Policy, trends and developments
Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?
The Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration constitute the leading regulatory policy for transfer pricing adjustments made by the Belgian Tax Authority (BTA).
Belgian legislation provides no specific guidelines or recommendations for the methods used to determine a transaction’s arm’s-length price. As such, the transfer pricing method is determined in accordance with the OECD guidelines, which are officially accepted by the BTA. As such, the nine-step transfer pricing analysis process, as outlined in the OECD guidelines, is generally employed in Belgian tax practice.
Regarding the search for comparables and the performance of benchmark studies, the BTA accepts the use of both pan-European databases and, under certain circumstances (eg, the absence of such reliable data), non-European databases, if deemed appropriate.
Following the introduction of EU Directive 2016/881/EU concerning the mandatory automatic exchange of information (which amended EU Directive 2011/16/EU on administrative cooperation in the field of taxation) as a result of Base Erosion and Profit Shifting (BEPS) Action 13, Belgium implemented three-tiered transfer pricing documentation and reporting requirements (ie, country-by-country reporting and a master and local file) applicable for the financial years starting from 1 January 2016.
Trends and developments
Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?
Many of the recent developments concerning transfer pricing at the OECD and EU level have affected Belgian transfer pricing practice. Since Belgium adheres to the OECD, the minister of finance stated that the recently updated chapters of the OECD guidelines (in particular, Chapter IV regarding intangibles) will be followed and applied to ongoing tax audits.
In 2016 the European Commission decided that Belgium’s excess profit ruling (EPR) constituted illegal state aid under the EU state aid principles and ordered Belgium to recover the aid allocated. The EPR allows for the actual recorded profit of a Belgian company (which is part of a multinational group) to be compared with the hypothetical average profit that a standalone company would have made in a comparable situation. The difference is deemed to be excess profit and is therefore not taxed in Belgium. This excess profit is usually produced by:
- economies of scale;
- networks; or
- access to new markets.
However, the European Commission considers the tax ruling to be illegal state aid, as it derogates from the normal tax regime applicable in Belgium and the arm’s-length principle. The government and several Belgian companies concerned appealed to the European Court of First Instance against the European Commission’s decision.
Belgium transposed the transfer pricing documentation and reporting requirements into domestic law in accordance with BEPS Action 13. In addition, following the introduction of EU Directive 2011/16/EU on administrative cooperation in the field of taxation (which repealed the EU Mutual Assistance Directive (77/799/EEC), the automatic exchange of tax rulings and BEPS Action 5), Belgium began spontaneously exchanging rulings with other EU member states. The latter directive requires EU member states to automatically exchange information on:
- tax rulings (including all arrangements relating to transfer pricing and the allocation of profits to permanent establishments) issued on or after 1 January 2017; or
- tax rulings issued, amended or renewed between 1 January 2012 and 31 December 2016, provided that certain conditions are met.
The information to be exchanged includes:
- a description of the transactions covered;
- the amount of the transactions covered;
- the method and criteria used to determine the appropriate transfer pricing; and
- the identification of other EU member states likely to be concerned.
On 9 November 2018 the BTA published a draft circular on transfer pricing. Although the draft circular is largely aligned with the OECD guidelines, the BTA deviates on certain points (eg, with regard to the remuneration of a cash pool leader, the seven-year review period with respect to hard-to-value intangibles and the performance of transfer pricing adjustments towards the median value of a benchmark). Interested parties can submit their comments with the BTA, which is expected to take these comments into account when amending the circular. It is unclear when the final version can be expected.
Domestic legislation and applicability
What primary and secondary legislation governs transfer pricing in your jurisdiction?
Primary legislation Below is a summary of the main federal legislation regulating transfer pricing in Belgium.
Upward adjustment A Belgian taxpayer’s taxable basis is increased by the abnormal or benevolent advantages that it grants to a beneficiary (Article 26 of the Income Tax Code). No profit adjustment is made if these advantages are considered to determine the beneficiary’s taxable basis (ie, escape clause). Irrespective of whether the advantage has been considered to determine the beneficiary’s taxable basis, a profit adjustment will be made if the beneficiary is:
- a non-resident company with which the Belgian taxpayer has a direct or indirect relationship of interdependence;
- a non-resident company or establishment that is established in a tax haven; or
- a non-resident company that shares common interests with a non-resident company or establishment referred to above.
