On 30 October 2015, the Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD (the "OECD Global Forum") announced that Luxembourg, Cyprus and the Seychelles are no longer deemed as non-compliant with the OECD exchange of information standard. Instead, they should be deemed "largely compliant", following significant changes to their legal frameworks or practices.
This is expected to have important implications for the Belgian reporting obligation for payments to persons established in Luxembourg, Cyprus and the Seychelles.
1. Reporting obligation for payments to tax havens
As of 1 January 2010, Belgian companies are required to report, through an annex to their annual income tax return, all (direct and indirect) payments to tax havens totalling EUR100,000 or more; failure to comply would mean that such payments will not be deductible for tax purposes. Once a payment has been reported, it will be tax deductible only if the taxpayer can justify that it has been made in the framework of an “actual and genuine transaction” with “persons other than artificial schemes” (and provided that the other requirements for tax deductibility are met). Consequently, there is an additional burden of proof for the deductibility of the reported payments.
The obligation is applicable to payments made to any person established in a tax haven, which the law defines as:
- any country that, during the whole taxable period during which the relevant payment was made, has been considered by the OECD Global Forum as a country not having substantially and effectively implemented the OECD exchange of information standard (first category); or
- any country without corporate income tax or where the nominal rate of the corporate income tax is lower than 10 percent (second category).
2. Administrative guidance
In a circular letter of 3 September 2015 (the "Circular Letter"), the tax authorities have provided further guidance as to the first category of tax haven.
On 22 November 2013, the OECD Global Forum has deemed Luxembourg, Cyprus and the Seychelles to be non-compliant with the OECD exchange of information standard. The Circular Letter indicated that as a result thereof, all payments to persons established in the aforementioned jurisdictions had to be reported for all taxable periods starting 1 December 2013, except if the OECD Global Forum would advise that said jurisdictions would no longer be deemed "non-compliant".
The Circular Letter noted that countries that are deemed "partially compliant" (e.g., Austria, Turkey and Andorra) are not targeted by the reporting obligation.
It was further noted that as a result of the non-discrimination provision in the Belgium-Cyprus tax treaty and the general EU principle on free movement of capital, the tax deduction of payments to persons established in Cyprus and persons established in Luxembourg could not be disallowed on the sole basis that the payment has not been reported.
Nevertheless, the legal requirement to report payments to persons established in Luxembourg and Cyprus remained in place, and their tax deduction remained subject to the abovementioned additional burden of proof (i.e., the taxpayer must prove that the payments have been made in the framework of an “actual and genuine transaction” with “persons other than artificial schemes”).
3. Consequences of new rating
Based on the recent statement of the OECD Global Forum that considers Luxembourg, Cyprus and the Seychelles to be "largely compliant", these countries can no longer be deemed to fall under the first category of tax havens mentioned above. This is in particular significant for Luxembourg, which is an important trading partner for Belgium.
The fact that Luxembourg was blacklisted in November 2013 did not, as such, have much impact for income tax year 2013, as it is for the reporting requirement and reversal of the burden of proof required that the relevant country be deemed non-compliant during the whole taxable period. Such is obviously different for payments made in 2014, which will for most taxpayers correspond to a taxable period during which Luxembourg was considered non-compliant for the entire taxable period. Based on the same principles, payments made in 2015 to persons established in Luxembourg would now again no longer have to be reported by most taxpayers (i.e., those whose financial year corresponds to the calendar year).