the société en nom collectif – vennootschap onder firma (SNC/VOF), the société en commandite simple – gewone commanditaire vennootschap (SCS/VEG) and the société privée à responsabilité limitée – besloten vennootschap met beperkte aansprakelijkheid (SPRL/BVBA). In the "société en nom collectif", partners are jointly and severally liable. In the "société en commandite simple", and in the "société en commandite par actions", unlimited partners are, limited partners are not. Both categories of companies and the société cooperative – samenwerkende venootschap (SC/SV) are subject to corporate income tax118. This also applies to non-profit making organizations when regularly engaged in business or seeking a profit. The nature of foreign corporations having their head office in Belgium is determined by analogy to comparable forms of legal entities in Belgium. C. Principles 1. Taxation of Worldwide Income 42. The taxable income of a corporation is its total income derived from business activities and from other sources, including foreign source income. Corporate income is, by definition, business income.

117 CIT, Art., 179 and Art. 1, 5°, a). 118 Hinnekens, Ph., Taxation of Partnerships in Belgium : An Imbroglio ?, Bull. Int. Taxation, 2008, p. 353.

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Taxes are often levied through prepayments in the form of withholding taxes at the moment the payment occurs or the benefit is granted. Withholding taxes are creditable against the final tax on global income, except for the real estate withholding tax119. Amounts withheld in excess of the tax due are refundable. Corporations may (but need not) estimate and pay in advance the entire annual corporate income tax. Failure to pay in advance will subject the taxpayer to a surcharge. Income from Foreign Sources The gross income of corporations includes all revenue from whatever source, including foreign source income. Hence, the corporate taxable income includes net foreign source interest, dividends, interest and royalties and income from foreign branches. Credits or exemptions are, however, granted under certain conditions so as to avoid double taxation of foreign source income. 2. Accounting 43. The determination of taxable income is generally based on the financial accounts of the company. However, in case of lack of reliability of the financial accounts, the tax administration may substitute an estimated amount of corporate income to the reported income. Accounting standards are defined in the Law of July 17, 1975, and the Royal Decree of implementation of the Company Code, governing the annual accounts of enterprises. Failing an exception in the tax law, accounting rules will apply for the determination of taxable income. D. Determination of Gross Income 1. Overview 44. Gross income of corporations includes all revenue from whatever source. All income of a corporation is considered professional income: the concept of exempt income generated by a purely private activity, which may allow an individual to exclude such income from gross income, does not apply to corporations120. The gross income of a corporation is computed on the basis of its accounting records; it is equal to the increase in the net asset value of the enterprise from one year to the other. Gross income of a corporation includes technically121 :

• reserved profits; • disallowed deductions; and • profits distributed as dividends.

Income from patents is taxable only on 20 % of their amount, meaning an effective corporate tax rate of 6,8 % down from the general 33,99 %. 80 % of the income is deductible.

119 CIT, Art. 277. 120 Cass. , June 7, 1966, Pas., I, 1281; Cass., January 28, 1969, Pas., I, 489. 121 CIT, Art. 185

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2. Capital Gains a. General principles 45. Capital gains are equal to the difference between the realization value and the acquisition value less the amount of the write-offs and depreciation annuities that have been deducted tax-wise122. Capital gains realized by corporations are, in principle, part of their gross income and subject to the standard corporate tax rate. However, capital gains realized on tangible and intangible assets held for more than five years by the enterprise may be rolled over, upon condition of reinvestment of the sale proceeds in depreciable assets within a three – or five - year period123. The determination of taxable income closely relates to the valuation of fixed assets, inventory, and other assets in the balance sheet. The tax authorities will, in principle, accept a valuation made in accordance with rules on annual accounts, subject to certain qualifications. By way of exception, long term capital gains realized on shareholdings are mostly tax exempt subject to certain conditions being met (see nr. 47). b. Unrealized Capital Gains 46. Unrealized capital gains are not taxed, except when they relate to the revaluation of raw materials, products, or merchandise, or to the recapture of allowable capital losses on shareholdings and securities up to original cost124. c. Long-Term Gains and Involuntary Gains 46 bis. Gains resulting from involuntary disposals of capital assets, such as following an accident or expropriation, as well as gains on any disposal (sale, exchange, contribution to the capital of a corporation) of fixed assets recorded as such by the enterprise for more than five years are rolled over if the indemnity or the sales proceeds are reinvested in depreciable assets used in the business in Belgium within a three-year period125. This reinvestment period starts at the end of the tax year during which the indemnity was paid or on the first day of the year during which the sale occurs; in any event, the reinvestment must be made before the business is wound up126. The capital gains that have been temporarily exempt are taxed according to the depreciation schedule of the assets acquired as reinvestment of the indemnity or sales proceeds. This is the equivalent of a roll-over. In a roll-over, the basis (cost for tax purposes) of the old asset carries over to the new asset. The three-year investment period is extended to five years if the reinvestment is made in buildings, ships or airplanes127.

122 CIT, Art. 43. 123 CIT, Art. 47. 124 CIT, Art. 24, 3 and 44, § 1, 1°. 125 CIT, Art. 47. Is the limitation to Belgian assets in conformity with the principle of freedom of establishment under the Treaty of Rome ? 126 CIT, Art. 47, § 3. 127 CIT, Art. 47, § 4. For those assets in the case of voluntary disposals, the reinvestment period may also start two years before the year of the sale, the reinvestment being made in anticipation of the sale.

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In the absence of reinvestment within the prescribed period, the gain will be taxable during the year in which such period expires. Interest is assessed on the amount of tax due from the year during which the exemption was granted128. In order to benefit from the temporary exemption of the capital gain, the enterprise is required to book the gain in a special account on the liabilities side on the balance sheet; it may not serve as a basis for the calculation of the legal reserve nor for any remuneration or distribution129. d. Capital Gains on Shares Sales or contributions to capital 47. Capital gains on shares realized by a Belgian company are in principle taxable at the ordinary corporate income tax rate, unless the gains relate to shares the income from which qualifies for the dividends received deduction130. Unlike under the dividends received deduction, however, the minimum holding requirement (i.e., 10 % of the shares or a holding with a value of at least € 2,5 million) is not a condition for the application of the tax exemption, e.g. the special tax rates for capital gains on shares. It follows that the relevant conditions for the tax treatment of capital gains on shares are the taxation condition and the minimum holding period requirement under the dividends received deduction, as follows :

(i) if the gains relate to shares that meet both the taxation condition and the minimum holding period requirement, they are fully tax exempt if realized by a company other than a large company ; if realized by a large company, such gains are subject to tax at a rate of 0.4 % (to be increased by the 3 % crisis surcharge, resulting in an effective rate of 0.412 %) ;

(ii) if the gains relate to shares that meet the taxation condition but not the minimum holding period requirement, they are taxable at a special rate of 25 % (to be increased by the 3 % crisis surcharge, resulting in an effective rate of 25.75 %) ;

(iii) if the gains relate to shares that do not meet the taxation condition, they are taxable at the standard corporate income tax rate.

According to the tax authorities, if part of the dividends that could have been distributed by the company do not fall under the participation exemption regime, the total gain is subject to tax131. Capital gains on shares are unconditionally exempt or eligible for the special tax rates; their amount must not be recorded under a distinct heading on the liabilities side of the balance sheet. On the other hand, capital gains and losses or reductions in value on the “trading portfolio” of banks, investment companies and companies managing UCITS will be subject to the normal regime of taxation of gains and deduction of charges. The transfer from their investment portfolio to their trading portfolio will be considered as a realization.

128 CIT, Art. 47, § 6. 129 CIT, Art. 190, § 1. 130 CIT, Art. 192 ; Navez, E.J., Belgium, in Maisto, G., ed., Taxation of Companies on Capital Gains on Shares under Domestic Law, EU Law and Tax Treaties, IBFD, 2013 at 409. 131 Administrative Circular of March 9, 1993.

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Reorganizations 47bis. Gains resulting from exchanges of shares due to mergers, divisions, “mixed divisions”, change of the form of a company are tax-exempt only if the corporations concerned are established either in Belgium or elsewhere in the EU and the applicable tax law exempts the corporate reorganization from taxation. The basis of the old shares and their date of acquisition will be rolled over to the new shares132. The one-year holding period required fro the application of the capital gains exemption must be calculated by reference to the date of acquisition of the shares exchanged (i.e., the date on which the exchanged shares had initially been acquired) and not as of the date of acquisition of the shares received in exchange as a result of the transaction133. When certificates are issued in exchange for shares - under a so called “certification” of shares - , any resulting capital gain is treated as unrealized. The basis of the shares carries over to the certificates134. Gains are also exempt when realized upon a contribution of shares to a Belgian or intra-European company135 by which the acquiring company acquires 50 p.c. of the shares or increases a 50 p.c. plus participation and no cash payment of more than 10 p.c. of the nominal or par value of the shares is made136. e. Capital losses 48. Capital losses and write-offs on shares are not deductible, whether or not they relate to shares which meet the above taxation requirement. By way of exception, capital losses will be deductible when incurred upon liquidation and to the extent of the real paid-up capital of the liquidated company137. If the paid-up capital has been reduced to absorb losses, the capital reduction will not be taken into account in determining a capital loss on the disposal of shares, which will be allowed up to the capital of the liquidated company, as if the reduction had not taken place138. E. Deductible expenses - Limitations Expenses are deductible, if paid or incurred during the taxable year in order to preserve or acquire business income139. 1. Interest and Royalties

132 CIT, Art. 45, § 1, 1°. 133 CIT, Art. 192, § 1. 134 Law of July 15, 1998, relating to the certification of shares by commercial companies, Art. 13, § 2. 135 An intra-european company is a non-resident company having on the forms cited in the Tax Merger Directive and resident in a State of the EU without being considered under a double tax treaty as resident in a third country outside of the Union, subject to corporation tax without a possibility of option for another tax regime or exemption (CIT, Art., 1, 5°, b bis)). 136 CIT, Art. 45, § 1, 2°. 137 CIT, Art. 198, § 1, 7°. 138 CIT, Art., 198, last §. 139 CIT, Art. 49.

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49. Interest on capital borrowed from third parties that has been used within the enterprise, and all charges and analogous fees relating to such borrowings are deductible business expenses140. Interest is deductible as a business expense, provided the interest rate is fixed at a market rate taking into account the risks relating to the operation, namely the financial situation of the debtor and the duration of the loan141. No limit applies, however, to interest paid by Belgian banks and Belgian branches of foreign banks. Neither does any limit apply to interest paid by any taxpayer on publicly issued bonds or interest paid to Belgian banks or insurance companies as well as Belgian branches of foreign banks or foreign insurance companies142. 2. Taxes Corporation tax is not deductible143. Foreign taxes are deductible. 50. Taxes that are specifically regional, i.e. instituted by the Regions, are no longer deductible for federal corporation tax purposes144. F. Losses 51. Losses are deductible in the year during which they are incurred, but may be carried forward without any time limit to be set-off against profits in future years145. They cannot be carried back. Reserve for future losses 52. Where a company considers it likely that it will incur a loss in a foreseeable future, it may make a provision against the anticipated loss and deduct this provision from taxable profits. This to some extent replaces the carry-back of losses that many other countries allow146. G. Rates 53. The basic rate of Belgian corporate income tax is 33%147. However, this rate is increased to 33,99% through the application of a 3% austerity surcharge. The abolition of this additional austerity surcharge remains a goal, as well as a decrease of the basic rate to 30%.

140 CIT, Art. 52, 2°. 141 CIT, Art. 55. 142 CIT, Art. 56. 143 CIT, Art. 198, § 1, 1°. 144 CIT, Art. 198, § 1, 5°. 145 CIT, Art. 206, § 1. 146 CIT, Art. 48 and RD-CIT, Art.22 ff. 147 CIT, Art. 215.

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The following reduced rates apply to companies with a taxable income lower than € 322,500 :

Income Rate Below € 25,000 24,25 %

From € 25,000 to € 90,000 31 % From € 90,000 to € 322,500 34,5 %

These rates are increased through the application of the 3% austerity surcharge to 24.98%, 31.93% and 35.54% respectively. The reduced rates are not applicable to :

- companies owning participations exceeding certain limits (financial companies)148;

- companies whose shares are at least 50% owned by one or more companies;

- companies whose dividend distributions exceed 13% of the paid-up capital at the

beginning of the financial year;

- companies which do not pay a remuneration of at least € 36.000149 to at least one of their directors (if the taxable income of the company is less than € 36.000, the remuneration should be equal to the taxable income.

53bis. “Secret commissions” Salaries, commission, rebates, fees and other similar expenses that constitute earned income are deductible if the identity of the beneficiary is disclosed in a special annex to the tax return. These expenses must be supported by individual fee slips and a comprehensive statement of all such expenses, which must be provided before June 30 of the year following the year in which they were paid150. Commissions and fees not supported by such individual records are taxed as “secret commissions” at a flat rate of 300 % (309 % including the crisis surcharge of 3 %), unless it can be proven that they are taxed in the hands of the beneficiary151. The latter condition is met if the commissions and fees are taxed within the ordinary 3-year assessment period (Article 354 of the ITC) in the hands of the beneficiary and with the beneficiary’s consent. The Circular Letter of July 22, 2013 extends this “tolerance” to final tax assessments in the hands of the beneficiary without his/her consent and/or outside the 3-year assessment period. The special levy on secret commission, to the extent applicable, is deductible as a business expense152. The secret commissions themselves, provided that they are taxed at the level of the beneficiary, also constitute deductible business expenses, absent such taxation, they are disallowed expenses, in the latter case, however, the Minister of Finance can allow the deductibility of the secret commissions themselves as business expenses if :

148 The value of the shares they hold, to the extent such shares represent less than a 75% participation in the capital of the issuing company(ies), exceeds 50% of the higher of their (reevalued) paid-up capital or their paid in capital plus taxed reserves and booked capital gains. 149 This amount is not indexed yearly whereas most amounts stated in Euros in the Code are. 150 CIT, Art. 57, 1°. 151 CIT, Art. 219. 152 CIT, Art. 197, 1°.

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(i) the payment of secret commissions can be regarded as current practice in the relevant sector of the economy ;

(ii) the taxpayer applies for this favorable tax regime beforehand ; (iii) the commissions paid are not excessive ; and (iv) the taxpayer pays a flat rate on these commissions (as fixed in the Royal Decree

granting the request), which cannot be lower than 20 % of the commissions paid153.

The Ministry of Finance cannot allow the deduction of secret commissions paid for the acquisition or maintenance of a public market (for example, the granting of a public tender) or administrative authorizations. H. Groups of companies 54. In contrast with French and German rules, no tax consolidation is possible in Belgium. Section II Taxation of non-resident companies A. Domestic Law 1. Definition 55. Formerly, the non-resident tax was applied to non-resident corporations, organizations and other institutions with or without legal personality having their statutory seat, principal establishment or seat of management outside Belgium. Today, non-resident associations without legal personality are no longer subject to non-resident tax as such unless they are set up under a form analogous to one of the legal forms provided by Belgian company law154. 2. Tax base of foreign companies 56. A foreign corporation is subject to non-resident income tax in Belgium, either because it has an establishment in Belgium or because it receives Belgian-source income. Any partner or member of a partnership without legal personality which has its statutory seat, principal establishment or seat of management in Belgium or which has at its disposal an establishment in Belgium, is deemed to have a Belgian establishment155. Even without an establishment, a foreign corporation may be taxed on its profits (other than personal property income). Thus :

- all rental income and capital gains derived from Belgian real property owned by non-residents are subject to income tax156 by way of assessment157;

153 CIT, Art. 58. 154 CIT, Art. 227, 2°. 155 CIT, Art.229, § 3. 156 CIT, Art. 228, § 2, 3°, a. 157 CIT, Art. 232, 1°.

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- directors’ fees received by a non-resident corporation are taxed158 by way of a withholding tax159;

- profits realized by a foreign company providing artistic or sporting services160 in

Belgium are taxable. When a non-resident company has no establishment in Belgium (and does not have income referred to above), it is subject to non-resident income tax by way of a withholding tax on certain Belgian-source income (mainly income from capital or personal property). 3. Method of taxation 57. If a non-resident corporation has a Belgian establishment, a distinction should be made between the income attributed to the Belgian establishment and the other income. The following income is allocated to the establishment :

- business income produced through the establishment, including161.

- income from capital and personal property (such as dividends, interest and royalties) if the property is invested in the business activity of the establishment in Belgium;

Rental income and capital gains relating to Belgian real property may also be assessed even in the absence of any establishment of the foreign company in Belgium. Income allocated to an establishment and the income referred to above is subject to non-resident income tax by way of assessment162. Other types of income are subject only to a withholding tax, which is not credited against the tax due by the branch163. If a foreign corporation does not have a Belgian establishment or real property income in Belgium, only income produced or collected in Belgium is taxable, including income from capital and personal property. Such income is subject only to withholding taxes. No tax assessment is made. B. Treaty rules 58. When a tax treaty applies, the taxpayer is subject to the particular treaty rule if it is more favorable. In all conventions following the OECD or the Belgian model, a foreign corporation will only have to pay tax in Belgium if it has a permanent establishment i.e. a fixed place of

158 CIT, Art. 228, § 2, 3°, d. 159 CIT, Art. 248. 160 CIT, Art. 228, § 2, 8°. 161 CIT, Art. 233. 162 CIT, Art. 233 and 246. 163 CIT, Art. 248.

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business through which the business of an enterprise is wholly or partly carried on or if it derives real property income from Belgium. Unrelated income is subject to withholding tax only within the limits of the relevant treaty provisions.

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TITLE II – INTERNATIONAL ASPECTS – INBOUND AND OUTBOUND INCOME

Chapter I – Business income Section I Inbound business income: income earned abroad by Belgian residents A. Domestic law : double taxation 59. For individuals, the part of the tax that proportionally relates to real property or business income from a foreign source is reduced by half. The amount of exempt income is however added to the other income to determine the applicable tax rate (reserve of progressivity)164. For corporations, the tax on foreign-source income that, in the absence of other treaty relief, was reduced to one-fourth, does not benefit any more from any reduction165. Foreign taxes are deductible. Double taxation will deter a Belgian company to create a permanent establishment in a non-treaty country. Interest and royalty income realized and taxed abroad is subject to the reduced rate (for an individual) only if the income-producing asset is invested in an establishment abroad. If the asset producing foreign interest or royalty income is invested in a Belgian establishment, the normal rate will apply, but, if the income has been taxed abroad, the taxpayer may, under certain circumstances, be granted a foreign tax credit. Dividends on foreign or domestic shareholdings received by a foreign branch are excluded up to 95% of their amount from income in the same conditions as intercorporate dividends received by the head office (see infra nr. 79); the balance is subject to tax at the standard rate. Foreign losses are deductible and can offset domestic income. B. Treaties : exemption a. Income 60. All foreign source income attributable to a foreign permanent establishment is exempt from Belgian tax. However, Belgium reserves the right to take such income into account to determine the progressive rate of tax applying to other income. Under the Belgian Code of Income Tax, the provision taking foreign source income into account to determine the progressive tax rate applies only to individuals, not to corporations166. The exemption applies to dividends, interest, and royalties when the income-producing asset is invested in a permanent establishment abroad.

164 CIT, Art. 155 and 156. 165 CIT, Art. 217, abolished. 166 CIT, Art. 155.

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b. Losses 61. Foreign losses are deductible. Double deduction of losses incurred in treaty countries is prevented by the levy of a Belgian tax on foreign-source income arising in subsequent years if such income is not taxed abroad because it is set off against a loss previously deducted from income taxable in Belgium. The company must demonstrate each year that the foreign loss has not been deducted from the profits of the foreign establishments. The loss may not be deducted if it can be set off against exempt profits of other foreign establishments of the company167. This provision may be contrary to the freedom of establishment in the EU as it discriminates between foreign and Belgian branches. Besides, if the foreign establishment is transferred to another company by way of contribution, merger, division or an assimilated transaction, the deductible foreign loss will be recaptured168. Losses incurred in non-treaty countries are deductible without any recapture, as the business income arising in such countries is taxable at the full corporate rate. If a loss is incurred by a Belgian company in Belgium and the company’s permanent establishment (PE) abroad has generated profits in the same year that are exempt under the tax treaty between the foreign country and Belgium, Belgium required the company to set off the Belgian loss against the profits of the foreign PE rather than allowing the carryover of the loss to a subsequent tax year. This position had been upheld by Belgian case law because the computation of losses is not a treaty matter, despite the fact that it denies the carryover of losses and that it de facto nullifies the foreign income treaty exemption. However, the European Court of Justice (ECJ) has held that this rule was contrary to the principle of freedom of establishment guaranteed under the European Union Treaty. According to the ECJ, the freedom of establishment principle precludes a Member State from applying legislation under which a company incorporated under national law and having its seat in that Member State may, for purposes of corporation tax, deduct a loss incurred the previous year from the taxable profit for the current year only on the condition that the loss was not susceptible of being set off against the profit made during that same previous year by one of its PE's situated in another Member State, when the loss, although set off, cannot be deducted from taxable income in the Member States concerned, whereas it would be deductible if the establishments of that company were situated exclusively in the Member State in which it has its seat169. The Belgian position is therefore no longer applicable in the case of PE's created within the EU, but may continue to be applied with respect to non-EU countries. c. Determination of profits 62. The problem just referred to above arose from the way in which the taxable profits of a Belgian corporation are computed.

167 CIT, Art. 185, § 3. 168 CIT, Art. 206, § 1. 169 ECJ, December 14, 2000, Case C-141-99, AMID ; Hinnekens, L., European Union, AMID : The Wrong Bridge or a Bridge too far ? An Analysis of a Recent Decision of the European Court of Justice, Eur. Tax., June 2001, p. 206.

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The taxable profit of a company is determined in the following sequence : (1) The elements of the tax base, i.e., reserved profits, disallowed expenses and dividends paid, are added up. Exempt capital gains and exempt reserves, including reserves created by a transfer of capital (in a capital reduction) or in respect of premiums on issuance of shares, are excluded from the tax base. (2) Profits are broken down according to their source, that is :

• Belgian profits;

• foreign profits realized in non-treaty countries which were formerly taxable at a reduced rate170;

• foreign profits exempted by a tax treaty.

If losses were incurred in Belgium and abroad, they are deducted as follows:

• losses incurred in a country where profits are exempted by treaty: first from profits so exempted, then from profits realized in non-treaty countries formerly taxable at the reduced rate, and then from Belgian profits;

• losses incurred in a non-treaty country the profits of which were formerly taxable

at the reduced rate: first from profits in non-treaty countries, then from profits exempted by treaty, and then from Belgian profits;

• losses incurred in Belgium: first from Belgian profits, then from profits in non-

treaty countries formerly taxable at the reduced rate, and then from profits exempted by treaty.

(3) The following amounts are deducted :

• foreign-source profits exempted by a tax treaty;

• exempted gifts; non-taxable items. If there are foreign source profits arising in non-treaty countries, the deduction applies first to Belgian source profits. (4) Deductible dividends and liquidation surpluses are deducted (see infra nr. 79 intercorporate dividend deduction). Belgian source dividends and liquidation surpluses are deducted from Belgian source profits and foreign source dividends and surpluses arising from shares invested in branches located in non-treaty countries are deducted first from foreign source income. (5) Income from patents up to 80 p.c. (see nr. 174) ; (6) Notional interest (see nr. 157) ; (7) Losses from previous years are deducted in the following order :

(a) losses from treaty countries (not set off against profits exempted by treaty): 170 This category does not make sense, but remains on the books.

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• first from profits in non-treaty countries formerly taxable at the reduced rate; • then from Belgian profits;

(b) losses from non-treaty countries :

• first from profits in non-treaty countries formerly taxable at the reduced rate; • then from Belgian profits;

(c) Belgian losses:

• first from Belgian profits; • then from profits in non-treaty countries formerly taxable at the reduced rate171.