Belgian law does not define the concept of an ‘abnormal or benevolent advantage’, but the Belgian Tax Authority’s (BTA’s) official commentary on the Income Tax Code states that it includes any enrichment of the recipient without adequate and actual consideration. An ‘advantage’ is defined as an enrichment of the recipient without equivalent real compensation to the grantor for the benefit provided. ‘Abnormal’ is defined as that which is not consistent with common practice.
A ‘benevolent advantage’ is an advantage granted without a contractual obligation or sufficient consideration; an intentional element is not required.
Whether an abnormal or benevolent advantage is granted requires a factual assessment which considers factors such as:
- the economic circumstances of the case at hand;
- the situation in which the parties are involved; and
- all other factual circumstances.
Article 185, Section 2a of the Income Tax Code governs the recognition of profits on cross-border commercial and financial transactions for Belgian taxpayers that are members of multinational groups. Any profits not recognised by an arm’s-length cross-border transaction are added to the taxpayer’s taxable profit. In principle, Article 185 of the Income Tax Code applies only by way of an advance decision obtained from the Belgian Service for Advance Decisions (Ruling Commission).
Article 185/2 of the Income Tax Code has introduced controlled foreign company (CFC) legislation into Belgian law following the implementation of the EU Anti-tax Avoidance Directive (2016/1164/EC), which lays down the rules against tax avoidance practices that directly affect the functioning of the internal market. Belgium has opted to implement option B of the EU Anti-tax Avoidance Directive, pursuant to which the CFC income taxable in Belgium is the non-distributed income of a low-taxed foreign subsidiary or permanent establishment that is generated through risks and assets that are linked to significant people functions performed by the Belgian parent company. The implementation of the CFC rule concerns the legislative incorporation of the so-called ‘authorised Organisation for Economic Cooperation and Development (OECD) approach’ principles as introduced by the OECD in relation to the attribution of profits to permanent establishments. The CFC rule constitutes another means for the BTA to perform transfer pricing adjustments.
Other general corporate tax rules indirectly regulate or impact transfer pricing (eg, provisions regarding tax deductibility of excessive business expenses or payments to tax haven entities).
Downward adjustment Under certain circumstances, Article 185, Section 2b of the Income Tax Code allows a corresponding downward profit adjustment for corporate income tax purposes in case profits are included in the tax basis of a related foreign company. A downward adjustment is available only if a ruling is obtained from the Ruling Commission. This provision applies despite the application of the EU Arbitration Convention (90/436/EEC) or international conventions on the avoidance of double taxation.
Abnormal or benevolent advantage received Articles 79 and 207 of the Income Tax Code deny deductions (eg, carry-forward tax losses) from profits derived from an abnormal or benevolent advantage received by a taxpayer where there is a relationship of direct or indirect interdependence between the parties.
The above provisions aim to prevent the shifting of profits to a Belgian company where the amount is not subject to tax given the availability of certain tax deductions. In the context of Article 207 of the Income Tax Code, the Supreme Court has broadened the definition of an ‘abnormal or benevolent advantage’ by including the results from transactions that take place in economically abnormal circumstances.
Secondary legislation There is no relevant secondary legislation.
Are there any industry-specific transfer pricing regulations?
Belgium has no industry-specific transfer pricing regulations.
What transactions are subject to transfer pricing rules?
All transactions that take place with related or associated parties are subject to the Belgian transfer pricing rules. However, the transactions include, but are not limited to:
- sale agreements;
- all financial transactions;
- service agreements;
- the transfer and concession of technology (eg, patents, know-how); and
- cost-sharing agreements.
How are ‘related/associated parties’ legally defined for transfer pricing purposes?
Belgian tax law refers to the concept of ‘related or associated parties’, as well as the concept of ‘direct or indirect relationship of interdependence’.
