Two new Circular Letters published on CFC. What to take into consideration?

End of last year Belgium amended its rules governing the taxation of the non-distributed profits of a Controlled Foreign Company (CFC) applicable as of financial years ending on or after December 31, 2023. This change represented a shift from model B (Transactional approach) to model A (Entity approach) in the implementation of the EU Anti-Tax Avoidance Directive (ATAD).

The amended rules target the taxation of passive income of a low taxed CFC entity that is directly owned by the Belgian controlling company, unless that CFC entity is deemed to have sufficient economic substance.

For a more detailed discussion of these amended CFC rules, we refer to our previous tax alert.

Administrative guidance issued on the CFC amended rules

The new CFC rules are complex and trigger in practice quite a lot of discussions. On 13 December 2024 the Belgian tax authorities have issued further guidance regarding the application of the CFC rules in two new Circular Letters published (nr. 2024/C/82 and nr. 2024/C/83). The first Circular Letter provides more guidance as regards the application and computation rules of the CFC rules, while the second Circular Letter discusses some specific procedural aspects (also covering recent amendment of some other anti-abuse rules).

Below we list an overview of the most remarkable items included in the Circular Letters with our comments.

No inclusion of Pillar 2 QDMTT

For the purpose of determining whether a foreign company or foreign establishment should be considered a low taxed entity for CFC purposes, i.e. to assess whether the foreign tax is at least half of the corporate tax that would have been due in Belgium,  the (qualified) domestic minimum top-up tax (‘QDMTT’) that may be levied in the country of the foreign entity cannot be considered as a qualifying income tax to be taken into consideration.  This is very surprising as CFC taxation is meant to tax low taxed income. If such income is not low taxed because of the local implementation of a global minimum tax through a domestic top -p tax, this will create double taxation.
 

No formal requirements imposed under Belgian tax law needed

It is further confirmed with respect to the Belgian hypothetical tax calculation that the formal requirements to claim certain tax deductions in Belgium do not need to be met in the hands of the foreign qualifying CFC entity. Reference is being made to the submission of a form 276 K to apply the deferred taxation of capital gains (no form required provided other substantive conditions for this regime are being met). This administrative confirmation is obviously welcome and allows that the absence of formal requirements generally applicable under Belgian law would not prevent specific tax deductions or tax regimes being applied to proceed with the hypothetical tax calculation for CFC purposes.
 

BEGAAP conversion required for non-EEA

For computing the Belgian hypothetical tax, the accounting result of the foreign company or establishment serves as the starting point. However, if the entity is located in an EEA Member State, the accounting figures may be based on the applicable local GAAP rules in that State.  In any other jurisdiction, the foreign accounting figures should be converted into BEGAAP.
 

Temporary and permanent differences

In view of the assessment of the taxation condition, for determining the foreign tax, an adjustment is allowed for temporary differences identified between Belgium and the relevant foreign jurisdiction. Such adjustment is however only possible to the extent the temporary difference relates to a period of less than 5 years (except for depreciations on tangible fixed assets and provisions of insurance companies – for which the 5-year period does not apply). Permanent differences resulting from for instance disallowed expenses or non-taxable items however constitute a lasting difference between the income tax due by the foreign entity and the theoretical corporate tax that would have been due in Belgium. The foreign tax cannot be adjusted with these permanent differences.
 

Considered tax for a PE of a CFC

For the assessment of the taxation condition in case a foreign establishment of a foreign company, it is acceptable to take into account both the income tax due on the profits of the establishment in the country or jurisdiction where it is located and any income tax that may be due on those same profits in the country or jurisdiction where the foreign company is established. According to the Circular Letter, such approach allows for an evaluation of the overall tax burden borne by the foreign establishment, considering the taxation in the respective relevant jurisdictions.
 

First Tier Subsidiaries only

The Belgian Tax Authorities confirm the CFC rules should not be applied in cascade. This actually means that if a foreign entity has been identified as a CFC entity and this entity holds further participations, those should not qualify as CFC’s in view of determining the hypothetical Belgian tax of the first tier CFC. One has to be careful, however, as the holding of one share of such lower tier subsidiary may also lead to the qualification as a CFC since the controlling shareholder is considered on a consolidated basis.
 