(8) The investment deduction, where applicable, or the deduction carried forward172 is deducted from the remaining amount of Belgian source profits173. Corporate gifts to authorized institutions are deductible up to 10 % of income with a maximum of € 500,000 (indexed). Section II Outbound business income: income earned in Belgium by foreign residents A. Domestic law 1. Definitions 63. A distinction should be made between a domestic subsidiary, a branch of a nonresident corporation and a non-resident corporation without a Belgian branch:

• a domestic subsidiary is an entity having legal personality which is subject to the Belgian corporate income tax because its statutory seat or principal office is located in Belgium;

• a branch of a foreign corporation is a commercial concept. Tax-wise, a branch

constitutes, in principle, an establishment of a foreign corporation in Belgium. The concept of a Belgian establishment is similar to but broader than the treaty concept of a “permanent establishment”;

• a nonresident corporation which does not have an establishment in Belgium may,

however, receive Belgian source income. 2. Tax base of a Foreign Corporation 64. A foreign corporation will be subject to nonresident income tax in Belgium, either because it has an establishment in Belgium or because it receives Belgian source income.

171 R.D.-CIT, Art. 75, 2d indent. The reference to the reduced rate only applies until assessment year 2003. 172 A special deduction – rarely – granted for some new investments, in the nature of a tax expenditure. 173 R.D.-CIT, Arts. 74 to 79.

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A Belgian establishment is defined as any fixed installation through which a foreign corporation conducts part or all of its professional activities in Belgium174. The term “Belgian establishment” includes especially :

• a place of management;

• a branch;

• an office;

• a factory;

• a workshop;

• an agency;

• a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

• a building site, construction or installation project if it lasts more than 30 days;

• a warehouse;

• an inventory of goods or merchandise175.

For such an establishment to exist, there must be an element of permanence. Business profits need not be produced directly by such establishment, as long as it participates in producing the business profits176. Any person – other than an agent having an independent status acting in the ordinary course of his business – acting in Belgium on behalf of a nonresident, must be considered a Belgian establishment, even if such person does not have the authority to conclude contracts in the name of the nonresident177. Any partner or member of a partnership without legal personality that has its statutory seat, principal establishment or seat of management in Belgium or that has at its disposal an establishment in Belgium, is deemed to have a Belgian establishment178. If reciprocal treatment is afforded by the country of domicile of the enterprise, the employment of an agent whose activity is limited to soliciting orders does not constitute a Belgian establishment. A Belgian establishment will also exist if services are supplied by individuals present in Belgium during more than 30 days during a 12 months period for a same or connected projects179 (“service establishment”).

174 Denys, L., Belgium : The Concept of Permanent Establishment Revisited and Other Reflections Beyond, Bull. Int. Taxation, 2008 at 440 ; Faes, P., Belgium, Tax Ramifications to a Foreign Corporation of Using a Service Provider in Host Country, 33 Tax Management International Forum, nr. 3, September 2012 at 8. 175 CIT, Art. 229, § 1. 176 Dierckx, F., How « Permanent » should a « Material Permanent Establishment » be ?, Eur. Tax., 2009, p. 34. 177 CIT, Art. 229, § 2. 178 CIT, Art. 229, § 3. 179 CIT, Art. 229, § 2.1.

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Activities of associated enterprises will be taken into account. Business profits of international shipping and air transport companies are exempt from tax under the same reciprocity condition180. Foreign insurance companies collecting insurance premiums in Belgium, other than from reinsurance, are subject to tax even if they do not have a permanent establishment in Belgium181. An establishment in Belgium is deemed to exist where a non-resident company reveals its presence through agents’ mail on letterheads, advertising, or in any other manner. When a foreign corporation has an establishment in Belgium, all its profits connected with the activities of the Belgian establishment (including income from personal property which is invested in the Belgian establishment) are subject to income tax in Belgium. As seen above, in exceptional circumstances, a foreign corporation may be taxed on its profits (other than income from capital and personal property) even without having a Belgian establishment :

• All rental income and capital gains derived from Belgian real property owned by non-residents are subject to income tax182 by way of assessment183.

• Director’s fees received by a nonresident corporation are taxed184 by way of

withholding tax185.

• Profits realized by a foreign company performing artistic or sports services186 are taxed by way of withholding tax.

When a non-resident company has no establishment in Belgium (and does not have income such as referred to above), it may be subject to nonresident income tax by way of a withholding tax on certain Belgian source income (mainly income from capital and personal property). 3. Method of Taxation 65. If a non-resident corporation has a Belgian establishment, a distinction should be made between the income attributed to the Belgian establishment and other income. The following income is allocated to the establishment :

• business income produced through the establishment, including187;

• income from capital and personal property (such as dividends, interest and royalties) if the asset is invested in the business activity of the establishment in Belgium;

180 CIT, Art. 231, § 1, 3. 181 CIT, Art. 231, § 1, 3. 182 CIT, Art. 228, § 2, 3, a. 183 CIT, Art. 232, 1. 184 CIT, Art. 228, § 2, 3, d. 185 CIT, Art. 248. 186 CIT, Art. 228, § 2, 8. 187 CIT, Art. 233.

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Rental income and capital gains relating to Belgian real property may also be assessed even in the absence of any establishment of the foreign company in Belgium. Income allocated to an establishment and the income referred to above is subject to nonresident income tax by way of assessment188. Other types of income are subject only to a withholding tax, which is not credited against the tax due by the branch189. 4. Determination of Taxable Income 66. The taxable income of branches of foreign corporations is defined by express reference to the taxable income of Belgian corporations190. But for minor exceptions, the same rules apply for the determination of taxable income of Belgian corporations and of establishments of foreign corporations. For branches, as for Belgian corporations, 95% of dividends paid by Belgian or foreign corporations are excluded from the taxable base when they arise from a participation which meets both the taxation requirement and the minimum shareholding and holding period conditions required for the participation exemption regime (see nr. 79). As in the case of Belgian corporations, the Belgian withholding tax on dividends paid to branches is creditable and the excess over the corporation tax due is refundable. Deductions 67. Only those expenses that relate exclusively to the Belgian establishment are deductible for purposes of the non-resident tax191. Operating expenses incurred abroad are deductible only if they relate exclusively to the Belgian establishment. The Tax Authorities will not allow a deduction for interest paid by a Belgian branch office in respect of money advanced to it by its foreign head office. An exception to this rule exists with respect to interest paid by the Belgian branch of a foreign financial institution to its head office192. Accounts 68. Normally, the profits of a Belgian branch will be determined on the basis of its accounts. Belgian accounting law compels branches of foreign corporations to keep accounts in accordance with Belgian accounting requirements193. However, the Tax Authorities will also accept accounts kept otherwise, and even excerpts of accounts kept abroad, proved they are sufficiently reliable. Violations of accounting law

188 CIT, Arts. 233 and 246. 189 CIT, Art. 248. 190 CIT, Art. 235, 2. 191 CIT, Art. 237. 192 Com. D.T.T., 7/313 ; Com. CIT, 235/38. 193 Law of July 17, 1975 on the annual accounts of enterprises, Art. 1.

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are subject to penalties that are enforced by the regular prosecution service rather than by the Tax Authorities. Comparison 69. In the absence of regular accounts, the normal practice is to determine profits by a comparison with taxpayers that are in a similar situation194. This method can also be applied if the activities of the branch are so intertwined with those of the head office that they cannot be distinguished therefrom, or if they do not give rise to separately identifiable income. The creation of a service subsidiary is often a way to avoid this type of taxation195. The application of the method of comparison is not always unfavorable. A special provision of the law determines minimum amounts of taxable income for branches of foreign corporations taxed by comparison. The Tax Administration often uses these minimum amounts as the basis for the determination of taxable income. Some of these amounts are listed below196 :

• chemical industry : € 22,000 per person employed;

• metal industry : € 7,000 per person employed;

• banks and credit establishments : € 24,000 per staff member;

• insurance : 10% of premiums collected;

• various enterprises, including service enterprises: 10% of the gross receipts, with a minimum of € 7,000 per person employed in the Belgian establishment.

The forfaitaire tax base can in no event be lower than € 19,000. It does not include capital gains on land and buildings. Coordination and control offices197 are often taxed on a cost-plus basis. Their taxable profit is then deemed to include :

• 10% of the office expenses as a deemed profit; and

• any disallowed deductions, such as corporate taxes. This system was found to be in contradiction with EU law because it applied only to non-resident taxpayers198. It was then extended to Belgian taxpayers. An apportionment of overall profits may also be made on the basis of appropriate key elements such as turnover, salaries and working capital. Foreign profits must be reconstructed in accordance with Belgian law. If the foreign tax system is similar to the Belgian system, such reconstruction will not be necessary.

194 CIT, Art. 342. 195 Com. D.T.T. 7/415. 196 R.D.-CIT, Art. 182. The rule also applies, to avoid discrimination, to Belgian enterprises which fail to report their income timely. 197 To be distinguished from “formal” coordination centres (see infra nr. 152) which existed in the past. 198 ECJ, Case C-383/05, March, 22, 2007, Talotta v Etat belge.

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The profit will be increased by the expenses which do not concern the corporation as a whole, but which only will be decreased by the elements of income that only the country of source may tax (dividends, interest and the like). To the fraction of profits attributable to the Belgian branch, the Tax Authorities will add elements of income directly attributable to the branch (for example, dividends, interest on securities held in the branch, etc.). Expenses relating directly to the branch and exempted items will be deducted from the taxable profit of the branch199. The rates of tax applicable to branches of foreign corporations are the same as those applicable to Belgian corporations200. The tax on business income should be paid in quarterly installments so as to avoid surcharges. B. Treaties 70. Under the double taxation treaties signed by Belgium, only income attributable to the permanent establishment of the foreign corporation in Belgium and Belgian source real property income are subject to corporate income tax. Unrelated income is subject to withholding tax only within the limits of the relevant treaty provisions. 1. Permanent establishment 71. Business profits are taxable only if an enterprise has a permanent establishment in the country and insofar as the profits are attributable to the permanent establishment. A permanent establishment is a fixed place of business where the business of the enterprise is wholly or partly carried on. It includes a place of management, branch, office, factory, workshop, mine, and construction or assembly works if it has been in existence for twelve (U.S.A., U.K., Japan), nine (Germany), or six (France) months. Application 71bis. The Court of Appeal of Mons201 has interpreted the concept of “permanent establishment” in the context of Article 3 of the Belgium-France Treaty. This interpretation, however, could apply to other treaties as well. The court held that a plasterwork company established in France that had carried out a series of assignments in Belgium had a permanent establishment in Belgium. The theory of the Court of Appeals was that the taxpayer had generated such a large turnover from Belgian activities that there must have existed substantial equipment and materials necessitating some sort of shelter in Belgium for more than six months. It was considered irrelevant that the Belgian assignments of the taxpayer had been executed pursuant to several individual contracts. These should be seen as constituting one economic activity. This decision could apply to any enterprise (whether large or small) carrying out building projects in Belgium from a temporary base. In effect, the decision creates a presumption that building activity of a certain scale and duration will constitute a permanent establishment in Belgium without the Tax Authorities having to identify the location of the site constituting the alleged permanent establishment. 199 CIT, Art. 237. 200 CIT, Art. 246, 1°. 201 Mons, October 10, 1978, Zinno Calogero, Bull. Contr., 1980, No. 589, at 2078.

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71ter. The term “permanent establishment” does not include :

• facilities used solely for storage, display, or delivery;

• the maintenance of a stock of goods;

• a purchasing office or an office for the collection of information;

• an information or research office or an office performing similar ancillary activities;

• a place used only for activities of a preparatory or auxiliary character, or

• a place used for a combination of those activities, provided they remain preparatory or auxiliary.

An agent, other than an independent agent, qualifies as a permanent establishment only if he is given the power to conclude contracts on behalf of the enterprise, unless is activities are limited to purchases. Under the Belgium-France treaty, an agent is considered to have such power if he regularly supplies orders out of a stock of goods. An enterprise will not be considered to have a permanent establishment solely because it acts through an independent agent or broker or because it has a subsidiary in the other country. 2. Method of taxation 72. Profits attributed to a permanent establishment will be the same as those of a separate enterprise dealing independently with the enterprise of which it is a part. Net profits will, in principle, be determined on the basis of the accounts of the establishment, subject to correction. In the absence of such accounts, or if accounts are not kept in accordance with the accountancy rules and regulations, or if the necessary corrections cannot be effected, either contracting State may use another fair method to determine the profits. Some treaties provide that, in the absence of accounting records or other evidence, the tax may be assessed in accordance with the law of the country (e.g. by comparison). The Belgian Model specifies that, if it is customary to determine the profits of the establishment by apportionment of the total profits of the enterprise, such determination is permitted202. No profit is deemed to arise from the mere purchase of goods. Expenses incurred by the company for the benefit of the permanent establishment, including executive and general administration expenses incurred within the country or abroad, are allowed as deductions. Interest and royalties paid to the head office are expressly excluded except in the case of banks, as seen above (nr. 67). This may change as the new Authorized OECD Approach (AOA) under the new art. 7 of the Model Treaty gets its way in treaties. If profits include items especially covered by the tax treaty, such as real property income, dividends, interest, royalties, capital gains, or compensation for services, such items are governed by the specific provisions relating thereto.

202 Belgian Model, Art. 7.4.

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Income from the international operation of ships and aircraft is taxable only in the country where the place of management of the enterprise is located. Chapter II – Inbound and outbound dividends Investment income generally – Foreign Tax Credit 73. To reduce double taxation on certain types of foreign source income, Belgian legislation provides for a foreign tax credit. This credit offsets corporate income tax, but the excess of the credit over the corporate tax liability is not refundable to the company. Such a tax credit is granted only with respect to foreign source interest and royalties, provided this income has been subject to foreign income or withholding tax. No foreign tax credit is granted with respect to foreign source dividend income, as this income may be covered under the participation exemption regime. Nor is the foreign tax credit available when the foreign source income is realized in a foreign branch of a Belgian corporation. Section I EC Directive 74. The two main objectives of the parent/subsidiary Directive203 are :

- the exemption of withholding tax on dividends distributed to a parent company that owns at least 10% of the stock of the subsidiary (with an optional two-year holding period);

- the granting of an almost total exemption from corporate income tax on or of an

underlying tax credit attached to the dividends received by such parent. This Directive establishes specific rules to be applied in intra-EU situations that are added to the rules existing under national legislation. Member States may extend these EU rules to domestic situation but are not legally required to do so. This does not result in a harmonized system in the EU since some provisions are vague enough to receive different interpretations. Regarding the withholding tax exemption, it applies to “distributed profits” (Article 5) whereas the corporation tax exemption concerns “distributed profits … except when the subsidiary is liquidated” (Article 4). With respect to the participation exemption, under the Directive, the Member State where the parent company is established may either exempt the dividends received from a qualifying subsidiary or grant a tax credit equal to the underlying tax paid by the subsidiary. Generally, such tax credit cannot exceed the amount of tax that the parent company would pay on these dividends. Belgium has adopted an exemption system.

203 Council Directive of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (2011/96/EU), recasting the Council Directive 90/435/CEE of 23 July 1990 as amended by Council Directive 2003/123/CE of 22 December 2003.

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Member States may disallow expenses connected with the participation and eventually estimate management expenses connected with the participation at a lump sum not to exceed 5 % of profits distributed by the subsidiary. Belgium taxes 5 % of such profits. Section II Tax treatment of dividends received within Belgium: withholding tax and participation exemption 75. Profits distributed as dividends are included in the gross income of a corporation. Profits received as dividends from Belgian corporations are, in principle, subject to a withholding tax of 25%204. The withholding tax is reduced to 15% for certain categories of dividends (see supra nr. 24). This tax is creditable against the income tax of the receiving corporation205. Withholding tax on dividends is, however, not due when a parent company holds at least 10 % of the capital of the Belgian resident subsidiary for an uninterrupted period of 12 months206. For dividends received by a Belgian resident corporation, 95% of the net amount received is deducted from taxable profits as definitively taxed income (the so-called “inter corporate deduction regime”207. The 5% inclusion accounts for income corresponding to the deductions relating to the management of the shares generating the dividend or the financing of their acquisition. The application of the participation exemption regime is subject to conditions, i.e. a minimum participation requirement, a holding period requirement208 and a taxation requirement. In the case of the certification of shares209, the holder of the certificates and not the issuer is in all respects regarded as the shareholder and, therefore, taxable on the dividend income. The issuer is only a “pass-through” and is transparent for tax purposes210. Tax transparency only applies, however, if the holder of the certificates has the right to receive the income derived from the shares. A. Withholding tax 1. Belgian dividends 76. Under domestic tax law, a withholding tax at the rate of 25% must in principle be withheld at source on dividends made payable by a Belgian resident corporation - this rate being usually reduced by applicable tax treaties -. The obligation to withhold tax 204 CIT, Art. 269. 205 CIT, Art. 279. 206 R.D.-CIT, Art. 106, § 6 ; Dassesse, M., Belgian Withholding Taxes on Outbound Dividend and Interest : The Challenge of Community Law, Bull. Int. Taxation, 2008 at 337. 207 CIT, Art. 204. 208 CIT, Arts. 202, § 2 and 203. 209 Certification of shares is a technique under which shares are transferred to a legal entity which commits itself to transfer the income or product of the shares to the transferor, who receives, who receives a certificate (Company Code, Art. 503). 210 Law of July 15, 1998, relating to the certification of securities issued by commercial companies, Art. 13, § 1.

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applies not only to resident payers but also to non-resident payers for which the amount paid is an expense deductible in Belgium. This extension of the obligation to withhold applies, however, only when it does not conflict with the terms of an applicable double taxation agreement. The withholding obligation applies irrespective of the place of payment, whether in or outside Belgium211. No withholding tax is due on dividends paid by a Belgian company under the following circumstances:

• the dividends are paid to a foreign non-profit making organization which is not subject to income tax in its country of residence and which is not contractually compelled to distribute the amount received to a final beneficiary (such as a Dutch administration office);212

• the dividends are paid to an approved investment fund that distributes at least

75% of its profits;

• the dividends are paid to a Belgian corporation holding at least 10% of the shares in the distributing company for more than one year213;

• the dividends are paid to an EU corporation holding at least 10% of the shares in

the Belgian distributing company for more than one year. To qualify for the exemption, the EU corporation must be a stock corporation subject to income tax in its country of residence214, listed in the Annex of the Parent-Subsidiary Directive.

Dividends paid by a Belgian investment company, other than a real estate investment company with a fixed equity, to a non-resident saver are also exempt from withholding tax provided they do not originate from dividends paid to the investment company by a Belgian resident company. Dividends paid by a Belgian real estate investment company with a fixed equity are also exempt from withholding tax provided that, at the end of the accounting year, at least 60% of the company’s real property investment is in real estate located in Belgium and used only for dwelling purposes. Dividends paid by UCITS specializing in investments in unquoted or growth companies (PRICAF) are not subject to withholding tax to the extent that they are paid out of capital gains realized by the UCITS. This has the effect of making such UCITS tax transparent, as capital gains on shares would be tax exempt. Refunds of capital excess of the true paid-up capital or refunds of capital that do not comply with the company law rules are treated as dividends215. Stock dividends are also treated as dividends and are therefore subject to withholding tax216. The excess of the amount received on the cost basis of the shares in the case of a repurchase by a corporation of its own stock is also subject to a 25% withholding tax217 (since 2012, as against 10 % formerly). The withholding is not due if the stock is quoted on the stock exchange, because this would be practically impossible.

211 CIT, Art. 269. Bearer shares are totally abolished in Belgium since 2013. 212 R.D.-CIT, Art. 106, § 2 and 4. 213 R.D.-CIT, Art. 106, § 6. 214 R.D.-CIT, Art. 106, § 5. 215 CIT, Art. 18, 2°. 216 CIT, Art. 18, 1°. 217 CIT, Art. 269, first indent, 2° bis.

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The liquidation surplus distributed by a company, i.e. the excess of the distribution above the paid-up capital, is subject to a 25 % withholding tax as of October 1, 2014, against 10 % formerly. If the paying company distributes a “net” dividend, i.e., it bears the burden of the withholding tax, the latter must be added to the income of the recipient in order to calculate the amount of withholding tax218. 2. Foreign dividends a. Withholding 77. No withholding tax is due on dividends of foreign companies received by a Belgian resident company219. No withholding tax is due on dividends of foreign shares that are deposited in Belgium by nonresidents (individual or corporate) who are liable to the Belgian non-resident income tax and who have not invested the capital that produces the income in a professional activity in Belgium220. When foreign source dividends are paid to a Belgian individual through a Belgian intermediary (e.g., banks), a withholding tax is due at the rate of 25%. Where such dividends are paid to a Belgian nonprofit organization without the intervention of a Belgian intermediary, the beneficiary is subject to a withholding tax at the rate of 25%221. b. Foreign tax credit No foreign tax credit is granted in principle for foreign dividends which have borne a withholding tax abroad, even when such dividends do not benefit of the participation exemption (see hereunder at 79) and are taxable. The foreign withholding will be deductible to the recipient : only the dividend net of such withholding will be taxable. 3. Imputation Against Corporate Tax of Withholding Tax Attributable to Personal Property Income 78. The personal property withholding tax is creditable by the Belgian recipient company222. Withholding taxes on dividends are creditable only if the corporate shareholder had full ownership of the shares at the time of the dividend payment or allocation and the distribution of the dividends did not result in a write-off on the shareholding223. This last condition is not applicable if the corporate shareholder has had the full ownership of the shares during twelve months prior to the attribution of the dividend224. The excess of the withholding tax relating to capital and personal property income over the corporate income tax is refundable. 218 CIT, Art. 268. 219 R.D.-CIT, Art. 106, § 1. 220 CIT, Art. 230 , 2°. 221 CIT, Art. 262, 1°. 222 CIT, Art. 279. 223 CIT, Arts. 281 and 282. 224 The condition does not fulfill any useful purpose since capital losses and write-offs on shares are not deductible to corporations.

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With respect to individuals who receive capital and personal property income, Belgian withholding tax is, in principle, the final liability. Resident individual taxpayers may elect not to include this income in their annual tax return; in that case, withholding taxes are not refundable225. It should be noted that the foreign tax credit is in principle not available to individual taxpayers either. Withholding taxes on income from capital and personal property represent the final liability for resident non-profit making organizations and for non-residents without a Belgian establishment (or even for non-residents with a Belgian establishment if the assets are not invested in such establishment). B. Participation exemption226 1. Intercompany Dividends and Liquidation Surpluses 79. Ninety-five percent of the net amount of dividends received from domestic or foreign corporations are deducted from profits taxable under the corporation tax (the so-called “inter-corporate deduction“ regime” or deduction of definitively taxed income)227. The 5% inclusion accounts for the income against which the expenses generated by the dividend-producing holding should be applied. The excess of the liquidation proceeds of a Belgian company over the tax cost basis of the holding or the excess of the repurchase price by a Belgian resident company of its own shares over the corresponding amount of paid up capital also falls under the participation exemption regime. Gains made upon the liquidation of a foreign company or upon the repurchase of its own shares by a foreign company will be subject to the same regime, if these operations are subject to a foreign income tax similar to the Belgian system228. If, however, gains on shares have been made on the occasion of a tax free merger, splitting or contribution of a business or division of a business, they will be treated as tax exempt capital gains229. a. Conditions Generally, the participation exemption will be granted only if the dividends or the liquidation surplus related to a shareholding of a minimum of 10% in the paying company or having an investment value of € 2.500.000, whichever is lower (the “minimum shareholding requirement”) at the time of attribution or payment of the dividend230. The shares of the subsidiary must be held for an uninterrupted period of one year. They must be held in full ownership. This condition was not found contrary to EC law231. Indeed, the parent-subsidiary directive applies to parents who receive dividends by reason of their quality of shareholder. A usufructuary receives them on the basis of his usufruct, which is a right in itself.

225 CIT, Art. 313. 226 Schoonvliet, E., Unilateral and Treaty Measures in Belgium for the Avoidance of Double Taxation, Bull. Int. Taxation, 2008 at 430 ; Bronselaer, K., Belgium, in Maisto, G., Taxation of intercompany Dividends under Tax Treaties and EU Law, IBFD, 2012 at 383.. 227 CIT, Arts. 202 to 205. 228 CIT, Art. 202, § 1, 2°. 229 CIT, Art. 45. 230 CIT, Art. 202, § 2. 231 ECJ, December, 22, 2008, Case C-48/07, Etat belge v Les Vergers du Vieux Tauves SA.