‘Related’ or ‘associated’ entities are:
- entities over which another entity exercises control;
- entities exercising control over another entity;
- entities with which another entity forms a consortium; and
- other entities being controlled, to the knowledge of their management body, by one of the entities.
The concept of a ‘direct or indirect relationship of interdependence’ requires:
- the direct control of one entity over another, with both entities being controlled by a third entity (ie, a direct relationship of interdependence); or
- both entities being part of the same group (ie, an indirect relationship of interdependence).
The existence of a relationship of interdependence depends on the circumstances at hand. For instance:
- the board of directors of both entities must primarily consist of the same people; or
- one entity must depend on the other for the acquisition of raw materials.
The law also refers to ‘common interests’, which are not defined by any Belgian legal provision. However, this concept is understood more broadly than a relationship of interdependence. For example, two independent entities that form a joint venture indicates the existence of common interests.
Are any safe harbours available?
Belgium has no formal safe harbour rules.
Which government bodies regulate transfer pricing and what is the extent of their powers?
The federal legislature enacts all transfer pricing legislation.
Which international transfer pricing agreements has your jurisdiction signed?
Belgium has concluded more than 90 tax treaties, most of which contain provisions on:
- the arm’s-length principle;
- the exchange of information; and
- the mutual agreement procedure.
On 23 July 1990 Belgium signed the EU Arbitration Convention (90/436/EEC) on the elimination of double taxation in terms of transfer pricing together with other EU member states, which entered into force on 1 January 1995. The EU Arbitration Convention provides mandatory relief from double taxation where the tax authorities of a contracting state unilaterally adjust the profits of a taxpayer in its state with respect to a transaction that the taxpayer entered into with a related taxpayer situated in another contracting state. In 2000 the BTA published a circular regarding the application of the EU Arbitration Convention.
Mutual agreement procedures are highly effective in Belgium and give multinational businesses comfort when establishing themselves in Belgium. The BTA is known for its responsiveness, willingness to cooperate and results orientation.
To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?
Although not expressly stated in Belgian law, the OECD guidelines are generally accepted and followed by the BTA – in particular, by the special transfer pricing team and the Ruling Commission. In addition, the 1999 circular refers explicitly to the OECD guidelines and the 2006 circular is fully aligned with the guidelines. Further, it is generally accepted that the OECD guidelines are to be applied as they evolve over time.
The OECD guidelines and other OECD reports (eg, the OECD 2010 Report on the Attribution of Profits to Permanent Establishments) play a central role in the Belgian transfer pricing framework. The BTA refers to these documents and reports published in the framework of the Base Erosion and Profit Shifting (BEPS). The fact that the BTA follows and applies the OECD initiatives rigorously and that no deviating rules exist under the Belgian legal framework provides significant legal certainty to multinationals investing in Belgium.
Specific reference can be made to Beaulieu (Ghent Court of Appeal, 16 September 2014), in which the BTA made an adjustment to the 1989 tax base by referring to the 1995 OECD guidelines. The court stated that the OECD guidelines are not obligatory or enforceable, but rather a recommendation. However, the BTA can apply their principles, as they provide sufficient guarantees in terms of objectivity and reliability. According to the court, the OECD guidelines contain internationally accepted principles and the application of the arm’s-length principle is prescribed by Article 9 of the OECD Model Tax Convention on Income and Capital.
The minister of finance recently stated that the BTA will apply the new OECD guidance on BEPS Actions 8 to 10 in transfer pricing audits.
Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
There are no specific guidelines or recommendations to determine an arm’s-length price in Belgium for legislation enacted by the federal legislature or circulars issued by the Belgian Tax Authority (BTA).
The BTA’s 1999 circular refers to the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration and contains a summary of Chapters II and III on transfer pricing methods. In accordance with the OECD guidelines, the selection of the most appropriate transfer pricing method should consider:
- the nature of the functions performed;
- the risks assumed; and
- the assets employed.
