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The Belgian tax authorities issued end of last year a Circular Letter on hybrid mismatches (Ci. 2024/C/66 dated October 22 2024), with further guidelines on the Belgian tax provisions to counter cross border double deductions or deductions without corresponding income inclusion.
Background
Anti hybrid rules have been introduced in Belgium end of 2017 by the Corporate Tax Reform implementing the European Directives ATAD 1 and ATAD 2. Those rules entered into effect in Belgium on January 1st 2019 (applicable as from tax year 2020 for financial years that started as from January 1st 2019). Hybrid mismatches occur and the Belgian tax effects must be neutralized if the Belgian tax effect is the result of a mismatch outcome (a deduction/non-inclusion outcome (“D/NI”) or a double deduction outcome (“DD”) because of a hybrid mismatch element, such as the difference in tax treatment or qualification of financial element, legal entities or permanent establishment.
Comments provided by the administrative circular
The administrative circular starts with a reference to the scope and the key notions required to have a proper understanding of the application of the anti-hybrid rules. Further, detailed comments are made on the respective tax adjustment mechanisms available to counter base erosion created by hybrid mismatches (being a.o. the increase of taxable profit, the denial of deduction of certain expenses and the limited imputation of foreign tax credit). It includes for each type of pattern a specific example inspired by the OECD Report, in order to illustrate the features and outcome.
Key takeaway
By focusing on the hybrid mismatches and by providing some more insights on the application of these anti-abuse rules, the Belgian Tax Authorities reinforce Belgium's commitment to address and combat hybrid mismatches arrangements. The circular letter may also be indicative of the Belgian tax authorities’ willingness to scrutinize and include those rules in future tax audits with a particular focus on imported mismatches. By providing more insights, this administrative guidance may also offer a new opportunity for multinational groups to closely assess their international structures and avoid potential exposures.