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This condition does now apply also to income received by banks, insurance companies, or brokers. It does not apply to investment companies or to income paid by investments companies232. b. Exclusions233 Moreover, the exemption will only be granted if the dividends or the liquidation surplus are received from a corporation which is subject to tax (“the taxation requirement”) 234. A number of definitions are of importance in applying the taxation requirement235. A financing company is a corporation that exclusively or principally supplies financial services, such as loans, to corporations that do not belong to the same group as the supplier. A treasury company is a corporation that exclusively or principally makes treasury investments, i.e., short term or passive investments, and not permanent investments, i.e., investments aimed to influence the management of another corporation or to create lasting ties. A corporation implementing the cash-pooling of other corporations within a group will not be considered to be a treasury company. An investment company, as referred to above, is a corporation, the corporate object of which is the collective investment of capital. There are five instances in which the taxation requirement will not be met, with the result that the participation exemption will be denied:236 1° The distributing company is not subject to corporation tax or a similar foreign tax, or is established in a country where the ordinary tax regime is considerably more favorable than in Belgium. The distributing company will qualify if it is in principle subject to tax, even if no tax is effectively levied because of some exemption. A country where the tax rate, including the tax levied by federated or decentralized powers (Switzerland e.g.), is lower than 15% at common law, either as a nominal rate or as an effective charge, is deemed to be a disqualified country. A list was published. No country of the European Union can fall under this rule. Ireland for instance, although its overall corporate tax rate is 12,5%, cannot be considered a tax haven. 2° The distributing company is a financing company, a treasury company or an investment company which, although subject to tax in the country of its domicile, is subject to a tax regime deviating from that under the ordinary tax law. The exception enabled Belgium to deny the exemption to dividends from Irish Financial Services Centre Companies without breaching the nondiscrimination article in the Belgium-Ireland double taxation agreement, because a Belgian corporation is treated in the same way.

232 An investment company is a company having as exclusive or main activity the collective investment of capital (CIT, Art. 1, 5°, f)). 233 Dierckx, F., Belgium’s Holding Companies Regime : Past, Present and Future, Bull. Int. Taxation, 2008 at 404. 234 CIT, Art. 2, § 2. 235 CIT, Art. 1, 5°, d), e) and f). 236 CIT, Art. 203, § 1.

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There are two exceptions to this exception.

- A distributing investment company will qualify if its by-laws provide for the distribution of 90% of its net income and such income consists of dividends or capital gains on stock that would otherwise qualify under the taxation requirements.

- A distributing financing company will qualify, provided it is resident in the

European Union, if it was created as to meet legitimate economic or financial needs of its shareholders and if the following prescribed equity-debt ratio exists: equity at the end of the tax year may not exceed 33% of debts ("thick" incorporation).

3° The distributing company realizes income, other than dividends, offshore, outside the country of its tax domicile, and the income is subject in the country of tax domicile to a special tax regime at variance with ordinary tax law. The exemption will be denied to the extent of such income. 4° The distributing company realizes income in foreign establishments which are subject to a tax regime considerably more favorable than the regime to which the profits would have been subject in Belgium. The exemption is denied to the extent of such income. The exception does not apply where the company and its foreign establishment are located in the European Union or when the country of the establishment levies an effective tax of at least 15% of the profits of the establishment. Swiss finance branches237 of corporations are thereby affected, although Belgium and Switzerland are bound by a double taxation agreement. 5° The distributing company redistributes “bad” dividends, i.e., dividends which fall within one of the four first exceptions, up to at least 10%. The exception does not apply to investment companies, which are subject to their own exception (see 2°). Nor does the exception apply to financing companies that qualify under the exception to the second exception (see 2°). The exception does not apply to foreign listed corporations established in a treaty country and subject to tax but not enjoying a tax regime at variance with ordinary tax law. Finally, the exception will not apply if the “bad” dividends have been excluded from the exemption at the level of the redistributing company, either under the Belgian provision discussed here or under foreign provisions having an equivalent effect238. The “look through” exception is particularly dangerous because it disqualifies the entire distribution. Dividends from Belgian corporations (but not from foreign companies) are grossed up by the amount of the Belgian withholding tax, when applicable (25% of the gross dividend or 25/75 of the net dividend). This calculation is shown below for :

237 A financial company located e.g. in Luxemburg would create a Swiss permanent establishment to which its interest income was largely allocated and was subject in Switzerland to a low rate of taxation. 238 CIT, Art. 203, § 2.

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Taxable amount = net dividend x 100/75 (or 4/3) Taxable amount after deduction = net dividend x 4/3 x 5/100 = 1/15 (6.66% of net dividend). c. Foreign permanent establishment The participation exemption regime is not available when income-producing shares are invested in a permanent establishment located abroad, the profits of which are exempted from Belgian tax by virtue of the applicable treaty239. Such profits are not taxed at all. d. Limits to the deduction 1°. Belgium grants a deduction from income and not an exemption. If the company incurred a loss or had insufficient income to deduct the dividend, the dividend deduction could not be carried over or rather had the result that loss could not be carried over. This was held to be contrary to the parent-subsidiary directive240. Following an amendment to the income tax code241, the unlimited carryforward of non-deducted dividends received from companies established within the EEA is allowed. The Belgian tax authorities first confirmed that the carryforward applies to domestic dividends, with retroactive effect from 1992. Second, intra-EU dividends qualify for the carryforward in accordance with the EC Parent-Subsidiary Directive, which took effect in 1992. Therefore, the carryforward applies with retroactive effect from 1992 only to dividends received from a subsidiary established in countries that were EU Member States. For dividends received from subsidiaries established in countries that were not EU Member States in 1992, the carryforward is available as from the date of such countries’entry into the EU. Third, the carryforward applies from January 1, 2004 to dividends received from a subsidiary established in a country in the European Economic Area (EEA), except for Liechtenstein as long as this country refrains from exchanging information. Fourth, the carryforward also applies to dividends received by a Belgian parent from its subsidiary established in a country with which Belgium has a tax treaty – as from the date of entry into force of that treaty – provided the carryforward would apply if both companies were established in Belgium. Finally, dividends from third-country subsidiaries established in non-treaty countries do not qualify for the carryforward, unless there is a free movement of capital principle applicable between Belgium and the source country prohibiting dividends from third-party subsidiaries from being treated less favorably than Belgian dividends242. 2°. The deduction cannot be offset against non-deductible expenses (except for corporate taxes and write-offs and realized capital losses on shares) and gratuities243 which would not otherwise be deductible under the law. As this limitation is not in conformity with the parent-subsidiary Directive, it does not apply to dividends from companies located in EU Member States. e. No credit for nonqualifying Dividends Dividends that do not qualify for the dividends received deduction are taxable in full at the standard corporate income tax rate (plus the crisis surcharge), without any tax credit

239 CIT, Art. 205, § 1. 240 ECJ, Case C-138/07, February, 12, 2009, Belgische Staat v Cobelfret. 241 ITC, Art. . 205, § 3 ITC in force as frome Oct. 1, 2010. 242 Circular Letter Afz./Int. IB 2006/0549. 243 CIT, Art. 205, § 2.

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being granted for the income tax paid in Belgium or abroad on the underlying income out of which the dividends were paid. There is a question as to whether the unilateral repeal by the Law of October 23, 1991of the application of the credit method for nonqualifying dividends distributed by foreign companies established in a country with which Belgium has signed a double taxation agreement is compatible with Belgium’s tax treaty obligations244. It was held generally compatible. 2. Foreign dividends and liquidation surpluses 80. Foreign source dividends are eligible for the participation exemption regime if they meet the taxation and minimum shareholding conditions. If those dividends do not meet both requirements, they will be subject to the standard corporate income tax on their amount not of foreign withholding tax, without any credit for the foreign withholding. 81. Example of computation :

Incoming dividends to companies Belgian subsidiary Withholding No Withholding Gross dividend 100 100 Withholding (25%) 25 0 Net dividend 75 100 Taxable in principle 100 100 Dividend deduction (95%) 95 95 Taxable amount 5 5 Corporate Tax (33,99%) 1,69 1,69 Credit for withholding 25 - Credit of refund 23.31 - Foreign subsidiary Foreign Withholding No Foreign Withholding Gross dividend 100 100 Foreign withholding (15%) 15 Net dividend 85 100 Taxable in principal 85 100 Dividend deduction (95%) 80.75 95 Taxable amount 4.25 5 Corporate tax (33,99%) 1.44 1.69

244 Malherbe, J., and Faes, P., De technieken in het Belgisch fiscaal recht ter voorkoming van internationale dubbele belasting : vrijstelling versus verrekening, in Het Belgisch Internationaal belastingrecht in ontwikkeling. Nieuwe wegen voor het Belgisch international belastingrecht ?, Antwerpen, Kluwer, 1993 at 475-479.

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C. Dividends subject to a reduced withholding tax rate (15 %) 82. A reduced property withholding tax rate is available for dividends (other than liquidation or share redemption surpluses) that relate to cash contributions made as of July 1, 2013, provided that the following conditions are simultaneously met245 :

(i) the company receiving the cash contribution qualifies as an SME within the meaning of Article 15 of the Companies Code for the tax year during which the capital contribution has been made ;

(ii) the shares issued in consideration of the cash contribution are in registered form and are non-preferred ;

(iii) the shares are acquired through new cash contributions made as of July 1, 2013 ; (iv) the cash contributions cannot originate from the distribution of taxed reserves

under the transitional special 10 % “liquidation” withholding tax rate ; (v) the shares are held in full ownership from the date of the capital contribution ; (vi) the dividends are attributed out of the profit allocation for the financial year

following that of the capital increase and (vii) the capital contribution has been fully paid at the time of the dividend distribution.

The reduced withholding tax rate is 20 % for dividends distributed out of the profit allocation of the 2nd financial year following the financial year in which the capital contribution was made and 15 % for the dividends distributed out of the profit allocation as of the 3rd financial year following the financial year of such contribution. Companies without minimum paid-in capital are excluded from this measure, except if the new cash contribution equals at least minimum paid-in capital of a BVBA/SPRL (currently € 18,550). The reduced rate(s) is (are) not only available for capital increases but also for capital contributions in newly-incorporated companies. The benefit of the reduced rate is maintained in the case of an exchange of shares in the context of tax neutral restructuring or in the context of certain transfers of shares following an inheritance or a gift (between spouses and in direct line). In order to counter abuses, certain capital increases do not qualify for the application of the reduced rate(s) i.e. (i) capital increases that are realized subsequent to a capital decrease realized as of May 1, 2013, except and to the extent that the capital increase exceeds the preceding capital decrease ; (ii) capital increases funded by capital decreases realized as of May 1, 2013 at the level of an affiliated or associated company (within the meaning of Articles 11 and 12 of the Companies Code). The anti-abuse measure also applies if the capital increase is not realized by the individual who benefited from the capital decrease but by his/her spouse, parents and children (if the parents are by law entitled to the income of these children). In addition, these specific anti-abuse measures do not preclude the possible application of the general tax abuse measure laid down in Article 344, § 1 of the ITC. Section III Treatment of outbound dividends Withholding

245 CIT, Art. 269 as amended by the Law of June 28, 2013.

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83. In respect of outbound dividends, Belgian domestic law will apply, but subject to treaty provisions and the EU Parent-subsidiary Directive. Belgium may withhold at source a tax of 15% under most treaties. The withholding tax is reduced when the recipient is a corporation holding a certain share of the capital of the paying entity : Country Share of Ownership Rate France 10% 10% Hong-Kong 10% 5% 25% - 12 months 0% Luxembourg 25% 10% Netherlands 25% 5% U.K. 25% 5% U.S.A. 10% 0% If the recipient is a company established in the EU, the treaty rate will apply only in cases where the parent-subsidiary Directive does not apply. Normally, the tax is withheld at the domestic tax rate (25%) and a refund of the excess must be requested. The paying entity may also limit the withholding to the reduced rate. An exemption from withholding tax is granted for dividends paid between EU resident parent and subsidiary companies under the November 30, 2011 EU Directive. A parent company is a company subject to income tax that has held at least 10 % of the subsidiary company for an uninterrupted period of at least two years. The holding period may be reduced by application of domestic legislation (e.g., in Belgium the holding period is only one year). The subsidiary company should also be subject to income tax. Both the parent and the subsidiary companies should have the legal form indicated in the Directive. Belgium also waived, starting in 2007, withholding tax on dividends paid in the same conditions to parent companies located outside of the EU but in countries with which Belgium has a double tax treaty246. Chapter III – Interest Section I Domestic tax treatment of interest A. Withholding tax 1. General rule 84. A withholding tax of 25% (15% formerly) is deducted at source on gross interest income from Belgian sources on bonds, public securities, loans, and deposits247. Interest from foreign sources is subject to Belgian withholding tax on capital or personal property income only if the income is received through a paying agent in Belgium.

246 RD-CIT, Art. 106, § 5. 247 CIT, Art. 269, 1°.

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The amount withheld at source may be credited against corporate income tax248. The credit is granted only in proportion to the holding period of the asset generating the income249. Withholding tax on interest income is fully refundable if it exceeds the final corporate tax due. If the debtor bears the burden of the withholding tax himself, he may not deduct it from income and the creditors must treat it as income250. 2. Exemption from Withholding Tax on Interest Income 85. Certain types of interest income are exempted from withholding tax, generally because the State is assured that the income will be reported. Specific terms are used in defining those exemptions :

• “financial establishments or other enterprises treated as such” are banks and other specifically designated financial institutions;

• “professional investors” are individuals who use income-producing personal

property in their professional activity and Belgian companies and non-residents having an establishment in Belgium;

• “private savers” are resident taxpayers who have not used the income-producing

asset in their professional activity, and

• “non-resident savers” are nonresident taxpayers who have not used the income-producing asset in their professional activity251.

1°. Exemptions for business First, there will be no withholding when the State can be assured that the final tax will be paid. This is the case :

- when a Belgian company pays interest to a “professional investor”, being a Belgian company, a Belgian unincorporated business or a Belgian branch252 ;

- when interest on bonds is paid to “financial establishments”253 ; - on interbank loans or deposits.

2°. Exemptions for non-residents Second, certain exemptions apply to Belgian companies which borrow abroad. This is the case :

- when a Belgian “professional investor” borrows from a foreign bank located in the EEA or in a treaty country254 ;

- when a Belgian company issues nominative bonds to “non-resident savers”255 ;

248 CIT, Art. 279. 249 CIT, Art. 280. 250 CIT, Art. 268. 251 RD-CIT, Art. 105. 252 RD-CIT, Art. 107, § 2, 9°, c. The exemption does not apply to bank deposits (RD-CIT, Art. 110, 5°). 253 RD-CIT, Art. 107, § 2, 8°, a. 254 RD-CIT, Art. 107, § 2, 5°, a.

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- when a Belgian “financial establishment” or the State and local authorities issue nominative bonds to “non-resident savers” or borrow abroad256.

Also exempt is interest, received by a taxpayer other than a Belgian resident individual or a Belgian non-profit making organization, on securities deposited in the clearing system operated by the Belgian National Bank. This system enables Belgian companies to issue securities on the international capital market and pay interest free of withholding tax to certain categories of investors who open clearing system accounts257. 3°. Exemption for associated companies Thirdly, Belgium has implemented the directive exempting interest paid on loans or bonds between associated companies of the EU258. The application of the directive is limited in Belgium to "sociétés anonymes", "sociétés en commandite par actions", "sociétés privées à responsabilité limitée" and entities of public law operating under a regime of private law. Companies are associated when :

- one of the two has a direct or indirect participation of at least 25 p.c. in the capital of the other one (parent or subsidiary);

- a third company also established in the EU has a direct or indirect participation of at least 25 p.c. in the capital of both (sister companies).

The participation must be held during one year259. The claim must not have been part, at any time of the period during which the income arose, of the assets of an establishment of the beneficiary outside of the EU. In order to secure the exemption, the creditor must deliver to the payor a certificate of compliance260. If the holding period of one year is not completed, the payor must retain provisionally the withholding tax until the period has expired261. Section II Inbound foreign interest A. Domestic law 86. Foreign-source interest income gives rise to a tax credit the amount of which is equal, in principle, to the foreign withholding tax, but which may not be higher than 15%. The credit is equal to the ratio between the foreign withholding tax expressed as a percentage and one hundred less that amount. The computation basis for this tax credit is further limited to take into account the financial charges paid relating to the acquisition of this

255 RD-CIT, Art. 107, § 2, 10°. The exemption does not apply if the subscriber is a tax haven company 50% held by Belgian residents. 256 RD-CIT, Art. 107, § 2, 5°, b. 257 Act of August 6, 1993 on transactions in certain securities and Royal Decree of May 26, 1994 (Mon. Belg., June 3, 1994). 258 Council Directive 2003/49/CE of June 3, 2003 concerning a common tax regime applicable to payments of interests and royalties made between associated companies of different member States ; RD-CIT, Art. 117, § 6 bis. 259 RD-CIT, Art. 105, § 6°, b). 260 R.D.-CIT, Art. 117, § 6 bis. 261 R.D.-CIT, Art. 117, § 15.

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foreign-source interest income262. The credit is also part of the taxable base. It is credited against the corporate income tax, but the excess is not refundable263. The amount of the real foreign tax credit for interest can be summarized in the following formula: actual amount of gross income less foreign tax paid (in %) x financial charges 100 – actual amount gross income of foreign tax paid (in %) where “gross income” is an amount excluding capital gains (realized or not) and “financial charges” include all payments made by the company during the tax period. To eliminate the system known as “channeling”, the tax credit relating to foreign-source interest income is deemed if the recipient acts only as an intermediary, i.e., in his own name, but for the account of a third part who provides the necessary funds and accepts, totally or partially, the risks of the operation264. Example : Interest 100 Foreign withholding tax 10 Income at the border (A) 90 Income (Belgian lender) 90 Gross-up 9.44 Taxable amount 99.44 Corporate tax 33.99% 33.79 Foreign tax credit (9.44) Tax due (B) 24.35 Net income after tax (A – B) 65.66 Limitation - Total Income 1.000 - Capital gains 100 - Financial charges relating to foreign-source interest 50 - Foreign-source interest 100 - Foreign withholding tax 10 The foreign tax credit available to the Belgian lender is calculated as follows : - first operation : real foreign tax credit (Foreign-source interest – tax at source) x [tax at source/(foreign-source interest – tax at source)] = 90 x 10/90 = 10 - second operation : multiplier [((Total income – capital gains) – financial charges relating to foreign-source interest))/(total income – capital gains)]

262 CIT, Art. 287. 263 CIT, Art. 292. 264 CIT, Art. 289.

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= [((1.000 – 100) – 50)/1.000 – 100)] = 850/900 = 0.944 - result : creditable amount of foreign tax [Real foreign tax credit x multiplier] = 10 x 0.944 = 9.44 B. Treaties 87. For interest and royalties received by corporations, Belgium confirms domestic law and grants to its residents a foreign tax credit (equal to the actual foreign withholding tax rate for interest and at the rate of 15/85 for royalties) provided the income has been taxed abroad, irrespective of the rate. This foreign tax credit will not be granted if the recipient of such income (financial institution) acts only as an intermediary for a third party who resides abroad. Tax sparing265 is provided for certain types of income e.g. in the treaties with Brazil, China, Egypt, Greece, India, Indonesia, Korea, Malaysia, Malta, Morocco, Pakistan, Philippines, Portugal, Singapore, Spain, Sri Lanka and Tunisia; under these treaties, Belgium will grant the standard tax credit even if the interest or royalties are not taxed in the country of source. The tax treaty with Egypt provides for a credit of 20% of interest when the interest is tax exempt in Egypt. The credit applies to net income received from abroad, after deduction of the foreign tax. Section III Outbound interest 88. Domestic rules on withholding tax will apply (see in particular nr. 85, 2° and 3°), subject to treaty restrictions. Interest is taxable in the country of residence of the recipient, but the country of source may levy a tax which is generally limited to 15%, provided administrative formalities are complied with. Some treaties reduce the rate to 10%. Under the German, Dutch and Luxembourg treaties, interest paid to an enterprise is not taxable in the country of source, except if it is paid on bonds or by a corporation to a German or Luxembourg company which owns directly or indirectly at least 25% of the voting stock of the former. A similar, but less restrictive, provision is included in the treaty with the Netherlands. Under the U.K. treaty, if interest is paid, other than in the course of normal business activities, to a corporation by a non-resident corporation, when 50% of the voting rights of both are controlled directly or indirectly by a maximum of five individuals resident in the source country, the tax rate limits in the source country will be those applying to dividends266. Interest on commercial claims, including interest on bills of exchange, is not subject to withholding tax when paid by a Belgian enterprise to enterprises of certain countries

265 Under tax sparing, the residence country grants a foreign tax credit even if the source country waives its right to tax at source. 266 Treaty with the U.K., Art. 11 (5).

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(Austria, U.S. , …). The exemption does not apply to purported extensions of commercial credit that are, in fact, loans made between related entities. Interest includes income from government bonds, mortgage bonds, and debentures carrying a right to participate in profits and all proceeds assimilated by internal law of the source country to income from money lent. The U.K. treaty expressly includes prizes on bonds and excludes annuities granted in exchange for full consideration. The limitation of the rate charged by the country of source does not apply when the claim from which the interest arises is effectively connected with a permanent establishment of the recipient in the country of source. Interest has its source in the country of residence of the paying entity. However, when such entity has a permanent establishment in one of the States for which the debt was incurred and which bears the interest, the interest has its source where such permanent establishment is located. The Belgian withholding tax on interest paid to foreign enterprises – whereas interest paid to Belgian companies is exempt – was considered not to be contrary to the freedom of establishment provided by the EU Treaty in a case concerning interest paid by a subsidiary to its Luxembourg parent267. Residents and non-residents are not in the same situation. Belgium can control the payment of corporate tax by Belgian companies whereas, if the withholding did not exist, it would have to rely on the foreign administration to recover the 15 p.c. tax which it may levy according to the treaty. There is no discrimination as Belgian companies also pay tax on interest.

267 ECJ, Case C-282/07, December, 22, 2008, Etat belge v Truck Centre.

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TITLE III – ANTI-TAX AVOIDANCE PROVISIONS Scope of the Provisions 89. Belgium’s anti-tax avoidance legislation is targeted specifically at the diversion of income to individuals or companies established in countries where little or no tax is levied on the recipient. Generally, those rules will apply where those individuals or companies are related to the paying entity, but sometimes anti-tax avoidance provisions will apply even when no relationship is apparent. Chapter I – Domestic Law Section I Transfer Pricing268 90. The Belgian Tax Code contains a general provision enabling the Tax Authorities to tax profits that are transferred to another taxpayer under “abnormal” conditions269. This provision reads as follows: “Notwithstanding Article 54, abnormal or gratuitous advantages granted by an enterprise established in Belgium are added to its own profits, unless those advantages are taken into account in the determination of the taxable income of their beneficiaries. Notwithstanding the restriction provided for in the first paragraph, the abnormal or gratuitous advantages are added to its own profits when they are granted to :

- a non-resident taxpayer with which the enterprise established in Belgium has direct or indirect links of interdependence;

- a non-resident taxpayer or a foreign establishment which is, by application of the

foreign tax law, not subject to income tax or which is subject to a tax regime which is substantially more advantageous than the Belgian one applying to the Belgian enterprise;

- a non-resident taxpayer which has a common interest with taxpayers referred to

above.” This provision covers transactions with both resident and non-resident taxpayers. For Belgian residents receiving abnormal and gratuitous advantages, the advantages are added to the tax base of the enterprise that grants them, provided they are not included in the tax base of the recipient. Such advantages are normally included in the taxable base of a corporate recipient, and therefore the provision will not be applicable between two Belgian resident enterprises. This rule will not apply when the recipient offsets losses carried forward, intercompany dividends or other deductible items against the advantages received, in which cases another provision prevents such a deduction270.

268 Cauwenbergh, P., Transfer Pricing in Belgium : Rulings and Practice, Bull. Int. Taxation, 2008 at 384. 269 CIT, Art. 26. 270 CIT, Art. 79 for individuals and Art. 207 for companies.