The following methods that the OECD guidelines address are accepted and employed under Belgian transfer pricing practice:
- traditional methods, including:
- the comparable controlled price method, which is usually applied where external or internal comparables are available; this is typically the case for intragroup loan agreements;
- the cost plus method, which is usually applied for intragroup services or manufacturing activities with low added value and makes use of external and internal comparables; and
- the resale price method, which is often used in case of intragroup distribution activities; and
- transactional methods, including:
- the transactional net margin method, which is most often applied, given the practical difficulties in applying other methods; and
- the profit split method.
In addition, for specific types of transaction (eg, those involving the transfer of intangibles), other valuation-based methods are applied and accepted in practice, such as the relief of royalty method or a residual discounted cash flow.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
Belgium has no official hierarchy of acceptable methods, no best method rule and no legal limits or restrictions in this respect.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
A comparability analysis is the backbone of a transfer pricing analysis and consists of five determining factors:
- the characteristics of the goods or services – differences in the specific characteristics (eg, quality or reliability) of goods or services usually explain, or at least partially explain, the differences in their market value;
- functional analysis – analysing and comparing the functions performed by the parties, which includes an analysis of the activities exercised, the risks assumed and the assets employed;
- contractual clauses – these may set out the terms with respect of liability and risk which impacts the functional analysis;
- economic circumstances – the arm’s-length principle may vary depending on the markets concerned (eg, the degree of competition and purchasing power of consumers); and
- company strategy – the group’s level of risk aversion partially determines its strategy and risk appetite.
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
There are no special considerations or issues specific to Belgium that associated parties should bear in mind when selecting transfer pricing methods.
Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
Until recently, Belgian law included no formal transfer pricing documentation and reporting requirements. However, in 2016 Belgium transposed the transfer pricing documentation and reporting obligations introduced by EU Directive 2016/881/EU concerning the mandatory automatic exchange of information (which amended EU Directive 2011/16/EU on administrative cooperation in the field of taxation) and Base Erosion and Profit Shifting (BEPS) Action 13 into national legislation (Articles 321/1 to 321/7 of the Income Tax Code). These requirements consist of filing a country-by-country report for the group’s Belgian parent and filing a master and local file for each of the Belgian group entities with the Belgian Tax Authority (BTA). The requirements apply for financial years starting on or after 1 January 2016.
Under Article 321/2 of the Income Tax Code, the Belgian parent entities of multinational groups with a consolidated gross revenue exceeding €750 million must file a country-by-country report that includes financial information (eg, revenue, profit before income tax, income tax paid and accrued and number of employees) on the multinational group’s entities for every jurisdiction in which it is active. The same obligation applies to Belgian companies:
- that are members of a qualifying group and have been appointed as a surrogate parent entity for country-by-country report filing purposes; or
- in the absence of an appointed surrogate parent, when the ultimate parent is established in a country that did not introduce the country-by-country report obligations or did not exchange its country-by-country report with Belgium.
In addition, an annual notification duty applies for each Belgian entity regarding the identity and jurisdiction of the group entity responsible for filing the country-by-country report on behalf of the group. Article 321/6 provides that the BTA can use the country-by-country report only to assess risks relating to transfer pricing and BEPS and for statistical purposes (and not as a basis to assess corporate income tax).
Each Belgian group entity must file a master and local file if at least one of the following thresholds is exceeded on the basis of the standalone annual accounts of the financial year immediately preceding the previous financial year:
- a total operational and financial income of €50 million;
- a balance sheet total of €1 billion; and
- an annual average of 100 full-time employees.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
The master file must include an overview of:
- the group;
- its intangibles;
- intra-group financial transactions;
- the group’s consolidated financial and fiscal position; and
- the group’s overall transfer pricing policy.
The master file must be submitted to the BTA within 12 months from the reporting period.
The local file consists of:
- general business and financial information concerning the local entity; and
- financial information on intercompany transactions and transfer pricing methods.
The second part must be filed only if at least one of the respective entity’s business units has carried out cross-border intercompany transactions exceeding €1 million in the preceding financial year.
The local file must be included with the annual corporate income tax return.
Model forms are available for:
- the country-by-country report;
- the country-by-country report notification; and
- the master and local file.
