Belgium further aligns Pillar Two legislation with OECD's Agreed Administrative Guidance

On 2 May 2024, Belgian Parliament approved a bill containing various tax measures including specific amendments to the Belgian Pillar Two legislation, originally enacted by the Law of 19 December 2023. Belgium's Pillar Two legislation included a Qualified Domestic Minimum Top-up Tax (QDMTT), an Income Inclusion Rule (IIR) and an Undertaxed Profits Rule (UTPR). (See EY Global Tax Alert, Belgian parliament approves draft bill on Pillar Two, dated 19 December 2023.)

Mainly, these amendments aim to correct certain unintended implementation errors, transpose certain of the OECD's Agreed Administrative Guidelines published in the course of 2023 and establish a legal framework for a system of Pillar Two advance tax prepayments as well as certain (additional) reporting obligations to facilitate the collection of IIR and/or UTPR taxes.

Furthermore, the bill amends the Belgian intellectual property (IP) regime (also referred to as the Innovation Income Deduction (IID)), allowing taxpayers to choose not to deduct part (or all) of the IID from their taxable basis, and instead convert it into a new nonrefundable tax credit available for carryforward. This is particularly relevant for Belgian taxpayers in scope of Pillar Two benefitting from the IID, allowing them to voluntarily increase their net taxable basis, and hence increase their effective tax rate in a given year. The regime's effectiveness is preserved in that the unused part may be carried forward as a nonrefundable tax credit to be used in a future year (for example in a year when the Belgian taxpayer's effective tax rate exceeds 15%). For more information, see EY Global Tax Alert, Belgium modernizes investment deduction regime and enhances IP regime, dated 20 May 2024.)

Discussion

Unique Belgian ID number requirement

The new law establishes a legal framework that requires in-scope multinational enterprises and large-scale domestic groups to be registered with the Crossroad Bank for Enterprises (the Belgian trade register), regardless of whether the Ultimate Parent Entity (UPE) is located in Belgium or abroad. Upon registration, in-scope multinational enterprises and large-scale domestic groups will be granted a new and specific Pillar Two Tax Identification Number (TIN) to be used, for example, to make Pillar Two tax prepayments. The exact modalities will be further determined by a yet-to-be issued Royal Decree.

Additional local IIR and UTPR forms

The central filing of the Global Anti Base Erosion (GloBE) Information Return (GIR) in a foreign jurisdiction could mean that it takes some time before the data needed to establish an IIR and/or UTPR assessment reaches the Belgian Tax Authorities.

Therefore, concurrent with submission of the GIR, an additional (local) form will need to be prepared and filed in Belgium indicating the amount of IIR and/or UTPR due in Belgium. The template of this form will be determined by a yet-to-be issued Royal Decree.

Transferable tax credits

The definition of a qualifying refundable tax credit is broadened to include the concept of so-called marketable transferable tax credits (as described in the OECD's Agreed Administrative Guidance of 17 July 2023). These tax credits can, generally speaking, be transferred to an unrelated party and meet specific legal transferability and marketability criteria. As such, they are considered to have similar features as income (and accordingly are treated as income). To date, Belgium does not have such tax credits.

Simplification for Short-term Portfolio Shareholdings

In accordance with the GloBE Model Rules, dividends from Short-term Portfolio Shareholdings (defined as those held for less than one year at the time of the dividend distribution) are included in the computation of GloBE Income or Loss.

A new election is introduced allowing a multinational entity group (MNE Group) to elect, for any Constituent Entity (CE), to include dividends from all of the CE's Portfolio Shareholdings in the computation of its GloBE Income or Loss (in line with the OECD's Agreed Administrative Guidance of 9 February 2023).

Loss-making Parent Entities of CFCs

In some countries, if there is a domestic-source loss and foreign-source income in the same year, tax on foreign-source income is offset by foreign tax credits (FTCs) and the loss is generally carried forward under domestic rules. Under Article 4.4 of the GloBE Model Rules, Deferred Tax Assets (DTAs) associated with this loss are carried forward and used as an addition to Adjusted Covered Taxes when the loss is used to offset domestic-source income in a later year.

In contrast, in jurisdictions in which the domestic loss must first be offset by foreign-source income before FTCs apply, no loss is generated. Instead, such jurisdictions will generally permit future domestic-source income to be recharacterized as foreign-source income, such that FTCs, as opposed to the domestic-source loss, may be used to offset such future income.