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When abnormal or gratuitous advantages are granted to a foreign taxpayer listed in the second paragraph of the provision (i.e., a foreign related taxpayer or a foreign taxpayer located in a tax haven), those advantages will be added to the taxable profits of the granting enterprises, even though the beneficiary may have included those advantages in its taxable income. Article 26 of the CIT applies to both subsidiaries and branches. It refers to abnormal advantages, i.e., advantages that would not have been granted under normal circumstances between unrelated parties, and to gratuitous advantages, i.e. advantages which are granted without counterpart271. Under the ruling practice that has been introduced in Belgian tax law, a taxpayer may file a request for an advance ruling on this topic272. One of the objectives of the Belgian legal provision is to serve as an instrument to challenge the intercompany transfer pricing of goods, services, the use of tangible and intangible assets, and interest paid or received by Belgian enterprises. When such transfer price results in a transfer of profits from Belgium to a foreign taxpayer or to a Belgian resident individual who is not taxed on the advantages received, the amount of those advantages may be taxed with the Belgian enterprise that grants them. It should be noted that the advantages added to the tax basis of the granting enterprise cannot be characterized as capital gains or as dividends. They are considered as common profits of the enterprise, without any possible application of a special regime273. As provided in the article 90 of the tax treaties, if Belgium has included in the profits of a Belgian enterprise profits of a foreign one, part of the same multinational group, and their relations are not at arm’s length with the consequence that a rectification took place abroad, Belgium will proceed to a corresponding adjustment274. The problem is of course to agree on the definition of the arm’s length relation. This is done by ruling or through the international treaty provisions, including those of the European Convention of 23 July 1990 on the elimination of double taxation in the event of correction of profits of associated enterprises. The competent authority may also act275. Section II Disallowance of Certain Payments 91. Amounts paid as interest, royalties, and remuneration for services will normally not be allowed as business expenses when they are paid directly or indirectly to foreign taxpayers or to foreign establishments which are not subject to income tax or which are subject to a tax regime substantially more favorable than the regime that would apply to such income in Belgium.

271 Com. CIT, 24/6 to 24/12. 272 Law of 24 December 2002, see infra nr. 85. 273 Cass. , September 20, 1972, Transmarine, J.P.D.F., 1972 at 295. 274 CIT, Art. 185, § 2. 275 Cauwenbergh, P., Gaublomme, A. and Vanmechelen, W., Belgium, ch. 20, in Income Tax Treaties : Competent Authority Functions and Procedures of Selected Countries, Portfolios 6885-6895, A-C at A-115.

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The deduction will, however, be allowed if the taxpayer proves that the payments are the result of legitimate business transactions and did not exceed normal limits276. Remuneration for services and intercompany charges are therefore deductible only if it is proven that the expenses are clearly for the benefit of the Belgian enterprise. “Normal” royalties are based on the cost of the rights granted, increased by a normal profit margin277. In principle, the remuneration will be normal if it would have been paid between unrelated parties contracting under the same circumstances. Under the Belgian legal provision, the “abnormal” portion of interest, royalties and fees paid by the Belgian enterprise is a non-deductible expense and is therefore taxed in accordance with Belgian domestic law. Section III Reporting Requirements 91bis. Any payment above € 100,000 made in a taxable year must be reported if it is made to persons established:

- in a country considered by the OECD World Forum on Transparency and Exchange of Information as below standard ;

- or in a country mentioned on the Belgian list of tax havens278. All bank account numbers are communicated to a central service279. 91ter. Taxpayers must mention on their returns their foreign bank accounts or insurance policies but also the existence of a “juridical construction” of which they are founders or beneficiaries280. A juridical construction includes :

a) any juridical relation by which assets or rights are placed under the control of an administrator in order to administer them in the interest of beneficiaries or with a specified purpose ;

b) a non-resident subject to no tax or to a tax regime notably more advantageous than the Belgian tax regime and in which the taxpayer is the holder of rights or shares on economic rights281.

Section IV General Anti-Abuse Provision282 92. For all operations, a general anti-abuse provision was introduced in 1993. Under this provision, the legal characterization of a deed or of a series of interconnected deeds by the parties may be disregarded by the Belgian income tax authorities if they can prove that this characterization has been chosen in order to avoid income tax. The taxpayer

276 CIT, Art. 54. 277 Com. D.T.T. 12/607. 278 CIT, Art. 307, § 1, par. 3, and 198, par. 1, 10°. 279 CIT, Art. 322, § 3. 280 CIT, Art. 307, § 1. 281 CIT, Art. 151, 13°. 282 Garabedian, D., Form and Substance in Tax Law, Cah. dr. fisc. intern., vol. LXXXXCIIa, I.F.A. 2002 Oslo Congress, p. 153 ; Malherbe, J., and Verstraete, H., Belgium, in Host Country Taxation of Tax-Motivated Transactions : The Economic Substance Doctrine, 31 Tax Management International Forum, 2010, nr. 2, June 2010, p. 8.

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may, however, adduce evidence that the legal characterization meets legitimate needs of a financial and economic nature283. This provision has created uncertainty in the Belgian tax environment. It should, however, be noted that the principle of allowing the choice of the least tax way remains valid under Belgian tax law. The provision does not alter this principle. It aims, however, at discouraging operations which have been carried out purely for tax reasons and for which the legal characterization advanced by the parties has only been motivated by these tax objectives. The scope of this provision is unclear as neither the parliamentary records underlying the Act which introduced this provision, nor the published administrative guidelines have given examples as to how to apply it. The Belgian income tax authorities would like to extend its scope to most transactions made by parties even when tax reasons are not the only ones motivating the legal characterization of the transaction. Under a strict interpretation of this provision, one has to conclude that if the parties can show but one justifying economic or financial reason, the provision should not be applicable. The parties may seek an advance ruling to determine whether the legal characterization of a deed or of a series of interconnected deeds meets legitimate needs of a financial and economic nature284. It was found difficult to recharacterize a transaction while respecting its juridical nature. The Supreme Court held that the new qualification must be compatible with the non-tax effects of the transactions285. Therefore a new provision has been introduced. A transaction or a series of transactions could not be opposed to the tax administration if it is proven in the light of objective circumstances that there is a tax abuse. A tax abuse can arise in two cases :

1° the tax taxpayer puts himself in violation of the purpose of a tax provision outside of the field of application of such provision; 2° the taxpayer realizes a transaction by which he claims a tax benefit, the granting of which would be contrary to the purpose of the provision and the obtention of the benefit is the essential purpose of the transaction.

It belongs to the taxpayer to prove that the choice of the legal act(s) is justified by other motives than the avoidance of tax. If he does not, the tax base and the computation of the tax take place according to the purpose of the law, as if the transaction had not taken place. The taxpayer who contemplates a transaction may apply for a ruling, but the ruling cannot bind the administration not to apply the anti-abuse measure. Indeed, a ruling may not concern a tax audit or the use of means of evidence. The Ruling Committee may only decide that the legal act or the whole of the legal acts contemplated is justified by other motives than tax avoidance. Needless to say, this new provision creates considerate legal uncertainty.

283 CIT, Art. 344, § 1. 284 Law of 24 December 2002, see nr. 101. 285 Cass., 22 November 2007 ; Cass., 4 November 2005.

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Section V Certain Transfers Disregarded 93. Certain transfers by sale or contribution to capital of qualifying assets may be disregarded by the Belgian income tax authorities and may, therefore, not avoid the imputation of income to the Belgian transferor resulting from the transfer of assets abroad, if the transferee is a foreign taxpayer not subject to income tax in its country of establishment or is subject to a privileged tax regime on the income of the assets transferred compared to the regime which would have been applicable to the transferor on such income in Belgium. Such transfer will, however, be accepted for tax purposes if :

• the taxpayer proves that the transaction was effected for legitimate financial or economic reasons; or

• the taxpayer has received consideration that produces income subject to normal

taxation in Belgium, as compared to the tax that would have been imposed if the transaction had not taken place286.

Qualifying assets which fall under this provision are shares, bonds, accounts receivable, intangible assets, and cash. Real estate, however, is not covered. The consequence of the application of this provision is that the imputed income on the transferred assets will be taxable in the hands of the transferor. Section VI Interest Rate 94. Only interest at a normal interest rate may be considered as a deductible expense287. This normal rate is determined in each case by market conditions and elements such as the nature of the loan, the solvency of the debtor, etc.288. There is no ceiling on interest paid to financial institutions289 Section VII Limits on the Offsetting of Losses and

Intercompany Dividends 95. Losses, intercompany dividends received and generally exempted items are not deductible by a Belgian company from profits arising from abnormal or gratuitous advantages obtained by this taxpayer from an enterprise with which it has direct or indirect ties of interdependence290. Advantages granted by Belgian residents and by non-residents are taken into account in the application of this provision although, in the latter case, Belgium loses non revenue.

286 CIT, Art. 344, § 2 ; Malherbe, J., and Verstraete, H., Belgium, in Current Taxation by Host Country of income earned by Controlled Foreign Corporations, 32 Tax Management International Forum, 2011, nr. 1, March 2011, p. 11 287 Com. CIT 53/0 to 53/11. 288 CIT, Art. 55. 289 CIT, Art. 56. 290 CIT, Art. 207.

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Besides, the denial of the deduction of intercompany dividends may be contrary to the parent subsidiary directive291. Chapter II – Double Taxation Agreements 96. Treaty provisions in Belgian tax treaties, similar to Article 9 of the OECD Model Treaty, enable Belgium to tax profits of an enterprise established in Belgium which are transferred to a foreign related taxpayer in a treaty country, if abnormal or gratuitous advantages have been granted. Hence, treaty provisions applying for example to interest and royalties provide that only the portion of interest and royalties which would have been paid in the absence of a special relationship between the paying entity and the recipient will be subject to the reduced withholding tax or exemption in the country of source.

291 Antwerp, 28 April 2009, Fiscologue, nr 1160, p. 1.

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TITLE IV – PROCEDURAL ISSUES Chapter I – Tax Procedure Section 1 Introduction 97. The Belgian tax procedure, in a restricted sense, rests upon the obligation of the taxpayer to file his tax return. The Belgian income tax system is, as in many other jurisdictions, based on a self-assessment approach, under which all taxpayers subject to individual income tax, corporate income tax, legal entity tax and (subject to certain exceptions) non-resident income tax must file a tax return on an annual basis. If the taxpayer's return is selected for audit, the tax administration will actually proceed to the verification of the tax return. The authority to perform such an audit and to collect the taxes imposed by the Belgian Income Tax Code (hereafter "ITC") and by the implementing legislation is vested with the Minister of Finance, who for his part is assisted by the different operating divisions of the Federal Tax Administration. If the audit of the tax return results in a proposal of increase in tax liability, the tax administration will send a notice of rectification ("avis de rectification" – "bericht van wijziging"). The taxpayer has to reply in writing within a term of one month as from the date the notice of rectification was sent. If the tax administration holds its ground, it will assess the tax on the basis of the rectified taxable base. At the latest on the date of the actual assessment, the tax administration has to acquaint the taxpayer by registered mail with the motives for upholding its position. The taxpayer may then appeal administratively within the tax administration, by filing a claim against assessment with the Regional Director within a period of three months as from the date the notice of assessment was sent. The taxpayer may challenge a negative decision of the Regional Director by commencing an action in the competent Court of First Instance (Tax Court) within three months as from the date the negative decision was sent by registered mail. Should the Regional Director fail to take a decision within six months (nine months in case of an assessment ex officio) as from the filing of the claim against assessment, the taxpayer may challenge the assessment directly before the Court of First Instance (Tax Chamber). If the taxpayer does not dispute the assessment by means of an administrative appeal or an action before the Court, the tax administration is allowed to proceed with the collection of the income tax. Section 2 Return Filing Requirements 98. The return filing requirements with regard to the proposed transaction will in general be dependent on whether the manufacturing and sales activities are conducted by a Belgian corporate subsidiary or by a Belgian branch or passthrough entity. Return and Record Maintenance Requirements 1. Income Tax Returns 99. As noted above, the model of the tax return is determined annually by a Royal Decree and published in the Belgian Official Gazette. Different models exist for (resident) corporate income tax and non-resident corporate income tax. In addition, special models

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exist for the payment of personal withholding tax (forms nr. 273, 273A and 273Sp.), the specification of the provision for liabilities and charges (form nr. 204.3), the investment deduction (form nr. 276U) and the taxable reserves (form nr. 329A), etc. If for instance a subsidiary is formed as a company, within the meaning of art. 2, 5° of the Belgian ITC, it will have to file a corporate income tax return. The return filing requirement applies whether or not the subsidiary has income for the relevant accounting year. The corporate income tax return must be filed with the competent tax administration by the date mentioned on the official form. The filing deadline mentioned may not be within less than one month as from the date the tax return was sent by the tax administration to the company292. For resident companies, the ultimate filing date will usually be June,30. In general, the filing period may not be less than one month from the date of approval of either the annual accounts or the profit and loss account and may not exceed six months following the close of the company's accounting year293. This filing period is mandatory. An extension of the initial filing period may be obtained from the tax administration, provided that the request for such an extension is made for a valid reason and is filed prior to the date on which the initial filing period expires294. The company has to date and validly sign the corporate income tax return. It must fill in the tax return in conformity with the indications and guidelines set forth in the explanatory note attached to the tax return form. All records, supporting documents and information requested in the form must be annexed to the tax return and form an integral part thereof. However, the absence of such records or documents does not automatically render the tax return invalid. In practice, a period of eight days is given to the taxpayer to rectify the situation and it is only when the taxpayer omits to proceed with such a rectification that the tax administration will consider the tax return to be non-existent. 100. If the taxpayer is treated as a transparent vehicle or is an actual branch of a foreign company, similar rules are applicable295. The foreign company will have to file a non-resident corporate income tax return with regard to the income derived from business or profit-making activities in Belgium. This requirement applies even if the foreign company has during the relevant accounting year no income that is effectively connected to the Belgian business or profit-making activities. 101. The lack of filing a tax return or the filing of an incomplete or incorrect tax return can be sanctioned with an assessment ex officio, a tax penalty, an administrative fine and/or criminal sanctions. 102. The tax administration may proceed to an assessment ex officio (“imposition d’office”) if the taxpayer fails to file a tax return within the applicable term as mentioned on the official form, to rectify the formal deficiencies of his tax return within the applicable term of eight days, to present the books, documents and records requested by the tax administration, to provide the information requested (in writing) by the tax administration or to answer a notice of rectification296. An assessment ex officio is made on the taxable income which the tax administration determines on the basis of the elements in its possession. Prior to proceeding to the actual assessment ex officio, the tax administration has to send a notice of assessment ex officio (“notification d’imposition d’office” – “aanslag van

292 CIT, Art. 305 and 308. 293 CIT, Art. 310. 294 CIT, Art. 311. 295 CIT, Art. 305, 308 and 310. 296 CIT, Art. 351, §1.

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ambtswege”) to the taxpayer by registered mail indicating the motives for the use of this procedure, the amount of the income and the other elements on which the assessment will be based, as well as the method used to determine such income and other elements297. In principle, the taxpayer has to reply to this notice within one month as from the date of its dispatch298. 103. Furthermore, in the case of the non-filing of a tax return or the filing of an incomplete or incorrect tax return, the tax owed on the unreported income portion may be increased by a tax penalty of 10%299 to 200%, depending on the nature and the seriousness of the infringement committed by the taxpayer. The aggregate amount of the tax and the penalty may, under no circumstances, exceed the amount of the unreported income. 104. Finally, administrative fines ranging in amount from € 50 to € 1.250 may be applied for each violation of the provisions of the ITC or implementing legislation300 and, in case such violation has been committed with fraudulent intent or with a view to causing damage, the taxpayer may be punished by means of a term of imprisonment of eight days to two years and a fine ranging in amount from Euro 250 to Euro 12.500, or by only one of these criminal sanctions301. A taxpayer who forges public, commercial or private documents, or uses such forged documents, with a view to violating the provisions of the ITC or implementing legislation, may face a term of imprisonment of one month to five years and a fine ranging in amount from Euro 250 to Euro 12.500 or only one of these criminal sanctions302. 2. Furnishing information and maintaining records a. Furnishing information 105. Upon request of the tax administration, the taxpayer is obliged to provide all books and documents (“livres et documents” – “boeken en bescheiden”) needed to determine the amount of taxable income303. For corporate taxpayers (resident and non-resident), this obligation extends to the registers of shareholders and bondholders and to the attendance lists of the general shareholders’ meetings. Furthermore, the taxpayer has an obligation to communicate all information requested by the tax administration with a view to the verification of his tax situation within a period of one month as from the date on which the request for information was sent. The request for information and the subsequent verification of the taxpayer’s tax situation may cover all transactions in which that taxpayer has participated and the information so obtained may also be used in order to tax third parties304. b. Record maintenance 106. Article 315 ITC provides for specific instructions regarding record maintenance. The books and documents must be kept at the disposal of the tax administration until the expiry of the fifth year or accounting year following the taxable period305. The obligation applies to the books and documents needed for the determination of the taxpayer’s

297 CIT, Art. 351, §2. 298 CIT, Art. 351, §3. 299 In the absence of bad faith, the minimum penalty of 10% may be waived. 300 CIT, Art. 445. 301 CIT, Art. 449. 302 CIT, Art. 450, § 1. 303 CIT, Art. 315. 304 CIT, Art. 317. 305 CIT, Art. 315.

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taxable income and, hence, is not limited to the books and documents the keeping of which is made mandatory by the accounting legislation306. Books and documents of which the presentation is obligatory can, in principle, be kept in electronic form307. Specific administrative guidelines exist on the retention of documents as microfilm copies. These guidelines specify which documents can be retained as microfilm copies and which conditions must be fulfilled. The retention period for a microfilm copy corresponds to the retention period for the document included in the microfilm (see above). Furthermore, these rules stipulate that one film can only be used for one book or one sort of document, that invoices can only be included in the order of their registration in the invoice ledger and that the films must carry a readable title and be accompanied by a table of contents. The books and documents, which can be retained as microfilm copies, can also be retained on a “CD-WORM” (“write once, read many”)308. Where documents are not retained for as long as legally required and the taxpayer thus fails to present them upon request by the tax administration, the latter can proceed to an assessment ex officio (see above). Furthermore, an administrative fine and/or criminal sanctions can be imposed (see above). Section 3 Examination, Appeals, Assessment, Collection A. Examination and Appeals 107. The tax administration only examines a limited number of tax returns filed by taxpayers. It selects tax returns for examination using a variety of methods, such as computer methods (based on specific codes mentioned on the official forms), manual selection (per sector), etc. If the taxpayer’s return is selected for audit, the tax administration will actually proceed to the verification of the tax return. The audit can be conducted either as an office audit or as a field investigation. The power to perform an audit may be exercised, without prior notification to the taxpayer, during the three-year period starting on 1 January of the assessment year for which the tax is owed (for the definition of an assessment year, please see below). An additional two-year period applies if the tax administration informs the taxpayer, by way of a written notification, of the existence of indications of tax fraud committed in the relevant year. The authority to perform such an audit is vested with the Minister of Finance, who for his part is assisted by the different operating divisions of the Federal Tax Administration, such as the corporate and income tax administration (“Administration de la fiscalité des entreprises et des revenus”) and the special tax inspection (“Inspection spéciale des impôts”). The corporate and income tax administration is authorized to perform the common tax verifications, whereas the special tax brigade specifically deals with cases of tax fraud. The administration mentioned first can be subdivided in (i) the small and mid-size business division, (ii) the large business division and (iii) the private individuals division. Assessment for income tax purposes is in principle made in accordance with the tax base and the other data contained in the tax return, unless the tax administration -after investigation- finds these elements to be incorrect309. The legal presumption of correctness attached to a tax return filed may be rebutted by the tax administration. Therefore, the tax administration may adduce all means of evidence allowed under civil 306 Cass., January, 29, 1988, F.J.F., 1988, 101; Cass., November, 28, 1967, Pas., 1968, I, 423. 307 CIT, Art. 316. 308 Decision of 27 March 1997. 309 CIT, Art. 339.

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law, except the oath310. The aforementioned presumption also applies in connection with the taxpayer, who is only entitled to amend or modify his tax return if it contains a material or legal error. 108. If the tax administration considers it necessary to rectify a tax return filed by the taxpayer, a notice of rectification (“avis de rectification” – “bericht van wijziging”) has to be sent by registered mail311 to the taxpayer, indicating the income and the other data which the tax administration intends to substitute for those reported by the taxpayer312. Failure to respect this formal requirement renders the entire procedure, as well as the assessment resulting from that, null and void. A notice of rectification is generally construed by case law as the starting point for negotiations between the taxpayer and his tax inspector in order to fix the taxable amount313. The taxpayer has to reply in writing to the notice of rectification within a term of one month as from the date of its receipt (deemed to be three days after his dispatch) . He has to indicate in his reply whether or not he is in agreement with the rectification proposed by the tax administration. In the absence of a reply from the taxpayer within the aforementioned period, the tax administration may proceed to an assessment ex officio (see above). However, an extension of the one-month period may be granted, provided that the request for such an extension is made for a valid reason and is filed prior to the date on which the initial filing period expires. At the latest on the date of the actual assessment, the tax administration has to acquaint the taxpayer by registered mail with the motives for maintaining its position. Where the tax administration proceeds to an assessment, the taxpayer may appeal administratively within the tax administration by filing a claim against assessment (“réclamation” – "bezwaar") with the competent Regional Director314. Such claim against assessment has to be filed within six months as from the third day following the date the notice of assessment has been sent315. This term cannot, in principle, be extended, except in cases of “force majeure”316. Upon request, the taxpayer may be granted access to his file317. A claim against an assessment is examined by a tax official of a grade higher than that of a tax inspector (usually the Regional Inspector) who has at his disposal the same rights of investigation and verification, the same means of evidence and the same competence as the tax inspector in the audit phase (see above). The Regional Director, or a person delegated by him, renders his decision on the basis of the tax official’s advice which, however, is not binding on him. The Regional Director’s decision must be notified to the taxpayer by registered mail. 109. Should the Regional Director fail to take a decision within a term of six months (nine months in the case of an assessment ex officio), the taxpayer may challenge this decision before the competent Court of First Instance (Tax Chamber) or choose to await the decision of the Director. In case a decision is taken by the Regional Director, the taxpayer can still challenge this decision before the Court of First Instance (Tax Chamber) within a term of three months as from the date the Director's decision was sent to the addressee318. 310 CIT, Art. 340 ; see also Cass., December, 21, 1990, R.W., 1990-91, 1141; Cass., March, 22, 1990, FJ.F., 1990, n° 110. 311 Cass., June, 21, 1991, R.W., 1991-92, 547. 312 CIT, Art. 346, § 1. 313 Cass., October, 26, 1965, Pas., 1966, I, 276; Cass., October, 30, 1956, Pas., 1957, I, 217. 314 CIT, Art. 366. 315 CIT, Art. 371. 316 Cass., January, 8, 1993, F.J.F., 1993, 230; Cass., October, 17, 1985, J.D.F., 1985, 350. 317 CIT, Art. 374. 318 Art. 1385decies and 1385undecies of the Judicial Code.

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110. An appeal may be lodged against the decision of the Court of First Instance with the competent Court of Appeal. The appeal must be filed within a term of one month as from the date the copy of the judgment of the Court of First Instance was served by bailiff on the taxpayer. Final recourse is to the Supreme Court, which can only decide questions of interpretation of the law and violation of legal procedures. Appeal to the Supreme Court must be filed within three months as from the date the copy of the judgment of the Court of Appeal was served by bailiff on the taxpayer. 111. Finally, it should be noted that the Regional Director, or a person delegated by him, is also authorized to grant automatic relief (“dégrèvement d’office” – “ambtshalve ontheffing”) from redundant taxation which results from a material error or double taxation319 or which appears from new documents or facts the late disclosure of which may be legally justified by the taxpayer. Automatic relief requires that the taxation which is redundant be ascertained by the tax administration or be evidenced by the taxpayer within five years from January 1st of the relevant assessment year320. B. Assessment and Collection 112. The assessment of tax is the first step in the collection process. The assessment has to occur within the period of time permitted by the statute of limitations for assessment (see below). Income taxes are in principle to be paid within a term of two months as from the date the notice of assessment was sent by the tax collector (“receveur” – “ontvanger”)321. After the expiry of this two month period, the five-year statute of limitations for collection of the assessed tax starts to run322. Where the tax remains unpaid, the notice of assessment will be followed by some computer-generated notices. In case these notices are not complied with, the tax administration can use forcible collection actions against the taxpayer, such as administrative levy, administrative seizure and judicial collection remedies. The filing of a claim against assessment or the lodging of an appeal before the judicial courts stops in principle the forcible collection of the tax323. Moratorium interest at 7% per calendar year is attributed to the taxpayer in the case of repayments of taxes, except in some specific cases324. 113. In case of late payment, interest is charged at 7% per calendar year325. If the taxpayer has filed a claim against the assessment and the Regional Director has not rendered a decision after six months have expired, the interest for late payment is automatically suspended until the end of the month during which a decision is rendered or the case is brought before the competent Court of First Instance (Tax Chamber)326.