The country-by-country report and master file forms are consistent with Organisation for Economic Cooperation and Development (OECD) guidance. The Belgian local file model strongly deviates from the standard recommendations of BEPS Action 13 regarding the information to be included in the local file.
What are the penalties for non-compliance with documentation and reporting requirements?
Failure to comply with the new documentation requirements within the abovementioned timeframes triggers administrative fines amounting to between €1,250 and €25,000 as of the second violation.
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
It is of paramount importance to prepare thorough transfer pricing documentation that is in line with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration, even if the group does not fall within the mandatory scope of the law on documentation requirements. Well prepared documentation will likely decrease the chances of an in-depth tax audit.
In addition, it is essential that actual prices and intercompany transactions are in line with the transfer pricing analysis and can be reconciled with the group’s financial statements.
Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
Taxpayers that wish to obtain certainty in advance and avoid potential transfer pricing disputes may obtain advance pricing agreements (APAs). Unilateral APAs can be obtained from the Belgian Service for Advance Decisions (Ruling Commission), which is a dedicated central and autonomous service within the Federal Ministry of Finance and independent from the Belgian Tax Authority (BTA).
Unilateral APAs in transfer pricing matters deal with the arm’s-length character of a given price or remuneration based on:
- the functions performed;
- the risks assumed; and
- the assets used.
APAs typically require a transfer pricing study that includes a functional analysis, a description of the methods used and a comparability analysis. Under certain circumstances, a limited transfer pricing report can suffice. The Ruling Commission generally has a cooperative attitude towards the taxpayer. Bilateral or multilateral APAs can be obtained through the Department of International Conventions.
Unilateral, bilateral or multilateral APAs may cover any (interpretative) issues regarding transfer pricing or the attribution of profits to permanent establishments. In this way, all transactions and entities subject to transfer pricing rules can be covered by APAs.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
A unilateral, bilateral or multilateral APA must be requested in writing (via registered mail, regular mail or email) from the Ruling Commission and the Department of International Conventions, respectively, either by the company concerned or by proxy (eg, a lawyer). The request must be drafted in Dutch, French or German and filed before the envisaged transactions have been carried out or produced any effects.
For practical reasons, the bilateral or multilateral APAs can enter into force as of the first day of the financial year – even if transactions took place between the first day of the financial year and the date of submission – provided that the application is submitted by the last day of that financial year. When the relevant facts and circumstances are identical to those in previous tax years, the taxpayer can ask for a roll-back. In such cases, the outcome of the bilateral or multilateral APA can also be applied for the previous years. Roll-back is available only if the applicable time limits (eg, the tax assessment terms) allow it.
The request must include the following information (in English, Dutch, French or German):
- the identity of all parties and a description of the group and its activities;
- the APA’s lifespan;
- a description of any intercompany transactions;
- details of the transfer pricing method used (if any);
- a comparability study (if available);
- a functional analysis;
- unilateral rulings obtained by the group (if available)
- the proxy of the person who filed the request (if available);
- financial information regarding the company concerned; and
- references to the applicable legal provisions at hand.
A subsequent request to renew the APA must be filed at least six months before the expiration of the existing one.
How long does it typically take to conclude an advance pricing agreement?
Unilateral APAs are generally obtained within three to six months, provided that all required information has been submitted on time.
Concluding a bilateral or multilateral APA takes approximately one year from when the competent authorities concerned avail of all relevant information, where it concerns a relatively simple case. However, this is usually prolonged to two to three years when cases are more complex.
What is the typical duration of an advance pricing agreement?
In general, APAs are valid for a maximum of five years.
What fees apply to requests for advance pricing agreements?
The filing of a unilateral, bilateral or multilateral APA is free of charge in Belgium.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
As of 2017, APAs are exchanged with the other jurisdictions involved, which mutually exchange ruling decisions with Belgium.
Review and adjustments
Review and audit
What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?
When a taxpayer provides insufficient information or documentation during a tax audit, the Belgian Tax Authority (BTA) can impose a tax assessment ex officio. This implies a reversal of the burden of proof. As such, it is up to the taxpayer to demonstrate that the profits declared are correct and at arm’s length.
Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?
The BTA is subject to the general rules and procedures with respect to tax audits. In addition, on 14 November 2006 a circular was published containing general guidance for tax inspectors and taxpayers on how a transfer pricing audit should be performed.
What penalties may be imposed for non-compliance with transfer pricing rules?
Belgian tax law contains no specific penalties concerning transfer pricing other than penalties ranging from €1,250 to €25,000 in the case of non-compliance with the newly introduced transfer pricing documentation reporting obligations.
The following general Income Tax Code penalties also apply to transfer pricing. A tax increase can be imposed when a tax audit leads to an increase in declared taxable income. This would generally be the case if a transfer pricing audit results in a profit adjustment. Depending on the nature and frequency of the infringement, the tax increase can range between 10% and 200% of the tax due on the undeclared income. No tax increase is due if the income has not been declared correctly due to circumstances that are beyond the taxpayer’s control.
An administrative fine ranging from €50 to €1,250 can be imposed for each violation of the Income Tax Code. This fine can be imposed if the taxpayer refuses to cooperate during a transfer pricing audit.
The tax authorities can establish an ex officio assessment if a taxpayer does not provide the tax inspector with sufficient information and documentation regarding a tax audit. Criminal penalties can also be imposed if a taxpayer acts with fraudulent intent or the aim of causing harm.
What rules and restrictions govern transfer pricing adjustments by the tax authorities?
The BTA can only apply tax adjustments and claim additional taxes to be paid within three years before the assessment year. This three-year limitation period is extended to four years in the case of wilful attempts to defeat or evade tax.
As of 2018, no deduction of current year losses and deferred tax assets (eg, carry-forward tax losses) can be made on a taxable basis as a result of a tax audit, except in relation to dividends received during the same taxable period. The new rule does not apply for infractions committed negligently and for which no tax increases are applied.
How can parties challenge adjustment decisions by the tax authorities?
There are two different ways to dispute transfer pricing adjustments asserted by the BTA, which taxpayers can use simultaneously:
- internal remedies stipulated by Belgian domestic tax legislation (ie, an administrative appeal which can be followed by a judicial appeal); and
- a mutual agreement procedure based on a double tax treaty and an arbitration procedure by virtue of the EU Arbitration Convention (90/436/EEC).
Mutual agreement procedures
What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?
Belgium grants access to the mutual agreement procedure in cases where a transfer pricing dispute has arisen between a taxpayer and the BTA or a foreign tax authority. As an EU member, and under the EU Arbitration Convention, Belgium must resolve any double taxation arising from EU transfer pricing cases.
An audit settlement is never an obstacle to the functioning of the mutual agreement procedure.
What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
Belgian tax law has a general anti-abuse rule (Article 344, Section 1 of the Income Tax Code) which aims to prevent tax evasion or avoidance. The principal features of Belgium’s general anti-abuse rule are listed below.
In 2016 the government adopted several additional anti-abuse rules, many of which resulted from recent developments in international tax law. Examples of these developments include:
- the implementation of EU Directive 2015/121/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different EU member states (ie, the amended EU Parent-Subsidiary Directive (2011/96/EU)), which introduced anti-hybrid and general anti-avoidance rules; and
- the repeal of the patent income deduction regime, which was replaced by a new regime that is consistent with Base Erosion Profit Shifting (BEPS) Action 5.
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
Belgium has adopted the following measures resulting from or inspired by the BEPS recommendations:
- Belgium introduced an anti-hybrid instruments rule in its participation exemption regime as a result of the implementation of EU Directive 2014/86/EU amending the EU Parent-Subsidiary Directive (2011/96/EU) (BEPS Action 2).
- Belgium repealed its patent income deduction regime and replaced it with a new innovation income deduction regime in line with the modified nexus approach as of 1 July 2016 (BEPS Action 5).
