Recent changes to the Belgian CFC legislation - Attention points in an M&A context
Recent changes to the Belgian CFC legislation - Attention points in an M&A context
With its program law of 22 December 2023, the Belgian legislator has significantly updated the Belgian CFC-regime, which imposes a so-called “look-through-taxation” on Belgian shareholder-companies. The aim is to tax income of low-taxed foreign subsidiaries (or permanent establishments) at the level of the Belgian shareholder (subject to Belgian corporate income tax).
The updated legislation entails a broader scope (i.e. more situations will be captured by the CFC-rules), changes to the taxation mechanism and extended reporting requirements in the relevant income tax return.
In the context of an M&A deal, it will be of the utmost importance to ensure that this new legislation is taken into account when setting up the post-acquisition group structure, in order to avoid unwelcome surprises at the level of the new Belgian holding companies / acquisition vehicles or in case of Belgian intermediate holdings in your or the Target’s group structure. Below, we have summarized the main attention point, which should be carefully considered in an M&A deal context.
Qualification as a CFC
The scope of the CFC-regime has been broadened:, going forward, only a “participation condition” and a “taxation condition” will need to be met in order for a foreign company or PE to qualify as a CFC.
Under the new “participation condition”, the Belgian holding must hold a minimum participation (i.e. at least the majority of the voting rights or 50% of the capital participation or profit rights) in the CFC, either directly or together with its associated entities. Under the current wording of the new legislation (and as confirmed in the Notice to the Belgian Income Tax Return with respect to assessment year 2024, published by the Belgian tax authorities), the participation condition requires a direct participation of at least one share by the Belgian holding in the foreign company. Direct participations held by associated entities are added to the participation held by the Belgian holding company to determine whether this threshold has been met.
The new “taxation condition” is met if a foreign subsidiary of the Belgian Holding company is not subject to corporate income tax, or is subject to corporate income tax which is less than half of the corporate income tax that would have been due in case the foreign subsidiary was located in Belgium. In order to determine whether this condition is met, a recalculation of the taxable base of the foreign subsidiary under Belgian corporate income tax rules will thus be required. This could entail a burdensome exercise, especially if the calculation needs to be made for all indirect participation of the Belgian holding company.
The new CFC-rules will hence entail a large yearly monitoring and compliance burden if a Belgian holding company acquires a Target group with a significant foreign presence. However, certain indicators could be checked in order to determine which foreign subsidiaries would have a higher risk of qualifying as a CFC under the new rules and should be analyzed with priority.
Exemptions
Several exemptions of Belgian CFC-taxation are available, including an exemption in case there is sufficient economic substance at the level of the CFC. However, this substance exemption is interpreted rather strictly (especially with respect to CFC’s who are intermediate holdings or who mainly receive income via intercompany transactions). It is recommended to prepare a defense file to support the applicability of this exemption (if invoked).
The CFC-exemptions only provide an exemption of CFC-taxation, not of CFC-reporting requirements at the level of the Belgian holding company (i.e. once a foreign subsidiary qualifies as a CFC, it will need to be reported).
CFC-taxation mechanism
Only non-distributed, passive income of a CFC will be taxed at the level of the Belgian holding company, in proportion to its direct participation in the CFC. This income is to be determined under the Belgian corporate income tax rules as well.
The interplay between the new CFC taxation rules and the new Cayman tax rules (for more information, click here), Pillar II and double tax treaties, as well as the availability of foreign tax credits and the applicability of Belgian participation exemption (DRD) upon later distributions by the CFC to the Belgian holding company should be closely monitored in order to avoid double taxation in the future.
In summary, the update of the Belgian CFC-rules will likely result in a larger scope of entities that will be captured, as well as lead to a limitation of instances in which an exemption can be invoked. Hence, it will be of the utmost importance to take these rules into account in the context of an M&A deal when analyzing potential risks at the level of the Target group and when setting up the post-deal structure. Also outside the context of an M&A deal, it is recommended to analyze and continuously monitor your group’s current structure in order to identify any potential risks of an increased tax burden or additional reporting and compliance requirements under the new legislation.
For more information reach out to Christophe Rapoye or Elise Van Zegbroeck