319 Cass., April, 20, 1990, F.J.F., 1990, 135. 320 CIT, Art. 376. 321 CIT, Art. 413. 322 CIT, Art. 145. 323 CIT, Art. 410. The taxpayer will, however, no longer receive any tax reimbursement to which he would be entitled. The sales price of any real estate disposed of by him will be attached. 324 CIT, Art. 418 and 419. 325 CIT, Art. 414, § 1, 1° ; Law of May 5, 1865 relating to interest-bearing loans, as amended, art. 2, § 2. 326 CIT, Art. 414, § 2.

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C. Statute of Limitations on Assessment 114. Under Belgian law, an assessment year (“exercice d’imposition” – “aanslagjaar”) starts on 1 January and ends on 31 December of a given year327. The tax owed for a given assessment year is determined on the basis of the income obtained or acquired by the taxpayer during the income year / taxable period328. Generally, the income year / taxable period coincides with the calendar year preceding the year after which the assessment year is named, except where the company has an accounting year that corresponds to a twelve month period other than a calendar year. In that case, the taxable period and the assessment year will partially overlap (e.g. income derived during an accounting year ending on 31 December 2012 relates to assessment year 2012, whereas income derived during an accounting year ending on or before 30 December 2013 relates to assessment year 2013). In other cases (e.g. withholding taxes), the assessment year may fully correspond to the taxable period. 115. The ordinary assessment period expires on 30 June of the year following the assessment year329. However, it may be extended to three years, starting on 1 January of the assessment year for which the tax is owed, if the taxpayer has failed to file a tax return, has not filed his tax return within the applicable term or has reported income the tax on which is lower than the tax actually owed330. The ordinary assessment period may be extended to seven years, starting on 1 January of the assessment year for which the tax is owed, if the taxpayer has acted with fraudulent intent or with a view to causing damage331. 116. Specific assessment periods332 apply in the following cases : (i) where the taxpayer has acted in violation with the provisions regarding personal property withholding tax or professional withholding tax in one of the five years preceding the year in which the offence was discovered, the assessment must be made within a term of twelve months from the date of discovery ; (ii) where an inspection carried out by a competent authority of a country with which Belgium has concluded a double taxation agreement indicates that taxable income has not been reported in Belgium in one of the five years preceding the year in which the results of the inspection are communicated to the Belgian tax administration ; the assessment must be made within a term of twelve months from the date of such communication ; (iii) where legal proceedings show that taxable income has not been reported in one of the five years preceding the year in which the lawsuit (civil or criminal) was filed, either by the plaintiff, the defendant or a third person, the assessment must be made within a term of twelve months from the date on which the intervening court decision has become final and definitive ; (iv) where evidential elements (e.g. arbitration decision, amicable settlement, results of an investigation or an estimation) show that taxable income has not been reported in one of the five years preceding the year in which such elements come to the knowledge of the tax administration ; the assessment must be made within a term of twelve months from the date on which the tax administration has gained such knowledge.

327 CIT, Art. 359, § 1. 328 CIT, Art. 360, § 1. 329 CIT, Art. 359, § 2. 330 CIT, Art. 354, § 1. 331 CIT, Art. 354, § 2. 332 CIT, Art. 358.

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Chapitre II – Exchange of Information Mutual Assistance Directive 117. Belgian legislation is based on the EU Council Directive concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation333 obliging Member States to exchange “any information that may enable them to effect a correct assessment of taxes on income and capital”. According to Article 338 of the CIT 1992, the Belgian direct tax administration is entitled to exchange information necessary for the assessment of income and wealth tax with the tax authorities of other EU Member States. In addition, the tax administration may allow the agents of foreign tax authorities to enter the Belgian territory. Savings Directive 117bis. In the application of this Savings Directive334, Belgium has moved from a withholding system to exchange of information on interest paid to other EU residents335.

Chapitre III – Tax Rulings 118. Given the complexity of the income tax code, a new system of advance tax rulings (“accord fiscal préalable” – "voorafgaandelijk fiscaal akkoord") entered into force on 1 January 2003, providing more certainty for all taxpayers336. It provides for the possibility to obtain from the Federal Department of Finance a written, justified and binding advance tax ruling on how taxes (the application or collection whereof falls under the authority of the Federal Department of Finance) should be applied to a specific situation or transaction that has not yet occurred. 119. However, no ruling can be obtained if : (i) the situation or transaction submitted is identical to a situation or transaction that has already had tax consequences for the applicant or that is subject to administrative appeal or a judicial action before the courts ; (ii) the ruling application relates to tax rates, the calculation of taxes, amounts and percentages, tax returns, investigation of tax returns and other procedural matters, items over which the Federal Department of Finance has no exclusive jurisdiction, sanctions and fines ; 333 Council Directive of 19 December 1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation, (77/799/EEC), OJ 1977 L 336, now replaced by Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EC. 334 Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments. 335 CIT, Art. 338bis, § 2. 336 Act of 24 December 2002 amending the corporate income tax regime and creating a practice of advance tax rulings, Belgian Official Gazette, 31 December 2002 ; Huyghe, A., and von Frenckel, E., New Belgian Law Streamlines Practices for Tax Rulings, APAs, Tax Notes International, 3 March 2003, p. 818.

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(iii) the ruling application concerns the legal provisions on collection and prosecution ; and (iv) the essential elements of the situation or transaction relate to a tax haven that is not cooperative with the OECD or the situation or transaction has no economic substance in Belgium. 120. The application for a ruling must be submitted in writing and must contain the following elements : (i) a reference to the applicable legal provision ; (ii) the identity of the applicant ; (iii) the business activities engaged in by the applicant ; (iv) a description of the specific transaction the taxpayer intends to carry out. The ruling application has to be updated in case of new relevant information. The Federal Department of Finance must deliver a decision within three months of the date of receipt of the application. A precise deadline may be fixed between the tax administration and the applicant. The tax administration will then inform the applicant of the precise deadline within fifteen working days of the date of receipt. 121. An advance tax ruling can be opposed to the tax administration and is legally binding for a maximum of five years or longer if justified (e.g. a longer depreciation period), provided that the transaction in respect of which the ruling application was filed was presented by the taxpayer in good faith. The “good faith” requirement means that the taxpayer must present the proposed transaction in the way that he intends to carry it out and that he must provide all the information needed for the appraisal of the ruling application. 122. The tax administration is not bound by or ceases to be bound by an advance tax ruling if : (i) the consequences of the transaction have been modified by subsequent domestic law, EU law or treaties ; (ii) the consequences of the transaction appear to be contrary to existing domestic law, EUlaw, treaties or case law or ; (iii) the principal consequences of the transaction have been modified by elements that are directly of indirectly attributable to the taxpayer. Rulings are published in a way respecting professional secrecy337. A taxpayer may not rely on a ruling given to another person338.

337 They can be found on a website of the Tax Administration. 338 Antwerp, September 6, 2006.

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TITLE V – SPECIFIC OPERATIONS Chapter I – Liquidation 123. Corporations that have gone into liquidation remain subject to normal corporate tax even if the business activity is not continued during the liquidation339. All profits and gains realized during the liquidation process are thus taxable under the same rules as those applying to other companies; companies in liquidation may therefore deduct from their taxable profits income exempted from corporate tax, such as loss carryovers or intercorporate dividends. At the end of the liquidation process, the liquidation proceeds are remitted to the shareholders. This operation may trigger the application of the corporate income tax for the company when the real market value of the assets remitted to the shareholders exceeds their net fiscal value; the gains are then taxable in accordance with the normal tax regime for capital gains (i.e., taxation of gains on all assets, except gains on shareholdings and revaluation gains)340. In addition, tax-free reserves become taxable at the time of their distribution341. Liquidation distributions will be treated for tax purposes as dividends to their recipients. Hence, the difference between the amounts received and the par value of paid-up capital, possibly revalued, will fall under the participation exemption regime for corporate shareholders342. A withholding tax of 25% is due on distributions of liquidation surpluses343. The tax treatment of liquidations also applies in cases of mergers and divisions that are realized under a so-called “taxed regime” (i.e. without applying the tax exempt regime). Also, changes of corporate form (other than those made in accordance with Belgian corporate law requirements) and the transfer by a Belgian resident company of its statutory seat, principal establishment or seat of management to another country are assimilated to liquidations and are therefore taxable events344. Chapter II – Mergers and Divisions 124. As a general rule, the dissolution of a corporation as a consequence of a merger or division will fall under a tax exempt regime345. In the case of a contribution of a branch of activity or of a universality of assets, the taxpayer has the option to elect between a tax exempt regime and a taxed regime. A. Overview 339 CIT, Art. 208. 340 CIT, Art. 208, 2d line. 341 CIT, Art. 190, 2d line. 342 CIT, Art. 202, 2. 343 CIT, Art. 269. 344 CIT, Art. 210. 345 CIT, Art. 210 ; For transnational mergers, see Tahon, M., and Caers, W., The Belgian Implementation of the EC Merger Directive and Associated Tax Law Amendments, Eur. Tax.,( 2009) at 67 ; Malherbe, J., and Verstraete, H., Belgium, Income Tax Treatment by Host Country of a Corporate Expatriation, 34 Tax Management International Forum, nr. 1, March 2013 at 9.

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125. Under the tax exempt regime, capital gains on the assets of the dissolved corporation are, in principle, not immediately taxed: the assets are carried over to the new entity at the same fiscal value they had in the dissolved corporation346. This exemption is not applicable when the receiving entity is an approved fixed capital real estate investment company. Such capital gains are taxed at a special rate of 19.5%347. B. Conditions 126. The tax exempt regime for mergers and divisions is granted under the following conditions348:

• the subsisting company after the reorganization has its seat or principal office in Belgium or is an intra-european company;

• the contribution to the subsisting company is compensated solely through an

issue of new stock of that company;

• the operation is organized in accordance with company law ;

• the reorganization does not have as its principal purpose tax fraud or evasion. This can be presumed if the operation is not justified by valid economic reasons349.

C. Tax regime 1. Mergers and divisions 127. Under a tax-free merger or division, existing gains which have been merely booked (without being taxed), gains which have been rolled-over on condition that they are reinvested, as well as gains which are booked because of the reorganization, are not subject to corporate income tax in the hands of the dissolved company. Other tax-free reserves of the dissolved company become taxable to the extent the contribution to the subsisting company is not compensated by the issue of new shares (e.g. because the subsisting company held shares of the dissolved company or because the contribution is partially compensated is cash)350. 2. Contribution of branch of activity or universality 128. An exemption for capital gains realized at the time of a contribution of a branch of activity or of a universality of assets is subject to the following conditions351:

• the statutory seat, the principal establishment or the principal office of the company to which assets have been contributed must be established in one of the EU States;

346 CIT, Art. 211. 347 CIT, Art. 46, § in fine ; 210, § 1; and 216, § 1 bis. 348 CIT, Art. 212. 349 CIT, Art. 183 bis. 350 CIT, Art. 211, § 1. 351 CIT, Art. 46, § 2.

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• the contribution must not have as principal objective tax fraud or evasion .

D. Carry-over of Tax Attributes 129. After a tax-free reorganization (merger, division, contribution of a branch of activity or of a universality of assets), the neutrality principle applies for the purpose of computing future gains and annual depreciation on the assets of the liquidated company. Future depreciation of acquired assets and capital gains thereon are calculated as if the reorganization had not occurred, because the book value of the assets of the dissolved corporation is carried over to the subsisting corporation352. In a tax exempt merger or division, the capital of the dissolved corporation is carried over to the subsisting corporation as the basis for computing future liquidation gains353. However, if the new corporation already owned shares in the dissolved one, its capital is proportionately reduced. The capital decrease is offset first against the taxed reserves, then against the tax-free reserves and only then against the real paid-up capital354. In a tax exempt contribution of a branch of activity or of a universality of assets, the capital of the company receiving the contribution is equal to the net fiscal value of the contribution355. E. Shareholders 130. The tax treatment of the shareholders of the acquired company in the case of an exempt transaction is as follows: a shareholder that is a private individual is not taxable on the capital gains realized on the shares which he held in the acquired company as a private investment. Indeed, profits or gains that result from the normal administration of private assets consisting of real property, portfolio securities and moveable objects, are not taxable356. Capital gains realized by Belgian corporate shareholders are exempt under Article 45 of the CIT. The shares issued on the occasion of a merger will be booked at the value of the shares of the dissolved companies. The absorbing corporation may deduct its own losses carried-forward after a tax-free merger, but only in the proportion that its net fiscal value before the merger bears to the net fiscal value of the surviving corporation357. The same rule applies in the case of a contribution of a branch of activity or a universality, in respect of the beneficiary company. The losses carried-forward of the dissolved company may also be offset by the surviving company but only in the proportion that the net fiscal value of the dissolved company

352 CIT, Arts. 212 (merger and division) and 46, § 2 (contribution of assets). 353 CIT, Art. 211, § 2. 354 CIT, Art. 211, § 2. 355 CIT, Art. 184, par. 2. 356 CIT, Art. 90, 1°. 357 CIT, Art. 206, § 2.

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before the merger bears to the net fiscal value of the surviving company after the merger358. The same rule applies to the receiving companies in the case of divisions. F. Taxable transactions 131. When a merger or a division does not meet the conditions of the tax exempt regime or when the taxpayer opts for the tax regime for contributions of a branch of activity or of a universality of assets, capital gains realized upon contribution and existing tax-free reserves become taxable. In that case, the capital of the absorbing or receiving company will be increased for tax purposes by the actual value of the assets contributed, after deduction of the tax due, even though for accounting purposes, under accounting law, the old value is carried over. The discrepancy between the capital amounts for tax and accounting purposes will be offset by a negative amount of reserves in the capital account. Chapter III – Redemption of Stock 132. When a resident corporation redeems its own stock, the amount paid for the stock (or alternatively on fair market value) which exceeds the corresponding portion of the real paid-up capital of the company is considered as a dividend; this capital is multiplied by a revaluation coefficient which varies with the year in which the capital was paid-up359. Where a corporation acquires its own shares in accordance with corporate law requirements and prior to its dissolution or liquidation, the assimilation to a dividend occurs only on the happening of one of the following :

• write-offs are made on the shares acquired;

• the shares are transferred;

• the shares are destroyed or cancelled;

• at the latest at the time of the liquidation of the company. At the corporate shareholder level, a stock redemption is therefore treated as a dividend received360. This dividend when received by a corporate shareholder may fall under the participation exemption regime if the conditions thereof are met361. This dividend is subject to a 25% withholding tax362, as against 10 % formerly. Partial distributions of the assets of a personal company (i.e., a company which is not a “capital” corporation) upon the death or retirement of one of its partners will be treated in accordance with the rules that apply to redemptions of stock363.

358 CIT, Art. 206, § 2, par. 2. 359 CIT, Art. 186. Revaluation stops in 1950. 360 CIT, Art. 18, 2° ter.. 361 CIT, Art. 202, § 1, 2°. 362 CIT, Art. 269, par. 1, 2° bis. The withholding tax is not due if the shares are quoted on a recognized stock exchange (CIT, Art. 264, par. 1, 2° bis). 363 CIT, Art. 187.

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Chapter IV – Transfer of Corporate Seat

A. Outbound Transfer of Corporate Seat The transfer of the statutory seat, the principal establishment or the seat of management or administration of a domestic company out of Belgium is assimilated to a liquidation for corporate income tax purposes. An exception applies as regards the emigration of an EU company or European Cooperative Company to another Member State of the EU. The tax neutrality regime available in such cases is similar to that applicable to outbound EU mergers and split-ups364.

B. Inbound Transfer of Corporate Seat The tax rules applicable to inbound EU cross-border mergers and split-ups discussed above apply, mutantis mutandis, to the immigration of a foreign company via the transfer of its seat of effective management from abroad (whether intra-EU or not) to Belgium. An anti-abuse provision applies in the case of the immigration of a company that, prior to the transfer of its effective seat to Belgium, was established in a tax haven. In that case, the portion of its equity exceeding its paid-up capital is treated as an untaxed reserve365.

TITLE VI – SPECIFIC REGIMES

. Chapter I – Investment Funds and Investment Companies (UCITS)

A. Introduction 133. The Law of December 4, 1990 on financial transactions and financial markets366 introduced into Belgian law two new legal forms of UCITS : the investment company with variable capital (SICAV/BEVEK) ; and the investment company with fixed capital (SICAF/BEVAK). A third type of investment company was added by the Law of August 5, 1992, the company for investment in receivables (SIC/VBS). Finally, the Royal Decree of April 10, 1995 introduced the real property investment company with fixed capital (“société d’investissement à capital fixe en biens immobiliers”/”beleggingsvennootschap met vas kapitaal in vastgoed”, SICAFI/BEVAKV). Each of these investment companies must be established in the form of a commercial company, i.e., either as a public limited company (SA/NV) or as a partnership limited by shares (“société en commandite par actions/commanditaire vennootschap op aandelen”, SCA/Comm.VA). In principle, therefore, such companies are fully subject to corporate income tax. However, with a view to enhancing their competitive edge vis-à-vis similar vehicles located in other European countries, especially Luxembourg, the Belgian legislature has adopted specific measures designed substantially to reduce their tax base. 364 Malherbe, J., and Center, M., Corporate Mobility – Transfer of Company Seat in the European Union, in Lüdicke, J., Mössner, J.M. and Hummel, L., eds., Das Steuerrecht des Unternehmen, Festschrift für Gerrit Frotscher zum 70 Geburtstag, Freiburg-Münich, Haufe Gruppe, 2013 at 441. 365 CIT, Art. 184bis, § 5, para. 3. 366 Law of December 4, 1990 on financial operations and markets, Art. 143, § 1.

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B. Tax Treatment The tax base of the investment companies under review consists of the sum of the abnormal or gratuitous advantages that they receive and the expenses and charges that are not deductible as business expenses, other than write-downs and capital losses on shares. Because they are not taxed on their profits, the statutory provisions with respect to the dividends received deduction and the foreign tax credit do not apply to investment companies. Investment companies are required to supply a breakdown of their allocated of distributed income per category. This breakdown allows for “semi-transparency” at the level of the beneficiaries of such income. Investment companies are not eligible for the reduced corporate income tax rates. No personal property withholding tax is to be withheld from the following income paid or attributed to Belgian investment companies :

(i) Belgian and foreign interest on fixed deposits ; (ii) Income from Belgian government securities ; or (iii) Foreign dividends received via a Belgian paying agent.

The withholding tax applies to Belgian dividends paid to a Belgian investment company and the investment company may not credit it against corporate tax eventually due or receive a refund367. It could in the past but this was considered a discrimination against foreign UCITS which could not368. A stamp duty of 1 % is due on the public issue of shares in capitalization investment companies (i.e. companies that “capitalize” income received rather than distributing it) ; a duty of 0.5 % is due on the resale of such shares369. In principle, the withholding tax on dividends distributed by Belgian investment companies constitutes the final tax liability for Belgian resident individual shareholders in such companies. Capital gains realized by such individuals on shares in investment companies are not subject to income tax. Gains are at law the result of repurchase of its own shares by a SICAV. Such gain, which is in principle a dividend, is not considered as income from capital370 and is exempted from withholding371. Belgian individual investors will therefore prefer investing in “capitalization SICAVs” than in “distribution SICAVs”. However, capital gains are taxable as interest if they are realized on shares of a SICAV which has invested more than 25 % of its assets in interest producing products372. If the investment value cannot be determined, the gain will be the difference between the repurchase price and the value on July 1, 2005373. There is an exemption from withholding tax on dividends distributed to non-resident individuals and corporations, provided the dividends are not distributed out of dividends received from Belgian resident corporations.

367 CIT, Art. 185bis. 368 ECJ, C-387/11, Commissie v. België, 25 October 2012. 369 Code of Miscellaneous Duties and Taxes (CTMD), Art. 121, para. 2. 370 CIT, Art. 21, 2°. 371 CIT, Art. 265, al. 1, 4°. 372 CIT, Art. 19bis, § 1. 373 CIT, Art. 19bis, § 2. The regime for SICAVs without a « European passport » is slightly different.

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In principle, dividend distributions made by Belgian investment companies do not give rise to the application of the dividends received deduction for Belgian corporate shareholders. However, the dividends received deduction may apply to dividends distributed by investment companies whose by-laws provide for the distribution of at least 90 % of their income, provided such income consists of dividends or capital gains on shares that would otherwise qualify374. Capital gains realized on the shares of a Belgian investment company are exempt under the same rules as those applying in the context of the dividends received deduction (except the minimum holding requirement and the minimum holding period requirement). If the portfolio of the investment company includes shares, dividends on which do not qualify under the dividends received deduction regime, the capital gains exemption is not available. Capital gains realized on SICAVs by corporations are therefore generally taxable. 135. For Belgian resident individual shareholders, the withholding tax of 25 % on dividends distributed by the Belgian investment companies constitutes the final tax liability. Capital gains realized by Belgian resident individual shareholders on the repurchase of the shares are not considered as income from personal property and therefore not taxable375. There is an exemption from withholding tax on dividends distributed to non-resident individuals and corporations, provided the dividends are not distributed out of dividends received from Belgian resident companies.

Chapter II – Economic Interest Groupings (EIG) and European Economic Interest Groupings (EEIG) 136. EIGs and EEIGs are not subject, as such, to corporate income tax; they are transparent for Belgian income tax purposes376. The income received by EIGs and EEIGs, whether or not distributed, is taxable for their members at the end of the accounting year. All other taxes are applicable to EIGs and EEIGs, e.g., VAT or registration duties on transfers of real property.

374 CIT, Art. 203, § 2. 375 R.D.-CIT, Art. 106, § 7. 376 CIT, Art. 29, 3-4.

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TITLE VII – TAX INCENTIVES Chapter I – Individual Tax Incentives Section I Stock options377 A. Options Granted on or after January 1, 1999 137. Options granted on or after January 1, 1999, are governed by articles 42 to 47 of the Law of March 26, 1999, relating to the Belgian action plan for employment 1998 and including miscellaneous provisions (“the Law”). 1. Scope of Application 138. The Law applies to options, defined as the right to purchase or subscribe for a fixed number of company shares for an ascertained or ascertainable price during a fixed period. The company, the shares of which will be subject to the option, must be a separate, Belgian or foreign, legal entity. The nature of the person or the company actually granting the option is irrelevant for the application of the Law. The tax regime provided under the Law applies to options granted to individuals by virtue or on the occasion of their professional activity. 2. Taxable Event 139. Under the regime, the employee to whom the option is offered is deemed to receive taxable professional income on the day the employee gives his acceptance after receiving the letter of notification that options are being offered to him, within 60 days following the day of notification of the option. Otherwise, the option is deemed to have been refused. Taxable income is deemed to accrue even if the employee does not exercise the option for whatever reason. 3. Valuation of Taxable Amount: Principle 140. Where the options themselves are quoted on a stock exchange, the taxable amount is the option’s last quotation price on the day preceding the day of the offer. If the options are not quoted, the option will be valued based on the value of the underlying stock. In this respect, the offering party may elect either the average quotation price of the shares during the 30-day period preceding the offer or the last closing 377 Smet, P., and Lalou, H., Tax Treatment of Employee Stock Options in Belgium, Bull. Int. Taxation, 2008 at 396.

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quotation price preceding the offer. The “offer” means the offer notified to the beneficiary. Thus, if the letter of notification is received by the employee on November 30, 2007, the reference quotation price for tax purposes will be either the closing quotation price for the shares on November 29, 2007, or the average quotation price for the period October 31 – November 29, depending on the offering party’s choice. If the shares are not quoted, their value will be the real value, certified by the auditor and not lower than book value according to balance sheet if the shares are capital shares. It is not required that the selected value be indicated in the documents forwarded to the employees being offered the option. However, the selected value must be ascertained by the offering party and communicated to the company responsible for withholding and reporting formalities. 4. Valuation of Taxable Amount: Lump Sum Rates 141. The taxable amount is a percentage of the value of the shares as valued in accordance with the rules described under nr. 140 above. Two rates are available :

(i) a general 18 % rate, possibly increased by 1% of the reference value per year or portion thereof beyond the fifth year following the date of the offer, as the case may be; and

(ii) a preferential 9 % rate to be increased by 0.5% for each year or portion thereof beyond the fifth year from the day of the offer, as the case may be; this rate is only applicable when certain conditions are met.