- Belgium introduced a regime for the automatic exchange of information on tax rulings (including all arrangements concerning transfer pricing and the allocation of profits to permanent establishments) issued on or after 1 January 2017 as well as, under certain conditions, tax rulings issued, amended or renewed between 1 January 2012 and 31 December 2016 as a result of the implementation of EU Directive 2015/2376/EU amending EU Directive 2011/16/EU regarding administrative cooperation in the field of taxation (BEPS Action 5). Before its implementation, Belgium had already begun spontaneously exchanging rulings with other EU member states.
- Belgium introduced transfer pricing documentation and reporting requirements through country-by-country reporting and the two-tiered master and local file as a result of the implementation of EU Directive 2016/881/EU amending EU Directive 2011/16/EU regarding the mandatory automatic exchange of information in the field of taxation (BEPS Action 13). These requirements apply for financial years starting from 1 January 2016.
- Belgium signed the Multilateral Instrument on 7 June 2017 (BEPS Action 15) and notified that 98 of its 104 tax treaties will be covered therein. It opted to include in these treaties:
- the hybrid mismatch provision;
- the provision on binding arbitration and closing of pending cases within 24 months;
- the anti-fragmentation and commissionaire provisions amending the permanent establishment definition; and
- the principal purpose test provision.
- Belgium transposed the EU Anti-tax Avoidance Directive (2016/1164/EC) and the revised EU Anti-tax Avoidance Directive (2017/952/EU) into domestic law. As a result, new provisions in the Belgian Income Tax Code containing measures neutralising hybrid mismatches (within the European Union and towards third countries), controlled foreign company legislation, an exit taxation and step-up regime, and the interest limitation rule will enter into effect as of 2019.
Is there a legal distinction between aggressive tax planning and tax avoidance?
In the landmark case Brepols, the Supreme Court acknowledged taxpayers’ fundamental right to choose the route of least taxation freely. However, this legislature subsequently took certain measures to restrict this fundamental right. It ultimately resulted in the introduction of a new general anti-abuse rule in 2012, which adopted a fraus legis (ie, abuse of the law) approach. As the revised Article 344, Section 1 of the Income Tax Code contains new general anti-abuse rules, taxpayers’ fundamental right to choose the route of least taxation freely continues to exist, but has been further restricted.
This new notion of tax abuse has an objective and subjective component. The objective component is present if the taxpayer:
- avoids the application of the Income Tax Code or its decree of execution in a way that is incompatible with the code’s objectives; or
- claims that the application of the Income Tax Code or its decree of execution confers a tax benefit that is incompatible with the code’s objectives. In other words, the purpose and scope of the legal provision must be frustrated as a result of a certain legal act not being taxed or leading to a specific tax benefit.
According to preparatory work conducted, the conflict with the aims of tax legislation should also be understood in the light of the concept of ‘artificial construction’ (ie, a transaction that does not pursue the underlying economic objectives of fiscal legislation, has no connection with economic reality or does not take place under commercial or financial market conditions). In other words, this concept refers to legal acts that are performed solely to avoid taxes.
The subjective component refers to the fact that the essential objective behind the taxpayer’s choice of legal act(s) was to avoid tax or to secure a tax benefit.
In the general anti-abuse rule contained in the amended EU Parent-Subsidiary Directive (2011/96/EU), the notion of ‘abuse’ has been defined as the legal act or series of legal acts that are ‘not genuine’ and have been put in place with the “main goal or one of the main goals to obtain one of the tax advantages” listed in the rule.
What penalties are imposed for non-compliance with anti-avoidance provisions?
Civil and administrative penalties The Income Tax Code’s penalties are applicable where the Belgian Tax Authority successfully applies the general anti-abuse rule.
Criminal penalties The violation of Belgian tax law with fraudulent or harmful intent is punished with imprisonment of eight days to two years and a fine ranging from €250 to €12,500. The Income Tax Code contains a series of specific criminal offences relating to tax fraud which are punishable as follows:
- forgery: a prison sentence of between one month and five years and/or a monetary penalty ranging from €250 to €500,000; and
- falsification of testimony: a prison sentence between two months and three years.
Criminal penalties can be imposed only by judicial power.
For indexation reasons, all criminal fines need to be multiplied by a factor of eight.