Tax Consolidation

If a foreign company or foreign establishment is part of a fiscal consolidation in its country of fiscal residence, the taxpayer can demonstrate which part of the foreign tax should be attributed to that company or establishment using a certain allocation key, hereby confirming what has been said previously by the Minister of Finance in this respect. However, it might be that the use of such allocation key does not provide an adequate solution. Under those circumstances, it is allowed for the taxpayer to opt for a so-called 'stand-alone' approach, as if the foreign company or establishment is a 'stand-alone' company. In this case, both the foreign tax and hypothetical Belgian tax will be determined as if the foreign company or foreign establishment is not part of a tax consolidation. The same can be applied for companies making use of the group contribution. Finally, the Circular Letter does not exclude a possible other methodology of computation, which then will be assessed on a case-by-case basis by the Belgian Tax Authorities.
 

EBITDA

As regards the application of the EBITDA rules in the hands of the CFC entity, the starting point is that this entity should be considered as part of the group for the calculation of the hypothetical Belgian tax and thus needs to be considered in view of the EBITDA calculation with the other Belgian group companies. In reference to the above, as discussed for the consolidation rules, the taxpayer can however also opt for applying the ‘stand-alone principle’.  This would mean that the thresholds of the minimum amount of EUR 3 million and 30% of the EBITDA should be assessed solely in the hands of the CFC entity in that case.
 

Losses of the CFC

As regards previous losses incurred by the foreign company or the foreign establishment, those can be taken into deduction in view of assessing the taxation condition, within the limits and the applicable conditions of the Belgian tax rules. The Circular Letter however indicates that for previous losses existing at the end of the taxable period associated with tax year 2023, no recalculation according to Belgian standards is needed. These tax losses are thus grandfathered (but still subject to the Belgian deduction limitation rules). For losses generated as from tax year 2024, a recalculation will apply according to Belgian rules.
 

Substantial Economic Activity

With respect to the safe harbors, the Circular Letter also makes some further specific comments as regards the assessment of the notion of ‘substantial economic activity’ to be performed by the foreign entity.

To qualify for this safe harbor, the entity must demonstrate genuine business operations supported by the presence of personnel, equipment, assets, and buildings. This should be assessed on a case-by-case basis and evidenced by any relevant facts and circumstances. Those conditions of personnel, equipment, assets and buildings should be applied cumulatively. However, it is stated that if the economic activity of a CFC may not be supported by all the aforementioned legal criteria, it should be allowed for the taxpayer to demonstrate that in the case at hand a substantial economic activity takes place.  Unfortunately, no further guidance is added in this respect.

The required activities of  said personnel do not necessarily have to be performed by the entity's own employees. The overall personnel, equipment, assets, and buildings available should be assessed to determine whether sufficient substance applied considering the turnover and the economic activity that the entity is supposed to carry out. Reference should be made to the profit and loss accounts of the entity for the specific financial year under consideration.

As regards holding companies, it is said that those entities can participate to the economic activity of the group, if they actively participate in the management of the group over which they exercise control. However, if a holding company holds minority portfolio investments without any intention to participate in the management or influence the control of the companies, this activity is presumably, and unless counterproof from the taxpayer, not to be considered a qualifying economic activity.
 

Formal reporting requirements

The other Circular Letter (nr. 2024/C/83) provides some general guidance on the formal reporting requirements related to the amended CFC rules (and some recent changes to other anti-abuse rules) without going into a lot of details compared to what is already included in the law. Taxpayers must report in their tax return when and if they hold a foreign company or establishment that qualifies as a CFC entity. The declaration should include detailed information about the CFC, such as its name, address, identification number, country of establishment, ownership percentage, and any applicable exemption. In this respect, the Tax Authorities confirm in the Circular Letter that the taxpayer should mention which type of the respective exemption is being claimed. This information will need to be added as an annex to the tax return, as the current format does not allow a taxpayer to mention this in the tax return itself (an annex to the tax return will be required in any event if the taxpayer declares more than one CFC entity).
 

How can we help you?

The issuance of the two new Circular Letters providing further clarifications on the new Belgian CFC rules are obviously welcome for the companies holding foreign entities and having to comply with those  rules. Although it gives the taxpayers some answers to questions that were outstanding as regards how to apply the CFC rules in general, some other questions remain unanswered. This is the case for example as regards the question as to whether, in view of the hypothetical tax calculation, the minimum taxable basis should still be applied in the hands of a loss-making foreign entity (not paying any local taxes because of the existence of those losses). We understand the aim of the Tax Authorities is to focus on more specific questions through additional Circular Letters providing further guidance.

However, considering the guidance already provided at this stage, it is important to assess the impact of these new Circular Letters to the positions that have been taken in the tax return that has been filed in the meantime for tax year 2024, as well as the impact on any future tax filing positions still to be taken.

In case you should have any questions regarding this matter, please do not hesitate to contact your trusted EY person of contact.