Four conditions need to be met for the preferential rate to be available : a) The exercise price must be ascertained at the time of the offer. This is the case when the exercise price is expressly mentioned or when it is determined based on the value of the underlying stock at the time of the offer (i.e., 95% of that value). b) the option plan or agreement must include provisions under which :

- the option may not be exercised before the expiration of the third calendar year following the year during which the offer was notified and must be exercised no later than the expiration of the tenth year following the year of the offer378; and

- the option may not be transferred except in the event of the death of the

employee being granted the option. As an exception to the fulfillment of condition (b) in the stock option plan or agreement itself, the Law makes it possible for option plans and agreements that do not contain such provisions (or even that include provisions to the contrary) to nevertheless qualify for the preferential rate if the employee to whom the option is offered undertakes to abide by the two conditions. The result of such an undertaking is that the benefit of the 9% and 0.5% preferential rates becomes available to the employee making the election. Such an undertaking must, therefore, be notified to the company in charge of the withholding and reporting formalities (see below).

378 To take into account the decline in the stock market this period can be extended by three years for plans adopted between 2000 and 2002.

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The Law also provides in this respect that the employee being offered the option is deemed to receive taxable income amounting to 7.5% (plus 0,5% per year or portion thereof, as the case may be, see below) during the year in which he transfers his fiscal domicile abroad and, at the latest, during the eleventh year following the year of the offer. The employee may, however, avoid this additional taxation by providing evidence in the tax return pertaining to this year that the option has not been transferred and that the option had either been exercised within the required period (three to ten years) or not exercised. c) The risk of a fall in the value of the underlying stock after the granting of the offer may not be covered either by the person granting the option or by a related person. d) The option must pertain to shares of the company for which the business activity of the employee being offered the option is carried out or to shares of another company that has a direct or indirect participating interest in such company within the meaning of the accounting rules379. 5. Valuation of Taxable Amount: Possible Increase or Decrease of Lump-Sum Taxable Amount 142. Once the taxable income is determined by applying the applicable rate to the elected value of the share, the Law provides for a possible increase or decrease of this taxable amount. If the option price is lower than the value of the underlying shares at the time of the offer, the discount must be added to the taxable amount as determined (“in the money options”). If the option price exceeds the value of the underlying shares at the time of the offer, no tax consequences are provided under the Law. If employees are charged for purchasing options, the price paid must be deducted from the taxable amount. Reporting and Withholding Formalities 143. The party granting taxable advantages derived from options must draft individual slips and collective lists as provided for in Article 57 of the Income Tax Code. If this formality is not complied with, the advantages granted will be considered a taxable benefit in the hands of the granting company.

379 Rights held in other enterprises are considered participating interests when the holding is intended, by establishing a lasting and specific relationship with these enterprises, to permit the enterprise to exercise an influence on the management policy of these enterprises. In the absence of evidence to the contrary given in the notes to the accounts, the following are considered participating interests: (i) possession of rights representing one tenth of the capital or of a particular category of shares of an enterprise; and (ii) possession of rights representing less than 10%:

- when the addition of the rights held by the enterprise and its subsidiaries represents a participating interest of one tenth of the capital or of a particular category of shares of the enterprise;

- when the disposal of the shares or the exercise of the related rights is subject to agreements or unilateral commitments that the enterprise has entered into.

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Where the advantages are granted by a foreign company without a permanent establishment (PE) in Belgium by virtue or on the occasion of the business activity of the employee on behalf of a Belgian resident taxpayer, such as a subsidiary, the latter will be liable to carry out the required formalities and the potential penalty will be applied to him. Withholding tax is only payable by foreign companies paying compensation to the extent that the compensation is a business expense deductible from income taxable in Belgium380. 6. Gains Derived from Exercise of Option and Sale of Underlying Shares 144. The Law clearly states that the advantage derived by the employee on the exercise of the option, the sale of the shares or the disposal of the options themselves, is not taxable business income381. Could these advantages not be taxed as miscellaneous income because they pertain to securities invested in a private estate and the operation goes beyond normal management ?382. 7. International Tax Aspects 145. The tax regime described above, is only applicable if the options granted are part of compensation paid to officers and employees that is taxable in Belgium. B. Other Options 146. The question of whether a stock option plan not covered by the statute referred to in paragraph (1) above could give rise to taxable income and how such taxable income should be determined, depends on general tax provisions of the CIT, particularly those dealing with earned income and fringe benefits received by employees. However, the Belgian tax authorities and Belgian legal doctrine come to different conclusions in interpreting these provisions. In almost all cases, there undoubtedly exists a causal connection between the stock option plan and employment with the company. In such cases, the stock option plan will in principle give rise to taxable earned income. a) According to legal doctrine, the taxable benefit may only consist of the fair market value of the option as such, less any price paid by the employee for the option. If the option is quoted on a stock exchange, the fair market value equals the stock exchange value on the date that the option is granted. If the option is not quoted, its fair market value will have to be assessed taking into account the characteristics of the option. In practice, however, it will often be very difficult to assess the value of unquoted options, so that it will be almost impossible to determine the taxable benefit. b) Conversely, the tax authorities have taken the position that the taxable benefit does not equal the value of the option itself but the fair market value of the shares on the date of exercise of the option, less the price paid for the shares. The fair market value of

380 CIT, Art. 270, 1°. 381 The Law, Art. 42, § 2. 382 CIT, Art. 90, 1°.

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the shares, as referred to by the tax authorities, is in practice the Belgian or foreign stock exchange value of the shares if quoted. Section II Special Regime for Foreign Directors and

Employees 147. The rules applying to qualifying expatriates since 1983 are contained in a Circular of August 8, 1983383. A. Eligible Persons 148. This special tax regime may be applied upon request to certain foreign company directors and officers and to foreign employees who :

(a) are posted from abroad to Belgium to work temporarily in one or several branches of a foreign enterprise or in a company controlled by such foreign enterprise;

(b) are posted from abroad to Belgium by a foreign company, member of an

international group, to work temporarily in one or several Belgian companies which are members of the group or in the group’s control or coordination office, i.e., in headquarters;

(c) have been hired directly abroad by a Belgian company which is a subsidiary of a foreign company or a member of an international group to work temporarily in the Belgian company or in the group’s control or coordination office;

(d) are researchers hired directly abroad by Belgian or foreign research centres or

laboratories to work temporarily in Belgium. The regime does not apply to employees of non-profit making associations, e.g., professional organizations, or to partners of partnerships without legal personality. Taxpayers must take up the qualifying position as their first assignment in Belgium; they may not move from a local job to an assignment covered by the Circular and thereby claim the favorable regime. Relocations within a group will not preclude the continued application of the provisions of the Circular. The special tax regime is normally granted only to :

• executive staff members, i.e., persons who exercise functions requiring special knowledge and responsibilities or which are predominantly managerial in nature;

• researchers in scientific research centres and laboratories, i.e., centres devoted

exclusively to the development of new processes or data and not to the mere collection of information or documentation;

• lower level employees, but only if suitable employees are not available for

recruitment in Belgium or if recruitment would be particularly difficult.

383 Administrative circular of August 8, 1983, Ci RH 624/325.294, Com. CIT, 227/4 and 235/4. See also L. Vanheeswijck, De belasting van buitenlandse kaderleden in België, Antwerp, 1986.

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B. Tax Regime 149. Although these foreign persons are residents, they may be considered as non-residents if they have maintained their family, a house, or the centre of their economic interests abroad, because of close ties with a foreign enterprise that may require their transfer abroad at any time. The taxpayer must prove the temporary nature of his assignment. Purchasing a house in Belgium or signing a contract subject to no time limit is not per se an indication that the employment becomes permanent and that the taxpayer should lose his privileged tax status. Additional factors showing that the centre of economic interests is located abroad include ownership of foreign real or personal property (such as bank accounts), coverage by foreign insurance or social security, etc. C. Deductions 150. These foreign directors and employees are therefore taxed as nonresidents on the total earned income collected in Belgium and income from real property located in Belgium. Qualifying foreigners may exclude from taxable income certain payments made by the employer which are considered as expenses incurred on behalf of the employer, including :

• once-off expenses: relocation expenses relating to the move to or from Belgium or to the establishment of a home in Belgium.

• recurring expenses including the following :

- differences in cost of housing or cost of living between Belgium and the country of

origin; - schooling for children in international or private schools during elementary or high

school; - one trip per year to the country of origin for the director or employee and family; - loss suffered when the home in the country of origin can be rented only below

normal value; - trips due to special circumstances (death or illness in the family); - exchange rate differences; - tax equalization; and - two annual trips for children studying abroad to visit their parents.

Except for schooling expenses and once-off expenses, the allowances must be duly documented and may not exceed € 11,250 for expatriates in general and € 30,000 for staff members of control or coordination centres or scientific research centres or laboratories. In addition, remuneration allocable, after the above-mentioned deductions, to work performed abroad is not included in taxable income. The excluded income is, as a rule, computed as follows : Total remuneration x working days spent in Belgium Total number of working days for the year Back pay and indemnities in lieu of notice, which are taxed separately from other income, are entirely taxable in Belgium.

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D. Procedure 151. All employers who wish to apply this special tax regime to their foreign executives must file a request with the Assistant Director of the Authorities’ foreign service. Such request must be submitted before June 30 of the year in which the assignment in Belgium starts or, at the latest, two months from the start of the assignment in Belgium, if the assignment starts after June 30384. Chapter II – Corporate Tax Incentives Section I – From Coordination Centres to Notional Interest § 1. Coordination Centres A. Scope 152. Royal Decree N° 187 of December 30, 1982 introduced tax concessions for the benefit of “coordination centres” thereby turning Belgium into an attractive tax haven385. Coordination centres must have as their exclusive purpose the development of preparatory or auxiliary activities (such as advertising, marketing, collecting information, centralization of purchases of goods and services, research, accounting works and administrative services), or financial operations for the benefit of a group of companies. The coordination centre has to be set up as either a Belgian company or a branch of a foreign company, by international groups having a consolidated balance sheet of at least € 24 million and a consolidated turnover of at least € 240 million. Coordination centres must belong to a group with an “international” character. Each centre must be approved by a Royal Decree and, two years after it starts its activities, must employ at least the equivalent of 10 full-time employees. B. Tax Regime 153. The tax basis of a recognized coordination centre is computed under a cost-plus method. It is not based on the accounting profits, but on certain costs borne by the centre: it is determined by a ruling. The costs include all operating charges and expenses of the centre with the exception of personnel costs, financial charges and income tax, which were previously excluded. C. Limitations 154. The tax concessions enumerated above were granted for a period of 10 years, starting with the (entire) year in which the request for recognition is introduced386. Upon

384 Com. CIT, 235/17. 385 Royal Decree No 187 of December 30, 1982 on coordination centres, amended by the Law of December 28, 1990; J. Malherbe et Y. François, Die belgischen Koordinierungsstellen, I St R, 1997, p. 105. 386 Royal Decree No. 187 of December 30, 1982 on coordination centres, Art. 4.

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request, this initial exemption period of 10 years could be renewed by Royal Decree for another period of 10 years. D. Tax 155. Each active coordination centre must pay a special tax (assimilated to an inheritance duty) equal to € 10.000 per employee, with an absolute maximum of € 100.000387. E. Use in International Planning 156. More than 300 major multinationals had established coordination centres in Belgium. This regime has been questioned by the Primarolo Group388. The Belgian coordination centres were considered as harmful because they are taxed on a fixed mark-up that is applied on a reduced tax base; only certain operating expenses of the centre are taken into account. There is also a requirement that they be part of an international group. The European Commission considered the regime to be a form of prohibited State aid and opened a formal inquiry under article 88 of the Treaty, which led to a decision putting an end to the system389. Belgium proposed a new scheme for its coordination centre regime, applying the cost plus percentage to the full cost incurred by the centre. § 2. Notional interest 157. Finally, the Belgian Government gave up on coordination centres. As a general replacement measure, it introduced a tax deduction for equity, also labelled as deduction of notional interest or deduction for risk capital390.

a. General

387 Inheritance Duties Code, Art. 162 bis to 162 decies. 388 R. Goulder, « Primarolo Group’s Report identifies 66 harmful tax regimes », Intertax, 2000, p. 1283; J. Malherbe, “Harmful Tax Competition and the European Code of Conduct”, Tax Notes Int’l, July 10, 2000, p. 151. 389 Decision of 17 February 2003 on the old scheme implemented by Belgium for Coordination Centres established in Belgium (2003/755/EC), O.J.L. 282, 30 October 2003, p. 25 ; ECJ, 22 June 2006, Case C-399/03 and Joint cases C-182/03 and C-217/03 confirming the nature of State aid but allowing a transitory period until 2010. See J. Malherbe and M. Wathelet, Pending Cases involving Belgium : The Belgian Coordination Centres Cases, in M. Lang, J. Schuch and Cl. Staringer, ECJ-Recent Developments in Direct Taxation, Eucotax, Vienna, Linde, 2006, p. 31. 390 Law of 22 June 2005 introducing a tax deduction for capital at risk, Moniteur belge, 30 June 2005 ; R. Vanpeteghem and P. Van Hove, Belgium Parliament approves Bill on Notional Interest Deduction, 32 TPIR 2005, n° 7, p. 13 ; Haelterman, A, and Verstraete, H., The Notional Interest Deduction in Belgium, Bull. Int. Taxation, 2008, p. 362 ; Gérard, M., Belgium Moves to Dual Allowance for Corporate Equity, Eur. Tax., 2006, p. 156 ; Bombeke, G., and von Frenckell, E., Deduction Allowed for Notional Interest : How the Centre of Europe Became an Interesting Tax Location, Derivatives and Financial Instruments, 2006, p. 167 ; Malherbe, J., and Vettori, G.G., Deducting Interest on Equity Capital : Brazilian and Belgian Tax Rules Compared, Studi Tributari Europei, (on line ste.seast.org), 2010, nr. 1, 20.03.2010.

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158. The deductions, effective as of tax year 2007 (normally accounting year 2006), amount to a percentage of equity (capital, scheme premium, retained earnings) under deduction of certain assets. The old idea that debt is favored over equity by the corporate income tax sounds familiar: interest is deductible, dividends are not. As regards shares held as “portfolio investments” and recorded as such (as opposed to financial fixed assets, it is arguable that such shareholdings should not be excluded from the equity base. However, as from assessment year 204 onwards, shares held as portfolio investments with an acquisition value of € 2.5 million held for an uninterrupted period of at least 12 months (implying that the dividends on such shares are eligible for the dividends received deduction), must be excluded from the NID equity base.

b. Scope of Application 159. The NID is available to all corporations (and associations) that are subject to the corporate income tax or the non-resident tax/corporations. However, certain corporations that already benefit from a tax regime that derogates from the normal tax regime are excluded from the system. The main exclusions concern : (i) recognized coordination centres that continue to benefit from advantages under Royal Decree n° 187 ; and (ii) investment companies of the following types : société d’investissement à capital variable/beleggingsvennootschap met veranderlijk kapitaal (SICAV/BEVEK), société d’investissement à capital fixe/beleggingsvennootschap met vast kapitaal (SICAF/BEVAK) and société d’investissement en créance/beleggingsvennootschap in schuldvordering (SIC/VBS). A foreign corporation is elligible for the NID with respect to risk capital that is attributed to its Belgian establishment and its real property located in Belgium, provided it maintains annual accounts and keepts its books in conformity with Belgian accounting law. A small or medium-sized company may elect to apply either to NID or an investment reserve. If it opts for the investment reserve, it loses the right to apply the NID for the taxable period concerned, as well as for the two subsequent taxable periods.

c. Computation of Adjusted Equity

(1) Equity for Accounting purposes 160. The computation basis for purposes of the NID is the (adjusted) equity for accounting purposes or “risk capital”. The risk capital is the equity at the end of the preceding taxable period, as recorded on the balance sheet and determined in accordance with the Belgian legislation on accounting and annual accounts. In other words, the equity to be taken into account is the non-consolidated equity as determined in accordance with the provisions of the Royal Decree implementing the Company Code (items 10 to 15 of the Minimum General Accounting Scheme). In the case of a Belgian establishment of a foreign corporation, the risk capital to be taken into account is the amount of capital attributed to the establishment, i.e. the net asset value of the assets that are allocated to the establishment, reduced by the amounts payable and the provisions that related to the establishment. Legal doctrine argues that all resources made available by a head office to its Belgian establishment should qualify as equity, having regard to the impossibility of a loan being made within the same legal entity. In the case of a newly-incorporated corporation, the risk capital for the first taxable period is determined based on the opening balance sheet.

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(2) Adjustments

161. With a view to avoiding abuses and the duplication of exemptions, the equity for accounting purposes may be subject to certain adjustments or corrections.

(a) First Adjustment : Shares 162. The equity for accounting purposes is reduced by the fiscal net value, at the end of the preceding taxable period of : (i) own shares ; (ii) financial fixed assets consisting of shareholdings and other shares ; and (iii) shares of investment companies the income from which is eligible for the dividends received deduction. The fiscal net value of shares and shareholdings is their historical acquisition value reduced by any previously recorded reductions in value that correspond to a real devaluation and that have been treated as a disallowed expense for income tax purposes. Reductions in value that have been treated as taxed reserves in the tax return are not taken into account in calculating the fiscal net value. The exclusion is designed to prevent cascading deductions, i.e. parent companies and their subsidiaries391.

(b) Second Adjustment : Foreign Establishments and Real Property situated in a Treaty Country

163. The equity for accounting purposes is further reduced by the equity that is attributed by a corporation to a foreign establishment whose income is exempted in Belgium under the terms of an applicable tax treaty. The reduction corresponds to the positive difference between: (i) the net book value of the assets of the foreign establishment; and (ii) the total liabilities that do not form part of the equity of the corporation and that are allocable to the foreign establishment. The test for determining whether assets and liabilities are allocated to a foreign establishment is the same as that for determining the profits that are exempted in the state of residence under the treaty. The exclusion from the NID equity base was condemned by the CJEU in the Argenta Spaarbank case as being incompatible with the European rules on the freedom of establishment392. As a result of the CJEU ruling, Belgian companies with tax exempt permanent establishments that have been precluded from utilizing the NID calculated on the net assets of these establishments can reclaim the excess taxes that have been paid in the past 5 years by means of an ex officio waiver request. A similar correction applies for real property situated abroad that does not form part of a foreign establishment. In that case, the corporation's equity must be reduced by the net book value of the real property (or the rights relating to such property) after deduction of the liabilities and provisions relating to the property. Having regard to the CJEU’s ruling in Argenta Spaarbank, the question arises whether this exclusion stands the EU law compatibility test to the extent the real property is situated in a EU or EEA Member State.

(c) Third Adjustment : Specific Anti-Abuse Provisions 164. Certain assets are excluded from the equity for accounting purposes if they are brought into the corporation's perimeter solely with a view to increasing the basis for the NID. Thus, the equity for accounting purposes must be reduced by each of the following : (i) The net book value of tangible fixed assets or parts thereof to the extent the costs relating thereto unreasonably exceed the business needs of the company;

391 This is not true for foreign subsidiaries. 392 CJEU, July 4, 2013, Case C-350/11, Argenta Spaarbank.

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(ii) The book value of assets that are kept as portfolio investments and are by their nature not intended to produce taxable periodical income; and (iii) The book value of real property or other rights in rem with respect to real property the use of which has been granted to individuals who perform a function within the meaning of Article 32, paragraph 1, 1° of the Income Tax Code (i.e., directors or active partners), their spouses or children. The burden of proof in this connection lies with the tax authorities. (d) Fourth Adjustment: Capital Subsidies, Tax Credits for Research and Development and Revaluation Gains 165. The equity for accounting purposes must be reduced by: (i) capital subsidies; (ii) tax credits for R& D; and (iii) revaluation gains (i.e., the expressed but unrealized capital gains targeted by Article 44, § 1, 1° of the Income Tax Code) on assets other than those already excluded from the NID computation basis on the grounds of one or more of the other adjustment rules. According to the Ruling Commission, merger goodwill established on the occasion of the merger of a subsidiary into its parent must be assimilated to revaluation surplus and should therefore be excluded from the equity for accounting purposes. (e) Fifth Adjustment: Adjustment for Variations in Composition of Equity During Taxable Period 166. While the computation basis for the NID is, in principle, the (adjusted) equity for accounting purposes at the end of the preceding period, account is also taken of variations that occurred during the taxable period in order to achieve consistency with accounting reality and to prevent maneuvers at the end of the taxable period. Thus, variations occurring during the taxable period in the value of the equity or “excluded” components, calculated as a weighted average, increase or reduce the risk capital. Variations are deemed to have occurred on the first day of the calendar month that follows the month during which they took place. Any variation is multiplied by the number of calendar months that remain until the end of the taxable period and is divided by the total number of calendar months of the taxable period. The principal variations targeted are capital increases or decreases, (dis)investment in “excluded” assets, dividend distributions, revaluations and the like. Variations in profit elements resulting from the conduct of daily business do not give rise to adjustments.

d. Computation of Deduction 167. The amount of the NID is calculated by multiplying the (adjusted) equity for accounting purposes by the applicable rate of the deduction. This rate is determined annually on the basis of average OLO rates (10-year linear bonds issued by the Belgian State). Initially determined and capped from the previously applicable 6,5 % at 3 %, the NID rate for assessment year 204 (financial years ending between 31 December 2013 and 30 December 2014, both dates inclusive) is more closely aligned with the effective OLO rate by taking into account the average rate of the OLOs of July, August and September 2012 only. As a result, the NID rate for assessment year 2014 is 2.742 %. SMEs are entitled to an upgratde of 0.5 % as a result of which the applicable rate amounts to 3.242 % for SMEs. A company qualifies as an SME if it meets the criteria mentioned in Article 15 of the Belgian Company Code. If the taxable period is longer or shorter than 12 months, the deduction rate is multiplied by a fraction the numerator of which is the total number of days of the taxable period and the denominator of which is 365.

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e. Carryover of Deduction

168. Up until assessment year 2013, if there was no profit in a taxable period or insufficient profit for the NID to be used in full, any excess may be carried forward to subsequent taxable periods. Carryover is limited to the seven subsequent taxable periods. As from assessment year 2013, the possibility to carry-forward excess NID for 7 taxable periods has been abolished. However, it is still possible to carry forward the unused portion of the NID built up under the previously applicable rules (the “NID stock”), but certain restrictions apply (any NID stock carry-forward which is left over after the application of these limitations can be further carried forward, regardless of expiry of the previously applicable 7-year time limit) :

• The NID stock carry-forward must be the last deduction taken on the corporate tax return to determine the tax base (in other words, all other deductions must be taken first, meaning the possibility to deduct the NID stock carry-forward will be severly reduced) ; and

• The maximum NID stock carry-forward that can be taken per tax year is limited to 60 % of the tax base, not taking into account the first one million € of the taxable base remaining before the deduction of the NID stock.

f. Deduction Carryovers and Change of Control

169. Where there is an acquisition or change of control over the corporation that does not meet legitimate financial or economic needs, any carried-over portion of the NID will be forfeited393.

g. No Intangibility Condition 170. The draft legislation relating to the NID initially provided for an intangibility condition to the effect that the deduction would only be available on condition that an amount equal to the deduction granted for the taxable period be recorded and maintained in a distinct account on the liabilities side of the company's balance sheet. Moreover, that amount was not to serve as a basis for calculating the annual attribution to the legal reserve or any entitlement of directors or active partners. The intangibility period was to apply during the relevant taxable period and the three subsequent years. Noncompliance was to result in the treatment of the granted portion of the deduction as taxable profit in the taxable period during which the intangibility condition was not respected and in the cancellation of the carryover of the unused portion of the deduction. The purpose was to ensure that the tax advantage remained in the company. Eventually, the Government decided to abolish the intangibility condition so as not to undermine the overall attractiveness of the NID regime.

h. Formalities 171. To justify its entitlement to the NID, a qualifying taxpayer must attach a special statement to its tax return relating to the assessment year for which the deduction is claimed.

i. No Combination with Investment Reserve

172. Small and medium-sized companies, i.e., companies within the meaning of Article 215, second and third paragraphs of the Income Tax Code, must choose between the NID and an investment reserve, available to them. A company that opts for the investment reserve loses the right to apply the NID for the taxable period during which the investment reserve is established and the two subsequent taxable periods. The seven-year carryover period in that case is extended by the number of full years for which no NID can be applied.

j. Circular on Anti-Abuse Measures

393 CIT, Art. 207.

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173. On April 3, 2008, the tax authorities issued a Circular Letter394 providing guidance on the specific anti-abuse measures included in the tax provisions relating to the NID and the possible application of anti-abuse rules laid down in other parts of the Income Tax Code.