The FTCs to be used to offset future domestic-source income in this case can be FTCs carried forward from a prior loss-generating year or, if no FTC carryforwards are allowed, excess FTCs created in a subsequent year. This scenario can give rise to essentially the same result as the one in which a domestic-source loss is carried forward.

However, the GloBE Rules provide that DTAs associated with tax credits (including FTC carryforwards) are not taken into account for purposes of computing Adjusted Covered Taxes, leading to more Top-up Tax in a jurisdiction offsetting future income with FTCs compared to a jurisdiction carrying losses forward.

The February 2023 Agreed Administrative Guidance seeks to ensure "functionally equivalent outcomes" between the above two scenarios under the GloBE Rules. These rules are now also implemented in Belgian domestic tax law; thus, subject to conditions, the deferred tax expense attributed to a Substitute Loss Carryforward DTA is included in the Constituent Entity's Total Deferred Tax Adjustment Amount.

QDMTT payable

A QDMTT jurisdiction may be prevented or restricted from applying the QDMTT due to constitutional provisions or tax stabilization agreements (or similar agreements between the QDMTT jurisdiction and the MNE Group). This will generally mean that the Top-up Tax payable under the QDMTT will not reduce the GloBE Top-up Tax to zero and could thus be collected by another jurisdiction under the GloBE Rules, via either the IIR or the UTPR.

In such a case, the MNE Group's financial accounts may still include an expense for the QDMTT. If so, the MNE Group would not have any Top-up Tax under the GloBE Rules if the QDMTT is considered payable under Article 5.2.3 of the Model GloBE Rules. The July 2023 Agreed Administrative Guidance recognized this integrity risk under the GloBE Rules.

To mitigate this risk, any amount of QDMTT that the MNE Group directly or indirectly challenges in a judicial or administrative proceeding must not be treated as QDMTT payable under Article 5.2.3 if the challenge is based on constitutional or other superior law grounds. The same treatment must apply in the case of a challenge based on a specific agreement with the government of the QDMTT jurisdiction limiting the MNE Group's tax liability, such as a tax stabilization agreement, investment agreement or similar agreement.

Adjusted Covered Taxes

A QDMTT excludes taxes paid or incurred by CE owners under CFC regimes that are allocable to CEs, as well as taxes paid or incurred by Main Entities and allocable to Permanent Establishments located in the jurisdiction. The policy rationale thereof is that a jurisdiction should have the first right to tax income of Entities located within its territory and therefore cannot be required to provide a credit in its QDMTT for taxes imposed on the Entities' income by the jurisdiction of a CE owner.

The February 2023 Agreed Administrative Guidance, however, did not specifically address the treatment of taxes a CE owner pays on the income of Hybrid Entities or distributions from distributing CEs. The 2023 July Agreed Administrative Guidance addressed this issue by including these taxes in the above policy rationale; the current law reflects this updated guidance.

Allocation of taxes arising under a Blended CFC Tax Regime

The GloBE Model Rules require that CFC taxes paid in a CE owner's jurisdiction are allocated to the jurisdiction of the CE CFC to match such taxes to the GloBE Income to which they relate.

To improve tax certainty and administrability of the GloBE Rules in the first years of application, a special allocation methodology has been developed for Blended CFC Tax Regimes on a time-limited basis (as outlined in the December 2023 Agreed Administrative Guidance). A Blended CFC Tax Regime is a CFC Tax Regime that aggregates income, losses and creditable taxes of all the CFCs for the purposes of calculating the shareholder's tax liability under the regime and that has an Applicable Rate of less than 15%. An example of such regime is the US Global Intangible Low-Taxed Income (GILTI) regime.

This approach applies for Fiscal Years beginning before 1 January 2026 (but not including a Fiscal Year that ends after 30 June 2027).

(For background, see EY Global Tax Alert, OECD/G20 Inclusive Framework releases Administrative Guidance under Pillar Two GloBE Rules: Detailed Review, dated 9 February 2023.)

Transitional CbCR Safe Harbor

For purposes of determining whether a jurisdiction qualifies for the Transitional Country-by-Country Reporting (CbCR) Safe Harbor, adjustments must be made to the jurisdiction's profit before tax and income tax expense with respect to so-called Hybrid Arbitrage Arrangements entered into after 18 December 2023 (as outlined in the December 2023 Agreed Administrative Guidance). (For more information regarding the concept of Hybrid Arbitrage Arrangements, see EY Global OECD/G20 Inclusive Framework releases additional Administrative Guidance on Pillar Two GloBE Rules and update on Pillar One Amount A timeline, dated 22 December 2023.)