First, the Circular Letter makes reference to the simulation or sham transaction doctrine as a potential basis for challenging abuses of the NID regime, but fails to provide any examples in this respect. Second, the Circular Letter reiterates the specific anti-avoidance measures relating to the computation of adjusted equity for purposes of the NID. In essence, the tax authorities' specifications are no more than a reminder of what is already in the statute. Finally, and most importantly, the Circular Letter gives an outline of the general and specific anti-abuse measures under which aggressive planning in the NID area may, at least theoretically, be challenged. The focus is essentially on “double dip” structures and structures set up in abnormal circumstances that lack a genuine business purpose and are exclusively or predominantly tax-motivated. As regards double dip structures, the Circular Letter emphasizes that interest deductions claimed in Belgium on loans financing the equity funding of the NID vehicle can be challenged if they relate to transactions that are outside the scope of the corporate purpose of the lending entity or to transactions that do not generate a positive net result before taxes (the “cash drain analysis”). As regards “abnormal transactions,” the Circular Letter refers to the position of the Supreme Court according to which such transactions can be challenged based on the abnormal or gratuitous advantage provisions of the Income Tax Code. A positive note is that the Circular Letter expressly confirms that NID structures that can be economically justified should generally not be challengeable. Also, the Circular Letter provides reassurance by stating that the centralization of financing activities in a “specialized” vehicle should not per se be regarded as a purely artificial, solely tax-driven structure. Under the coordination centre regime, the parent could borrow to capitalize the centre and deduct the interest, whereas the profit of the centre remained untaxed. This latter system can now be used with any Belgian company. As the measure is general, it cannot be labeled as State aid. § 3. Income from patents

a. General

174. The measure provides for an 80% deduction of qualifying patent income395, thus leading to a maximum effective tax rate on patent income of 6.789% (i.e., 20% of the standard corporate tax rate of 33.99%).

b. Scope of Application 175. The patent income deduction is available to all corporations that are subject to the corporate income tax or the non-resident income tax (corporations). Hence, it is available to Belgian resident corporations and to Belgian permanent establishments (PEs) of foreign corporations. The only requirement is that the taxpayer has performed R& D in a research centre in Belgium or abroad.

c. Qualifying Patents

176. Qualifying patents include effective patents and complementary certificates of protection (these are specific to the pharmaceutical sector). This means that R& D income obtained prior

394 AFER, n° 14/2008. 395 CIT, Art. 205/1.

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to the granting of a patent (or certificate) is outside the scope of the deduction. Also, income derived from intellectual property rights other than patents (for example, know-how, trademarks, and copyrights) does not qualify for the deduction. There are two categories of qualifying patents and certificates of complimentary protection, i.e.: (i) patents that have been developed, totally or partially, by the taxpayer in a research centre in Belgium or abroad; and (ii) patents or certificates that have been acquired (for example, by way of purchase, contribution or license), provided the taxpayer has totally or partially improved or further developed the patented products or the patented processes in a research centre located in Belgium or abroad. In the latter case, it is not required that the improvement or further development result in a new or additional patent396. In both cases, the research centre should have minimum substance, meaning that it must qualify as a branch of activity, i.e., a technical and organizational unit that carries on an autonomous activity and is able to operate on its own. The underlying rationale is to prevent a Belgian company from being interposed as a mere conduit solely to benefit from the patent income deduction. Practice has shown that (even if the Belgian ruling commission is applying this condition, with a certain level of flexibility), the research centre condition is an obstacle for the application of the patent income deduction, more in particular for SME’s. Therefore, as of assessment year 204, the research centre condition is abolished for SMEs. As a consequence, SMEs qualify for the patent income deduction for their patents and complementary certificates of protection, even if the R&D activities were totally outsourced to a third party and the SME was/is not involved through an own research centre with the further development of the patented products or processes. In this regard, a company qualifies as an SME if no more than one of the following criteria are exceeded ; total balance sheet amounts to maximum € 3.650.000 ; maximum turn-over of € 7.300.00 ; a maximum of 50 FTEs. If the SME forms part of a group of affiliated companies, these criteria are to be assessed a consolidated basis.

d. Qualifying Patent Income 177. Qualifying patent income is comprised of two elements397. First, qualifying patent income includes licensing income, i.e., income derived in consideration for licenses or sublicenses of patents developed or acquired by the company or establishment concerned. Such income may consist of periodic income such as royalties, upfront fees or milestone fees. Income from the transfer of a patent does not constitute qualifying patent income. Licensing income deriving from intellectual property rights other than patents and income arising from the reimbursement of or participation in R& D expenses is excluded from qualifying patent income so that only the part of the licensing income relating to the patent is taken into account for purposes of the patent income deduction. Licensing income obtained from a company that has a “special relationship” with the licensor (for example from a company in the same group of group companies) qualifies only if it is at arm's length. Second, qualifying patent income comprises the patent remuneration embedded in the sales price of patented products that are manufactured by the company or establishment concerned or on its behalf by a contract manufacturer. In other words, such “deemed” patent income is the income the company or establishment would have derived if it had granted a license of the patents used to manufacture the products. Only that part of the remuneration that conforms to market conditions is taken into account. The burden of proof rests with the taxpayer, both as regards the necessity of the license to the manufacturing of the products and the arm's-length character of the “deemed” patent income. A ruling can be obtained on the latter aspect. In the case of patents and patent licenses acquired from third parties, qualifying patent income is limited to the difference between the gross patent income received and the

396 CIT, Art. 205/2, § 1. 397 CIT, Art. 205/2, § 2.

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remuneration paid to third parties (i.e., the depreciation of the patents acquired or the royalties due under the patent licenses), to the extent such remuneration is deductible from the taxable result in Belgium for the same taxable period. The patent income deduction is limited to “new” patent income, i.e., patent income earned as of assessment year 2008 (i.e., the financial year ending on December 31, 2007) and derived from patents that have not been used by the company (or establishment), a licensee or related companies for sales of products prior to January 1, 2007.

e. No Carryover of Deduction 178. If there is no profit in a taxable period or insufficient profit for the patent income deduction to be used in full, the excess may not be carried forward to subsequent taxable periods.

f. Combination with Notional Interest Deduction and Investment Deduction 179. The patent income deduction can be applied cumulatively with the notional interest deduction and the investment deduction (discussed below).

g. Impact on Foreign Tax Credit 180. In the case of patent income benefiting from the patent income tax deduction, the foreign tax credit available for foreign withholding tax levied on royalties is limited to the actual amount of the foreign tax paid, subject to a maximum rate of 15% and not to exceed the corporate tax on the patent income. § 4. Fairness Tax : a recapture of tax incentives 181. The Law of July 30, 2013 has introduced the so-called “fairness tax”. The fairness tax is a separate assessment aiming at taxing dividends distributed out of profits that were not effectively subject to the normal Belgian corporate tax regime due to the notional interest deduction regime and/or the carried forward tax losses deduction. The fairness tax applies as from assessment year 204 (financial years ending between 31 December 2013 and 30 December 2014, both dates inclusive) onwards398.

a. Scope 182. The fairness tax applies to both Belgian companies and Belgian permanent establishments of foreign companies that do not qualify as SMEs within the meaning of Article 15 of the Belgian Companies Code399. However, SMEs may still come within the ambit of the fairness tax if they form part of a group of affiliated companies as, in that case, the applicable thresholds (number of employees, annual turn-over, total balance sheet) must be assessed on a consolidated basis. The fairness tax applies to “dividends”, i.e. distribution of profit. Liquidation surpluses, while deemed to be dividends for income tax purposes, are not aimed at. Despite declaration by the Minister of Finance to the contrary, the same should hold true for share redemption surpluses.

b. Tax Base 183. The determination of the tax base for purposes of the fairness tax involves a three-step approach. The first step requires a computation of the difference between, on the one hand, the gross dividend distributed during the taxable period and, on the other

398 CIT, Art. 219ter. 399 See supra nr. 176.

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hand, the taxable income for that period that has been effectively subject to normal corporate income tax regime. If the difference is positive, then in a second step, the tax base resulting from the first step is reduced by that part of the distributed dividend that originates in previous taxed reserves built up at the latest during assessment year 2014. This elimination is intended to avoid that future distribution of “old” (retained) profits would become subject to the fairness tax. For purposes of the elimination, a “last in first out” method is applied, implying that the most recent built up taxed reserves are deemed to be distributed first. In a third step, the (positive) outcome of steps 1 and 2 is multiplied by a fraction where (i) the numerator consists of the notional interest and/or carried forward losses deduction(s) effectively taken in the relevant assessment year, and (ii) the denominator is the taxable result excluding tax exempt reductions in value, provisions and capital gains of the same assessment year. Example Assume a Belgian company in a given taxable period with the following features : Increase of retained earnings 550 Disallowed expenses 450 Distributed dividends (of which 50 relate to taxed reserves built up, at the latest, during assessment year 2014 and 550 to the current year’s result) 600 Taxable result 1600 Dividend received deduction (300) Notional interest deduction (800) Carried forward losses used (50) Tax base effectively subject to ordinary corporate income tax (1600-300-800-50) 450 Computation of tax base for fairness tax Step 1 : distributed dividends (600) less tax base effectively subject to corporate income tax (450) 150 Step 2 : elimination of (qualifying) previously taxed reserves (50) from outcome of step 1 (150) 100 Step 3 : numerator (notional interest deduction and carried forward losses used (850)/denominator (taxable result) (1600) 53.12 % hence tax base for fairness tax outcome of step 2 (100) multiplied by 53.12 = 53.12 Fairness tax due : outcome of step 3 (53.12) multiplied by 5 % = 2.66 (plus 3 % crisis surcharge = 2.74). While the fairness tax has been presented as a measure aimed at taxing companies that erode their tax base by way of the notional interest deduction and/or the use of carried forward losses, the fairness tax can also apply to (exempt) capital gains on shares distributed as dividends (which, reportedly, was not intended by the tax legislature). The reason is the exclusion of capital gains from the denominator of the fraction in step 3 potentially affecting holding companies that, in addition to (exempt) capital gains on shares, also make an operational profit that is fully or partly offset by the notional interest deduction and/or the use of carried forward losses. This is illustrated by the following example : Assume a Belgian (holding) company in a given taxable period with the following features: Profit capital gains on shares (1500) + interest (200) 1700 Distributed dividend 1700 Taxable result profits (1700) – exempt capital gain (1500) 200 Notional interest deduction 200

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Tax base effectively subject to corporate income tax: taxable result (200) – notional interest deduction (200) nil Computation of tax base for fairness tax Step 1 : distributed dividends (1700) les tax base effectively subject to corporate income tax (nil) 1700 Step 2 : n/a Step 3 ; numerator (notional interest deduction) (200)/denominator (taxable result) (300): 100 ù hence, tax base for fairness tax customs of step 1 (1700) multiplied by 100 % 1700 Fairness tax due : outcome of step 3 (1700) multiplied by 5 % = 85 (plus 3 % crisis surcharge 87.55)

c. Points of criticism 184. In its advice on the fairness tax, the Council of State has queried why SMEs are, in principle, excluded from the scope of application of the fairness tax. While the Council of State has in the past accepted a different treatment between SMEs and non-SMEs provided that there is a relevant reason and purpose for such different treatment, it would seem to suggest that the difference in treatment as regards the fairness tax is not sufficiently motivated. It follows that the fairness tax could well be open to challenge under the constitutional principle of equality in tax matters. In addition, to the extent that the fairness tax could be assimilated to a withholding tax, it is questionable whether it is compatible with the Parent/Subsidiary Directive. Finally, there are doubts as to whether the fairness tax is reconcilable with Belgium’s tax treaty obligations. To sum up, it is more likely than not that the fairness tax will be challenged before the courts. Section II Service Centres and Distribution Centres 185. Besides the now extinct regime of coordination centres, Belgium had developed two specific favorable tax regimes applicable to service centres and distribution centres, both intra-group. Services centres cover activities of a preparatory or auxiliary nature, information (call centres, for instance), activities contributing in a passive way (sic !) to sales and some activities contributing actively thereto, but excluding activities increasing turnover, such as prospection. Taxation of service centres was levied on a “cost-plus” basis (5 – 15 years) and, for those which contributed actively to sales, on a “resale minus” basis (maximum 5 %)400. Distribution centres will purchase, warehouse or condition goods, take or confirm orders without power to accept them, sell or transport to group companies or to third parties on account of group companies, send invoices and comply with bank, customs or VAT formalities. They were taxed on a 105 % cost-plus basis401.

400 Administrative circular of 26 July 1996, Ci.R.H. 421/483.766. 401 Administrative circular of 9 August 1989, Ci.R.H. 421/390.701,as amended by the administrative circular of 9 May 1994.

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Belgium protested against the condemnation of those regimes by the Primarolo Group in the former EU Code of Conduct : they were, in the view of the Belgian Government, only ways to determine a safe haven for transfer prices. Nevertheless, Belgium complied, abolished those regimes and replaced them with an application to such requests of the new system of advance rulings402. The ruling determines the percentage to be applied to the tax base in line with the functions and peculiarities of the centre, instead of using a standard rate. The taxpayer will give a full description of the transactions contemplated between parties (nature of services, list of enterprises concerned, structure of the group, identification of contracts, functions and risks, immaterial elements such as intellectual property rights). As far as possible, he will also compare the transactions with transactions between independent enterprises, for instance by using external data banks, and list the costs to which cost-plus is proposed to be applied. Section III Sectorial Incentives A. Audiovisual Tax Shelter 186. A company investing, after signature of a framework agreement with a local audiovisual production company, in an audiovisual production, may exempt up to 150 % of the amount paid, without exceeding 50 % of the reserved profits, capped at € 750.000. The excess may be carried over to other tax-years403. The purpose is to develop the Belgian movie industry and coincides with its success at the Cannes Festival. The EC Commission exempted the regime from the State aid prohibition in the basis of the cultural exception404. Permitted State aid may not be granted exclusively to enterprises created according to national law. The deduction is granted to Belgian companies and Belgian establishments of foreign companies, but the investment, within a framework agreement, must be realized in the work of a Belgian producer. This has been found compatible with EC law. B. Shipping Industry 187. It is common knowledge that a vast proportion of the world merchant navy sails under flags of convenience. The European Community felt the need to encourage this

402 Circular of 20 September 2005. 403 CIT, art. 194ter ; Circular of 23 December 2004, Law of 2 August 2002. P.P. Hendrickx and A. Cardijn, Le « Tax Shelter », un mode de sponsoring fiscalement avantageux pour les enterprises, Cahier du Juriste, 2002 at 91 ; id., Le Tax Shelter, Comptabilité et Fiscalité pratique, 2004 at 45 ; P. Bralins, Régime du « Tax Shelter » : un incitant fiscal pour les investissements dans l’audio-visuel, R.G.F., 2005, n° 4 at 21 ; A. Rayet, Le Tax Shelter en Belgique, J.D.F., 2005 at 129. 404 EC Treaty, art. 87.3, d ; Communication of the EC Commission of 26 September 2001 concerning audiovisual works, Com. (2001) 534 final.

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maritime sector and issued State aid guidelines in 1989, 1997 and finally 2004405, the latter to be reviewed in 2011406. After several EU countries, Belgium issued a legislation in conformity with the EC Guidelines407. 1. Tonnage Tax 188. Eligible shipping entities may elect to be taxed according to daily tonnage per 100 net tons according to the following scale :

Tons € per 100 net tons 0 – 1.000 1 1.001 – 10.000 0.60 10.001 – 20.000 0.40 20.001 – 40.000 0.20 > 40.000 0.05 The latter rate applies only to new ships or ships which move from a non-EU flag after having been foreign-flagged since their delivery with a maximum of five years. The corporate tax rate (33.99 %) will apply to the profit so determined. 189. The tax regime is granted by ruling408 for a period of ten years. Losses of other divisions of the company may not offset the profit determined for purposes of the tonnage tax. The Net Operating Loss (NOL) carry-over is “frozen” until such time the tonnage tax will no longer apply. Capital gains on ships are included in the profit subject to the tonnage tax and are not subject to any other tax. 190. Eligible profits are profits from maritime navigation including :

- profits from the operation of a ship for the transportation of goods or persons on an international sea route ; profits from transportation of extraction materials from exploration or exploitation of natural resources at sea ;

- profits from the operation of a ship for towing at sea ; - activities directly related thereto409.

If it engages in the first activity, the ship must flag a EU flag, but for exceptions according to conditions set by the EC Commission. The Commission Guidelines on State aid to maritime transport (2004/C13/03) provide indeed that in exceptional cases the ship may fly the flag of certain territories associated to the European Community (for example Dutch Antilles, Bermuda or Cayman) or of the Isle of Man if the management of the fleet

405 Community guidelines on State aid to Maritime Transport (2004) C/13/03/OJ, C13 of 17 January 2004 at 3. 406 B. Springael, EC Guidelines to Maritime Transport and Belgian Maritime Tax Measures, Intertax, 2005 at 229. 407 Program-law of 2 August 2002, art. 1.15-127, amended by the Law of 27 December 2004 ; Royal Decree of 7 May 2003. Comp. in France, Code Général des Impôts, art. 209-0.B. 408 See hereabove, art. 16. 409 Short-term investments of liquid assets from eligible activities, advertisement on board, ship brokerage to seek supplementary cargo, sale of operating assets. They do not include sale of luxury products, excursions or gambling.

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takes place in the Community and contributes substantially to economic activity and employment within the Community. For the two latter activities, the ship must flag a Belgian flag and be engaged for 50 % of its time into the eligible activity. 191. Operation of a ship takes place when :

(i) the taxpayer is the owner, co-owner or charterer410 of a ship chiefly managed in Belgium ;

(ii) the taxpayer is engaged chiefly in Belgium in the commercial management in Belgium of a ship of another taxpayer (ship management company) if tonnage on managed ships does not exceed three times tonnage of ships owned, co-owned of chartered411 by the same Belgian taxpayer ;

(iii) the taxpayer owns in Belgium a ship which is voyage – or time – chartered, under the same conditions as sub (ii).

Belgian companies and Belgian establishments of foreign companies are eligible. If the company has several divisions, the maritime division must be a branch of activity according to Belgian law, i.e. an independent business unit, and keep separate accounts. 2. Incentive for shipping companies not opting for the tonnage tax (i) Accelerated depreciation 192. The following percentage of depreciation will apply to new ships or ships entering in possession of a Belgian taxpayer :

Year Percentage First 20 Second & Third 15 Next 10 The same percentages will apply to heavy repairs and improvements. This compares with normal depreciation on 15 years. (ii) Capital gains exemption 193. Capital gains on ships used by companies which would otherwise be eligible for the tonnage tax and having been fixed assets since five years are exempt if the proceeds of disposal are reinvested in ships or shares of a EU maritime company. (iii) Investment deduction 194. Upon purchase of a new ship of a ship entering in possession of a Belgian taxpayer, an investment deduction of 30 % of the price is granted. It may be carried over in the absence of sufficient profits.

410 On chartering of ships, Commercial Code, Book II, art. 112 and seq. 411 Co-ownership is counted as full ownership if it reaches 5 %.

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195. Tax incentives induce taxpayers to act in a way which is desired by the legislator412. They have been described as well guided tax evasion413. Professor Schoueri, in his historical review of tax incentives, traces them back to Cato’s laws against luxury in Rome414. Internationally, the use of incentives is limited by the rules of the World Trade Organization415 prohibiting export subsidiaries416. In the European Union, Article 87 of the EC treaty prohibiting State aids which distort competition is an additional barrier, with far-reaching consequences. Any EU Member State – Belgium is an example – had to remodel its pattern of economic – including tax – incentives to accommodate EU rules. The Code of Conduct on business taxation, which is a political agreement, was also found to have a definite influence on the behavior of Member States, even though it does not provide for an enforcement mechanism417. Generally, the European prohibition of State aids will be stricter than the WTO prohibition of subsidiaries, which applies only to export subsidiaries or measures stimulating import substitution. A difference is that some types of State aid may be acceptable under EU rules (regional development incentives for instance), whereas no such exceptions exist under WTO rules418.

412 Schoueri, L.E. , Normas Tributárias Indutoras e Intervençao Econômica, Rio de Janeiro, Editoria Forense, 2005 at 206. 413 Bellstedt, C., Die Steuer als Instrument der Politik, Berlin, Duncker & Humblot, 1966 at 298. 414 Op. cit. at 109. 415 GATT, art. VI, XVI and XXIII. Agreement on Subsidiaries and Countervailing measures of 1994. 416 Schoueri, L.E., op.cit. at 210. 417 Mors, M., Tax Competition in Europe – An EU Perspective, in W. Schön, ed., Tax Competition in Europe, European Association of Tax Law Professors, Amsterdam, IBFD, 2003 at 151. 418 Luja, R.H.C. , Assessment and Recovery of Tax Incentives in the EC and the WTO : A View on State Aids, Trade Subsidiaries and Direct Taxation, Antwerp-Oxford-New York, Intersentia, 2003 at 193.

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TITLE VIII – PRACTICAL APPLICATION Subsidiary v. Branch 196. A Belgian subsidiary will be taxed on its worldwide income (except for income exempted under tax treaties). The Belgian branch of a foreign corporation will be taxed only on Belgian source income. Belgian subsidiaries of foreign corporations may not be taxed more heavily than other Belgian corporations and benefit from reduced rates of corporate tax. The same regime applies to Belgian branches of foreign corporations. For subsidiaries and branches alike, capital gains on shares are tax exempt. Long-term capital gains on other fixed assets are taxable at the standard rate; deferral of tax can be obtained if the proceeds of the sale are reinvested in new depreciable fixed assets. The gain will be taxed over time at the standard rate pursuant to the depreciation allowed on the fixed asset reinvested. A subsidiary entering into liquidation remains subject to normal corporate tax. Liquidation proceeds exceeding the amount of paid-up capital are treated as dividends for the shareholders, but are subject to withholding tax of 10% only. Branches are taxed in the same manner, but the repatriation of net amounts available after the winding up of operations is not treated as payment of a dividend and, therefore, is not subject to withholding tax. When the assets of a branch are contributed to another foreign company as a consequence of a reorganization decided upon abroad, a gain will be realized upon the exchange of the assets against shares even if the new entity maintains a branch in Belgium with the same assets. A contribution of a branch of activity can, however, be realized in exemption of income or corporation tax. Moreover, when a Belgian establishment is contributed by an EU Member State company as part of a tax-free reorganization, capital gains resulting from such merger are not taxed in Belgium, provided the assets are kept in Belgium as an establishment of the recipient company419. When a branch is formed by a foreign corporation, the memorandum and articles of association of the foreign corporation must be registered and filed, and excerpts must be published in the Official Gazette. The same applies to the board resolution deciding to create the branch. Value-added tax (VAT), at the standard rate of 21%, is due when tangible personal property and, under certain conditions, newly erected buildings are either sold to a subsidiary or a branch, or are contributed to a subsidiary or to a foreign corporation having a branch in Belgium. All these transactions are considered taxable deliveries or imports, provided, in the case of deliveries, the transferor is a VAT taxpayer. When a subsidiary distributes dividends to its foreign parent, the applicable withholding tax will be due as follows:

• 25% under general domestic law;

• 0% by application of the Belgian provisions implementing the EC Directive 90/435 of July 23, 1990. Profit distributions from a Belgian subsidiary to its parent stock

419 CIT, Art. 231, § 2.

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company (10 % or greater shareholding) resident in another Member State or in Belgium are exempt from withholding tax;

• 15% under most treaties. The withholding tax rate is further reduced under

certain treaties for parent companies owning a stated percentage of the shares of a Belgian subsidiary.

By comparison, no withholding tax is due on the remittance of income by a branch to its head office. Interest, royalties and service fees are generally deductible. Branches may not, however, deduct interest, royalties or service fees paid to the head office or to other branches of the same corporation. Only payments made to third parties are deductible420. However, if the head office had borrowed funds specifically for the needs of the Belgian branch, the interest paid could be deducted, at cost, as an expense incurred abroad for the benefit of the Belgian establishment421. An exception applies to banks. The Belgian branch of a foreign bank may remunerate its head office or other branches for the use of funds without exceeding the rate applicable for similar transactions in the country of source. The reason behind the exception is that a bank does not really “borrow”, but actually trades in, money422. A withholding tax on personal property income is due at the rate of 15%, when interest is paid by a Belgian corporation or when it is deducted from the profits of a Belgian establishment of a foreign corporation, even if it is paid abroad by the head office423. No withholding tax is due on :

• interest for late payment of commercial debts, whether or not evidenced by bills of exchange;

• interest paid between banks, in Belgium or abroad424;

• interest on deposits of non-residents with banks in Belgium;

• interest on dematerialized securities paid to creditors other than Belgian resident

individuals or Belgian resident non-profit making organizations425;

• interest on registered bonds paid to non-residents426. These latter exemptions are provided under domestic law and are confirmed in some treaties. No withholding tax applies to royalties paid to Belgian residents or corporations. Under domestic tax law, a 25% withholding tax applies to outbound royalties. Generally, such withholding tax is waived by treaties. Under some treaties, mostly with developing countries, a reduced withholding tax remains applicable to all or some types of royalties.

420 Com. CIT 144/4, at 3 - Com. D.T.T. 7/312. 421 Com. CIT 144/4. 422 Com. CIT 144/3 ; at 3 - Com. D.T.T. 7/313. 423 CIT, Art. 261, 1. 424 R.D.-CIT, Art. 107, § 2, 5, a. 425 Royal Decree of May 26, 1994. 426 R.D.-CIT, Art. 107, § 2, 10, as inserted by Royal Decree of May 26, 1994.

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Generally, a flat 15% deduction for expenses applies, thereby reducing the effective rate of withholding to 12.75%427 (85% x 25%). Rentals of industrial equipment are generally covered by the royalty clause of Belgium’s double taxation treaties. Other rentals are covered either as business profits or as residual income and re-exempted under the relevant provisions. Technical assistance fees and management fees are treated under domestic law and under most treaties as business profits and not as royalties. They are not subject to withholding and are taxable in Belgium only if the supplier has an establishment (or permanent establishment if a treaty applies) there. Management fees may be deducted if they are incurred for the production of income by the subsidiary, subject to the rules on reallocation of income. Only expenses incurred exclusively for the purposes of the branch are deductible under domestic law428, whether borne by the branch or by the head office to meet the needs of the branch. Treaties generally accept the deduction of a ratable share of general administration expenses. Before computing the applicable rate, certain expenses must be excluded from the apportionable amounts:

• expenses incurred exclusively for the head office or other foreign branches (for example: foreign taxes, director’s fees which do not compensate real and permanent functions benefiting the whole enterprise, etc.);

• expenses relating to shareholdings or other assets managed by the head office

(for example: interest on debts incurred for the acquisition of a participation). Expenses which are deductible under foreign but not under Belgian law are included in the computation, but a ratable share thereof is added back to the profits of the branch as a disallowed expense429. Contribution by the foreign corporation of all or part of the assets and liabilities of its establishment in Belgium to a Belgian corporation, whether new or previously existing, may qualify as a tax exempt contribution of branch of activity or of a universality of assets430. In such a case, the capital gain on the transfer is tax exempt in the hands of the foreign corporation. A Belgian establishment may also be contributed within the framework of a tax exempt merger between EU corporations; in this case, the capital gains will be tax exempt provided the assets are kept in Belgium as an establishment of the recipient company431. If the exemption applies, realized gains will not be taxable, but the tax treatment of the assets in the branch will carry over to the subsidiary. Thus, depreciations and gains and losses will be computed by reference to the tax basis of the assets in the hands of the transferor. If the shares received by a Belgian establishment after a tax-free contribution of a portion of the business are later disposed of by the branch, the capital gains will be tax exempt under the common rules432. VAT does not apply because the transfer is one of a “universality of assets”433.

427 R.D.-CIT, Art. 3. 428 CIT, Art. 237. 429 Com. Conv. 7/333. 430 CIT, Art. 46, § 1st, 2°. 431 CIT, Art. 231, § 2. 432 CIT, Art. 192. 433 CVAT, Art. 11.

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When the parent company sells the shares of a Belgian subsidiary, it will normally not be subject to any tax in Belgium. The sale of shares, even of major shareholdings, in Belgian corporations by residents is not per se subject to Belgian taxation. No stamp or other transfer tax is due on a private sale or disposal of shares.

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BIBLIOGRAPHY

Direct Taxes

IN ENGLISH

- De Broe, L., International Tax Planning and Prevention of Abuse, IBFD, 2008; - Malherbe, J. and Ph., Verstraete, H. and Faes, P., Tax Management, Foreign

Income Portfolios, 953-3rd, “Business Operations in Belgium”, BNA, Washington, D.C. ;

- IBFD, Belgium, Country Analysis; - Tax Survey, Ministry of Finance, Research and Information Department,

www.minfin.fgov.be/uk – memento/index – 102.html ; - Eicke, R., Tax Planning with Holding Companies, Wolters-Kluwer, 2009; - Faes, P., “Belgian Income Tax Law, Principles and Practice”, Chichester, Wiley,

1995 ; - Malherbe, J., ed., Tax Amnesties, Alphen-aan-den-Rijn, Kluwer, 2011 (see

Belgium, at p. 29). - Van Bael & Bellis, Business Law Guide to Belgium, 2nd ed., The Hague-London-

New York, Kluwer Law International – Bruylant, 2003 ; - Van de Vijver, A., ed., The New US-Belgium Double Tax Treaty, Brussels,

Larcier, 2009 ; - Vanhaute, P., Belgium in International Tax Planning, Amsterdam, IBFD, 2004.

IN FRENCH

- Afschrift, Th., L’abus fiscal, Brussels, Larcier, 2013 ; - Cheruy, C. and Laurent, C., Le régime fiscal des sociétés holdings en Belgique,

Brussels, Larcier, 2008 ; - Coppens, P.-F., L’entreprise face au droit fiscal belge, Brussels, Larcier, vol. I,

2008 ; vol. II, 2009 ; - Dassesse, M., and Minne, P., – Droit Fiscal – Principes généraux et Impôts sur

les Revenus, 5th ed., Brussels, Bruylant, 2002 ; - De Wolf, M., Thilmany, J. and Malherbe, J., L’impôt des personnes physiques,

Brussels, Larcier, 2014 - Kirkpatrick, J. and Garabedian, D. – Le régime fiscal des sociétés en Belgique,

3rd ed., Brussels, Bruylant, 2003, yearly update available for students ; - Koning, F., Le redressement fiscal à l’impôt sur les revenus – Analyse et moyens

de défense, Brussels, Kluwer, 2003 ; - Magremanne, J.-P., Marlière, M., Lambot, D. and de Clippel, B., Le contentieux

de l’impôt sur les revenus, Brussels, Kluwer, 2000 ; - Malherbe, J., De Wolf, M., and Schotte, C., Droit fiscal – L’impôt des sociétés,

Brussels, Larcier, 1997 ; - Malherbe, J., Droit fiscal international, Brussels, Larcier, 1994 (sold out –

available on Internet at www. Larcier.be/cgi-bin/bookmark.pl - Mihail, P., Optimisation fiscale : sociétés résidentes et impôts des sociétés,

Brussels, Kluwer, 2002 ; - Minne, P., and Douénias, S., Planification fiscale internationale des sociétés

belges, Brussels, Larcier, 2004 ; - Stevenart Meeüs, F., dir., Manuel de procédure fiscale, Limal, Anthemis, 2011 ; - Tiberghien, Manuel de Droit fiscal, Brussels, Kluwer, yearly ;

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- Guide fiscal du contribuable – Personnes physiques, par Cludts, G., et al., Sociétés, par Michel, F. and Rosoux, R., yearly, UNSP Finances.

IN DUTCH

- De Broe, L., Kroniek Internationaal Belastingsrecht (periodically), Tijdschrift voor Rechtspersonen en Vennootschappen ;

- Faes, P.,, Het rechtsmisbruik in fiscale zaken, Brussels, Larcier, 2008; - Lagae, J.-P., Vennootschapsbelasting, Diegem, Ced.Samsom, 1998; - Schoonvliet, E., Handboek Internationaal Fiscaal recht, Kalmthout, Biblo, 1996; - Tiberghien, Handboek Fiscaal Recht, Brussels, Kluwer, yearly.

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ABBREVIATIONS

A.F.T. Algemeen Fiscaal Tijdschrift

Ann. Dr. Annales de Droit (Louvain)

Am. Dr. Liège Annales de la Faculté de droit de Liège

Ann. Not. Annales du Notariat et de l’Enregistrement

Antwerp Judgment of the Court of appeal of Antwerp

Bull. ContR. Bulletin des contributions

B.I.F.D. Bulletin for International Fiscal Documentation

Brussels Judgment of the Court of appeal of Brussels

Bull. Bel. Bulletin der Belastingen

Cah. Dr. fisc. int. Cahiers de droit fiscal international

Cass. Judgment of the Cour de cassation (Supreme Court)

C.C. Civil Code

CID Code of Inheritance Duties

CIT Code of Income Taxes

CRD Code of Registration Duties

Com.I.T. Commentary of the Income Tax Code

Courr. fisc. Courrier fiscal

ECJ European Court of Justice

Eur. Tax. European Taxation

Fisc. Koer. Fiscaal Koerier

F.J.F. Fiscale jurisprudentie – Jurisprudence fiscale

Ghent Judgment of the Court of appeal of Ghent

J.D.F. Journal de droit fisal

J.L.M.B. Jurisprudence de Liège, Mons et Bruxelles

J.Prat.Dr.Fisc. Journal pratique de droit fiscal et financier

J.T. Journal des Tribunaux

Liege Judgment of the Court of appeal of Liege

M-D Ministerial Decree

Mons Judgment of the Court of appeal of Mons

Pas. Pasicrisie belge

P.-R. Parliamentary Questions

R.C.J.B. Revue critique de jurisprudence belge

RD Royal Decree

RD-CIT Royal Decree of Implementation of the Income Tax Code

Rec. arr. et avis C.E. Recueil des arrêts et avis du Conseil d’Etat

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Rec. Gén. Enr. Not. Recueil général de l’enregistrement et du notariat

Rev. not. b. Revue du notariat belge

Rev. T.V.A. Revue de la T.V.A.

R.G.F. Revue générale de fiscalité

R.P.S. Revue pratique des sociétés

R.W. Rechtskundig Weekblad

T.F.R. Tijdschrift voor fiscaal recht

T.M.I.F. Tax Management International Forum

T.P.I.R. Tax Planning International Review

Trib. Brussels Judgment of the Court of first instance of Brussels

Trib. Judgment of the Court of first instance

W.F.R. Weekblad voor Fiscaal Recht (Dutch)

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TABLE OF CONTENTS

INTRODUCTION ..................................................................................................................................... 1  

TITLE I –BELGIAN INDIVIDUAL AND CORPORATE TAX LAW ................................................. 3  

CHAPTER I – TAXATION OF INDIVIDUALS .............................................................................................. 3  Section I   Taxation of resident individuals ........................................................................... 3  

A. Taxable persons ................................................................................................................................... 3  B. Residence .............................................................................................................................................. 3  

1. Domestic Law ........................................................................................................................... 3  2. Treaty Law ................................................................................................................................. 7  3. Income from Real Property ................................................................................................... 7  

a. “Cadastral Income” ................................................................................................................... 7  b. Taxable Income ........................................................................................................................ 8  c. Exemptions, Reductions and Deductions ................................................................................. 9  d. Real Property Withholding Tax ............................................................................................. 11  

C. Determination of Gross Income ....................................................................................................... 12  Overview ...................................................................................................................................... 12  Application .................................................................................................................................. 12  2. Income from Capital and Personal Property .................................................................. 12  

a. Introduction ............................................................................................................................ 12  b. Income to Be Included in the Taxpayer’s Return ................................................................... 13  c. Income Not to Be Included in the Taxpayer’s Return ............................................................ 13  d. Tax Rules ................................................................................................................................ 15  

3. Professional Income ............................................................................................................. 15  4. Miscellaneous Income ......................................................................................................... 16  

a. Globalized with Other Income and Taxed at Progressive Rates ............................................ 16  b. Taxed Separately at a Flat Rate .............................................................................................. 16  

5. Treaty rules ............................................................................................................................. 18  D. Tax rates .............................................................................................................................................. 19  

Section II   Taxation of non-resident individuals ................................................................. 20  A. Overview .............................................................................................................................................. 20  B. Assessment ......................................................................................................................................... 21  

CHAPTER II – TAXATION OF COMPANIES ............................................................................................ 22  Section I   Taxation of resident companies ........................................................................ 22  

A. Taxable persons ................................................................................................................................. 22  B. Residence ............................................................................................................................................ 23  C. Principles ............................................................................................................................................. 23  

1. Taxation of Worldwide Income .......................................................................................... 23  2. Accounting .............................................................................................................................. 24  

D. Determination of Gross Income ....................................................................................................... 24  1. Overview .................................................................................................................................. 24  2. Capital Gains .......................................................................................................................... 25  

a. General principles ................................................................................................................... 25  b. Unrealized Capital Gains ........................................................................................................ 25  c. Long-Term Gains and Involuntary Gains ............................................................................... 25  d. Capital Gains on Shares ......................................................................................................... 26  e. Capital losses .......................................................................................................................... 27  

E. Deductible expenses - Limitations ................................................................................................... 27  1. Interest and Royalties .......................................................................................................... 27  2. Taxes ........................................................................................................................................ 28  

F. Losses ................................................................................................................................................... 28  G. Rates .................................................................................................................................................... 28  H. Groups of companies ......................................................................................................................... 30  

Section II   Taxation of non-resident companies ................................................................ 30  A. Domestic Law ...................................................................................................................................... 30  

1. Definition ................................................................................................................................. 30  2. Tax base of foreign companies ......................................................................................... 30  3. Method of taxation ................................................................................................................ 31  

B. Treaty rules .......................................................................................................................................... 31  

TITLE II – INTERNATIONAL ASPECTS – INBOUND AND OUTBOUND INCOME ................ 33  

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CHAPTER I – BUSINESS INCOME ........................................................................................................ 33  Section I   Inbound business income: income earned abroad by Belgian residents ... 33  

A. Domestic law : double taxation ............................................................................................................. 33  B. Treaties : exemption .............................................................................................................................. 33  

a. Income .................................................................................................................................... 33  b. Losses ..................................................................................................................................... 34  c. Determination of profits ......................................................................................................... 34  

Section II   Outbound business income: income earned in Belgium by foreign residents 36  

A. Domestic law ....................................................................................................................................... 36  1. Definitions ............................................................................................................................... 36  2. Tax base of a Foreign Corporation ................................................................................... 36  3. Method of Taxation ............................................................................................................... 38  4. Determination of Taxable Income ..................................................................................... 39  

B. Treaties ................................................................................................................................................. 41  1. Permanent establishment ................................................................................................... 41  2. Method of taxation ................................................................................................................ 42  

CHAPTER II – INBOUND AND OUTBOUND DIVIDENDS ......................................................................... 43  Investment income generally – Foreign Tax Credit ............................................................... 43  Section I   EC Directive .......................................................................................................... 43  Section II Tax treatment of dividends received within Belgium: withholding tax and participation exemption ............................................................................................................... 44  

A. Withholding tax .................................................................................................................................... 44  1. Belgian dividends .................................................................................................................. 44  2. Foreign dividends ................................................................................................................. 46  

a. Withholding ............................................................................................................................ 46  b. Foreign tax credit .................................................................................................................... 46  

3. Imputation Against Corporate Tax of Withholding Tax Attributable to Personal Property Income ......................................................................................................................... 46  

B. Participation exemption ..................................................................................................................... 47  1. Intercompany Dividends and Liquidation Surpluses .................................................. 47  

a. Conditions ............................................................................................................................... 47  b. Exclusions .............................................................................................................................. 48  c. Foreign permanent establishment ........................................................................................... 50  d. Limits to the deduction ........................................................................................................... 50  e. No credit for nonqualifying Dividends ................................................................................... 50  

2. Foreign dividends and liquidation surpluses ................................................................ 51  C. Dividends subject to a reduced withholding tax rate (15 %) ........................................................ 52  

Section III   Treatment of outbound dividends ..................................................................... 52  Withholding ................................................................................................................................. 52  

CHAPTER III – INTEREST .................................................................................................................... 53  Section I   Domestic tax treatment of interest .................................................................... 53  

A. Withholding tax .................................................................................................................................... 53  1. General rule ............................................................................................................................ 53  2. Exemption from Withholding Tax on Interest Income ................................................ 54  

Section II   Inbound foreign interest ...................................................................................... 55  A. Domestic law ....................................................................................................................................... 55  B. Treaties ................................................................................................................................................. 57  

Section III   Outbound interest ................................................................................................ 57  

TITLE III – ANTI-TAX AVOIDANCE PROVISIONS ........................................................................ 59  

Scope of the Provisions .............................................................................................................. 59  CHAPTER I – DOMESTIC LAW ............................................................................................................. 59  

Section I   Transfer Pricing .................................................................................................... 59  Section II   Disallowance of Certain Payments ................................................................... 60  Section III   Reporting Requirements .................................................................................... 61  Section IV   General Anti-Abuse Provision ........................................................................... 61  Section V   Certain Transfers Disregarded .......................................................................... 63  Section VI   Interest Rate ......................................................................................................... 63  Section VII   Limits on the Offsetting of Losses and Intercompany Dividends .............. 63  

CHAPTER II – DOUBLE TAXATION AGREEMENTS ............................................................................... 64  

TITLE IV – PROCEDURAL ISSUES ................................................................................................. 65  

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CHAPTER I – TAX PROCEDURE .......................................................................................................... 65  Section 1 Introduction ................................................................................................................. 65  Section 2 Return Filing Requirements ..................................................................................... 65  

Return and Record Maintenance Requirements ................................................................................ 65  1.   Income Tax Returns ................................................................................................................... 65  2.   Furnishing information and maintaining records ....................................................................... 67  

a.   Furnishing information ........................................................................................................ 67  b.   Record maintenance ............................................................................................................. 67  

Section 3 Examination, Appeals, Assessment, Collection .................................................... 68  A.   Examination and Appeals ............................................................................................................ 68  B.   Assessment and Collection ......................................................................................................... 70  C.   Statute of Limitations on Assessment ....................................................................................... 71  

CHAPITRE II – EXCHANGE OF INFORMATION ..................................................................................... 72  CHAPITRE III – TAX RULINGS ............................................................................................................. 72  

TITLE V – SPECIFIC OPERATIONS ................................................................................................ 74  

CHAPTER I – LIQUIDATION .................................................................................................................. 74  CHAPTER II – MERGERS AND DIVISIONS ........................................................................................... 74  

A. Overview .............................................................................................................................................. 74  B. Conditions ............................................................................................................................................ 75  C. Tax regime ........................................................................................................................................... 75  

1. Mergers and divisions .......................................................................................................... 75  2. Contribution of branch of activity or universality ........................................................ 75  

D. Carry-over of Tax Attributes .............................................................................................................. 76  E. Shareholders ....................................................................................................................................... 76  F. Taxable transactions .......................................................................................................................... 77  

CHAPTER III – REDEMPTION OF STOCK ............................................................................................. 77  CHAPTER IV – TRANSFER OF CORPORATE SEAT ............................................................................. 78  

A.   Outbound Transfer of Corporate Seat .................................................................................. 78  B.   Inbound Transfer of Corporate Seat .................................................................................... 78  

TITLE VI – SPECIFIC REGIMES ....................................................................................................... 78  

CHAPTER I – INVESTMENT FUNDS AND INVESTMENT COMPANIES (UCITS) .................................... 78  A.   Introduction .......................................................................................................................... 78  B.   Tax Treatment ....................................................................................................................... 79  

CHAPTER II – ECONOMIC INTEREST GROUPINGS (EIG) AND EUROPEAN ECONOMIC INTEREST GROUPINGS (EEIG) ........................................................................................................................... 80  

TITLE VII – TAX INCENTIVES ........................................................................................................... 81  

CHAPTER I – INDIVIDUAL TAX INCENTIVES ......................................................................................... 81  Section I   Stock options ........................................................................................................ 81  

A. Options Granted on or after January 1, 1999 ................................................................................. 81  1. Scope of Application ............................................................................................................ 81  2. Taxable Event ......................................................................................................................... 81  3. Valuation of Taxable Amount: Principle ......................................................................... 81  4. Valuation of Taxable Amount: Lump Sum Rates .......................................................... 82  5. Valuation of Taxable Amount: Possible Increase or Decrease of Lump-Sum Taxable Amount ......................................................................................................................... 83  6. Gains Derived from Exercise of Option and Sale of Underlying Shares ................ 84  7. International Tax Aspects ................................................................................................... 84  

B. Other Options ...................................................................................................................................... 84  Section II   Special Regime for Foreign Directors and Employees .................................. 85  

A. Eligible Persons .................................................................................................................................. 85  B. Tax Regime ......................................................................................................................................... 86  C. Deductions ........................................................................................................................................... 86  D. Procedure ............................................................................................................................................ 87  

CHAPTER II – CORPORATE TAX INCENTIVES ..................................................................................... 87  Section I – From Coordination Centres to Notional Interest ................................................. 87  

§ 1. Coordination Centres ...................................................................................................................... 87  A. Scope ................................................................................................................................................ 87  B. Tax Regime ...................................................................................................................................... 87  C. Limitations ....................................................................................................................................... 87  D. Tax ................................................................................................................................................... 88  

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E. Use in International Planning ........................................................................................................... 88  § 2. Notional interest ............................................................................................................................... 88  

a.   General ....................................................................................................................................... 88  b.   Scope of Application .................................................................................................................. 89  c.   Computation of Adjusted Equity ................................................................................................ 89  

(1)   Equity for Accounting purposes .......................................................................................... 89  (2)   Adjustments ......................................................................................................................... 90  

(a)   First Adjustment : Shares ................................................................................................ 90  (b)   Second Adjustment : Foreign Establishments and Real Property situated in a Treaty Country ....................................................................................................................................... 90  (c)   Third Adjustment : Specific Anti-Abuse Provisions ....................................................... 90  (d) Fourth Adjustment: Capital Subsidies, Tax Credits for Research and Development and Revaluation Gains ...................................................................................................................... 91  (e) Fifth Adjustment: Adjustment for Variations in Composition of Equity During Taxable Period ......................................................................................................................................... 91  

d.   Computation of Deduction ......................................................................................................... 91  e.   Carryover of Deduction .............................................................................................................. 92  f.   Deduction Carryovers and Change of Control ........................................................................... 92  g.   No Intangibility Condition ......................................................................................................... 92  h.   Formalities .................................................................................................................................. 92  i.   No Combination with Investment Reserve ................................................................................ 92  j.   Circular on Anti-Abuse Measures .............................................................................................. 92  

§ 3. Income from patents ........................................................................................................................ 93  a.   General ....................................................................................................................................... 93  b.   Scope of Application .................................................................................................................. 93  c.   Qualifying Patents ...................................................................................................................... 93  d.   Qualifying Patent Income ........................................................................................................... 94  e.   No Carryover of Deduction ........................................................................................................ 95  f.   Combination with Notional Interest Deduction and Investment Deduction .............................. 95  g.   Impact on Foreign Tax Credit .................................................................................................... 95  

§ 4. Fairness Tax : a recapture of tax incentives ........................................................................................ 95  a.   Scope .......................................................................................................................................... 95  b.   Tax Base ..................................................................................................................................... 95  c.   Points of criticism ....................................................................................................................... 97  

Section II   Service Centres and Distribution Centres ....................................................... 97  Section III   Sectorial Incentives ............................................................................................. 98  

A. Audiovisual Tax Shelter ..................................................................................................................... 98  B. Shipping Industry ................................................................................................................................ 98  

1. Tonnage Tax ........................................................................................................................... 99  2. Incentive for shipping companies not opting for the tonnage tax ........................ 100  

(i) Accelerated depreciation ................................................................................................. 100  (ii) Capital gains exemption .................................................................................................. 100  (iii) Investment deduction ..................................................................................................... 100  

TITLE VIII – PRACTICAL APPLICATION ..................................................................................... 102  

BIBLIOGRAPHY ................................................................................................................................. 106  

ABBREVIATIONS .............................................................................................................................. 108