QDMTT Safe Harbor

The requirement to undertake separate Top-up Tax calculations in respect of the same CE under the GloBE Rules and the QDMTT rules result in increased compliance costs for MNE Groups. Indeed, the application of the credit mechanism requires at least two separate Top-up Tax calculations in respect of the same jurisdiction: the first calculation, based on the QDMTT legislation in the local CE's jurisdiction and further calculations based on the GloBE Rules (e.g., under the legislation of the UPE Jurisdiction).

The QDMTT Safe Harbor as introduced in the July 2023 Agreed Administrative Guidance is intended to provide a practical solution to address this issue. Where an MNE Group qualifies for a QDMTT Safe Harbor, no "second" Top-up Tax calculation is required. This QDMTT Safe Harbor is now introduced in Belgian domestic law.

As a reminder, the July 2023 Agreed Administrative Guidance indicates that to determine whether a minimum tax can be considered a QDMTT, a peer review process will be developed under the GloBE Implementation Framework. The peer review process will incorporate transitional and permanent review processes to determine whether a QDMTT also meets the standards of the QDMTT Safe Harbor.

Simplified Calculations Safe Harbor for Non-Material Constituent Entities

Simplified calculations are introduced by the December 2023 Agreed Administrative Guidance for determining GloBE Income or Loss, GloBE Revenue, and Adjusted Covered Taxes for Non-Material Constituent Entities (NMCEs) as part of the Simplified Calculations Safe Harbor. An NMCE is broadly defined as an entity that is not consolidated on a line-by-line basis in the Consolidated Financial Statements solely on size or materiality grounds.

This alternative calculation method for NMCEs is intended to alleviate some of the compliance challenges in terms of data collection, processing and recording for such NMCEs. (See EY Global Tax Alert, OECD/G20 Inclusive Framework releases additional Administrative Guidance on Pillar Two GloBE Rules and update on Pillar One Amount A timeline, dated 22 December 2023.)

Transitional UTPR Safe Harbor

Under the rule order of the GloBE Rules, the UTPR effectively operates as the primary mechanism for imposing Top-up Tax in the UPE jurisdiction if that jurisdiction has not introduced a QDMTT. MNE Groups that are exposed to the potential application of the UTPR in the UPE jurisdiction have limited ability to change their ownership structure to bring the UPE's profits within the scope of an IIR.

Therefore, the July 2023 Agreed Administrative Guidance introduced a transitional UTPR Safe Harbor under which the UTPR Top-up Tax amount calculated for the UPE Jurisdiction may only be deemed to be zero for Fiscal Years beginning before 1 January 2026 and ending before 31 December 2026 if the UPE's jurisdiction has a nominal corporate income tax rate of at least 20%.

Corrections

The new law further aligns the rules with respect to the exclusion from the IIR and UTPR of MNE Groups and large-scale domestic groups in their initial phase of internationalization with the Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the European Union (EU). As a reminder, an MNE group is considered to be in the initial phase of its international activity if, for a Fiscal Year: (a) it has constituent entities in not more than six jurisdictions; and (b) the sum of the net book value of the tangible assets of all the MNE Group's CEs located in all jurisdictions other than the reference jurisdiction does not exceed €50m. There is no exemption from the QDMTT for groups in their initial phase of internationalization.

The law also amends the rules for the charging mechanisms applicable to multiple-tier Partially Owned Parent Entities (POPEs), correcting an unintended mistake and aligning the text of the law with the Council Directive.

Entry into force

The additional rules and amendments enter into force for Fiscal Years beginning as from 31 December 2023.

Implications for businesses

In the short term, business will want to assess whether they are in scope of Pillar Two and apply for a unique Belgian Pillar Two number. It is expected that additional guidance will be released soon. It will be important for businesses to continue to assess and map the potential impact of the Pillar Two Global Minimum Tax on their tax positions, the availability of the required datapoints in their systems and their overall compliance processes.

As Belgium has opted to introduce a system of advance tax payments specifically for QDMTT and IIR taxes, businesses should forecast and assess their potential Pillar Two tax liability well in advance.

The continued introduction of new rules and guidance makes it difficult to fully grasp the already complex set of rules. In this respect, note that the OECD recently consolidated the Pillar Two Commentary and the Agreed Administrative Guidance that the Inclusive Framework had released from March 2022 through December 2023. In-scope taxpayers with questions on the application of the Pillar Two law to specific situations or transactions should consult their tax advisors.